The following table sets forth selected financial data for the Company. You should read this data in conjunction with the Company’s consolidated financial statements and accompanying notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this report.
predictive of future development. Therefore, future development is assumed to follow an expected pattern that is supported by more stable historical data or by emerging trends. This method is also useful when changing reporting patterns or payment patterns distort the historical development of losses. As noted below, the Company tends to rely more heavily on the incurred Bornhuetter-Ferguson method for its most recent accident years due to the smaller size of each line of business and the instability in incurred and paid amounts.
Each month, we review our loss reserves to ascertain whether new developments have occurred which would require adjustment to our ultimate loss estimates. The review involves roundtable discussion involving the claims, accounting and underwriting departments. Discussion is generally focused on claims involving liability and those claims that involve significant judgment. Because the establishment of loss reserves is an inherently uncertain process, we cannot be certain that ultimate losses will not exceed the established loss reserves and have a material adverse effect on the Company’s results of operations and financial condition. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made.
The fair value of shares issued for stock dividends of 25% or less is transferred from retained earnings to additional paid-in capital, to the extent of available retained earnings. No transfer is recorded for stock dividends or splits in excess of 25%. All share and per share amounts are retroactively adjusted for stock dividends in excess of 25% and stock splits. On May 8, 2008, the Board of Directors declared a 3% stock dividend, which was paid on June 5, 2008.
Other income consists primarily of premium installment charges which are recognized when earned and other miscellaneous income.
Losses and loss adjustment expense (“LAE”) reserves represent the estimated liability for reported losses and loss adjustment expenses and actuarial estimates for incurred but not reported losses and loss adjustment expenses based upon the Company’s actual experience, assumptions and projections as to claims frequency, severity, inflationary trends and settlement payments. The reserve for losses and loss adjustment expenses is intended to cover the ultimate net cost of all losses and loss adjustment expenses incurred but unsettled through the balance sheet date. The reserves are reported gross of any amounts recoverable from reinsurers and are reduced for anticipated salvage and subrogation. The methods of making estimates and establishing these reserves are reviewed regularly, and resulting adjustments are reflected in income currently. The liability for losses and loss adjustment expenses is necessarily an estimate and while it is believed to be adequate, the ultimate liability could exceed or be less than such estimate. The anticipated recoverable salvage and subrogation at December 31, 2010 and 2009 was approximately $79,000 and $151,000, respectively.
The carrying amount is a reasonable estimate of fair value based on the terms of the loans.
In 2010 and 2009, the property excess of loss layers provided up to $2,825,000 of coverage over the $175,000 retention. In 2008 the property excess of loss layers provided up to $2,850,000 of coverage over the $150,000 retention. In 2010 and 2009, the casualty and workers compensation excess of loss layers provided up to $5,825,000 of coverage over the $175,000 retention. In 2008 the casualty and workers compensation excess of loss layers provided up to $4,850,000 of coverage over the $150,000 retention. In 2010, an additional workers compensation catastrophe excess of loss layer provided an additional $6,000,000 of coverage to cover a catastrophic event. In 2009, an additional workers compensation catastrophe excess of loss layer provided an additional $4,000,000 of coverage to cover a catastrophic event. In 2008 an additional workers compensation catastrophe excess of loss layer provided an additional $5,000,000 of coverage to cover a catastrophic event.
The Company holds collateral in the form of letters of credit, trust accounts or funds withheld accounts for amounts recoverable from reinsurers that are not considered authorized insurers by the State of Michigan Office of Financial and Insurance Regulation. At December 31, 2010, the Company had 6 reinsurance recoverable amounts from reinsurers whose individual recoverable balance exceeded 5% of the total recoverable amount. The amount due from these 6 reinsurers accounts for 96% of the total recoverable.
Actual federal income taxes vary from amounts computed by applying the current federal income tax rate of 34 percent to income before federal income taxes. For the years ended December 31, 2010, 2009 and 2008, the reasons for these differences and the tax effects thereof, are as follows:
The estimated prior service credit and net actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $85,682 and $18,798, respectively.
The Company uses a December 31 measurement date for its other postretirement plan. As this plan is not pre-funded, no contributions other than those necessary to cover benefit payments are anticipated. At December 31, 2010, the Company’s expected future benefit payments are as follows:
Three nonemployee directors of the Company are also owners of independent insurance agencies. These individuals are currently appointed as agents with and write insurance for the Company. The terms and conditions of the agency agreements between these agencies and the Company are similar in all material respects to agency agreements with other agents of the Company. The Company pays all agencies commissions on business produced. All agencies are also able to earn profit sharing commissions based on the profit margins of the business produced. Total regular and profit sharing commissions earned by these agencies approximated $627,000, $548,000 and $545,000 in 2010, 2009 and 2008, respectively. The commission rates, including profit sharing commission opportunity, are the same as other agents of the Company. The agencies are independent agents and also write with regional and national insurers that may be competitors of the Company.
A summary of option activity under the plans as of December 31, 2010 and changes during the year then ended is presented below:
A summary of the status of the Company’s nonvested options as of December 31, 2010 and changes during the year ended December 31, 2010 is presented below: