`================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                ------------------------------------------------

                                    FORM 10-K

(Mark One)
   |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

   |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

               For the transition period from          to
                                              --------    --------

                        COMMISSION FILE NUMBER 000-51767

                        --------------------------------

                               AMCOMP INCORPORATED
             (Exact name of registrant as specified in its charter)

                DELAWARE                               65-0636842
     (State or other jurisdiction of                 (I.R.S. Employer
     incorporation or organization)                Identification Number)

                              701 U.S. HIGHWAY ONE
                         NORTH PALM BEACH, FLORIDA 33408
                            TELEPHONE: (561) 840-7171
      (Address of registrant's principal executive offices and registrant's
                     telephone number, including area code)

                        --------------------------------

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:


                               Title of each class
                     --------------------------------------
                     Common Stock, $0.01 par value per share


   Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
                                   Yes [   ]               No  [  x ]

   Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.
                                   Yes [   ]               No  [ x  ]

   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
                                   Yes [ x ]               No  [  ]

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]




   Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]   Accelerated filer [ ]   Non-accelerated filer [x]

   Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
                                   Yes [   ]               No  [ x ]

   The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2006 was approximately
$135,360,000. In determining this figure, the Registrant has assumed that all of
the registrant's directors and executive officers are affiliates. This
assumption should not be deemed a determination or an admission by the
registrant that such individuals are, in fact, affiliates of the registrant.

   Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.

                Class                          Outstanding at March 12, 2007
--------------------------------------      ------------------------------------
  Common Stock, $0.01 par value per                  15,759,889 shares
                share

                       DOCUMENTS INCORPORATED BY REFERENCE

           Document                              Parts Into Which Incorporated
           --------                              -----------------------------
Proxy Statement for the 2007 Annual                        Part III
Meeting of Stockholders

================================================================================


                                       ii


                               AMCOMP INCORPORATED

                                      INDEX


PART I

  Item 1. Business.............................................................1

  Item 1A. Risk Factors.......................................................24

  Item 1B.  Unresolved Staff Comments.........................................37

  Item 2.  Properties.........................................................37

  Item 3.  Legal Proceedings..................................................38

  Item 4.  Submission of Matters to a Vote of Security Holders................38


PART II

  Item 5.  Market for Registrant's Common Equity, Related Stockholder
  Matters and Issuer Purchases of Equity Securities...........................39

  Item 6.  Selected Financial Data............................................41

  Item 7.  Management's Discussion and Analysis of Financial Condition
  and Results of Operations...................................................43

  Item 7A.  Quantitative and Qualitative Disclosure about Market Risk.........64

  Item 8.  Financial Statements and Supplementary Data........................66

  Item 9.  Changes in and Disagreements with Accountants on Accounting
  and Financial Disclosure....................................................93

  Item 9A.  Controls and Procedures...........................................93

  Item 9B.  Other Information.................................................93


PART III

  Item 10.  Directors and Executive Officers of the Registrant................94

  Item 11.  Executive Compensation............................................94

  Item 12.  Security Ownership of Certain Beneficial Owners and
  Management..................................................................94

  Item 13.  Certain Relationships and Related Transactions....................94

  Item 14.  Principal Accounting Fees and Services............................94


PART IV

  Item 15.  Exhibits and Financial Statement Schedules........................95

SIGNATURES...................................................................106


                                      iii


                                     PART I

ITEM 1. BUSINESS

OVERVIEW

      We are a property and casualty insurer incorporated in the state of
Delaware in 1995, specializing in workers' compensation insurance products that
include a strong emphasis on value-added services to our policyholders. We offer
insurance coverage for the statutorily prescribed wage replacement and medical
care benefits that employers are required to provide to their employees who are
injured in the course of their employment. In this Annual Report on Form 10-K,
we use the terms "AmCOMP," "we," "our" and "us" to refer to AmCOMP Incorporated
and its subsidiaries.

      We offer these products and services by emphasizing our individual risk
underwriting approach, and the loss prevention and claims management services we
provide. We target employers that are safety conscious, demonstrate a strong
commitment to loss prevention and have a favorable attitude toward the health
and safety of their employees. We underwrite these risks on an individual basis,
as opposed to following an occupational class-based underwriting approach, and
consider many factors such as type of business, nature of operations, risk
exposures and other employer-specific conditions. We try to avoid risks that
have either a significant potential for severe losses, such as steel erectors,
or a reduced opportunity to obtain an adequate rate, such as clerical workers.
In underwriting and pricing our policies, our goal is to maintain adequate
premium levels commensurate with the risks we underwrite to earn consistent
underwriting profits.

      Our loss prevention specialists provide various services for the classes
of business that we underwrite. These services include identifying and
eliminating unsafe working conditions, accident and illness prevention, safety
awareness training and sound employee hiring practices. Our claims management
services include return-to-work programs, case management by teams of registered
nurses and experienced claims adjusters and management of medical provider
services and billings.

      These consultative services result in added value to our insureds and
their employees. In many cases, our services provide employers the opportunity
to reduce their loss experience and their long-term net workers' compensation
costs. Many of our competitors have greater financial resources or offer other
lines of business and can offer their workers' compensation insurance at lower
prices. We are able to compete primarily due to service and other value-based
considerations, rather than solely on premium cost.

      Our proactive claims management strategy includes promoting prompt
reporting of claims, obtaining appropriate medical care for injured workers and
mandating early return to work programs for our policyholders. We believe this
strategy leads to rapid claims closure and lower overall claims costs. We retain
authority over underwriting, claims processing, safety engineering and policy
auditing and do not delegate these responsibilities to third parties.

      We seek to establish long-standing relationships with our policyholders
and agents. Our policyholders are primarily small to mid-sized businesses, those
with annual premiums between $10,000 and $100,000 per year, and include selected
classes of contractors, manufacturers and "main street" businesses such as
retail stores and restaurants. Excluding the policies assumed from our
participation in mandatory pooling arrangements implemented by certain states in
which we operate, we had the following numbers of policyholders with an average
premium per policy as of the dates set forth in the following table.

                                                  December 31,
                                ------------------------------------------------
                                 2006       2005      2004      2003      2002
                                -------   -------   -------   -------   --------
         Policy Count             9,572     9,790     9,599     8,691    10,552
         Average Premium Size   $25,571   $25,115   $25,455   $25,371   $19,989

      Our management embarked on a growth and diversification strategy in 1999.
Until that time, we wrote business only in Florida. After the successful
execution of this strategy, we currently focus on 15 states with Florida
representing 37.7% of our 2006 direct premiums written. In all of the states in
which we operate, a significant portion of total workers' compensation insurance
premiums is written by numerous companies that individually have a small market
share.




      Some companies require that their workers' compensation insurance carrier
have a rating of at least "A-" from A.M. Best. Most of these companies are
larger than the companies in our target market and generally do not meet our
underwriting objectives. We have no current plans to request an A.M. Best
rating, but we will continue to periodically review whether a rating would allow
us to more profitability grow our business.

STRATEGY

      We plan to pursue profitable growth and favorable returns on equity
through the following strategies:

         o  LEVERAGE EXISTING INFRASTRUCTURE. Since 1999, we have successfully
            expanded our operations across 15 targeted states. We have offices
            in 10 states, each of which we believe has been staffed to
            accommodate anticipated premium growth. We have grown our workforce
            104.1% since December 31, 1999 from 244 employees to 498 at December
            31, 2006. We believe that these initiatives have given us a
            fully-built, well-developed scalable infrastructure that will allow
            us to continue to lower our expense ratio as we grow our premium.

         o  EXPAND IN OUR EXISTING MARKETS. Our market share in each of our
            states as measured by 2005 direct premiums written does not exceed
            5.0%. Competition in our target markets varies by state and employer
            size. In all of the states in which we operate, a significant
            portion of total workers' compensation insurance premiums is written
            by numerous companies that individually have a small market share.
            We believe that the strength of our risk selection, loss prevention,
            claims management, and policyholder service positions us to
            profitably increase our market share in our existing markets.

         o  PRUDENT GEOGRAPHIC EXPANSION. While we are licensed in 23 states, we
            actively market our insurance in the 15 states that we believe
            provide the greatest opportunity for near-term profitable growth. We
            are evaluating a number of states for long term entry potential.
            Possible expansion states in the near term include Arkansas and
            Maryland, subject to compliance with applicable licensing
            requirements. We intend to continue to scrutinize carefully the
            potential for achieving underwriting profits and adequate returns on
            capital before expanding our business in existing or new states.

         o  EXCLUSIVE FOCUS ON WORKERS' COMPENSATION INSURANCE. Our operations
            are exclusively focused on providing workers' compensation insurance
            and related services to policyholders. We believe this focus enables
            us to better understand an employer's needs and potential risks in
            this industry relative to competitors who offer a broader range of
            insurance products. This focus also allows us to manage all aspects
            of our business to profitably serve this market.

         o  FOCUS ON UNDERWRITING PROFITABILITY. We intend to maintain our focus
            on underwriting discipline and profitability throughout market
            cycles. Our strategy is to focus on underwriting workers'
            compensation insurance and to maintain adequate premium rate levels
            commensurate with the risks we underwrite. We will also continue to
            strive for improved risk selection and pricing, as well as reduced
            loss frequency and severity of claims through comprehensive
            workplace safety reviews, rapid closing of claims through personal,
            direct contact with our policyholders and their employees, and
            effective medical cost containment measures.

WORKERS' COMPENSATION SYSTEM

      Workers' compensation is a statutory system under which an employer is
required to pay for its employees' costs of medical care and other statutorily
prescribed benefits for work-related injuries or illnesses. Most employers
comply with this requirement by purchasing workers' compensation insurance. The
principal concept underlying workers' compensation laws is that employees
injured in the course of their employment have only the legal remedies available
under those laws and do not have any other claims against their employers.
Generally, workers are covered for injuries that occur in the course and within
the scope of their employment. The employers' obligation to compensate injured
workers does not depend on any negligence or wrongdoing of the employer and
exists even for injuries that result from the negligence or wrongdoing of
others, including the injured employee. The benefits payable and the duration of
such benefits are set by statute and vary by state and with the nature and
severity of the injury or disease and the wages, occupation and age of the
employee.


                                       2


      Workers' compensation insurance policies obligate the carrier to pay all
benefits that the insured employer may become obligated to pay under applicable
workers' compensation laws. Each state has a regulatory and adjudicatory system
that:

         o  quantifies the level of wage replacement to be paid;

         o  determines the level of medical care required to be provided and
            the cost of permanent impairment; and

         o  specifies the options in selecting healthcare providers available to
            the injured employee or the employer.

      State laws generally require two types of benefits for injured employees:
medical benefits and indemnity payments. Medical benefits include expenses
related to diagnosis and treatment of the injury and any required
rehabilitation. Indemnity payments consist of temporary wage replacement,
permanent disability payments and death benefits to surviving family members. To
fulfill this mandated financial obligation, virtually all employers are required
to purchase workers' compensation insurance or, if permitted by their state, to
self-insure. Employers may purchase workers' compensation insurance from a
private insurance carrier, a state-sanctioned assigned risk pool or a
self-insurance fund (an entity that allows employers to obtain workers'
compensation coverage on a pooled basis, typically subjecting each employer to
joint and several liability for the entire fund) or may self-insure, thereby
retaining all risk. Texas is the only state in which we operate that allows the
policyholder to "opt out" of the workers' compensation no-fault system. When
that option is elected, the policyholder either self-insures its risk or
purchases disability type insurance for its employees.

      Workers' compensation premiums, which are paid by employers, are
determined by the payroll generated by employers, the specific type of work that
each employee performs and the employer's historical loss experience. Class
codes are established by rating organizations, which categorize the types of
tasks performed by employees. Each class code is then assigned a specific dollar
rate depending on the propensity of an individual performing that job function
to be injured at work. The more likely it is that an individual will be injured
at work, based upon the hazards associated with performing that work, the higher
the rate and thus the higher the premiums will be.

      DESCRIPTION OF OUR BUSINESS

      The following table sets forth our direct premiums written by state and as
a percentage of total direct premiums written for each of the last three fiscal
years:

                                                Year Ended December 31,
                       ------------------------------------------------------------------------
                               2006                      2005                      2004
                       --------------------      --------------------      --------------------
                                                (Dollars in thousands)
Florida                $100,635       37.7%      $108,995       40.3%      $ 92,278       35.5%
Wisconsin                34,459       12.9         31,572       11.7         27,980       10.8
Texas                    30,241       11.3         25,234        9.3         23,157        8.9
Indiana                  26,193        9.8         32,954       12.2         33,935       13.0
Tennessee                15,912        6.0         19,203        7.1         24,918        9.6
Georgia                  13,072        4.9         12,911        4.8         17,873        6.9
Kentucky                 10,589        4.0         11,869        4.4          9,587        3.7
North Carolina(1)        10,147        3.8          7,693        2.8          8,912        3.4
Virginia                  9,301        3.5          7,847        2.9         10,562        4.1
Illinois(2)               7,932        3.0          4,665        1.7          2,179        0.8
South Carolina            7,629        2.9          6,808        2.5          8,341        3.2
Other States                717        0.2            580        0.3            451        0.1
                       --------      -----       --------      -----       --------      -----
TOTAL                  $266,827      100.0%      $270,331      100.0%      $260,173      100.0%
                       ========      =====       ========      =====       ========      =====

(1)   We were subject to a $12.0 million cap on written premiums during the
      2002-2004 periods. Effective July 6, 2005, the cap was removed.

(2)   We were subject to a $2.5 million cap on written premiums in 2004. In
      2005, the cap was raised to $9.0 million. Effective January 1, 2006, the
      cap was removed.


                                       3


      We have created a decentralized operating structure that we believe fully
supports our philosophy of local people doing business with local people. When
entering a new state, we first seek out qualified candidates who have developed
relationships with independent insurance agents and businesses in the geographic
area into which we would like to expand. Local management establishes its own
underwriting targets and operating budgets, which are ultimately approved by our
executive management. This bottom-up framework is important to our success, as
we believe that local employees best understand the needs and concerns of the
insurance agents and policyholders in the communities in which they work.

      We have offices in 10 of the 15 targeted states in which we operate, from
which our field underwriters, loss prevention professionals or claims personnel
provide services to our agents and policyholders. For administrative purposes,
we have grouped these states into five geographic regions. We perform all of our
corporate accounting, regulatory compliance, human resources, executive
management and information management technology functions from our principal
executive offices.

      To ensure consistency of our underwriting, loss prevention and claims
management philosophies throughout our company, we audit our underwriting, loss
prevention, and claims' processes across regions. Underwriting, loss prevention
and claims management personnel from different states review a particular
state's practices, files and philosophy.

      INSURANCE PRODUCTS AND PRICING

      Our products and rating plans encompass a variety of options designed to
fit the needs of our policyholders and employer groups. Our basic product is a
guaranteed cost policy, under which the premium for a policyholder is set in
advance and varies based only upon changes in the policyholder's employee class
codes and payroll. In return for payment of premium, we agree to assume
statutorily imposed obligations of the policyholder to provide workers'
compensation benefits to its employees.

      Generally, premiums for workers' compensation insurance policies are a
function of:

         o  the amount of the insured employer's payroll;

         o  the applicable premium rate, which varies with the nature of the
            employees' duties and the business of the employer; and

         o  factors reflecting the insured employer's historical loss
            experience.

      We write business in administered pricing and "loss cost" states. In
administered pricing states, insurance rates are set by the state insurance
regulators and are adjusted periodically. Rate competition generally is not
permitted in these states and, consequently, policy dividend programs, which
reflect an insured's risk profile, are an important competitive factor. Florida
and Wisconsin are administered pricing states, while the other states in which
we operate are loss cost states. In loss cost states, we have more flexibility
to offer premium rates that reflect the risk we are taking based on each
employer's profile.

      In Florida, Texas and Wisconsin, we offer dividend programs to eligible
policyholders under which a portion of the premium paid by a policyholder may be
returned in the form of a dividend. Eligibility for these programs varies based
upon the nature of the policyholder's operations, value of premium generated,
loss experience and existing controls intended to minimize workers' compensation
claims and costs. We have four basic types of dividend plans:

         o  a "flat dividend," which provides for a dividend payment as a
            specified percentage of the policy premium, which we offer only in
            Wisconsin;

         o  a "sliding dividend," which provides for the dividend payment to be
            eliminated or increased depending on the loss ratio of the policy;

         o  a combination flat and sliding dividend, which we offer only in
            Wisconsin; and

         o  a "group retention program," which we offer only in Florida,
            provides for a dividend payment based upon the loss ratio of the
            policy as well as a group of policies in a defined group dividend
            plan.


                                       4


      Payment of the policy dividends specified in the dividend plan cannot be
guaranteed and is at the discretion of the board of directors of the applicable
insurance subsidiary and may be based upon:

         o  the individual policyholder's loss ratio;

         o  the insurance subsidiary's overall loss ratio; and

         o  the terms of the policyholder's dividend plan agreement.

      Generally, we pay dividends between four and 24 months after the
applicable policy expires. Dividend policies represented 25.7% of our direct
premiums written in force in 2006 and represented 24.9% and 21.1% in 2005 and
2004, respectively. They represented 37.8%, 36.8%, and 32.3% of direct premiums
written in Florida, and 84.1%, 86.4%, and 89.4% of direct premiums written in
Wisconsin, in those periods, respectively.

      The Florida Office of Insurance Regulation (the "Florida OIR") allows
insurers to charge a rate that exceeds the state-established rate when deemed
necessary through its Consent to Rate program. Under this program, an insurer
determines the additional premium, which, if accepted by the policyholder, is
applied directly to the filed, published rate.

      In loss cost states, we determine insurance rates through a two-step
process. First, the state approves a set of loss costs that provide for expected
payments, which are prepared by an insurance rating bureau. An insurer then
selects a factor, known as a loss cost multiplier, to apply to loss costs to
determine its insurance rates. In these states, regulators permit pricing
flexibility primarily through (1) the selection of the loss cost multiplier and
(2) schedule rating modifications that allow an insurer to adjust premiums
upwards or downwards for specific risk characteristics of the policyholder such
as:

         o  type of work conducted at the premises or work environment;

         o  on-site medical facilities;

         o  level of employee safety;

         o  use of safety equipment; and

         o  policyholder management practices.

      In loss cost states, we use both variables to calculate a policy premium
that we believe will cover the claim payments, losses and loss adjustment
expenses ("LAE"), and company overhead and result in a reasonable profit.

      At December 31, 2006, we marketed and sold our insurance products through
more than 3,000 independent insurance agents operating in approximately 950
independent insurance agencies. During 2006, 256 agencies produced at least
$250,000 of our gross premiums written. We seek to establish and maintain
long-term relationships with the principals, producers and customer service
representatives of independent agencies that will actively market our products
and services. We do this by emphasizing superior service and offering financial
incentives including commissions and bonuses, including contingent bonuses based
on net loss ratios and premiums earned. No single agency representing us
accounted for 10% or more of gross premiums written in 2006, 2005 or 2004.

      UNDERWRITING

      We do not use a class underwriting approach that targets specific classes
of business or industries in which the acceptability of a risk is determined by
the entire class or industry. Our underwriting strategy is to identify and
target individual risks based on the individual characteristics of a prospective
insured, although there are certain exposures that are either excluded or
restricted which may result in account declination.


                                       5


      Our field underwriters regularly visit agents and participate in
presentations to insureds. Our field underwriters' extensive personal
interaction with independent agents and policyholders has led to an enhanced
understanding of the businesses we underwrite and the needs of prospective
insureds. This allows us to apply subjective criteria when considering
prospective insureds. Our field underwriters have the authority to underwrite
risk while in the field. The underwriting authority of a field underwriter is
subject to guidelines based on the specific experience of the field underwriter
and the nature of the risk. The guidelines set forth the underwriting authority
for each field underwriter based on his experience and demonstrated knowledge of
the product and market. Risks outside a field underwriter's predetermined level
of authority are referred to underwriting management for underwriting approval.
In assessing a risk and our ability to service the policyholder, the field
underwriter and underwriting management will become familiar with the individual
employer's business and consider many factors.

      In addition, the underwriter also evaluates losses in the employer's
specific industry, geographic area and other non-employer specific conditions.
These and other factors are documented on our risk analysis worksheet and used
to formulate projected loss experience for each individual account. Our risk
analysis worksheet was created by our internal and independent actuaries to
assist underwriters with their decision making process. The worksheet provides
an estimate of the losses that will occur for each policy based on all available
loss runs and an employer's payroll history. In addition, the worksheet contains
the underwriter's documentation regarding his expectation of losses (which may
be different than the worksheet estimate), the type of insured, the risks
associated with the insured and the rationale behind his decision whether to
quote the account. Our policy requires a risk analysis worksheet for every
account we underwrite. Our reinsurers also review the worksheets during their
underwriting reviews, which we believe is a valuable tool for them as it is
evidence that we actively and thoroughly review each account before we
underwrite it. Experience modification factors are applied to a policyholder's
rate either to increase the cost due to a history of prior losses or to reduce
the cost of the policy due to favorable prior claims history. To ensure that we
truly understand a prospective insured's business, any submission involving a
state other than a field underwriter's own state must be referred to that
state's underwriting management for underwriting approval. This allows us to
make certain that state specific issues, market conditions, regulatory
requirements and pricing requirements are monitored and applied by underwriters
with expertise in a given state.

      Our underwriting strategy focuses on developing a relationship among the
insured, the agent and us to promote account safety, long-term loyalty and
continued profitability. Our loss prevention professionals visit many
policyholders to ascertain the policyholder's willingness to comply with our
underwriting and loss prevention philosophy. This philosophy includes adhering
to early return to work programs and implementing recommended safety practices.
To the extent we are permitted by law, we will cancel the policy of a
policyholder that is not willing to comply with our philosophy. If we cannot
cancel the policy, we will not renew it upon its expiration.

      We review our existing policies prior to renewal and when circumstances
otherwise warrant. Policies with net loss ratios in excess of 40% are reviewed
by our underwriting review team comprising representatives from all concerned
departments. Each state has its own underwriting review team, which meets
monthly. The team evaluates all aspects of a particular policyholder's
operations, including financial stability, management control and claims
history. Recommendations as to risk improvements or nonrenewal decisions are
made by the team and conveyed to the agent and policyholder through the field
underwriter and loss prevention professional assigned to the policyholder.

      We have no industry focus in targeting accounts. Our rates vary in
accordance with the risk of injury and potential claim size in each of the
industries we underwrite. The following table sets forth the percentage of our
written premium by industry classification:

                                                          Year Ended December 31,
                                             -----------------------------------------------
NCCI Industry Group                           2006       2005      2004      2003      2002
-------------------                          ------     ------    ------    ------    ------
Contracting ..............................    40.4%      43.7%     41.7%     41.7%     44.5%
Goods and Services .......................    29.3       26.5      26.4      27.5      25.4
Manufacturing ............................    17.5       16.6      18.4      17.1      15.3
Miscellaneous ............................     6.8        7.2       7.0       7.3       8.7
Office and Clerical ......................     6.0        6.0       6.5       6.4       6.1
                                             ------     ------    ------    ------    ------
Total ....................................   100%       100%      100%      100%      100%


                                       6


      The following table sets forth representative businesses for each of the
industry groups listed above:

Industry Classification                     Representative Business
------------------------                    -----------------------
Contracting...............................  artisan contractors (E.G., plumbers,
                                            electricians, painters and carpenters)
Goods and Services........................  retail stores
                                            restaurants
Manufacturing.............................  component manufacturers for larger
                                            products such as gear, pump,
                                            automotive part and computer
                                            component manufacturers
Miscellaneous.............................  drivers
                                            park employees
Office and Clerical.......................  clerical office employees
                                            salespersons
                                            collectors

      LOSS PREVENTION

      Our loss prevention professionals serve as the cornerstone of our loss
control strategy and we believe their consultative services are important to our
policyholders. The purpose of our loss prevention group is to aid policyholders
in preventing losses before they occur and in containing costs once claims
occur. The group also assists our underwriting personnel in evaluating potential
and current policyholders. We train employers in the details of workers'
compensation practices, safety and health techniques to reduce frequency and
severity of injuries.

      Loss prevention services to our policyholders include education about:

         o  employee hiring and screening;

         o  new employee orientation for safety;

         o  hazard identification, elimination or control;

         o  development and implementation of drug- and alcohol-free
            workplaces;

         o  implementation of return to work programs for recovering
            employees;

         o  claims management; and

         o  care management.

      Loss prevention services to our underwriters include:

         o  evaluation of risk and continued insurability of existing
            policyholders; and

         o  evaluation of risk and initial insurability of prospective
            policyholders.

      Loss prevention services to our claims personnel include:

         o  assistance with return-to-work issues, including identification of
            light duty jobs;

         o  accident investigation; and

         o  job analysis.


                                       7


      Our loss prevention professionals conduct surveys of prospective
policyholders' operations to determine insurability of risks.

      CLAIMS MANAGEMENT AND MANAGED CARE

      We believe that a claims management strategy emphasizing the efficient and
effective handling of reported claims is equally integral to our ability to
reduce policyholders' overall losses. Our strategy is to team registered nurses
with claims adjusters who have long-term experience in the workers' compensation
system. By reducing the cost of claims, we ultimately help our policyholder
reduce the cost of its workers' compensation insurance through lower experience
modification factors.

      We provide our policyholders with an active claims management program and
strive for rapid, reasonable closure of all claims. After we receive notice of a
lost-time injury, our registered nurses or adjusters immediately contact the
injured worker to assist with the injured worker's care and prompt return to
work. If an injury is significant and meets specified criteria, we will assign a
registered nurse to assist in the management of that claim. Working as a team
with claims adjusters, our nurses direct and coordinate the medical treatment
from inception until the medical component of the claim has been resolved. The
same claims adjuster manages the claim until it is resolved.

      Claims can only be handled appropriately when adjusters and nurses have
enough time to devote to each case. We believe that our claims handling
procedures result in reduced insurance losses and lower litigation expenses. Our
goal is to maintain a maximum of 125 lost-time claims per adjuster. We have
hired local claims professionals in each region because we believe individuals
familiar with the local regulations and healthcare providers are best qualified
to handle local claims.

      Our injury notification call center operates 24 hours a day, seven days a
week. To report a claim, policyholders call a toll-free number and receive
immediate attention, or alternatively, a claim may be reported via the internet.
We provide electronic reporting capability of injuries where required. To
expedite our response, the appropriate regional claims department leader is
immediately contacted when catastrophic claims are reported.

      We or our policyholders can select individual medical professionals from
whom injured workers may receive care or can provide a panel of approved medical
professionals from whom one may be chosen in each state where we operate other
than Texas, Kentucky, Illinois, Mississippi and Wisconsin. In Texas, since
January 1, 2006, we have been able to provide a panel of approved medical
professionals who are the exclusive medical professionals providing care to
injured employees of our policyholders. In Kentucky, policyholders can recommend
occupational physicians, but the injured worker has the ultimate choice in
selecting the medical provider. Injured workers in Mississippi, Illinois and
Wisconsin may seek treatment from their own medical professionals.

      We work regularly with local vendors, including attorneys, medical
professionals and investigators, to bring local expertise to our reported
claims. We pay special attention to reducing costs in each region and have
established discounting arrangements with these groups. We use preferred
provider organizations, bill review and utilization management to closely
monitor medical costs and to verify that healthcare providers charge no more
than reasonable and customary charges for the treatment rendered or adhere to an
agreed upon fee schedule, as appropriate. By reducing expenses and achieving
cost savings, we are able to provide injured workers access to quality medical
treatment while charging lower premiums.

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

      Accounting for workers' compensation insurance requires us to estimate the
liability for the expected ultimate cost of unpaid losses and LAE, referred to
as loss reserves, as of a balance sheet date. The amount by which estimated
losses, measured subsequently by reference to payments and additional estimates,
differ from those previously estimated for a time period is known as "loss
development." Development is unfavorable when losses close for more than the
levels at which they were reserved or when subsequent estimates indicate a basis
for reserve increases on open claims. Loss development, whether due to an
increase in estimated losses, or a decrease in estimated losses, is reflected
currently in earnings through an adjustment to incurred losses for the period in
which the development is recognized. If the loss development is due to an
increase in estimated losses, the previously estimated losses are considered
"deficient;" if the loss development is due to a decrease in estimated losses,
the previously estimated losses are considered "redundant." When there is no
deficiency in loss development, the previously estimated losses are considered
"adequate." In each of the last 10 years, we have had redundancy in our net loss
reserves, which we believe reflects our conservative methodology.


                                       8


      We seek to provide estimates of loss reserves that equal the expected
ultimate loss. Maintaining the adequacy of loss reserve estimates is an inherent
risk of the workers' compensation insurance business. We use an independent
actuarial consulting firm to assist in the evaluation of the adequacy of our
loss reserves. Workers' compensation claims may be paid over a long period of
time. Estimating reserves for these claims may be more uncertain than estimating
reserves for other lines of insurance with shorter or more definite periods
between occurrence of the claim and final determination of the loss. We endeavor
to minimize this risk by closing claims promptly and by relying on the estimates
of our professional claims adjusting staff, supplemented by actuarial estimation
techniques. The two main components of loss reserves are: (1) case reserves for
reported claims and (2) reserves for claims incurred but not reported ("IBNR").
Case reserves are estimates of future claim payments based upon periodic
case-by-case evaluation and the judgment of our claims adjusting staff. These
case reserves are updated and reviewed continuously to reflect current
information. IBNR is an actuarial estimate of claim payments for a particular
time period that are not considered in the case reserve estimates. IBNR
reserves, unlike case reserves, do not apply to a specific claim, but rather
apply to the entire body of claims arising from a specific time period. IBNR
primarily provides for costs due to:

         o  future claim payments and LAE in addition to case reserves due to
            unforeseen or unknown events;

         o  additional claim payments on closed claims;

         o  claims that have not yet been reported to us; and

         o  development on claims that have been reported to us, but not yet
            recorded in our ledger.

      Judgment is required in actuarial estimation to ascertain the relevance of
historical payment and claim closure patterns under current facts and
circumstances. We continually monitor loss development trends and data to
establish adequate premium rates and reasonable loss reserves estimates. The
adequacy of loss reserves, which are based on estimates, is inherently uncertain
and represents a significant risk to the business, which we attempt to mitigate.
No assurance can be given whether the ultimate liability will be more or less
than such estimates.

      Case reserves for reported claims are established on a claim-by-claim
basis. Case reserve amounts are determined by our claims examiners, based on the
examiner's judgment and experience, and on our reserving practices. Our
reserving practices account for the type of risk, the circumstances surrounding
the claim or policy provisions relating to the type of loss and historical paid
loss and LAE data for similar claims. Case reserves are not established for
unallocated loss adjustment expense ("ULAE") (expenses incurred to manage claims
but which cannot be allocated to a specific claim), and the entire reserve for
ULAE is established primarily based upon our historical paid data. Our
management and independent actuarial consulting firm regularly monitor reserve
adequacy for losses that have occurred and been reported and we adjust such
reserves as necessary.

      Loss and LAE reserves for IBNR are estimated based on many variables,
including:

         o  historical and statistical information;

         o  inflation;

         o  legal developments;

         o  the regulatory environment;

         o  benefit levels;

         o  economic conditions;

         o  judicial administration of claims;

         o  general frequency and severity trends;

         o  medical costs; and

         o  other factors affecting the adequacy of loss reserves.


                                       9


      Since 1992, we have retained an independent actuarial consulting firm to
perform a comprehensive study of our IBNR reserves. Our independent actuarial
firm estimates IBNR three times annually (as of June 30, September 30 and
December 31). In this study, the consultant firm determines an estimate of IBNR
by accident year for each state on both a gross and net of reinsurance basis.
During the course of each study, our management and actuary review preliminary
analysis and provide additional information and feedback that the consulting
firm may use in its final analysis. In addition, our internal actuaries review
the independent actuarial consulting firm's studies for reasonableness. Our
internal actuaries perform an estimate of IBNR using the same methods used by
the independent actuarial firm each year for the quarter ending March 31. We
update our IBNR estimates based on the best estimate offered in the study
performed for each respective quarter.

      Changes in our operations and management philosophy also may cause actual
developments to vary from the past. A shift to underwriting more or less
hazardous risk classifications, hiring of new claims personnel or changing
claims servicing vendors and third party administrators may change rates of
reserve development, payments and claims closings, increasing or decreasing
claims severity and closing rates.

      Adjustments in aggregate reserves are reflected in the operating results
of the period during which such adjustments are made. Although claims for which
reserves are established may not be paid for several years or more, we do not
discount loss reserves in our financial statements other than for select
policies issued in the Texas region that have fixed or determinable future
payments.

      The following table provides a reconciliation of the beginning and ending
loss reserves.

                                                                            Year Ended December 31,
                                                                        -------------------------------
                                                                          2006                  2005
                                                                        ---------             ---------
                                                                            (Dollars in thousands)
Unpaid losses and LAE at beginning of period                            $ 309,857             $ 297,698
Less reinsurance recoverables on unpaid losses                             78,659               107,155
                                                                        ---------             ---------
Net unpaid losses and LAE at beginning of the period                    $ 231,198             $ 190,543
                                                                        ---------             ---------

Losses and LAE, net of reinsurance, incurred in:
  Current year                                                          $ 177,841             $ 168,355
  Prior years                                                             (14,171)              (24,692)
                                                                        ---------             ---------
Total net losses and LAE incurred                                       $ 163,670             $ 143,663
                                                                        ---------             ---------

Deduct payments for losses and LAE, net of reinsurance related to:
  Current year                                                          $  56,448             $  48,299
  Prior years                                                              76,353                54,709
                                                                        ---------             ---------

Total net payments for losses and LAE during the current period         $ 132,801             $ 103,008
                                                                        ---------             ---------

Ending unpaid losses and LAE, net of reinsurance                        $ 262,067             $ 231,198
                                                                        ---------             ---------
Reinsurance recoverable on unpaid losses and LAE                           72,296                78,659
                                                                        ---------             ---------
Ending unpaid losses and LAE, gross of reinsurance                      $ 334,363             $ 309,857
                                                                        ---------             ---------

      We experienced reserve redundancies of $14.2 million and $24.7 million
during the years ended December 31, 2006 and 2005, respectively. In addition to
the redundancies, prior accident year losses were also reduced by $.7 million
and $1.2 million, respectively, from the Florida Special Disability Trust Fund
("SDTF"), during 2006 and 2005, most of which related to losses from accident
year 1997. When recovered, the Florida SDTF receipts reduced our paid loss
expenses. As collection from the Florida SDTF is uncertain, we record these
recoveries only when received and do not accrue for future recoveries in
Florida. These recoveries reduce paid and incurred losses when received. We also
recovered approximately $.7 million and $1.0 million, respectively, from South
Carolina's fund in 2006 and 2005.


                                       10


      The following tables show changes in the historical loss reserves, on a
gross basis and net of reinsurance, for the insurance subsidiaries for the 10
years ended December 31, 2006. The top line of each table shows the reserve
recorded at each year-end. Such amount represents an estimate of unpaid losses
and LAE occurring in that year as well as future payments on claims occurring in
prior years. The upper portion of these tables (cumulative paid) present the
cumulative amounts paid during subsequent years on those losses for which
reserves were carried as of each specific year. The lower portions (reserves
re-estimated) show the re-estimated amounts of the previously recorded reserve
based on experience as of the end of each succeeding year. The re-estimate
changes as more information becomes known about the actual losses for which the
initial reserve was carried. An adjustment to the carrying value of unpaid
losses for a prior year will also be reflected in the adjustments for each
subsequent year. For example, an adjustment made in the 1996 year will be
reflected in the re-estimated ultimate net loss for each of the years
thereafter. The cumulative redundancy (deficiency) line represents the
cumulative change in estimates since the initial reserve was established. It is
equal to the difference between the initial reserve and the latest re-estimated
reserve amount. A redundancy means that the original estimate was higher than
the current estimate. A deficiency means that the current estimate is higher
than the original estimate.

                     1996     1997      1998      1999      2000      2001      2002     2003       2004     2005      2006
                    ------   ------    ------    ------    ------   -------   -------   -------   -------   -------   ------
                                                                 (Dollars in thousands)
Net reserves for
losses and loss
adjustment
expenses
Originally
estimated           41,307   67,872    56,191    43,432    70,641   114,273   146,631   156,695   190,543   231,198   262,067
                    ------   ------   -------   -------   -------   -------   -------   -------   -------   -------   -------

Net cumulative
amounts paid
as of:
One year later      20,993   30,576    30,165     9,220    28,687    51,514    61,919    59,322    54,709    76,352
Two years later     29,655   43,982    39,529    15,334    41,302    71,328    88,031    81,043    90,014
Three years
later               33,333   49,256    35,995    18,827    46,860    81,276   101,937    96,850
Four years later    34,341   51,337    35,062    22,207    50,281    87,829   108,504
Five years later    35,408   48,422    35,941    22,740    52,119    89,691
Six years later     32,803   48,169    35,439    23,135    53,030
Seven years
later               32,601   47,038    35,547    23,505
Eight years later   32,611   46,809    35,731
Nine years later    32,563   46,866
Ten years later     32,608

Net reserves
re-estimated as
of:
One year later      42,737   67,613    55,445    45,191    81,707   113,857   145,613   148,358   165,851   217,027   262,067
Two years later     41,388   64,514    56,429    45,374    73,017   110,234   133,298   135,175   165,511
Three years
later               41,525   64,679    56,172    40,973    70,271   104,074   127,990   137,132
Four years later    42,792   64,749    52,435    39,615    63,590   101,011   129,313
Five years later    43,289   60,468    50,102    32,754    61,389   101,708
Six years later     39,467   58,288    43,371    30,720    61,906
Seven years
later               37,888   52,649    41,825    30,766
Eight years later   35,601   51,377    41,655
Nine years later    35,110   51,190
Ten years later     35,041
                    ------   ------   -------   -------   -------   -------   -------   -------   -------   -------   -------

Net cumulative
redundancy           6,266   16,682    14,536    12,666     8,735    12,565    17,318    19,563    25,032    14,171      --
                    ======   ======   =======   =======   =======   =======   =======   =======   =======   =======   =======

Gross reserves--
December 31         45,382   86,511   117,520   133,803   151,693   198,954   227,714   251,122   297,698   309,857   334,363
Reinsurance
recoverables         4,075   18,639    61,329    90,371    81,052    84,681    81,083    94,427   107,155    78,659    72,296
                    ------   ------   -------   -------   -------   -------   -------   -------   -------   -------   -------

Net reserves--
December 31         41,307   67,872    56,191    43,432    70,641   114,273   146,631   156,695   190,543   231,198   262,067
                    ======   ======   =======   =======   =======   =======   =======   =======   =======   =======   =======

Gross
re-estimated
reserves            49,800   74,344    85,960   108,109   155,635   180,516   205,169   229,397   265,231   287,863
Re-estimated
reinsurance
recoverable         14,759   23,154    44,305    77,343    93,729    78,808    75,856    92,265    99,720    70,836
                    ------   ------   -------   -------   -------   -------   -------   -------   -------   -------   -------
Net
re-estimated
reserves            35,041   51,190    41,655    30,766    61,906   101,708   129,313   137,132   165,511   217,027
                    ======   ======   =======   =======   =======   =======   =======   =======   =======   =======   =======


                                                             11


                     1996     1997      1998      1999      2000      2001      2002     2003       2004     2005      2006
                    ------   ------    ------    ------    ------   -------   -------   -------   -------   -------   ------
                                                                 (Dollars in thousands)

Gross reserves
for losses and
loss adjustment
expenses
Originally
estimated           45,382   86,511   117,520   133,803   151,693   198,954   227,714   251,122   297,698   309,857   334,363
                    ------   ------   -------   -------   -------   -------   -------   -------   -------   -------   -------

Gross
cumulative
amounts paid
as of:
One year later      21,500   34,118    42,298    45,026    68,631    64,480    71,578    75,217    88,128    82,427
Two years later     31,117   49,763    60,676    61,309    91,113    93,975   103,504   115,539   129,507
Three years
later               35,641   56,414    60,926    65,837   105,642   109,068   125,748   136,039
Four years later    37,132   60,259    60,561    76,254   112,271   122,011   136,685
Five years later    39,292   58,345    66,720    78,089   116,989   127,115
Six years later     37,255   62,756    66,221    80,255   119,168
Seven years
later               41,981   61,393    67,550    81,424
Eight years later   41,815   62,208    68,112
Nine years later    42,904   62,030
Ten years later     42,725

Gross reserves
re-estimated as
of:
One year later      48,978   94,628   116,915   130,266   176,953   192,111   224,735   241,602   270,833   287,863   334,363
Two years later     55,940   91,504   115,139   126,840   166,521   189,484   207,293   230,932   265,231
Three years
later               56,074   92,157   105,894   117,039   166,918   179,673   206,031   229,397
Four years later    58,341   90,727    97,746   119,491   157,125   180,844   205,169
Five years later    59,239   83,783    97,881   109,879   156,240   180,516
Six years later     53,678   84,464    89,001   108,916   155,635
Seven years
later               55,302   77,643    87,145   108,109
Eight years later   52,503   75,596    85,960
Nine years later    50,686   74,344
Ten years later     49,800
                    ------   ------   -------   -------   -------   -------   -------   -------   -------   -------   -------

Gross
cumulative
redundancy
(deficiency):       (4,418)  12,167    31,560    25,694    (3,942)   18,438    22,545    21,725    32,467    21,994      --
                    ======   ======   =======   =======   =======   =======   =======   =======   =======   =======   =======

SECOND INJURY FUNDS

      Many states have laws that establish second injury funds to provide
compensation to injured employees for aggravation of a prior condition or
injury. Funding is provided either by assessments based on paid losses or
premium surcharge mechanisms. The Florida SDTF was established to promote the
re-hiring of injured workers by providing a reimbursement for certain qualifying
claims made by those injured workers subsequent to their re-hiring. We are able
to submit such second injury claims to the Florida SDTF and, if the claims are
accepted, we are reimbursed for part of the cost of the claim. The Florida SDTF
stopped accepting new second injury claims for injuries that occurred after
January 1, 1998. We bill the Florida SDTF and receive reimbursements as we make
payments on accepted claims. As of December 31, 2006, an additional $0.8 million
for which we had submitted reimbursement claims had been accepted but not yet
paid by the Florida SDTF. As collection is uncertain, we record SDTF
reimbursements only when received and do not accrue for future recoveries. We
have submitted second injury claims to the Georgia, Texas and South Carolina
second injury funds. The relevant claims files are currently being reviewed by
those states. Indiana and Illinois also have similar funds; however, we have not
submitted any second injury claims in those states. We recovered $1.4 million,
$2.2 million and $3.4 million during 2006, 2005 and 2004, respectively, from the
Florida SDTF and other states' comparable funds.

