UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K


(Mark
One)




ý
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the fiscal year ended December 31, 2007




 ̈
            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

                incorporation
      or organization)
            (I.R.S.
      Employer

                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 classCommon
      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
      o
                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
      o
                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
      o


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. o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.


Large
      accelerated filer o
              Accelerated
      filer x
              Non-accelerated
      filer o
              Smaller
      reporting company o




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes
      o
              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, 2007 was approximately
$128,449,000.  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 February 28, 2008Common
      Stock, $0.01 par value per share
            
            15,290,181
      shares





DOCUMENTS
INCORPORATED BY REFERENCE


Document
            
            Parts Into Which
      IncorporatedProxy
      Statement for the 2008 Annual Meeting of Stockholders
            
            Part
      III










AMCOMPINCORPORATED
  INDEX
  PART
      IItem 1. Business
                
                
                
                1Item 1A. Risk Factors
                
                
                
                25Item 1B. Unresolved Staff Comments
                
                
                
                40Item 2. Properties
                
                
                
                40Item 3. Legal Proceedings
                
                
                
                40Item 4. Submission of Matters to a Vote of Security
      Holders
                
                
                
                40PART
      IIItem 5. Market for Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
                
                
                
                41Item 6. Selected Financial Data
                
                
                
                43Item 7. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
                
                
                
                45Item 7A. Quantitative and Qualitative Disclosure about Market
      Risk
                
                
                
                68Item 8. Financial Statements and Supplementary
      Data
                
                
                
                71Item 9. Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
                
                
                
                101Item 9A. Controls and Procedures
                
                
                
                101Item 9B. Other Information
                
                
                
                101PART
      IIIItem 10. Directors and Executive Officers of the
      Registrant
                
                
                
                102Item 11. Executive Compensation
                
                
                
                102Item 12. Security Ownership of Certain Beneficial Owners and
      Management
                
                
                
                102Item 13. Certain Relationships and Related
      Transactions
                
                
                
                102Item 14. Principal Accounting Fees and
    Services
                
                
                
                102PART
      IVItem 15. Exhibits and Financial Statement
      Schedules
                
                
                
                103SIGNATURES
                
                
                
                115
   ii
 Index
  PARTI
  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
      31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Policy
      Count
              
              
              9,502
              
              
              
              9,572
              
              
              
              9,790
              
              
              
              9,599
              
              
              
              8,691Average
      Premium Size
              
              $
              23,114
              
              
              $
              25,571
              
              
              $
              25,115
              
              
              $
              25,455
              
              
              $
              25,371
 
 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 17 states with Florida representing 28.6% of our 2007
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.
   1
 Index
  
 Merger
Agreement
  On
January 10, 2008, we entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Employers Holdings, Inc., a Nevada corporation ("Employers"),
and Sapphire Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of Employers ("Merger Sub"), providing for the acquisition of our
company by Employers (NYSE: EIG).  Pursuant to the Merger Agreement,
each issued and outstanding share of our common stock, other than dissenting
shares or shares that we own as treasury stock, or shares owned by Employers or
Merger Sub, will be converted into the right to receive $12.50 per share in
cash. As part of the Merger Agreement, Merger Sub will merge with and into us
with our company being the surviving corporation in the merger. Our Board of
Directors and Employers’ Board of Directors each approved the entry into the
Merger Agreement.  As a result of the merger, we will cease to be a
publicly traded company and will become a wholly-owned subsidiary of Employers,
and thus our stockholders will cease to have any ownership interest in us and
will not participate in any of our future earnings and growth or
losses.
 
 The Merger Agreement and related
transactions are subject to the approval of our stockholders, the receipt of
required regulatory approvals, including from the Florida Office of Insurance
Regulation, and certain other customary closing conditions.  The
merger and related transactions are expected to be completed by the end of the
second quarter of 2008.
  Employers
may terminate the Merger Agreement under certain circumstances, including if our
Board of Directors changes or withdraws its recommendation that our stockholders
adopt the Merger Agreement or under other circumstances involving a competing
offer to acquire us. In connection with such termination, we may be required to
pay a fee of $8 million to Employers. We may terminate the Merger Agreement as a
result of Employers’ material breach of certain of its representations
and warranties, or any of its covenants or agreements under the Merger
Agreement. In connection with Employers’ breach of any of its covenants or
agreements or of its representation and warranty that it has sufficient funds to
complete the transaction, Employers may be required to pay a termination fee of
$8 million to us.
 
 If the
merger is not consummated for any reason (including failure to receive the
requisite regulatory or stockholder approvals), our stockholders will not
receive any payment for their shares. We would remain an independent public
company, and we would expect to be operated by our management in a manner
similar to that in which we are being operated today.
 
 In
connection with the proposed transaction, we filed a preliminary proxy
statement with the Securities and Exchange Commission (the “SEC”) on February
22, 2008.  INVESTORS AND SECURITY HOLDERS ARE ADVISED TO READ THE
DEFINITIVE PROXY STATEMENT WHEN IT BECOMES AVAILABLE, BECAUSE IT WILL CONTAIN
IMPORTANT INFORMATION.  Investors and security holders may obtain a
free copy of the definitive proxy statement (when available) and other documents
filed by us at the SEC’s web site at www.sec.gov.  The proxy statement
and such other documents may also be obtained without cost from the Company by
directing such request to us, Attention: George E. Harris, Secretary, AmCOMP
Incorporated, 701 U.S. Highway One, North Palm Beach, Florida 33408, Telephone:
(561) 840-7171.
 
 The
Company and our directors, executive officers and other members of our
management and employees may be deemed to be participants in the solicitation of
proxies from our stockholders in connection with the proposed
transaction.  Information concerning the interests of the Company’s
participants in the solicitation is set forth in our proxy statements and Annual
Reports on Form 10-K, previously filed with the SEC, and in the definitive proxy
statement relating to the transaction when it becomes available.
  On March
4, 2008, a purported class-action complaint was filed in the Circuit Court of
the 15th
Judicial Circuit, in and for Palm Beach County, Florida, on behalf of Broadbased
Equities, an alleged stockholder of ours, and all others similarly situated. The
complaint, which names as defendants AmCOMP, our directors Fred R. Lowe, Debra
Cerre-Ruedisili, Sam A. Stephens, Paul B. Queally, Donald C. Stewart and Spencer
L. Cullen, Jr., and Employers, asserts claims related to our proposed
transaction with Employers for breaches of fiduciary duty and, in the case of
Employers, aiding and abetting such breaches, in connection with the directors’
determination to sell the company.  The complaint seeks a declaratory
judgment that the defendants have breached their fiduciary duties to plaintiff
and the purported class members and/or, in the case of Employers, aided and
abetted such breaches, compensatory and/or rescissory damages, as well as pre
and post-trial interest, as allowed by law, and the costs and disbursements of
the action, including reasonable attorneys' and experts' fees and other costs.
We believe that these claims are without merit and intend to defend this action
vigorously and, therefore, no provision for this litigation has been made in the
current financial statements.
 Strategy
 
 In the
short term, we will continue to focus on customers – our agents and
policyholders – as well as our day-to-day operations until such time as the
merger with Employers closes.
 
 We plan
to pursue profitable growth and favorable returns on equity through the
following strategies:
  ·
              Leverage Existing
      Infrastructure.  Since 1999, we have successfully
      expanded our operations across 17 targeted states.  We have
      offices in eight states, each of which we believe has been staffed to
      accommodate anticipated premium growth.  We have grown our
      workforce 96.7% since December 31, 1999 from 244 employees to 480 at
      December 31, 2007.  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 while attempting to grow our
      premium.
   2
 Index
 ·
                Expand in our Existing
      Markets.  Our market share in each of our states as
      measured by 2006 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.
  ·
              Prudent Geographic
      Expansion.  While we are licensed in 25 states and the
      District of Columbia, we actively market our insurance in the 17 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, Iowa and Oklahoma, 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.
  ·
              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.
  ·
              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.
  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:
  ·
              quantifies
      the level of wage replacement to be
paid;
  ·
              determines
      the level of medical care required to be provided and the cost of
      permanent impairment; and
  ·
              specifies
      the options in selecting healthcare providers available to the injured
      employee or the employer.
   3
 Index
  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 31,2007
              
              
              2006
              
              
              2005(Dollars
      in thousands)Florida
              
              $
              63,160
              
              
              
              28.6
              %
              
              $
              100,635
              
              
              
              37.7
              %
              
              $
              108,995
              
              
              
              40.3
              %Wisconsin
              
              
              31,394
              
              
              
              14.2
              
              
              
              34,459
              
              
              
              12.9
              
              
              
              31,572
              
              
              
              11.7Texas
              
              
              27,531
              
              
              
              12.5
              
              
              
              30,241
              
              
              
              11.3
              
              
              
              25,234
              
              
              
              9.3Indiana
              
              
              18,864
              
              
              
              8.6
              
              
              
              26,193
              
              
              
              9.8
              
              
              
              32,954
              
              
              
              12.2Tennessee
              
              
              15,097
              
              
              
              6.8
              
              
              
              15,912
              
              
              
              6.0
              
              
              
              19,203
              
              
              
              7.1Georgia
              
              
              13,532
              
              
              
              6.1
              
              
              
              13,072
              
              
              
              4.9
              
              
              
              12,911
              
              
              
              4.8Illinois(1)
              
              
              10,091
              
              
              
              4.6
              
              
              
              7,932
              
              
              
              3.0
              
              
              
              4,665
              
              
              
              1.7Kentucky
              
              
              9,740
              
              
              
              4.4
              
              
              
              10,589
              
              
              
              4.0
              
              
              
              11,869
              
              
              
              4.4Virginia
              
              
              9,586
              
              
              
              4.3
              
              
              
              9,301
              
              
              
              3.5
              
              
              
              7,847
              
              
              
              2.9North
      Carolina(2)
              
              
              9,282
              
              
              
              4.2
              
              
              
              10,147
              
              
              
              3.8
              
              
              
              7,693
              
              
              
              2.8South
      Carolina
              
              
              7,734
              
              
              
              3.6
              
              
              
              7,629
              
              
              
              2.9
              
              
              
              6,808
              
              
              
              2.5Mississippi
              
              
              1,905
              
              
              
              0.9
              
              
              
              295
              
              
              
              0.1
              
              
              
              190
              
              
              
              0.1Other
      States
              
              
              2,649
              
              
              
              1.2
              
              
              
              422
              
              
              
              0.1
              
              
              
              390
              
              
              
              0.2Total
              
              $
              220,565
              
              
              
              100.0
              %
              
              $
              266,827
              
              
              
              100.0
              %
              
              $
              270,331
              
              
              
              100.0
              %
 
 (1)
              We
      were subject to a $9.0 million cap on written premiums in
      2005.  Effective January 1, 2006, the cap was
      removed.
  (2)
              We
      were subject to a $12.0 million cap on written premiums in early
      2005.  Effective July 6, 2005, the cap was
    removed.
  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.
   4
 Index
  We have
offices in 8 of the 17 targeted states in which we focus our operations, 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 six 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:
  ·
              the
      amount of the insured employer’s
payroll;
  ·
              the
      applicable premium rate, which varies with the nature of the employees’
      duties and the business of the employer;
and
  ·
              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 and Wisconsin, and to a much more limited extent in Georgia, Texas and
Virginia, 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:
  ·
              a
      “flat dividend,” which provides for a dividend payment as a specified
      percentage of the policy premium, which we offer only in
      Wisconsin;
  ·
              a
      “sliding dividend,” which provides for the dividend payment to be
      eliminated or increased depending on the loss ratio of the
      policy;
  ·
              a
      combination flat and sliding dividend, which we offer only in Wisconsin;
      and
  ·
              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.
  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:
  ·
              the
      individual policyholder’s loss
ratio;
   5
 Index
  ·
              the
      insurance subsidiary’s overall loss ratio;
and
  ·
              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 27.5% of our direct premiums
written in force in 2007 and represented 25.7% and 24.9% in 2006 and 2005,
respectively.  They represented 46.8%, 37.8%, and 36.8% of direct
premiums written in Florida, and 90.7%, 84.1%, and 86.4% 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:
  ·
              type
      of work conducted at the premises or work
  environment;
  ·
              on-site
      medical facilities;
  ·
              level
      of employee safety;
  ·
              use
      of safety equipment; and
  ·
              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, 2007, we marketed and sold our insurance products through
approximately 3,000 independent insurance agents operating in approximately 900
independent insurance agencies.  During 2007, 241 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 2007, 2006 or 2005.
  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.
   6
 Index
  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
                  
                  
                  2007
                  
                  
                  
                  2006
                  
                  
                  
                  2005
                  
                  
                  
                  2004
                  
                  
                  
                  2003
 Contracting
                
                
                35.7
                %
                
                
                40.2
                %
                
                
                39.8
                %
                
                
                39.1
                %
                
                
                39.0
                %Goods
      and Services
                
                
                31.7
                
                
                
                29.2
                
                
                
                29.0
                
                
                
                27.7
                
                
                
                28.1Manufacturing
                
                
                18.1
                
                
                
                17.4
                
                
                
                17.4
                
                
                
                18.5
                
                
                
                16.8Office
      and Clerical
                
                
                6.4
                
                
                
                6.0
                
                
                
                5.8
                
                
                
                5.9
                
                
                
                5.9Miscellaneous
                
                
                8.1
                
                
                
                7.2
                
                
                
                8.0
                
                
                
                8.8
                
                
                
                10.2Total
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %
 7
 Index
 
 The
following table sets forth representative businesses for each of the industry
groups listed above:
  Industry
      Classification
              Representative
      BusinessContracting
              artisan
      contractors (e.g., plumbers,
      electricians, painters and carpenters)Goods
      and Services
              retail
      stores
                restaurantsManufacturing
              component
      manufacturers for larger products such as gear, pump, automotive part and
      computer component manufacturersOffice
      and Clerical
              clerical
      office employees
                salespersons
                collectorsMiscellaneous
              drivers
                park
      employees
 
 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:
  ·
              employee
      hiring and screening;
  ·
              new
      employee orientation for safety;
  ·
              hazard
      identification, elimination or
control;
  ·
              development
      and implementation of drug- and alcohol-free
  workplaces;
  ·
              implementation
      of return to work programs for recovering
  employees;
  ·
              claims
      management; and
  ·
              care
      management.
  Loss
prevention services to our underwriters include:
  ·
              evaluation
      of risk and continued insurability of existing policyholders;
      and
  ·
              evaluation
      of risk and initial insurability of prospective
    policyholders.
  Loss
prevention services to our claims personnel include:
  ·
              assistance
      with return-to-work issues, including identification of light duty
      jobs;
  ·
              accident
      investigation; and
  ·
              job
      analysis.
  Our loss
prevention professionals conduct surveys of prospective policyholders’
operations to determine insurability of risks.
   8
 Index
  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.
  Choice of
medical providers for injured workers is determined by law in each state
jurisdiction.  In some states the injured worker is allowed their choice of
treating physician throughout the length of the claim.   In others the
employer/carrier directs the medical care choosing the treating physician. Yet,
in others the employer/carrier must provide an entire network of medical
professionals for the employee to pick from.
  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.
   9
 Index
  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:
  ·
              future
      claim payments and LAE in addition to case reserves due to unforeseen or
      unknown events;
  ·
              additional
      claim payments on closed claims;
  ·
              claims
      that have not yet been reported to us;
and
  ·
              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:
  ·
              historical
      and statistical information;
  ·
              inflation;
  ·
              legal
      developments;
  ·
              the
      regulatory environment;
  ·
              benefit
      levels;
  ·
              economic
      conditions;
  ·
              judicial
      administration of claims;
  ·
              general
      frequency and severity trends;
  ·
              medical
      costs; and
  ·
              other
      factors affecting the adequacy of loss
reserves.
   10
 Index
  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 Texas that have fixed or determinable future
payments.
  The
following table provides a reconciliation of the beginning and ending loss
reserves.
  2007
              
              
              2006Unpaid
      losses and LAE, gross of related reinsurance recoverables, at beginning of
      period
              
              $
              334,363
              
              
              $
              309,857Less
      reinsurance recoverables on unpaid losses and LAE at beginning of
      period
              
              
              72,296
              
              
              
              78,659Unpaid
      losses and LAE, net of related reinsurance recoverables, at beginning of
      period
              
              
              262,067
              
              
              
