Subordinated Debentures
Donegal Mutual holds a $5.0 million surplus note that MICO issued to increase MICOs statutory surplus. The surplus note carries
an interest rate of 5.00%, and any repayment of principal or payment of interest on the surplus note requires prior approval of the Michigan Department of Insurance and Financial Services.
8 - ShareBased Compensation
We
measure all share-based payments to employees, including grants of stock options, and use a fair-value-based method for the recording of related compensation expense in our results of operations. In determining the expense we record for stock
options granted to directors and employees of our subsidiaries and affiliates, we estimate the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The significant assumptions we utilize in applying the
Black-Scholes option pricing model are the risk-free interest rate, the expected term, the dividend yield and the expected volatility.
We
charged compensation expense related to our stock compensation plans against income before income taxes of $423,623 and $521,689 for the three months ended June 30, 2019 and 2018, respectively, with a corresponding income tax benefit of $88,961
and $109,555, respectively. We charged compensation expense related to our stock compensation plans against income before income taxes of $866,276 and $1.0 million for the six months ended June 30, 2019 and 2018, respectively, with a
corresponding income tax benefit of $181,918 and $218,897, respectively. At June 30, 2019, we had $1.5 million of unrecognized compensation expense related to nonvested share-based compensation granted under our stock compensation plans
that we expect to recognize over a weighted average period of approximately 1.7
years.
We received cash from option exercises
under all stock compensation plans during the three months ended June 30, 2019 of $795,182. We realized actual tax benefits for the tax deductions related to those option exercises of $15,962. We did not receive any cash from option exercises
under all stock compensation plans during the three months ended June 30, 2018. We received cash from option exercises under all stock compensation plans during the six months ended June 30, 2019 and 2018 of $795,182 and $478,650,
respectively. We realized actual tax benefits for the tax deductions related to those option exercises of $15,962
and $18,803 for the six months ended June 30, 2019 and 2018, respectively.
9 - Fair Value Measurements
We account
for financial assets using a framework that establishes a hierarchy that ranks the quality and reliability of the inputs, or assumptions, we use in the determination of fair value, and we classify financial assets and liabilities carried at fair
value in one of the following three categories:
Level 1 quoted prices in active markets for identical assets and liabilities;
Level 2 directly or indirectly observable inputs other than Level 1 quoted prices; and
Level 3 unobservable inputs not corroborated by market data.
For investments that have quoted market prices in active markets, we use the quoted market price as fair value and include these investments
in Level 1 of the fair value hierarchy. We classify publicly-traded equity securities as Level 1. When quoted market prices in active markets are not available, we base fair values on quoted market prices of comparable instruments or price
estimates we obtain from independent pricing services and include these investments in Level 2 of the fair value hierarchy. We classify our fixed maturity investments as Level 2. Our fixed maturity investments consist of U.S. Treasury
securities and obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, corporate securities and mortgage-backed securities.
We present our investments in
available-for-sale
fixed
maturity and equity securities at estimated fair value. The estimated fair value of a security may differ from the amount that could be realized if we sold the security in a forced transaction. In addition, the valuation of fixed maturity
investments is more subjective when markets are less liquid, increasing the potential that the estimated fair value does not reflect the price at which an actual transaction would occur. We utilize nationally recognized independent pricing services
to estimate fair values or obtain market quotations for substantially all of our fixed maturity and equity investments. These pricing services utilize market quotations for fixed maturity and equity securities that have quoted prices in active
markets. For fixed maturity securities that generally do not trade on a daily basis, the pricing services prepare estimates of fair value measurements based predominantly on observable market inputs. The pricing services do not use broker quotes in
determining the fair values of our investments. Our investment personnel review the estimates of fair value the pricing services provide to verify that the estimates we obtain from the pricing services are representative of fair values based upon
our investment personnels general knowledge of the market, their research findings related to unusual
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