REINSURANCE

      Reinsurance is a transaction between insurance companies in which an
original insurer, or ceding company, remits a portion of its premiums to a
reinsurer, or assuming company, as payment for the reinsurer assuming a portion
of the risk. Reinsurance agreements may be proportional in nature, under which
the assuming company shares proportionally in the premiums and losses of the
ceding company. This arrangement is known as quota share reinsurance.
Reinsurance agreements may also be structured so that the assuming company
indemnifies the ceding company against all or a specified portion of losses on
underlying insurance policies in excess of a specified amount, which is called
an "attachment level" or "retention" in return for a premium, usually determined
as a percentage of the ceding company's primary insurance premiums. This
arrangement is known as excess of loss reinsurance. Excess of loss reinsurance
may be written in layers, in which a reinsurer or a group of reinsurers accepts
a band of coverage up to a specified amount. Any liability exceeding the outer
limit of the program is retained by the ceding company. The ceding company also
bears the credit risk of a reinsurer's insolvency. In accordance with general
industry practices, we purchase excess of loss reinsurance to protect against
the impact of large, irregularly-occurring losses in the workers' compensation


                                       12


business, which would otherwise cause sudden and unpredictable changes in net
income and capital of our insurance subsidiaries.

      Like other insurers, we have managed our risks in part through excess of
loss and quota share reinsurance agreements. Reinsurance is used principally:

         o  to reduce net liability on individual risks;

         o  to provide protection for catastrophic losses; and

         o  to stabilize underwriting results.

EXCESS OF LOSS REINSURANCE

      Effective January 1, 2006, we entered into an excess of loss
reinsurance treaty in various layers for losses in excess of a $2.0 million
retention up to $10.0 million in varying percentages from Munich Reinsurance
America, Inc., rated "A" by A.M. Best, Everest Reinsurance Company, rated
"A+" by A.M. Best, Employers Reinsurance Corporation, rated "A+" by A.M.
Best, GE Reinsurance Corporation, rated "A" by A.M. Best, Hannover
Ruckversicherungs-Aktiengesellschaft, rated "A" by A.M. Best, Aspen Insurance
UK, Ltd., rated "A" by A.M. Best, Liberty Syndicate 4472, rated "A" by A.M.
Best, and Max Re Ltd., rated "A-" by A.M. Best. The premium for this
agreement is equal to a fixed percentage of the direct premiums written
subject to the agreement.

      Effective January 1, 2006, we entered into a catastrophe excess of loss
reinsurance agreement with Arch Re, rated "A" by A.M. Best, Aspen Insurance UK,
Ltd., rated "A" by A.M. Best, Everest Reinsurance Company, rated "A+" by A.M.
Best, IOA/Catlin rated "A" by A.M. Best, Max Re Ltd., rated "A-" by A.M. Best,
GE Reinsurance Corporation, rated "A" by A.M. Best, Chaucer Syndicates Limited
1084 & 1301, rated "A" by A.M. Best, Liberty Syndicate 4472, rated "A" by A.M.
Best, Brit Insurance Limited, rated "A" by A.M. Best, and Danish Re Syndicate
1400, rated "A" by A.M. Best. Under this agreement, we cede $20.0 million of
ultimate net loss for any one occurrence in excess of $10.0 million per
occurrence to the reinsurers. The premium for this agreement is equal to a
percentage of the earned premium subject to the agreement.

      Both of our excess of loss reinsurance agreements are subject to various
exclusions and limitations. These agreements nevertheless reduce our exposure
not only to catastrophic claims, but also to any increased frequency of claims
of intermediate severity that may result from economic, legal, regulatory or
social changes.

      Effective January 1, 2007, we entered into new excess of loss and
catastrophe reinsurance treaties that are structured in various layers. These
treaties are substantially comparable to our 2006 reinsurance treaties and carry
reinsurance protection up to a maximum of $30.0 million per occurrence, subject
to our retention of the first $2.0 million. There has been no material change in
our 2007 reinsurance costs from our 2006 reinsurance costs.

QUOTA SHARE REINSURANCE

      Our practice is to select reinsurers with an A.M. Best rating of "A-" or
better. Effective January 1, 2004, we entered into a 30% quota share reinsurance
agreement with a company rated "A++" by A.M. Best. Under the agreement, we ceded
30% of the subject written premium (defined as gross premiums written less
specific excess reinsurance premiums) in 2004, with a provisional ceding
commission of 31%. The reinsurer's liability was limited to 130% of the gross
earned reinsurance premium under any agreement year. In addition, the
reinsurer's liability could not exceed the reinsurer's portion of the estimated
net loss as evaluated and reported by us 24 months after the inception of each
agreement year. This treaty was terminated for new and renewal business
effective July 1, 2004. Furthermore, the remaining exposures for claims
occurring prior to June 30, 2004 were commuted. Effective July 1, 2005, we
terminated the quota share reinsurance that we maintained on a run-off basis for
policies written prior to June 30, 2004.

      Although we did not enter into any quota share reinsurance for new and
renewal business in 2006 or 2007, we may determine to purchase such coverage in
the future based upon our premium growth and capitalization and the terms of
available quota share reinsurance.


                                       13


RECOVERABILITY OF REINSURANCE

      In addition to selecting financially strong reinsurers, we continue to
monitor and evaluate our reinsurers to minimize our exposure to credit risks or
losses from reinsurer insolvencies. Reinsurance makes the assuming reinsurer
liable to the ceding company, or original insurer, to the extent of the
reinsurance. It does not, however, discharge the ceding company from its primary
liability to its policyholders in the event the reinsurer is unable to meet its
obligations under such reinsurance. Therefore, we are subject to credit risk
with respect to the obligations of our reinsurers. Recent natural disasters,
such as Hurricanes Katrina, Rita and Wilma have caused unprecedented insured
property losses, a significant portion of which will be borne by reinsurers. If
a reinsurer is active both in this market and in the workers' compensation
insurance market, its ability to perform its obligations in the latter market
may be adversely affected by events unrelated to workers' compensation insurance
losses. We regularly perform internal reviews of the financial strengths of our
reinsurers. However, if a reinsurer is unable to meet any of its obligations to
the insurance subsidiaries under the reinsurance agreements, our insurance
subsidiaries would be responsible for the payment of all claims and claims
expenses that we have ceded to such reinsurer. We do not believe that our
insurance subsidiaries are currently exposed to any material credit risk.

      The availability, amount and cost of reinsurance are subject to market
conditions and to our experience with insured losses. There can be no assurance
that our reinsurance agreements can be renewed or replaced prior to expiration
upon terms as satisfactory as those currently in effect. If we were unable to
renew or replace our reinsurance agreements, or elect not to obtain quota share
reinsurance:

         o  our net liability on individual risks would increase;

         o  we would have greater exposure to catastrophic losses;

         o  our underwriting results would be subject to greater variability;
            and

         o  our underwriting capacity would be reduced.

      Certain information regarding our ceded reinsurance recoverable is
provided in the following table:

                                               As of December 31, 2006
                                       ------------------------------------------------
                                                     Paid         Unpaid
        Reinsurance Carrier            Rating(1)    Losses        Losses       Total
------------------------------------   ---------   ---------     ---------    ---------
                                                   (Dollars in Thousands)
Aspen Insurance UK, Ltd.                   A       $     25      $  1,446     $  1,471
Continental Casualty Company               A          1,584        37,506       39,090
Employers Reinsurance Corporation          A+           128         2,462        2,590
Everest Reinsurance Company                A+           113         2,101        2,214
GE Reinsurance Corporation                 A            179         5,258        5,437
General Reinsurance                        A++           (2)        5,359        5,357
Hannover
Ruckversicherungs-Aktiengesellschaft       A            158         4,727        4,885
Max Re Ltd.                                A-           306         3,689        3,995
Munich Reinsurance Amer Inc.               A            428         6,673        7,101
Swiss Reinsurance America
Corporation                                A+           145         1,415        1,560
All others                                             --           1,660        1,660
                                                   --------      --------     --------
  Total                                            $  3,064      $ 72,296     $ 75,360
                                                   --------      --------     --------

(1)   A.M. Best's highest financial strength ratings for insurance companies are
      "A++" and "A+" (superior) and "A" and "A-" (excellent). "NR-5" is defined
      as not formally followed.

INTERCOMPANY REINSURANCE POOLING AGREEMENT

      Our insurance subsidiaries are parties to an intercompany pooling
agreement. Under such agreement, the results of underwriting operations of
AmCOMP Assurance are transferred to and combined with those of AmCOMP Preferred
and the combined results are then reapportioned. For 2006, the proportions under
the pooling agreement are as follows:


                                       14



         o  AmCOMP Preferred--63%

         o  AmCOMP Assurance--37%

      Transactions under the pooling agreement are eliminated in consolidation
and have no impact on our consolidated financial statements.

COMPETITIVE STRENGTHS

      We believe that we have the following competitive strengths:

         o  STRONG DISTRIBUTION RELATIONSHIPS. We have established strong
            relationships with our independent agents by emphasizing personal
            interaction, offering superior services and maintaining an exclusive
            focus on workers' compensation insurance. These agents are attracted
            to us because of the level of service we provide to them and our
            policyholders and our focus on small to mid-sized employers. Our
            field underwriters work closely with independent agents to market
            and underwrite our business. These underwriters regularly visit
            agents and participate in presentations to insureds. Our field
            underwriters' extensive personal interaction with independent agents
            and policyholders has led to an enhanced understanding of the
            businesses we underwrite and the needs of prospective insureds.

         o  SPECIALIZED UNDERWRITING APPROACH. We price our policies based on
            the specific risk associated with each potential insured rather than
            solely on the industry class in which such potential insured is
            classified. Our underwriters average 17 years of experience
            underwriting workers' compensation insurance. We believe our
            underwriting approach and experience have played pivotal roles in
            enabling us to outperform the workers' compensation insurance
            industry based on our accident year loss ratios.

         o  LOSS PREVENTION SERVICES. We believe the value-added services that
            we provide strengthen our relationships with our policyholders and
            enable them to reduce their losses from employee injuries. Loss
            prevention specialists conduct pre- and post-underwriting safety
            consultations with policyholders. They also develop and implement
            loss prevention programs for these customers. Our loss prevention
            personnel, who average 15 years of industry experience, conduct
            on-site evaluations for most of our policyholders annually.

         o  PROACTIVE CLAIMS MANAGEMENT. We provide our policyholders with an
            active claims management program and strive for rapid closure of
            claims. As of December 31, 2006, we had closed 96.2 %, 98.3 % and
            99.1% of all reported claims for accident years 2005, 2004 and 2003,
            respectively. Our injury notification call center operates 24 hours
            a day, seven days a week, and internet claims reporting is also
            available so that injured workers and policyholders can report
            claims promptly. This enables our nurses or claims adjusters to
            conduct an injury assessment and begin to develop a program for
            treatment within 24 hours after notification. Our experienced claims
            adjusters average 12 years of workers' compensation insurance
            industry experience. Our policy is that each claims adjuster be
            responsible for a maximum of 125 open indemnity cases. This allows
            our claims adjusters to devote substantial attention to each claim
            and facilitates more effective claims management. Our registered
            nurses have an average of approximately 25 years of nursing
            experience.

         o  STATE FOCUSED OPERATIONS. Our core operating philosophy is "local
            people doing business with local people." We currently focus on 15
            states that we believe provide us with the greatest opportunity for
            near-term profitable growth. Our strategy in these states is
            executed by our regional presidents and their local teams who we
            believe have a deep understanding of the business climate and
            policyholder base and have strong relationships with agents
            operating in these states.

         o  PRUDENT RESERVING. Workers' compensation claims are often paid over
            a long period of time. We have demonstrated consistent success in
            estimating our liabilities for losses and LAE and establishing
            adequate reserves, despite challenges faced by the workers'
            compensation insurance industry. Our net loss reserves as of the end
            of each of the 10 years from 1996 to 2005 have proven to be
            redundant as developed through December 31, 2006, meaning that our


                                       15


            reserves as originally estimated were higher than what our
            experience as of December 31, 2006 indicates.

         o  FOCUS ON SMALL TO MID-SIZED EMPLOYERS. We believe that we have
            achieved significant scale and profitability, throughout our 25-year
            history, by specializing on a target market of small to mid-sized
            businesses, principally employers with premiums between $10,000 and
            $100,000 per year. Based on our extensive experience with
            independent agents and employers in this market, we believe our
            target market is not subject to the same degree of price competition
            as larger accounts. Furthermore, we believe that employers in this
            size category are not as sensitive to A.M. Best ratings and that
            they value our service-oriented approach to business to a greater
            extent due to their limited resources.

         o  PROVEN LEADERSHIP AND EXPERIENCED MANAGEMENT TEAM AND EMPLOYEES. Our
            senior management team, consisting of Fred R. Lowe, as chairman of
            the board, president and chief executive officer, Debra
            Cerre-Ruedisili, as executive vice president, chief operating
            officer and director and Kumar Gursahaney, as senior vice president,
            chief financial officer and treasurer, has an average of 31 years of
            insurance industry experience and 24 years of workers' compensation
            insurance experience. We believe that hiring and retaining
            management and employees with insurance experience are crucial to
            our operating performance. We offer our employees a positive working
            environment and comprehensive benefits and incentives to remain with
            us.

COMPETITION

      The market for workers' compensation insurance policies is highly
competitive. Our competitors include, but are not limited to, other specialty
workers' compensation carriers, multi-line insurance companies, professional
employer organizations, third party administrators, self-insurance funds, state
insurance pools and, in Texas, "opt out" programs. Many of our existing and
potential competitors are significantly larger and possess considerably greater
financial and other resources than we do. Consequently, they can offer a broader
range of products, provide their services nationwide, and/or capitalize on lower
expenses to offer more competitive pricing. We compete with several national
carriers including Zenith National Insurance Corporation, St. Paul Travelers,
The Hartford Financial Services Group, Inc. and Liberty Mutual Group. In many
states, our most significant competitors are regional carriers. For example, in
Texas, a major competitor is Texas Mutual, in Florida, our primary competitors
are Summit/Bridgefield and FCCI and in Wisconsin, our primary competitors are
United Heartland, Acuity, State Fund Mutual, West Bend Mutual, General Casualty
and Sentry. In Indiana, our principal competition is from Accident Fund,
Amerisure and Indiana Insurance. In Tennessee, our main competition comes from
Acuity, Accident Fund, Bridgefield and Hartford.

      Competition in the workers' compensation insurance field is based on many
factors, including, but not limited to:

         o  pricing (either through premium rates or dividends);

         o  level of service;

         o  insurance ratings;

         o  capitalization levels;

         o  quality of care management services;

         o  the ability to reduce net loss ratios;

         o  effective loss prevention; and

         o  the ability to reduce claims expenses.

In the 15 states in which we currently focus our operations, aggregate workers'
compensation direct premiums written totaled $19.6 billion in 2005.
Approximately 38%, or $7.4 billion, of this amount pertains to business written
from policyholders that have annual policy premiums between $10,000 and
$100,000, which is our core policyholder base. We believe that our products and


                                       16


services are competitively priced. In Florida and Wisconsin, premium rates are
fixed by that state's insurance regulators and are not a competitive factor.
Insurers in those two states compete principally on policyholder dividends, the
availability of premium payment plans and service. We also believe that our
level of service, loss prevention programs, and our ability to reduce claims
through our total care management strategy are strong competitive factors that
have enabled us to retain existing policyholders and attract new policyholders.
Also, over the long run, our services provide employers the opportunity to
reduce their experience modification factor and therefore their long-term
workers' compensation costs.

REGULATION

      GENERAL. Our insurance subsidiaries are subject to regulation by
government agencies in the states in which they do business. The nature and
extent of such regulation varies by jurisdiction but typically involve:

         o  standards of solvency, including risk-based capital measurements;

         o  restrictions on the nature, quality and concentration of
            investments;

         o  restrictions on the types of terms that we can include in the
            insurance policies we offer;

         o  mandates that may affect wage replacement and medical care benefits
            paid under the workers' compensation system;

         o  procedures for adjusting claims, which can affect the ultimate
            amount for which a claim is settled;

         o  restrictions on the way rates are developed and premiums are
            determined;

         o  the manner in which general agencies may be appointed;

         o  required methods of accounting for regulatory reporting;

         o  establishment of reserves for unearned premiums, losses and other
            purposes;

         o  limitations on our ability to transact business with affiliates;

         o  mergers, acquisitions and divestitures involving our insurance
            subsidiaries;

         o  licensing requirements and approvals that affect our ability to
            do business;

         o  compliance with medical privacy laws;

         o  potential assessments for the closure of covered claims under
            insurance policies issued by impaired, insolvent or failed insurance
            companies; and

         o  the amount of dividends that our insurance subsidiaries may pay to
            us, the parent holding company.

In addition, state regulatory examiners perform periodic examinations of
insurance companies. This regulation is generally intended for the protection of
policyholders, not insurance companies or their stockholders. In general, state
regulations governing workers' compensation systems and the insurance business
impose restrictions and limitations on our business operations that are not
imposed on unregulated businesses.

      PREMIUM RATE RESTRICTIONS. Among other matters, state laws regulate not
only the amounts and types of workers' compensation benefits that must be paid
to injured workers, but in some instances the premium rates that may be charged
by us to insure employers for those liabilities.

      ADMINISTERED PRICING STATES. The regulatory agencies in Florida and
Wisconsin set the premium rates we may charge for our insurance products. The
Florida OIR approves manual premium rates for each of the approximately 650
employment classification codes prepared and filed by National Council on
Compensation Insurance ("NCCI"), the authorized state rating organization. In


                                       17


accordance with Florida's Consent to Rate program, we are authorized by law to
deviate from these approved rates for up to 10% of the policies we write in
Florida. The Florida Department of Financial Services, Division of Workers'
Compensation, regulates levels of benefit payments to injured employees.
Similarly, Wisconsin's Department of Insurance sets standard rates for workers'
compensation insurance.

      FINANCIAL, DIVIDEND AND INVESTMENT RESTRICTIONS. State laws require
insurance companies to maintain minimum surplus balances and place limits on the
amount of insurance a company may write based on the amount of that company's
surplus. These limitations may restrict the rate at which our insurance
operations can grow.

      State laws also require insurance companies to establish reserves for
payments of policyholder liabilities and impose restrictions on the kinds of
assets in which insurance companies may invest. These restrictions may require
us to invest in assets more conservatively than we would if we were not subject
to state law restrictions and may prevent us from obtaining as high a return on
our assets as we might otherwise be able to realize.

      Under Florida law, without regulatory approval, an insurance company may
not pay dividends or other distributions of cash or property to its stockholders
within a 12-month period with a total fair market value exceeding the lesser of
10% of surplus as of the preceding December 31st or 100% of its prior year's net
income, not including realized capital gains. This may limit the amount of
dividends that we receive from our insurance subsidiaries, which in turn may
limit the amount of capital available to us for debt service, expansion,
dividend payments to stockholders, and other purposes. At December 31, 2006, our
insurance subsidiaries were authorized to pay approximately $15.6 million in
dividends without additional regulatory approval.

      STATUTORY ACCOUNTING AND SOLVENCY REGULATIONS. State regulation of
insurance company financial transactions and financial condition are based on
statutory accounting principles ("SAP"). SAP differs in a number of ways from
accounting principles generally accepted in the United States of America
("GAAP"), which governs the financial reporting of most other businesses. In
general, SAP financial statements are more conservative than GAAP financial
statements, reflecting lower asset balances, higher liability balances and lower
equity.

      State insurance regulators closely monitor the financial condition of
insurance companies reflected in SAP financial statements and can impose
significant financial and operating restrictions on an insurance company that
becomes financially impaired. Regulators generally have the power to impose
restrictions or conditions on the following kinds of activities of a financially
impaired insurance company: transfer or disposition of assets, withdrawal of
funds from bank accounts, extension of credit or advancement of loans and
investment of funds.

      The National Association of Insurance Commissioners ("NAIC") is a group
formed by state insurance commissioners to discuss issues and formulate policy
with respect to regulation, reporting and accounting of and by insurance
companies. Although the NAIC has no legislative authority and insurance
companies are at all times subject to the laws of their respective domiciliary
states and, to a lesser extent, other states in which they conduct business, the
NAIC is influential in determining the form in which such laws are enacted.
Model Insurance Laws, Regulations and Guidelines, or the Model Laws, have been
promulgated by the NAIC as a minimum standard by which state regulatory systems
and regulations are measured. Adoption of state laws that provide for
substantially similar regulations to those described in the Model Laws is a
requirement for accreditation by the NAIC.

      Insurance operations are subject to various leverage tests, which are
evaluated by regulators and rating agencies. Florida law requires the insurance
subsidiaries to maintain a ratio of 1.25 times written premiums to statutory
surplus of no greater than 10-to-1 for gross premiums written and no greater
than 4-to-1 for net premiums written. Our premium leverage ratios as of December
31, 2006, on a statutory combined basis, were 2.2-to-1 and 2.1-to-1 on a gross
and net premiums written basis, respectively.

      RISK-BASED CAPITAL REQUIREMENTS. The NAIC has adopted a risk-based
capital, or RBC, formula to be applied to all insurance companies. RBC is a
method of measuring the amount of capital appropriate for an insurance company
to support its overall business operations in light of its size and risk
profile. RBC standards are used by regulators to determine appropriate
regulatory actions relating to insurers that show signs of weak or deteriorating
conditions. As of December 31, 2006, the total adjusted capital for AmCOMP
Preferred and AmCOMP Assurance was 1411% and 1433% over the authorized control
level, respectively.


                                       18


      The RBC Model Act provides for four different levels of regulatory
attention depending on the ratio of the company's total adjusted capital,
defined as the total of its statutory capital, surplus and asset valuation
reserve, to its risk-based capital.

         o  The "Company Action Level" is triggered if a company's total
            adjusted capital is less than 200% but greater than or equal to 150%
            of its risk-based capital. At the "Company Action Level," a company
            must submit a comprehensive plan to the regulatory authority that
            discusses proposed corrective actions to improve its capital
            position. A company whose total adjusted capital is between 250% and
            200% of its risk-based capital is subject to a trend test. A trend
            test calculates the greater of any decrease in the margin (I.E., the
            amount in dollars by which a company's adjusted capital exceeds its
            risk-based capital) between the current year and the prior year and
            between the current year and the average of the past three years,
            and assumes that the decrease could occur again in the coming year.

         o  The "Regulatory Action Level" is triggered if a company's total
            adjusted capital is less than 150% but greater than or equal to 100%
            of its risk-based capital. At the "Regulatory Action Level," the
            regulatory authority will perform a special examination of the
            company and issue an order specifying corrective actions that must
            be followed.

         o  The "Authorized Control Level" is triggered if a company's total
            adjusted capital is less than 100% but greater than or equal to 70%
            of its risk-based capital, at which level the regulatory authority
            may take any action it deems necessary, including placing the
            company under regulatory control.

         o  The "Mandatory Control Level" is triggered if a company's total
            adjusted capital is less than 70% of its risk-based capital, at
            which level regulatory authority is mandated to place the company
            under its control.

      IRIS RATIO. The Insurance Regulatory Information System ("IRIS") is a
system established by the NAIC. It was designed to provide state insurance
departments with an integrated approach to monitor the financial condition of
insurers for the purposes of detecting financial distress and preventing
insolvency. In the statistical phase of IRIS, 12 industry ratios are identified
and an IRIS standard for each of the financial ratios is compared with a
company's actual financial ratios. Unusual results on four or more ratios
generally lead to further inquiries or review from individual state insurance
commissioners. A ratio that falls outside the usual range is not considered a
failing result. Rather, unusual values are regarded as part of an early warning
monitoring system. Financially sound companies may have several ratios outside
the usual ranges because of specific transactions that have the effect of
producing unusual results.

      As of December 31, 2006, AmCOMP Preferred and AmCOMP Assurance had two
ratios outside the usual range, as set forth in the following table.

                        Usual        Actual
Ratio                   Range        Results            Reason for Unusual Results
-----                   -----        -------            --------------------------

AMCOMP PREFERRED
Investment Yield.... 3.0% to 6.5%      2.0%      Low investment yields are due to approval
                                                 and payment of inter-company surplus note
                                                 interest during the year, which reduces
                                                 investment income. Surplus note interest
                                                 is recognized on a statutory accounting
                                                 basis when approved by the Florida OIR.
                                                 On a GAAP basis this expense was accrued
                                                 as incurred and included in interest
                                                 expense. Additionally, statutory
                                                 accounting policies do not recognize
                                                 increases in the value of AmCOMP
                                                 Assurance as investment income of AmCOMP
                                                 Preferred.

Gross Change in                                  Higher than expected increase in
  Policyholder's                                 Policyholder's Surplus is the result of
  Surplus........... -10% to 50%      62%        the capital contribution made during the
                                                 current year as a result of the initial
                                                 public offering.


                                       19


                        Usual        Actual
Ratio                   Range        Results            Reason for Unusual Results
-----                   -----        -------            --------------------------

AMCOMP ASSURANCE

Investment Yield.... 3.0% to 6.5%     2.3%       Low investment yields are due to approval
                                                 and payment of inter-company surplus note
                                                 interest during the year, which reduces
                                                 investment income. Surplus note interest
                                                 is recognized on a statutory accounting
                                                 basis when approved by the Florida OIR.
                                                 On a GAAP basis this expense was accrued
                                                 as incurred and included in interest
                                                 expense.

Gross Change in
  Policyholder's
  Surplus........... -10% to 50%      53%        Higher than expected increase in
                                                 Policyholder's Surplus is the result of
                                                 the capital contributions made during the
                                                 current year as a result of the initial
                                                 public offering.

      INSURANCE HOLDING COMPANY REGULATION. In addition to the regulatory
oversight of our insurance subsidiaries, we are subject to regulation under
Florida insurance holding company laws that contain certain reporting
requirements including those requiring us, as the ultimate parent company, to
file information relating to its capital structure, ownership, and financial
condition and general business operations of its insurance subsidiaries. These
laws contain special reporting and prior approval requirements with respect to
transactions among affiliates.

      STOCK OWNERSHIP RESTRICTIONS. Florida statute Section 628.461 prohibits
any person from acquiring 10% or more of the outstanding voting securities of us
or any of our insurance subsidiaries without the prior approval of the Florida
OIR. Any person who acquires between 5% and 10% of the outstanding securities of
us or any of our subsidiaries must file a disclaimer of control with the Florida
OIR, provided that the acquiror is not going to participate in management or
control. If the acquiror is planning on participating in management or control,
it must obtain prior approval from the Florida OIR for any acquisition exceeding
5%.

      In addition, many state insurance laws require prior notification to the
state insurance department of a change of control of a non-domiciliary insurance
company licensed to transact insurance in that state. While these
pre-notification statutes do not authorize the state insurance departments to
disapprove the change of control, they authorize regulatory action (including a
possible revocation of our authority to do business) in the affected state if
particular conditions exist, such as undue market concentration. Any future
transactions that would constitute a change of control of us may require prior
notification in the states that have pre-acquisition notification laws.

      PRIVACY REGULATIONS. In 1999, the United States Congress enacted the
Gramm-Leach-Bliley Act, which, among other things, protects consumers from the
unauthorized dissemination of certain personal information. Subsequently, a
majority of states have implemented additional regulations to address privacy
issues. These laws and regulations apply to all financial institutions,
including insurance and finance companies, and require us to maintain
appropriate procedures for managing and protecting certain personal information
of our customers and to fully disclose our privacy practices to our customers.
We may also be exposed to future privacy laws and regulations, which could
impose additional costs and impact our results of operations or financial
condition. An NAIC initiative that impacted the insurance industry in 2001 was
the adoption in 2000 of the Privacy of Consumer Financial and Health Information
Model Regulation, which assisted states in promulgating regulations to comply
with the Gramm-Leach-Bliley Act. In 2002, to further facilitate the
implementation of the Gramm-Leach-Bliley Act, the NAIC adopted the Standards for
Safeguarding Customer Information Model Regulation. Several states have now
adopted similar provisions regarding the safeguarding of customer information.
Our insurance subsidiaries have established procedures to comply with the
Gramm-Leach-Bliley related privacy requirements.

      FEDERAL LEGISLATIVE CHANGES. In response to the tightening of supply in
certain insurance and reinsurance markets resulting from, among other things,
the September 11, 2001 terrorist attacks, the Terrorism Risk Insurance Act of
2002 (the "2002 Act") was enacted on November 26, 2002. The principal purpose of
the Act was to create a role for the Federal government in the provision of
insurance for losses sustained in connection with terrorism. Prior to the Act,
insurance (except for workers' compensation insurance) and reinsurance for
losses arising out of acts of terrorism were largely unavailable from private
insurance and reinsurance companies.

      The program initiated by the 2002 Act applies to losses arising out of
acts of terrorism that are certified as such by the Secretary of the Treasury.
In order to be certified as an act of terrorism under the 2002 Act, losses
incurred are required to exceed $5.0 million, and the act may not be an act of


                                       20


domestic terrorism. In addition, such losses must arise out of an act of
terrorism committed in the course of a war declared by the United States
Congress, except with respect to workers' compensation coverage. Under the 2002
Act, Federal reimbursement is subject to an annual aggregate limit of $100.0
billion. Each insurer is responsible for a deductible based on a percentage of
its direct premiums earned in the previous calendar year. For losses in excess
of the deductible, the Federal government will reimburse 90% of the insurer's
loss, up to the insurer's proportionate share of the $100.0 billion. Insurers
will not be liable for payments for any portion of losses in excess of the
$100.0 billion annual limit.

      In December 2005, Presidential Bush signed into law the Terrorism Risk
Insurance Extension Act of 2005 (the "2005 Act"), which extended the 2002 Act
for an additional two years to December 31, 2007. While the underlying structure
of the 2002 Act was left intact, the 2005 Act made some adjustments, including
increasing the current insurer deductible to 20% of direct premiums earned in
2007. Our 2007 deductible is equal to 20% of 2006 direct premiums earned, or
approximately $54 million. Commencing January 1, 2007, for losses in excess of
the deductible, Federal reimbursement decreased to 85% of the insurer's loss.
After January 1, 2007, Federal reinsurance will only be available if industry
aggregate insured losses from a certified act exceed $100.0 million. Insurers
must still provide terrorism insurance for events causing losses up to the above
amount, even though Federal reinsurance is only available for events causing
losses exceeding that amount.

      Under the 2005 Act, insurers must offer coverage for losses due to
terrorist acts in all of their commercial property and casualty insurance
policies. The 2005 Act's definition of property and casualty insurance includes
workers' compensation insurance. Moreover, the workers' compensation laws of the
various states generally do not permit the exclusion of coverage for losses
arising from terrorist acts or from nuclear, biological and chemical attacks. In
addition, we are not able to limit our loss arising from any one catastrophe or
any one claimant. Our reinsurance policies exclude coverage for losses arising
out of terrorism and nuclear, biological and chemical attacks. Therefore, acts
of terrorism could adversely affect our business and financial condition.

      We do not believe that the risk of loss to our insurance subsidiaries from
acts of terrorism is currently significant. Small businesses constitute a large
proportion of our policies, and we avoid risks in high profile locations.
However, the impact of any future terrorist acts is unpredictable, and the
ultimate impact on our insurance subsidiaries, if any, of losses from any future
terrorist acts will depend upon their nature, extent, location and timing.

EMPLOYEES

      As of December 31, 2006, we had 498 employees, eight of whom were
executive officers. None of our employees is covered by a collective bargaining
agreement. We believe our relations with our employees are excellent.

EXECUTIVE OFFICERS

      The following table provides information regarding our executive officers.
Executive officers serve at the pleasure of the board of directors.

Name                                      Age Position
----                                      --- --------
Fred R. Lowe............................   72 Chairman of the Board and Director,
                                              President and Chief Executive Officer
Debra Cerre-Ruedisili...................   51 Executive Vice President, Chief
                                              Operating Officer and Director
Kumar Gursahaney........................   50 Senior Vice President, Chief Financial
                                              Officer and Treasurer
George Harris...........................   58 Senior Vice President, General Counsel
Timothy J. Spear........................   40 President, Mid-Atlantic Region
Lisa Perrizo............................   41 President, Midwest Region
Frank Pinson............................   52 President, Southern Region
Colin Williams..........................   55 President, Texas Region

      FRED R. LOWE has served as chairman of AmCOMP since September 2005 and has
been AmCOMP's president, chief executive officer and a director of AmCOMP since
February 1997. He is the chairman of each of AmCOMP's subsidiaries. Mr. Lowe
co-founded Florida Administrators, Inc, a precursor to AmCOMP. From 1992 until
1997, Mr. Lowe was an independent consultant, which included providing


                                       21


consulting services to Florida Administrators from 1994 to 1997. From 1989 to
1992, Mr. Lowe held various executive positions with several financial service
companies. Mr. Lowe assisted in the conversion of FACCA-SIF, which later became
AmCOMP Preferred, into a capitalized insurance company. He attended Ohio
University.

      DEBRA CERRE-RUEDISILI has served as executive vice president of AmCOMP
since April 1997, chief operating officer since March 1998 and a director since
September 1998. Ms. Cerre-Ruedisili has served as a director of AmCOMP Assurance
since September 1998 and as president and chief operating officer since January
2001. Ms. Cerre-Ruedisili has served as the president, vice chairman and a
director of AmCOMP Preferred since January 2001, and as the chief operating
officer since January 2003. Prior to joining AmCOMP, Ms. Cerre-Ruedisili served
for 10 years as co-chief executive officer and chief operating officer of
MedView Services Incorporated, a managed care provider. From 1984 through 1987,
Ms. Cerre-Ruedisili served as the risk manager of Kmart Corporation. Prior to
that, Ms. Cerre-Ruedisili was an attorney in private practice specializing in
defense of workers' compensation claims and a workers' compensation claims
adjuster and claims manager for Transamerica Insurance Group. Ms.
Cerre-Ruedisili served as a member of the Board of Governors of the Florida
Workers' Compensation Joint Underwriting Association from 1999 through 2003. Ms.
Cerre-Ruedisili has a B.A. in psychology from the University of Michigan and a
J.D. from the University of Detroit.

      KUMAR GURSAHANEY joined AmCOMP in December 2003 as assistant vice
president, finance. He was appointed senior vice president, chief financial
officer and treasurer of AmCOMP in July 2004. Mr. Gursahaney served as vice
president and chief financial officer for the insurance operations at
Transportation Financial Group from November 2002 through November 2003 and as
vice president and comptroller of the Domestic Brokerage Group of American
International Group, Inc. ("AIG") between 1986 and 1998. Prior to joining AIG,
Mr. Gursahaney was an Audit Senior in the New York office of Coopers & Lybrand
(now PricewaterhouseCoopers) from 1983 through 1986. Between 1998 and 2002, Mr.
Gursahaney was a private investor. He obtained a Bachelors degree in commerce,
economics and accounting from the Sydenham College of Economics, Bombay, India.

      GEORGE HARRIS joined AmCOMP in January 2007 as senior vice president and
general counsel. Mr. Harris has practiced law in Palm Beach County, Florida for
32 years, with an emphasis in corporate, real property, banking and insurance
law, primarily representing businesses, financial institutions and insurance
companies. For the last 20 years, he was a principal in the law firm of Harris,
Kukey & Helgesen, P.A., in Palm Beach Gardens, Florida. Mr. Harris received his
Juris Doctor from Stetson University College of Law in St. Petersburg, Florida,
and also graduated from Randolph Macon College in Ashland, Virginia with a B.A.
in political science and advanced French studies.

      TIMOTHY J. SPEAR has served as president, Mid-Atlantic region, of AmCOMP
since January 2006. Mr. Spear also continues to be responsible for the field
underwriting and marketing department for the Mid-Atlantic region. Mr. Spear
served as vice president of field services for AmCOMP's Mid-Atlantic region from
February 2003 to January 2006. Mr. Spear joined AmCOMP in 1996, initially
assisting with marketing efforts and, in 1997, he assumed the management
responsibilities of the loss control department for the Southeast region. In
1999, Mr. Spear became co-manager of the field underwriting and marketing
department for AmCOMP's Southeast region. Before joining AmCOMP, Mr. Spear was a
loss control underwriter with FCCI from 1990 to 1992 followed by four years in
various capacities with Associated Business and Commerce Insurance Company,
another Florida domiciled workers' compensation insurance carrier. He has more
than 14 years of experience in the workers' compensation industry. Mr. Spear
earned a B.S. in occupational safety from the University of
Wisconsin-Whitewater.

      LISA PERRIZO has served as president, Midwest region of AmCOMP since June
2004. Ms. Perrizo joined AmCOMP in 1998 as manager of field underwriting for
Wisconsin and thereafter assumed the management of operations in AmCOMP's
Wisconsin and Illinois offices. From 1995 through 1998, Ms. Perrizo held various
positions at USF&G/St. Paul (St. Paul/Travelers) including auto specialist,
construction specialist and commercial account manager. From 1992 through 1995,
she was a senior casualty underwriter at Crum & Foster Insurance. From 1987
through 1992, Ms. Perrizo was a multi-line commercial underwriter for Heritage
Mutual Insurance Company (Acuity). She has 17 years of experience in the
property and casualty lines of business. Ms. Perrizo has a B.B.A. in finance
from the University of Wisconsin-Whitewater.

      FRANK PINSON joined AmCOMP in August 2005 as operations manager in
Nashville, Tennessee. He was promoted to Vice President, Midwest Region, in
January 2006, and to President, Southern Region, in June 2006. From 2004 through
2005, Mr. Pinson was Agency Manager for Geny Insurance Agency. From 2002 to 2004
he was President of the Middle Tennessee Insurance Agency. From 2000 through
2001, he worked for Highlands Insurance Group as a Regional Vice President. From
1997 through 2000, he worked for Harleysville Insurance Company as a Regional
Vice President. From 1984 through 1997, he worked for General Insurance Company,


                                       22


first as a Branch Manager and then later was promoted to Resident Vice
President. Prior to this position, he worked with several insurance companies
and agencies in the Nashville area. Mr. Pinson has 29 years of experience in the
insurance industry. He has a B.S. degree in business administration from
Trevecca College, Nashville, Tennessee.

      COLIN WILLIAMS has served as president, Texas region, of AmCOMP since
1999. From 1995 to 1999, he was an executive vice president of Acordia
Southeast, an insurance brokerage agency. From 1993 to 1995, he was a vice
president/sales manager for Alexander & Alexander, an insurance agency. From
1982 to 1993, he was an agency sales manager and agency president of Kenneth
Murchison & Company, subsidiary president of Kmart Insurance Services in Dallas
and corporate risk manager at the Kmart Corporation in Troy, Michigan. Mr.
Williams has a B.B.A. from the University of Wisconsin and an M.B.A. from
Southern Methodist University.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

      This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act") relating to our operations
and our results of operations that are based on our current expectations,
estimates and projections. Words such as "expects," "intends," "plans,"
"projects," believes," "estimates" and similar expressions are used to identify
these forward-looking statements. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult
to predict. Forward-looking statements are based upon assumptions as to future
events that may not prove to be accurate. Actual outcomes and results may differ
materially from what is expressed or forecast in these forward-looking
statements. The reasons for these differences include changes in general
economic and political conditions, including fluctuations in exchange rates, and
the factors discussed below under the section entitled "Business--Risks Related
to Our Business and Industry."

AVAILABLE INFORMATION

      Our website address is WWW.AMCOMP.COM. We make available free of charge on
the Investor Relations section of our website (IR.AMCOMP.COM) our Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
all amendments to those reports as soon as reasonably practicable after such
material is electronically filed or furnished with the Securities and Exchange
Commission (the "SEC") pursuant to Section 13(a) or 15(d) of the Exchange Act.
We also make available through our website other reports filed with or furnished
to the SEC under the Exchange Act, including our proxy statements and reports
filed by officers and directors under Section 16(a) of that Act, as well as our
Code of Business Conduct and Ethics. We do not intend for information contained
in our website to be part of this Annual Report on Form 10-K.

      You also may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, DC, 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site (WWW.SEC.GOV) that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.


                                       23


ITEM 1A. RISK FACTORS

      YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL
OF THE OTHER INFORMATION INCLUDED IN THIS ANNUAL REPORT. THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY. IF ANY
OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR
OPERATING RESULTS COULD BE HARMED. ANY OF THE RISKS DESCRIBED BELOW COULD RESULT
IN A SIGNIFICANT OR MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION OR
RESULTS OF OPERATIONS, AND A CORRESPONDING DECLINE IN THE MARKET PRICE OF OUR
COMMON STOCK. YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. THE RISKS DISCUSSED
BELOW ALSO INCLUDE FORWARD-LOOKING STATEMENTS AND OUR ACTUAL RESULTS MAY DIFFER
SUBSTANTIALLY FROM THOSE DISCUSSED IN THOSE FORWARD-LOOKING STATEMENTS. PLEASE
REFER TO THE DISCUSSION UNDER THE HEADING "FORWARD-LOOKING STATEMENTS AND
ASSOCIATED RISKS" IN ITEM 1.

RISKS RELATED TO OUR BUSINESS

WE MAY NOT BE ABLE TO COLLECT ON OUR REINSURANCE RECOVERABLES, WHICH WOULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION.

      We are subject to credit risk with respect to our reinsurers. Reinsurance
is an arrangement in which an insurance company, called the ceding company,
transfers a portion of insurance risk under policies it has written to another
insurance company, called the reinsurer, and pays the reinsurer a portion of the
premiums relating to those policies. Conversely, the reinsurer receives or
assumes reinsurance from the ceding company. Although we purchase reinsurance to
manage our risk and exposure to losses, we continue to have direct obligations
under the policies we write. We remain liable to our policyholders, even if we
are unable to recover what we believe we are entitled to receive under our
reinsurance contracts. Reinsurers might refuse or fail to pay losses that we
cede to them, or they might delay payment. In the case of long-term workers'
compensation cases, the creditworthiness of our reinsurers may change before we
can recover amounts to which we are entitled. Recent natural disasters, such as
Hurricanes Katrina, Rita and Wilma, have caused unprecedented insured property
losses, a significant portion of which will be borne by reinsurers. If a
reinsurer is active both in this market and in the workers' compensation
insurance market, its ability to perform its obligations in the latter market
may be adversely affected by events unrelated to workers' compensation insurance
losses.

      In 2001, we wrote off $10.8 million of uncollectible reinsurance
receivables from Reliance Insurance Company and Legion Insurance Company. In
addition, the liquidator for Reliance has filed an action against us seeking
recovery of approximately $2.3 million of reinsurance recoverables paid to us by
Reliance as preferential payments in the ordinary course of business prior to
the entry of an order to liquidate Reliance. While we are vigorously defending
such action, we cannot assure the outcome of such action.

      At December 31, 2006, we carried a total of $75.4 million of reinsurance
recoverables for paid and unpaid losses and LAE and ceding commissions,
representing 54.1% of our total stockholders' equity as of that date. Under
Florida law, each of our insurance subsidiaries is required to maintain a ratio
of 1.25 times premiums written to surplus of no greater than 10-to-1 for gross
premiums written and no greater than 4-to-1 for net premiums written. If all
reinsurance recoverables became uncollectible, our surplus would decline by this
amount, and we would not be in compliance with Florida's statutory requirement
at our current level of premiums written. The Florida OIR would have the
authority to place us into receivership, to suspend our insurance subsidiaries'
certificates of authority or to set limits on our maximum annual gross or net
premiums written in all states. In addition, we may be unable to comply with
certain regulatory requirements, including solvency standards that may subject
us to additional restrictions on our operations. Of the $75.4 million in
reinsurance recoverables, $3.1 million is the current recoverable on paid losses
and $72.3 million is recoverable on unpaid losses and therefore not currently
due. The reinsurance recoverables on unpaid losses will become current as we pay
the related claims. If we are unable to collect a significant amount of our
reinsurance recoverables, our financial condition and results of operations
would be adversely affected. See "Business--Recoverability of Reinsurance" and
"--Regulation."