              231,198Add
      provision for losses and LAE, net of reinsurance, occurring
      in:Current
      period
              
              
              163,070
              
              
              
              177,841Prior
      periods
              
              
              (36,508
              )
              
              
              (14,171
              )Incurred
      losses during the current period, net of reinsurance
              
              
              126,562
              
              
              
              163,670Deduct
      payments for losses and LAE, net of reinsurance, occurring
    in:Current
      period
              
              
              52,974
              
              
              
              56,448Prior
      periods
              
              
              77,784
              
              
              
              76,353Payments
      for losses and LAE during the current period, net of
      reinsurance
              
              
              130,758
              
              
              
              132,801Unpaid
      losses and LAE, net of related reinsurance recoverables, at end of
      period
              
              
              257,871
              
              
              
              262,067Reinsurance
      recoverables on unpaid losses and LAE at end of period
              
              
              66,353
              
              
              
              72,296Unpaid
      losses and LAE, gross of reinsurance recoverables, at end of
      period
              
              $
              324,224
              
              
              $
              334,363
 
 We
experienced reserve redundancies of $36.5 million and $14.2 million during the
years ended December 31, 2007 and 2006, respectively.  In
addition to the redundancies, prior accident year losses were also reduced by
$1.4 million and $0.7 million, respectively, from the Florida Special
Disability Trust Fund (“SDTF”), during 2007 and 2006.  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 $0.4 million and $0.7 million, respectively, from South
Carolina’s fund in 2007 and 2006.
   11
 Index
  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, 2007.  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 1997 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.
  1997
              
              
              1998
              
              
              1999
              
              
              2000
              
              
              2001
              
              
              2002
              
              
              2003
              
              
              2004
              
              
              2005
              
              
              2006
              
              
              2007(Dollars
      in thousands)Net
      reserves for losses and loss adjustment expensesOriginally
      estimated
              
              
              67,872
              
              
              
              56,191
              
              
              
              43,432
              
              
              
              70,641
              
              
              
              114,273
              
              
              
              146,631
              
              
              
              156,695
              
              
              
              190,543
              
              
              
              231,198
              
              
              
              262,067
              
              
              
              257,871Net
      cumulative amounts paid as of:One
      year later
              
              
              30,576
              
              
              
              30,165
              
              
              
              9,220
              
              
              
              28,687
              
              
              
              51,514
              
              
              
              61,919
              
              
              
              59,322
              
              
              
              54,709
              
              
              
              76,352
              
              
              
              77,784Two
      years later
              
              
              43,982
              
              
              
              39,529
              
              
              
              15,334
              
              
              
              41,302
              
              
              
              71,328
              
              
              
              88,031
              
              
              
              81,043
              
              
              
              90,014
              
              
              
              109,470Three
      years later
              
              
              49,256
              
              
              
              35,995
              
              
              
              18,827
              
              
              
              46,860
              
              
              
              81,276
              
              
              
              101,937
              
              
              
              96,850
              
              
              
              105,526Four
      years later
              
              
              51,337
              
              
              
              35,062
              
              
              
              22,207
              
              
              
              50,281
              
              
              
              87,829
              
              
              
              108,504
              
              
              
              104,609Five
      years later
              
              
              48,422
              
              
              
              35,941
              
              
              
              22,740
              
              
              
              52,119
              
              
              
              89,691
              
              
              
              111,041Six
      years later
              
              
              48,169
              
              
              
              35,439
              
              
              
              23,135
              
              
              
              53,030
              
              
              
              90,748Seven
      years later
              
              
              47,038
              
              
              
              35,547
              
              
              
              23,505
              
              
              
              53,358Eight
      years later
              
              
              46,809
              
              
              
              35,731
              
              
              
              23,417Nine
      years later
              
              
              46,866
              
              
              
              35,633Ten
      years later
              
              
              46,635Net
      reserves re-estimated as of:One
      year later
              
              
              67,613
              
              
              
              55,445
              
              
              
              45,191
              
              
              
              81,707
              
              
              
              113,857
              
              
              
              145,613
              
              
              
              148,358
              
              
              
              165,851
              
              
              
              217,027
              
              
              
              225,559Two
      years later
              
              
              64,514
              
              
              
              56,429
              
              
              
              45,374
              
              
              
              73,017
              
              
              
              110,234
              
              
              
              133,298
              
              
              
              135,175
              
              
              
              165,511
              
              
              
              193,921Three
      years later
              
              
              64,679
              
              
              
              56,172
              
              
              
              40,973
              
              
              
              70,271
              
              
              
              104,074
              
              
              
              127,990
              
              
              
              137,132
              
              
              
              153,476Four
      years later
              
              
              64,749
              
              
              
              52,435
              
              
              
              39,615
              
              
              
              63,590
              
              
              
              101,011
              
              
              
              129,313
              
              
              
              131,501Five
      years later
              
              
              60,468
              
              
              
              50,102
              
              
              
              32,754
              
              
              
              61,389
              
              
              
              101,708
              
              
              
              125,547Six
      years later
              
              
              58,288
              
              
              
              43,371
              
              
              
              30,720
              
              
              
              61,906
              
              
              
              98,944Seven
      years later
              
              
              52,649
              
              
              
              41,825
              
              
              
              30,766
              
              
              
              59,191Eight
      years later
              
              
              51,377
              
              
              
              41,655
              
              
              
              28,072Nine
      years later
              
              
              51,190
              
              
              
              39,119Ten
      years later
              
              
              49,209Net
      cumulative redundancy
              
              
              18,663
              
              
              
              17,072
              
              
              
              15,360
              
              
              
              11,450
              
              
              
              15,329
              
              
              
              21,084
              
              
              
              25,194
              
              
              
              37,067
              
              
              
              37,277
              
              
              
              36,508
              
              
              
              –Gross
      reserves—December 31
              
              
              86,511
              
              
              
              117,520
              
              
              
              133,803
              
              
              
              151,693
              
              
              
              198,954
              
              
              
              227,714
              
              
              
              251,122
              
              
              
              297,698
              
              
              
              309,857
              
              
              
              334,363
              
              
              
              324,224Reinsurance
      recoverables
              
              
              18,639
              
              
              
              61,329
              
              
              
              90,371
              
              
              
              81,052
              
              
              
              84,681
              
              
              
              81,083
              
              
              
              94,427
              
              
              
              107,155
              
              
              
              78,659
              
              
              
              72,296
              
              
              
              66,353Net
      reserves—December 31
              
              
              67,872
              
              
              
              56,191
              
              
              
              43,432
              
              
              
              70,641
              
              
              
              114,273
              
              
              
              146,631
              
              
              
              156,695
              
              
              
              190,543
              
              
              
              231,198
              
              
              
              262,067
              
              
              
              257,871Gross
      re-estimated reserves
              
              
              71,577
              
              
              
              82,388
              
              
              
              104,052
              
              
              
              151,078
              
              
              
              172,513
              
              
              
              195,141
              
              
              
              217,241
              
              
              
              245,763
              
              
              
              256,035
              
              
              
              287,042Re-estimated
      reinsurance recoverable
              
              
              22,368
              
              
              
              43,269
              
              
              
              75,980
              
              
              
              91,887
              
              
              
              73,569
              
              
              
              69,594
              
              
              
              85,740
              
              
              
              92,287
              
              
              
              62,114
              
              
              
              61,483Net
      re-estimated reserves
              
              
              49,209
              
              
              
              39,119
              
              
              
              28,072
              
              
              
              59,191
              
              
              
              98,944
              
              
              
              125,547
              
              
              
              131,501
              
              
              
              153,476
              
              
              
              193,921
              
              
              
              225,559
   12
 Index
  1997
                
                
                1998
                
                
                1999
                
                
                2000
                
                
                2001
                
                
                2002
                
                
                2003
                
                
                2004
                
                
                2005
                
                
                2006
                
                
                2007(Dollars
      in thousands)Gross
      reserves for losses and loss adjustment expensesOriginally
      estimated
                
                
                86,511
                
                
                
                117,520
                
                
                
                133,803
                
                
                
                151,693
                
                
                
                198,954
                
                
                
                227,714
                
                
                
                251,122
                
                
                
                297,698
                
                
                
                309,857
                
                
                
                334,363
                
                
                
                324,224
 Gross
      cumulative amounts paid as of:One
      year later
                
                
                34,118
                
                
                
                42,298
                
                
                
                45,026
                
                
                
                68,631
                
                
                
                64,480
                
                
                
                71,578
                
                
                
                75,217
                
                
                
                88,128
                
                
                
                82,427
                
                
                
                81,583Two
      years later
                
                
                49,763
                
                
                
                60,676
                
                
                
                61,309
                
                
                
                91,113
                
                
                
                93,975
                
                
                
                103,504
                
                
                
                115,539
                
                
                
                129,507
                
                
                
                119,344Three
      years later
                
                
                56,414
                
                
                
                60,926
                
                
                
                65,837
                
                
                
                105,642
                
                
                
                109,068
                
                
                
                125,748
                
                
                
                136,039
                
                
                
                148,817Four
      years later
                
                
                60,259
                
                
                
                60,561
                
                
                
                76,254
                
                
                
                112,271
                
                
                
                122,011
                
                
                
                136,685
                
                
                
                147,657Five
      years later
                
                
                58,345
                
                
                
                66,720
                
                
                
                78,089
                
                
                
                116,989
                
                
                
                127,115
                
                
                
                142,856Six
      years later
                
                
                62,756
                
                
                
                66,221
                
                
                
                80,255
                
                
                
                119,168
                
                
                
                131,160Seven
      years later
                
                
                61,393
                
                
                
                67,550
                
                
                
                81,424
                
                
                
                120,923Eight
      years later
                
                
                62,208
                
                
                
                68,112
                
                
                
                82,094Nine
      years later
                
                
                62,030
                
                
                
                67,960Ten
      years later
                
                
                61,202Gross
      reserves re-estimated as of:One
      year later
                
                
                94,628
                
                
                
                116,915
                
                
                
                130,266
                
                
                
                176,953
                
                
                
                192,111
                
                
                
                224,735
                
                
                
                241,602
                
                
                
                270,833
                
                
                
                287,863
                
                
                
                287,042Two
      years later
                
                
                91,504
                
                
                
                115,139
                
                
                
                126,840
                
                
                
                166,521
                
                
                
                189,484
                
                
                
                207,293
                
                
                
                230,932
                
                
                
                265,231
                
                
                
                256,035Three
      years later
                
                
                92,157
                
                
                
                105,894
                
                
                
                117,039
                
                
                
                166,918
                
                
                
                179,673
                
                
                
                206,031
                
                
                
                229,397
                
                
                
                245,763Four
      years later
                
                
                90,727
                
                
                
                97,746
                
                
                
                119,491
                
                
                
                157,125
                
                
                
                180,844
                
                
                
                205,169
                
                
                
                217,241Five
      years later
                
                
                83,783
                
                
                
                97,881
                
                
                
                109,879
                
                
                
                156,240
                
                
                
                180,516
                
                
                
                195,141Six
      years later
                
                
                84,464
                
                
                
                89,001
                
                
                
                108,916
                
                
                
                155,635
                
                
                
                172,513Seven
      years later
                
                
                77,643
                
                
                
                87,145
                
                
                
                108,109
                
                
                
                151,078Eight
      years later
                
                
                75,596
                
                
                
                85,960
                
                
                
                104,052Nine
      years later
                
                
                74,344
                
                
                
                82,388Ten
      years later
                
                
                71,577Gross
      cumulative redundancy (deficiency):
                
                
                14,934
                
                
                
                35,132
                
                
                
                29,751
                
                
                
                615
                
                
                
                26,441
                
                
                
                32,573
                
                
                
                33,881
                
                
                
                51,935
                
                
                
                53,822
                
                
                
                47,321
                
                
                
                –
  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, 2007, an additional $0.1 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 $2.3 million, $1.4 million and $2.2 million
during 2007, 2006 and 2005, 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 business, which would otherwise cause sudden and unpredictable
changes in net income and capital of our insurance subsidiaries.
   13
 Index
  Like
other insurers, we have managed our risks in part through excess of loss and
quota share reinsurance agreements.  Reinsurance is used
principally:
  ·
              to
      reduce net liability on individual
risks;
  ·
              to
      provide protection for catastrophic losses;
and
  ·
              to
      stabilize underwriting results.
  Excess
of Loss Reinsurance
  Effective
January 1, 2007, 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, Max Re, rated “A-” by A.M. Best, AXA Re, 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, Brit Syndicate 2987, rated “A” by A.M. Best, and
Safety National Casualty Corporation, rated “A” by A.M. Best. The premium
for this agreement is equal to a fixed percentage of the direct premiums earned
subject to the agreement.
  Effective
January 1, 2007, 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, AXA Re, rated “A” by A.M. Best, IOA/Catlin  rated
“A” by A.M. Best,  Max Re Ltd., rated “A-” by A.M. Best, Odyssey AM
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
Syndicate 2987, 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 maximum loss on any one life ceded under the treaty
was $10.0 million, up from $5.0 million in the prior year.  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, 2008, we entered into new excess of loss and catastrophe
reinsurance treaties that are structured in various layers.  These
treaties are substantially comparable to our 2007 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 2008 reinsurance costs from our 2007 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, 2007 or 2008, 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.
   14
 Index
  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:
  ·
              our
      net liability on individual risks would
  increase;
  ·
              we
      would have greater exposure to catastrophic
  losses;
  ·
              our
      underwriting results would be subject to greater variability;
      and
  ·
              our
      underwriting capacity would be
reduced.
  Certain
information regarding our ceded reinsurance recoverable is provided in the
following table:


As
      of December 31, 2007Reinsurance
      Carrier
                
                Rating(1)
                
                Paid
      Losses
                
                
                Unpaid
      Losses
                
                
                Total(Dollars
      in thousands)Aspen
      Insurance UK, Ltd.
                
                
                A
                
                
                $
                (15
                )
                
                $
                2,033
                
                
                $
                2,018Continental
      Casualty Company
                
                
                A
                
                
                
                1,390
                
                
                
                30,828
                
                
                
                32,218Employers
      Reinsurance Corporation
                
                
                A
                +
                
                
                (11
                )
                
                
                1,991
                
                
                
                1,980Everest
      Reinsurance Company
                
                
                A
                +
                
                
                25
                
                
                
                3,618
                
                
                
                3,643Hannover
      Ruckversicherungs-Aktiengesellschaft
                
                
                A
                
                
                
                (26
                )
                
                
                4,365
                
                
                
                4,339Max
      Re Ltd.
                
                
                A
                -
                
                
                (44
                )
                
                
                4,434
                
                
                
                4,390Munich
      Reinsurance Amer Inc.
                
