MICO is a member of the Federal Home Loan Bank (FHLB) of Indianapolis. During
the second quarter of 2018, MICO terminated its line of credit with the FHLB of Indianapolis.
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.
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 $317,526 and $411,450 for the
three months ended September 30, 2018 and 2017, respectively, with a corresponding income tax benefit of $66,680 and $144,008, respectively. We charged compensation expense related to our stock compensation plans against income before
income taxes of $1.4 million and $1.6 million for the nine months ended September 30, 2018 and 2017, respectively, with a corresponding income tax benefit of $285,578 and $564,075, respectively. At September 30,
2018, we had $1.4 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 1.4
We received cash from option exercises under all stock compensation plans during the three months ended September 30,
2018 and 2017 of $217,112 and $765,127, respectively. We received cash from option exercises under all stock compensation plans during the nine months ended September 30, 2018 and 2017 of $695,762 and $2.9 million, respectively. We
realized actual tax benefits for the tax deductions related to those option exercises of $2,516 and $42,411 for the three months ended September 30, 2018 and 2017, respectively. We realized actual tax benefits for the tax deductions
related to those option exercises of $21,319 and $220,767 for the nine months ended September 30, 2018 and 2017, respectively.
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