      Our largest recoverable from a single reinsurer as of December 31, 2006
was $39.1 million owed to us by Continental Casualty Company, a subsidiary of
CNA Financial Corporation, representing 28.1% of our total stockholders' equity
as of that date. Of the $39.1 million, $1.6 million was the current recoverable
on paid losses. The balance of $37.5 million is recoverable from Continental
Casualty Company on losses that may be paid by us in the future and therefore is
not currently due. We also have a net outstanding and past due claims receivable
for reinsurance recoveries in the amount of approximately $1.8 million under
reinsurance agreements assumed from 1998 through 2000, with Security Insurance
Company of Hartford, Fire and Casualty Insurance Company of Connecticut and
Connecticut Indemnity Company. These amounts have become past due because of
Security Insurance Company's contract disputes with its reinsurer. If these
amounts are ultimately determined to be uncollectible from Security Insurance
Company, we will write off that amount.


                                       24


OUR LOSS RESERVES ARE BASED ON ESTIMATES AND MAY BE INADEQUATE TO COVER OUR
ACTUAL LOSSES.

      We must establish and maintain reserves for our estimated liability for
losses and LAE. We establish loss reserves in our financial statements that
represent an estimate of amounts needed to pay and administer claims with
respect to insured events that have occurred, including events that have not yet
been reported to us. Loss reserves are estimates of the ultimate cost of
individual claims based on actuarial estimation techniques and are inherently
uncertain. Judgment is required in applying actuarial techniques to determine
the relevance of historical payment and claim closure patterns under current
facts and circumstances. We review our established reserves each quarter. We may
adjust our reserves based on the results of these reviews and these adjustments
could be significant. If we change our estimates, these changes are reflected in
our results of operations during the period in which they are made.

      In states other than Florida, we have a shorter operating history and must
rely on a combination of industry benchmarks, our specific experience in these
states and our experience in Florida. Operational changes in claims handling
practices over the years may impact the interpretation of this historical data,
which can also be impacted by external forces such as legislative changes,
economic fluctuations and legal trends. A key assumption in the estimation
process for workers' compensation reserves is severity trends, including the
increasing costs of health care and the medical claims process. If there were
unfavorable changes in severity trends, our loss reserves might need to be
increased, which would result in a charge to our earnings.

      In 2006 and 2005, we experienced redundancies in our reserves for prior
periods of $14.2 million and $24.7 million, respectively. Our loss reserve
estimates are made primarily by reviewing our current pricing and state specific
loss reserving patterns from the past. We review our loss information and adjust
our expected loss reserving patterns on a state specific basis three times a
year. During 2006, we observed that enough loss reserving history had occurred
to select loss development factors based entirely on state specific information.
While the selected development factors changed significantly for some states,
many of the changes were offsetting. The overall effect for the company was to
slightly increase loss development factors affecting only the 2006 accident
year. Our reserves may not develop as favorably in the future as the have in
recent periods.

      Workers' compensation claims are often paid over a long period of time.
Estimating reserves for these claims may be more uncertain than estimating
reserves for other lines of insurance with shorter or more definite periods
between occurrence of the claim and final determination of the ultimate loss.
Accordingly, there is a greater risk that we may fail to accurately estimate the
risks associated with the businesses that we insure and that our reserves may
prove to be inadequate to cover our actual losses.

IF WE DO NOT EFFECTIVELY PRICE OUR INSURANCE POLICIES, OUR FINANCIAL RESULTS
WILL BE ADVERSELY AFFECTED; WE DO NOT SET PRICES FOR OUR POLICIES IN FLORIDA
AND WISCONSIN.

      Our policy prices are established when coverage is initiated. Our prices
for insurance coverage are based on estimates of expected losses generated from
the policies we underwrite. As do most workers' compensation insurance carriers,
we analyze many factors when pricing a policy, including the policyholder's
prior loss history and industry, and the loss prevention orientation of the
policyholder's management. Inaccurate information regarding a policyholder's
past claims experience puts us at risk for mispricing our policies. When
initiating coverage on a policyholder, we must rely on the claims information
provided by the policyholder or previous carriers to properly estimate future
claims expense. If the claims information is not accurately stated, we may
underprice our policy by using claims estimates that are too low. As a result,
our actual costs for providing insurance coverage to our policyholders may be
significantly higher than our premiums.

      We write insurance policies in two "administered pricing" states, Florida
and Wisconsin. In 2006, we wrote 37.7% of our direct written premiums in Florida
and 12.9% in Wisconsin. In administered pricing states, insurance rates are set
by the state insurance regulators and are adjusted periodically. Rate
competition generally is not permitted in these states.

      On October 24, 2006, NCCI submitted an amended filing calling for a
statewide decrease of 15.7%, which was approved by the Florida OIR on October
31, 2006. Significant declines in claim frequency and an improvement in loss
development in Florida since the legislature enacted the 2003 reforms are the
two main reasons for the proposed premium level decrease. The new rates apply to
all new and renewal policies as of January 1, 2007. The effect of the approved
decrease cannot currently be ascertained. If the 2007 premium decrease had been
in effect in 2006, our direct premiums written would have declined by $15.8
million, our Florida net loss ratio would have increased by 3.8% and our
company-wide net loss ratio would have increased by 2.1%. If the approved rate
decrease results in a material adverse effect on our profitability in Florida,


                                       25


we may elect to reduce the amount of premiums written there. In states in which
we operate, other than administered pricing states, should our competitors offer
products at prices lower than we believe would be profitable, we may decline to
compete at those lower prices and our premium levels could be reduced.

WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY AND MAY LACK THE FINANCIAL
RESOURCES TO COMPETE EFFECTIVELY.

      The market for workers' compensation insurance products is highly
competitive. Competition in our business is based on many factors, including
premiums charged, policyholder dividends, services provided, financial ratings
assigned by independent rating agencies, speed of claims payments, reputation,
perceived financial strength and general experience. In some cases, our
competitors offer lower priced products than we do. If our competitors offer
more competitive premiums, dividends or payment plans, services or commissions
to independent agencies, we could lose market share or have to reduce our
premium rates, which could adversely affect our profitability. Our competitors
include insurance companies, professional employer organizations, third party
administrators, self-insurance funds and state insurance pools. Our main
competitors in each of the 15 states in which we operate vary from state to
state but are usually those companies that offer a full range of services in
underwriting, loss prevention and claims. We compete on the services that we
offer to our policyholders and on ease of doing business rather than solely on
price.

      In Florida, our main competitor is Summit Holdings Southeast,
Inc./Bridgefield Employers Insurance Company, a full service company that
provides comparable services to employers. Another Florida competitor, FCCI
Commercial Insurance Company, also provides these services to policyholders in
the $10,000 to $100,000 premium range, our target market. In Texas, our main
competitor is Texas Mutual Insurance Company, a company also not rated by A.M.
Best, which sells to all sized policyholders, including policyholders in the
$10,000 to $100,000 range. In Wisconsin, there are over 300 companies that write
workers' compensation insurance. Our primary competitors there include Acuity, a
Mutual Insurance Company, United Heartland Life Inc., State Fund Mutual
Insurance Company, West Bend Mutual Insurance Company, General Casualty Company
of Wisconsin and Sentry Insurance Group, because they offer the same types of
services that we offer. In Indiana, our principal competition is from Accident
Fund, Amerisure Insurance Company and Indiana Insurance Company. In Tennessee,
our main competition comes from Acuity, Accident Fund Insurance Company of
America, Bridgefield and Hartford Insurance Group. Many of our existing and
potential competitors are significantly larger and possess greater financial,
marketing and management resources than we do.

      State insurance regulations require maintenance of minimum levels of
surplus and of ratios of net premiums written to surplus. Accordingly,
competitors with more surplus than we possess have the potential to expand in
our markets more quickly than we can. Additionally, greater financial resources
permit a carrier to gain market share through more competitive pricing, even if
that pricing results in reduced underwriting margins or an underwriting loss.
Many of our competitors are multi-line carriers that can price the workers'
compensation insurance that they offer at a loss in order to obtain other lines
of business at a profit. If we are unable to compete effectively, our business
and financial condition could be materially adversely affected.

IF WE DO NOT MAINTAIN GOOD RELATIONSHIPS WITH INDEPENDENT INSURANCE AGENCIES,
THEY MAY NOT SELL OUR PRODUCTS IN PREFERENCE TO THOSE OF OUR COMPETITORS AND
OUR REVENUES MAY DECLINE.

      We market and sell our insurance products solely through independent,
non-exclusive insurance agencies. These agencies are not obligated to promote
our products and can and do sell our competitors' products. We must offer
workers' compensation insurance products that meet the requirements of these
agencies and their customers. We must provide competitive compensation to these
agencies. Our business model is based on an extensive network of smaller
agencies distributed throughout the states in which we do business. We need to
maintain good relationships with the agencies with which we contract to sell our
products. If we do not, these agencies may sell our competitors' products
instead of ours or may direct less desirable risks to us, and our revenues or
profitability may decline. In addition, these agencies may find it easier to
promote the broader range of programs of our competitors than to promote our
niche selection of insurance products. A loss of a number of our independent
agencies or the failure of these agencies to successfully market our products
may reduce our revenues and our results of operations if we are unable to
replace them with agencies that produce comparable premiums.

INSURANCE RATINGS MAY BECOME IMPORTANT TO OUR AGENTS AND POLICYHOLDERS AND AN
ADVERSE RATING COULD NEGATIVELY IMPACT OUR COMPETITIVE POSITION.


                                       26


      Insurance ratings may become an increasingly important factor in
establishing our competitive position. Rating agencies rate insurance companies
based on their financial strength and their ability to pay claims, factors that
are relevant to agents and policyholders. The ratings assigned by nationally
recognized, independent rating agencies, particularly A.M. Best, may become
material to our ability to maintain and expand our business. Ratings from A.M.
Best and other rating agencies are used by some insurance buyers, agents and
brokers as an indicator of financial strength and security. These ratings are
not intended to reflect the quality of the rated company for investment purposes
and are not recommendations to buy or hold securities. The financial strength
ratings of A.M. Best and other rating agencies are subject to periodic review
using, among other things, proprietary capital adequacy models, and are subject
to revision or withdrawal at any time. Other companies in our industry that have
been rated and have had their rating downgraded have experienced negative
effects.

      Our insurance subsidiaries have never been rated by A.M. Best. Since 1982,
AmCOMP and its predecessors have been a mono-line workers' compensation
insurance carrier specializing in smaller sized policyholders, principally
employers with premium between $10,000 and $100,000 per year. Based on our
extensive experience with independent agents, we believe employers in this size
category are not as sensitive to A.M. Best ratings and they place more
importance on a workers' compensation carrier's ability to assist in the
prevention of injuries at their job site. To date, we have not pursued a rating
because we have been able to successfully increase premiums written without a
rating in the 15 states in which we operate. Some companies require that their
workers' compensation insurance carrier have a rating of at least "A-" from A.M.
Best. Most of these companies are larger than companies in our target market,
and generally do not meet our underwriting and pricing objectives. Historically,
when we have sought to write policies for these companies, we have been
successful in many cases in having this requirement waived. However, we may not
be able to obtain these waivers in the future and, should we decide to expand
our target market, the absence of an A.M. Best rating or an unfavorable rating
may limit our ability to profitably expand our business.

      One of our insurance subsidiaries, AmCOMP Preferred, is rated "BBpi" by
Standard & Poor's on an unsolicited basis. A rating of "BB" is the 5th highest
of 8 rating levels used by Standard & Poor's and indicates marginal financial
security characteristics, although positive attributes exist, but adverse
business conditions could lead to insufficient ability to meet financial
commitments. Our insurance subsidiaries, AmCOMP Preferred and AmCOMP Assurance,
are also rated "BBq" by Fitch Ratings on an unsolicited basis. A rating of "BBq"
is the 5th highest of 7 Q-IFS rating levels used by Fitch and indicates that the
insurer has an uncertain capacity to meet policyholder and contract obligations
and that, although positive factors are present, overall risk factors are high
and the impact of adverse business and economic factors is expected to be
significant. These ratings are based solely on an analysis of published
financial information and additional information in the public domain. They are
not based on meetings with our management, nor do they incorporate material,
non-public information, and are therefore based on less comprehensive
information than ratings without a "pi" or "q" subscript.

      The absence of a rating from A.M. Best and the current ratings by Standard
& Poor's and Fitch may adversely affect our marketing efforts, cost or
availability of reinsurance and financial performance. Should our insurance
subsidiaries apply for a rating or should A.M. Best choose to rate our insurance
subsidiaries on an unsolicited basis, the ratings they receive may not be
favorable, which could adversely affect our marketing efforts, cost or
availability of reinsurance and financial performance. Additionally, a downgrade
in or withdrawal of any future A.M. Best or other rating agency rating could
cause a reduction in the number of policies we write and could have a material
adverse effect on our results of operations and our financial position.

OUR GEOGRAPHIC CONCENTRATION TIES OUR PERFORMANCE TO BUSINESS, ECONOMIC AND
REGULATORY CONDITIONS IN CERTAIN STATES.

      Our business is currently concentrated in Florida (37.7% of 2006 direct
premiums written), Wisconsin (12.9% of 2006 direct premiums written), Texas
(11.3% of 2006 direct premiums written), Indiana (9.8% of 2006 direct premiums
written) and Tennessee (6.0% of 2006 direct premiums written). Unfavorable
business, economic or regulatory conditions in these states could impact our
business disproportionately in comparison to insurers with less geographic
concentration.

      In Florida, the state in which we write the most premium, and in
Wisconsin, insurance regulators set the premium rates we may charge. The Florida
and Wisconsin insurance regulators may set rates below those that we require to
maintain profitability. For example, in October 2006, the Florida OIR approved
an overall average 15.7% decrease in premium rates for all workers' compensation
insurance policies written by Florida licensed insurers in 2007. The effect of
the approved decrease cannot be ascertained at this time, because of anticipated
changes in the number of insurers that will operate in Florida and the amount of
insurance that they seek to write, the use of dividend plans and consent to rate
policies and possible additional realization of cost savings resulting from
reforms enacted in 2003.


                                       27


      In addition, Florida is exposed to severe natural perils, such as
hurricanes. As our business is concentrated in this manner, we may be exposed to
economic and regulatory risks or risks from natural perils that are greater than
the risks we would face if our business were spread more evenly by state. To
date we have not been adversely affected by natural perils. However, were
Florida to experience a natural peril of the magnitude of Hurricane Katrina, the
result could be disruption of the entire local economy, the loss of jobs and a
concomitant reduction in the opportunity to place workers' compensation
insurance.

OUR FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO REALIZE
OUR INVESTMENT OBJECTIVES.

      Investment income is an important component of our revenues and net
income. The ability to achieve our investment objectives is affected by factors
that are beyond our control. For example, United States participation in
hostilities with other countries and large-scale acts of terrorism may adversely
affect the economy generally, and our investment income could decrease due to
decreases in the yield on our investments. Interest rates are highly sensitive
to many factors, including governmental monetary policies and domestic and
international economic and political conditions. These and other factors affect
the capital markets and, consequently, the value of the securities we own.
Interest rates have remained low in the past several years. The outlook for our
investment income is dependent on the future direction of interest rates,
maturity schedules and the amount of cash flows from operations that is
available for investment. The fair values of fixed maturity investments that are
"available-for-sale" fluctuate with changes in interest rates and cause
fluctuations in our balance sheet. Our stockholders' equity will continue to
fluctuate with any future changes in interest rates. Any significant decline in
our investment income as a result of falling interest rates or general market
conditions would have an adverse effect on our net income and, as a result, on
our stockholders' equity and our policyholders' surplus.

OUR BUSINESS IS LARGELY DEPENDENT ON THE EFFORTS OF OUR MANAGEMENT BECAUSE OF
ITS INDUSTRY EXPERTISE, KNOWLEDGE OF OUR MARKETS AND RELATIONSHIPS WITH THE
INDEPENDENT AGENCIES THAT SELL OUR PRODUCTS.

      Our success will depend in substantial part upon our ability to attract
and retain qualified executive officers, experienced underwriting personnel and
other skilled employees who are knowledgeable about our business. The current
success of our business is dependent in significant part on the efforts of Fred
R. Lowe, our president and chief executive officer, Debra Cerre-Ruedisili, our
executive vice president and chief operating officer, and Kumar Gursahaney, our
senior vice president, chief financial officer and treasurer. Many of our
regional and local officers are also critical to our operations because of their
industry expertise, knowledge of our markets and relationships with the
independent agencies who sell our products. We carry key person life insurance
only on Ms. Cerre-Ruedisili. If we were to lose the services of members of our
management team or key regional or local officers, we may be unable to find
replacements satisfactory to us and our business. As a result, our operations
may be disrupted and our financial performance may be adversely affected.

WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY NOT BE AVAILABLE
OR MAY BE AVAILABLE ONLY ON UNFAVORABLE TERMS.

      Our future capital requirements depend on many factors, including our
ability to write new business successfully and to establish premium rates and
reserves at levels sufficient to cover losses. To the extent that the funds
generated by operations are insufficient to fund future operating requirements
and/or cover losses, we may need to raise additional funds through financings or
curtail our growth. We believe that the cash generated from operations, together
with our anticipated retained earnings, will support our operations for at least
the next 18 to 24 months without the need to raise additional capital. However,
we cannot provide any assurance in that regard, because many factors will affect
the amount and timing of our capital needs, including our growth and
profitability, our claims experience, and the availability of reinsurance, as
well as possible market disruptions and other unforeseeable developments. If we
have to raise additional capital, equity or debt financing may not be available
on terms that are favorable to us. In the case of equity financings, dilution to
our stockholders could result. In any case, such securities may have rights,
preferences and privileges that are senior to those of the shares currently
outstanding. In the case of debt financings, we may be subject to covenants that
restrict our ability to freely operate our business. If we cannot obtain
adequate capital on favorable terms or at all, we may not have sufficient funds
to implement our future growth or operating plans and our business, financial
condition or results of operations could be materially adversely affected.

THE INSURANCE BUSINESS IS SUBJECT TO EXTENSIVE REGULATION THAT LIMITS THE WAY
WE CAN OPERATE OUR BUSINESS.

      We are subject to extensive regulation by the Florida OIR and the
insurance regulatory agencies in each state in which our insurance subsidiaries
are licensed. These state agencies have broad regulatory powers designed


                                       28


primarily to protect policyholders and their employees, not the stockholders of
AmCOMP. Regulations vary from state to state, but typically address or include:

         o  standards of solvency, including risk-based capital measurements;

         o  restrictions on the nature, quality and concentration of
            investments;

         o  restrictions on the types of terms that we can include in the
            insurance policies we offer;

         o  mandates that may affect wage replacement and medical care benefits
            paid under the workers' compensation system;

         o  procedures for adjusting claims, which can affect the ultimate
            amount for which a claim is settled;

         o  restrictions on the way rates are developed and premiums are
            determined;

         o  the manner in which general agencies may be appointed;

         o  required methods of accounting for regulatory reporting;

         o  establishment of reserves for unearned premiums, losses and other
            purposes;

         o  limitations on our ability to transact business with affiliates;

         o  mergers, acquisitions and divestitures involving our insurance
            subsidiaries;

         o  licensing requirements and approvals that affect our ability to
            do business;

         o  compliance with medical privacy laws;

         o  potential assessments for the settlement of covered claims under
            insurance policies issued by impaired, insolvent or failed insurance
            companies; and

         o  the amount of dividends that our insurance subsidiaries may pay to
            us, the parent holding company.

      Stock insurance companies are subject to Florida statutes related to
excess profits for workers' compensation insurance companies. Excessive profits
are calculated based upon a complex statutory formula which is applied over
rolling three year periods. Companies are required to file annual excess profits
forms, and they are required to return so-called "excessive profits" to
policyholders in the form of a cash refund or credit toward the future purchase
of insurance. To date, we have not been required to return excess profits and no
amounts have been provided for returns of excess profits in our financial
statements.

      Regulatory authorities have broad discretion to deny or revoke licenses
for various reasons, including the violation of regulations. We may be unable to
maintain all required approvals or comply fully with the wide variety of
applicable laws and regulations, which are continually undergoing revision, or
the relevant authority's interpretation of such laws and regulations. In some
instances, where there is uncertainty as to applicability, we follow practices
based on our interpretations of regulations or practices that we believe
generally to be followed by the industry. These practices may turn out to be
different from the interpretations of regulatory authorities. This extensive
regulation of our business may affect the cost of our products and may limit our
ability to obtain rate increases or to take other actions that we might pursue
to increase our profitability. Further, changes in the level of regulation of
the insurance industry or changes in laws or regulations or interpretations by
regulatory authorities could impact our operations and require us to bear
additional costs of compliance.

      The NAIC has adopted a system to test the adequacy of statutory capital,
known as "risk-based capital." This system establishes the minimum amount of
capital and surplus calculated in accordance with statutory accounting
principles, necessary for an insurance company to support its overall business
operations. It identifies insurers that may be inadequately capitalized by
looking at certain inherent risks of each insurer's assets and liabilities and
its mix of net premiums written. Insurers falling below a calculated threshold


                                       29


may be subject to varying degrees of regulatory action, including supervision,
rehabilitation or liquidation. Failure to maintain our risk-based capital at the
required levels could adversely affect the ability of our insurance subsidiaries
to maintain regulatory authority to conduct our business. See
"Business--Regulation."

      For 2005, the Illinois insurance regulatory agency imposed a cap of $9.0
million on the annual premiums we could write because AmCOMP Preferred was not
currently a licensed carrier in Illinois. This limit superseded a previous $2.5
million limit. The Illinois insurance regulatory agency considered our
aggregation of the financial statements of AmCOMP Assurance, a licensed carrier
in Illinois, and AmCOMP Preferred to be a reinsurance transaction with an
unlicensed carrier and has required a deposit from us for premiums written in
that state. In April 2006, Illinois lifted the limitation on annual premium
writings, retroactive to January 1, 2006. In North Carolina, we were subject to
a $12.0 million cap on written premiums during the 2002-2004 periods. Effective
July 6, 2005, the cap was removed.

ASSESSMENTS AND OTHER SURCHARGES BY GUARANTY FUNDS AND SECOND INJURY FUNDS
AND OTHER MANDATORY POOLING ARRANGEMENTS MAY REDUCE OUR PROFITABILITY.

      Most states have guaranty fund laws under which insurers doing business in
the state are required to fund policyholder liabilities of insolvent insurance
companies. Generally, assessments are levied by guaranty associations within the
state, up to prescribed limits, on all insurers doing business in that state on
the basis of the proportionate share of the premiums written by insurers doing
business in that state in the lines of business in which the impaired, insolvent
or failed insurer is engaged. Maximum contributions required by law in any one
state in which we offer insurance vary between 0.3% and 2.0% of direct premiums
written. We recorded an estimate of $5.7 million, $4.9 million and $4.3 million
for our expected liability for guaranty fund assessments at December 31, 2006,
2005 and 2004, respectively. These liabilities were offset by related assets for
expected recoveries in the form of premium tax credits in the amount of $2.4
million, $2.7 million, and $3.1 million at December 31, 2006, 2005, and 2004.
The assessments levied on us may increase as we increase our premiums written.

      Many states also have laws that established second injury funds to
reimburse employers and insurance carriers for workers' compensation benefits
paid to employees who are injured and whose disability is increased by a prior
work-related injury. The source of these funds is an assessment charged to
workers' compensation insurance carriers doing business in such states.
Assessments are based on paid losses or premium surcharge mechanisms. Several of
the states in which we operate maintain second injury funds with material
assessments. Our total liability for assessments was $8.3 million in 2006, $10.7
million in 2005, and $4.9 million in 2004. Our collections from these funds were
$1.4 million in 2006, $2.2 million in 2005 and $3.4 million in 2004. There is
significant uncertainty that these funds will have the money required to
reimburse us for our claims. For example, Florida's fund currently has
significant unfunded liabilities and no reserves exist to satisfy future claims.
Consequently, we have recorded no asset for future collections. No recoveries
are available from Florida's fund for claims arising from accidents occurring on
or after January 1, 1998. Beginning in the third quarter of 2005, the second
injury fund assessment in South Carolina was doubled to 36.8% on losses. A
pre-tax charge of $3.3 million was recorded in the third quarter of 2005 to
reflect the impact of this rate change. During 2006, the second injury fund
assessment rate in South Carolina decreased to 24.5% on losses. The impact of
this rate change was to increase 2006 pre-tax income by $2.8 million.

      As a condition to the ability to conduct business in some states,
insurance companies are required to participate in mandatory workers'
compensation shared market mechanisms, or pooling arrangements. These
arrangements provide insurance to companies that are otherwise unable to obtain
coverage due, for example, to their prior loss experience. Our estimated
liability is based upon currently available information and could change based
on additional information or reinterpretations of existing information
concerning the actions of the pools. Although we price our products to account
for the obligations that we may have under these pooling arrangements, we may
not be successful in estimating our liability for these obligations.
Accordingly, our prices may not fully account for our liabilities under pooling
arrangements, which may cause a decrease in our profits. We cannot predict the
financial impact of our participation in any shared market or pooling mechanism
that may be implemented in the future. As we write policies in new states that
have pooling arrangements, we will be required to participate in additional
pooling arrangements. Further, the insolvency of other insurers in these pooling
arrangements would likely increase the liability for other members in the pool.
The effect of these assessments and mandatory shared market mechanisms or
changes in them could reduce our profitability in any given period or limit our
ability to grow our business.

WE RELY ON OUR INFORMATION TECHNOLOGY AND TELECOMMUNICATION SYSTEMS, AND THE
FAILURE OF THESE SYSTEMS COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.


                                       30


      Our business is highly dependent upon the successful and uninterrupted
functioning of our information technology and telecommunications systems. We
rely on these systems to process new and renewal business, provide customer
service, make claims payments and facilitate collections and cancellations.
These systems also enable us to perform actuarial and other modeling functions
necessary for underwriting and rate development. The failure of these systems,
or the termination of a third-party software license upon which any of these
systems is based, could interrupt our operations or materially impact our
ability to evaluate and write new business. As our information technology and
telecommunications systems interface with and depend on third-party systems, we
could experience service denials if demand for such services exceeds capacity or
such third-party systems fail or experience interruptions. If sustained or
repeated, a system failure or service denial could result in a deterioration of
our ability to write and process new and renewal business and provide customer
service or compromise our ability to pay claims in a timely manner. This could
result in a material adverse effect on our business.

AS WE ONLY OFFER WORKERS' COMPENSATION INSURANCE, NEGATIVE DEVELOPMENTS IN
THIS INDUSTRY WOULD ADVERSELY AFFECT OUR BUSINESS.

      We only offer workers' compensation insurance and have no plans to offer
any other type of insurance. As a result of this concentration, negative
developments in the economic, competitive or regulatory conditions affecting the
workers' compensation insurance industry could have a material adverse effect on
our results of operations and financial condition. A significant decrease in
pricing due to increased competition or regulatory action, adverse court
decisions interpreting states' workers' compensation laws and newly enacted
legislation could negatively impact our business.

      On October 24, 2006, NCCI submitted an amended filing calling for a
statewide decrease of 15.7%, which was approved by the Florida OIR on October
31, 2006. The new rates apply to all new and renewal policies as of January 1,
2007. The effect of the approved decrease cannot currently be ascertained. If
the 2007 premium decrease had been in effect in 2006, our direct premiums
written would have declined by $15.8 million, our Florida net loss ratio would
have increased by 3.8% and our company-wide net loss ratio would have increased
by 2.1%. If the approved rate decrease results in a material adverse effect on
our profitability in Florida, we may elect to reduce the amount of premiums
written there. In states in which we operate, other than administered pricing
states, should our competitors offer products at prices lower than we believe
would be profitable, we may decline to compete at those lower prices and our
premium levels could be reduced. Many of our competitors are multi-line carriers
that can price the workers' compensation insurance that they offer at a loss in
order to obtain other lines of business at a profit. As we offer only workers'
compensation insurance, we must make a profit on this business and will not
lower our price to obtain business below a price that we believe will be
profitable for us.

      Adverse economic conditions for the construction industry across the
states in which we do business could also adversely affect our business, as over
40% of our business historically has come from underwriting workers'
compensation insurance for the construction industry. This industry is more
vulnerable than most due to downturns in the local economy, including those in
the housing market, and natural disasters. We also derive over 20.0% of our
business from the goods and services industry and over 15% of our business from
the manufacturing industry. Negative developments in these industries would have
a greater effect on us, compared to more diversified insurers that also sell
other types of insurance products. See also "--Our geographic concentration ties
our performance to business, economic and regulatory conditions in certain
states."

IF WE ARE UNABLE TO OBTAIN REINSURANCE, OUR ABILITY TO WRITE NEW POLICIES AND
TO RENEW EXISTING POLICIES COULD BE ADVERSELY AFFECTED.

      Like other insurers, we manage risk, in part, by buying reinsurance. We
currently purchase excess of loss reinsurance. Under excess of loss reinsurance,
a reinsurer reimburses the ceding company for losses and loss expenses over a
specified dollar amount up to an agreed limit per occurrence. For 2007, 2006 and
2005, our excess of loss reinsurers assumed liability on each loss occurrence up
to $30.0 million, $30.0 million and $20.0 million, respectively, subject to our
retention of the first $2.0 million.

      We review and renegotiate our reinsurance protection each year. The
availability, amount and cost of reinsurance are subject to market conditions
and to our experience with insured losses. We cannot be certain that our
reinsurance agreements will be renewed or replaced prior to their expiration
upon terms satisfactory to us. If we are unable to renew or replace our
reinsurance agreements upon terms satisfactory to us, our net liability on
individual risks would increase and we would have greater exposure to
catastrophic losses. If this were to occur, our underwriting results would be
subject to greater variability and our underwriting capacity would be reduced.
These consequences could adversely affect our financial performance.


                                       31


WE HAVE REDUCED OUR USE OF EXCESS OF LOSS REINSURANCE.  THE GREATER RISK WE
HAVE RETAINED COULD RESULT IN LOSSES.

      We reduced the amount of excess of loss reinsurance we purchased in 2005
and subsequent years compared to 2004. For policies effective January 1, 2005 or
later, we no longer maintain reinsurance coverage for the layer of loss
occurrences in excess of $1.0 million but not in excess of $2.0 million. This
layer of excess of loss reinsurance was used in the past primarily to reduce the
volatility of our financial results caused by large loss occurrences. We have
continued to purchase excess of loss reinsurance for losses above $2.0 million,
up to $20.0 million in 2005, and $30.0 million in 2006 and 2007. As a result of
the reduction of excess of loss reinsurance purchased, we will reduce our
overall reinsurance costs, but will also retain more losses from large loss
occurrences.

WE HAVE ELIMINATED OUR USE OF QUOTA SHARE REINSURANCE.  THE GREATER RISK WE
HAVE RETAINED COULD RESULT IN LOSSES.

      We terminated our quota share reinsurance effective June 30, 2004 on new
and renewal business. Effective July 1, 2005, we terminated the quota share
reinsurance we maintained on a run-off basis for policies written prior to June
30, 2004. Quota share reinsurance was used in the past primarily to increase our
underwriting capacity and to reduce our exposure to losses. Quota share
reinsurance refers to a form of reinsurance under which the reinsurer
participates in a specified percentage of the premiums and losses on all
reinsured policies in a given class of business. As a result of the termination
of our quota share reinsurance, we retain and earn more of the premiums we
write, but also retain more of the related losses. Our increased exposure to
potential losses could have a material adverse effect on our business, financial
condition and results of operations.

LITIGATION AGAINST OUR INSURANCE SUBSIDIARIES COULD HAVE AN ADVERSE EFFECT ON
OUR BUSINESS, RESULTS OF OPERATIONS AND/OR FINANCIAL CONDITION.

      Our insurance subsidiaries have been named as defendants in various legal
actions in the course of their insurance operations. Our subsidiaries have
responded to the lawsuits, and we believe that there are meritorious defenses
and intend to vigorously contest these claims. Adverse judgments in multiple
lawsuits could require us to pay significant damage amounts in the aggregate or
to change aspects of our operations, which could have a material adverse effect
on our financial results.

OUR STATUS AS AN INSURANCE HOLDING COMPANY WITH NO DIRECT OPERATIONS COULD
ADVERSELY AFFECT OUR ABILITY TO MEET OUR OBLIGATIONS AND PAY DIVIDENDS IN THE
FUTURE.

      AmCOMP is a holding company that transacts substantially all of its
business through operating subsidiaries. Our primary assets are the stock of our
operating subsidiaries. Our ability to meet obligations on outstanding debt, to
pay stockholder dividends and to make other payments depends on the surplus and
earnings of our subsidiaries and their ability to pay dividends or to advance or
repay funds. Payments of dividends and advances and repayments by our insurance
subsidiaries are restricted by state insurance laws and could be subject to
contractual restrictions in the future, including those imposed by indebtedness
we may incur in the future. See "Business--Regulation--Financial, Dividend and
Investment Restrictions." In addition, the payment of stockholder dividends by
us is within the discretion of our board of directors and will depend on
numerous factors, including our financial condition, our capital requirements
and other factors that our board of directors considers relevant. Currently, we
do not intend to pay dividends on our capital stock.

RISKS RELATED TO OUR INDUSTRY

OUR RESULTS OF OPERATIONS AND REVENUES MAY FLUCTUATE AS A RESULT OF MANY
FACTORS, INCLUDING CYCLICAL CHANGES IN THE INSURANCE INDUSTRY, WHICH MAY
CAUSE THE PRICE OF OUR COMMON STOCK TO BE VOLATILE.

      The results of operations of companies in the insurance industry
historically have been subject to significant fluctuations and uncertainties.
Our profitability can be affected significantly by:

         o  competition;

         o  rising levels of loss costs that we cannot anticipate at the time
            we price our products;

         o  volatile and unpredictable developments, including man-made or
            natural catastrophes or terrorist attacks;


                                       32


         o  changes in the level of reinsurance capacity and capital capacity;

         o  changes in the amount of loss reserves resulting from new types of
            claims and new or changing judicial interpretations relating to the
            scope of insurers' liabilities;

         o  changes in the regulatory or legal framework governing the
            worker's compensation system;

         o  premium rate levels fixed by regulators; and

         o  fluctuations in interest rates, inflationary pressures and other
            changes in the investment environment, which affect returns on
            invested assets and may impact the ultimate payout of losses.

      The supply of insurance is related to prevailing prices, the level of
insured losses and the level of industry surplus which, in turn, may fluctuate
in response to changes in rates of return on investments being earned in the
insurance industry. As a result, the insurance business historically has been a
cyclical industry characterized by periods of intense price competition due to
excessive underwriting capacity as well as periods when shortages of capacity
permitted favorable premium levels. During 1998, 1999 and 2000, the workers'
compensation insurance industry experienced substantial pricing competition, and
this pricing competition greatly affected our ability to increase premium rates
in other than administered pricing states. Beginning in 2001, we witnessed a
decrease in pricing competition in the industry, which enabled us to raise our
rates. The pricing competition has returned during 2006 and this has again
affected our ability to increase rates. The supply of insurance may increase,
either by capital provided by new entrants or by the commitment of additional
capital by existing insurers, which may cause prices to continue to decrease or
remain flat. For example, in October 2006, the Florida OIR approved an overall
average 15.7% decrease in premium rates for all workers' compensation insurance
policies written by all Florida licensed insurance carriers in 2007. This
reduction may have a material adverse effect on our profitability in Florida
next year and may result in a decrease in the number of policies we issue in
Florida in 2007. Any of these factors could lead to a significant reduction in
premium rates, less favorable policy terms and fewer policies written. In
addition to these considerations, changes in the frequency and severity of
losses suffered by insureds and insurers may affect the cycles of the insurance
business significantly, and we expect to experience the effects of such
cyclicality. This cyclicality may cause the price of our securities to be
volatile.

INVESTIGATIONS INTO INSURANCE AND REINSURANCE PRACTICES COULD CAUSE
VOLATILITY IN OUR STOCK AND ADVERSELY AFFECT OUR BUSINESS.

      The Florida OIR is among the regulators that have been investigating
insurance industry practices. On April 20, 2005, the Florida OIR announced that
it had issued investigative subpoenas requesting information related to finite
reinsurance activities in the insurance industry. Finite reinsurance is a type
of reinsurance that is structured to limit the amount of insurance risk the
reinsurer assumes. Prior to 2005, AmCOMP did purchase quota share reinsurance,
which may have the characteristics of finite reinsurance. In cases where quota
share reinsurance qualified for risk transfer, the transaction was treated in
our financial statements as reinsurance. In certain other cases, where quota
share reinsurance did not qualify for risk transfer, we recorded the effects of
the transaction pursuant to deposit accounting. AmCOMP Assurance received and
responded to an investigative subpoena from the Florida OIR requesting answers
to interrogatories and the production of certain documents relating to the
Florida OIR's civil investigation into finite reinsurance activities in the
insurance industry. These inquiries were made to certain other Florida domestic
insurers, as well as to certain reinsurers doing business with Florida domestic
insurers.

      The Florida OIR's civil investigation, all developing regulatory responses
related to the investigation and other investigations relating to brokerage
practices in the insurance industry represent an evolving area of law. At this
time, we are unable to predict the potential effects, if any, that these
investigations and inquiries may have upon the insurance markets and industry
business practices. For example, they may lead to changes in industry practices
that may make it more difficult for us to compete for insurance business, reduce
the effectiveness of our business processes or increase our cost of doing
business. For example, 12.0% of our direct premiums written for the year ended
December 31, 2006 were collected by insurance agencies that are responsible for
collecting premiums on our behalf. As we do not require a deposit or collateral
from these agencies in respect of accrued balances, we may be subject to credit
risk with respect to these agencies if they suffer severe financial difficulties
as a result of these or other investigations. Any of the foregoing could
materially and adversely affect our business, results of operations and
financial condition. In addition, to the extent that any of the arrangements
into which we routinely enter with our agents were determined to be unlawful, we
could be fined or otherwise penalized. These inquiries and investigations have
also caused substantial volatility in the prices of insurance company stocks


                                       33


generally, and this volatility may continue or increase in the future if these
inquiries and investigations continue or are expanded.

      We also expect new regulatory requirements related to finite reinsurance
to be imposed on the insurance industry. The NAIC has requested its Property and
Casualty Reinsurance Study Group of the Reinsurance Task Force to formally study
statutory financial accounting issues related to finite reinsurance. In an
effort to eliminate the abuse of finite reinsurance contracts, changes have been
proposed to filing forms that would require insurers to make specific
disclosures related to finite reinsurance on their financial statement filings.
Additionally, the Florida OIR has developed and continues to make additional new
regulations that would require domestic insurers to make additional disclosures
and attestations relating to their finite and other risk limiting reinsurance
agreements and comply with new disclosure requirements. Increased regulation of
finite reinsurance may affect the availability or cost of reinsurance in ways
that are difficult to foresee at present, and could have a material adverse
effect on our business.

      Investigations of broker placement and compensation practices initiated by
the attorney general's office of certain states, including the State of New
York, together with class action lawsuits initiated against such broker entities
and certain insurance companies, have challenged the legality of certain
activities conducted by these brokers and companies. The investigations and
suits challenge, among other things, the appropriateness of setting fees paid to
brokers based on the volume of business placed by a broker with a particular
insurer or reinsurer; the payment of contingent fees to brokers by insurers or
reinsurers and the alleged conflict of interest arising from such fee
arrangements; the nondisclosure by brokers to their clients of contingent fees
paid to them by insurers and reinsurers; bid rigging, and tying the receipt of
direct insurance to placing reinsurance through the same broker. AmCOMP
distributes its products through independent agents who are appointed by and
represent the Company and does not distribute through brokers. In some cases, we
do pay contingent commissions to our agents. To our knowledge, these
investigations have been focused on broker practices. However, these
investigations and lawsuits may change industry practices in unforeseeable ways
and those changes could adversely affect the competitive environment in our
business.

ACTS OF TERRORISM COULD NEGATIVELY AFFECT OUR BUSINESS AND FINANCIAL
CONDITION, AND THE AVAILABILITY OF FEDERAL REIMBURSEMENT FOR ACTS OF
TERRORISM COULD EXPIRE OR BE CURTAILED.

      We are required to provide workers' compensation benefits for losses
resulting from certain acts of terrorism. The impact on us of any terrorist act
will depend upon the nature, extent, location and timing of such an act, and
could be material. The extent of losses from an act of terrorism is a function
of both the number of workers employed by our policyholders in the area affected
by the event and the severity of the event.

      The 2002 Act was enacted in response to the events of September 11, 2001.
The program initiated by the 2002 Act applies to losses arising out of acts of
terrorism that are certified as such by the Secretary of the Treasury. In order
to be certified as an act of terrorism under the 2002 Act, losses incurred as a
result of the act are required to exceed $5.0 million, and the act may not be an
act of domestic terrorism. In addition, such losses must arise out of an act of
terrorism committed in the course of a war declared by the United States
Congress, except with respect to workers' compensation coverage. Under the 2002
Act, Federal reimbursement is subject to an annual aggregate limit of $100.0
billion. Each insurer is responsible for a deductible based on a percentage of
its direct premiums earned in the previous calendar year. For losses in excess
of the deductible, the Federal government will reimburse 90% of the insurer's
loss, up to the insurer's proportionate share of the $100.0 billion. Insurers
will not be liable for payments for any portion of losses in excess of the
$100.0 billion annual limit.

      The 2005 Act extended the 2002 Act for an additional two years to December
31, 2007. While the underlying structure of the 2002 Act was left intact, the
2005 Act made some adjustments, including increasing the current insurer
deductible to 20% of direct premiums earned in 2007. Our 2007 deductible is
equal to 20% of 2006 direct premiums earned, or approximately $54 million.
Commencing on January 1, 2007, for losses in excess of the deductible, Federal
reimbursement decreased to 85% of the insurer's loss. After January 1, 2007,
Federal reinsurance will only be available if industry aggregate insured losses
from a certified act exceed $100.0 million. Insurers must still provide
terrorism insurance for events causing losses up to the above amount, even
though Federal reinsurance is only available for events causing losses exceeding
that amount.

      Under the 2005 Act, insurers must offer coverage for losses due to
terrorist acts in all of their commercial property and casualty insurance
policies. The 2005 Act's definition of property and casualty insurance includes
workers' compensation insurance. Moreover, the workers' compensation laws of the
various states generally do not permit the exclusion of coverage for losses


                                       34


arising from terrorist acts or from nuclear, biological and chemical attacks. In
addition, we are not able to limit our loss arising from any one catastrophe or
any one claimant. Our reinsurance policies exclude coverage for losses arising
out of terrorism and nuclear, biological and chemical attacks. Therefore, acts
of terrorism could adversely affect our business and financial condition. The
failure to extend the 2005 Act or its extension on terms less favorable to
insurers could adversely affect our ability to obtain reinsurance on favorable
terms and could influence our underwriting strategy and how we conduct our
business in the future.