                
                A
                +
                
                
                13
                
                
                
                8,007
                
                
                
                8,020National
      Union Fire Ins. Co. of Pittsburg
                
                
                A
                +
                
                
                –
                
                
                
                2,433
                
                
                
                2,433Swiss
      Reinsurance America Corporation
                
                
                A
                +
                
                
                105
                
                
                
                5,214
                
                
                
                5,319All
      others
                
                
                
                
                
                
                17
                
                
                
                3,430
                
                
                
                3,447Total
                
                
                
                
                
                $
                1,454
                
                
                $
                66,353
                
                
                $
                67,807


(1)
              A.M.
      Best’s highest financial strength ratings for insurance companies are
      “A++” and “A+” (superior) and “A” and “A-”
  (excellent).
   15
 Index
  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
2007, the proportions under the pooling agreement are as follows:
  ·
              AmCOMP
      Preferred—63%
  ·
              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:
  ·
              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.
  ·
              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 18 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.
  ·
              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 16 years of industry
      experience, conduct on-site evaluations for most of our policyholders
      annually.
  ·
              Proactive Claims
      Management.  We provide our policyholders with an active
      claims management program and strive for rapid closure of
      claims.  As of December 31, 2007, we had closed 95.6 %,
      98.3 % and 99.2% of all reported claims for accident years 2006, 2005 and
      2004, 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 26 years of nursing
  experience.
  ·
              State Focused
      Operations.  Our core operating philosophy is “local
      people doing business with local people.”  We currently focus on
      17 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.
   16
 Index
  ·
              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 1997 to 2006 have proven to be redundant as developed
      through December 31, 2007, meaning that our reserves as originally
      estimated were higher than what our experience as of December 31, 2007
      indicates.
  ·
              Focus on Small to Mid-Sized
      Employers.  We believe that we have achieved significant
      scale and profitability, throughout our 26-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.
  ·
              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 32 years of insurance industry experience and
      25 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, FCCI Insurance Group
and recently FFVA Mutual Insurance Company and FHM Insurance Company, 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, Indiana Insurance
and Selective Insurance Company.  In Tennessee, our main competition
comes from FCCI Insurance Group, FFVA Mutual Insurance Company, Accident Fund,
Bridgefield and national/regional multi-line carriers.
  Competition
in the workers’ compensation insurance field is based on many factors,
including, but not limited to:
  ·
              pricing
      (either through premium rates or
dividends);
  ·
              level
      of service;
  ·
              insurance
      ratings;
  ·
              capitalization
      levels;
  ·
              quality
      of care management services;
  ·
              the
      ability to reduce net loss ratios;
  ·
              effective
      loss prevention; and
  ·
              the
      ability to reduce claims expenses.
   17
 Index
  In the 17
states in which we currently focus our operations, aggregate workers’
compensation direct premiums written totaled $22.1 billion in
2006.  Approximately 38%, or $8.4 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 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 involves:
  ·
              standards
      of solvency, including risk-based capital
  measurements;
  ·
              restrictions
      on the nature, quality and concentration of
  investments;
  ·
              restrictions
      on the types of terms that we can include in the insurance policies we
      offer;
  ·
              mandates
      that may affect wage replacement and medical care benefits paid under the
      workers’ compensation system;
  ·
              procedures
      for adjusting claims, which can affect the ultimate amount for which a
      claim is settled;
  ·
              restrictions
      on the way rates are developed and premiums are
  determined;
  ·
              the
      manner in which general agencies may be
  appointed;
  ·
              required
      methods of accounting for regulatory
reporting;
  ·
              establishment
      of reserves for unearned premiums, losses and other
    purposes;
  ·
              limitations
      on our ability to transact business with
  affiliates;
  ·
              mergers,
      acquisitions and divestitures involving our insurance
      subsidiaries;
  ·
              licensing
      requirements and approvals that affect our ability to do
      business;
  ·
              compliance
      with medical privacy laws;
  ·
              potential
      assessments for the closure of covered claims under insurance policies
      issued by impaired, insolvent or failed insurance companies;
      and
  ·
              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.
   18
 Index
  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 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 larger of 10% of
surplus as of the preceding December 31st or 100% of its prior year’s net
income, not including realized capital gains, or net investment income plus a
three-year carryforward.  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, 2007, our
insurance subsidiaries were authorized to pay approximately $17.6 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, 2007, on a statutory combined basis, were
1.6-to-1 and 1.6-to-1 on a gross and net premiums written basis,
respectively.
   19
 Index
  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, 2007, the total adjusted
capital for AmCOMP Preferred and AmCOMP Assurance was 1,619% and 1,871% over the
authorized control level, respectively.
  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.
  ·
              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.
  ·
              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.
  ·
              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.
  ·
              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, 2007, AmCOMP Preferred and AmCOMP Assurance had one ratio
outside the usual range, as set forth in the following table.
  Ratio
              
              Usual
      Range
              
              Actual
                Results
              
              Reason for Unusual
      ResultsAmCOMP
      PreferredInvestment
      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.
   20
 Index
  Ratio
              
              Usual
      Range
              
              Actual
                Results
              
              Reason for Unusual
      ResultsAmCOMP
      AssuranceInvestment
      Yield
              
              3.0%
      to 6.5%
              
              2.6%
              
              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.
 
 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 acquirer is not going to participate in
management or control.If
the acquirer is planning on participating in management or control, it must
obtain prior approval from the Florida OIR for any acquisition exceeding
5%.  In connection with the proposed merger, Employers has filed a
Form A with the Florida OIR requesting the required approvals, which request is
currently pending.
  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.  No
filings with state insurance departments, other than the filing of the Form A
with the Florida OIR referenced above, are required to be made in connection
with the proposed merger with Employers.
  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.
   21
 Index
  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 domestic terrorism.  In addition, such losses may
not 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 would reimburse 90% of the insurer’s loss, up to the
insurer’s proportionate share of the $100.0 billion.  Insurers
would not be liable for payments for any portion of losses in excess of the
$100.0 billion annual limit.
  In
December 2005, President 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 was 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, and Federal reinsurance is only
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.
  In 2007,
the Terrorism Risk Insurance Revision and Extension Act of 2007 (the “2007 Act”)
was signed into law.  The 2007 Act extended the 2002 Act through
December 31, 2014.  Effective January 1, 2008, the definition of
terrorism includes domestic acts of terrorism.  In addition, under the
2007 Act, insurers must offer coverage for losses due to terrorist acts in all
of their commercial property and casualty insurance policies.  The
2007 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, 2007, we had 480 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
              
              PositionFred
      R. Lowe
              73
              
              Chairman
      of the Board and Director, President and Chief Executive
      OfficerDebra
      Cerre-Ruedisili
              52
              
              Executive
      Vice President, Chief Operating Officer and DirectorKumar
      Gursahaney
              51
              
              Senior
      Vice President, Chief Financial Officer and TreasurerGeorge
      Harris
              59
              
              Senior
      Vice President, General CounselTimothy
      J. Spear
              41
              
              President,
      Mid-Atlantic RegionLisa
      Perrizo
              42
              
              President,
      Midwest RegionFrank
      Pinson
              53
              
              President,
      Southern RegionColin
      Williams
              56
              
              President,
      Texas Region
   22
 Index
 
 Fred R. Lowehas 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
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-Ruedisilihas
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 Gursahaneyjoined
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 Harrisjoined AmCOMP
in January 2007 as senior vice president and general counsel. Mr. Harris has
practiced law in Palm Beach County, Florida for 33 years, with an emphasis in
corporate, real property, banking and insurance law, primarily representing
businesses, financial institutions and insurance companies. For the 20 years
prior to joining AmCOMP, 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 15 years of experience in the workers’ compensation
industry.  Mr. Spear earned a B.S. in occupational safety from
the University of Wisconsin-Whitewater.
  Lisa Perrizohas 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 18 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.
   23
 Index
  Frank Pinsonjoined 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, 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 30 years of
experience in the insurance industry. He has a B.S. degree in business
administration from Trevecca College, Nashville, Tennessee.
  Colin Williamshas 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 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 100 F Street, N.E., 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.
   24
 Index
  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
information provided in this Item 1A is applicable to the period prior to the
closing of the merger transaction with Employers.  Should such
transaction not be consummated for any reason, the risk factors described would
continue to be applicable to us, our business, our industry and our common
stock.  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 Pending Merger
 Completion
of the proposed merger with Employers is subject to various
conditions.  As a result, we cannot assure you that the proposed
merger will be completed.
 The
completion of the proposed merger with Employers is subject to various
conditions, including approval of the Merger Agreement by our stockholders,
receipt of all authorizations, approvals and permits required to be obtained
from any governmental authority in order to consummate the merger (without the
imposition of a burdensome condition, as defined in the Merger Agreement),
absence of any law or order that has the effect of making the merger illegal or
otherwise preventing or prohibiting consummation of the merger and the absence
of any material adverse effect upon us or our business.  We currently
expect the merger to close by the end of the second quarter of
2008.  However, it is possible that factors outside our control could
require the parties to complete the merger at a later time or not to complete it
at all.  If the transaction is not completed, then we expect that our
current management, under the direction of the Board of Directors, will continue
to manage us.
  Failure
to complete the proposed merger with Employers could negatively impact our
ability to operate our business.
  Should
the merger fail to close, our business could be negatively
impacted.  Agents and policyholders who would prefer to deal with a
carrier rated by A.M. Best may choose to take their business
elsewhere.  Additionally, should employees choose to leave as result
of the announced merger, we may be unable to replace them on a timely basis or
at all.  The diversion of management’s attention from our day-to-day
business and the unavoidable disruption to our business during the period before
completion of the merger may make it difficult for us to maintain our financial
and market position and could have a material adverse impact on our financial
condition and results of operation.
  Failure
to complete the proposed merger with Employers could have a material adverse
effect on the market price of our common stock.
  Under the
Merger Agreement, each issued and outstanding share of our common stock, other
than dissenting shares or shares that we own as treasury stock, or shares owned
by Employers or Merger Sub, will be converted into the right to receive $12.50
per share in cash.  Should the merger fail to close, our stock price
may fall to the extent that the current market price of our common stock
reflects market assumptions that the merger will be completed and the premium
implied by the merger consideration will be realized.  As a result,
stockholders may be unable to sell their shares at a price near the $12.50 that
would be received in the merger.
 
 In
certain circumstances under the Merger Agreement, we are required to pay
Employers a termination fee of $8 million, and any such payment could have a
material adverse effect on our financial condition and results of
operations.  In addition, if the transaction with Employers does not
occur, there can be no assurance that we will be able to find another acquirer
willing to pay an equivalent or a price better than the price to be paid by
Employers under the Merger Agreement.
 
 In
certain circumstances, the Merger Agreement requires us to pay Employers a
termination fee of $8 million in cash.  Employers and Merger Sub may
also be entitled to recover additional damages and to require specific
performance of the Merger Agreement.  If the transaction with
Employers does not occur, there can be no assurance that we will be able to find
another acquirer willing to pay an equivalent or a price better than the price
to be paid by Employers under the Merger Agreement.  Should the Merger
Agreement be terminated in circumstances under which we would be required to pay
Employers the termination fee and/or costs and expenses, such payment(s) could
have a material adverse effect on our financial condition and results of
operations.
   25
 Index
 
 The
Merger Agreement contains restrictive covenants that may limit our ability to
respond to changes in market conditions or pursue business
opportunities.
 
 The
Merger Agreement contains restrictive covenants that limit our ability to, among
other things:
 
 ·
              authorize
      for issuance, issue, grant, sell, pledge, dispose of or propose to issue,
      grant, sell, pledge or dispose of any shares of, or any options, warrants,
      commitments, subscriptions or rights of any kind to acquire or sell any
      shares of, our capital stock or other securities or equity interests or
      any indebtedness of ours having voting rights or that is convertible or
      exchangeable into securities having such rights, including any securities
      convertible into or exchangeable for shares of stock of any class and any
      other equity-based awards, except for the issuance of shares of common
      stock pursuant to the exercise of options outstanding on the date of the
      Merger Agreement and set forth in the schedules to the Merger Agreement in
      accordance with their present
terms;
 
 ·
              incur,
      create, assume, prepay or otherwise become liable for any indebtedness
      (directly, contingently or otherwise), make a loan or advance to or
      investment in any third party, or guarantee or endorse any indebtedness,
      liability or obligation of any person, except for indebtedness incurred
      under our existing credit facilities in the ordinary course of business
      consistent with past practice in an aggregate principal amount not to
      exceed $250,000;
 
 ·
              increase
      the wages, salaries, bonus, compensation or other benefits of any of our
      or our subsidiaries’ current or former consultants, officers, directors or
      employees, or enter into, establish, amend or terminate any of our
      employee benefit plans or any other employment, consulting, retention,
      change in control, collective bargaining, bonus or other incentive
      compensation, profit sharing, health or other welfare, stock option or
      other equity or equity-related, pension, retirement, consulting, vacation,
      severance, separation, termination, deferred compensation, fringe,
      perquisite, or other compensation or benefit plan, policy, program,
      agreement, trust, fund or other arrangement with, for or in respect of any
      current or former consultant, officer, director or employee, in each case
      other than as required by applicable law or pursuant to the terms of any
      of our employee benefit plans in effect on the date of the Merger
      Agreement, or, solely with respect to increases in wages or salaries of
      employees who are not officers or directors, in the ordinary course of
      business consistent with past
practice;
 
 ·
              modify
      or amend in any material manner, terminate or waive or assign any material
      right under any of our material contracts or enter into any contract that
      would be material to us with a term longer than one year that cannot be
      terminated without payment of a material penalty and upon notice of 60
      days or less, in each case other than in the ordinary course of business
      consistent with past practice;
 
 ·
              make
      any capital expenditures;
 
 ·
              voluntarily
      incur any material liability or obligation (whether absolute, accrued,
      contingent or otherwise) other than in the ordinary course of business
      consistent with past practice;
 
 ·
              sell,
      lease, license, transfer, exchange or swap, mortgage or otherwise pledge
      or encumber (including securitizations), or otherwise dispose of any
      material portion of our properties, assets or
  rights;
 