RISKS RELATED TO OUR COMMON STOCK

YOUR ABILITY TO INFLUENCE CORPORATE DECISIONS MAY BE LIMITED BECAUSE OUR
PRINCIPAL STOCKHOLDERS BENEFICIALLY OWN 29% OF OUR COMMON STOCK.

      Our principal stockholders beneficially own, in the aggregate,
approximately 29% of our outstanding stock. These stockholders may be able to
determine who will be elected to our board of directors and to control
substantially all matters requiring approval by our stockholders, including
mergers, sales of assets and approval of other significant corporate
transactions, in a manner with which you may not agree or that may not be in
your best interest. This concentration of stock ownership may adversely affect
the trading price for our common stock because investors often perceive
disadvantages in owning stock in companies with controlling stockholders.

THE PRICE OF OUR COMMON STOCK MAY DECREASE, AND YOU MAY LOSE ALL OR A PART OF
YOUR INVESTMENT.

      The trading price of our common stock may fluctuate widely as a result of
a number of factors, many of which are beyond our control, including:

         o  variations in our quarterly operating results;

         o  changes in operating and stock performance of similar companies;

         o  changes in earnings estimates and market price targets by
            securities analysts;

         o  investor perception of the workers' compensation insurance
            industry and of our company;

         o  results of operations that vary from those expected by securities
            and other market analysts and investors;

         o  future sales of our securities;

         o  litigation developments;

         o  regulatory actions;

         o  departures of key personnel; and

         o  general market conditions, including market volatility.

      A significant decline in our stock price could result in substantial
losses for individual stockholders and could lead to costly and disruptive
securities litigation.

      In addition, the stock market in recent years has experienced substantial
price and volume fluctuations that sometimes have been unrelated or
disproportionate to the operating performance of companies whose shares are
publicly traded. As a result, the trading price of shares of our common stock
may be below your purchase price and you may be unable to sell your shares of
common stock at or above the price that you paid, and you may lose some or all
of your investment.

FUTURE SALES OF OUR COMMON STOCK, OR THE POSSIBILITY OR PERCEPTION THAT SUCH
FUTURE SALES MIGHT OCCUR, MAY DEPRESS ITS PRICE.


                                       35


      The market price of our common stock could decline as a result of sales of
substantial numbers of shares in the public market, or the perception that these
sales could occur. This may make it more difficult for you to sell your shares
at a time and at a price that you deem appropriate. In addition, these factors
could make it more difficult for us to raise funds through future offerings of
common stock. There were 15,759,889 shares of our common stock outstanding as of
March 12, 2007. All of these shares are freely transferable without restriction
or further registration under the Securities Act of 1933, as amended, except for
the 2,762,717 shares held by our senior management, directors and their
affiliates.

       We may also acquire other companies or assets or finance strategic
alliances by issuing equity, which may result in additional dilution to you.

FLORIDA AND OTHER APPLICABLE STATE INSURANCE LAWS, CERTAIN PROVISIONS OF OUR
CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A CHANGE OF CONTROL
OF AMCOMP AND COULD ALSO LIMIT THE MARKET PRICE OF OUR COMMON STOCK.

      Florida insurance law prohibits any person from acquiring 10% or more of
the outstanding voting securities of us or any of our insurance subsidiaries
without the prior approval of the Florida OIR. Any person who acquires between
5% and 10% of the outstanding securities of us or any of our subsidiaries must
file a disclaimer of control with the Florida OIR, provided that the acquiror is
not going to participate in management or control. If the acquirer is planning
on participating in management or control, they must obtain prior approval from
the Florida OIR for any acquisition exceeding 5%. Any person wishing to acquire
control of us or of any substantial portion of our outstanding shares would
first be required to obtain the approval of the Florida OIR.

      In addition, many state insurance laws require prior notification to the
state insurance department of a change of control of a non-domiciliary insurance
company licensed to transact insurance in that state. While these
pre-notification statutes do not authorize the state insurance departments to
disapprove the change of control, they authorize regulatory action (including a
possible revocation of our authority to do business) in the affected state if
particular conditions exist, such as undue market concentration. Any future
transactions that would constitute a change of control of us may require prior
notification in the states that have pre-acquisition notification laws.

      Provisions of our certificate of incorporation and bylaws could
discourage, delay or prevent a merger, acquisition or other change in control of
AmCOMP, even if such a change in control would be beneficial to our
stockholders. These provisions could also discourage proxy contests and make it
more difficult for you and other stockholders to elect directors and take other
corporate actions. These provisions include:

         o  authorizing our board of directors to issue up to 5,000,000 shares
            of preferred stock with rights senior to those of our common stock
            without further stockholder approval;

         o  limiting the ability of our stockholders to call special meetings
            of stockholders;

         o  advance notice requirements for nominations for election to our
            board of directors or for proposing matters that can be acted upon
            by stockholders at the stockholder meetings; and

         o  prohibiting stockholder action by written consent, thereby limiting
            stockholder action to that taken at a meeting of our stockholders.

      Section 203 of the Delaware General Corporation Law prohibits a
publicly-held Delaware corporation from engaging in a business combination with
a person who acquires at least 15% of its voting stock for a period of three
years after the date such person acquired such voting stock, unless the business
combination is approved in a prescribed manner. These provisions and other
similar provisions make it more difficult for stockholders or potential
acquirers to acquire us without negotiation. These provisions may apply even if
some stockholders may consider the transaction beneficial to them.

      These provisions could limit the price that investors are willing to pay
in the future for shares of our common stock. These provisions might also
discourage a potential acquisition proposal or tender offer, even if the
acquisition proposal or tender offer is at a premium over the then current
market price for our common stock.

WE DO NOT ANTICIPATE PAYING DIVIDENDS ON OUR CAPITAL STOCK IN THE FORESEEABLE
FUTURE.


                                       36


      We currently intend to retain our future earnings, if any, to fund the
development and growth of our business. The amount of cash we may have available
is in part limited by dividend restrictions imposed on our insurance
subsidiaries by state insurance laws and regulations, which prescribe the amount
of dividends our insurance subsidiaries can pay us. As a result, capital
appreciation, if any, of our common stock will be your sole source of gain for
the foreseeable future.

WE ARE EXPOSED TO RISKS RELATING TO EVALUATIONS OF OUR INTERNAL CONTROLS OVER
FINANCIAL REPORTING REQUIRED BY SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002.

      As a public company, absent an available exemption, we will be required to
comply with Section 404 of the Sarbanes-Oxley Act by no later than December 31,
2007. However, we cannot be certain as to the timing of completion of our
evaluation, testing and remediation actions or the impact of the same on our
operations. Furthermore, upon completion of this process, we may identify
control deficiencies of varying degrees of severity that remain unremediated. As
a public company, we are required to report, among other things, control
deficiencies that constitute a "material weakness." A "material weakness" is a
significant deficiency, or combination of significant deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. If we fail to
implement the requirements of Section 404 in a timely manner, we might be
subject to sanctions or investigation by regulatory agencies such as the SEC. In
addition, failure to comply with Section 404 or the report by us of a material
weakness may cause investors to lose confidence in our financial statements and
the trading price of our common stock may decline. If we fail to remedy any
material weakness, our financial statements may be inaccurate, our access to the
capital markets may be restricted and the trading price of our common stock may
decline.

OUR MANAGEMENT AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HAVE IN THE
PAST DETERMINED THAT THERE ARE MATERIAL WEAKNESSES IN OUR INTERNAL CONTROLS
OVER FINANCIAL REPORTING.  IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF
INTERNAL CONTROLS OVER FINANCIAL REPORTING, WE MAY NOT BE ABLE TO ACCURATELY
REPORT OUR FINANCIAL RESULTS.

      During their audit of our financial statements for the year ended December
31, 2004, our independent registered public accounting firm identified certain
reportable conditions that constitute material weaknesses in the internal
controls over financial reporting of our insurance subsidiaries, AmCOMP
Assurance and AmCOMP Preferred. With regard to AmCOMP Assurance and AmCOMP
Preferred, our independent auditors noted that audit adjustments were identified
during the 2004 audit process in areas that require management judgment and
accounting estimates and impacted the assessment accrual and commission
accruals. Our analyses of these accounts had not been updated for all known
information at the time of the audit or were not used to adjust the general
ledger to the appropriate amount. As a result, audit adjustments on the
financial statements we prepared were required.

      During the preparation of the financial statements for the quarter ended
September 30, 2006, our independent registered public accounting firm and
management identified certain reportable conditions that constitute material
weaknesses in the internal controls over financial reporting. Specifically, our
independent auditors noted that an error was made in the presentation of our
book overdrafts. The error was the result of a book overdraft position being
presented as a reduction of "cash and cash equivalents" rather than as an "other
liabilities" and required that certain previously filed financial statements be
restated.

      Our audit committee and management team agreed with the matters identified
as material weaknesses. In response, we initiated corrective actions to address
these control deficiencies. If we fail to maintain an effective system of
internal controls over financial reporting, we may not be able to accurately
report our financial results.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

      None

ITEM 2.  PROPERTIES

      Our principal executive offices are located in leased premises of
approximately 32,536 square feet in North Palm Beach, Florida. We also lease a
total of approximately 70,152 square feet of office space in 10 states. We
believe that there is sufficient office space available at favorable leasing
terms both to replace existing office space and to satisfy any additional needs
we may have as a result of future expansion.


                                       37


ITEM 3.  LEGAL PROCEEDINGS

      We are periodically a party to routine litigation incidental to our
business. We do not believe that we are a party to any pending legal proceeding
that is likely to have a material adverse effect on our business, financial
condition or results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      No matters were submitted to a vote of security holders during the fourth
quarter of 2006.


                                       38


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION AND HOLDERS

      The Company's common stock is traded on the Nasdaq National Market System
under the ticker symbol "AMCP". On February 9, 2006, the Securities and Exchange
Commission declared the Company's registration statement effective and the
Company's common stock began trading on February 10, 2006. The following table
shows the high and low per share closing sale prices of our common stock for the
period indicated, as reported on The Nasdaq National Market. These prices
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not necessarily represent actual transactions.

                                                                     Price Range
                                                                   ---------------
2006                                                                High     Low
----                                                               ------   ------
First Quarter (from February 10, 2006 through March 31, 2006) ..   $ 9.65   $ 8.80

Second Quarter .................................................   $10.54   $ 9.50

Third Quarter ..................................................   $10.34   $ 8.75

Fourth Quarter .................................................   $11.22   $ 9.15

      As of March 12, 2007, there were 15,759,889 shares of common stock issued
and outstanding held by 57 shareholders of record, although the number of
beneficial shareholders was much larger.

DIVIDEND POLICY

      We have never declared or paid cash dividends on our common stock. We
currently intend to retain all of our earnings for the foreseeable future to
finance the operation and expansion of our business. We are limited in our
ability to pay dividends by the amount of cash we have available. The amount of
cash we have available is, in part, limited by dividend restrictions imposed on
our insurance subsidiaries by state insurance statutes that prescribe the amount
of dividends our insurance subsidiaries can pay us. Our future dividend policy
will be at the discretion of our board of directors and will also depend on the
requirements of any future financing arrangements to which we may be a party and
other factors considered relevant by our board of directors.

UNREGISTERED SALES OF EQUITY SECURITIES

      There were no unregistered sales of equity securities in 2006.

PURCHASE OF EQUITY SECURITIES

      There were no purchases of equity securities by AmCOMP in the fourth
quarter of 2006.

PERFORMANCE GRAPH

     Set forth below are a graph and table comparing cumulative total return
on $100 invested, alternatively, in our common stock, the AMEX Market Index and
the Hemscott Property/Casualty Insurance Group Index for the period commencing
on February 10, 2006, the date of our initial public offering, and ending on
December 31, 2006. Calculations were made on a dividends reinvested basis.
Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.

[GRAPH OMITTED.]


                                       39


                                                     PERIOD ENDING
                                  ----------------------------------------------------
COMPANY/INDEX/MARKET              2/10/2006 3/31/2006  6/30/2006  9/30/2006 12/31/2006
                                  --------- ---------- ---------- --------- ----------

AmCOMP Incorporated                 100.00    106.56     117.11     107.22    122.11
Property/Casualty Insurance         100.00    100.70      98.40     105.82    114.51
AMEX Market Index                   100.00    101.28      97.47      97.14    106.43

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

      The following table gives information about stock option awards under the
Company's equity compensation plans as of December 31, 2006. The plans are
discussed further in Note 15 to the Company's Consolidated Financial Statements
included herein.

                                                                                                Number of
                                                                                                securities
                                                                                                remaining
                                                                                              available for
                                                                                             future issuance
                                                                                               under equity
                                               Number of securities    Weighted-average        compensation
                                                to be issued upon      exercise price of     plans (excluding
                                                   exercise of            outstanding           securities
                                               outstanding options,    options, warrants   reflected in column
                                               warrants and rights        and rights               (a))
Plan category                                          (a)                    (b)                  (c)
--------------------------------------------- ----------------------  ------------------- ---------------------
Equity compensation plans approved by
   security holders.........................       1,221,558              $   10.08              220,681
Equity compensation plans not
   approved by security holders.............            --                     --                   --
                                                   ----------             ----------           ----------
 Total                                             1,221,558              $   10.08              220,681
                                                   ==========             ==========           ==========


                                       40


ITEM 6.  SELECTED FINANCIAL DATA

      YOU SHOULD READ THE FOLLOWING SELECTED CONSOLIDATED FINANCIAL DATA
TOGETHER WITH "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED
NOTES INCLUDED ELSEWHERE IN THIS REPORT.

      THE SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA FOR THE YEARS ENDED
DECEMBER 31, 2006, 2005 AND 2004 AND THE SELECTED CONSOLIDATED BALANCE SHEET
DATA AS OF DECEMBER 31, 2006 AND 2005 ARE DERIVED FROM OUR AUDITED CONSOLIDATED
FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THE SELECTED
CONSOLIDATED STATEMENT OF OPERATIONS DATA FOR THE YEARS ENDED DECEMBER 31, 2003
AND 2002 AND THE SELECTED CONSOLIDATED BALANCE SHEET DATA AS OF DECEMBER 31,
2004, 2003, 2002 ARE DERIVED FROM OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOT INCLUDED IN THIS REPORT. THESE FINANCIAL STATEMENTS HAVE BEEN PREPARED IN
ACCORDANCE WITH GAAP. OUR HISTORICAL RESULTS MAY NOT BE INDICATIVE OF THE
OPERATING RESULTS TO BE EXPECTED IN ANY FUTURE PERIOD.

                                                                                   Year Ended December 31,
                                                           -----------------------------------------------------------------------
                                                              2006            2005            2004         2003            2002
                                                           ----------      ---------       ---------    ----------      ----------
                                                                  (Dollars and shares in thousands, except per-share data)
STATEMENT OF OPERATIONS DATA:
REVENUES:
Net premiums earned                                        $ 266,456       $ 256,603       $ 181,186    $ 164,287       $ 196,478
Net investment income                                         17,461          10,798           6,077        4,803           5,689
Net realized investment (loss) gain                             (307)           (385)            982        2,644             320
Other income (loss)                                              333             285             332       (2,464)(1)       1,446
                                                           ---------       ---------       ---------    ---------       ---------
  Total revenue                                            $ 283,943       $ 267,301       $ 188,577    $ 169,270       $ 203,933
                                                           ---------       ---------       ---------    ---------       ---------
EXPENSES:
Losses and loss adjustment expenses(2)                     $ 163,670       $ 143,663       $ 119,121    $ 109,518       $ 126,386
Policy acquisition expenses                                   49,547(3)       51,508(4)       19,499       21,735          40,925
Underwriting and other expenses                               32,175          34,447          32,280       30,244          25,579
Dividends to policyholders                                     9,926           8,612           6,983        5,796           5,931
Interest expense                                               3,807           2,960           1,389          410             352
                                                           ---------       ---------       ---------    ---------       ---------
  Total expenses                                           $ 259,125       $ 241,190       $ 179,272    $ 167,703       $ 199,173
                                                           ---------       ---------       ---------    ---------       ---------
Income before income taxes                                    24,818          26,111           9,305        1,567           4,760
Income tax expense                                             8,256           9,326           4,275          632           1,379
                                                           ---------       ---------       ---------    ---------       ---------
Net income before cumulative effect of accounting
change                                                        16,562          16,785           5,030          935           3,381
                                                           ---------       ---------       ---------    ---------       ---------
Cumulative effect of accounting change                          --              --              --           --             2,455(5)
                                                           ---------       ---------       ---------    ---------       ---------
  Net income                                               $  16,562       $  16,785       $   5,030    $     935       $   5,836
                                                           =========       =========       =========    =========       =========
OPERATING DATA:
Direct premiums written                                    $ 266,827       $ 270,331       $ 260,173    $ 231,083       $ 227,241
Gross premiums written                                       273,713         277,095         270,981      239,484         232,536
Net premiums written                                         264,788         267,652         217,472      144,952         209,537
PER SHARE DATA:
Earnings per share
 Basic                                                     $    1.15       $    3.13       $    0.94    $    0.17       $    1.07
 Diluted                                                        1.11            1.76            0.53         0.10            0.61
Weighted average common shares outstanding
 Basic                                                        14,452           5,367           5,368        5,368           5,437
 Diluted                                                      14,931           9,562           9,564        9,562           9,628


                                                                 41


                                                                                   Year Ended December 31,
                                                           -----------------------------------------------------------------------
                                                              2006            2005            2004         2003            2002
                                                           ----------      ---------       ---------    ----------      ----------
                                                                  (Dollars and shares in thousands, except per-share data)
SELECTED INSURANCE RATIOS:
Net loss ratio(6)                                               61.4%           56.0%           65.7%        66.7%           64.3%
Net policy acquisition expense ratio(7)                         18.6            20.1            10.8         13.2            20.8
Underwriting and other expense ratio(8)                         12.1            13.4            17.8         18.4            13.0
                                                           ---------       ---------       ---------    ---------       ---------
Net combined ratio, excluding policyholder dividends(9)         92.1%           89.5%           94.3%        98.3%           98.1%
                                                           ---------       ---------       ---------    ---------       ---------
Dividend ratio(10)                                               3.7             3.4             3.9          3.5             3.0
                                                           ---------       ---------       ---------    ---------       ---------
Net combined ratio, including policyholder dividends(11)        95.8%           92.9%           98.2%       101.8%          101.1%
                                                           =========       =========       =========    =========       =========


                                                         As of December 31,
                                      --------------------------------------------------------
                                          2006       2005       2004       2003       2002
                                      ----------- ---------- ---------- ---------- -----------
                                      (Dollars and shares in thousands, except per share data)
Balance Sheet Data:
ASSETS
Cash and investments                    $436,775   $338,546   $265,407   $183,884   $141,532
Premiums receivable--net                 106,270    104,522    101,638     96,818     94,133
Reinsurance recoverables                  75,360     83,880    115,870     99,894     84,907
Deferred policy acquisition costs         20,749     19,413     14,695      4,902     16,149
Deferred income taxes                     21,613     20,871     17,646     19,368     12,065
Other assets                              23,730     22,455     32,814     52,506     64,351
                                        --------   --------   --------   --------   --------
Total assets                            $684,497   $589,687   $548,070   $457,372   $413,137
                                        --------   --------   --------   --------   --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment
  expenses                              $334,363   $309,857   $297,698   $251,122   $227,714
Unearned and advance premiums            115,218    115,574    114,235    102,804     89,350
Notes Payable                             38,250     40,036     41,821     11,607      7,438
Other liabilities                         57,378     52,239     35,981     37,055     32,492
                                        --------   --------   --------   --------   --------
Total liabilities                        545,209    517,706    489,735    402,588    356,994
Preferred stock                             --       23,098     23,098     23,098     23,098
Total stockholders' equity               139,288     71,981     58,335     54,784     56,143
                                        --------   --------   --------   --------   --------
Total liabilities and stockholders'
  equity                                $684,497   $589,687   $548,735   $457,372   $413,137
                                        --------   --------   --------   --------   --------

(1)   Includes a pre-tax loss of $2.1 million from the commutation of two
      reinsurance agreements in 2003.

(2)   Includes favorable loss reserve development for the years ended December
      31, 2006, 2005, 2004, 2003 and 2002 of $14.2 million, $24.7 million, $8.3
      million, $1.0 million and $0.4 million, respectively.

(3)   During 2006, the second injury fund assessment rate in South Carolina
      decreased to 24.5% on losses. The impact of this rate change was to
      increase 2006 pre-tax income by $2.8 million.

(4)   Beginning in the third quarter of 2005, the second injury fund assessment
      in South Carolina was doubled, which resulted in a pre-tax charge of $3.3
      million in the third quarter of 2005.

(5)   Reflects the write off of negative goodwill upon adoption of Statement of
      Financial Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE
      ASSETS.

(6)   Losses and LAE divided by net premiums earned, after the effects of
      reinsurance.

                                       42


(7)   Policy acquisition expenses, including commissions, assessments, premium
      tax and general and administrative expenses directly associated with
      policy acquisition, divided by net premiums earned, after the effects of
      reinsurance.

(8)   Underwriting and other expenses not directly associated with policy
      acquisition divided by net premiums earned.

(9)   Sum of ratios computed in footnotes 6, 7 and 8.

(10)  Dividends to policyholders divided by net premiums earned.

(11)  Sum of ratios computed in footnotes 9 and 10.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

      THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES APPEARING ELSEWHERE IN THIS
REPORT.


      IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS IN FUTURE PERIODS MAY DIFFER FROM THOSE REFERRED TO HEREIN DUE TO
A NUMBER OF FACTORS, INCLUDING THE RISKS DESCRIBED IN THE SECTIONS ENTITLED
"RISK FACTORS" AND "FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS" AND
ELSEWHERE IN THIS REPORT.

OVERVIEW

      AmCOMP Incorporated, a Delaware corporation, is a holding company engaged
through its wholly-owned subsidiaries, including AmCOMP Preferred and AmCOMP
Assurance, in the workers' compensation insurance business. Our long-term source
of consolidated earnings is principally the income from our workers'
compensation insurance business and investment income from our investment
portfolio. Workers' compensation insurance provides coverage for the statutorily
prescribed wage replacement and medical care benefits that employers are
required to make available to their employees injured in the course of
employment. We are licensed to provide workers' compensation insurance in 23
states, but currently focus our resources in 15 states that we believe provide
the greatest opportunity for near-term profitable growth.

      Our results of operations are affected by the following business and
accounting factors and critical accounting policies:

      REVENUES

      Our revenues are principally derived from:

         o  premiums we earn from the sale of workers' compensation insurance
            policies and from the portion of the premiums assumed from the
            National Workers' Compensation Reinsurance Pool ("NWCRP") and other
            state mandated involuntary pools, which we refer to as gross
            premiums, less the portion of those premiums that we cede to other
            insurers, which we refer to as ceded premiums. We refer to the
            difference between gross premiums and ceded premiums as net
            premiums; and

         o  investment income that we earn on invested assets.

      EXPENSES

      Our expenses primarily consist of:

         o  insurance losses and LAE relating to the insurance policies we write
            directly and to the portion of the losses assumed from the state
            mandated involuntary pools, including estimates for losses incurred
            during the period and changes in estimates from prior periods, which


                                       43


            we refer to as gross losses and LAE, less the portion of those
            insurance losses and LAE that we cede to our reinsurers, which we
            refer to as ceded losses and LAE. We refer to the difference as net
            losses and LAE;

         o  commissions and other underwriting expenses, which consist of
            commissions we pay to agents, premium taxes and company expenses
            related to the production and underwriting of insurance policies,
            less ceding commissions reinsurers pay to us under our reinsurance
            contracts;

         o  other operating and general expenses, which include general and
            administrative expenses such as salaries, rent, office supplies and
            depreciation and other expenses not otherwise classified separately;

         o  assessments and premium surcharges related to our insurance
            activities, including assessments and premium surcharges for state
            guaranty funds and other second injury funds; and

         o  interest expense under our bank credit facility and surplus notes
            issued to third parties.

CRITICAL ACCOUNTING POLICIES

      The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect amounts reported in the
financial statements. As more information becomes known, these estimates and
assumptions could change, which would have an impact on the amounts reported in
the future. We view as our critical accounting policies the estimates and
assumptions used in establishing our loss reserves, reinsurance, reinsurance
recoverables, premium revenues, deferred policy acquisition costs, valuation of
investments and dividends to policyholders.

      LOSS AND LOSS ADJUSTMENT EXPENSES

      We are directly liable for losses and LAE under the terms of insurance
policies our insurance subsidiaries underwrite. We are also liable for a
proportional share of losses from state mandated involuntary pools. The state
mandated involuntary pools a mechanism used to reinsure the risk underwritten by
state created workers' compensation insurance. Insurance companies are generally
required to participate in these state created workers' compensation insurance
programs as a condition to conducting business in these states. The NWCRP, the
largest of the state mandated involuntary pools, is administered by NCCI. Each
year, NCCI establishes an estimated reserve for losses arising from this pool
and notifies us of our proportionate share of loss reserves from this pool. We
add our share of the loss reserves from this pool to the loss reserves for the
insurance policies our insurance subsidiaries underwrite. Significant periods of
time can elapse between the occurrence of an insured loss, the reporting of the
loss to the insurer and the insurer's payment of that loss. To recognize
liabilities for unpaid loss and LAE, insurers establish reserves as balance
sheet liabilities representing estimates of amounts needed to pay reported and
unreported net losses and loss expenses. Except as mandated by Texas statutes on
fatality claims where the calculation takes into account the life expectancy of
a surviving spouse, we do not discount our reserves for estimated losses and
LAE.

      When claims are reported to one of our insurance subsidiaries, its claims
personnel establish "case reserves" that represent an estimate of the amount
(including LAE) that we will have to pay in respect of these claims. The amount
of the reserve is primarily based upon a case-by-case evaluation of the claims
involved, the circumstances surrounding each claim, historical loss experience
and the policy provisions relating to the type of losses. The estimate reflects
the informed judgment of our claims personnel based on general insurance
reserving practices, as well as the experience and knowledge of the claims
personnel. Our claims professionals continually monitor all open claims. As new
information becomes available about the claims, the case reserves may be
updated.

      In accordance with industry practice, we also maintain estimates of
reserves for losses and LAE incurred but not reported, or IBNR. IBNR reserves,
unlike case reserves, do not apply to a specific claim, but rather apply to the
entire body of claims arising from a specific time period. IBNR primarily
provides for costs due to:

         o  future claim payments and LAE in addition to case reserves due to
            unforeseen or unknown events;

         o  additional claim payments on closed claims;

         o  claims that have not yet been reported to us; and


                                       44


         o  development in excess of claim reserves on claims that have been
            reported to us.

      Our internal actuaries and the independent actuarial consulting firm we
have retained prepare estimates of our insurance subsidiaries' IBNR reserves by
state and loss year using generally accepted actuarial techniques. These
estimates are currently prepared quarterly. Our independent actuarial firm
participates in our IBNR estimation process three times annually (as of June 30,
September 30 and December 31). These estimates are analyzed on a gross of
reinsurance basis and on a net of all reinsurance recoverables basis. Estimation
of loss reserves is subject to variation as a result of factors such as
inflation, claims settlement patterns, legislative activity and litigation
trends. Our IBNR estimates are affected by the results of nine separate
actuarial reserving methods, our assumptions regarding the adequacy of case
reserves, the impact of future wage and medical inflation, litigation trends,
the quality of recent underwriting standards and actuarial judgment. Consistent
with industry practices, the actuarial judgment of our management plays a
significant part in the reserving process. Actuarial judgment takes into account
our assumptions regarding future claims emergence, the number of claims to be
closed in the future with or without payment, amounts that may be collected from
subrogation and any other changes expected to occur in the future. Changes in
the assumptions we employ or our estimates associated with such assumptions
could result in materially different amounts being reported as reserves. If
necessary, we will increase or decrease the level of our reserves, with a
corresponding change in our expenses in the period in which the increase or
decrease occurs, as experience develops or new information becomes known in the
period in which changes to the estimates are determined. As of December 31,
2006, our case reserves and IBNR net of reinsurance were $172.4 million and
$89.7 million, respectively. Gross of reinsurance, these amounts were $196.8
million and $137.6 million, respectively.

      The range of estimates for IBNR as of December 31, 2006 produced by the
various separate actuarial reserving methods we reviewed ranged from $31.7
million above the point estimate (for the reserve development method) and $31.1
million below the point estimate (for the paid loss development method). This
range does not necessarily constitute a range of reasonable estimates and does
not imply that each of these loss estimates is equally likely. No one actuarial
reserving method has consistently been found to be more predictive than any
other.

      We arrive at our estimate of company-wide reserves and IBNR by separately
analyzing loss information for each state and each accident year. In addition,
in some cases we analyze our loss data on an even more refined basis whenever
required to calculate the IBNR recoverable under our reinsurance agreements.

      We and our independent actuarial firm prepare IBNR estimates using nine
separate actuarial methods. Each of these methods arrives at a different
estimate of IBNR by assigning different weights to assumptions based upon three
factors affecting the claim closure process: (1) claim payment and reporting
patterns (loss development patterns); (2) expected ultimate net loss ratios; and
(3) average claim costs and claim frequency. Each of these assumptions changes
depending on the state and accident year being examined. In most cases the
assumptions do not change between successive actuarial reviews.

      The amount by which estimated losses, measured subsequently by reference
to payments and additional estimates, differ from those originally reported for
a period is known as "development." Development is unfavorable when ultimate
losses indicate a basis for increases over the established reserves. Development
is favorable when ultimate losses indicate a basis for reducing the established
reserves. Favorable or unfavorable development of loss reserves is reflected in
the earnings of the period during which the development is identified. A 10-year
history of the development of our loss reserves is set forth in the loss
development table in this report under "Business--Loss and Loss Adjustment
Expense Reserves." Our current loss reserve estimates may be subject to
development in future years and reserve development may take a long time to
appear because of the uncertainty inherent in currently estimating long-term
liabilities.

      The state-specific assumptions regarding the claim payment and claim
reporting patterns are established by considering loss development patterns for
the industry, as well as our loss development patterns for the state being
examined and Florida, the state in which we have the most extensive loss
experience. The state-specific assumptions regarding the expected net loss
ratios are established by examining historic pricing levels in that state for
that accident year and our and the consulting firm's judgment on the expected
difference between our net loss ratio and that of the workers' compensation
insurance industry given the same pricing structure. Claim cost and claim
averages are based on AmCOMP's history and our judgment and that of the
independent actuarial firm regarding trends.

      We develop our IBNR estimate separately, for each state and accident year,
based on our review of the results of nine separate actuarial methods (five
separate methods for accident years prior to 1998) and actuarial judgment. After
reviewing the nine actuarial methods for each state and accident year, we select
an estimate of ultimate losses (the "point estimate") for each state and


                                       45


accident year. Our point estimate of IBNR is the compilation of the estimate of
ultimate losses by state for each accident year and equals the total ultimate
loss estimate minus the incurred losses. We book to this point estimate. We
observe that the selected estimate ultimate loss is most sensitive to four of
the nine actuarial methods examined:

   1. Paid Bornhuetter-Ferguson Method - A method assigning partial weight to
      the initial expected losses (calculated from the initial expected loss
      ratio) and partial weight to observed paid losses. The weights assigned to
      the initial expected losses decrease as the accident year matures.

   2. Incurred Bornhuetter-Ferguson Method - A method assigning partial weight
      to the initial expected losses (calculated from the initial expected loss
      ratio) and partial weight to observed incurred losses. The weights
      assigned to the initial expected losses decrease as the accident year
      matures.

   3. Paid Development Method - A method using historical, cumulative paid
      losses by accident year and develops those actual losses to estimated
      ultimate losses based upon the assumption that each accident year will
      develop to estimated ultimate cost in a manner that is analogous to prior
      years.

   4. Incurred Development Method - A method using historical, cumulative
      incurred losses by accident year and develops those actual losses to
      estimated ultimate losses based upon the assumption that each accident
      year will develop to estimated ultimate cost in a manner that is analogous
      to prior years.

      All of the methods described above utilize expected loss payment and
reporting patterns for losses and our actual paid and reported losses and LAE to
estimate the reserve. The expected payment and reporting patterns are based on
state specific industry patterns as well as our historical patterns. The
expected payment and reporting patterns can change whenever there is new
information that leads the consulting actuary to believe that the pattern of
future loss payments will be different from what has historically been expected.
In addition, the first two methods utilize our initial expected loss ratio (the
ratio of losses and LAE incurred to net premiums earned) to estimate the
reserve. The initial expected loss ratio is estimated based on the average
premium level of our risks relative to industry expected losses for the size and
types of risks we write. The initial expected loss ratio will change between
accident years depending on our pricing in those accident years, but generally
will not change between successive evaluations of losses.

      There are five other actuarial methods considered by us and some of these
methods rely on assumptions about frequency and loss trends. The results of
these methods generally track with the four methods listed above. Any changes in
frequency and/or loss trends would impact the claim reporting and payment
patterns. Therefore, we believe the effect of these changes are implicitly
considered in the sensitivity of reserve estimates to the four actuarial methods
listed above.

      Our aggregate reserve is a point estimate, which is the sum of the
selected reserve for each state and accident year combination in which we have
exposure. This aggregate reserve calculated by us represents our best estimate
of our outstanding loss and LAE.

      Historically, our point estimate closely follows a weighting of the four
methods described above. The weights we observe are:

Accident Years          Method                                   Weight
---------------         ------                                   ------
2001 to 2006..........  Paid Bornhuetter-Ferguson Method            25%
2001 to 2006..........  Incurred Bornhuetter-Ferguson Method        25%
2001 to 2006..........  Paid Loss Development Method                25%
2001 to 2006..........  Incurred Loss Development Method            25%
1982 to 2000..........  Paid Bornhuetter-Ferguson Method             0%
1982 to 2000..........  Incurred Bornhuetter-Ferguson Method         0%
1982 to 2000..........  Paid Loss Development Method                50%
1982 to 2000..........  Incurred Loss Development Method            50%

      We believe the weightings displayed above are appropriate for a
long-tailed line of business such as workers' compensation insurance. Initially,
when loss experience is very immature and the ultimate payout of our largest
claims is still unknown, the expected loss ratio should carry relatively more
weight than after experience has developed more fully. As loss experience
matures, the initial expected loss ratio becomes less important as it does not
consider all of the new loss information that has become available. As a result,


                                       46


the weighting of the Bornhuetter-Ferguson methods decreases from 25% to 0% after
five years and the weighting of the loss development methods increases from 25%
to 50% after 5 years. The 0% weight of the Bornhuetter-Ferguson methods for
accident years older than five years should not suggest that the
Bornhuetter-Ferguson methods are not considered, but rather that they are
typically not given significant weight when selecting our estimate of ultimate
losses for older accident years. In the future, as we compare the actual losses
with the different estimates of losses for recent accident years, we may change
the relative weightings of these and other actuarial methods.

      Reserve estimates derived using the Bornhuetter-Ferguson methods are
driven by our assumptions related to the expected loss ratio and the expected
reporting or payment pattern for losses, while reserve estimates derived using
the loss development methods are solely driven by our assumptions related to the
expected reporting and payment patterns, and are not at all affected by our
assumptions related to the expected loss ratio. Reporting and payment pattern
refers to the estimated percentage of the ultimate losses for a particular state
that have been reported or paid at a particular valuation date. The table below
quantifies the impact that reasonably likely changes in these three
variables--the expected loss ratio, the expected payment pattern and the
expected reporting pattern for losses--would have on the recorded net and gross
reserves for losses and LAE at December 31, 2006. Due to the selection of
weights in the table above, changes in the initial expected loss ratio do not
have an effect on accident years prior to 2000.

SENSITIVITY OF NET LOSS RESERVES TO CHANGES IN ACTUARIAL ASSUMPTIONS
as of December 31, 2006
(all dollar amounts in thousands)

SENSITIVITY OF NET LOSS RESERVES TO CHANGES IN ACTUARIAL ASSUMPTIONS
as of December 31, 2006
(all dollar amounts in thousands)
                                                              Change in Net Loss
Change in Assumptions                                              Reserves
--------------------------------------------------------      ------------------
Improve Expected Loss Ratio by 10%                             $    (7,943)

Deteriorate Expected Loss Ratio by 10%                               7,943

Improve Paid Loss Development Pattern by 10%                        (9,310)

Deteriorate Paid Loss Development Pattern by 10%                     9,079

Improve Incurred Loss Development Pattern by 10%                    (3,561)

Deteriorate Incurred Loss Development Pattern by 10%                 3,510

Improve Expected Loss Ratio by 10%
and Improve Loss Development Patterns by 10%                       (20,418)

Improve Expected Loss Ratio by 10%
and Deteriorate Loss Development Patterns by 10%                     4,192

Deteriorate Expected Loss Ratio by 10%
and Improve Loss Development Patterns by 10%                        (5,403)

Deteriorate Expected Loss Ratio by 10%
and Deteriorate Loss Development Patterns by 10%                    20,892


                                       47


SENSITIVITY OF GROSS LOSS RESERVES TO CHANGES IN ACTUARIAL ASSUMPTIONS
as of December 31, 2006
(all dollar amounts in thousands)
                                                            Change in Gross Loss
Change in Assumptions                                             Reserves
--------------------------------------------------------    --------------------
Improve Expected Loss Ratio by 10%                               $(10,710)

Deteriorate Expected Loss Ratio by 10%                             10,710

Improve Paid Loss Development Pattern by 10%                      (14,225)

Deteriorate Paid Loss Development Pattern by 10%                   13,919

Improve Incurred Loss Development Pattern by 10%                   (5,415)

Deteriorate Incurred Loss Development Pattern by 10%                5,343

Improve Expected Loss Ratio by 10%
and Improve Loss Development Patterns by 10%                      (29,725)

Improve Expected Loss Ratio by 10%
and Deteriorate Loss Development Patterns by 10%                    7,966

Deteriorate Expected Loss Ratio by 10%
and Improve Loss Development Patterns by 10%                       (9,554)

Deteriorate Expected Loss Ratio by 10%
and Deteriorate Loss Development Patterns by 10%                   30,558

      As summarized in the tables above, we estimated the sensitivity of the
reserve estimates to three items:

1. Changes in the initial expected loss ratio--We varied the initial expected
loss ratio utilized in the Bornhuetter-Ferguson methods by + / - 10% (e.g., if
the initial expected loss ratio was 60% for a particular state and accident
year, we calculated the sensitivity of reserves to a change in loss ratio of 6%
= 10% x 60%). Changes in the initial expected loss ratio affect the results of
the two Bornhuetter-Ferguson methods.

2. Changes in the paid loss development pattern--We varied the paid loss
development pattern by + / - 5% (e.g., if paid losses were expected to develop
by 50% for a particular state and accident year, we calculated the sensitivity
of reserves to a change in paid loss development factors of 2.5% = 5% x 50%).
Changes in the paid loss development factors affect the results of the Paid Loss
Bornhuetter-Ferguson Method and the Paid Loss Development Method.

3. Changes in the incurred loss development pattern--We varied the incurred loss
development pattern by + / - 5% (e.g., if incurred losses were expected to
develop by 30% for a particular state and accident year, we calculated the
sensitivity of reserves to a change in incurred loss development factors of 1.5%
= 5% x 30%). Changes in the incurred loss development factors affect the results
of the Incurred Loss Bornhuetter-Ferguson Method and the Incurred Loss
Development Method.

      We believe that loss ratios 10% above or below our expected loss ratio
constitute a reasonable range of expectations for each state and accident year
in which we have loss reserves. In addition, we believe the adjustments (5%)
that we made to improve or deteriorate the paid and incurred loss development
patterns are also reasonably likely outcomes. Assumptions about loss development
patterns are made based on our entire claim history back to 1982, while
assumptions about expected loss ratios are made based on our current pricing and
only up to two years of aggregated industry data. As a result of the longer
relevant history of loss patterns, loss development patterns are considerably
more stable and warrant a smaller variation. Such changes in the net reserves
for losses and loss adjustment expense would not have an immediate impact on our
liquidity, but would affect cash flow in future periods as the incremental or
reduced amount of losses is paid.

      Our reserves are driven by a number of important assumptions including
litigation and regulatory trends, legislative activity, social and economic
patterns and claims inflation assumptions. Our reserve estimates reflect
expected inflation in legal claims settlements and assume we will not be subject
to losses from significant new legal liability theories. Our reserve estimates
also assume that we will not experience significant losses from mass torts and
that we will not incur losses from future mass torts not known to us today.
While it is not possible to predict the impact of changes in this environment,
if new mass torts or expanded legal theories of liability emerge, our IBNR
claims may differ substantially from our IBNR reserves. Our reserve estimates
assume that there will not be significant changes in the regulatory and
legislative environment. The impact of potential changes in the regulatory or


                                       48


legislative environment is difficult to quantify in the absence of specific,
significant new regulation or legislation. In the event of significant new
regulation or legislation, we will attempt to quantify its impact on our
business. These estimates also assume that the inflation assumption implicitly
built into our reserving philosophy, expected loss ratio, and loss payment and
reporting patterns will continue into the future. Unexpected changes in loss
cost inflation can occur through changes in general inflationary trends, changes
in medical technology and procedures, changes in wage levels and general
economic conditions in particular geographic areas and changes in legal theories
of liability.

      REINSURANCE

      Reinsurance premiums, losses, and LAE are accounted for on a basis
consistent with those used in accounting for the original policies issued and
the terms of the reinsurance contracts. Reinsurance ceding commissions received
are deferred and amortized over the effective period of the related insurance
policies.

      REINSURANCE RECOVERABLES

      Reinsurance recoverables represent: (1) amounts currently due from
reinsurers on paid losses and LAE, (2) amounts recoverable from reinsurers on
case basis estimates of reported losses and LAE and (3) amounts recoverable from
reinsurers on actuarial estimates of IBNR for losses and LAE. These
recoverables, by necessity, are based upon estimates and are reported on our
balance sheet separately as assets, as reinsurance does not relieve us of our
legal liability to policyholders. We are required to pay losses even if a
reinsurer fails to meet its obligations under the applicable reinsurance
agreement. We continually monitor the financial condition and rating agency
ratings of our reinsurers. We require reinsurers that are not admitted
reinsurers in Florida, if any, (where our insurance subsidiaries are domiciled)
to collateralize their share of the unearned premiums and unpaid loss reserves
in order that our insurance subsidiaries receive credit for reinsurance on their
statutory financial statements. We bear credit risk with respect to the
reinsurers, which can be significant considering that some of the unpaid losses
and LAE remain outstanding for an extended period of time. While management
believes that the amount accrued is collectible, the ultimate recovery may be
greater or less than the amount accrued.