 ·
              enter
      into any new reinsurance transaction as assuming or ceding insurer (a)
      that does not contain market cancellation, termination and commutation
      provisions or (b) that adversely changes our or our subsidiaries’
      reinsurance profile on a consolidated basis outside of the ordinary course
      of business consistent with past practice;
and
   26
 Index
 ·
                alter
      or amend in any material respect any existing underwriting, claims
      handling, loss control, investment, actuarial, financial reporting or
      accounting practices, guidelines or policies (including compliance
      policies) or any material assumption underlying an actuarial practice or
      policy, except as may be required by generally accepted accounting
      principles, applicable statutory accounting practices, any governmental
      authority or applicable law.
 Although
the Merger Agreement provides that we may obtain Employers’ prior written
consent to otherwise prohibited actions, there can be no assurance that
Employers will grant such consent.  The requirement that we comply
with these provisions prior to the closing of the merger may hinder our ability
to react to changes in market conditions or take advantage of business
opportunities, which could have a material adverse effect on our financial
condition and results of operations.
  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, 2007, we carried a total of $67.8 million of reinsurance
recoverables for paid and unpaid losses and LAE, representing 42.9% 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
$67.8 million in reinsurance recoverables, $1.5 million is the current
recoverable on paid losses and $66.3 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, 2007 was $32.2
million owed to us by Continental Casualty Company, a subsidiary of CNA
Financial Corporation, representing 20.3% of our total stockholders’ equity as
of that date.  Of the $32.2 million, $1.4 million was the
current recoverable on paid losses.  The balance of $30.8 million
is recoverable from Continental Casualty Company on losses that may be paid by
us in the future and therefore is not currently due.
   27
 Index
  We also
have a net outstanding and past due claims receivable under a claims
administration contact in the amount of approximately $2.1 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, we will write off that amount.
  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 2007
and 2006, we experienced redundancies in our reserves for prior periods of $36.5
million and $14.2 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 and
subsequent accident years.  Our reserves may not develop as favorably
in the future as they 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 2007, we wrote 28.6% of our direct written premiums in
Florida and 14.2% 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.
   28
 Index
  On
October 29, 2007, NCCI submitted an amended filing calling for a statewide
decrease of 18.4%, which was approved by the Florida OIR on October 31,
2007.  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, 2008.  The
effect of the approved decrease cannot currently be ascertained.  If
the 2008 premium decrease had been in effect in 2007, our direct premiums
written would have declined by $11.6 million, our Florida net loss ratio
would have increased by 4.8% and our company-wide net loss ratio would have
increased by 1.6%.  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.
  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
17 states on which we focus our operations 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
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., 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, Indiana Insurance Company and Selective Insurance
Company.  In Tennessee, our main competition comes from FCCI Insurance
Group, FFVA Mutual Insurance Company, Accident Fund, Bridgefield and national
/regional multi-line carriers.  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.
   29
 Index
  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.
  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 17 states in which focus our
operations.  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 “BBBq” by Fitch Ratings on
an unsolicited basis.  A rating of “BBBq” is the 4th highest of 7
Q-IFS rating levels used by Fitch and indicates that the insurer is viewed as
possessing good capacity to meet policyholder and contract obligations based
solely on their stand-alone publicly available financial statement
information.  Risk factors are somewhat high, and the impact of any
adverse business and economic factors is expected to be material, yet
manageable.  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.
   30
 Index
  Our
geographic concentration ties our performance to business, economic and
regulatory conditions in certain states.
  Our
business is currently concentrated in Florida (28.6% of 2007 direct premiums
written), Wisconsin (14.2% of 2007 direct premiums written), Texas (12.5% of
2007 direct premiums written), Indiana (8.6% of 2007 direct premiums written),
Tennessee (6.8% of 2007 direct premiums written) and Georgia (6.1% of 2007
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 2007, the Florida OIR
approved an overall average 18.4% decrease in premium rates for all workers’
compensation insurance policies written by Florida licensed insurers in
2008.  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.
  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.
   31
 Index
  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
primarily to protect policyholders and their employees, not the stockholders of
AmCOMP.  Regulations vary from state to state, but typically address
or include:
  ·
              standards
      of solvency, including risk-based capital
  measurements;
  ·
              restrictions
      on the nature, quality and concentration of
  investments;
  ·
              restrictions
      on the types of terms that we can include in the insurance policies we
      offer;
  ·
              mandates
      that may affect wage replacement and medical care benefits paid under the
      workers’ compensation system;
  ·
              procedures
      for adjusting claims, which can affect the ultimate amount for which a
      claim is settled;
  ·
              restrictions
      on the way rates are developed and premiums are
  determined;
  ·
              the
      manner in which general agencies may be
  appointed;
  ·
              required
      methods of accounting for regulatory
reporting;
  ·
              establishment
      of reserves for unearned premiums, losses and other
    purposes;
  ·
              limitations
      on our ability to transact business with
  affiliates;
  ·
              mergers,
      acquisitions and divestitures involving our insurance
      subsidiaries;
  ·
              licensing
      requirements and approvals that affect our ability to do
      business;
  ·
              compliance
      with medical privacy laws;
  ·
              potential
      assessments for the settlement of covered claims under insurance policies
      issued by impaired, insolvent or failed insurance companies;
      and
  ·
              the
      amount of dividends that our insurance subsidiaries may pay to us, the
      parent holding company.
   32
 Index
  Stock
insurance companies are subject to Florida statutes related to excess profits
for workers’ compensation insurance companies.  Florida 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 “Florida
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 Florida excess profits.  As of December 31, 2007,
$0.5 million was accrued for Florida excessive profits expected to be paid in
the future.
  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 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 0.2% and 2.0% of direct premiums written.  We recorded an
estimate of $3.5 million, and $5.7 million for our expected liability for
guaranty fund assessments at December 31, 2007, and 2006,
respectively.  These liabilities were offset by related assets for
expected recoveries in the form of premium tax credits in the amount of $1.5
million, and $2.4 million at December 31, 2007, and 2006,
respectively.  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
second injury fund assessments was $6.7 million in 2007 and $8.3 million in
2006.  Our collections from these funds were $2.3 million in 2007 and
$1.4 million in 2006.  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.  During 2007, the second injury fund
assessment rate in South Carolina decreased to 13.9% on losses.  The
impact of this rate change was to increase 2007 pre-tax income by $1.8
million.  This is just one example of the impact of assessment rate
changes on pre-tax income.  Future rate increases or decreases related
to material assessments will lead to volatility in earnings in the period in
which the rate change occurs.
   33
 Index
  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.
  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 29, 2007, NCCI submitted an amended filing calling for a statewide
decrease of 18.4%, which was approved by the Florida OIR on October 31,
2007.  The new rates apply to all new and renewal policies as of
January 1, 2008.  The effect of the approved decrease cannot currently
be ascertained.  If the 2008 premium decrease had been in effect in
2007, our direct premiums written would have declined by $11.6 million, our
Florida net loss ratio would have increased by 4.8% and our company-wide net
loss ratio would have increased by 1.6%.  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.
   34
 Index
  Adverse
economic conditions for the construction industry across the states in which we
do business could also adversely affect our business, as approximately 35% of
our business in 2007 came 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 derived approximately 30% of our
business from the goods and services industry and approximately 20% of our
business from the manufacturing industry in 2007.  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 2008, 2007 and 2006, our excess of loss reinsurers
assumed liability on each loss occurrence up to $30.0 million, 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.
  We
have reduced our use of excess of loss reinsurance.  The greater risk
we have retained could result in losses.
  For
policies effective January 1, 2005 or later, we maintained excess of loss
reinsurance coverage for the layer of loss occurrences in excess of
$2.0 million.  Lower layers of excess of loss reinsurance were
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, 2007, and
2008.  As a result of the reduction of excess of loss reinsurance
purchased, we have reduced 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.
   35
 Index
  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:
  ·
              competition;
  ·
              rising
      levels of loss costs that we cannot anticipate at the time we price our
      products;
  ·
              volatile
      and unpredictable developments, including man-made or natural catastrophes
      or terrorist attacks;
  ·
              changes
      in the level of reinsurance capacity and capital
  capacity;
  ·
              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;
  ·
              changes
      in the regulatory or legal framework governing the worker’s compensation
      system;
  ·
              premium
      rate levels fixed by regulators;
and
  ·
              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 returned during 2006 and 2007, 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 2007, the Florida OIR
approved an overall average 18.4% decrease in premium rates for all workers’
compensation insurance policies written by all Florida licensed insurance
carriers in 2008.  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 2008.  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.
   36
 Index
  Investigations
into insurance and reinsurance practices could cause volatility in our stock and
adversely affect our business.
  We 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.  The 2007 Act further extended the 2005 Act for seven
additional years to December 31, 2014.
  Under the
2007 Act, insurers must offer coverage for losses due to terrorist acts in all
of their commercial property and casualty insurance policies.  The
2007 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.  The failure to extend the 2007
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.
   37
 Index
  Risks
Related to our Common Stock
  Your
ability to influence corporate decisions may be limited because our principal
stockholders beneficially own approximately 20% of our common
stock.
  Our
principal stockholders, including senior management, directors and their
affiliates, beneficially own, in the aggregate, approximately 20% of our common
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:
  ·
              variations
      in our quarterly operating results;
  ·
              changes
      in operating and stock performance of similar
  companies;
  ·
              changes
      in earnings estimates and market price targets by securities
      analysts;
  ·
              investor
      perception of the workers’ compensation insurance industry and of our
      company;
  ·
              results
      of operations that vary from those expected by securities and other market
      analysts and investors;
  ·
              future
      sales of our securities;
  ·
              litigation
      developments;
  ·
              regulatory
      actions;
  ·
              departures
      of key personnel; and
  ·
              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.
   38
 Index
  Future
sales of our common stock, or the possibility or perception that such future
sales might occur, may depress its price.
  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 15,290,181
shares of our common stock outstanding as of February 28, 2008.  All
of these shares are freely transferable without restriction or further
registration under the Securities Act of 1933, as amended, except for the
2,677,239 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 connection with the proposed
merger, Employers has filed a Form A with the Florida OIR requesting the
required approvals, which request is currently pending.
  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:
  ·
              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;
  ·
              limiting
      the ability of our stockholders to call special meetings of
      stockholders;
  ·
              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
  ·
              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.
   39
 Index
  We
do not anticipate paying dividends on our capital stock in the foreseeable
future.
  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, we were required to comply with Section 404 of the
Sarbanes-Oxley Act by no later than December 31, 2007.  When
completing this process annually, 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
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
33,758 square feet in North Palm Beach, Florida.  We also lease a
total of approximately 69,264 square feet of office space in 9
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.
  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 2007.
   40
 Index
  PARTII
  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 SEC 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.
  2007
                  Price
      Range
                
                
                2006
                  Price
      RangeHigh
                
                
                Low
                
                
                High
                
                
                LowFirst
      Quarter (1)
                
                $
                11.85
                
                
                $
                9.66
                
                
                $
                9.65
                
                
                $
                8.80Second
      Quarter
                
                $
                10.92
                
                
                $
                8.75
                
                
                $
                10.54
                
                
                $
                9.50Third
      Quarter
                
                $
                10.04
                
                
                $
                7.32
                
                
                $
                10.34
                
                
                $
                8.75Fourth
      Quarter
                
                $
                10.48
                
                
                $
                8.91
                
                
                $
                11.22
                
                
                $
                9.15
  (1) The
stock prices for the first quarter 2006 reflect the period from the Company’s
initial public offering of February 10, 2006 through the end of the quarter,
March 31, 2006.
  As of
February 28, 2008, there were 15,290,181 shares of common stock issued and
outstanding held by 45 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 2007.
  Purchase
of Equity Securities
  On August
28, 2007, the Company announced a share repurchase program to acquire up to 1.5
million shares of the Company’s common stock. The program was intended to be
implemented through purchases made from time to time in either the open market
or through private transactions, in accordance with the SEC’s
requirements.  Repurchases under this authorization commenced in
August 2007, and were suspended in December 2007, in connection with the
potential acquisition of the Company by Employers.  As of February 28,
2008, 559,954 shares have been repurchased pursuant to this authorization at an
average cost of $9.76 per share.
  41
 Index
  Details
of the repurchase activity under the repurchase plan are a follows:
 
 2007:
              
              Total
      Number of
                Shares
      Repurchased
              
              
              Average
      Price Paid Per Share
              
              
              Cumulative
      Number of Shares Purchased as Part of a Publicly Announced
      Plan
              
              
              Maximum
      Number of Shares that May Yet be Purchased Under the PlanMonth
      #1 (August 28, 2007 - August 31, 2007)
              
              
              16,800
              
              
              $
              9.45
              
              
              
              16,800
              
              
              
              1,483,200Month
      #2 (September 1, 2007 - September 30, 2007)
              
              
              217,100
              
              
              $
              9.52
              
              
              
              233,900
              
              
              
              1,266,100Month
      #3 (October 1, 2007 - October 31, 2007)
              
              
              125,254
              
              
              $
              9.89
              
              
              
              359,154
              
              
              
              1,140,846Month
      #4 (November 1, 2007 - November 30, 2007)
              
              
              183,000
              
              
              $
              9.97
              
              
              
              542,154
              
              
              
              957,846Month
      #5 (December 1, 2007 - December 6, 2007)
              
              
              17,800
              
              
              $
              9.86
              
              
              
              559,954
              
              
              
              940,046Total
              
              
              559,954
              
              
              $
              9.76
              
              
              
              559,954
              
              
              
              940,046
 
  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, 2007. The plans are discussed
further in Note 15 to the Company’s Consolidated Financial Statements included
herein.
  Plan
      category
              
              Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                (a)
              
              Weighted-average
      exercise price of outstanding options, warrants and rights
                (b)
              
              Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))
                (c)Equity
      compensation plans approved bysecurity
      holders
              
              906,422
              
              $
      9.43
              
              174,892Equity
      compensation plans not approved by security holders
              
              –
              
              –
              
              –Total
              
              906,422
              
              $
      9.43
              
              174,892
   42
 Index
  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, 2007, 2006 and 2005 and the selected consolidated balance
sheet data as of December 31, 2007 and 2006 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, 2004 and 2003 and the selected consolidated
balance sheet data as of December 31, 2005, 2004, 2003 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 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(Dollars
      and shares in thousands, except per-share data)Statement
      of Operations Data:Revenues:Net
      premiums earned
              
              $
              229,349
              
              
              $
              266,456
              
              
              $
              256,603
              
              
              $
              181,186
              
              
              $
              164,287Net
      investment income
              
              
              20,102
              
              
              
              17,461
              
              
              
              10,798
              
              
              
              6,077
              
              
              
              4,803Net
      realized investment (loss) gain
              
              
              (473
              )
              
              
              (307
              )
              
              
              (385
              )
              
              
              982
              
              
              
              2,644Other
      income (loss)
              
              
              127
              
              
              
              333
              
              
              
              285
              
              
              
              332
              
              
              
              (2,464
              )(1)Total
      revenue
              
              $
              249,105
              
              
              $
              283,943
              
              
              $
              267,301
              
              
              $
              188,577
              
              
              $
              169,270Expenses:Losses
      and loss adjustment expenses(2)
              
              $
              126,562
              
              
              $
              163,670
              
              
              $
              143,663
              
              
              $
              119,121
              
              
              $
              109,518Policy
      acquisition expenses
              
              
              41,180
              
              
              
              49,547
              (3)
              
              
              51,508
              (4)
              
              
              19,499
              
              
              
              21,735Underwriting
      and other expenses
              
              
              36,014
              
              
              
              32,175
              
              
              
              34,447
              
              
              
              32,280
              
              
              
              30,244Dividends
      to policyholders
              
              
              11,334
              
              
              
              9,926
              
              
              
              8,612
              
              
              
              6,983
              
              
              
              5,796Interest
      expense
              
              
              3,717
              
              
              
              3,807
              
              
              
              2,960
              
              
              
              1,389
              
              
              
              410Total
      expenses
              
              $
              218,807
              
              
              $
              259,125
              
              
              $
              241,190
              
              
              $
              179,272
              
              
              $
              167,703Income
      before income taxes
              
              
              30,298
              
              
              
              24,818
              
              
              
              26,111
              
              
              
              9,305
              
              
              
              1,567Income
      tax expense
              
              
              11,462
              
              
              
              8,256
              
              
              
              9,326
              
              
              
              4,275
              
              
              
              632Net
      income
              
              $
              18,836
              
              
              $
              16,562
              
              
              $
              16,785
              
              
              $
              5,030
              
              
              $
              935Operating
      Data:Direct
      premiums written
              
              $
              220,565
              
              
              $
              266,827
              
              
              $
              270,331
              
              
              $
              260,173
              
              
              $
              231,083Gross
      premiums written
              
              
              225,545
              
              
              
              273,713
              
              
              
              277,095
              
              
              
              270,981
              
              
              
              239,484Net
      premiums written
              
              
              221,084
              
              
              
              264,788
              
              
              
              267,652
              
              
              
              217,472
              
              
              
              144,952Per Share
      Data:Earnings
      per shareBasic
              
              $
              1.20
              
              
              $
              1.15
              
              
              $
              3.13
              
              
              $
              0.94
              
              
              $
              0.17Diluted
              
              
              1.20
              
              
              
              1.11
              
              
              
              1.76
              
              
              
              0.53
              
              
              
              0.10Weighted
      average common shares outstandingBasic
              
              
              15,647
              
              
              
              14,452
              
              
              
              5,367
              
              
              
              5,368
              
              
              
              5,368Diluted
              
              
              15,656
              
              
              
              14,931
              
              
              
              9,562
              
              
              
              9,564
              
              
              
              9,562Selected Insurance
      Ratios:Net
      loss ratio(5)
              
              
              55.2
              %
              
              
              61.4
              %
              
              
              56.0
              %
              
              
              65.7
              %
              
              
              66.7
              %Net
      policy acquisition expense ratio(6)
              
              
              18.0
              
              
              
              18.6
              
              
              
              20.1
              
              
              
              10.8
              
              
              
              13.2Underwriting
      and other expense ratio(7)
              
              
              15.7
              
              
              
              12.1
              
              
              
              13.4
              
              
              
              17.8
              
              
              
              18.4Net
      combined ratio, excluding policyholder dividends(8)
              
              
              88.9
              %
              
              
              92.1
              %
              
              
              89.5
              %
              
              
              94.3
              %
              
              
              98.3
              %Dividend
      ratio(9)
              
              
              4.9
              
              
              
              3.7
              
              
              
              3.4
              
              
              
              3.9
              
              
              
              3.5Net
      combined ratio, including policyholder dividends(10)
              
              
              93.8
              %
              
              
              95.8
              %
              
              
              92.9
              %
              
              
              98.2
              %
              
              
              101.8
              %
   43
 Index
  As
      of December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(Dollars
      and shares in thousands, except per share data)Balance
      Sheet Data:AssetsCash
      and investments
              
              $
              454,199
              
              
              $
              436,775
              
              
              $
              338,546
              
              
              $
              265,407
              
              
              $
              183,884Premiums
      receivable—net
              
              
              88,486
              
              
              
              106,270
              
              
              
              104,522
              
              
              
              101,638
              
              
              
              96,818Reinsurance
      recoverables
              
              
              67,807
              
              
              
              75,360
              
              
              
              83,880
              
              
              
              115,870
              
              
              
              99,894Deferred
      policy acquisition costs
              
              
              19,116
              
              
              
              20,749
              
              
              
              19,413
              
              
              
              14,695
              
              
              
              4,902Deferred
      income taxes
              
              
              19,889
              
              
              
              21,613
              
              
              
              20,871
              
              
              
              17,646
              
              
              
              19,368Other
      assets
              
              
              19,666
              
              
              
              23,730
              
              
              
              22,455
              
              
              
              32,814
              
              
              
              52,506Total
      assets
              
              $
              669,163
              
              
              $
              684,497
              
              
              $
              589,687
              
              
              $
              548,070
              
              
              $
              457,372
 Liabilities
      and stockholders’ equityUnpaid
      losses and loss adjustment expenses
              
              $
              324,224
              
              
              $
              334,363
              
              
              $
              309,857
              
              
              $
              297,698
              
              
              $
              251,122Unearned
      and advance premiums
              
              
              102,672
              
              
              
              115,218
              
              
              
              115,574
              
              
              
              114,235
              
              
              
              102,804Notes
      payable
              
              
              36,464
              
              
              
              38,250
              
              
              
              40,036
              
              
              
              41,821
              
              
              
              11,607Other
      liabilities
              
              
              47,626
              
              
              
              57,378
              
              
              
              52,239
              
              
              
              35,981
              
              
              
              37,055Total
      liabilities
              
              
              510,986
              
              
              
              545,209
              
              
              
              517,706
              
              
              
              489,735
              
              
              
              402,588Preferred
      stock
              
              
              –
              
              
              
              –
              
              
              
              23,098
              
              
              
              23,098
              
              
              
              23,098Total
      stockholders’ equity
              
              
              158,177
              
              
              
              139,288
              
              
              
              71,981
              
              
              
              58,335
              
              
              
              54,784Total
      liabilities and stockholders’ equity
              
              $
              669,163
              
              
              $
              684,497
              
              
              $
              589,687
              
              
              $
              548,070
              
              
              $
              457,372
 
 (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,
      2007, 2006, 2005, 2004 and 2003 of $36.5 million, $14.2 million,
      $24.7 million, $8.3 million, and $1.0 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)
              Losses
      and LAE divided by net premiums earned, after the effects of
      reinsurance.
  (6)
              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.
  (7)
              Underwriting
      and other expenses not directly associated with policy acquisition divided
      by net premiums earned.
  (8)
              Sum
      of ratios referenced in footnotes 5, 6 and
7.
  (9)
              Dividends
      to policyholders divided by net premiums
earned.
  (10)
              Sum
      of ratios computed in footnotes 8 and
9.
  
 44
 Index
  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 as an insurance carrier in 25 states and
the District of Columbia, but currently focus our resources in 17 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:
  ·
              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
  ·
              investment
      income that we earn on invested
assets.
  Expenses
  Our
expenses primarily consist of:
  ·
              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 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;
  ·
              dividends
      paid to policyholders, primarily in administered pricing states where
      premium rates are set by the
regulators;
   45
 Index
  ·
              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;
  ·
              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;
  ·
              assessments
      and premium surcharges related to our insurance activities, including
      assessments and premium surcharges for state guaranty funds and other
      second injury funds; and
  ·
              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, dividends to policyholders,
and income taxes.
  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 are 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:
  ·
              future
      claim payments and LAE in addition to case reserves due to unforeseen or
      unknown events;
  ·
              additional
      claim payments on closed claims;
  ·
              claims
      that have not yet been reported to us;
and
  ·
              development
      in excess of claim reserves on claims that have been reported to
      us.
   46
 Index
  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, 2007, our case reserves and IBNR
net of reinsurance were $176.8 million and $81.1 million,
respectively.  Gross of reinsurance, these amounts were
$198.3 million and $125.9 million, respectively.
  The range
of estimates for IBNR as of December 31, 2007 produced by the various separate
actuarial reserving methods we reviewed ranged from $42.4 million above the
point estimate (for the reserve development method) and $30.2 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.
   47
 Index
  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 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 estimated 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 generally follows a weighting of the four methods described
above.  The weights we observe are:
  Accident
      Years
              Method
              Weight2001
      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%
   48
 Index
 
 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, 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, 2007.  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 2001.
  Sensitivity
      of Net Loss Reserves to Changes in Actuarial
Assumptionsas
      of December 31, 2007(all
      dollar amounts in thousands)Change
      in Assumptions
              Change
      in Net Loss Reserves
 Improve
      Expected Loss Ratio by 10%
              $     
       (7,468)Deteriorate
      Expected Loss Ratio by 10%
              7,468Improve
      Paid Loss Development Pattern by 10%
              (8,423)Deteriorate
      Paid Loss Development Pattern by 10%
              8,205Improve
      Incurred Loss Development Pattern by 10%
              (3,398)Deteriorate
      Incurred Loss Development Pattern by 10%
              3,355Improve
      Expected Loss Ratio by 10%
                and
      Improve Loss Development Patterns by 10%
              (18,813)Improve
      Expected Loss Ratio by 10%
                and
      Deteriorate Loss Development Patterns by 10%
              3,641Deteriorate
      Expected Loss Ratio by 10%
                and
      Improve Loss Development Patterns by 10%
              (4,829)Deteriorate
      Expected Loss Ratio by 10%
                and
      Deteriorate Loss Development Patterns by 10%
              19,477
   49
 Index
  Sensitivity
      of Gross Loss Reserves to Changes in Actuarial
  Assumptionsas
      of December 31, 2007(all
      dollar amounts in thousands)Change
      in Assumptions
              Change
      in Gross Loss Reserves
 Improve
      Expected Loss Ratio by 10%
              $     
      (9,565)Deteriorate
      Expected Loss Ratio by 10%
              9,565Improve
      Paid Loss Development Pattern by 10%
              (12,788)Deteriorate
      Paid Loss Development Pattern by 10%
              9,753Improve
      Incurred Loss Development Pattern by 10%
              (4,932)Deteriorate
      Incurred Loss Development Pattern by 10%
              4,877Improve
      Expected Loss Ratio by 10%
                and
      Improve Loss Development Patterns by 10%
              (26,655)Improve
      Expected Loss Ratio by 10%
                and
      Deteriorate Loss Development Patterns by 10%
              7,231Deteriorate
      Expected Loss Ratio by 10%
                and
      Improve Loss Development Patterns by 10%
              (8,785)Deteriorate
      Expected Loss Ratio by 10%
                and
      Deteriorate Loss Development Patterns by 10%
              27,555
 
 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%  ́ 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 + / - 10% (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
5.0% = 10%  ́ 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 + / - 10% (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
3.0% = 10%  ́ 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 (10%)
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.
   50
 Index
  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
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.
   51
 Index
  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, 2007 and 2006, our deferred acquisition costs were
$19.1 million and $20.7 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 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, and
in Georgia, Texas and Virginia, to a lesser extent.  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.
  Income
Taxes
  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 attributes 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 was adopted by the Company on January 1, 2007.  As of
the adoption date and as of December 31, 2007, the Company had no material
unrecognized tax benefits and no adjustments to liabilities or operations were
required.  We recognize income tax related interest in interest
expense and penalties in income tax expense.  Income tax related
interest recognized in the year ended December 31, 2007 was $0.2
million.  Tax years 2003 through 2006 and 2002 through 2006 are
subject to examination by the federal and state taxing authorities,
respectively.  There are no income tax examinations currently in
process.
   52
 Index
  Measurement
of Results
  We
evaluate our operations by monitoring key measures of growth and
profitability.  We measure our growth by examining our gross
premiums.  We measure our operating results by examining our net
income, return on equity, and our loss and LAE, 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 and is recognized as
revenue.  For each day a one-year policy is in force, we earn 1/365th
of the annual premium.
  Net Premiums
Earned.  Net premiums earned represents 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,
policy acquisition expense, underwriting and other epense 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.
  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.”
   53
 Index
  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 premium 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.
   54
 Index
  Results
of Operations
  Years
Ended December 31, 2007, 2006 and 2005
  Year Ended December 31,2007
              
              
              2006
              
              
              2005
              
              
              Increase
      (decrease) 2007 over 2006
              
              
              Increase
      (decrease) 2006 over 2005(Dollars in thousands)Selected
      Financial Data:Gross
      premiums written
              
              $
              225,545
              
              
              $
              273,713
              
              
              $
              277,095
              
              
              
              (17.6
              )%
              
              
              (1.2
              )%Net
      premiums written
              
              
              221,084
              
              
              
              264,788
              
              
              
              267,652
              
              
              
              (16.5
              )
              
              
              (1.1
              )Gross
      premiums earned
              
              
              236,997
              
              
              
              277,018
              
              
              
              276,117
              
              
              
              (14.4
              )
              
              
              0.3Net
      premiums earned
              
              
              229,349
              
              
              
              266,456
              
              
              
              256,603
              
              
              
              (13.9
              )
              
              
              3.8Net
      investment income
              
              
              20,102
              
              
              
              17,461
              
              
              
              10,798
              
              
              
              15.1
              
              
              
              61.7Net
      realized investment loss
              
              
              (473
              )
              
              
              (307
              )
              
              
              (385
              )
              
              
              54.1
              
              
              
              (20.3
              )Other
      income
              
              
              127
              
              
              
              333
              
              
              
              285
              
              
              
              (61.9
              )
              
              
              16.8Total
      revenue
              
              $
              249,105
              
              
              $
              283,943
              
              
              $
              267,301
              
              
              
              (12.3
              )%
              
              
              6.2
              %Losses
      and loss adjustment expenses
              
              
              126,562
              
              
              
              163,670
              
              
              
              143,663
              
              
              
              (22.7
              )
              
              
              13.9Policy
      acquisition expenses
              
              
              41,180
              
              
              
              49,547
              
              
              
              51,508
              
              
              
              (16.9
              )
              
              
              (3.8
              )Underwriting
      and other expenses
              
              
              36,014
              
              
              
              32,175
              
              
              
              34,447
              
              
              
              11.9
              
              
              
              (6.6
              )Dividends
      to policyholders
              
              
              11,334
              
              
              
              9,926
              
              
              
              8,612
              
              
              
              14.2
              
              
              
              15.3Interest
      expense
              
              
              3,717
              
              
              
              3,807
              
              
              
              2,960
              
              
              
              (2.4
              )
              
              
              28.6Federal
      and state income taxes
              
              
              11,462
              
              
              
              8,256
              
              
              
              9,326
              
              
              
              38.8
              
              
              
              (11.5
              )Net
      income
              
              $
              18,836
              
              
              $
              16,562
              
              
              $
              16,785
              
              
              
              13.7
              %
              
              
              (1.3
              )%Key
      Financial Ratios:Net
      loss ratio
              
              
              55.2
              %
              
              
              61.4
              %
              
              
              56.0
              %Net
      policy acquisition expense ratio
              
              
              18.0
              
              
              
              18.6
              
              
              
              20.1Underwriting
      and other expense ratio
              
              
              15.7
              
              
              
              12.1
              
              
              
              13.4Net
      combined ratio, excluding policyholder dividends
              
              
              88.9
              %
              
              
              92.1
              %
              
              
              89.5
              %Dividend
      ratio
              
              
              4.9
              
              
              
              3.7
              
              
              
              3.4Net
      combined ratio, including policyholder dividends
              
              
              93.8
              %
              
              
              95.8
              %
              
              
              92.9
              %Return
      on equity
              
              
              12.7
              %
              
              
              15.7
              %
              
              
              25.8
              %
 
 
 Gross premiums writtendecreased $48.2 million, or 17.6% in 2007 as compared to 2006. Direct
premiums written decreased $46.3 million, while assumed premiums written
decreased $1.9 million.  Direct premiums written decreased due to
decreases in writings in Florida ($37.5 million), Indiana ($7.3 million),
Wisconsin ($3.1 million), and Texas ($2.7 million), offset by increases in
Illinois ($2.2 million), and Mississippi ($1.6 million), combined with other
smaller changes.  The decrease in Florida premiums is the result of
the 15.7% rate decrease in 2007, a 5.7% decline in in-force policies as of
December 31, 2007 from 2006, and a reduction in construction-related
payrolls.  For all other states with significant changes in direct
premiums written, generally, the change in the number of policies is consistent
with the change in premiums written.  The decrease in assumed premiums
written is the result of a decrease in Indiana premiums assumed through
involuntary pools.  Such increases or decreases in premiums assumed
from involuntary pools are the result of changes in the total written premiums
in the pool and/or a change in the Company’s premiums as a percentage of total
premiums written in the state for the same line of business.
   55
 Index
  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 combined 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.
  Net premiums writtendecreased
$43.7 million, or 16.5% in 2007 as compared to 2006.  This decrease is
the result of the decrease in gross premiums written, combined with a decrease
in ceded premiums written of $4.5 million.  The decrease in ceded
premiums written is the result of a change in the ceded reinsurance agreement to
ceding on an earned basis from ceding on a written basis.  The
retention in our 2007 and 2006 excess-of-loss treaties was unchanged at $2.0
million.
  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.
  Gross premiums earneddecreased $40.0 million, or 14.4% in 2007 as compared to
2006.  This decrease is primarily the result of a decrease in direct
earned premiums, with the largest decreases being in Florida ($31.8 million),
Indiana ($6.9 million), Tennessee ($2.2 million), Wisconsin ($2.0 million) and
Kentucky ($1.4 million), offset by increases in Illinois ($2.8 million) and
Georgia ($1.2 million), combined with other smaller changes.  Assumed
premiums earned also decreased by $1.9 million, as a result of the decrease in
assumed premiums written.
  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.
  Net premiums earneddecreased
$37.1 million, or 13.9% in 2007 as compared to 2006.  This decrease is
primarily the result of the decrease in gross premiums earned.  The
change in gross premiums earned was partially offset by a $2.9 million decrease
in ceded premiums earned, caused by a decrease in the reinsurance premiums rates
from 4.5% of direct premiums on the 2005 treaties to 3.2% on the 2006 and 2007
treaties.  As the 2005 treaty was settled on a run-off basis, the rate
on the 2005 treaty continued to impact ceded premiums earned in
2006.
  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.
   56
 Index
  The table
below sets forth the calculation of net premiums earned and this amount as a
percentage of gross premiums earned:
  2007
              
              Percent
      of Gross Premiums Earned
              
              2006
              
              Percent
      of Gross Premiums Earned
              
              2005
              
              Percent
      of Gross Premiums Earned(Dollars in thousands)Gross
      premiums earned
              
              $
              236,997
              
              
              
              100.0
              %
              
              $
              277,018
              
              
              
              100.0
              %
              
              $
              276,117
              
              
              
              100.0
              %Excess
      reinsurance premiums
              
              
              (7,619
              )
              
              
              (3.2
              )
              
              
              (10,814
              )
              
              
              (3.9
              )
              
              
              (12,224
              )
              
              
              (4.5
              )Facultative
      reinsurance premiums
              
              
              –
              
              
              
              –
              
              
              
              221
              
              
              
              0.1
              
              
              
              –
              
              
              
              –Quota
      share reinsurance premiums
              
              
              (29
              )
              
              
              0.0
              
              
              
              31
              
              
              
              0.0
              
              
              
              (7,290
              )
              
              
              (2.6
              )Net
      premiums earned
              
              $
              229,349
              
              
              
              96.8
              %
              
              $
              266,456
              
              
              
              96.2
              %
              
              $
              256,603
              
              
              