      RECOGNITION OF PREMIUM REVENUE

      All premium revenue is recognized over the period of the contract in
proportion to the amount of insurance protection provided. The insurance
premiums we charge are billed to our policyholders either annually or under
various installment plans based on the estimated annual premium under the policy
terms. We recognize the premium revenue for the proportionate share of the risks
assumed from state mandated involuntary pools on a quarterly basis. At the end
of the policy term, payroll-based premium audits are performed on substantially
all policyholder accounts to determine earned premiums for the policy year.
Earned but unbilled premiums include estimated future audit premiums. Estimates
of future audit premiums are based on our historical experience. These estimates
are subject to changes in policyholders' payrolls due to growth, economic
conditions and seasonality. Although considerable variability is inherent in
such estimates, management believes that the accrual for earned but unbilled
premiums is reasonable. The estimates are continually reviewed and adjusted as
necessary as experience develops or new information becomes known. Any such
adjustments are included in current operations. The reserve for unearned
premiums is determined on a daily pro rata basis.

      DEFERRED POLICY ACQUISITION COSTS

      To the extent recoverable from future policy revenues, costs that vary
with and are primarily related to the production of new and renewal business,
such as commissions paid to agents and our other acquisition expenses, net of
reinsurance ceding allowances received, have been deferred and are amortized
over the effective period of the related insurance policies. The method followed
in computing deferred policy acquisition costs limits such deferred amounts to
their estimated realizable value. The ultimate recoverability of deferred
acquisition costs is dependent on the continued profitability of our insurance
underwriting. If our insurance underwriting ceases to be profitable, we may have
to write off a portion of our deferred policy acquisition costs, resulting in a
further charge to income in the period in which the underwriting losses are
recognized. At December 31, 2006 and 2005, our deferred acquisition costs were
$20.7 million and $19.4 million, respectively.

      INVESTMENTS

      Fixed maturity investments are designated at purchase as held-to-maturity
or available-for-sale. Held-to-maturity investments are reported at amortized
cost. Securities classified as available-for-sale are reported at fair value
with unrealized appreciation and depreciation, net of deferred taxes, on our


                                       49


balance sheet in accumulated other comprehensive income as a separate component
of stockholders' equity. We have historically held until maturity those
securities designated as held-to-maturity and intend to maintain our investment
guidelines so that we would do so in the future.

      Realized gains and losses on sales of investments are recognized in
operations on the specific identification basis.

      We continuously monitor our portfolio to preserve principal values
whenever possible. All securities in an unrealized loss position are reviewed to
determine whether the impairment is other-than-temporary. An investment in a
fixed maturity security is impaired if its fair value falls below its book
value. Factors considered in determining whether a decline is considered to be
other-than-temporary include length of time and the extent to which fair value
has been below book value, the financial condition and near-term prospects of
the issuer, and our ability and intent to hold the security until its expected
recovery. If an impairment of a security is determined to be
other-than-temporary, such impairment will result in a charge to net income in
the period in which such other-than-temporary determination is made. For details
on our investments in an unrealized loss position, see "Business--Investments."

      DIVIDENDS TO POLICYHOLDERS

      An estimated provision for our dividends to policyholders is accrued as
the related premiums are earned. We offer dividend programs to our policyholders
in Florida and Wisconsin, where rates are set by state insurance regulators.
These dividends are not guaranteed and are required to be approved by the boards
of directors of our insurance subsidiaries. The boards of directors may base
their decisions to pay dividends on many factors, including (1) an individual
policyholder's net loss ratio, (2) the insurance subsidiary's overall net loss
ratio and (3) the terms of the individual policyholder's dividend plan. The type
of dividend plan is stated in the policy and, other than with respect to flat
dividend policies in Wisconsin, has a direct relationship to the amount of
losses incurred under that policy. The prior loss experience of the policyholder
is a key element in the estimation of our dividend liability.

MEASUREMENT OF RESULTS

      We evaluate our operations by monitoring key measures of growth and
profitability. We measure our growth by examining our gross premiums written. We
measure our operating results by examining our net income, return on equity, and
our loss, expense, dividend and combined ratios. The following provides further
explanation of the key measures that we use to evaluate our results:

      GROSS PREMIUMS WRITTEN. Gross premiums written is the sum of direct
premiums written and assumed premiums written. Direct premiums written is the
sum of the total policy premiums, net of cancellations, associated with policies
underwritten by our insurance subsidiaries. Assumed premiums written represent
our share of the premiums assumed from state mandated involuntary pools. We use
gross premiums written, which excludes the impact of premiums ceded to
reinsurers, as a measure of the underlying growth of our insurance business from
period to period.

      NET PREMIUMS WRITTEN. Net premiums written is the sum of direct premiums
written and assumed premiums written less ceded premiums written. Ceded premiums
written is the portion of our direct premiums that we cede to our reinsurers
under our reinsurance contracts. We use net premiums written, primarily in
relation to gross premiums written, to measure the amount of business retained
after cession to reinsurers.

      GROSS PREMIUMS EARNED. Gross premiums earned represent that portion of
gross premiums written equal to the expired portion of the time for which the
insurance policy was in effect during the financial year. For each day a
one-year policy is in force, we earn 1/365th of the annual premium.

      NET PREMIUMS EARNED. Net premiums earned represent that portion of net
premiums written equal to the expired portion of the time for which the
insurance policy was in effect during the financial year and is recognized as
revenue. It represents the portion of premium that belongs to us on the part of
the policy period that has passed and for which coverage has been provided. Net
premium earned is used to calculate the net loss, net expense and dividend
ratios, as indicated below.

      NET LOSS RATIO. The net loss ratio is a measure of the underwriting
profitability of an insurance company's business. Expressed as a percentage,
this is the ratio of net losses and LAE incurred to net premiums earned.


                                       50


      Like many insurance companies, we analyze our loss ratios on a calendar
year basis and on an accident year basis. A calendar year loss ratio is
calculated by dividing the losses and LAE incurred during the calendar year,
regardless of when the underlying insured event occurred, by the premiums earned
during that calendar year. The calendar year net loss ratio includes changes
made during the calendar year in reserves for losses and LAE established for
insured events occurring in all prior periods. A calendar year net loss ratio is
calculated using premiums and losses and LAE that are net of amounts ceded to
reinsurers.

      An accident year loss ratio is calculated by dividing the losses and LAE,
regardless of when such losses and LAE are incurred, for insured events that
occurred during a particular year by the premiums earned for that year. An
accident year net loss ratio is calculated using premiums and losses and LAE
that are net of amounts ceded to reinsurers. An accident year loss ratio for a
particular year can decrease or increase when recalculated in subsequent periods
as the reserves established for insured events occurring during that year
develop favorably or unfavorably, respectively, whereas the calendar year loss
ratio for a particular year will not change in future periods.

      We analyze our calendar year loss ratio to measure our profitability in a
particular year and to evaluate the adequacy of our premium rates charged in a
particular year to cover expected losses and LAE from all periods, including
development (whether favorable or unfavorable) of reserves established in prior
periods. In contrast, we analyze our accident year loss ratios to evaluate our
underwriting performance and the adequacy of the premium rates we charged in a
particular year in relation to ultimate losses and LAE from insured events
occurring during that year.

      While calendar year loss ratios are useful in measuring our profitability,
we believe that accident year loss ratios are more useful in evaluating our
underwriting performance for any particular year because an accident year loss
ratio better matches premium and loss information. Furthermore, accident year
loss ratios are not distorted by adjustments to reserves established for insured
events that occurred in other periods, which may be influenced by factors that
are not generally applicable to all years. The loss ratios provided in this
report are calendar year loss ratios, except where they are expressly identified
as accident year loss ratios. See "--Results of Operations,"
"Business--Overview" and "--Regulation."

      POLICY ACQUISITION EXPENSE RATIO. The policy acquisition expense ratio is
a measure of an insurance company's operational efficiency in producing and
underwriting its business. Expressed as a percentage, this is the ratio of
policy acquisition expenses to net premiums earned.

      UNDERWRITING AND OTHER EXPENSE RATIO. The underwriting and other expense
ratio is a measure of an insurance company's operational efficiency in
administering its business. Expressed as a percentage, this is the ratio of
underwriting and other expenses to net premiums earned. For underwriting and
other expense ratio purposes, underwriting and other expenses of an insurance
company exclude investment expenses and dividends to policyholders.

      DIVIDEND RATIO. The dividends to policyholders ratio equals policy
dividends incurred in the current year divided by net premiums earned for the
year.

      NET COMBINED RATIO. The net combined ratio is a measure of an insurance
company's overall underwriting profit. This is the sum of the net loss, policy
acquisition expense, underwriting and other expense, and dividend ratios. If the
net combined ratio is at or above 100, an insurance company cannot be profitable
without investment income, and may not be profitable if investment income is
insufficient.

      RETURN ON EQUITY. This percentage is the sum of return on equity (ROE)
from underwriting, ROE from investing, the ROE impact of debt and ROE from other
income, multiplied by one minus the effective tax rate. ROE from underwriting is
calculated as one minus the combined ratio, representing our underwriting profit
percentage, multiplied by our operating leverage (annualized net premiums earned
divided by average equity). ROE from investing is calculated by multiplying the
investment yield for the period by our investment leverage (average investments
divided by average equity). The ROE impact of debt is calculated by multiplying
the effective interest rate on debt for the period by our financial leverage
(average debt divided by average equity). We use return on equity to measure our
growth and profitability. We can compare our return on equity to that of other
companies in our industry to see how we are performing compared to our
competition.


                                       51


RESULTS OF OPERATIONS

      YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

                                                Year Ended December 31,
                                        ---------------------------------------
                                                                                    Increase    Increase
                                                                                   (decrease)  (decrease)
                                                                                    2006 over  2005 over
                                           2006          2005            2004         2005       2004
                                        ----------    ----------      ----------   ---------- -----------
                                                               (Dollars in thousands)
SELECTED FINANCIAL DATA:
Gross premiums written                  $ 273,713      $ 277,095      $ 270,981       (1.2)%      2.3%
Net premiums written                      264,788        267,652        217,472       (1.1)      23.1
Gross premiums earned                     277,018        276,117        259,445        0.3        6.4

Net premiums earned                       266,456        256,603        181,186        3.8       41.6
Net investment income                      17,461         10,798          6,077       61.7       77.7
Net realized investment (loss) gain          (307)          (385)           982      (20.3)    (139.2)
Other income                                  333            285            332       16.8      (14.2)
                                        ---------      ---------      ---------
Total revenue                           $ 283,943      $ 267,301      $ 188,577        6.2%      41.7%
                                        ---------      ---------      ---------
Losses and loss adjustment expenses       163,670        143,663        119,121       13.9       20.6
Policy acquisition expenses                49,547         51,508         19,499       (3.8)     164.2
Underwriting and other expenses            32,175         34,447         32,280       (6.6)       6.7
Dividends to policyholders                  9,926          8,612          6,983       15.3       23.3
Interest expense                            3,807          2,960          1,389       28.6      113.1
Federal and state income taxes              8,256          9,326          4,275      (11.5)     118.2
                                        ---------      ---------      ---------     ------     ------
Net income                              $  16,562      $  16,785      $   5,030       (1.3)%    233.7%
                                        =========      =========      =========     ======     ======

KEY FINANCIAL RATIOS:
Net loss ratio                               61.4%          56.0%          65.7%
Net policy acquisition expense ratio         18.6           20.1           10.8
Underwriting and other expense ratio         12.1           13.4           17.8
                                        ---------      ---------      ---------
Net combined ratio, excluding
policyholder dividends                       92.1%          89.5%          94.3%
Dividend ratio                                3.7            3.4            3.9
                                        ---------      ---------      ---------
Net combined ratio, including
policyholder dividends                       95.8%          92.9%          98.2%
                                        =========      =========      =========

------------

      GROSS PREMIUMS WRITTEN decreased $3.4 million, or 1.2% in 2006 as compared
to 2005. Direct premiums written decreased $3.5 million, while assumed premiums
written increased $0.1 million. The decrease in direct premiums written is
primarily driven by decreases in direct written premiums in Florida ($8.4
million), Indiana ($6.8 million), and Tennessee ($3.3 million), offset by
increases in Texas ($5.0 million), Illinois ($3.3 million), Wisconsin ($2.9
million), North Carolina ($2.5 million), and Virginia ($1.5 million). All other
states decreased by $0.2 million. The decrease in Florida premiums is the result
of a rate decrease during the year, with the number of policies written in
Florida remaining relatively flat. For all other states with significant changes
in direct premiums written, the change in the number of policies was consistent
with the change in direct premiums written. The overall number of policies
written decreased 2.2% during the year.

      Gross premiums written increased $6.1 million, or 2.3% in 2005 as compared
to 2004. Gross premiums written were relatively flat in 2005 primarily due to a
decrease in assumed premiums from the NWCRP involuntary pool, which declined
$4.0 million to $6.8 million in 2005 from $10.8 million in 2004. Direct written
premium increased 3.9% to $270.3 million in 2005 from $260.1 million in 2004.


                                       52


This is attributable to an increase in the number of policies written. The
average policy premium did not change significantly from 2004 to 2005.

      NET PREMIUMS WRITTEN decreased $2.9 million, or 1.1% in 2006 as compared
to 2005. This decrease is the result of the decrease in gross premiums written.
The retention in our 2006 and 2005 excess-of-loss treaties was unchanged at $2.0
million.

      Net premiums written increased $50.2 million, or 23.1% in 2005 as compared
to 2004. Net premiums written were significantly impacted by the changes in our
quota share reinsurance arrangements. In 2004, we terminated our quota share
reinsurance arrangement for new and renewal business effective July 1, 2004. The
premium associated with quota share reinsurance was completely run off by July
1, 2005. The increase in the retention in our 2005 excess-of-loss reinsurance
program reduced our ceded premiums written for the $1.0 million excess of $1.0
million layer.

      GROSS PREMIUMS EARNED increased $0.9 million, or 0.3% in 2006 as compared
to 2005. This increase is the direct result of an increase in direct earned
premiums, with the largest increases being in Wisconsin ($4.3 million), Texas
($3.7 million) and Illinois ($3.5 million), offset by decreases in Indiana ($5.6
million) and Tennessee ($4.6 million). Florida earned premium decreased $0.7
million.

      Gross premiums earned increased $16.7 million, or 6.4% in 2005 as compared
to 2004. This increase was the result of consistent overall growth each quarter
throughout 2004 and 2005.

      NET PREMIUMS EARNED increased $9.9 million, or 3.8 % in 2006 as compared
to 2005. This increase is in part attributable to the elimination of the quota
share reinsurance on all new and renewal business after July 1, 2004. During
2006 the activity on quota share treaties was minimal and attributable to
premium audits performed on prior year policies. In 2005, $7.3 million of earned
premiums was ceded under quota share reinsurance agreements The remaining
increase in 2006 net premiums earned is primarily the result of the reduction in
the excess-of-loss reinsurance contractual rate from 4.5% of direct premiums
written in 2005 to 3.2% in 2006. The rate decrease in the excess-of-loss
reinsurance is due to the elimination of ceding commission in the 2006 contract.

      Net premiums earned increased $75.4 million, or 41.6 % in 2005 as compared
to 2004. The increase in net premiums earned in 2005 is greater than the
increase in gross premiums earned due to the elimination of quota share
reinsurance on all new and renewal business after July 1, 2004 and the reduction
in excess-of-loss reinsurance premiums from 7.5% of gross premiums earned in
2004 to 4.5% for 2005 as a result of an increase in our retention level.

      The table below sets forth the calculation of net premiums earned and this
amount as a percentage of gross premiums earned:

                                                Percent of                Percent of                Percent of
                                                   Gross                    Gross                      Gross
                                                 Premiums                  Premiums                  Premiums
                                      2006        Earned        2005        Earned        2004        Earned
                                   ----------   ----------   ----------   ----------   ----------   ----------
                                                             (Dollars in thousands)

Gross premiums earned              $ 277,018      100.0%     $ 276,117      100.0%     $ 259,445      100.0%
Excess reinsurance premiums          (10,814)      (3.9)       (12,224)      (4.5)       (19,322)      (7.5)
Facultative reinsurance premiums         221        0.1           --          --           --           --
Quota share reinsurance premiums          31        0.0         (7,290)      (2.6)       (58,937)     (22.7)
                                   ---------       ----      ---------     ------      ---------     ------
Net premiums earned                $ 266,456       96.2%     $ 256,603       92.9%     $ 181,186       69.8%
                                   =========       ====      =========     ======      =========     ======

      NET INVESTMENT INCOME increased $6.7 million or 61.7% in 2006 as compared
to 2005. The increase is attributable to two factors. First, the investment
portfolio increased $94.1 million over December 31, 2005. The additional funds
available for investment were provided by $48.0 million of net initial public
offering proceeds, and $54.2 million of net cash provided by operating
activities. Additionally, at December 31, 2006, the yield to maturity on the
portfolio increased to 5.4% from 4.9% in the prior year.


                                       53



Net investment income increased $4.7 million, or 77.7% in 2005 as compared
to 2004. The increase in investment income was the result of the increase in our
investment portfolio due to the commutation of two of our reinsurance treaties,
an increase in our net operating cash flow as a result of the elimination of the
use of quota share reinsurance, and an increase in the size of our investment
portfolio. Additionally, at December 31, 2005 the market yield to maturity
increased to 4.9% from 3.6% in 2004.

      NET REALIZED INVESTMENT LOSS was $0.3 million in 2006, as compared to $0.4
in 2005. As the Company sells few securities the amount of loss recorded is
relatively small as a percentage of net income. During the year ended December
31, 2006, three other-than-temporary impairments totaling approximately $0.2
million were recorded on our investments, which are included in the current year
realized loss.

      Net realized investment (loss) gain was ($0.4) in 2005, as compared to
$1.0 in 2004. In 2005 we sold two bonds due to credit issues, which accounted
for the majority of our realized loss. In 2004, due to a decline in interest
rates, we sold securities in our investment portfolio and recognized gains.

      LOSSES AND LOSS ADJUSTMENT EXPENSES increased $20.0 million, or 13.9% in
2006 as compared to 2005. Loss and loss adjustment expenses were 61.4% and 56.0%
of net premiums earned in 2006 and 2005, respectively. The primary causes of the
increased loss ratios are the reduction of the redundancy as well as an increase
in catastrophic claims and an overall increase in severity during 2006.
Reflected in our losses and LAE in 2006, is a $14.2 million redundancy, net of
reinsurance, for years prior to 2006. Excluding assumed business, this
redundancy was attributable to prior year reserve decreases in Florida ($10.9
million), Tennessee ($7.2 million), Indiana ($4.3 million), and Texas ($3.7
million), offset by increases in North Carolina ($4.7 million), and Wisconsin
($3.8 million), with the remaining offset being attributable to other states and
assumed business. Reflected in our losses and LAE in 2005, was a $24.7 million
redundancy, net of reinsurance, for years prior to 2005. Additionally, as of
December 31, 2006, the current accident year loss ratio, excluding the
involuntary pool and ULAE, increased to 63.4% from 61.3% for the prior accident
year. Contributing to the higher accident year loss ratio were increases in
South Carolina (to 124.2% from 66.9% at December 31, 2005), Virginia (to 95.1%
from 56.5%), Georgia (to 80.3% from 60.7%), and North Carolina (to 91.5% from
67.5%). These increases were offset by decreases in net accident year loss
ratios for Tennessee (to 79.3% from 101.6%) and Texas (to 39.2% from 44.6%).
Loss and LAE on involuntary pools increased to 1.2% of net earned premiums from
0.8% as of December 31, 2005. Additionally, ULAE was 3.9% of net earned premium
for the year ended December 31, 2006, and 3.7% for the year ended December 31,
2005.

      Losses and loss adjustment expenses increased $24.5 million, or 20.6% in
2005 as compared to 2004. Loss and loss adjustment expenses were 56.0% and 65.7%
of net premiums earned in 2005 and 2004, respectively. Reflected in our losses
and LAE in 2005, is a $24.7 million redundancy, net of reinsurance, for years
prior to 2005. Reflected in our losses and LAE in 2004, was a $8.3 million
redundancy, net of reinsurance, for years prior to 2004. The loss development we
have experienced in recent years has been significantly lower than our selected
development factors. Because of the Company's extensive history in Florida,
Florida loss development factors significantly influence the results of our
actuarial reserving methods. The results of these methods, in turn, influence
the IBNR estimate. In recent years, Florida loss development experience has
decreased from previous levels.

      We observed that a general downward trend in loss development factors in
place for some time accelerated in 2003. We believe that much of this trend is
due to the effects of Florida Senate Bill 50A, enacted on October 1, 2003. This
law was a workers' compensation reform act that reduced attorney fees and
involvement on open workers' compensation claims in Florida. In this
environment, there is less uncertainty surrounding the ultimate cost of claims,
and there is a greater ability to settle claims promptly. Both of these factors
lower loss development. Based on the entirety of our loss development history,
including the observations noted above, with each passing quarter of favorable
loss development, the loss development experience becomes more credible, and the
expected future development decreases. This resulted in a change in 2005 in
selected loss development factors affecting all accident years. Excluding ULAE
and state mandated involuntary pools, Florida experienced $11.0 million in
redundancy, Texas $5.3 million, Georgia $3.0 million, Virginia $2.7 million and
Indiana $2.7 million. Overall, the 2005 accident year net loss ratio was 61.3%
at December 31, 2005, compared to a 2004 accident year net loss ratio of 67.1 at
December 31, 2004. In 2005, NWCRP pool losses of $7.3 million were allocated to
us, representing 88.1% of net premiums earned from that pool during 2005.

      POLICY ACQUISITION EXPENSES decreased $2.0 million, or 3.8% in 2006 as
compared to 2005. Policy acquisition expenses were 18.6% and 20.1% of net
premiums earned in 2006 and 2005, respectively. This decrease is the result of
decreases in premium taxes and assessments, partially offset by increases in
commissions and the general and administrative expense component of policy
acquisition expenses. Premium taxes represented 1.6% of net premiums earned,
compared to 1.9% for 2005. This decrease is the result of the application of


                                       54


state income tax credits allowed on the Florida premium tax return in the
current year. Assessments represented 3.0% of net premiums earned, compared to
6.5% for 2005. This is due in part to a approximately 30% decrease in the South
Carolina SDTF rate during the third quarter of 2006, and a 90% increase in the
rate in the third quarter of 2005. Additionally, in 2006 the rate used for the
2005 premium assessment by the Florida Guarantee Fund assessment was reduced to
zero from the original 2% accrued during 2005. The Florida Workers' Compensation
Insurance Guarantee Association did not assess the 2005 premiums in 2005;
however, it reserved the right to assess the 2005 premiums in 2006 if any
solvency issues arose that required additional cash flow for the Association. As
no assessment was made during 2006 for premiums written in 2005, and the time
period in which the Association was able to assess the 2005 premiums has passed,
the accrual for assessment on the 2005 premium was reduced to zero. These
decreases were partially offset by an increase in commissions. The commissions
increase is the result of receiving no ceding commission to offset commission
expense on the 2006 excess-of-loss treaty, compared to a 35% commission received
on the 2005 treaty. In 2005, ceding commissions reduced policy acquisition
expenses by $7.4 million, which decreased the expense ratio by 2.9%. In 2006,
ceding commission was reduced to $1.9 million, which decreased the expense ratio
by 0.7%. The general and administrative expenses associated with policy
acquisition costs represented 3.9% of net premiums earned, compared to 3.4% for
2005. This increase is primarily the result of an increase in the payroll
expense attributed to underwriting in 2006.

      Policy acquisition expenses increased $32.0 million, or 164.2% in 2005 as
compared to 2004. Policy acquisition expenses were 20.1% and 10.8% of net
premiums earned in 2005 and 2004, respectively. Policy acquisition expenses are
recorded net of ceding commissions. In 2005, as a result of the elimination of
quota share reinsurance, ceding commission decreased $17.5 million to $7.4
million. Direct commissions as a percent of direct premiums earned increased to
9.4% 2005 from 8.7% for 2004. The increase is due to the change in geographic
mix of our book of business. Florida, which had an average commission rate of
10.2% (the highest of the states), accounted for 40.3% of direct premiums
written as compared to only 35.5% for the prior year. Georgia, North Carolina,
South Carolina and Virginia, which had an average commission rate of only 7.7%,
accounted for only 13.0% of direct premiums written for 2005, down from 17.6% in
the prior year. Assessments increased to 6.8% of direct premiums earned for 2005
from 3.8% for the prior year due primarily to the doubling of the South Carolina
Second Disability Trust Fund assessment rate in the third quarter of 2005. The
impact of this rate increase was a pre-tax charge of $3.3 million in the third
quarter of 2005. Premium tax expense increased to 1.6% from 1.4% of direct
premiums earned during 2005 and 2004, respectively. This is due to Florida's
increased effective rate from the reduction of the credits allowed for the
administrative assessment. Administrative assessments paid in Florida are
allowed as a credit against premium taxes. The administrative assessment rate
decreased in 2005 thereby reducing the amount of credit allowed and resulting in
an increase in the Florida premium tax effective rate.

      UNDERWRITING AND OTHER EXPENSES decreased $2.3 million, or 6.6% in 2006 as
compared to 2005. Underwriting and other expenses were 12.1% and 13.4% of net
premiums earned in 2006 and 2005, respectively. The decrease in underwriting and
other expense is primarily attributable to decreases in agent incentives of $1.0
million and litigation reserve expenses of $1.4 million. In 2005 we recorded a
$1.3 million accrual in connection with outstanding litigation, as discussed in
Note 10, with no similar amount recorded in 2006. Also in 2006, the positive
premiums receivable collection trend continued, resulting in a reduced bad debt
expense. These decreases in underwriting and other expenses were partially
offset by increases in expenses associated with being a public company including
increases in auditing, actuarial, investor relations, Sarbanes Oxley compliance
readiness, and directors and officers insurance.

      Underwriting and other expenses increased $2.2 million, or 6.7% in 2005 as
compared to 2004. Underwriting and other expenses were 13.4% and 17.8% of net
premiums earned in 2005 and 2004, respectively. The increase in net premiums
earned in the 2005 period significantly reduced the net expense ratio. The $2.2
million increase in underwriting and other expenses was attributable to an
increase in human resource expenses by $1.0 million in 2005 from 2004
attributable to additional employees and higher compensation costs. The
continued improvement in our collection practices in 2005 enabled us to lower
the allowance for doubtful accounts by approximately $1.4 million in 2005.

      DIVIDENDS TO POLICYHOLDERS increased $1.3 million, or 15.3 % in 2006 as
compared to 2005. Dividends to policyholders were 3.7% and 3.4% of net premiums
earned in 2006 and 2005, respectively. This is due to an increase in direct
premiums earned in Wisconsin, one of the states in which policyholders are
eligible for dividend plans. The percentage of direct premiums written in
Florida on a dividend plan increased slightly to 37.8% in 2006 from 36.8% in
2005. The percentage of direct premiums written in Wisconsin on a dividend plan
decreased to 84.1% in 2006 from 86.4% in 2005. The company wide direct premiums
written on a dividend plan increased to 25.7% in 2006 from 24.9% in 2005.


                                       55


      Dividends to policyholders increased $1.6 million, or 23.3% in 2005 as
compared to 2004. This was due to an increase in gross premiums earned in
Wisconsin and Florida, the states in which policyholders are eligible for
dividend plans. Additionally, the percentage of direct premiums written in
Florida on a dividend plan increased to 36.8% in 2005 from 32.3% in 2004.
Wisconsin's direct written premiums on dividend plans decreased to 86.4 % from
89.4% in 2004. The company wide direct premiums written on a dividend plan
increased to 24.9% from 21.1% in 2004.

      INTEREST EXPENSE increased $0.8 million, or 28.6% in 2006 as compared to
2005. The increase is attributable to an interest rate increase of approximately
1% on our $38.3 million of variable rate debt. Additionally, during 2006,
interest expense increased as the result of accruing approximately $0.3 million
of interest in connection with an interest bearing payable.

      Interest expense increased $1.6 million, or 113.1% in 2005 as compared to
2004. The increase is due to interest paid on $32.0 million of surplus notes
issued to third parties in 2004. These surplus notes were issued at various
times during the second and third quarters of 2004 and are subject to floating
interest rates. The rates increased in 2005 by over 200 basis points.

      FEDERAL AND STATE INCOME TAXES decreased $1.1 million, or 11.5% in 2006 as
compared to 2005. Federal and state income taxes were 33.3% of pretax income in
2006, and 35.7% in 2005. The primary causes of the decrease are a change in the
tax rate applied to the deferred tax assets, and a decrease in state income
taxes. In 2006, the federal effective rate used in calculating the value of the
deferred tax assets was increased to 35% from 34%. This adjustment in the rate
was made to more accurately reflect the federal tax rate at which the Company is
expected to be taxed when the deferred tax asset is utilized. The decrease in
state tax expense is a result of amending the 2005 and 2004 Florida state income
tax returns to apportion interest income between states in which we operate.
These amended returns resulted in additional state tax refund amounts recorded
in the current period related to prior years. These decreases were partially
offset by other increases, including a provision to return adjustment.

      Federal and state income taxes increased $5.1 million, or 118.2% in 2005
as compared to 2004. Federal and state income taxes were 35.7% of pretax income
in 2005, and 46.0% of pretax income in 2004. The effective tax rate for 2005
includes a 35% federal tax rate. The state of Florida's tax rate is 5.5%. We
apportion our pretax income to the State of Florida according to the State's
apportionment factors. For 2005, this decreased the effective state tax rate to
3.5%. This was an increase compared to our 2004 apportioned rate used of 2.5%.
The tax exempt interest lowered our effective tax rate by 2.2%. The increase in
the effective rate for 2004 was due to an adjustment in 2004 in the effective
rate used in calculating the value of the deferred tax assets. The rate was
adjusted to 34.0% from 35.0% to reflect the current federal tax rate and to 3.5%
from 5.5% to reflect the current Florida state tax rate after its apportionment
of income. These are the rates at which we expect to be taxed when the deferred
tax asset is utilized. The adjustment in the rates caused an additional deferred
tax expense of approximately $1.2 million to be recognized in 2004, creating the
higher effective tax rate.

      NET INCOME decreased $0.2 million or 1.3% in 2006 as compared to 2005.
Increases in net premiums earned and net investment income of $9.9 million and
$6.7 million respectively, and a decrease in underwriting and acquisition
expenses of $4.2 million, were offset by an increases in loss and loss
adjustment expenses and dividends of $20.0 million and $1.3 million,
respectively .

      Net income increased $11.8 million or 233.7% in 2005 as compared to 2004.
Net income was significantly impacted by our losses and LAE relative to the net
premiums earned as indicated by net loss ratios of 56.0 % and 65.7% in 2005 and
2004, respectively.

      RETURN ON EQUITY - Our annualized return on equity for the years ended
December 31, 2006 and 2005 is 15.7% and 25.8%, respectively.

LIQUIDITY AND CAPITAL RESOURCES

      We are a holding company and our insurance subsidiaries are the primary
source of funds for our operations. We have historically received dividend
payments solely from Pinnacle Administrative Company ("Pinnacle Administrative")
and Pinnacle Benefits, Inc ("Pinnacle Benefits"). These dividend payments are
funded by fee payments under service agreements between Pinnacle Administrative
and Pinnacle Benefits and our insurance subsidiaries. Fee payments under the
service agreements are subject to review by the Florida OIR, as are dividend
payments by our insurance subsidiaries. There are no restrictions on the payment
of dividends by our non-insurance subsidiaries, Pinnacle Administrative,
Pinnacle Benefits and AmSERV, Inc., other than customary state corporation laws


                                       56


regarding solvency. The cash requirements of these non-insurance subsidiaries
are primarily for the payment of salaries, employee benefits and other operating
expenses.

      LIQUIDITY

      The primary source of cash flow for Pinnacle Benefits and Pinnacle
Administrative is service fees paid by our insurance subsidiaries. Our insurance
subsidiaries' primary cash sources are insurance premiums, investment income and
the proceeds from the sale, redemption or maturity of invested assets. The cash
requirements of the insurance subsidiaries are primarily for the payment of
losses and LAE, guaranty fund and second-injury fund assessments, commissions,
reinsurance premiums, premium taxes, services fees, interest on surplus notes
and purchase of investment securities. We maintain cash reserves to meet our
obligations that comprise current outstanding loss and LAE, reinsurance premiums
and administrative expenses. Due to the uncertainty regarding the timing and
amount of settlement of unpaid losses, the liquidity requirements of the
insurance subsidiaries vary. The insurance subsidiaries' investment guidelines
and investment portfolio take into account historical payout patterns. If loss
payments were to accelerate beyond our ability to fund them from current
operating cash flows, we would need to liquidate a portion of our investment
portfolio and/or arrange for financing. For example, several catastrophic
injuries occurring in a relatively short period of time could cause such a
liquidity strain. Our insurance subsidiaries have historically purchased excess
reinsurance to mitigate the effects of large losses and to help stabilize
liquidity. These reinsurance agreements require initial outlays of reinsurance
premiums, based on premiums written, which is in advance of our receipt of cash
premiums, and the reinsurers reimburse us after losses and LAE are paid by us.
These reinsurance agreements exclude coverage for losses arising out of
terrorism and nuclear, biological and chemical attacks.

      CAPITAL RESOURCES

      We have historically met our cash requirements and financed our growth
principally from operations, the proceeds of borrowings, investment income and
more recently the initial public offering completed February 10, 2006 for $48.0
million. Cash flow is summarized in the table below.

                              For the Twelve Months Ended
                                      December 31,
                          ------------------------------------
                             2006         2005         2004
                          ----------   ----------   ----------
Cash and cash
equivalents
provided by (used
in):
Operating activities      $  54,154    $  83,602    $  59,047
Investing activities        (98,160)    (108,877)    (102,862)
Financing activities         48,176       (1,789)      30,214
                            -------     --------     --------
Change in cash and cash
equivalents               $   4,170    ($ 27,064)   ($ 13,601)
                            =======     ========     ========

      In October 2000, we entered into a credit facility with AmSouth Bank under
which we borrowed $11.3 million. In April 2003, the loan was amended and the
aggregate borrowing increased to $12.5 million. The loan calls for monthly
payments of principal and of interest at the 30-day LIBOR rate plus a margin. At
December 31, 2006, the principal balance of the loan was $6.2 million and the
annual interest rate was 7.85%. The loan contains various restrictive covenants
generally pertaining to levels of indebtedness and limitations on incurrence of
capital expenditures. Additionally, our insurance subsidiaries must comply with
financial covenant restrictions, including ratios of leverage, debt service,
current maturity coverage, net premiums written to surplus and risk based
capital. The loan is collateralized by $25.5 million of internal surplus notes
issued to us by our insurance subsidiaries and the stock of AmCOMP Preferred.
The surplus notes bear interest, in the case of $10.0 million principal amount,
at an annual rate of 100 basis points in excess of the prime rate, in the case
of $10.5 million principal amount, at an annual rate of 450 basis points in
excess of LIBOR, and in the case of $5.0 million principal amount, at an annual
rate of 10.0%. Interest and principal payments on the surplus notes require
prior approval by the Florida OIR.

      In 2004, AmCOMP Preferred issued surplus notes to third parties as part of
three securitizations of pooled surplus notes of insurance companies. The
following table summarizes the terms of these surplus notes:


                                       57


                                                                        Optional
                                                                     Redemption by
                                                                         Amcomp                                       Frequency
                            Principal                                  Preferred                                     of Interest
       Issue Date             Amount          Maturity Date           On or After             Interest Rate            Payments
                          -------------     -----------------      -----------------      ----------------------     -----------
April 30, 2004            $10.0 million       April 29, 2034         April 29, 2009       Three-month LIBOR plus      Quarterly
                                                                                             425 basis points
May 26, 2004              $12.0 million        May 24, 2034           May 24, 2009        Three-month LIBOR plus      Quarterly
                                                                                             425 basis points
September 14, 2004        $10.0 million     December 15, 2034      December 15, 2009      Three-month LIBOR plus      Quarterly
                                                                                             405 basis points

      For statutory purposes, these surplus notes are considered as a component
of AmCOMP Preferred's policyholders' surplus. For GAAP and income tax purposes,
the surplus notes are considered debt. The issuance of the surplus notes
required Florida OIR approval. Additionally, all future principal and interest
payments require the approval of the Florida OIR.

      We consummated our initial public offering on February 15, 2006 with the
sale by the Company of 6,000,000 shares of common stock. Our net proceeds, after
deducting underwriting discounts and commissions and other expenses relating to
the offering, were approximately $48.0 million. We utilized substantially all of
the proceeds to further capitalize our insurance subsidiaries which enables us
to underwrite additional insurance in the states where we currently operate. We
are evaluating a number of states in the near term including Arkansas and
Maryland, subject to compliance with applicable licensing requirements. The
balance of the net proceeds we received from the initial public offering is
being used for working capital and general corporate purposes.

      REGULATION

      Our insurance subsidiaries are required to maintain certain minimum
amounts of capital as established by the Florida OIR pursuant to risk-based
capital standards of the NAIC. These standards require the computation of a
risk-based capital amount, which is then compared to the insurance subsidiaries'
actual total adjusted capital. The computation of risk-based capital involves
applying various financial factors to address four primary risks: asset risk,
insurance underwriting risk, credit risk and off-balance sheet risk. The
standards provide for regulatory intervention when the ratio of an insurance
company's total adjusted capital to its risk-based capital is below certain
levels. For further information, see the discussion of risk-based capital under
"Business--Regulation."

      Our insurance subsidiaries are also subject to statutory insurance laws
and regulations that limit the amount of dividends or distributions that may be
paid by an insurance company to its stockholders. Pursuant to the Florida
Insurance Code, our insurance subsidiaries may not, without the prior approval
of the Florida OIR, pay to us dividends or other distributions of cash or
property, the total fair market value of which generally exceeds the lesser of
10% of their surplus as of the prior December 31 or net income for the calendar
year then ended, excluding realized capital gains, plus a two-year carryback of
realized capital gains. At December 31, 2006, our insurance subsidiaries were
authorized to pay approximately $15.6 million in dividends without additional
regulatory approval. No dividends were paid by the insurance subsidiaries during
2006, 2005 or 2004.

      Effective January 1, 2006, the Illinois Department of Insurance removed
the $9.0 million cap premium writings requirement previously applicable in that
state. Historically, the regulatory authorities' primary concern was the
capitalization of AmCOMP Assurance and its reliance on an inter-company pooling
arrangement with AmCOMP Preferred, which is not licensed to do business in those
states. Should we choose to expand our operations in Illinois, we would be
required to negotiate an increase in the current limit on premium writing and
there is no assurance that we would be able to do so. In North Carolina, we were
subject to a $12.0 million cap on written premiums during the 2002-2004 periods.
Effective July 6, 2005, the cap was removed.


                                       58


      REINSURANCE

      We have historically operated with a limited amount of capital and, as a
result, have made extensive use of the reinsurance market to maintain our net
exposures within our capital resources. We have ceded premiums and losses to
unaffiliated insurance companies under quota share, excess of loss and
catastrophe reinsurance agreements. We evaluate the financial condition of our
reinsurers and monitor various credit risks to minimize our exposure to losses
from reinsurer insolvencies. However, we remain obligated for amounts ceded
irrespective of whether the reinsurers meet their obligations. We ceded a high
percentage of our premiums and the associated losses prior to July 1, 2004. A
failure of one of our reinsurers to pay could have a significant adverse effect
on our capital and our financial condition and results of operations. At
December 31, 2006 and December 31, 2005, reinsurance recoverables on paid and
unpaid losses and LAE and ceding commissions were $75.4 million and $83.9
million, respectively. Our largest recoverable from a single reinsurer as of
December 31, 2006 was $39.1 million owed to us by Continental Casualty Company,
a subsidiary of CNA Financial Corporation, representing 28.1% of our total
stockholders' equity as of that date. Of the $39.1 million, $1.6 million was the
current recoverable on paid losses. The balance of $37.5 million is recoverable
from Continental Casualty Company on losses that may be paid by us in the future
and therefore is not currently due. The unpaid losses will become current as we
pay the related claimants.

      As a result of raising $32.0 million from surplus notes issued by one of
our insurance subsidiaries, we have eliminated the need for quota share
reinsurance on new and renewal business since July 1, 2004. In addition, we
increased our retention in our excess of loss reinsurance program to $2.0
million in 2005 and thereafter from $1.0 million in 2004.

      INVESTMENTS

      Our insurance subsidiaries employ an investment strategy that emphasizes
asset quality to minimize the credit risk of our investment portfolio. As
economic conditions change, our insurance subsidiaries' investment committees
recommend strategy changes and adjustments to our investment portfolio. We have
maintained a high portion of our portfolio in short-term investments recently to
mitigate the risk of falling prices for fixed maturity securities if rates
should rise. Changes in interest rates impact our investment income and cause
fluctuations in the carrying values of the majority of our investments (these
changes are reflected as changes in stockholders' equity).

      We may sell securities due to changes in the investment environment, our
expectation that fair value may deteriorate further, our desire to reduce our
exposure to an issuer or an industry and changes in the credit quality of the
security. In addition, depending on changes in prevailing interest rates, our
investment strategy may shift toward long-term securities, and we may adjust
that portion of our investment portfolio that is held-to-maturity rather than
available-for-sale. Except for recognizing other-than-temporary impairments, our
held to maturity portfolio is carried at amortized cost because we have the
ability and intent to hold those securities to maturity. As of December 31,
2006, 81.9% of our entire portfolio was classified as available-for-sale and as
of December 31, 2005, approximately 90.3% of our entire portfolio was classified
as available-for-sale.

      The amount and types of investments that may be made by our insurance
subsidiaries are regulated under the Florida Insurance Code and the rules and
regulations promulgated by the Florida OIR. As of December 31, 2006 and December
31, 2005, our insurance subsidiaries' combined portfolio consisted entirely of
investment grade fixed-income securities. As of December 31, 2006, our
investments (excluding cash and cash equivalents) had an average duration of 3.9
years, and the bond portfolio was heavily weighted toward short- to
intermediate-term securities.

      Our insurance subsidiaries employ AmSouth Bank to act as their independent
investment advisor. AmSouth Bank follows the insurance subsidiaries' written
investment guidelines based upon strategies approved by our insurance
subsidiaries' board of directors. Our insurance subsidiaries have no investments
in common stock (other than AmCOMP Preferred's investment in AmCOMP Assurance
and certain institutional money market accounts), preferred stock, real estate,
asset-backed securities (other than mortgages) or derivative securities. AmSouth
Bank has discretion to enter into investment purchase transactions within our
insurance subsidiaries' investment guidelines. In the case of sales of
securities prior to maturity or the acquisition of securities that differ from
the types of securities already present in the portfolio, AmSouth Bank is
required to obtain approval from our insurance subsidiaries' executive officers,
who report regularly to our insurance subsidiaries' investment committees, prior
to executing the transactions. AmSouth Bank's fee is based on the amount of
assets in the portfolio and is not dependent upon investment results or
portfolio turnover.