              92.9
              %
 
 Net investment incomeincreased $2.6 million or 15.1% in 2007 as compared to 2006. The increase
is attributable to a 15.0% increase in the average balance of invested assets
during 2007 as compared to 2006.  The additional funds available for
investment were provided by cash generated from operating
activities.
  Net
investment incomeincreased $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.
  Losses and loss adjustment expensesdecreased $37.1 million, or 22.7% in 2007 as compared to
2006.  Loss and loss adjustment expenses were 55.2% and 61.4% of net
premiums earned in 2007 and 2006, respectively.  These changes are the
result of a few factors.  First, reflected in our losses and LAE in
2007 is a $36.5 million redundancy, net of reinsurance, for years prior to
2007.  Excluding business assumed from state mandated pools, the
redundancy in the year ended December 31, 2007 was attributable to prior
accident year reserve decreases in Florida ($17.6 million), Tennessee ($4.9
million), Wisconsin ($2.8 million), Indiana ($2.8 million), South Carolina ($2.2
million), Texas ($2.2 million), North Carolina ($1.7 million), Georgia ($1.2
million) and less significant decreases in several other states.  The
accident years with the largest redundancies were 2006 ($13.4 million), 2005
($11.1 million) and 2004 ($6.4 million).  The redundancy for 2007 was
more than the redundancy of $14.2 million in 2006.  Second, loss and
loss adjustment expenses decreased as a result of the decrease in net premiums
earned discussed above.  These decreases in loss and loss adjustment
expense were partially offset by an increase in the current net accident year
loss ratio.  The current net accident year loss ratio, excluding
business assumed from state mandated pools and adjusting and other expense,
increased to 66.6% for 2007 from 63.4% in 2006.  Additionally,
adjusting and other expense was 4.8% of net premiums earned in 2007, up from
3.9% in 2006.
  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 accident 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 premiums earned from 0.8% as of
December 31, 2005. Additionally, adjusting and other expense was 3.9% of net
premiums earned in 2006, and 3.7% for 2005.
   57
 Index
  Policy acquisition expensesdecreased $8.4 million, or 16.9% in 2007 as compared to
2006.  Policy acquisition expenses decreased to 18.0% from 18.6% of
net premiums earned in 2007 and 2006, respectively.  This decrease is
primarily the result of a decrease in assessments, offset by an increase in the
general and administrative component of policy acquisition
expenses.  Commissions and premium taxes as a percentage of net
premiums earned were relatively consistent between 2007 and
2006.  Assessments, including guaranty fund credits which reduce
premium tax expense, represented 1.4% of net premiums earned, compared to 2.9%
for 2006.  The decrease in assessments is a result of decreases in
subsequent injury fund and guaranty fund assessment expenses.  The
decrease in subsequent injury fund assessment expense is primarily the result of
decreases in Florida ($1.4 million) and South Carolina ($0.7 million) subsequent
injury fund assessments, offset by an increase in the Georgia assessment ($0.8
million).  The decrease in the Florida subsequent injury fund
assessment is a result of the decrease in Florida direct premiums
written.  The South Carolina subsequent injury fund assessment
decreased due to current year redundancies and a decrease in the current
accident year loss ratio to 72.0% in 2007 from 126.2% in 2006.  The
subsequent injury fund assessment for Georgia increased as a result of a rate
increase in 2007 from 2006, partially offset by redundancies in 2007. The
decrease in guaranty fund assessment expense is primarily the result of
decreases related to Wisconsin ($0.9 million), Florida ($0.5 million) and
Tennessee ($0.4 million).  In all three of these states, information
obtained in the current year regarding insolvencies in the states lead us to
believe that accruals held in the prior year could be removed or
reduced.  The general and administrative expense component of policy
acquisition expense represented 4.6% of net premiums earned, compared to 3.9% in
2006.  The increase in general and administrative expenses is the
result of an increase in employee time spent prior to or at policy
initiation.  Note that while commissions were flat in 2007 as compared
to 2006, there was a decrease in direct commissions that was offset by a
decrease in ceded commissions.  The decrease in direct commissions
resulted from a decrease in direct premiums earned and a decrease in the
commission payable accrual.  The decrease in the ceding commission
received is the result of receiving no ceding commission on the 2007 and 2006
excess-of-loss reinsurance treaties, compared to the 35% commission received on
the 2005 treaty, which was in run-off through 2006.
  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 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.
  Underwriting and other
expenses increased $3.8 million, or 11.9% in 2007 as compared to
2006.  Underwriting and other expenses were 15.7% and 12.1% of net
premiums earned in 2007 and 2006, respectively.  The increase in
underwriting and other expense is primarily attributable to increases in payroll
related expense ($3.2 million), agent entertainment expense ($0.8 million),
insurance expense ($0.5 million), and other smaller increases, offset by a
decrease in bad debt expense ($1.1 million).  The increase in payroll
related expense is the result of a 2.7% increase in the average number of
employees in 2007 compared to 2006, combined with an increase in the average pay
rate, and an increase in management team bonuses paid during the
year.  The increase in agent entertainment expense is the result of
agent events in 2007 related to the 25th
anniversary of the Company, and a credit taken in 2006 related to an
over-accrual in 2005.  The increase in insurance expense is due to an
increase in employee insurance, with the greatest increase being for employee
health insurance.   The increase in the cost of health insurance
is the result of an 8% rate increase in 2007 and an increase in the average
number of employees.  The decrease in bad debt expense is due to the
reduction in premiums receivable and a refinement of the allowance for bad debt
calculation in the current year.  The method used to determine the
allowance for doubtful accounts was refined to limit the impact that non-cash
premium adjustments have on the allowance calculated, as such premium
adjustments are already accounted for in the earned but unbilled premium
calculation.
   58
 Index
  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.
  Dividends to policyholders
increased $1.4 million, or 14.2% in 2007 as compared to
2006.  Dividends to policyholders were 4.9% and 3.7% of net premiums
earned in 2007 and 2006, respectively.  The increase in dividends to
policyholders is a result of a refinement in the dividend accrual calculation,
an increase in percentage of direct written premiums on dividend plans, and the
accrual of $0.5 million of Florida excessive profits
dividends.  Excluding Florida excessive profits dividends, the
percentage of direct premiums written in Florida on a dividend plan increased to
46.8% in 2007 from 37.8% in 2006.  The percentage of direct premiums
written in Wisconsin on a dividend plan increased to 90.7% in 2007 from 84.1% in
2006.  The company wide direct premiums written on a dividend plan
increased to 27.5% in 2007 from 25.7% in 2006.  The accrual of Florida
excessive profits was the result redundancies booked during the quarter that
increased the Company’s profits in Florida for the years 2004 through 2006
combined.
  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.
  Interest expense was
relatively flat, with only a minor decrease of $0.1 million, or 2.4% in 2007 as
compared to 2006.
  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.
  Federal and state income taxes
increased $3.2 million, or 38.8% in 2007 as compared to 2006.  Federal
and state income taxes were 37.8% of pretax income in 2007, and 33.3% in
2006.  During 2006, the rate used on the federal deferred tax asset
was increased from 34% to 35% as we expected to be in the 35% tax bracket when
future tax assets were realized.  This change in the effective tax
rate on net deferred tax assets decreased the effective tax rate in 2006 by
2.0%.  In 2007, the rate used on the state deferred tax asset was
decreased from 3.5% to 2.2% to reflect the blended state tax rate that is
expected to be in effect with the future tax assets are realized, based on
changes in the Company’s mix of business by state.  This change in the
state tax rate increased the effective tax rate in 2007 by
1.5%.  Provision to return adjustments booked in the current year also
contributed to the increase in the effective tax rate.
  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 federal tax rate applied to the deferred tax assets as described
above, and a decrease in state income taxes.  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.
   59
 Index
  Net income increased
$2.3 million or 13.7% in 2007 as compared to 2006.   A
decrease in loss and LAE of $37.1 million, a decrease in policy acquisition
expenses of $8.4 million and an increase in net investment income of $2.6
million, offset by a decrease in net premiums earned of $37.1 million, an
increase in underwriting and other expenses of $3.8 million, an increase in
federal and state income taxes of $3.2 million, and a increase in dividends to
policyholders of $1.4 million, primarily comprised the change.
  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.
  Return on Equity -Our
annualized return on equity for the years ended December 31, 2007, 2006 and 2005
is 12.7%, 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 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, dividends, 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 in 2006 the
initial public offering completed February 10, 2006 for
$48.0 million.  Cash flow is summarized in the table
below.
   60
 Index
  For
      the Twelve Months Ended
                December 31,2007
              
              
              2006
              
              
              2005Cash
      and cash equivalents provided by (used in):Operating
      activities
              
              $
              21,124
              
              
              $
              54,154
              
              
              $
              83,602Investing
      activities
              
              
              916
              
              
              
              (98,160
              )
              
              
              (108,877
              )Financing
      activities
              
              
              (6,608
              )
              
              
              48,176
              
              
              
              (1,789
              )Change
      in cash and cash equivalents
              
              $
              15,432
              
              
              $
              4,170
              
              
              $
              (27,064
              )
 
 In
October 2000, we entered into a credit facility with AmSouth Bank (now
Regions 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 London Interbank Offered Rate (“LIBOR”) rate plus
a margin.  At December 31, 2006, the principal balance of the loan was
$4.5 million and the annual interest rate was 6.83%.  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
  Issue
      Date
              Principal
                Amount
              Maturity
      Date
              Optional
                Redemption
      by
                AmCOMP
                Preferred
                On
      or After
              Interest
      Rate
              Frequency
                of
      Interest
                PaymentsApril 29,
      2004
              $10.0
      million
              April 29,
      2034
              April 30,
      2009
              Three-month
      LIBOR plus 425 basis points
              QuarterlyMay 26,
      2004
              $12.0
      million
              May 24,
      2034
              May 24,
      2009
              Three-month
      LIBOR plus 425 basis points
              QuarterlySeptember 14,
      2004
              $10.0
      million
              December
      15, 2034
              December
      15, 2009
              Three-month
      LIBOR plus 405 basis points
              Quarterly
 
 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.
  On
September 4, 2007, the Company obtained a commitment for a $30 million secured
non-revolving line of credit from Regions Bank.  Under the terms of
the commitment for the loan, the interest rate is a floating rate of 160 basis
points over LIBOR.  Advances under the commitment will be available
for up to two years from the date of closing.  Fundings under the
commitment will have a seven-year fully amortizing term and can be repaid at any
time without penalty.  The loan has no fees associated with it other
than a 1⁄4% non-usage fee per annum pro-rated for the amount of loan principal
which is not drawn down by AmCOMP.  Any advances under the line of
credit are to be collateralized by the stock of a wholly-owned insurance
subsidiary of AmCOMP and certain intercompany surplus notes.  The loan
is designated for strategic and general corporate purposes.  At
AmCOMP’s request Regions Bank extended the closing date of the commitment
through June 15, 2008.
   61
 Index
 
 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.  The balance of the net proceeds we
received from the initial public offering are 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 larger of
10% of surplus, as of the preceding December 31st or 100% of its prior
year’s net income, not including realized capital gains, or net investment
income plus a three-year carryforward.  At December 31, 2007, our
insurance subsidiaries were authorized to pay approximately $17.6 million in
dividends without additional regulatory approval.  No dividends were
paid by the insurance subsidiaries during 2007, 2006 or 2005.
  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.
  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, 2007
and 2006, reinsurance recoverables on paid and unpaid losses and LAE were
$67.8 million and $75.4 million, respectively.  Our largest
recoverable from a single reinsurer as of December 31, 2007 was
$32.2 million owed to us by Continental Casualty Company, a subsidiary of
CNA Financial Corporation, representing 20.3% of our total stockholders’ equity
as of that date.  Of the $32.2 million, $1.4 million was the
current recoverable on paid losses.  The balance of $30.8 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 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.
   62
 Index
  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, net of tax).
  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, 2007
and 2006, 77.9% and 81.9%, respectively, 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, 2007 and
December 31, 2006, our insurance subsidiaries’ combined portfolio consisted
entirely of investment grade fixed-income securities.  As of December
31, 2007, our investments (excluding cash and cash equivalents) had an average
duration of 4.1 years, and the bond portfolio was heavily weighted toward
short- to intermediate-term securities.
  Our
insurance subsidiaries employ Regions Bank to act as their independent
investment advisor.  Regions Bank follows the insurance subsidiaries’
written investment guidelines based upon strategies approved by our insurance
subsidiaries’ boards 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 mortgage-backed) or derivative
securities.  Regions 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, Regions 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.  Regions Bank’s fee is based on the amount of assets in
the portfolio and is not dependent upon investment results or portfolio
turnover.
  The table
below contains information concerning the composition of our investment
portfolio at December 31, 2007:
  Carrying
                Amount
      (1)
              
              
              Yield
      to Maturity
              
              
              Percentage
      of Carrying Amount (1)(Dollars
      in thousands)Bonds:(2)U.S.
      Treasury securities
              
              $
              24,200
              
              
              
              3.5
              %
              
              
              5.3
              %Agencies
              
              
              37,589
              
              
              
              5.1
              
              
              
              8.3Municipalities(3)
              
              
              81,264
              
              
              
              4.9
              
              
              
              17.9Corporate
      “A” rated and above
              
              
              138,673
              
              
              
              5.0
              
              
              
              30.5Corporate
      “BBB”/”Baa” rated
              
              
              21,508
              
              
              
              5.3
              
              
              
              4.7Mortgage-backed
      securities
              
              
              120,274
              
              
              
              5.4
              
              
              
              26.5Total
      Bonds
              
              $
              423,508
              
              
              
              5.0
              %
              
              
              93.2
              %Cash
      and cash equivalents
              
              
              30,691
              
              
              
              4.5
              
              
              
              6.8Total
              
              $
              454,199
              
              
              
              5.0
              %
              
              
              100.0
              %
 
 (1)
              Carrying
      amount is amortized cost for bonds held-to-maturity.  Carrying
      value is market value for bonds available-for-sale.  As of
      December 31, 2007, $329.8 million of our bonds was classified as
      available-for-sale and $93.7 million were classified as
      held-to-maturity.
   63
 Index
  (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 1.25% on the yield to maturity for
      municipal bonds and 0.2% 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, 2007:
  Available-for-Sale
              
              
              Held-to-MaturityAmortized
      Cost
              
              
              Fair
      Value
              
              
              Amortized
      Cost
              
              
              Fair
      ValueYears
      to maturity (1):One
      or less
              
              $
              49,111
              
              
              $
              48,917
              
              
              
              —
              
              
              
              —After
      one through five
              
              
              127,712
              
              
              
              127,828
              
              
              
              —
              
              
              
              —After
      five through ten
              
              
              107,762
              
              
              
              108,420
              
              
              
              —
              
              
              
              —After
      ten
              
              
              16,960
              
              
              
              18,069
              
              
              
              —
              
              
              
              —Mortgage-backed
      securities
              
              
              26,111
              
              
              
              26,613
              
              
              
              93,661
              
              
              
              94,414Total
              
              $
              327,656
              
              
              $
              329,847
              
              
              $
              93,661
              
              
              $
              94,414
  (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
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.
   64
 Index
  The
following table summarizes, for all fixed maturity securities in an unrealized
loss position at December 31, 2007, the aggregate fair value and gross
unrealized loss by length of time the security has continuously been in an
unrealized loss position:
  Fair
      Value
              
              
              Unrealized
      Losses
              
              
              Number
      of Issues(In
      thousands)Less
      than 12 months:U.S.
      Treasury securities
              
              $
              -
              
              
              $
              -
              
              
              
              -Agency
              
              
              -
              
              
              
              -
              
              
              
              -Municipalities
              
              
              -
              
              
              
              -
              
              
              
              -Corporate
      debt securities
              
              
              13,348
              
              
              
              (75
              )
              
              
              6Mortgage-backed
      securities
              
              
              10,814
              
              
              
              (49
              )
              
              
              2Total
              
              $
              24,162
              
              
              $
              (124
              )
              
              
              8Greater
      than 12 months:U.S.
      Treasury securities
              
              $
              4,887
              
              
              $
              (17
              )
              
              
              6Agency
              
              
              9,001
              
              
              
              (35
              )
              
              
              6Municipalities
              
              
              33,555
              
              
              
              (101
              )
              
              
              24Corporate
      debt securities
              
              
              88,476
              
              
              
              (1,026
              )
              
              
              60Mortgage-backed
      securities
              
              
              17,320
              
              
              
              (273
              )
              
              
              13Total
              
              $
              153,239
              
              
              $
              (1,452
              )
              
              
              109Total
      fixed maturity securities:U.S.
      Treasury securities
              
              $
              4,887
              
              
              $
              (17
              )
              
              
              6Agency
              
              
              9,001
              
              
              
              (35
              )
              
              
              6Municipalities
              
              
              33,555
              
              
              
              (101
              )
              
              
              24Corporate
      debt securities
              
              
              101,824
              
              
              
              (1,101
              )
              
              
              66Mortgage-backed
      securities
              
              
              28,134
              
              
              
              (322
              )
              
              
              15Total
      fixed maturity securities
              
              $
              177,401
              
              
              $
              (1,576
              )
              
              
              117
 
 At
December 31, 2007, there were no investments in fixed maturity securities
with individual material unrealized losses.  One other-than-temporary
impairment totaling $0.1 million and three other-than-temporary impairments
totaling approximately $0.2 million were recorded on our investments during the
years ended December 31, 2007 and 2006, respectively.  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.
   65
 Index
  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 seek
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, but not limited to a right of
recoupment related to the statement of claim filed by us in the Reliance
liquidation proceeding for the recovery of approximately $7.8 million under
the reinsurance agreement.  However, on November 14, 2007 the trial
court in Florida granted the plaintiff liquidator’s motion for partial summary
judgment, finding that the approximate $2.3 million in payments were
“preferential” under Pennsylvania law.  This order is not yet a final,
appealable order under Florida law.  There are a number of remaining
issues, including AmCOMP’s affirmative defenses, which must be determined by the
court before a final order or judgment could be entered.  Although the
ultimate results of these legal actions and related claims (including any future
appeals) cannot presently be determined, the Company had accrued a $1.2 million
liability as of each of December 31, 2007 and 2006, related to those
matters.
  Other
  In
August 1998, in an effort to expand its customer base, AmCOMP 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.  Included in other assets at
December 31, 2007 is approximately $2.1 million in loss and LAE payments on the
administered business that is currently due from the third-party
insurer.  Management is currently in discussion with the insurer
regarding payment, and expects to recover the balance due.
  Contractual
Obligations and Commitments
  The
following table identifies our long-term debt and contractual obligations as of
December 31, 2007:
  Payment
      Due By PeriodTotal
              
              
              Less
      Than
                1
      Year
              
              
              1-3
      Years
              
              
              4-5
      Years
              
              
              More
      Than 5 Years(Dollars
      in thousands)Long
      Term Debt Obligations(1)
              
              $
              114,642
              
              
              $
              4,947
              
              
              $
              8,657
              
              
              $
              5,859
              
              
              $
              95,179Capital
      Leases
              
              
              796
              
              
              
              340
              
              
              
              456
              
              
              
              –
              
              
              
              –Operating
      Leases
              
              
              7,157
              
              
              
              2,563
              
              
              
              3,214
              
              
              
              1,219
              
              
              
              161Loss
      Reserves(2)
              
              
              324,224
              
              
              
              107,266
              
              
              
              92,076
              
              
              
              19,333
              
              
              
              105,549FIN
      48 Income Tax Obligations
              
              
              2,136
              
              
              
              504
              
              
              
              –
              
              
              
              –
              
              
              
              1,632Total
      Contractual Obligations
              
              $
              448,955
              
              
              $
              115,620
              
              
              $
              104,403
              
              
              $
              26,411
              
              
              $
              202,521
 _______________________
 (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,
      2007.  The rates ranged from 6.83% to
  9.28%.
  (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.
   66
 Index
  Off-Balance
Sheet Arrangements
  We have
no off-balance sheet arrangements.
  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, FASB issued 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 attributes 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 was adopted by the Company on January 1, 2007.  As of
the adoption date and as of December 31, 2007, the Company had no material
unrecognized tax benefits and no adjustments to liabilities or operations were
required.
 