                                       59


      The table below contains information concerning the composition of our
investment portfolio at December 31, 2006:


                                Carrying      Yield to     Percentage of
                               Amount (1)     Maturity   Carrying Amount (1)
                               ----------     --------   -------------------
                                       (Dollars in thousands)
Bonds:(2)
U.S. government                 $ 34,162        4.8%           7.8%
Agencies                          41,846        5.2            9.6
Municipalities(3)                 74,055        5.2           16.9
Corporate "A" rated and above    169,689        5.4           38.9
Corporate "BBB"/"Baa" rated       17,949        5.6            4.1
Mortgage-backed securities        83,815        5.6           19.2
                                --------        ---          -----
  Total Bonds                   $421,516        5.4%          96.5%
Cash and cash equivalents         15,259        5.5            3.5
                                --------        ---          -----

  Total                         $436,775        5.4%         100.0%
                                ========        ===          =====

(1)   Carrying amount is amortized cost for bonds held-to-maturity. Carrying
      value is market value for bonds available-for-sale and common stock. As of
      December 31, 2006, $345.3 million of our bonds was classified as
      available-for-sale and $76.2 million were classified as held-to-maturity.

(2)   Standard & Poor's highest rating is "AAA" and signifies that a company's
      capacity to meet its financial commitment on the obligation is extremely
      strong, followed by "AA" (very strong), "A" (strong) and "BBB" (adequate).
      Ratings may be modified by the addition of a plus or minus sign to show
      relative standing within the major rating categories. Moody's Investors
      Service, Inc.'s highest rating is "Aaa" (best quality), followed by "Aa"
      (high quality), "A" (strong) and "Baa" (adequate). For investments with
      split ratings, the higher rating has been used.

(3)   The municipal bonds' yields to maturity have been shown on a
      tax-equivalent basis. The tax impact was 1.37% on the yield to maturity
      for municipal bonds and 0.3% on the yield to maturity for total cash and
      investments.

      The table below sets forth the maturity profile of our bond portfolio at
amortized cost and fair market values as of December 31, 2006:

                                  Available-for-Sale          Held-to-Maturity
                               -----------------------    ------------------------
                               Amortized                  Amortized
                                  Cost     Fair Value        Cost       Fair Value
                               ---------   -----------    ---------     ----------

Years to maturity (1):
   One or less                  $ 54,066    $ 53,708          --            --
   After one through five        172,036     168,968          --            --
   After five through ten        102,968     101,636          --            --
   After ten                      12,601      13,389          --            --
   Mortgage-backed securities      7,816       7,617        76,198        75,933
                                --------    --------      --------      --------
Total                           $349,487    $345,318      $ 76,198      $ 75,933
                                ========    ========      ========      ========

 (1)  Based on the stated maturities of the securities. Actual maturities may
      differ as obligors may have the right to call or prepay obligations.

      We continuously monitor our portfolio to preserve principal values
whenever possible. An investment in a fixed maturity security is impaired if its
fair value falls below its book value. All securities in an unrealized loss
position are reviewed to determine whether the impairment is


                                       60


other-than-temporary. Factors considered in determining whether a decline is
considered to be other-than-temporary include length of time and the extent to
which fair value has been below book value, the financial condition and
near-term prospects of the issuer, and our ability and intent to hold the
security until its expected recovery.

      The following table summarizes, for all fixed maturity securities in an
unrealized loss position at December 31, 2006, the aggregate fair value and
gross unrealized loss by length of time the security has continuously been in an
unrealized loss position:

                                                   Unrealized    Number of
                                     Fair Value      Losses        Issues
                                     ----------    ----------    ---------
                                                 (In thousands)
Less than 12 months:
  U.S. Treasury securities            $  1,097      $     12          5
  Agency                                 7,966            25          4
  Municipalities                        15,669           132          7
  Corporate debt securities             33,493           230         17
  Mortgage-backed securities            28,930            54         11
                                      --------      --------        ---
Total                                 $ 87,155      $    453         44
                                      ========      ========        ===
Greater than 12 months:
  U.S. Treasury securities            $ 27,148      $    695         22
  Agency                                21,676           422         15
  Municipalities                        36,116           687         26
  Corporate debt securities            134,240         2,967        102
  Mortgage-backed securities            28,160           666         20
                                      --------      --------        ---
Total                                 $247,340      $  5,437        185
                                      ========      ========        ===
Total fixed maturity
securities:
  U.S. Treasury securities            $ 28,245      $    707         27
  Agency                                29,642           447         19
  Municipalities                        51,785           819         33
  Corporate debt securities            167,733         3,197        119
  Mortgage-backed securities            57,090           720         31
                                      --------      --------        ---
Total fixed maturity
securities                            $334,495      $  5,890        229
                                      ========      ========        ===

      At December 31, 2006, there were no investments in fixed maturity
securities with individual material unrealized losses. Three
other-than-temporary impairments totaling approximately $0.2 million were
recorded on our investments during the year ended December 31, 2006. All the
unrealized losses on the fixed maturity securities are interest rate related.

      We believe our future cash flow generated by operations, and our cash and
investment will be sufficient to fund continuing operations, service our
outstanding obligations and provide for required capital expenditures for at
least the next 12 months.

      LITIGATION

      Prior to 2001, no material amounts due from reinsurers were written off as
uncollectible, because most of our reinsurance was recoverable from large,
well-capitalized reinsurance companies. On October 3, 2001, the Commonwealth
Court of Pennsylvania approved an Order of Liquidation for Reliance Insurance
Company in response to a petition from the Pennsylvania Department of Insurance.
In 2001, we wrote off all balances due from Reliance. The write off resulted in
an increase in underwriting and other expenses of approximately $8.3 million. We
are continuing to pursue the collection of amounts recoverable from Reliance in
its liquidation proceeding.


                                       61


      AmCOMP and both of our insurance subsidiaries are defendants in an action
commenced in Florida by the Insurance Commissioner of Pennsylvania, acting in
its capacity as liquidator of Reliance Insurance Company. The complaints in
those actions allege that preferential payments were made to us by Reliance
under the formerly existing reinsurance agreement with the insurance
subsidiaries and seeks damages in the amount of approximately $2.3 million. We
have answered the complaint and we expect the matter to be scheduled for trial.
We believe that we have multiple factual and legal defenses to the claim made in
this action, including a right of recoupment related to the statement of claim
filed by us in the Reliance liquidation proceeding for the recovery of
approximately $9.9 million under the reinsurance agreement. Although the
ultimate results of these legal actions and related claims cannot presently be
determined, the Company had an accrued liability of $1.2 million and $1.3
million as of December 31, 2006 and 2005, respectively, related to those
matters.

      OTHER

      In August 1998, in an effort to expand its customer base, AmCOMP Assurance
began selling insurance policies for a third party insurance company. This
arrangement included insurance policies with effective dates of August 1, 1998
through November 1, 2000. Pinnacle Administrative performed marketing,
underwriting, loss prevention and other administrative functions, and Pinnacle
Benefits provided claim adjusting services, including the payment of claims,
related to these policies. This arrangement also provided for a reinsurance
agreement between AmCOMP Assurance as the reinsurer and the third party
insurance company as the reinsured. At December 31, 2006, the amount to be
recovered from this insurance company on these claims and LAE expenses paid by
us that is included in other assets on the balance sheet was $1.7 million.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

      The following table identifies our long-term debt and contractual
obligations as of December 31, 2006:

                                                      Payment Due by Period
                                    ------------------------------------------------------------
                                                 Less Than                              More Than
                                     Total        1 Year      1-3 Years    4-5 Years    5 Years
                                    --------     --------     ---------    ---------    --------
                                                       (Dollars in thousands)
Long Term Debt Obligations(1)       $123,465     $  5,282     $ 10,143     $  7,035     $101,005
Operating Leases                       8,333        3,229        3,962        1,061           81
Loss Reserves(2)                     334,363      111,642       94,999       22,091      105,631
                                    --------     --------     --------     --------     --------
Total Contractual Obligations       $466,161     $120,153     $109,104     $ 30,187     $206,717
                                    ========     ========     ========     ========     ========

-------------------------------
(1)   Long-Term Debt Obligations reflect payments for the principal and
      estimated interest expense that is based on variable LIBOR rates plus a
      margin. The estimated interest expense was based on the contractual
      obligations of the debt as of December 31, 2006. The rates ranged from
      7.85% to 9.62%.

(2)   Estimated pay out dates for the loss reserves are determined in the
      actuarial process. As a result, our calculation of loss reserve payments
      due by period is subject to the same uncertainties associated with
      determining the level of reserves and to the additional uncertainties
      arising from the difficulty of predicting when claims (including claims
      that have not yet been reported to us) will be paid. For a discussion of
      our reserving process, see "Business--Loss and Loss Adjustment Expense
      Reserves." Actual payments of losses and LAE by period will vary, perhaps
      materially, from the above table to the extent that current estimates of
      loss reserves vary from actual ultimate claims amounts and as a result of
      variations between expected and actual payout patterns. See "Risk
      Factors--Our loss reserves are based on estimates and may be inadequate to
      cover our actual losses" for a discussion of the uncertainties associated
      with estimating loss reserves.

OFF-BALANCE SHEET ARRANGEMENTS

      We have no off-balance sheet arrangements.


                                       62


EFFECTS OF INFLATION

      The effects of inflation could impact our financial statements and results
of operations. Our estimates for losses and loss expenses include assumptions
about future payments for closure of claims and claims handling expenses, such
as medical treatments and litigation costs. To the extent inflation causes these
costs to increase above reserves established, we will be required to increase
reserves for losses and loss expenses with a corresponding reduction in our
earnings in the period in which the deficiency is identified. We consider
inflation in the reserving process by reviewing cost trends and our historical
reserving results. Additionally, an actuarial estimate of increased costs is
considered in setting adequate rates, especially as it relates to medical and
hospital rates where historical inflation rates have exceeded general inflation
rates. We are able to mitigate the effects of inflation on medical costs due to
the fee schedules imposed by most of the states where we do business and the
utilization of preferred provider networks. However, providers are not obligated
to invoice us per the fee schedule or the negotiated rate. We review medical
bills for appropriate coding and pay the lower of the negotiated or fee schedule
rate. Disputes are resolved by negotiation.

      Fluctuations in rates of inflation also influence interest rates, which in
turn impact the market value of our investment portfolio and yields on new
investments. Operating expenses, including payrolls, are impacted to a certain
degree by the inflation rate.

RECENT ACCOUNTING PRONOUNCEMENTS

      In July 2006, the Financial Accounting Standards Board ("FASB") issued an
interpretation of FASB Statement No. 109, ACCOUNTING FOR UNCERTAINTY IN INCOME
TAXES ("FIN 48"). This interpretation clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements in accordance
with FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The Interpretation establishes a "more likely than
not" recognition threshold for tax benefits to be recognized in the financial
statements. The "more likely than not" determination is to be based solely on
the technical merits of the position. This interpretation is effective January
1, 2007 The Company is currently evaluating the impact of this standard.

      In September 2006, the FASB issued SFAS No. 157, FAIR VALUE Measurements
("SFAS 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement addresses how to
calculate fair value measurements required or permitted under other accounting
pronouncements. Accordingly, this statement does not require any new fair value
measurements. However, for some entities, the application of this statement will
change current practice. SFAS No. 157 is effective for the Company beginning
January 1, 2008. The Company is currently evaluating the impact of this
standard.

      In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS
WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS ("SAB 108").
SAB 108 provides interpretive guidance on how the effects of the carryover or
reversal of prior year misstatements should be considered in quantifying a
current year misstatement. The Company was required to adopt the provisions of
SAB 108 in its annual financial statements for fiscal year 2006. The adoption of
SAB 108 did not have a material impact on our financial condition or results of
operations.

      Statement of Position ("SOP") 05-1, Accounting by Insurance Enterprises
for Deferred Acquisition Costs in Connection with Modifications or Exchanges of
Insurance Contracts, issued September 2005, became effective January 1, 2007.
SOP 05-1 provides guidance on accounting for deferred acquisition costs on
internal replacements of insurance and investment contracts other than those
specifically described in SFAS 97, Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments. The SOP defines an internal replacement as
a modification in product benefits, features, rights, or coverage that occurs by
the exchange of a contract for a new contract, or by amendment, endorsement, or
rider to a contract, or by the election of a feature or coverage within a
contract. The Company does not anticipate a significant impact upon adoption.


                                       63


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

      We believe we are principally exposed to two types of market risk:
interest rate risk and credit risk.

INTEREST RATE RISK

      INVESTMENTS. Our investment portfolio consists primarily of debt
securities, of which 81.9% were classified as available-for-sale as of December
31, 2006. The primary market risk exposure to our debt securities portfolio is
interest rate risk, which we strive to limit by managing duration. As of
December 31, 2006, our investments (excluding cash and cash equivalents) had an
average duration of 3.9 years. Interest rate risk includes the risk from
movements in the underlying market rate and in the credit spread of the
respective sectors of the debt securities held in our portfolio. The fair value
of our fixed maturity portfolio is directly impacted by changes in market
interest rates. As interest rates rise, the market value of our fixed-income
portfolio falls, and the converse is also true. We expect to manage interest
rate risk by instructing our investment manager to select investments consistent
with our investment strategy based on characteristics such as duration, yield,
credit risk and liquidity.

      CREDIT FACILITY AND THIRD PARTY SURPLUS NOTES. Our exposure to market risk
for changes in interest rates also relates to the interest expense of variable
rate debt under our bank credit facility and our insurance subsidiaries' surplus
notes issued to unaffiliated third parties. The interest rates we pay on these
obligations increase or decrease with changes in LIBOR.

SENSITIVITY ANALYSIS

      Sensitivity analysis is a measurement of potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In our sensitivity analysis model,
we select a hypothetical change in market rates that reflects what we believe
are reasonably possible near-term changes in those rates. The term "near-term"
means a period of time going forward up to one year from the date of the
consolidated financial statements. Actual results may differ from the
hypothetical change in market rates assumed in this disclosure, especially since
this sensitivity analysis does not reflect the results of any action that we may
take to mitigate such hypothetical losses in fair value.

      In this sensitivity analysis model, we use fair values to measure our
potential loss. The sensitivity analysis model includes fixed maturities and
cash equivalents.

      For invested assets, we use modified duration modeling to calculate
changes in fair values. Durations on invested assets are adjusted for call, put,
and interest rate reset features. Durations on tax-exempt securities are
adjusted for the fact that the yield on such securities is less sensitive to
changes in interest rates compared to Treasury securities. Invested asset
portfolio durations are calculated on a market value weighted basis, including
accrued investment income, using holdings as of December 31, 2006.

      The following table summarizes the estimated change in fair value on our
fixed maturity portfolio including cash equivalents based on specific changes in
interest rates:

                                 Estimated Increase    Estimated Percentage
                                    (Decrease) in      Increase (Decrease)
      Change in Interest Rates        Fair Value           in Fair Value
      ------------------------   ------------------    --------------------
      December 31,2006:                   (Dollars in thousands)
      300 basis point rise            ($42,077)            (10.1%)
      200 basis point rise             (28,068)             (6.8%)
      100 basis point rise             (13,819)             (3.3%)
      50 basis point decline             6,298               1.5%
      100 basis point decline           12,296               3.0%


                                       64


                                 Estimated Increase    Estimated Percentage
                                    (Decrease) in      Increase (Decrease)
      Change in Interest Rates        Fair Value           in Fair Value
      ------------------------   ------------------    --------------------
      December 31, 2005:
      300 basis point rise            ($30,074)             (9.5%)
      200 basis point rise             (20,211)             (6.4%)
      100 basis point rise             (10,107)             (3.2%)
      50 basis point decline             4,962               1.6%
      100 basis point decline            9,862               3.1%

      The sensitivity analysis model used by us produces a predicted pre-tax
loss in fair value of market-sensitive instruments of $13.8 million or 3.3%
based on a 100 basis point increase in interest rates as of December 31, 2006.
This loss amount only reflects the impact of an interest rate increase on the
fair value of our fixed maturities and cash equivalents, which constituted
approximately 97.3% of our total invested assets as of December 31, 2006.

      Interest expense would also be affected by a hypothetical change in
interest rates. As of December 31, 2006 we had $38.3 million in variable rate
debt obligations. Assuming this amount remains constant, a hypothetical 100
basis point increase in interest rates would increase annual interest expense by
approximately $0.4 million, a 200 basis point increase would increase interest
expense by approximately $0.8 million and a 300 basis point increase would
increase interest expense by approximately $1.1 million. As of December 31, 2005
we had $40.0 million in variable rate debt obligations. Assuming this amount
remained constant, a hypothetical 100 basis point increase in interest rates
would have increased annual interest expense by approximately $0.4 million, a
200 basis point increase would increase interest expense by approximately $0.8
million and a 300 basis point increase would increase interest expense by
approximately $1.2 million.

      With respect to investment income, the most significant assessment of the
effects of hypothetical changes in interest rates on investment income would be
based on Statement of Financial Accounting Standards No. 91, ACCOUNTING FOR
NONREFUNDABLE FEES AND COSTS ASSOCIATED WITH ORIGINATING OR ACQUIRING LOANS AND
INITIAL DIRECT COSTS OF LEASES ("FAS 91"), issued by the FASB, which requires
amortization adjustments for mortgage backed securities. The rates at which the
mortgages underlying mortgage backed securities are prepaid, and therefore the
average life of mortgage backed securities, can vary depending on changes in
interest rates (for example, mortgages are prepaid faster and the average life
of mortgage backed securities falls when interest rates decline). The
adjustments for changes in amortization, which are based on revised average life
assumptions, would have an impact on investment income if a significant portion
of our mortgage backed securities holdings had been purchased at significant
discounts or premiums to par value. As of December 31, 2006, the par value of
our mortgage backed securities holdings was $83.6 million. Amortized cost
divided by par value equates to an average price of 100.5% of par. Since a
majority of our mortgage backed securities were purchased at a premium or
discount that is significant as a percentage of par, a FAS 91 adjustment could
have a significant effect on investment income.

      However, given the current interest rate environment, which has exhibited
lower rates over the last few years, the possibility of additional significant
declines in interest rates such that prepayment speeds are significantly
impacted is unlikely. The mortgage backed securities portion of the portfolio
totaled approximately 19.9% of total investments as of December 31, 2006. Of
this total, 100% was in agency pass through securities.

CREDIT RISK

      INVESTMENTS. Our debt securities portfolio is also exposed to credit risk,
which we attempt to manage through issuer and industry diversification. We
regularly monitor our overall investment results and review compliance with our
investment objectives and guidelines. Our investment guidelines include
limitations on the minimum rating of debt securities in our investment
portfolio, as well as restrictions on investments in debt securities of a single
issuer. As of December 31, 2006 and 2005, all of the debt securities in our
portfolio were rated investment grade by the NAIC, Standard & Poor's, Moody's
and Fitch.

      REINSURANCE. We are subject to credit risk with respect to our reinsurers.
Although our reinsurers are liable to us to the extent we cede risk to them, we
are ultimately liable to our policyholders on all risks we have reinsured. As a
result, reinsurance agreements do not limit our ultimate obligations to pay
claims to policyholders and we may not recover claims made to our reinsurers.


                                       65


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS


Financial Statements as of December 31, 2006 and 2005 and
  for the Three Years Ended December 31, 2006:                             Page
                                                                           ----
Report of Independent Registered Public Accounting Firm..................   67
Consolidated Balance Sheets..............................................   68
Consolidated Statements of Operations....................................   69
Consolidated Statements of Changes in Stockholders' Equity...............   70
Consolidated Statements of Cash Flows....................................   71
Notes to Consolidated Financial Statements...............................  72-92


                                       66


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
AmCOMP Incorporated

We have audited the accompanying consolidated balance sheets of AmCOMP
Incorporated and subsidiaries (the "Company") as of December 31, 2006 and 2005,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2006. Our audits also included the financial statement schedules listed in
the index at Item 15. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of AmCOMP Incorporated and
subsidiaries at December 31, 2006 and 2005 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2006, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.

/s/ Deloitte & Touche LLP

Certified Public Accountants
Fort Lauderdale, Florida
April 2, 2007


                                       67


                                           AMCOMP INCORPORATED AND SUBSIDIARIES
                                                CONSOLIDATED BALANCE SHEETS
                                                DECEMBER 31, 2006 AND 2005
                                                      (In thousands)

                                           ASSETS                                                   2006            2005
                                                                                                 ---------       ---------
Investments:
   Fixed maturity securities available-for-sale at fair value (amortized cost of $349,487
     in 2006 and $300,274 in 2005) ............................................................  $ 345,318       $ 295,664
   Fixed maturity securities held-to-maturity at amortized cost (fair value of $75,933 in
     2006 and $31,326 in 2005) ................................................................     76,198          31,793
                                                                                                 ---------       ---------
       Total investments ......................................................................    421,516         327,457
Cash and cash equivalents .....................................................................     15,259          11,089
Restricted cash ...............................................................................       --                10
Accrued investment income .....................................................................      5,120           3,992
Premiums receivable--net ......................................................................    106,270         104,522
Assumed reinsurance premiums receivable .......................................................      1,822            --
Reinsurance recoverable:
   On paid losses and loss adjustment expenses ................................................      3,064           5,202
   On unpaid losses and loss adjustment expenses ..............................................     72,296          78,659
   On ceding commissions ......................................................................       --                19
Prepaid reinsurance premiums ..................................................................      3,326           5,368
Deferred policy acquisition costs .............................................................     20,749          19,413
Property and equipment--net ...................................................................      2,705           2,658
Income taxes recoverable ......................................................................      3,102           1,166
Deferred income taxes--net ....................................................................     21,613          20,871
Goodwill--net .................................................................................      1,260           1,260
Other assets ..................................................................................      6,395           8,001
                                                                                                 ---------       ---------
TOTAL .........................................................................................  $ 684,497       $ 589,687
                                                                                                 =========       =========
                            LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
   Policy reserves and policyholders' funds:
     Unpaid losses and loss adjustment expenses ...............................................  $ 334,363       $ 309,857
     Unearned and advance premiums ............................................................    115,218         115,574
     Policyholders' deposits ..................................................................       --                10
     Policyholder retention dividends payable .................................................      8,504           6,636
                                                                                                 ---------       ---------
       Total policy reserves and policyholders' funds .........................................    458,085         432,077
   Reinsurance payable ........................................................................      3,774             668
   Accounts payable and accrued expenses ......................................................     39,416          38,565
   Notes payable ..............................................................................     38,250          40,036
   Other liabilities ..........................................................................      5,684           6,360
                                                                                                 ---------       ---------
       Total liabilities ......................................................................    545,209         517,706
                                                                                                 =========       =========
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
   Common stock (par value $.01; 45,000 and 28,000 authorized shares in 2006 and
     2005, respectively; 15,893 in 2006 and 5,502 in 2005 issued; 15,758 in 2006
     and 5,367 in 2005 outstanding) ...........................................................        158              54
   Convertible preferred stock series A .......................................................       --            23,098
   Additional paid-in capital .................................................................     73,952             536
   Retained earnings ..........................................................................     67,990          51,428
   Accumulated other comprehensive loss (net of deferred taxes of $1,553 in 2006 and
     $1,674 in 2005) ..........................................................................     (2,613)         (2,936)
   Treasury stock (135 shares in 2006 and 2005) ...............................................       (199)           (199)
                                                                                                 ---------       ---------
       Total stockholders' equity .............................................................    139,288          71,981
                                                                                                 ---------       ---------
TOTAL .........................................................................................  $ 684,497       $ 589,687
                                                                                                 =========       =========

                                                  See accompanying notes.


                                                            68


                                 AMCOMP INCORPORATED AND SUBSIDIARIES

                                 CONSOLIDATED STATEMENTS OF OPERATIONS
                         FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                               (In thousands, except per share amounts)

                                                                   2006           2005          2004
                                                                ---------      ---------     ---------
REVENUE:
  Net premiums earned ........................................  $ 266,456      $ 256,603     $ 181,186
  Net investment income ......................................     17,461         10,798         6,077
  Net realized investment (losses) gains .....................       (307)          (385)          982
  Other income ...............................................        333            285           332
                                                                ---------      ---------     ---------
   Total revenue .............................................    283,943        267,301       188,577
                                                                ---------      ---------     ---------
EXPENSES:
  Losses and loss adjustment expenses ........................    163,670        143,663       119,121
  Dividends to policyholders .................................      9,926          8,612         6,983
  Underwriting and acquisition expenses ......................     81,722         85,955        51,779
  Interest expense ...........................................      3,807          2,960         1,389
                                                                ---------      ---------     ---------
   Total expenses ............................................    259,125        241,190       179,272
                                                                ---------      ---------     ---------
Income before income taxes ...................................     24,818         26,111         9,305
Income tax expense ...........................................      8,256          9,326         4,275
                                                                ---------      ---------     ---------
Net income ...................................................  $  16,562      $  16,785     $   5,030
                                                                =========      =========     =========
Earnings per common share--basic .............................  $    1.15      $    3.13     $    0.94
                                                                =========      =========     =========
Earnings per common share--diluted ...........................  $    1.11      $    1.76     $    0.53
                                                                =========      =========     =========
Weighted average number of common shares outstanding
   Basic .....................................................     14,452          5,367         5,368
                                                                =========      =========     =========
   Diluted ...................................................     14,931          9,562         9,564
                                                                =========      =========     =========

                                        See accompanying notes.


                                                  69


                                              AMCOMP INCORPORATED AND SUBSIDIARIES
                                   CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                          YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                                         (In thousands)

                                                    Convertible                                       Accumulated
                                                     Preferred    Additional                              Other          Total
                                          Common       Stock       Paid-In     Treasury     Retained  Comprehensive   Stockholders'
                                           Stock     Series A      Capital       Stock      Earnings  Income (Loss)      Equity
                                         ---------   ---------    ---------   ----------   ---------  -------------   -------------
BALANCE AT DECEMBER 31, 2003 .........   $      54   $  23,098    $     536   $    (195)   $  29,613    $   1,678     $  54,784
  Net income .........................        --          --           --          --          5,030         --           5,030
  Unrealized loss on investments (net
    of tax benefit of $939) ..........        --          --           --          --           --         (1,479)       (1,479)
  Comprehensive income ...............        --          --           --          --           --           --           3,551
                                         ---------   ---------    ---------   ---------    ---------    ---------     ---------
BALANCE AT DECEMBER 31, 2004 .........          54      23,098          536        (195)      34,643          199        58,335
  Net income .........................        --          --           --          --         16,785         --          16,785
  Unrealized loss on investments (net
    of tax benefit of $1,789) ........        --          --           --          --           --         (3,135)       (3,135)
  Comprehensive income ...............        --          --           --          --           --           --          13,650
  Purchase of treasury stock .........        --          --           --            (4)        --                           (4)
                                         ---------   ---------    ---------   ---------    ---------    ---------     ---------
BALANCE AT DECEMBER 31, 2005 .........          54      23,098          536        (199)      51,428       (2,936)       71,981
  Net income .........................        --          --           --          --         16,562         --          16,562
  Unrealized loss on investments (net
    of tax benefit of $121) ..........        --          --           --          --           --            323           323
  Comprehensive income ...............        --          --           --          --           --           --          16,885
  Conversion of Series A Preferred
    into Common Stock ................          42     (23,098)      23,056        --           --           --            --
  Stock issued during initial public
    offering (net of offering costs of
    $2,341) ..........................          60        --         47,912        --           --           --          47,972
  Stock option compensation expense ..        --          --            545        --           --           --             545
  Stock option exercise ..............           2        --          1,826        --           --           --           1,828
  Tax benefit on stock options .......        --          --             77        --           --           --              77
                                         ---------   ---------    ---------   ---------    ---------    ---------     ---------
BALANCE AT DECEMBER 31, 2006 .........   $     158   $    --      $  73,952   $    (199)   $  67,990    $  (2,613)    $ 139,288
                                         =========   =========    =========   =========    =========    =========     =========


                                                    See accompanying notes.


                                                               70


                                   AMCOMP INCORPORATED AND SUBSIDIARIES
                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                               YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                              (In thousands)

                                                                        2006         2005          2004
                                                                     ---------     ---------     ---------
OPERATING ACTIVITIES:
  Net income .....................................................   $  16,562     $  16,785     $   5,030
  Adjustments to reconcile net income to net cash
   provided by operating activities:
   Depreciation and amortization .................................       1,711         2,144         2,396
   Amortization of investment premiums/discounts .................       2,466         3,069         2,415
   Excess tax benefits from stock option exercise.................        (162)         --            --
   Stock option expense ..........................................         545          --            --
   Provision for deferred income taxes ...........................        (859)       (1,434)        2,661
   Net realized losses (gains) on investments ....................         307           385          (982)
   Gain on sale of property and equipment ........................          20          --            --
   Policy acquisition costs deferred .............................     (50,746)      (47,673)      (28,938)
   Policy acquisition costs amortized ............................      49,410        42,955        19,145
  Change in operating assets and liabilities:
   Restricted cash ...............................................        --            --             944
   Accrued investment income .....................................      (1,128)         (962)       (1,217)
   Premiums receivable ...........................................      (1,748)       (2,884)       (4,820)
   Reinsurance balances ..........................................      11,846        41,888           948
   Other assets ..................................................       1,606        (2,015)       (1,657)
   Unpaid losses and loss adjustment expenses ....................      24,506        12,159        46,576
   Unearned and advance premiums and policyholder
    deposits .....................................................        (366)        1,339        10,487
   Policyholder retention dividends payable ......................       1,868           351        (1,482)
   Accounts payable and accrued expenses .........................         851        13,464         4,936
   Income taxes recoverable ......................................      (1,859)        1,959        (1,683)
   Other liabilities .............................................        (676)        2,072         4,288
                                                                     ---------     ---------     ---------
    Net cash provided by operating activities ....................      54,154        83,602        59,047
INVESTING ACTIVITIES:
  Securities available-for-sale:
   Purchases .....................................................     (98,578)     (152,524)     (150,070)
   Sales and maturities ..........................................      46,369        63,531        59,952
  Securities held-to-maturity:
   Purchases .....................................................     (53,687)      (22,814)      (10,069)
   Redemptions and maturities ....................................       9,504         3,224           265
  Purchases of property and equipment ............................      (1,795)       (1,193)       (2,041)
  Sale of property and equipment .................................          17          --            --
  Regulatory restricted deposit ..................................          10           899          (899)
                                                                     ---------     ---------     ---------
    Net cash used in investing activities ........................     (98,160)     (108,877)     (102,862)
FINANCING ACTIVITIES:
  Proceeds from initial public offering, net of offering
   costs of $2,341 ...............................................      47,972          --            --
  Proceeds from borrowings .......................................        --            --          32,000
  Proceeds from stock option exercise ............................       1,828          --            --
  Excess tax benefits from stock option exercise .................         162          --            --
  Payment of note payable ........................................      (1,786)       (1,785)       (1,786)
  Purchase of treasury stock .....................................        --              (4)         --
                                                                     ---------     ---------     ---------
    Net cash provided by (used in) financing activities ..........      48,176        (1,789)       30,214
                                                                     ---------     ---------     ---------
    Net increase (decrease) in cash and cash equivalents .........       4,170       (27,064)      (13,601)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ...................      11,089        38,153        51,754
                                                                     ---------     ---------     ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR .........................   $  15,259     $  11,089     $  38,153
                                                                     =========     =========     =========
SUPPLEMENTAL CASH FLOW DATA:
  Cash paid--interest ............................................   $   3,786     $   2,872     $   1,232
  Cash paid--income taxes ........................................   $  11,282     $   8,795     $   3,288

                                          See accompanying notes.


                                                    71


                      AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

1.  NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

      ORGANIZATION--AmCOMP Incorporated and subsidiaries (collectively, the
"Company") consist of the following entities at December 31, 2006, 2005 and
2004:

         o  AmCOMP Incorporated ("AmCOMP"), a holding company incorporated on
            December 28, 1995;

         o  AmCOMP Preferred Insurance Company ("AmCOMP Preferred"), a wholly
            owned property and casualty insurance company (formerly known as
            Pinnacle Assurance Corporation);

         o  Pinnacle Administrative, Inc. ("Pinnacle Administrative"), a wholly
            owned administrative services company providing sales and marketing,
            underwriting, policyholder service, data processing, and accounting
            services;

         o  Pinnacle Benefits, Inc. ("Pinnacle Benefits"), a wholly owned claims
            processing company;

         o  AmCOMP Assurance Corporation ("AmCOMP Assurance"), a wholly owned
            property and casualty insurance company; and

         o  AmServ Incorporated ("AmServ"), a wholly owned company established
            to provide administrative services to external customers.

      The Company's long-term source of consolidated earnings is principally the
income from its workers' compensation insurance business and investment income
from its investment portfolio. Workers' compensation insurance provides coverage
for the statutorily prescribed benefits that employers are required to provide
to their employees injured in the course of employment. The Company is licensed
to provide workers' compensation insurance in 23 states, but currently focuses
its resources in 15 states that it believes provide greater opportunity for
near-term profitable growth, with the most significant concentrations in
Florida, Wisconsin, Texas, Indiana and Tennessee.

      USE OF ESTIMATES--The preparation of consolidated financial statements
requires management to make estimates and assumptions that affect amounts
reported in the consolidated financial statements and the accompanying notes.
Such estimates and assumptions could change in the future as more information
becomes known that could affect the amounts reported herein.

      BASIS OF PRESENTATION--The accompanying consolidated financial statements
have been prepared on the basis of accounting principles generally accepted in
the United States of America ("GAAP") and include the accounts of AmCOMP, AmCOMP
Preferred, Pinnacle Administrative, Pinnacle Benefits, AmCOMP Assurance, and
AmServ. All intercompany accounts and transactions have been eliminated in
consolidation.

      INVESTMENTS--Fixed maturity investments are designated at purchase as
held-to-maturity or available-for-sale. Held-to-maturity fixed maturity
investments are reported at amortized cost. Securities classified as
available-for-sale are reported at fair value with unrealized appreciation and
depreciation, net of deferred taxes, included as a component of accumulated
other comprehensive income. The Company has the intent and ability to hold
securities that have fair value below cost until their expected recovery and to
hold to maturity securities designated as held-to-maturity.

      Single class and multiclass mortgage-backed/asset-backed securities are
valued at amortized cost using the interest method including anticipated
prepayments. Changes in anticipated prepayment assumptions are accounted for
using the retrospective method. Prepayment assumptions are obtained from dealer
surveys or internal estimates and are based on the current interest rate and
economic environment.

      Realized gains and losses on sales of investments are recognized in
operations on the specific identification basis.

      Debt and equity securities are exposed to various risks such as interest
rate, market, and credit risk. Fair values of securities fluctuate based on the
magnitude of changing market conditions; significant changes in market
conditions could materially affect portfolio value in the near term. The Company


                                       72


                      AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

continually monitors its portfolio for pricing changes, which might indicate
potential impairments and performs detailed reviews of securities with
unrealized losses based on predetermined criteria. When a security in the
Company's investment portfolio has an unrealized loss in fair value that is
deemed to be other-than-temporary, the Company reduces the book value of such
security to its current market value, recognizing the decline as a realized loss
in the accompanying consolidated statements of operations. Any future increases
in the fair value of securities previously written down are recorded and
presented as changes in unrealized gains (losses) as part of accumulated other
comprehensive income within stockholders' equity.

      CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.

      PREMIUMS RECEIVABLE--Premiums receivable consist primarily of
premium-related balances due from policyholders. The balance is shown net of the
allowance for doubtful accounts. Receivables due from insureds are written off
when a determination has been made that a specific balance will not be collected
based upon the collection efforts of Company personnel. An estimate of amounts
that are likely to be written off is established as an allowance for doubtful
accounts as of the balance sheet date. The estimate is primarily comprised of
specific balances that are considered probable to be written off after all
collection efforts have ceased, as well as historical trends and an analysis of
the aging of the receivables.

      RESTRICTED CASH--Restricted cash represents policyholder deposits and
regulatory deposits.

      DEFERRED POLICY ACQUISITION COSTS--To the extent recoverable from future
policy revenues, costs that vary with and are primarily related to the
production of new and renewal business, including premium tax, commissions,
assessments and other general acquisition expenses, net of reinsurance ceding
allowances received, have been deferred and are amortized over the effective
period of the related insurance policies. The components of deferred policy
acquisition costs at December 31, 2006 and 2005 are as follows (in thousands):

                                                          2006        2005
                                                       --------    --------
Gross deferred policy acquisition costs ...........    $ 20,749    $ 21,101
Reduction for ceding allowances received ..........        --        (1,688)
                                                       --------    --------
Net deferred policy acquisition costs .............    $ 20,749    $ 19,413
                                                       ========    ========

      PROPERTY AND EQUIPMENT--Property and equipment is stated on the basis of
cost. Depreciation is computed using the straight-line method over the estimated
useful lives, generally 3 to 7 years for financial reporting purposes.
Depreciation expense was $1.7 million, $2.1 million and $2.4 million for the
years ended December 31, 2006, 2005 and 2004, respectively. Accumulated
depreciation was $12.8 million and $14.3 million at December 31, 2006 and 2005
respectively.

      GOODWILL--Goodwill is reviewed for impairment on an annual basis, or more
frequently if circumstances indicate that a possible impairment has occurred.
The assessment of impairment involves a two step process whereby an initial
assessment for potential impairment is performed, followed by a measurement of
the amount of impairment, if any. No impairment has been recorded by AmCOMP in
2006, 2005 or 2004.

      IMPAIRMENT OF LONG-LIVED ASSETS--The Company's policy is to record an
impairment charge against the balance of a long-lived asset in accordance with
Statement of Financial Accounting Standards No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS No. 144"), in the period when
it is determined that the carrying amount of the asset may not be recoverable.
This determination is based on an evaluation of such factors as the occurrence
of a significant event or a significant change in the environment in which the
business assets operate. The Company considers assets to be impaired when the
expected future undiscounted cash flows of the assets are determined to be less
than the carrying value. If impairment is deemed to exist, the related asset is
written down to fair value. Management also evaluates events and circumstances
to determine whether revised estimates of useful lives are warranted. As of
December 31, 2006, management expects the carrying value of its remaining
long-lived assets to be fully recoverable.

      REINSURANCE--Reinsurance premiums, losses, and loss adjustment expenses
("LAE") are accounted for on a basis consistent with those used in accounting
for the original policies issued and the terms of the reinsurance contracts.


                                       73


                      AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

Reinsurance ceding commissions, if any, received are deferred and amortized over
the effective period of the related insurance policies.

      FEDERAL AND STATE INCOME TAXES--The Company provides deferred federal and
state income taxes for certain differences between the financial statement
amounts and tax basis of assets and liabilities.

      COMPREHENSIVE INCOME--Comprehensive income encompasses all changes in
stockholders' equity (except those arising from transactions with stockholders)
and includes net income and changes in net unrealized investment gains and
losses on fixed maturities investments classified as available-for-sale
securities and taxes.

      POLICYHOLDER DIVIDENDS--Policyholder dividends are recognized over the
effective period of the related policies and are restricted in certain instances
to limitations imposed by the Board of Directors (see Note 9).

      UNPAID LOSSES AND LAE--Unpaid losses and LAE represent the estimated
ultimate net cost of all reported and unreported losses incurred through
December 31, 2006 and 2005. The reserves for unpaid losses and LAE are estimated
using individual case basis valuations and statistical analyses. Those estimates
are subject to the effects of trends in loss severity and frequency. Although
considerable variability is inherent in such estimates, management believes that
the reserves for losses and LAE are adequate. The estimates are continually
reviewed and adjusted as necessary as experience develops or new information
becomes known; such adjustments are included in current operations.

      RECOGNITION OF PREMIUM REVENUE--The Company's insurance premiums are
billed annually or under various installment plans based on the estimated annual
premium under the policy terms. At the end of the policy term, payroll-based
premium audits are performed on substantially all policyholder accounts to
determine earned premiums for the policy year. Earned but unbilled premiums
included in premiums receivable include estimated future audit premiums and
collateralized premiums. Collateralized premiums include policies where the
final calculated premium is paid after the end of the policy term and the
receivable balance is collateralized by letters of credit and financial
guarantee bonds. Estimated future audit premiums are based on the Company's
historical earned premium development experience. All premium revenue is
recognized over the period of the contract in proportion to the amount of
insurance protection provided.

      These estimates are subject to the effects of trends in payroll audit
adjustments. Although considerable variability is inherent in such estimates,
management believes that the accrual for earned but unbilled premiums is
reasonable. The estimates are continually reviewed and adjusted as necessary as
experience develops or new information becomes known; such adjustments are
included in current operations. The reserve for unearned premiums is determined
on a daily pro rata basis.

      SECOND INJURY FUND ASSESSMENTS AND RECOVERIES-- Many states have laws that
established second injury funds to reimburse employers and insurance carriers
for workers' compensation benefits paid to employees who are injured and whose
disability is increased by a prior work-related injury. The Company accrues a
liability for second injury fund assessments as net premiums are written or as
losses are incurred based on individual state guidelines, and for premium based
assessments, we defer these costs and recognize them as an expense as the
related premiums are earned. The Company recognizes recoveries from the second
injury funds when they are received (see Note 3).

      GUARANTY FUND ASSESSMENTS-- Most states have guaranty fund laws under
which insurers doing business in the state are required to fund policyholder
liabilities of insolvent insurance companies. The Company accrues a liability
for estimated assessments as net premiums are written and defers these costs and
recognizes them as an expense as the related premiums are earned. The Company is
continually notified of assessments from various states relating to insolvencies
in that particular state; however, there are no expense accruals recorded when
the Company is unable to estimate the potential future assessment.

      POLICYHOLDER DEPOSITS--Policyholders are required to maintain deposits
with the Company for certain installment pay plans. Based on the selected pay
plan, management determines the deposit amount, which is based on a percentage
of the policyholders' estimated annual premium. Deposits are analyzed annually
and adjusted as considered necessary.

      EARNINGS PER SHARE--The Company computes earnings per share in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 128. In the
calculation of basic earnings per share, the dilutive effects of options,


                                       74


                      AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

warrants, and convertible securities are excluded from the calculation. Diluted
earnings per share consider the effects of dilutive convertible securities and
stock options.

      CONCENTRATIONS OF CREDIT RISK--Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash, investments, premiums receivable, and reinsurance
recoverables (see Notes 4, 5, and 6). Concentrations of credit risk with respect
to premiums receivable are limited due to the large number of entities
comprising the Company's customer base.

      STOCK-BASED COMPENSATION-- The Company grants stock options to its
employees, officers and directors. Effective January 1, 2006, the Company
adopted the provisions of SFAS 123R, for its stock based compensation plans.
Among other things, SFAS 123R requires that compensation expense for all
share-based awards be recognized in the financial statements based upon the
grant-date fair value of those awards.

      Prior to January 1, 2006, the Company accounted for stock-based
compensation to employees using the intrinsic value method as prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB No. 25"), and related interpretations and disclosure
requirements established by SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), as amended by SFAS No. 148, Accounting for
Stock-Based Compensation - Transitions and Disclosures ("SFAS 148").
Accordingly, compensation cost for stock options issued to employees was
measured as the excess, if any, of the estimated market price of the Company's
stock at the date of grant over the amount an employee must pay for the stock.