 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 accounting principles generally accepted in the United
States, 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.
  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 No. 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 adoption of SOP 05-01 did not have a material impact upon
adoption.
   67
 Index
 
 In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(“SFAS No. 159”), which permits entities
to elect to measure many financial instruments and certain other items at fair
value.  Upon adoption of SFAS No. 159, an entity may elect the fair value
option for eligible items that exist at the adoption date. Subsequent to the
initial adoption, the election of the fair value option should only be made at
the initial recognition of the asset or liability or upon a re-measurement event
that gives rise to the new-basis of accounting. All subsequent changes in fair
value for that instrument are reported in earnings.  SFAS No. 159 does not
affect any existing accounting literature that requires certain assets and
liabilities to be recorded at fair value nor does it eliminate disclosure
requirements included in other accounting standards.  SFAS No. 159 is
effective as of January 1, 2008.  The Company is currently evaluating the
impact of this standard.
  In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS
No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree and recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase.   SFAS
No. 141(R) also sets forth the disclosures required to be made in the
financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, SFAS No. 141(R) will be applied by the Company to business
combinations occurring on or after January 1, 2009.
  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 77.9% were
classified as available-for-sale as of December 31, 2007.  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,
2007, our investments (excluding cash and cash equivalents) had an average
duration of 4.1 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,
2007.
   68
 Index
  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:
  Change in Interest
      Rates
              
              Estimated
      Increase (Decrease) in Fair Value
              
              
              Estimated
      Percentage Increase (Decrease) in Fair ValueDecember
      31, 2007:
              
              (Dollars
      in thousands)300
      basis point rise
              
              $
              (45,095
              )
              
              
              (10.7
              %)200
      basis point rise
              
              
              (29,401
              )
              
              
              (7.0
              %)100
      basis point rise
              
              
              (13,977
              )
              
              
              (3.3
              %)50
      basis point decline
              
              
              5,843
              
              
              
              1.4
              %100
      basis point decline
              
              
              11,130
              
              
              
              2.7
              %Change
      in Interest Rates
              
              Estimated
      Increase (Decrease) in Fair Value
              
              
              Estimated
      Percentage Increase (Decrease) in Fair ValueDecember
      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
              %
 
  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, 2007.  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 93.2% of our total invested assets as of December 31,
2007.
  Interest
expense would also be affected by a hypothetical change in interest
rates.  As of December 31, 2007, we
had      $36.5 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 $0.7 million and a 300 basis point increase
would increase interest expense by approximately $1.1 million.  As of
December 31, 2006 we had $38.3 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 $1.1 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, 2007, the par value of our mortgage backed securities
holdings was $120.0 million.  Amortized cost divided by par value
equates to an average price of 99.8% of par.  Since some of our
mortgage backed securities were purchased at a premium or discount that is a
significant percentage of par, a FAS 91 adjustment could have a significant
effect on investment income.
   69
 Index
  However,
given the current interest rate environment, which has exhibited higher rates
resulting in lower values for fixed maturity securities over the last few years
and the slow down in the housing market and the overall economy during 2007, the
possibility of additional significant declines such that prepayment speeds are
significantly impacted is unlikely.  The mortgage backed securities
portion of the portfolio totaled approximately 28.4% of total investments as of
December 31, 2007.  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, 2007 and 2006, 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.
   70
 Index
  Item 8.  Financial Statements and Supplementary
Data
  INDEX
TO FINANCIAL STATEMENTS
  PageFinancial Statements as of
      December 31, 2007 and 2006 and for the three years ended December 31,
      2007:Reports of Independent Registered Public Accounting
      Firms
              72-73Consolidated Balance Sheets
              74Consolidated Statements of Operations
              75Consolidated Statements of Changes in Stockholders’
      Equity
              76Consolidated Statements of Cash Flows
              77Notes to Consolidated Financial Statements
              78-100
   71
 Index
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  We have
audited the accompanying balance sheet of AmCOMP Incorporated and Subsidiaries
(the "Company") as of December 31, 2007 and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for the year then
ended.  Our audit also included the financial statement schedules
listed in the index at Item 15.  We also have audited the Company's
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for these financial statements and financial
statement schedules, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting.  Our responsibility is to
express an opinion on these financial statements and an opinion on the Company's
internal control over financial reporting 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 audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects.  Our audit of the financial statements included 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, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audits provide a reasonable basis for our
opinions.
 
 A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of AmCOMP Incorporated and
Subsidiaries as of December 31, 2007, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.  In addition, in
our opinion, such financial statement schedules, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.  Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
 
 As
disclosed in Note 19, on January 10, 2008 the Company announced that it had
executed a definitive agreement to be acquired by Employers Holdings, Inc., an
unrelated insurance holding corporation.  The transaction, which is subject
to regulatory approvals, is expected to be completed during the second quarter
of 2008.
  /s/
Johnson Lambert & Co., LLP
  Certified
Public Accountants
 Jacksonville,
Florida
 February
28, 2008, except
for Note 19, as to
which the date is March 4, 2008
   72
 Index
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders
 AmCOMP
Incorporated
 
 We have
audited the accompanying consolidated balance sheet of AmCOMP Incorporated and
subsidiaries (the "Company") as of December 31, 2006, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the two 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 the
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 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 the results of their operations and their cash flows for
each of the two 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
  73
 Index
  AmCOMPINCORPORATED AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 DECEMBER
31, 2007 AND 2006
 (In
thousands)
 December
      31,ASSETS
              
              2007
              
              
              2006Investments:Fixed maturity securities available-for-sale at fair value (amortized cost
      of $327,656 in 2007 and $349,487 in 2006)
              
              $
              329,847
              
              
              $
              345,318Fixed maturity securities held-to-maturity at amortized cost (fair value
      of $94,414 in2007
      and $75,933 in 2006)
              
              
              93,661
              
              
              
              76,198Total
      investments
              
              
              423,508
              
              
              
              421,516Cash
      and cash equivalents
              
              
              30,691
              
              
              
              15,259Accrued
      investment income
              
              
              4,721
              
              
              
              5,120Premiums
      receivable—net
              
              
              88,486
              
              
              
              106,270Assumed
      reinsurance premiums receivable
              
              
              1,809
              
              
              
              1,822Reinsurance
      recoverable:On paid losses and loss adjustment expenses
              
              
              1,454
              
              
              
              3,064On unpaid losses and loss adjustment expenses
              
              
              66,353
              
              
              
              72,296Prepaid
      reinsurance premiums
              
              
              1,215
              
              
              
              3,326Deferred
      policy acquisition costs
              
              
              19,116
              
              
              
              20,749Property
      and equipment—net
              
              
              3,352
              
              
              
              2,705Income
      tax recoverable
              
              
              ­962
              
              
              
              3,102Deferred
      income taxes—net
              
              
              19,889
              
              
              
              21,613Goodwill—net
              
              
              1,260
              
              
              
              1,260Other
      assets
              
              
              6,347
              
              
              
              6,395TOTAL
              
              $
              669,163
              
              
              $
              684,497LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIES:Policy reserves and policyholders’ funds:Unpaid
      losses and loss adjustment expenses
              
              $
              324,224
              
              
              $
              334,363Unearned
      and advance premiums
              
              
              102,672
              
              
              
              115,218Policyholder
      retention dividends payable
              
              
              10,276
              
              
              
              8,504Total
      policy reserves and policyholders’ funds
              
              
              437,172
              
              
              
              458,085Reinsurance payable
              
              
              622
              
              
              
              3,774Accounts payable and accrued expenses
              
              
              30,868
              
              
              
              39,416Notes payable
              
              
              36,464
              
              
              
              38,250Income tax payable
              
              
              1,441
              
              
              
              —Other liabilities
              
              
              4,419
              
              
              
              5,684Total
      liabilities
              
              
              510,986
              
              
              
              545,209STOCKHOLDERS’
      EQUITY:Common stock (par value $.01; authorized shares  45,000; 15,922
      in 2007 and  15,893 in 2006 issued ; 15,290 in 2007 and 15,758
      in 2006 outstanding)
              
              
              159
              
              
              
              158Additional paid-in capital
              
              
              75,392
              
              
              
              73,952Retained earnings
              
              
              86,826
              
              
              
              67,990Accumulated other comprehensive income (loss) (net of deferred taxes of
      ($799) in 2007 and $1,553 in 2006)
              
              
              1,392
              
              
              
              (2,613
              )Treasury stock (631 shares in 2007 and 135 in 2006)
              
              
              (5,592
              )
              
              
              (199
              )Total
      stockholders’ equity
              
              
              158,177
              
              
              
              139,288TOTAL
              
              $
              669,163
              
              
              $
              684,497
 
 See
accompanying notes.
   74
 Index
  AmCOMPINCORPORATED AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF OPERATIONS
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
 (In thousands, except per share
amounts)
  2007
              
              
              2006
              
              
              2005REVENUE:Net
      premiums earned
              
              $
              229,349
              
              
              $
              266,456
              
              
              $
              256,603Net
      investment income
              
              
              20,102
              
              
              
              17,461
              
              
              
              10,798Net
      realized investment losses
              
              
              (473
              )
              
              
              (307
              )
              
              
              (385
              )Other
      income
              
              
              127
              
              
              
              333
              
              
              
              285Total
      revenue
              
              
              249,105
              
              
              
              283,943
              
              
              
              267,301EXPENSES:Losses
      and loss adjustment expenses
              
              
              126,562
              
              
              
              163,670
              
              
              
              143,663Dividends
      to policyholders
              
              
              11,334
              
              
              
              9,926
              
              
              
              8,612Underwriting
      and acquisition expenses
              
              
              77,194
              
              
              
              81,722
              
              
              
              85,955Interest
      expense
              
              
              3,717
              
              
              
              3,807
              
              
              
              2,960Total
      expenses
              
              
              218,807
              
              
              
              259,125
              
              
              
              241,190Income
      before income taxes
              
              
              30,298
              
              
              
              24,818
              
              
              
              26,111Income
      tax expense
              
              
              11,462
              
              
              
              8,256
              
              
              
              9,326Net
      income
              
              $
              18,836
              
              
              $
              16,562
              
              
              $
              16,785Earnings
      per common share—basic
              
              $
              1.20
              
              
              $
              1.15
              
              
              $
              3.13Earnings
      per common share—diluted
              
              $
              1.20
              
              
              $
              1.11
              
              
              $
              1.76Weighted
      average number of common shares outstandingBasic
              
              
              15,647
              
              
              
              14,452
              
              
              
              5,367Diluted
              
              
              15,656
              
              
              
              14,931
              
              
              
              9,562
 
 See
accompanying notes.
   75
 Index
  AmCOMPINCORPORATED AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
 (In
thousands)
  Common
      Stock
              
              
              Convertible
      Preferred Stock Series A
              
              
              Additional
      Paid-In Capital
              
              
              Treasury
      Stock
              
              
              Retained
      Earnings
              
              
              Accumulated
      Other Comprehensive Income (Loss)
              
              
              Total
      Stockholders’ EquityBALANCE
      AT DECEMBER 31, 2004
              
              
              54
              
              
              
              23,098
              
              
              
              536
              
              
              
              (195
              )
              
              
              34,643
              
              
              
              199
              
              
              
              58,335Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              16,785
              
              
              
              —
              
              
              
              16,785Unrealized
      loss on investments (net of tax benefit of $1,789)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (3,135
              )
              
              
              (3,135
              )Comprehensive
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              13,650Purchase
      of treasury stock
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (4
              )
              
              
              —
              
              
              
              
              
              
              
              (4
              )BALANCE
      AT DECEMBER 31, 2005
              
              
              54
              
              
              
              23,098
              
              
              
              536
              
              
              
              (199
              )
              
              
              51,428
              
              
              
              (2,936
              )
              
              
              71,981Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              16,562
              
              
              
              —
              
              
              
              16,562Unrealized
      gain on investments (net of tax expense of $121)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              323
              
              
              
              323Comprehensive
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              16,885Conversion
      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
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              47,972Stock
      option compensation expense
              
              
              —
              
              
              
              —
              
              
              
              545
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              545Stock
      option exercise
              
              
              2
              
              
              
              —
              
              
              
              1,826
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,828Tax
      benefit on stock options
              
              
              —
              
              
              
              —
              
              
              
              77
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              77BALANCE
      AT DECEMBER 31, 2006
              
              $
              158
              
              
              $
              —
              
              
              $
              73,952
              
              
              $
              (199
              )
              
              $
              67,990
              
              
              $
              (2,613
              )
              
              $
              139,288Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              18,836
              
              
              
              —
              
              
              
              18,836Unrealized
      gain on investments (net of tax expense of $2,356)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              4,005
              
              
              
              4,005Comprehensive
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              22,841Stock
      option compensation expense
              
              
              —
              
              
              
              —
              
              
              
              702
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              702Stock
      option exercise
              
              
              1
              
              
              
              —
              
              
              
              723
              
              
              
              88
              
              
              
              —
              
              
              
              —
              
              
              
              812Tax
      benefit on stock options
              
              
              —
              
              
              
              —
              
              
              
              15
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              15Purchase
      of treasury stock (560 shares)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (5,481
              )
              
              
              —
              
              
              
              —
              
              
              
              (5,481
              )BALANCE
      AT DECEMBER 31, 2007
              
              $
              159
              
              
              $
              —
              
              
              $
              75,392
              
              
              $
              (5,592
              )
              
              $
              86,826
              
              
              $
              1,392
              
              
              $
              158,177
 
 See
accompanying notes.
   76
 Index
  AmCOMPINCORPORATED AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
 (In
thousands)
  2007
              
              
              2006
              
              
              2005OPERATING
      ACTIVITIES:Net
      income
              
              $
              18,836
              
              
              $
              16,562
              
              
              $
              16,785Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              1,626
              
              
              
              1,711
              
              
              
              2,144Amortization
      of investment premiums/discounts
              
              
              1,616
              
              
              
              2,466
              
              
              
              3,069Excess
      tax benefits from stock option exercise
              
              
              (41
              )
              
              
              (162
              )
              
              
              —Stock
      option expense
              
              
              702
              
              
              
              545
              
              
              
              —Provision
      for deferred income taxes
              
              
              (632
              )
              
              
              (859
              )
              