      The following table illustrates the pro forma effect on net earnings and
earnings per share for the years ended December 31, 2005 and 2004 (as reported)
if the Company had applied the fair value recognition provisions of SFAS 123(R)
to stock-based employee compensation (in thousands, except per share data):

                                                                 2005          2004
                                                             ----------     ---------
Net income ............................................      $   16,785     $   5,030
Deduct: total stock-based employee compensation expense
  determined under fair value based method for all
  awards--net of related tax effects ..................             (35)         (113)
Pro forma net income ..................................      $   16,750     $   4,917
Basic earnings per share--as reported .................      $     3.13     $    0.94
Basic earnings per share--pro forma ...................            3.12          0.92
Diluted earnings per share--as reported ...............            1.76          0.53
Diluted earnings per share--pro forma .................            1.75          0.51

The fair value for those options was estimated at the date of grant using the
minimum value option pricing model with the following assumptions: risk-free
interest rates equal to the five-year U.S. Treasury Bill rate on the grant date;
expected dividend yield of 0%; expected life equal to the life of the options
between four and five years; and stock price on the date of grant.

      The Company has adopted SFAS 123R using the modified prospective
transition method. Under this transition method, compensation cost recognized in
2006 includes:

         o  Compensation cost for all share based awards (expected to vest)
            granted prior to, but not yet vested as of January 1, 2006, based
            upon grant-date fair value estimated in accordance with the original
            provisions of SFAS 123; and

         o  Compensation cost for all share-based awards (expected to vest)
            granted during the year ended December 31, 2006 based upon the
            grant-date fair value estimated in accordance with the provisions of
            SFAS 123R.

Results for prior periods have not been restated.

      Upon adoption of SFAS 123R, the Company continued to use the Black-Scholes
option pricing model for valuing all stock options. Compensation for non-vested
stock awards is measured at fair value on the grant-date based upon the number
of shares expected to vest and the quoted market price of the underlying common
stock. Compensation cost for all awards will be recognized in earnings, net of


                                       75


                      AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

estimated forfeitures, on a straight-line basis over the requisite service
period. As a result of the adoption of SFAS 123R, the Company recognized
approximately $0.6 million of stock option compensation expense in the year
ended December 31, 2006. Basic and diluted earnings per share for the year ended
December 31, 2006 were reduced by $0.04. Additionally, as a result of adoption,
cash flows from financing increased $162,000 and cash flows from operations
decreased by the same amount.

      See Note 15 for additional information regarding the Company's stock-based
compensation plans and the assumptions used to calculate the fair value of
stock-based awards.

      SEGMENT REPORTING--The Company operates in a single industry segment,
property and casualty insurance specializing in workers' compensation insurance.

      NEW ACCOUNTING PRONOUNCEMENTS--In July 2006, the Financial Accounting
Standards Board ("FASB") issued an interpretation of FASB Statement No. 109,
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES ("FIN 48"). This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
ACCOUNTING FOR INCOME TAXES. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. The
Interpretation establishes a "more likely than not" recognition threshold for
tax benefits to be recognized in the financial statements. The "more likely than
not" determination is to be based solely on the technical merits of the
position. This interpretation is effective January 1, 2007. The Company is
currently evaluating the impact of this standard.

      In September 2006, the FASB issued SFAS No. 157, FAIR VALUE Measurements
("SFAS 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement addresses how to
calculate fair value measurements required or permitted under other accounting
pronouncements. Accordingly, this statement does not require any new fair value
measurements. However, for some entities, the application of this statement will
change current practice. SFAS No. 157 is effective for the Company beginning
January 1, 2008. The Company is currently evaluating the impact of this
standard.

      In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS
WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS ("SAB 108").
SAB 108 provides interpretive guidance on how the effects of the carryover or
reversal of prior year misstatements should be considered in quantifying a
current year misstatement. The Company was required to adopt the provisions of
SAB 108 in its annual financial statements for fiscal year 2006. The adoption of
SAB 108 did not have a material impact on our financial condition or results of
operations.

      Statement of Position ("SOP") 05-1, Accounting by Insurance Enterprises
for Deferred Acquisition Costs in Connection with Modifications or Exchanges of
Insurance Contracts, issued September 2005, became effective January 1, 2007.
SOP 05-1 provides guidance on accounting for deferred acquisition costs on
internal replacements of insurance and investment contracts other than those
specifically described in SFAS 97, Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments. The SOP defines an internal replacement as
a modification in product benefits, features, rights, or coverage that occurs by
the exchange of a contract for a new contract, or by amendment, endorsement, or
rider to a contract, or by the election of a feature or coverage within a
contract. The Company does not anticipate a significant impact upon adoption of
this pronouncement.


                                       76


                      AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

2.  REGULATORY REQUIREMENTS AND RESTRICTIONS (UNAUDITED)

      AmCOMP Preferred and AmCOMP Assurance are required to periodically submit
financial statements prepared in accordance with prescribed or permitted
statutory accounting practices ("SAP") to the Florida Department of Financial
Services ("FDFS"). Such practices vary from GAAP. Prescribed SAP includes state
laws, regulations, and general administrative rules, as well as a variety of
publications of the National Association of Insurance Commissioners ("NAIC").
Permitted SAP encompasses all accounting practices that are not specifically
prescribed, but have been permitted by the regulatory authority; such practices
may differ from company to company and may not necessarily be permitted in
subsequent reporting periods.

      AmCOMP Preferred and AmCOMP Assurance are subject to comprehensive
supervision and regulation by the FDFS. Florida statute Section 624.408 requires
AmCOMP Preferred and AmCOMP Assurance to maintain minimum capital and surplus of
the greater of $4.0 million or 10% of total liabilities. Florida statute Section
624.4095 requires AmCOMP Preferred and AmCOMP Assurance to maintain a ratio of
written premiums times 1.25 to surplus of no greater than 10-to-1 for gross
written premiums and 4-to-1 for net written premiums. During the years ended
December 31, 2006 and 2005, AmCOMP Preferred and AmCOMP Assurance were in
compliance with these statutes.

      Additionally, AmCOMP Preferred and AmCOMP Assurance are required to comply
with NAIC risk-based capital ("RBC") requirements. RBC is a method of measuring
the amount of capital appropriate for an insurance company to support its
overall business operations in light of its size and risk profile. NAIC RBC
standards are used by regulators to determine appropriate regulatory actions
relating to insurers that show signs of weak or deteriorating conditions.

      As of December 31, 2006 and 2005, AmCOMP Preferred's and AmCOMP
Assurance's total adjusted capital is above all regulatory action levels.

      Statutory-basis net income (loss) for AmCOMP Preferred and AmCOMP
Assurance for the years ended December 31, 2006, 2005 and 2004 is as follows (in
thousands):

                                     2006       2005       2004
                                   -------    -------    --------
AmComp Preferred ..............    $ 8,596    $ 5,922    $(5,686)
AmComp Assurance ..............      5,317      6,078     (1,467)


      Statutory-basis capital and surplus for AmCOMP Preferred and AmCOMP
Assurance as of December 31, 2006 and 2005 is as follows (in thousands):

                                                 2006        2005
                                              --------    --------
AmComp Preferred(a) ......................    $155,509    $ 96,175
AmComp Assurance .........................      84,817      55,337
(a) includes AmCOMP Preferred's equity ownership in AmCOMP Assurance's capital
  and surplus

      Under Florida insurance regulations, the maximum dividend to stockholders
that may be paid without prior approval by the FDFS is specifically defined by
the Florida insurance laws and regulations and is generally based on operating
results and capital and surplus. For AmCOMP Preferred and AmCOMP Assurance, no
dividends were paid during 2006 and 2005. As of December 31, 2006 and 2005,
AmCOMP Preferred had $15.6 million and $9.6 million, respectively, available to
pay dividends without prior approval. As of December 31, 2006 and 2005, AmCOMP
Assurance had $7.4 million and $1.4 million, respectively, available to pay
dividends without prior approval. These amounts represent 10% of statutory
surplus, not to exceed unassigned funds.

      Stock insurance companies are subject to Florida statutes related to
excess profits for workers' compensation insurance companies. Excessive profits
are calculated based upon a complex statutory formula which is applied over
rolling three year periods. Companies are required to file annual excess profits
forms, and they are required to return so-called "excessive profits" to
policyholders in the form of a cash refund or credit toward the future purchase
of insurance. To date, we have not been required to return excess profits and no
amounts have been provided for returns of excess profits in our financial
statements. See Note 17.


                                       77


                      AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

3.  ASSESSMENTS

      GUARANTY FUND ASSESSMENTS-- Most states have guaranty fund laws under
which insurers doing business in the state are required to fund policyholder
liabilities of insolvent insurance companies. Generally, assessments are levied
by guaranty associations within the state, up to prescribed limits, on all
insurers doing business in that state on the basis of the proportionate share of
the premiums written by insurers doing business in that state in the lines of
business in which the impaired, insolvent or failed insurer is engaged. The
Company accrues a liability for estimated assessments as direct premiums are
written and defers these costs and recognizes them as an expense as the related
premiums are earned. The Company is continually notified of assessments from
various states relating to insolvencies in that particular state; however, the
Company estimates the potential future assessment in the absence of an actual
assessment. Guaranty Fund assessment expenses were $1.5 million, $4.0 million
and $3.5 million for the years ended December 31, 2006, 2005 and 2004,
respectively. The Company has deferred approximately $1.2 million and $1.7
million as of December 31, 2006 and 2005, respectively, related to guaranty fund
assessments, which is included in deferred policy acquisition costs. Maximum
contributions required by law in any one state in which we offer insurance vary
between 0.3% and 2.0% of direct premiums written.

      SECOND INJURY FUND ASSESSMENTS AND RECOVERIES -- Many states have laws
that established second injury funds to reimburse employers and insurance
carriers for workers' compensation benefits paid to employees who are injured
and whose disability is increased by a prior work-related injury. The source of
these funds is an assessment charged to workers' compensation insurance carriers
doing business in such states. Assessments are based on paid losses or premium
surcharge mechanisms. Several of the states in which we operate maintain second
injury funds with material assessments. The Company accrues a liability for
second injury fund assessments as net premiums are written or as losses are
incurred based on individual state guidelines, and for premium based
assessments, we defer these costs and recognize them as an expense as the
related premiums are earned. Second Injury Fund Assessment expenses were $4.6
million, $11.9 million, and $5.0 million for the years ended December 31, 2006,
2005 and 2004, respectively. The Company has deferred approximately $1.8 million
and $2.0 million as of December 31, 2006 and 2005, respectively, related to
second injury fund assessments, which is included in deferred policy acquisition
costs.

      The Company submits claims to the appropriate state's second injury fund
for recovery of applicable claims paid on behalf of the Companay's insureds.
Because of the uncertainty of the collectibility of such amounts, second injury
fund recoverables are reported in the accompanying consolidated financial
statements when received. Cash collections from the second injury funds were
approximately $1.4 million, $2.2 million, and $3.4 million in the years ended
December 31, 2006, 2005 and 2004, respectively.

      The Florida SDTF currently has significant unfunded liabilities. It is not
possible to predict how the Florida SDTF will operate, if at all, in the future
after further legislative review. Changes in the Florida SDTF's operations could
decrease the availability of recoveries from the Florida SDTF, increase Florida
SDTF assessments payable by AmCOMP Preferred and/or result in the
discontinuation of the Florida SDTF and thus could have an adverse effect on
AmCOMP Preferred's business, financial condition, and its operations. Under
current law, future assessments are capped at 4.52% of net written premiums, and
no recoveries can be made for losses incurred by the Florida SDTF after January
1, 1998.

      OTHER ASSESSMENTS-- Various other assessments are levied by states in
which the Company transacts business, and are primarily based on premiums
written or collected in the applicable state. The total expense related to these
assessments was $1.2 million, $1.3 million, and $1.9 million for the years ended
December 31, 2006, 2005 and 2004, respectively. The Company has deferred
approximately $0.3 million and $0.3 million as of December 31, 2006 and 2005,
respectively, related to these assessments, which are included in deferred
policy acquisition costs.


                                       78


                      AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

4.  INVESTMENTS

      The Company's investments in available-for-sale securities and
held-to-maturity securities are summarized as follows at December 31, 2006 and
2005 (in thousands):

                                                                  Gross      Gross
                                                     Amortized  Unrealize  Unrealized   Fair
                                                        Cost      Gains      Losses     Value
                                                      --------   --------   --------   --------
Available-for-sale securities at December 31, 2006:
  U.S. Treasury securities ........................   $ 34,020   $    848   $    706   $ 34,162
  Agency ..........................................     42,276         17        447     41,846
  Municipalities ..................................     74,737        137        819     74,055
  Corporate debt securities .......................    190,638        196      3,196    187,638
  Mortgage-backed securities ......................      7,816          3        202      7,617
                                                      --------   --------   --------   --------
   Total fixed maturity securities ................   $349,487   $  1,201   $  5,370   $345,318
                                                      ========   ========   ========   ========
Held-to-maturity securities at December 31, 2006:

  Mortgage-backed securities ......................   $ 76,198   $    255   $    520   $ 75,933
                                                      ========   ========   ========   ========

Available-for-sale securities at December 31, 2005:
  U.S. Treasury securities ........................   $ 38,136   $  1,094   $    636   $ 38,594
  Agency ..........................................     29,895          9        580     29,324
  Municipalities ..................................     44,472       --          781     43,691
  Corporate debt securities .......................    176,180         68      3,577    172,671
  Mortgage-backed securities ......................     11,591          2        209     11,384
                                                      --------   --------   --------   --------
   Total fixed maturity securities ................   $300,274   $  1,173   $  5,783   $295,664
                                                      ========   ========   ========   ========
Held-to-maturity securities at December 31, 2005:
  Mortgage-backed securities ......................   $ 31,793   $     11   $    478   $ 31,326
                                                      ========   ========   ========   ========

      The amortized cost and estimated fair values of investments in fixed
maturity securities, segregated by available-for-sale and held-to-maturity, at
December 31, 2006 are summarized by maturity as follows (in thousands):


                                        Available-for-sale    Held-to-maturity
                                       -------------------   -------------------
                                       Amortized    Fair     Amortized    Fair
                                         Cost      Value       Cost       Value
                                       --------   --------   --------   --------
Years to maturity:
  One or less ......................   $ 54,066   $ 53,708       --         --
  After one through five ...........    172,036    168,968       --         --
  After five through ten ...........    102,968    101,636       --         --
  After ten ........................     12,601     13,389       --         --
  Mortgage-backed securities .......   $  7,816      7,617     76,198     75,933
                                       --------   --------   --------   --------
Total ..............................   $349,487   $345,318   $ 76,198   $ 75,933
                                       ========   ========   ========   ========

      The foregoing data is based on the stated maturities of the securities.
Actual maturities may differ as borrowers may have the right to call or prepay
obligations.


                                       79


                      AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

      At December 31, 2006 and 2005, bonds with an amortized cost of $13.2
million and $19.2 million and a fair value of $14.0 million and $20.2 million,
respectively, were on deposit with various states' departments of insurance in
accordance with regulatory requirements. Additionally, at December 31, 2006 and
2005, bonds with an amortized cost of $6.0 million and $6.0 million,
respectively, were held in a reinsurance trust to the benefit of members of the
Orion Insurance Group in accordance with the terms of a reinsurance agreement
between the Company and the Orion Companies.

      Major categories of the Company's net investment income for the years
ended December 31, 2006, 2005 and 2004 are summarized as follows (in thousands):

                                                 2006         2005         2004
                                               -------      -------      -------
Income:
  Fixed maturity securities .............      $17,031      $11,038      $ 6,484
  Cash and cash equivalents .............        1,265          674          317
                                               -------      -------      -------
  Investment income .....................       18,296       11,712        6,801
  Investment expenses ...................          835          914          724
                                               -------      -------      -------
Net investment income ...................      $17,461      $10,798      $ 6,077
                                               =======      =======      =======

      Proceeds from the sale of available-for-sale fixed maturity securities
during the years ended December 31, 2006, 2005 and 2004 were $5.3 million, $33.4
million and $49.2 million, respectively. Gross gains of $9,000, $0.2 million and
$1.2 million and gross losses of $0.2 million, $0.6 million and $0.2 million
were realized in the years ended December 31, 2006, 2005 and 2004, respectively,
on those sales.

      The Company continuously monitors its portfolio to preserve principal
values whenever possible. All securities in an unrealized loss position are
reviewed to determine whether the impairment is other-than-temporary. An
investment in a fixed maturity security is impaired if its fair value falls
below its book value. Factors considered in determining whether an impairment is
considered to be other-than-temporary include length of time and the extent to
which fair value has been below cost, the financial condition and near-term
prospects of the issuer, and the Company's ability and intent to hold the
security until its expected recovery.


                                       80


                      AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

      The following table summarizes, for all fixed maturity securities in an
unrealized loss position at December 31, 2006, the aggregate fair value and
gross unrealized loss by length of time the security has continuously been in an
unrealized loss position (in thousands):

                                                       Unrealized      Number
                                         Fair Value      Losses      of Issues
                                         ----------     --------     ---------
Less than 12 months:
  U.S. Treasury securities                $  1,097     $     12            5
  Agency                                     7,966           25            4
  Municipalities                            15,669          132            7
  Corporate debt securities                 33,493          230           17
  Mortgage-backed securities                28,930           54           11
                                          --------     --------      --------
Total                                     $ 87,155     $    453           44
                                          ========     ========      ========
Greater than 12 months:
  U.S. Treasury securities                $ 27,148     $    695           22
  Agency                                    21,676          422           15
  Municipalities                            36,116          687           26
  Corporate debt securities                134,240        2,967          102
  Mortgage-backed securities                28,160          666           20
                                          --------     --------      --------
Total                                     $247,340     $  5,437          185
                                          ========     ========      ========
Total fixed maturity securities:
  U.S. Treasury securities                $ 28,245     $    707           27
  Agency                                    29,642          447           19
  Municipalities                            51,785          819           33
  Corporate debt securities                167,733        3,197          119
  Mortgage-backed securities                57,090          720           31
                                          --------     --------      --------
Total fixed maturity securities           $334,495     $  5,890          229
                                          ========     ========      ========

      At December 31, 2006, there were no investments in fixed maturity
securities with individual material unrealized losses. Three
other-than-temporary impairments totaling approximately $0.2 million were
recorded on our investments during the year ended December 31, 2006. All the
unrealized losses on the fixed maturity securities are interest rate related.

5.  PREMIUMS RECEIVABLE

      Major categories of the Company's premiums receivable at December 31, 2006
and 2005 are summarized as follows (in thousands):

                                                           2006           2005
                                                       ---------      ---------
Direct billed premiums receivable ................     $  20,722      $  18,197
Estimated future audit premiums ..................        11,318         11,759
Collateralized premiums receivable ...............            31            132
Premiums receivable deferred installments ........        78,305         79,321
                                                       ---------      ---------
                                                         110,376        109,409
Less allowance for doubtful accounts .............        (4,106)        (4,887)
                                                       ---------      ---------
Net premiums receivable ..........................     $ 106,270      $ 104,522
                                                       =========      =========


                                       81


                      AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

6.  REINSURANCE

      Certain premiums and losses are ceded to other insurance companies under
quota share reinsurance arrangements and various aggregate and specific excess
of loss reinsurance agreements. The ceded reinsurance agreements are intended to
provide the Company with the ability to maintain its exposure to loss within its
capital resources. Losses ceded under these treaties are estimated based on
ultimate losses. These estimates are subject to the effects of trends in loss
severity. Although considerable variability is inherent in such estimates,
management believes that their estimates of losses ceded under these treaties
are reasonable. These estimates are continually reviewed and adjusted as
necessary as experience develops or new information becomes known; such
adjustments are included in current operations. Effective July 2004, the Company
has discontinued the use of quota share reinsurance on new and renewal business.

      AmCOMP Preferred and AmCOMP Assurance offer workers' compensation policies
at statutory limits. A summary of specific and aggregate reinsurance retention
limits, as well as limits above which retention reverts to the Company are as
follows (in thousands):

                            Specific        Aggregate       Occurrence
Accident Year               Retention       Retention         Limit
----------------------------------------------------------------------

1989 and 1990                 $ 500         Unlimited       Unlimited
1991 through 1993               500         Unlimited       Unlimited
1994                            400         Unlimited       Unlimited
1995                            400         $ 28,000        Unlimited
1996                            500         Unlimited       Unlimited
1997                            500         Unlimited       Unlimited
1998                            500         Unlimited       Unlimited
1999                            250         Unlimited       Unlimited
2000                            250         Unlimited       Unlimited
2001                            250         Unlimited       Unlimited
2002 (a)                        500         Unlimited        $ 50,000
2003                          1,000         Unlimited          20,000
2004 (b)                      1,000         Unlimited          20,000
2005                          2,000         Unlimited          20,000
2006                          2,000         Unlimited          30,000
------------------
(a) For policies effective in 2002, the specific retention is $500,000. The
reinsurer's limit on policies effective in 2002 was $50 million. The Company
also retained 10% of the layer from $1 million to $10 million for the first half
of 2002 on policies effective in 2002 and 10% of the layer from $5 million to
$10 million for the second half of 2002 for policies effective in 2002.

(b) For in-force, new and renewal policies effective in 2004, the specific
retention is $1 million. The Company also retained 10% of the layer from $5
million to $10 million.

      In addition to the stated specific retentions and limits shown and
consistent with common industry practice, our excess reinsurance contracts
contain several other limitations to claim payouts. Some of the more significant
limitations include limitations to the payout for any one claimant, limitations
to the number of reinsurance claims allowed in any one year, and exclusions for
payments related to terrorism and other similarly catastrophic events.


                                       82


                     AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

      Insurance premiums for the years ended December 31, 2006, 2005 and 2004
are summarized as follows (in thousands):

                                   2006                 2005                  2004
                          --------------------  --------------------  --------------------
                           Written     Earned    Written     Earned    Written     Earned
                          ---------  ---------  ---------  ---------  ---------  ---------
Direct .................  $ 266,827  $ 269,752  $ 270,331  $ 267,809  $ 260,173  $ 249,526
Assumed ................      6,886      7,266      6,764      8,308     10,808      9,919
Ceded ..................     (8,925)   (10,562)    (9,442)   (19,514)   (53,509)   (78,259)
                          ---------  ---------  ---------  ---------  ---------  ---------
Net ....................  $ 264,788  $ 266,456  $ 267,652  $ 256,603  $ 217,472  $ 181,186
                          =========  =========  =========  =========  =========  =========

      Incurred losses and loss adjustment expenses for the years ended December
31, 2006, 2005 and 2004 are summarized as follows (in thousands):

                                                                    2006       2005       2004
                                                                ---------  ---------  ---------
Direct losses and loss adjustment expenses  incurred ........   $ 157,005  $ 144,832  $ 162,250
Assumed losses and loss adjustment expenses  incurred .......       6,376      8,164      8,750
Ceded losses and loss adjustment expenses incurred ..........         289     (9,333)   (51,879)
                                                                ---------  ---------  ---------
Net losses and loss adjustment expenses incurred ............   $ 163,670  $ 143,663  $ 119,121

      Reinsurance recoverables on paid and unpaid losses and loss adjustment
expenses were $75.4 million and $83.9 million at December 31, 2006 and 2005,
respectively, of which $39.1 million and $45.6 million, respectively, was
recoverable from one reinsurer. Management evaluates the financial condition of
its reinsurers and monitors concentrations of credit risk to minimize its
exposure to significant losses from reinsurer insolvencies. Reinsurance
contracts do not relieve the Company from its obligations to policyholders.
Failure of reinsurers to honor their obligations could result in losses to the
Company.

7.  FEDERAL AND STATE INCOME TAXES

      Significant components of income tax expense for the years ended December
31, 2006, 2005 and 2004 are as follows (in thousands):


                                                  2006        2005        2004
                                               --------    --------    --------
Current expense (benefit)
  Federal ..................................   $  8,690    $  9,555    $  1,891
  State ....................................        425       1,205        (277)
                                               --------    --------    --------
   Total current tax expense ...............   $  9,115    $ 10,760    $  1,614
                                               --------    --------    --------
Deferred expense (benefit)
  Federal ..................................   $   (827)   $ (1,123)   $  1,461
  State ....................................        (32)       (311)      1,200
                                               --------    --------    --------
   Total deferred tax expense (benefit) ....       (859)     (1,434)      2,661
                                               --------    --------    --------
   Income tax expense ......................   $  8,256    $  9,326    $  4,275
                                               ========    ========    ========

                                       83


                      AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

      The effective federal income tax rates on income before income taxes
differ from the maximum statutory rates as follows for the years ended December
31, 2006, 2005 and 2004 (in thousands):

                                             2006         %       2005        %      2004         %
                                           -------    -------  -------    -------  -------    -------
Income tax at statutory rate ...........   $ 8,687      35.0%  $ 9,139      35.0%  $ 3,164      34.0%
Permanent differences:
  State income taxes ...................       255       1.1       844       3.2       159       1.7
  Tax-exempt interest ..................      (942)     (3.8)     (584)     (2.2)     (199)     (2.1)
  Non-deductible meals and entertainment       197       0.8       350       1.3       152       1.6
  Change in deferred tax rate ..........      (513)     (2.0)       --      --       1,216      13.1
  Provision to return adjustment .......       278       1.1        (4)     --        (381)     (4.1)
  Non-deductible option expense ........       133       0.5        --      --          --        --
  Other expense--net ...................       161       0.6      (419)     (1.6)      164       1.8
                                           -------    -------  -------    -------  -------    -------
Effective income tax expense ...........   $ 8,256      33.3%  $ 9,326      35.7%  $ 4,275      46.0%
                                           =======    =======  =======    =======  =======    =======

      The Company records deferred federal income taxes on certain temporary
differences between the amounts reported in the accompanying consolidated
financial statements and the amounts reported for federal and state income tax
reporting purposes.

      The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and tax liabilities as of December 31, 2006
and 2005 are presented below (in thousands):

                                                          2006            2005
                                                       --------        --------
Deferred tax assets:
  Loss reserve adjustments .....................       $ 13,551        $ 13,432
  Unearned and advance premiums ................          8,112           8,043
  Allowance for bad debt .......................          1,531           1,774
  Policyholder dividends .......................          3,170           2,409
  FAS 115 unrealized losses ....................          1,553           1,674
  Deferred compensation ........................            650             470
  Disallowed capital losses ....................            326            --
  Other ........................................            689             477
                                                       --------        --------
   Total deferred tax assets ...................         29,582          28,279
Deferred tax liabilities:
  Deferred policy acquisition expenses .........         (7,734)         (7,049)
  Other ........................................           (235)           (359)
                                                       --------        --------
   Total deferred tax liabilities ..............         (7,969)         (7,408)
                                                       --------        --------
   Total net deferred tax assets ...............       $ 21,613        $ 20,871
                                                       ========        ========


                                       84


                      AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

8.  UNPAID LOSSES AND LAE

      The following table provides a reconciliation of the beginning and ending
balances for unpaid losses and LAE, reported in the accompanying consolidated
balance sheets as of December 31, 2006 and 2005 (in thousands):

                                                                               2006       2005
                                                                           ---------  ---------
Unpaid losses and LAE, gross of related reinsurance
  recoverables at beginning of period .................................    $ 309,857  $ 297,698
Less reinsurance recoverables on unpaid losses and LAE at
  beginning of period .................................................       78,659    107,155
                                                                           ---------  ---------
Unpaid losses and LAE, net of related reinsurance
  recoverables at beginning of period .................................      231,198    190,543
                                                                           ---------  ---------
Add provision for losses and LAE, net of reinsurance,occurring in:
  Current period ......................................................      177,841    168,355
  Prior periods .......................................................      (14,171)   (24,692)
                                                                           ---------  ---------
Incurred losses during the current period .............................      163,670    143,663
                                                                           ---------  ---------
Deduct payments for losses and LAE, net of reinsurance, occurring in:
  Current period ......................................................       56,448     48,299
  Prior periods .......................................................       76,353     54,709
                                                                           ---------  ---------
Payments for losses and LAE during the current period, net of
  reinsurance .........................................................      132,801    103,008
                                                                           ---------  ---------
Unpaid losses and LAE, net of related reinsurance
  recoverables at end of period .......................................      262,067    231,198
Reinsurance recoverables on unpaid losses and LAE at end of
  period ..............................................................       72,296     78,659
                                                                           ---------  ---------
Unpaid losses and LAE, gross of reinsurance recoverables on
  unpaid losses at end of period ......................................    $ 334,363  $ 309,857
                                                                           =========  =========

      The Company's estimate for losses and LAE related to prior years, net of
related reinsurance recoverables, decreased during the years ended December 31,
2006 and 2005 by $14.2 million and $24.7 million, respectively, as a result of
actual loss development emerging more favorably than expected. Management
believes the historical experience of the Company is a reasonable basis for
estimating future losses. However, future events beyond the control of
management, such as changes in law, judicial interpretations of law, and
inflation may favorably or unfavorably impact the ultimate settlement of the
Company's loss and loss adjustment expenses.

      The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and LAE. While anticipated changes in claim
costs due to inflation are considered in estimating the ultimate claim costs,
the increase in average severity of claims is caused by a number of factors that
vary with the individual type of policy written. Future average severities are
projected based on historical trends adjusted for implemented changes in
underwriting standards, policy provisions, and general economic trends. Those
anticipated trends are monitored based on actual development and are modified if
necessary. Changes in the Company's estimate of reserves for losses and loss
adjustment expenses are reflected in operations in the period in which the
estimates are changed.

9.  POLICYHOLDER DIVIDENDS

      Certain policyholders have entered into agreements that provide the
opportunity for dividends. Dividends are accrued on such policies based on
specific dividend contract provisions, and the policies' earned premiums and
loss ratios. Additionally, dividend agreements also allow management to reduce
the amount to be paid at management's discretion, based on the overall
profitability of the Company. Should management choose to reduce the ultimate
dividends to be paid, once the amount of the total dividend that will be paid
for a policy year is determined, the dividend accrued would be reduced down to
the level determined by management. The reduced dividend amount would be
allocated ratably to the participating policies, based on the dividend amount
calculated prior to the reduction. Approximately 26%, 25% and 22% of the total
business was subject to dividend participation during the years ended December
31, 2006, 2005 and 2004, respectively. The dividends are ultimately paid at the
sole discretion of the Board of Directors (the "Board") and must be approved by
the Board prior to payment.

      Board-mandated dividends accrued for 2006, 2005 and 2004 policies reflect
the full potential amount allowed under the respective policies.


                                       85


                      AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

10. COMMITMENTS AND CONTINGENCIES

      LITIGATION--AmCOMP along with AmCOMP Preferred and AmCOMP Assurance are
collectively defendants in identical actions commenced in Pennsylvania and
Florida courts by the Insurance Commissioner of Pennsylvania, acting in the
capacity as liquidator of Reliance Insurance Company. The complaints in those
actions allege that preferential payments were made by Reliance Insurance
Company under the formerly existing reinsurance agreement with AmCOMP Preferred
and AmCOMP Assurance and seek damages in the amount of approximately $2.3
million. AmCOMP, along with AmCOMP Preferred and AmCOMP Assurance, has made
various motions addressed to these complaints. The Company, based on the advice
of counsel, believes that it has a variety of factual and legal defenses,
including a right of offset related to the statement of claim filed by the
Company and Preferred in the Reliance Insurance Company liquidation proceeding
for the recovery of approximately $9.9 million under the reinsurance agreement.
Although the ultimate results of these legal actions and related claims cannot
presently be determined, the Company had accrued a liability of $1.2 million and
$1.3 million as of December 31, 2006 and 2005, respectively, related to those
matters.

      The Company is named as a defendant in various legal actions arising
principally from claims made under insurance policies and contracts. Those
actions are considered by the Company in estimating the losses and LAE reserves.

      LEASES--The Company leases office space, equipment and automobiles under
noncancelable lease agreements, with various renewal and escalation clauses.
Rental expense was $3.2 million, $2.6 million and $2.6 million for 2006, 2005
and 2004, respectively. Future minimum payments under noncancelable operating
leases with initial terms of one year or more as of December 31, 2006 are as
follows (in thousands):

YEAR ENDED DECEMBER 31,
    2007 .....................................................     $3,229
    2008 .....................................................      2,383
    2009 .....................................................      1,579
    2010 .....................................................        746
    2011 and thereafter ......................................        396
                                                                   ------
                                                                   $8,333
                                                                   ======

      EMPLOYMENT CONTRACTS--The Company has entered into employment contracts
with certain of its executives. These contracts generally provide for continuing
compensation for a period of 12 to 18 months if the executives are released
without cause, except the contract of the chief executive officer provides for
compensation for a period equal to the greater of 18 months or the number of
months then remaining in the term of the contract.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

      SFAS No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of the estimated fair value of all financial instruments,
including both assets and liabilities, unless specifically exempted.

      The following methods and assumptions were used by the Company in
estimating the fair value of financial instruments:

      CASH AND CASH EQUIVALENTS--The carrying amount reported in the balance
sheet for cash and cash equivalents approximates fair value due to the
short-term nature of those items.

      INVESTMENT SECURITIES--Fair values for fixed maturity securities and other
invested assets are based on quoted market prices where available. For fixed
maturity securities not actively traded, fair values are estimated using values
obtained from independent pricing services (see Note 4).

      NOTES PAYABLE--The Company's note payable is a floating rate long-term
debt. Accordingly, the carrying amount is estimated to approximate the fair
value.


                                       86


                     AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

12. 401(K) SAVINGS PLAN

      The Company sponsors a 401(k) tax-deferred retirement savings plan (the
"Plan") for its employees. The Plan is approved by the Internal Revenue Service
and is administered by a national financial management service. The Company
matches the employee's contribution at 100% for the first 2% of salary and 50%
for the next 4% of salary. Expenses relating to the Plan were $619,000, $570,000
and $525,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
Effective January 1, 2007, eligibility into the plan was changed to allow
entrance into the plan following the first full month of employment, which was a
change from the six months previously required.


13. NOTES PAYABLE

      On October 12, 2000, the Company entered into a credit facility (the
"Loan") with a financial institution under which the Company borrowed $11.3
million. The Loan calls for monthly interest payments at the 30-day LIBOR rate
plus a margin. The expiration date on the loan is April 10, 2010. The Loan is
collateralized by $25.5 million of surplus notes issued by AmCOMP Preferred and
AmCOMP Assurance and the stock of AmCOMP Preferred. During 2003, the remaining
balance of the Loan was refinanced and the Company borrowed an additional $5.5
million. At December 31, 2006 and 2005, the principal balance was $6.3 million
and $8.0 million respectively. The interest rate was 7.85% at December 31, 2006.
Interest paid during 2006 and 2005 totaled $558,000 and $495,000, respectively.

      The Loan contains various restrictive covenants and certain financial
covenants. At December 31, 2006, the Company was in compliance with all
restrictive and financial covenants.

      On April 30, 2004, AmCOMP Preferred issued a $10 million surplus note in
return for $10 million in cash to Dekania CDO II, Ltd., as part of a pooled
transaction. The note matures in 30 years and is callable by the Company after
five years. The terms of the note provide for quarterly interest payments at a
rate 425 basis points in excess of the 90-day London Interbank Offered Rate
("LIBOR"). Both the payment of interest and repayment of the principal under
this note and the surplus notes described in the succeeding two paragraphs are
subject to the prior approval of the Florida Department of Financial Services.
Interest paid through December 31, 2006 and 2005 totaled $0.9 million and $0.7,
million respectively. Interest acrrued as of December 31, 2006 and 2005 was
$120,000 and $107,000, respectively. This interest was paid subsequent to year
end.

      On May 26, 2004, AmCOMP Preferred issued a $12 million surplus note, in
return for $12 million in cash, to ICONS, Inc., as part of a pooled transaction.
The note matures in 30 years and is callable by the Company after five years.
The terms of the note provide for quarterly interest payments at a rate 425
basis points in excess of the 90-day LIBOR. Interest paid through December 31,
2006 and 2005 totaled $1.1 million and $0.9, million respectively. Interest
unpaid as of December 31, 2006 and 2005 was $115,000 and $104,000, respectively.
This interest was paid subsequent to year end.

      On September 14, 2004, AmCOMP Preferred issued a $10 million surplus note,
in return for $10 million in cash, to Alesco Preferred Funding V, LTD, as part
of a pooled transaction. The note matures in approximately 30 years and is
callable by the Company after approximately five years. The terms of the note
provide for quarterly interest payments at a rate 405 basis points in excess of
the 90-day LIBOR. Interest paid through December 31, 2006 and 2005 totaled $0.9
million and $0.7, million respectively. Interest unpaid as of December 31, 2006
and 2005 was $39,000 and $38,000, respectively. This interest was paid
subsequent to year end.

      Payments of principal due on the notes payable at December 31, 2006 are as
follows (in thousands):

2007.........................................................      $1,786
2008.........................................................       1,786
2009.........................................................       1,786
2010.........................................................         892
2011 and thereafter..........................................      32,000
                                                                  -------
Total........................................................     $38,250
                                                                  =======


                                       87


                     AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004


14. CAPITAL STOCK

      CONVERTIBLE PREFERRED STOCK SERIES A--At December 31, 2005, 2.4 million
shares of $1.00 par value, voting, participating, convertible preferred stock
("CPS") was authorized, issued, and outstanding. If the Company declared and
paid a dividend on the common stock, the CPS stockholders were entitled to a
dividend equal to the dividend that would have been payable to such holder if
the shares had been converted. The CPS had a liquidation preference of $10 per
share and was convertible, at the holder's option, into 1.7464 shares of the
Company's common stock for each share of CPS held. The CPS automatically
converted into 4,191,399 shares of common stock upon consummation of the
qualified public offering.

      UNDESIGNATED PREFERRED STOCK--At December 31, 2006, the board or directors
had the authority to issue up to 5,000,000 shares of undesignated preferred
stock and to determine the rights, preferences and privileges of the shares,
without stockholder approval.

      COMMON STOCK--There were 45 million and 28 million authorized shares of
$.01 par value common stock as of December 31, 2006 and 2005, respectively. At
December 31, 2006 and 2005, 15,893,162 and 5,501,936 shares, respectively, were
issued and 15,758,252 and 5,367,025, respectively, were outstanding. During
2005, the Company repurchased 873 shares at a purchase price of $4.24. The
repurchased shares are recorded as treasury stock on the consolidated balance
sheets. Dividends are payable as declared by the Board and are subordinate to
the CPS.

As of December 31, 2006, 1,442,239 shares of common stock were issuable and
reserved for future issuance under employee stock option plans and to executives
granted options outside of option plans.

15. STOCK OPTIONS

      During 1997, the Board of Directors approved a director stock option plan
(the "Directors Plan") and reserved 87,320 shares of common stock for issuance
under this plan. Under the Directors Plan, options vest over a period determined
at the time of grant and are exercisable over a five-year period after the date
of grant for an exercise price equal to fair value of the common stock (prior to
the initial public offering management's estimate of the fair market value) on
the date of grant . In January 2006, the Directors' Plan was amended. The
amended plan states that all directors who are not employees of AmCOMP are
eligible to receive grants of options under the Directors Plan. Each eligible
director receives an automatic, nondiscretionary grant of (1) an option to
purchase shares of common stock with an aggregate fair market value at the time
of grant equal to $66,000 upon election to the Board and (2) options to purchase
shares of common stock with an aggregate fair market value at the time of grant
equal to $13,200 annually on each January 1 thereafter so long as he remains an
eligible director. In addition, the Board has the authority to make
discretionary grants of options under the Plan.

      During 1996, the Board approved an employee stock option plan (the "1996
Plan") and reserved 272,878 shares of the Company's common stock, subsequently
increased to 960,531 shares, for future issuance thereunder. The employee
options vest over a period determined at the time of grant and are exercisable
over a period of not more than 10 years at an exercise price equal to
management's estimate of the fair market value of the common stock at the date
of grant in the case of incentive options and not less than 80% of such fair
market value in the case of nonqualified options. In September 2005, the Board
terminated the 1996 Plan, which had no effect on options outstanding thereunder.

      Prior to 1999, the Company granted two executives options to purchase
shares under nonqualified stock option agreements. Of the options granted,
options to purchase 272,877 common shares are still outstanding as of December
31, 2006. These options vested over a three to five-year period and are
exercisable over a 10 year period after the date of grant at an exercise price
of $13.74 per share.

      In September 2005, the Board adopted an employee stock option plan (the
"2005 Plan"), and reserved 567,586 shares with a limit of 218,302 shares per
optionee per calendar year. Unless sooner terminated by the Board, the 2005 Plan
terminates on September 6, 2015. The employee options vest over a period
determined at the time of grant, generally 4 years, and are exercisable over a
period of not more than 10 years at an exercise price at least equal to fair
market value of the common stock at the date of grant.

      Effective January 1, 2006, the Company adopted SFAS No. 123R, using the
modified prospective application transition method. Under this method, all
outstanding employee stock options are being expensed over the remaining vesting
period based on the fair value of the options at the date they were granted.
Additionally, SFAS No. 123R requires the estimation of forfeitures in


                                       88


                     AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

calculating the expense related to stock-based compensation. As a result of the
adoption of SFAS No. 123R, the Company recognized approximately $0.6 million of
stock option compensation expense and $0.1 million of related tax benefit in the
year ended December 31, 2006. The recognition of the expense reduced 2006
earnings per share by $0.04. As of December 31, 2006, total unrecognized
compensation expense related to non-vested stock options was approximately $1.8
million. This cost is expected to be recognized over the weighted average period
of 2.7 years.

      In February 2006, the Company granted three executives options to purchase
384,217 shares of common stock outside of existing plans. These options vest
over a three-to-four year period and are exercisable over a five-year period
after the date of grant for an exercise price of $9 per share.

      For the years ended December 31, 2005 and prior, the Company has elected
to follow APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its stock options granted to employees and
directors. Under APB No. 25, because the exercise price of the Company's
employee stock options equals or is greater than the estimated fair value of the
underlying stock on the date of grant, no compensation expense is recognized.

      A summary of the Company's stock option activity through December 31, 2006
is as follows:


                                        Employees, Directors, and
                                                Executives
                                      -----------------------------
                                          Average        Number of
                                      Exercise Price       Shares
                                      -----------------------------
Outstanding-December 31, 2003           $   10.97         741,301
    Granted                                  9.30          43,660
    Exercised                                 --             --
    Forfeited                                9.71        (111,258)
                                        ---------       ---------
Outstanding- December 31, 2004              11.09         673,703
    Granted                                   --             --
    Exercised                                 --             --
    Forfeited                               10.13         (28,124)
                                        ---------       ---------
Outstanding- December 31, 2005              11.12         645,579
    Granted                                  9.03         818,442
    Exercised                                9.32        (239,757)
    Forfeited                                8.89            (132)
    Expired                                  9.26          (2,574)
                                        ---------       ---------
Outstanding- December 31, 2006          $   10.08       1,221,558
                                        =========       =========

      As of December 31, 2006, 2005 and 2004, options to purchase 360,505,
588,453 and 463,212 shares were exercisable. The weighted average remaining
contractual life of the exercisable options was 0.6 years and 1.4 years as of
December 31, 2006 and 2005, respectively. The per-share weighted average grant
date fair value of options granted in the years ended December 31, 2006 and 2004
were $3.05 and $1.53, respectively. The fair value of stock options granted was
estimated on the dates of grant using the Black-Scholes option pricing model.
The following weighted average assumptions were used to perform the calculation
of 2006 grant date fair value: zero expected dividend yield, 4.56% risk-free
interest rate, 5 year expected life, and 28.2% volatility. The expected life was
based on historical exercise behavior and the contractual life of the options.
Due to the unavailability of historical company information, volatility was
based on average volatilities of similar entities for the appropriate period.
Forfeitures were estimated at 20% for board members, 5% for executives and 10%
for all remaining employees. No options were granted in 2005. The
weighted-average grant date fair value of options vesting during 2006, 2005 and
2004 was $1.48, $1.68 and $1.70, respectively. As of December 31, 2006 the
aggregate intrinsic value of options outstanding and options exercisable was
approximately $772,000 and $77,000, respectively. The total aggregate intrinsic
value of options exercised during 2006 was approximately $298,000. No options
were exercised in 2005 or 2004.


                                       89


                     AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

Summary information for option awards expected to vest is as follows:

                                                      Options Outstanding
                           -------------------------------------------------------------------
                                                Weighted
                                 Number          Average
                             Outstanding at     Remaining     Weighted
                               December 31,    Contractual     Average            Aggregate
Range of Exercise Prices          2006            Life      Exercise Price     Intrinsic Value
----------------------------------------------------------------------------------------------
          $ 0.00 - $ 8.99        84,501           1.03       $    8.83           $  84,409
              9.00 - 9.99       782,943           4.03            9.02             637,114
            10.00 - 14.00       291,877           0.55           13.52                --
                              ---------           ----       ---------           ---------
                              1,159,321           2.93       $   10.14           $ 721,523
                              =========           ====       =========           =========

Summary information for total outstanding option awards is as follows:


                                          Options Outstanding                        Options Exercisable
                             ---------------------------------------------------------------------------------
                                                Weighted
                                 Number          Average                         Number
                             Outstanding at     Remaining     Weighted       Exercisable at       Weighted
                               December 31,    Contractual     Average         December 31,        Average
Range of Exercise Prices          2006            Life      Exercise Price        2006          Exercise Price
---------------------------------------------------------------------------------------------------------------
           $ 0.00 - $ 8.99        86,579          1.03          $ 8.83           65,798           $8.83
               9.00 - 9.99       842,102          4.03            9.02           21,830            9.30
             10.00 - 14.00       292,877          0.56           13.51          272,877           13.74
                               ---------          ----         -------          -------          ------
                               1,221,558          2.99         $ 10.08          360,505          $12.58
                               =========          ====         =======          =======          ======

      In the event that currently outstanding options are exercised, the Company
intends to first issue treasury shares to the extent available, followed by new
shares as necessary.

16. EARNINGS PER SHARE

      The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31, 2006, 2005 and 2004 (in
thousands, except per share data):

                                                                2006      2005       2004
                                                              -------   -------   -------
Numerator:
  Net income attributable to common stockholders ..........   $16,562   $16,785   $ 5,030
                                                              =======   =======   =======
Denominator:
  Weighted-average shares outstanding (denominator for
   basic earnings per share) ..............................    14,452     5,367     5,368
  Plus effect of dilutive securities:
   Convertible preferred stock ............................       459     4,191     4,191
   Employee stock options .................................        20         4         5
                                                              -------   -------   -------
  Weighted-average shares outstanding and assumed
   conversions (denominator for diluted earnings per share)    14,931     9,562     9,564
                                                              =======   =======   =======
Basic earnings per share ..................................   $  1.15   $  3.13   $  0.94
Diluted earnings per share ................................   $  1.11   $  1.76   $  0.53

      For the years ended December 31, 2006, 2005 and 2004, outstanding employee
stock options of 1,134,979, 558,483 and 585,767 have been excluded from the
computation of diluted earnings per share since they are anti-dilutive.

      All share and per share amounts in the condensed consolidated financial
statements have been restated to give effect to the 1-for-2.2904 reverse common
stock split effected by AmCOMP on February 6, 2006. The stock split was effected
as a stock dividend.


                                       90


                     AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

17. REGULATORY EVENTS

      The National Council on Compensation Insurance ("NCCI") submitted its
annual workers' compensation rate filing to the Florida Office of Insurance
Regulation (the "Florida OIR"), which called for a statewide average 13.3% rate
decrease. Significant declines in claim frequency and an improvement in loss
development since the legislature enacted the 2003 reforms are the two main
reasons for the proposed premium level decrease. On October 17, 2006, the OIR
issued an order requesting that NCCI make an amended filing for an overall
workers' compensation rate decrease of 15.7%. On October 24, 2006, NCCI
submitted an amended filing calling for a statewide decrease of 15.7% as
requested, which was approved by the Florida OIR on October 31, 2006. The new
rates will apply to all new and renewal policies as of January 1, 2007. The
effect of the approved decrease cannot currently be ascertained.

      On March 19, 2007, the Company received a Notice of Intent to Issue Order
to Return Excessive Profit signed March 14, 2007 (the "Notice") from the Florida
OIR. The Notice indicates on a preliminary basis that Florida OIR proposes to
make a finding, following its review of data submitted by the Company on July 1,
2006 for accident years 2002, 2003 and 2004, that "Florida excessive profits"
(as defined in Florida Statute Section 627.215) ("excessive profits") in the
amount of $5,663,805 have been realized by the Company. Excessive profits under
the statute are required to be returned to policyholders under methods defined
in the statute. Upon receipt of the Notice, and upon further review by the
Company of the data previously submitted, the Company amended its filings to the
Florida OIR responding to the Notice and amending the deductible expense items
that are utilized in the calculation of excessive profits. These filings amend
and increase the expenses the Company believes are permitted by the statute in
calculating excessive profits.

      The Company, through outside regulatory counsel, has submitted their
amended filings to Florida OIR for the years 2002, 2003 and 2004. The amended
filings report no excessive profits for the reporting periods. In the event
Florida OIR does not agree with the amended filings as submitted by the Company,
there would be a disputed issue of material fact and law regarding the
calculation of excessive profits. The Company has preserved its right to an
administrative hearing under the provisions of the Notice and Florida Statute
Chapter 120 (the Florida Administrative Procedures Act). Under Chapter 120, the
Company is entitled to a DE NOVO proceeding on the issues described above. If
the administrative ruling is adverse to the Company, the Company would have
further appellate rights to the District Court of Appeal. Management of the
Company believes, in part based on input from legal counsel, that "excessive
profits" were not, in fact, earned in Florida for the years 2002, 2003, and
2004. No accrual for excessive profits has been provided as of December 31,
2006.


                                       91


                     AMCOMP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

18. QUARTERLY RESULTS FOR 2006 AND 2005 (UNAUDITED)

                                            First    Second     Third    Fourth
                                           Quarter   Quarter   Quarter   Quarter
                                           -------   -------   -------   -------
2006
Revenues                                   $70,099   $72,524   $72,572   $68,748
Expenses                                    60,769    65,428    65,376    67,552
Net income                                   5,975     5,007     4,324     1,256
Basic earnings per share                      0.54      0.31      0.28      0.08
Diluted earnings per share                    0.46      0.31      0.28      0.08

2005
Revenues                                   $63,122   $66,759   $68,457   $68,963
Expenses                                    54,902    57,659    66,353    62,276
Net income                                   5,327     5,220     1,579     4,659
Basic earnings (loss) per share               0.99      0.97      0.29      0.87
Diluted earnings (loss) per share             0.56      0.55      0.17      0.49


                                       92


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

      None.

ITEM 9A.  CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

      AmCOMP's management, with the participation of AmCOMP's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of AmCOMP's
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this report. Based on
such evaluation, AmCOMP's Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of such period, AmCOMP's disclosure controls
and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by AmCOMP in
the reports that it files or submits under the Exchange Act and are effective in
ensuring that information required to be disclosed by AmCOMP in the reports that
it files or submits under the Exchange Act is accumulated and communicated to
AmCOMP's management, including AmCOMP's Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.

      There have not been any changes in AmCOMP's internal control over
financial reporting, other than as noted below, (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the year ended
December 31, 2006 to which this report relates that have materially affected, or
are reasonably likely to materially affect, AmCOMP's internal control over
financial reporting. In connection with management's evaluation of disclosure
controls and procedures in the third quarter of 2006, management determined that
a presentation error had occurred in AmCOMP's financial statements previously
filed for December 31, 2005 and the quarters ended March 31, 2006 and June 30,
2006. The error was the result of a book overdraft position being presented as a
reduction of "cash and cash equivalents" rather than as an "other liabilities,"
and required the previously filed financial statements to be restated. As a
result, management identified a material weakness in our internal control over
financial reporting and concluded that the disclosure controls and procedures
designed for recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act and communicated to AmCOMP's management,
including AmCOMP's Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure were not
effective as of September 30, 2006. Subsequent to September 30, 2006, additional
internal control over financial reporting procedures were designed and
implemented to address the material weakness identified above.

ITEM 9B.  OTHER INFORMATION

      Not Applicable.


                                       93


                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required by this item is incorporated by reference to our
definitive proxy statement to be filed with the Securities and Exchange
Commission not later than April 30, 2007 in connection with our annual meeting
of stockholders (the "Proxy Statement") under the headings "Executive Officers,"
"Election of Directors," "Corporate Governance Principles and Board Matters,"
"Director Compensation" and "Compliance with Section 16(a) of the Exchange Act.

ITEM 11.  EXECUTIVE COMPENSATION

      The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Relationships and Related
Transactions."

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

      The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Principal Accounting Fees and Services."


                                       94


                                     PART IV


ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:

1. Financial Statements as of December 31, 2006 and December 31, 2005 and for
the three years ended December 31, 2006 included in Part II of this Form 10-K:

      Consolidated Balance Sheets

      Consolidated Statements of Operations

      Consolidated Statements of Changes in Stockholders' Equity

      Consolidated Statements of Cash Flows

      Notes to Consolidated Financial Statements

2. Financial Statement Schedules

The following financial statement schedules are filed as part of this Report.

      Schedule II - Condensed Financial Information of Parent Company

      Schedule V - Valuation and Qualifying Accounts

      Schedule VI--Supplemental Information Concerning Property-Casualty
      Insurance Operations

Schedules not filed herewith are either not applicable, the information is not
material or the information is set forth in the Consolidated Financial
Statements or notes thereto.


                                       95


                                  AMCOMP INCORPORATED
             SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
                                CONDENSED BALANCE SHEETS

                                                                       December 31,
                                                                   --------   --------
                                                                     2006        2005
                                                                   --------   --------
                                                                      (In Thousands)
ASSETS
Cash and cash equivalents ......................................   $  5,799   $    983
Fixed maturity securities available-for-sale at fair value
  (amortized cost of $5,000,000 in 2006) .......................      5,000       --
Investment in subsidiaries .....................................    127,518     66,921
Surplus notes receivable from affiliates .......................     25,500     25,500
Interest receivable on surplus notes receivable from affiliates       2,552      4,652
Receivable from affiliates .....................................       --          679
Other assets ...................................................         91      1,480
Income tax recoverable .........................................      3,102      1,164
                                                                   --------   --------
                                                                   $169,562   $101,379
                                                                   ========   ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deferred income taxes ..........................................   $    951   $  1,689
Note payable ...................................................      6,250      8,036
Payable to affiliated companies ................................     22,824     19,131
Other Liabilities ..............................................        249        542
Stockholders' Equity
  Common stock .................................................        158         54
  Preferred stock ..............................................       --       23,098
  Other stockholders' equity ...................................    139,130     48,829
                                                                   --------   --------
                                                                    139,288     71,981
                                                                   --------   --------
                                                                   $169,562   $101,379
                                                                   ========   ========

                See accompanying notes to condensed financial statements


                                           96


                                           AMCOMP INCORPORATED
                                   CONDENSED STATEMENTS OF OPERATIONS

                                                                               Year Ended December 31,
                                                                           ----------------------------
                                                                              2006      2005      2004
                                                                           --------  --------  --------
                                                                                  (In Thousands)
Revenues
Interest income .......................................................    $  2,770  $  1,955  $  1,676

Expenses
Other operating expenses ..............................................         159        62       835
Interest expense ......................................................         529       545       380
                                                                           --------  --------  --------
  Total expenses ......................................................         688       607     1,215
                                                                           --------  --------  --------
Income before income taxes and equity in undistributed
  earnings of consolidated subsidiaries ...............................       2,082     1,348       461
Income tax (benefit) expense ..........................................         797      (279)     (214)
Equity in undistributed earnings of consolidated subsidiaries .........      15,277    15,158     4,355
                                                                           --------  --------  --------
Net Income ............................................................    $ 16,562  $ 16,785  $  5,030

                        See accompanying notes to condensed financial statements


                                                   97


                                      AMCOMP INCORPORATED
                               CONDENSED STATEMENTS OF CASH FLOWS

                                                                     Year Ended December 31,
                                                                ------------------------------
                                                                   2006       2005       2004
                                                                --------   --------   --------
                                                                        (In Thousands)
OPERATING ACTIVITIES:
Net income ..................................................   $ 16,562   $ 16,785   $  5,030
Adjustments to reconcile net income to net cash
  provided by operating activities:
Excess tax benefit from stock option exercise................       (162)      --         --
Equity in earnings of subsidiaries ..........................    (15,277)   (15,158)    (4,355)
Stock Option expense ........................................        545       --         --
Interest receivable on surplus notes receivable
  from affiliates ...........................................      2,100     (1,917)       235
Deferred income taxes .......................................       (576)        24      1,233
Income tax recoverable ......................................     (2,023)     1,961     (1,683)
Other assets and other liabilities ..........................      1,389     (1,365)       (14)
Payable to affiliated companies .............................      4,372        890       (469)
Accounts payable and accrued expenses .......................       (290)       542         50
                                                                --------   --------   --------
Net cash provided by operating activities ...................      6,640      1,762         27
                                                                --------   --------   --------
INVESTING ACTIVITIES:
Securities available-for-sale:
   Purchases ................................................     (7,000)      --         --
   Sales and maturities .....................................      2,000       --         --
Investment in subsidiary ....................................    (45,000)      --         --
                                                                --------   --------   --------
Net cash used in investing activities .......................    (50,000)      --         --
                                                                --------   --------   --------

FINANCING ACTIVITIES:
Proceeds from initial public offering .......................     47,972       --         --
Proceeds from option exercise ...............................      1,828       --         --
Excess tax benefits from exercise of options ................        162       --         --
Payment of note payable .....................................     (1,786)    (1,785)    (1,786)
                                                                --------   --------   --------
Net cash provided by (used in) financing activities .........     48,176     (1,785)    (1,786)
                                                                --------   --------   --------
Net increase(decrease) in cash ..............................      4,816        (23)    (1,759)
Cash at beginning of year ...................................        983      1,006      2,765
                                                                --------   --------   --------
Cash at end of the year .....................................   $  5,799   $    983   $  1,006
                                                                ========   ========   ========

                    See accompanying notes to condensed financial statements


                                              98


                               AMCOMP INCORPORATED
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

1.  ACCOUNTING POLICIES

ORGANIZATION

      AmCOMP Incorporated (the "Company") is a Delaware-domiciled holding
company organized for the purpose of acquiring and managing insurance entities.

BASIS OF PRESENTATION

      The condensed financial statements and notes are prepared in accordance
with accounting principles generally accepted in the United States.

      The accompanying condensed financial statements have been prepared using
the equity method to account for investments in subsidiaries. Under the equity
method, the investment in consolidated subsidiaries is stated at cost plus
equity in undistributed earnings (loss) of consolidated subsidiaries since the
date of acquisition. These condensed financial statements should be read in
conjunction with the Company's consolidated financial statements.

ESTIMATES AND ASSUMPTIONS

      Preparation of the condensed financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the condensed financial statements and accompanying disclosures. Those estimates
are inherently subject to change, and actual results may ultimately differ from
those estimates.

2.  NOTE PAYABLE

      On October 12, 2000, the Company entered into a credit facility (the
"Loan") with a financial institution whereby the Company borrowed $11.3 million.
The Loan calls for monthly interest payments at the 30-day LIBOR rate plus a
margin. The expiration date of the loan is April 10, 2010. The Loan is
collateralized by $25.5 million of surplus notes issued by AmCOMP Preferred and
AmCOMP Assurance and the stock of AmCOMP Preferred. During 2003, the Loan was
refinanced whereby the Company borrowed an additional $5.5 million. At December
31, 2006 and 2005, the principal balance was $6.3 million and $8.0 million,
respectively. The interest rate was 7.85% at December 31, 2006.

      Maturities of the Loan at December 31, 2006 are as follows (in thousands):

      2007.........................................................     $1,786
      2008.........................................................      1,786
      2009.........................................................      1,786
      2010.........................................................        892
                                                                        ------
      Total........................................................     $6,250
                                                                        ======

3.  RELATED PARTY TRANSACTIONS

      On December 30, 1996, the Company loaned $10.0 million to AmCOMP Preferred
Insurance Company ("AmComp Preferred") and received a surplus note in the same
amount. The note provides for quarterly interest payments beginning on March 31,
1997 and payment of the principal on September 15, 2009. Interest accrues at an
annual rate of 100 basis points in excess of the prime rate, which was 8.25% at
December 31, 2006. Both the payment of interest and principal require approval
of the Florida Department of Financial Services ("FDFS"). Interest income was
$0.8 million, $0.6 million and $0.5 million for the years ended December 31,
2006, 2005 and 2004, respectively. Approved interest paid through December 31,
2006 totaled $1.6 million. Earned but unpaid interest as of December 31, 2006
and 2005 was $0.8 million and $1.6 million, respectively. To preserve the
surplus position of AmCOMP Preferred, neither the Company nor AmCOMP Preferred
has requested FDFS approval for the payment of additional interest beyond the
aforementioned paid amounts.


                                       99


                               AMCOMP INCORPORATED
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

      On December 31, 2000, the Company loaned $5.0 million to AmCOMP Assurance
Corporation ("AmComp Assurance") and received a surplus note in the same amount.
The note provides for quarterly interest payments beginning on March 31, 2001
and payment of the principal on March 31, 2006. Interest accrues at an annual
rate of 10.0%. Both the payment of interest and principal require approval of
the FDFS. Interest income was $0.5 million, $0.5 million and $0.5 million for
the years ended December 31, 2006, 2005 and 2004, respectively. Approved
interest paid during the year ended December 31, 2006 totaled $1.4 million.
Earned but unpaid interest as of December 31, 2006 and 2005 was $0.6 million and
$1.5 million, respectively. To preserve the surplus position of AmCOMP
Assurance, neither the Company nor AmCOMP Assurance has requested FDFS approval
for the payment of additional interest beyond the aforementioned paid amounts.

      On December 31, 2002, the Company loaned $2.0 million to AmCOMP Assurance
and received a surplus note in the same amount. The note provides for quarterly
interest payments beginning on March 31, 2003 and payment of the principal on
March 31, 2008. Interest accrues at an annual rate of 450 basis points in excess
of the LIBOR, which was 9.98% at December 31, 2006. Both the payment of interest
and principal require approval of the FDFS. Interest income was $0.2 million,
$0.2 million and $0.1 million for the years ended December 31, 2006, 2005 and
2004, respectively. Approved interest paid during the year ended December 31,
2006 totaled $0.3 million. Earned but unpaid interest as of December 31, 2006
and 2005 was $0.2 million and $0.4 million, respectively. To preserve the
surplus position of AmCOMP Assurance, neither the Company nor AmCOMP Assurance
has requested FDFS approval for the payment of interest amounts.

      On March 31, 2003, the Company loaned $2.0 million to AmCOMP Assurance and
received a surplus note in the same amount. The note provides for quarterly
interest payments beginning on June 30, 2003 and payment of the principal on
March 31, 2008. Interest accrues at an annual rate of 450 basis points in excess
of LIBOR, which was 9.98% at December 31, 2006. Both the payment of interest and
principal require approval of the FDFS. Interest income was $0.2 million, $0.2
million and $0.1 million for the years ended December 31, 2006, 2005 and 2004,
respectively. Approved interest paid during the year ended December 31, 2006
totaled $0.3 million. Earned but unpaid interest as of December 31, 2006 and
2005 was $0.2 million and $0.4 million, respectively. To preserve the surplus
position of AmCOMP Assurance, neither the Company nor AmCOMP Assurance has
requested FDFS approval for the payment of interest amounts.

      On December 4, 2003, the Company loaned $6.5 million to AmCOMP Assurance
and received a surplus note in the same amount. The note provides for quarterly
interest payments beginning on March 31, 2004 and repayment of the principal on
December 31, 2008. Interest accrues at an annual rate of 450 basis points in
excess of LIBOR, which was 9.98% at December 31, 2006. Both the payment of
interest and principal require approval of the FDFS. Interest income was $0.6
million, $0.5 million and $0.4 million for the years ended December 31, 2006,
2005 and 2004 respectively. Approved interest paid during the year ended
December 31, 2006 totaled $0.8 million. Earned but unpaid interest as of
December 31, 2006 and 2005 was $0.7 million and $0.9 million, respectively. To
preserve the surplus position of AmCOMP Assurance, neither the Company nor
AmCOMP Assurance has requested FDFS approval for the payment of interest
amounts.

      As the Company does not keep significant cash on hand, it may find it
necessary to borrow funds from subsidiaries to make tax, debt or other payments.
Additionally, as the Company files a consolidated tax return with its
affiliates, it makes tax payments on behalf of subsidiaries, thereby creating a
receivable from affiliates balance. The tax allocation method between affiliates
is subject to a written tax sharing agreement under which each company pays a
share of the total tax liability determined as if computed separately. The
borrowings from affiliates, offset by receivables from affiliates, and interest
receivable on surplus notes are recorded in the Receivable from or Payable to
Affiliated Companies line items on the balance sheet. As of December 31, 2006
and 2005, the Company had recorded approximately $22.8 million and $18.5
million, respectively, of net payables to affiliates.


                                      100


4.  FEDERAL AND STATE INCOME TAXES

      Income tax expense (benefit) for the years ended December 31, 2006, 2005
and 2004 was allocated as follows:

                                                2006         2005         2004
                                              -------      -------      -------
Current expense (benefit)
  Federal ...............................     $ 1,371      $  (329)     $  (227)
  State .................................         164           26         (506)
                                              -------      -------      -------
   Total current (benefit) expense ......       1,535         (303)        (733)
                                              -------      -------      -------
Deferred (benefit) expense
  Federal ...............................        (665)          22          471
  State .................................         (73)           2           48
                                              -------      -------      -------
   Total deferred (benefit) expense .....        (738)          24          519
                                              -------      -------      -------
   Total tax (benefit) expense ..........     $   797      $  (279)     $  (214)
                                              =======      =======      =======

      AmCOMP's effective income tax rate differed from the statutory income tax
rate for the years ended December 31, 2006, 2005 and 2004 as follows:

                                          2006     %     2005    %      2004      %
                                          -----  ----   -----  -----   -----   ------
Statutory federal income tax rate .....   $ 729  35.0%  $ 457   35.0%  $ 157     34.0%
Increases (reductions) in tax resulting
  from:
Surplus notes interest income deferred     --     --     (647) (49.6)    471    102.2
NOL Florida state tax .................    --     --      --     --     (835)  (181.1)
State tax .............................      59   2.8%   (211) (16.1)%    (7)    (1.5)
Other .................................       9   0.5     122    9.3     --      --
                                          -----  ----   -----  -----   -----   ------
                                          $ 797  38.3%  $(279) (21.4)% $(214)   (46.4)%
                                          =====  ====   =====  =====   =====   ======


      The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities included at December 31, 2006 and 2005
are presented below:

                                                    2006         2005
Deferred Tax Liabilities:
Surplus Notes Interest Receivable..............     $951        $1,689


                                      101


                      AMCOMP INCORPORATED AND SUBSIDIARIES
                 SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)


                                                                             Additions
                                                                  -----------------------------
                                                                    Charged/
                                                     Balance at   (credited) to
                                                    beginning of    costs and     Charged to                      Balance at end
                                                       period       expenses     other accounts   Deductions (1)    of period
                                                    ------------  -------------  --------------   --------------  --------------
Year ended December 31, 2006
Allowance for uncollectible:

Premiums in course of collection .............       $ 4,887         $   987         $--             $(1,768)         $ 4,106
Year ended December 31, 2005                        ============  =============  ==============   ==============  ==============
Allowance for uncollectible:


Premiums in course of collection .............       $ 6,000         $ 1,525         $--             $(2,638)         $ 4,887
Year ended December 31, 2004                        ============  =============  ==============   ==============  ==============
Allowance for uncollectible:


Premiums in course of collection .............       $ 8,841         $   156         $--             $(2,997)         $ 6,000
                                                    ============  =============  ==============   ==============  ==============
-----------------

(1) Deductions include write-offs of amounts determined to be uncollectible.


                                      AMCOMP INCORPORATED AND SUBSIDIARIES
                  SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE
                                                   OPERATIONS
                                                 (IN THOUSANDS)

                                                                                          Claims and Claims
                                  Reserves for                                                 Adjustment
                                        Unpaid   Discount                                    Expense Incurred
                        Deferred    Claims and     If Any  Unearned                            Related to
       Affiliations       Policy        Claims   Deducted       and       Net        Net   --------------------
               With  Acquisition    Adjustment  in Column  Advanced  Premiums Investment    Current       Prior
         Registrant        Costs      Expenses      C (1)  Premiums    Earned     Income       Year       Years
        ------------ -----------   ----------- ---------- --------- --------- ----------   --------    --------
     Consolidated
      Property
         and
      Casualty
     Subsidiaries
2006                    $ 20,749      $334,363         $-  $115,218  $266,456   $ 17,461   $177,841   $(14,171)
2005                      19,413       309,857          -   115,574   256,603     10,798    168,355    (24,692
2004                      14,695       297,698          -   114,235   181,186      6,077    127,458     (8,337)

----------------------------
(1)   We discount the indemnity portion of loss reserves for select policies issued Texas that have fixed or
      determinable future payment. The total amount of this discount is not material to the financial
      statements.


                                                                102-A


                      AMCOMP INCORPORATED AND SUBSIDIARIES
  SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE
                                   OPERATIONS
                                 (IN THOUSANDS)


     Amortization
               of
         Deferred   Paid Claims
           Policy    and Claims         Net
      Acquisition    Adjustment    Premiums
            Costs      Expenses     Written
     ------------  ------------    --------





2006    $ 49,410       $132,801    $264,788
2005      42,955        103,008     267,652
2004      19,145         85,273     217,472



                                      102-b





3. EXHIBIT INDEX

      The following is a list of exhibits filed as part of this Form 10-K:

                                  EXHIBIT INDEX

Number   Description of Exhibit
------   ----------------------

   3.1   Form of Amended and Restated Certificate of Incorporation of the
         Registrant (incorporated by reference to Exhibit 3.1 to the Company's
         Registration Statement on Form S-1 (File No. 333-128272) (the "Form
         S-1").
   3.2   Form of Amended and Restated Bylaws of the Registrant (incorporated by
         reference to Exhibit 3.2 to the Form S-1).
   4.1   Specimen Certificate for the Registrant's common stock (incorporated by
         reference to Exhibit 4.1 to the Form S-1).
   4.2   Indenture, dated April 30, 2004, by and between AmCOMP Preferred
         Insurance Company and JP Morgan Chase Bank, as trustee (incorporated by
         reference to Exhibit 4.2 to the Form S-1).
   4.3   Indenture, dated May 26, 2004, by and between AmCOMP Preferred
         Insurance Company and JP Morgan Chase Bank, as trustee (incorporated by
         reference to Exhibit 4.3 to the Form S-1).
   4.4   Indenture, dated September 14, 2004, by and between AmCOMP Preferred
         Insurance Company and JP Morgan Chase Bank, as trustee (incorporated by
         reference to Exhibit 4.4 to the Form S-1).
  10.1   Registration Rights Agreement, dated as of January 26, 1996, by and
         among the Registrant and the stockholders party thereto (incorporated
         by reference to Exhibit 10.1 to the Form S-1).
  10.2   Amendment No. 1 to Stockholders Agreement and Registration Rights
         Agreement dated July 8, 1996 by and among the Registrant, Florida
         Administrators, Inc. and the stockholders party thereto (incorporated
         by reference to Exhibit 10.2 to the Form S-1).
  10.3   Loan Agreement, dated October 12, 2000, by and between the Registrant
         and AmSouth Bank (incorporated by reference to Exhibit 10.3 to the Form
         S-1).
  10.4   First Amendment to Loan Agreement, dated April 25, 2003, by and between
         the Registrant and AmSouth Bank (incorporated by reference to Exhibit
         10.4 to the Form S-1).
  10.5   Second Amendment to Loan Agreement, dated April 23, 2004, by and
         between the Registrant and AmSouth Bank (incorporated by reference to
         Exhibit 10.5 to the Form S-1).
  10.6   Third Amendment to Loan Agreement, dated August 23, 2005, by and
         between the Registrant and AmSouth Bank (incorporated by reference to
         Exhibit 10.6 to the Form S-1).
 +10.7   1996 Stock Option Plan of the Registrant, as amended (incorporated by
         reference to Exhibit 10.7 to the Company's Form S-1).
 +10.8   Amended and Restated Directors' Stock Option Plan of the Registrant
         (incorporated by reference to Exhibit 10.8 to the Form S-1).
 +10.9   Form of 2005 Stock Option Plan of the Registrant (incorporated by
         reference to Exhibit 10.9 to the Form S-1).
 +10.10  Form of Stock Option Award Agreement of the Registrant for options
         granted under the Registrant's stock option plans (incorporated by
         reference to Exhibit 10.10 to the Form S-1).
 +10.11  Amended and Restated Employment Agreement, dated as of August 22, 2005,
         by and between the Registrant and Fred R. Lowe (incorporated by
         reference to Exhibit 10.11 to the Form S-1).
 +10.12  Amended and Restated Employment Agreement, dated as of August 22, 2005,
         by and between the Registrant and Debra Cerre-Ruedisili (incorporated
         by reference to Exhibit 10.12 to the Form S-1).
 +10.13  Amended and Restated Employment Agreement dated as of August 22, 2005,
         by and between the Registrant and Kumar Gursahaney (incorporated by
         reference to Exhibit 10.13 to the Form S-1).
 +10.14  Form of Executive Employment Agreement by and between the Registrant
         and other executive employees (incorporated by reference to Exhibit
         10.14 to the Form S-1).
 +10.15  Form of Indemnification Agreement by and between the Registrant and its
         directors and officers (incorporated by reference to Exhibit 10.15 to
         the Form S-1).
  10.16  Lease Agreement for North Palm Beach Facility, dated December 31, 2001,
         by and between 701 U.S. Highway 1, Inc. and AmCOMP Preferred Insurance
         Company (incorporated by reference to Exhibit 10.16 to the Form S-1).
  10.17  Office Lease Agreement for Maitland Facility, dated March 17, 1997, by
         and between Lincoln -300 Lincoln Place, Ltd. and Pinnacle Assurance
         Corporation (incorporated by reference to Exhibit 10.17 to the Form
         S-1).
  10.18  First Amendment to Lease Agreement for Maitland Facility, dated
         December 1, 2002, by and among Brookhaven (Maitland), LLC, Kpers Realty
         Holding Co. # 31, Inc. and AmCOMP Preferred Insurance Company
         (incorporated by reference to Exhibit 10.18 to the Form S-1).
  10.19  Second Amendment to Lease Agreement for Maitland Facility, dated May
         25, 2004, by and between Kpers Realty Holding Co. # 31, Inc. and AmCOMP
         Preferred Insurance Company (incorporated by reference to Exhibit 10.19
         to the Form S-1).


                                      103


  10.20  Purchase Agreement, dated April 29, 2004, by and between AmCOMP
         Preferred Insurance Company and Dekania CDO II, Ltd. (incorporated by
         reference to Exhibit 10.20 to the Form S-1).
  10.21  Floating Rate Surplus Note, dated April 29, 2004, from AmCOMP Preferred
         Insurance Company to Cede & Co., for $10.0 million (incorporated by
         reference to Exhibit 10.21 to the Form S-1).
  10.22  Purchase Agreement, dated May 26, 2004, by and between AmCOMP Preferred
         Insurance Company and Icons, Ltd. (incorporated by reference to Exhibit
         10.22 to the Form S-1).
  10.23  Floating Rate Surplus Note, dated May 26, 2004, from AmCOMP Preferred
         Insurance Company to JP Morgan Chase Bank, as trustee, for $12.0
         million (incorporated by reference to Exhibit 10.23 to the Form S-1).
  10.24  Purchase Agreement, dated September 14, 2004, by and between AmCOMP
         Preferred Insurance Company and Alesco Preferred Funding V, Ltd.
         (incorporated by reference to Exhibit 10.24 to the Form S-1).
  10.25  Floating Rate Surplus Note, dated September 14, 2004, from AmCOMP
         Preferred Insurance Company to Sigler & Co., for $10.0 million
         (incorporated by reference to Exhibit 10.25 to the Form S-1).
  10.26  Amended Tax Allocation Agreement, dated January 1, 1998, by and among
         the Registrant, AmCOMP Preferred Insurance Company, AmCOMP Assurance
         Corporation, Pinnacle Administrative Company and Pinnacle Benefits,
         Inc. (incorporated by reference to Exhibit 10.26 to the Form S-1).
  10.27  Service Company Contract, dated April 7, 1995, by and between FAI and
         Compensation Benefits, Inc. (incorporated by reference to Exhibit 10.27
         to the Form S-1).
  10.28  Amendment to Service Company Contract, dated January 26, 1996, by and
         between FAI and Compensation Benefits, Inc. (incorporated by reference
         to Exhibit 10.28 to the Form S-1).
  10.29  Second Amendment to Service Company Contract, dated January 1, 2000, by
         and between Pinnacle Administrative Company and Pinnacle Benefits, Inc.
         (incorporated by reference to Exhibit 10.29 to the Form S-1).
  10.30  Third Amendment to Service Company Contract, dated December 16, 1997,
         by and between Pinnacle Administrative Company and Pinnacle Benefits,
         Inc. (incorporated by reference to Exhibit 10.30 to the Form S-1).
  10.31  Fourth Amendment to Service Company Contract, dated January 1, 2000, by
         and between Pinnacle Administrative Company and Pinnacle Benefits, Inc.
         (incorporated by reference to Exhibit 10.31 to the Form S-1).
  10.32  Management Company Contract, dated April 7, 1995, by and between
         Pinnacle Assurance Corporation and FAI (incorporated by reference to
         Exhibit 10.32 to the Form S-1).
  10.33  Amendment to Management Company Contract, dated January 26, 1996, by
         and between Pinnacle Assurance Corporation and FAI (incorporated by
         reference to Exhibit 10.33 to the Form S-1).
  10.34  Second Amendment to Management Company Contract, dated January 1, 2000,
         by and between Pinnacle Assurance Corporation and FAI (incorporated by
         reference to Exhibit 10.34 to the Form S-1).
  10.35  Management Company Contract, dated December 16, 1997 by and between
         AmCOMP Assurance Corporation and Pinnacle Administrative Company
         (incorporated by reference to Exhibit 10.35 to the Form S-1).
  10.36  Reinsurance Pooling Agreement, dated May 10, 2001, by and between
         AmCOMP Preferred Insurance Company and AmCOMP Assurance Corporation
         (incorporated by reference to Exhibit 10.36 to the Form S-1).
  10.37  First Amendment to Reinsurance Pooling Agreement, dated December 31,
         2003, by and between AmCOMP Preferred Insurance Company and AmCOMP
         Assurance Corporation (incorporated by reference to Exhibit 10.37 to
         the Form S-1).
  10.38  Workers Compensation and Employers Liability Statutory Excess of Loss
         Reinsurance Agreement, effective January 1, 1999, issued to Pinnacle
         Assurance Corporation, AmComp Preferred Insurance Company, Thomas
         Jefferson Insurance Company and AmComp Insurance Company by Jardine
         Sayer & Company, Inc. (incorporated by reference to Exhibit 10.38 to
         the Form S-1).
  10.39  Workers' Compensation and Employers Liability Quota Share Reinsurance
         Agreement between AmCOMP Assurance Company and/or AmCOMP Preferred
         Insurance Company, and/or Pinnacle Assurance Corporation, and/or Thomas
         Jefferson Insurance Company and Swiss Reinsurance America Corporation
         (incorporated by reference to Exhibit 10.39 to the Form S-1).
  10.40  Underlying Excess Workers' Compensation Reinsurance Contract, effective
         January 1, 2002, issued to AmCOMP Preferred Insurance Company, AmCOMP
         Assurance Corporation and any and all insurance companies which are now
         or hereafter come under the same ownership or management as the AmCOMP
         Group by American Re-Insurance Company (incorporated by reference to
         Exhibit 10.40 to the Form S-1).
  10.41  Excess Workers' Compensation Reinsurance Contract, effective January 1,
         2002, issued to AmCOMP Preferred Insurance Company, AmCOMP Assurance
         Corporation and any and all insurance companies which are now or
         hereafter come under the same ownership or management as the AmCOMP
         Group (incorporated by reference to Exhibit 10.41 to the Form S-1).
  10.42  Catastrophe Workers' Compensation Reinsurance Contract, effective
         January 1, 2002, issued to AmCOMP Preferred Insurance Company, AmCOMP
         Assurance Corporation and any and all insurance companies which are now
         or hereafter come under the same ownership or management as the AmCOMP
         Group (incorporated by reference to Exhibit 10.42 to the Form S-1).


                                      104


  10.43  Excess Workers' Compensation Reinsurance Contract, effective January 1,
         2003, issued to AmCOMP Preferred Insurance Company, AmCOMP Assurance
         Corporation and any and all insurance companies which are now or
         hereafter come under the same ownership or management as the AmCOMP
         Group (incorporated by reference to Exhibit 10.43 to the Form S-1).
  10.44  Catastrophe Workers' Compensation Reinsurance Contract, effective
         January 1, 2003, issued to AmCOMP Preferred Insurance Company, AmCOMP
         Assurance Corporation and any and all insurance companies which are now
         or hereafter come under the same ownership or management as the AmCOMP
         Group (incorporated by reference to Exhibit 10.44 to the Form S-1).
  10.45  Excess Workers' Compensation Reinsurance Contract, effective January 1,
         2004, issued to AmCOMP Preferred Insurance Company, AmCOMP Assurance
         Corporation and any and all insurance companies which are now or
         hereafter come under the same ownership or management as the AmCOMP
         Group (incorporated by reference to Exhibit 10.45 to the Form S-1).
  10.46  Catastrophe Workers' Compensation Reinsurance Contract, effective
         January 1, 2004, issued to AmCOMP Preferred Insurance Company, AmCOMP
         Assurance Corporation and any and all insurance companies which are now
         or hereafter come under the same ownership or management as the AmCOMP
         Group (incorporated by reference to Exhibit 10.46 to the Form S-1).
  10.47  Excess Workers' Compensation Reinsurance Contract, effective January 1,
         2005, issued to AmCOMP Preferred Insurance Company, AmCOMP Assurance
         Corporation and any and all insurance companies which are now or
         hereafter come under the same ownership or management as the AmCOMP
         Group (incorporated by reference to Exhibit 10.47 to the Form S-1).
  10.48  Catastrophe Workers' Compensation Reinsurance Contract, effective
         January 1, 2005, issued to AmCOMP Preferred Insurance Company, AmCOMP
         Assurance Corporation and any and all insurance companies which are now
         or hereafter come under the same ownership or management as the AmCOMP
         Group (incorporated by reference to Exhibit 10.48 to the Form S-1).
  10.49  Excess Workers' Compensation Reinsurance Contract, effective January 1,
         2006, issued to AmCOMP Preferred Insurance Company, AmCOMP Assurance
         Corporation and any and all insurance companies which are now or
         hereafter come under the same ownership or management as the AmCOMP
         Group (incorporated by reference to Exhibit 10.49 to the Form S-1).
  10.50  Catastrophe Workers' Compensation Reinsurance Contract, effective
         January 1, 2006, issued to AmCOMP Preferred Insurance Company, AmCOMP
         Assurance Corporation and any and all insurance companies which are now
         or hereafter come under the same ownership or management as the AmCOMP
         Group (incorporated by reference to Exhibit 10.50 to the Form S-1).
 *10.51  Excess Workers' Compensation Reinsurance Contract, effective January 1,
         2007, issued to AmCOMP Preferred Insurance Company, AmCOMP Assurance
         Corporation and any and all insurance companies which are now or
         hereafter come under the same ownership or management as the AmCOMP
         Group.
 *10.52  Catastrophe Workers' Compensation Reinsurance Contract, effective
         January 1, 2007, issued to AmCOMP Preferred Insurance Company, AmCOMP
         Assurance Corporation and any and all insurance companies which are now
         or hereafter come under the same ownership or management as the AmCOMP
         Group.
  14     Code of Business Ethics and Conduct.
  21     Subsidiaries of the Registrant (incorporated by reference to Exhibit 21
         to the Form S-1).
 *23     Consent of Independent Registered Public Accounting Firm - Deloitte &
         Touche LLP
 *31.1   Certification of Chief Executive Officer pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.
 *31.2   Certification of Chief Financial Officer pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.
 *32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
         1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
         2002.
 *32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
         1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
         2002.
-----------------
*     Filed herewith.

+     Indicates those contracts that are management contracts or compensation
      plans or arrangements.


                                      105


                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized, in the
City of North Palm Beach, State of Florida on the 2nd day of April, 2007.

                                                 AMCOMP INCORPORATED
                                                    (Registrant)

                                      By: /s/ Fred R. Lowe
                                          -------------------------------------
                                          Fred R. Lowe
                                          PRESIDENT AND CHIEF EXECUTIVE OFFICER

                                POWER OF ATTORNEY

      The Company and each of the undersigned do hereby appoint Fred R. Lowe,
Debra Cerre-Ruedisili and Kumar Gursahaney, and each of them severally, its or
his true and lawful attorney to execute on behalf of the Company and the
undersigned any and all amendments to this Annual Report on Form 10-K and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission; each of such attorneys
shall have the power to act hereunder with or without the other.

      In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

          Signature                          Title                                           Date
          ---------                          -----                                           ----

                                 Chairman of the Board, President and Chief Executive    April 2, 2007
/s/ Fred R. Lowe                 Officer (principal executive officer)
------------------------------
Fred R. Lowe

/s/ Debra Cerre-Ruedisili        Executive Vice President, Chief Operating Officer       April 2, 2007
------------------------------   and Director
Debra Cerre-Ruedisili

/s/ Kumar Gursahaney             Senior Vice President, Chief Financial Officer and      April 2, 2007
------------------------------   Treasurer (principal financial and accounting officer)
Kumar Gursahaney

/s/ Sam A. Stephens              Director                                                 April 2, 2007
------------------------------
Sam A. Stephens

/s/ Paul B. Queally              Director                                                 April 2, 2007
------------------------------
Paul B. Queally

/s/ Sean Traynor                 Director                                                 April 2, 2007
------------------------------
Sean Traynor

/s/ Spencer L. Cullen, Jr.       Director                                                 April 2, 2007
------------------------------
Spencer L. Cullen, Jr.

/s/ Donald C. Stewart            Director                                                 April 2, 2007
------------------------------
Donald C. Stewart


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