              
              (1,434
              )Net
      realized losses on investments
              
              
              473
              
              
              
              307
              
              
              
              385­Loss
      on sale of property and equipment
              
              
              18
              
              
              
              20
              
              
              
              —Policy
      acquisition costs deferred
              
              
              (42,836
              )
              
              
              (50,746
              )
              
              
              (47,673
              )Policy
      acquisition costs amortized
              
              
              44,469
              
              
              
              49,410
              
              
              
              42,955Change
      in operating assets and liabilities:Accrued
      investment income
              
              
              399
              
              
              
              (1,128
              )
              
              
              (962
              )Premiums
      receivable
              
              
              17,784
              
              
              
              (1,748
              )
              
              
              (2,884
              )Reinsurance
      balances
              
              
              6,525
              
              
              
              11,846
              
              
              
              41,888Other
      assets
              
              
              48
              
              
              
              1,606
              
              
              
              (2,015
              )Unpaid
      losses and loss adjustment expenses
              
              
              (10,139
              )
              
              
              24,506
              
              
              
              12,159Unearned
      and advance premiums and policyholder deposits
              
              
              (12,546
              )
              
              
              (366
              )
              
              
              1,339Policyholder
      retention dividends payable
              
              
              1,772
              
              
              
              1,868
              
              
              
              351Accounts
      payable and accrued expenses
              
              
              (8,548
              )
              
              
              851
              
              
              
              13,464Income
      tax recoverable/payable
              
              
              3,596
              
              
              
              (1,859
              )
              
              
              1,959Other
      liabilities
              
              
              (1,998
              )
              
              
              (676
              )
              
              
              2,072Net
      cash provided by operating activities
              
              
              21,124
              
              
              
              54,154
              
              
              
              83,602INVESTING
      ACTIVITIES:Securities
      available-for-sale:Purchases
              
              
              (79,683
              )
              
              
              (98,578
              )
              
              
              (152,524
              )Sales
      and maturities
              
              
              99,456
              
              
              
              46,369
              
              
              
              63,531Securities
      held-to-maturity:Purchases
              
              
              (30,887
              )
              
              
              (53,687
              )
              
              
              (22,814
              )Redemptions
      and maturities
              
              
              13,394
              
              
              
              9,504
              
              
              
              3,224Purchases
      of property and equipment
              
              
              (1,378
              )
              
              
              (1,795
              )
              
              
              (1,193
              )Sale
      of property and equipment
              
              
              14
              
              
              
              17
              
              
              
              —Regulatory
      restricted deposit
              
              
              —
              
              
              
              10
              
              
              
              899Net
      cash provided by (used in) investing activities
              
              
              916
              
              
              
              (98,160
              )
              
              
              (108,877
              )FINANCING
      ACTIVITIES:Proceeds
      from initial public offering, net of offering costs of
    $2,341
              
              
              —
              
              
              
              47,972
              
              
              
              —Proceeds
      from stock option exercise
              
              
              812
              
              
              
              1,828
              
              
              
              —Excess
      tax benefits from stock option exercise
              
              
              41
              
              
              
              162
              
              
              
              —Payment
      on capital lease
              
              
              (194
              )
              
              
              —
              
              
              
              —Payment
      of note payable
              
              
              (1,786
              )
              
              
              (1,786
              )
              
              
              (1,785
              )Purchase
      of treasury stock
              
              
              (5,481
              )
              
              
              —
              
              
              
              (4
              )Net
      cash (used in) provided by financing activities
              
              
              (6,608
              )
              
              
              48,176
              
              
              
              (1,789
              )Net
      increase (decrease) in cash and cash equivalents
              
              
              15,432
              
              
              
              4,170
              
              
              
              (27,064
              )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF YEAR
              
              
              15,259
              
              
              
              11,089
              
              
              
              38,153CASH
      AND CASH EQUIVALENTS AT END OF YEAR
              
              $
              30,691
              
              
              $
              15,259
              
              
              $
              11,089SUPPLEMENTAL
      CASH FLOW DATA:Cash
      paid—interest
              
              $
              3,739
              
              
              $
              3,786
              
              
              $
              2,872Cash
      paid—income taxes
              
              $
              8,691
              
              
              $
              11,282
              
              
              $
              8,795
 See
accompanying notes.
   77
 Index
 AmCOMPINCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  1.NATURE OF
OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
  Organization—AmCOMP
Incorporated and subsidiaries (collectively, the “Company”) consist of the
following entities at December 31, 2007, 2006 and 2005:
  ·
              AmCOMP
      Incorporated (“AmCOMP”), a holding company incorporated on
      December 28, 1995;
  ·
              AmCOMP
      Preferred Insurance Company (“AmCOMP Preferred”), a wholly owned property
      and casualty insurance company (formerly known as Pinnacle Assurance
      Corporation);
  ·
              Pinnacle
      Administrative, Inc. (“Pinnacle Administrative”), a wholly owned
      administrative services company providing sales and marketing,
      underwriting, policyholder service, data processing, and accounting
      services;
  ·
              Pinnacle
      Benefits, Inc. (“Pinnacle Benefits”), a wholly owned claims
      processing company;
  ·
              AmCOMP
      Assurance Corporation (“AmCOMP Assurance”), a wholly owned property and
      casualty insurance company; and
  ·
              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 as an insurance carrier in 25 states and the District of
Columbia, but currently focuses its resources in 17 states that it believes
provide greater opportunity for near-term profitable growth, with the most
significant concentrations in Florida, Wisconsin, Texas, Indiana, Tennessee, and
Georgia.
  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 designated
held-to-maturity 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.
   78
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  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 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.
  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 have been deferred and are amortized over the
effective period of the related insurance policies.
 
 Property and
Equipment—Property and equipment is stated on the basis of cost net of
accumulated depreciation.  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 $1.6
million, $1.7 million and $2.1 million for the years ended December 31, 2007,
2006 and 2005, respectively.  Accumulated depreciation was $12.1
million and $12.8 million at December 31, 2007 and 2006, respectively. During
the year ended December 31, 2007, the Company purchased $0.9 million worth on
computer equipment under a capital lease.
  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 2007, 2006 or 2005.
  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, 2007, 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.  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.
   79
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  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 net of the
related tax effect.  During the years ended December 31, 2007, 2006
and 2005, realized losses, net of tax, of $0.3 million, $0.2 million and $0.2
million, respectively, were reclassified out of accumulated comprehensive income
into earnings.
  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, 2007 and
2006.  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.  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,
warrants, and convertible securities are excluded from the
calculation.  Diluted earnings per share consider the effects of
dilutive convertible securities and stock options.
   80
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  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
over the requisite service period 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 year ended December 31, 2005 (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):
  2005Net
      income
              
              $
              16,785Deduct:
      total stock-based employee compensation expense determined under fair
      value based method for all awards—net of related tax
    effects
              
              
              (35
              )Pro
      forma net income
              
              $
              16,750Basic
      earnings per share—as reported
              
              $
              3.13Basic
      earnings per share—pro forma
              
              
              3.12Diluted
      earnings per share—as reported
              
              
              1.76Diluted
      earnings per share—pro forma
              
              
              1.75
 
 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 2007 and 2006
includes:
  ·
              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
  ·
              Compensation
      cost for all share-based awards (expected to vest) granted during the
      years ended December 31, 2007 and 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.
   81
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  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 is recognized in
earnings, net of 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 $0.7 million and $0.6 million of
stock option compensation expense in the years ended December 31, 2007 and 2006,
respectively.  Basic and diluted earnings per share for the years
ended December 31, 2007 and 2006 were reduced by $0.05 and $0.04,
respectively.  Additionally, as a result of adoption, cash flows from
financing increased less than $0.1 million and $0.2 million for the years ended
December 31, 2007 and 2006, respectively.  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 attributes 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 was adopted by the Company on January 1, 2007.  As of
the adoption date and as of December 31, 2007, the Company had no material
unrecognized tax benefits and no adjustments to liabilities or operations were
required.
 
 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 accounting principles generally accepted in the United
States, 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.
  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 No. 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 adoption of SOP 05-01 did not have a material impact upon
adoption.
 
 In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(“SFAS No. 159”), which permits entities
to elect to measure many financial instruments and certain other items at fair
value.  Upon adoption of SFAS No. 159, an entity may elect the fair value
option for eligible items that exist at the adoption date. Subsequent to the
initial adoption, the election of the fair value option should only be made at
the initial recognition of the asset or liability or upon a re-measurement event
that gives rise to the new-basis of accounting. All subsequent changes in fair
value for that instrument are reported in earnings.  SFAS No. 159 does not
affect any existing accounting literature that requires certain assets and
liabilities to be recorded at fair value nor does it eliminate disclosure
requirements included in other accounting standards.  SFAS No. 159 is
effective as of January 1, 2008.  The Company is currently evaluating the
impact of this standard.
   82
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS
No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree and recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase.   SFAS
No. 141(R) also sets forth the disclosures required to be made in the
financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, SFAS No. 141(R) will be applied by the Company to business
combinations occurring on or after January 1, 2009.
  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, 2007 and 2006, 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, 2007 and 2006, 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, 2007, 2006 and 2005 is as follows (in thousands):
  2007
              
              
              2006
              
              
              2005AmComp
      Preferred
              
              $
              12,712
              
              
              $
              8,596
              
              
              $
              5,922AmComp
      Assurance
              
              
              8,095
              
              
              
              5,317
              
              
              
              6,078
 
 Statutory-basis
capital and surplus for AmCOMP Preferred and AmCOMP Assurance as of December 31,
2007 and 2006 is as follows (in thousands):
  2007
              
              
              2006AmComp
      Preferred(a)
              
              $
              176,463
              
              
              $
              155,509AmComp
      Assurance
              
              
              102,068
              
              
              
              84,817(a)
      includes AmCOMP Preferred’s equity ownership in AmCOMP Assurance’s capital
      and surplus
   83
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
 
 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 2007 and 2006.  As of December 31, 2007 and
2006, AmCOMP Preferred had $17.6 million and $15.6 million, respectively,
available to pay dividends without prior approval.  As of December 31,
2007 and 2006, AmCOMP Assurance had $10.2 million and $7.4 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 statute 627.215 and applicable
regulations related to Florida excess profits for workers’ compensation
insurance companies.  Florida 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 “Florida 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.  See note 17.  As of December 31, 2007, the Company
had accrued $0.5 million for estimated additional Florida excessive profits
based on its statutory underwriting results for the 2004, 2005 and 2006
years.
  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 ($1.6) million, $1.5 million and $4.0 million for the
years ended December 31, 2007, 2006 and 2005, respectively.  The
Company has deferred approximately $1.0 million and $1.2 million as of December
31, 2007 and 2006, respectively, related to guaranty fund assessments, which is
included in deferred policy acquisition costs.  Additionally,
guarantee fund receivable assets of $1.5 million and $2.4 million as of December
31, 2007 and 2006, respectively, are included in other assets, as they can be
used as a credit against future premium taxes owed.  Maximum
contributions required by law in any one state in which we offer insurance vary
between 0.2% 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 expense was $3.0 million, $4.6 million, $11.9 million for the years
ended December 31, 2007, 2006 and 2005, respectively.  The Company has
deferred approximately $1.5 million and $1.8 million as of December 31, 2007 and
2006, 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 Company’s
insureds.  Because of the uncertainty of the collectability 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 $2.3 million, $1.4 million, $2.2
million in the years ended December 31, 2007, 2006 and 2005,
respectively.
   84
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  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 and/or result in the
discontinuation of the Florida SDTF and thus could have an adverse effect on
AmCOMP’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 or submitted on claims occurring 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 $0.9 million, $1.2 million and $1.3 million for the years ended
December 31, 2007, 2006 and 2005, respectively.  The Company has
deferred approximately $0.2 million and $0.3 million as of December 31, 2007 and
2006, respectively, related to these assessments, which are included in deferred
policy acquisition costs.
  Liabilities
for assessments are expected to be paid over the next five
years.  Guarantee fund receivable assets are expected to be realized
over the next five to ten years.
  4.
INVESTMENTS
  The
Company’s investments in available-for-sale securities and held-to-maturity
securities are summarized as follows at December 31, 2007 and 2006 (in
thousands):
  Amortized
      Cost
              
              
              Gross
      Unrealized Gains
              
              
              Gross
      Unrealized Losses
              
              
              Fair
      ValueAvailable-for-sale
      securities at December 31, 2007:U.S.
      Treasury securities
              
              $
              22,850
              
              
              $
              1,367
              
              
              $
              17
              
              
              $
              24,200Agency
              
              
              37,279
              
              
              
              345
              
              
              
              35
              
              
              
              37,589Municipalities
              
              
              80,959
              
              
              
              406
              
              
              
              101
              
              
              
              81,264Corporate
      debt securities
              
              
              160,457
              
              
              
              825
              
              
              
              1,101
              
              
              
              160,181Mortgage-backed
      securities
              
              
              26,111
              
              
              
              587
              
              
              
              85
              
              
              
              26,613Total
      fixed maturity securities
              
              $
              327,656
              
              
              $
              3,530
              
              
              $
              1,339
              
              
              $
              329,847Held-to-maturity
      securities at December 31, 2007:Mortgage-backed
      securities
              
              $
              93,661
              
              
              $
              990
              
              
              $
              237
              
              
              $
              94,414Available-for-sale
      securities at December 31, 2006:U.S.
      Treasury securities
              
              $
              34,020
              
              
              $
              848
              
              
              $
              706
              
              
              $
              34,162Agency
              
              
              42,276
              
              
              
              17
              
              
              
              447
              
              
              
              41,846Municipalities
              
              
              74,737
              
              
              
              137
              
              
              
              819
              
              
              
              74,055Corporate
      debt securities
              
              
              190,638
              
              
              
              196
              
              
              
              3,196
              
              
              
              187,638Mortgage-backed
      securities
              
              
              7,816
              
              
              
              3
              
              
              
              202
              
              
              
              7,617Total
      fixed maturity securities
              
              $
              349,487
              
              
              $
              1,201
              
              
              $
              5,370
              
              
              $
              345,318Held-to-maturity
      securities at December 31, 2006:Mortgage-backed
      securities
              
              $
              76,198
              
              
              $
              255
              
              
              $
              520
              
              
              $
              75,933
   85
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
 
 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, 2007 are summarized by maturity as follows (in thousands):
  Available-for-Sale
              
              
              Held-to-MaturityAmortized
      Cost
              
              
              Fair
      Value
              
              
              Amortized
      Cost
              
              
              Fair
      ValueYears
      to maturity:One
      or less
              
              $
              49,111
              
              
              $
              48,917
              
              
              
              —
              
              
              
              —After
      one through five
              
              
              127,712
              
              
              
              127,828
              
              
              
              —
              
              
              
              —After
      five through ten
              
              
              107,762
              
              
              
              108,420
              
              
              
              —
              
              
              
              —After
      ten
              
              
              16,960
              
              
              
              18,069
              
              
              
              —
              
              
              
              —Mortgage-backed
      securities
              
              
              26,111
              
              
              
              26,613
              
              
              
              93,661
              
              
              
              94,414Total
              
              $
              327,656
              
              
              $
              329,847
              
              
              $
              93,661
              
              
              $
              94,414
 
 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.
  At
December 31, 2007 and 2006, bonds with an amortized cost of $7.9 million and
$13.2 million and a fair value of $9.0 million and $14.0 million, respectively,
were on deposit with various states’ departments of insurance in accordance with
regulatory requirements.  Additionally, as of December 31, 2007, $6.0
million of cash, representing a matured security not yet reinvested, was on
deposit with a department of insurance.  At December 31, 2007 and
2006, bonds with an amortized cost of $6.5 million and $6.0 million and a fair
value of $6.6 million and $5.9 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, 2007, 2006 and 2005 are summarized as follows (in thousands):
  2007
              
              
              2006
              
              
              2005Income:Fixed
      maturity securities
              
              $
              20,167
              
              
              $
              17,031
              
              
              $
              11,038Cash
      and cash equivalents
              
              
              796
              
              
              
              1,265
              
              
              
              674Investment
      income
              
              
              20,963
              
              
              
              18,296
              
              
              
              11,712Investment
      expenses
              
              
              861
              
              
              
              835
              
              
              
              914Net
      investment income
              
              $
              20,102
              
              
              $
              17,461
              
              
              $
              10,798
 
 Proceeds
from the sale of available-for-sale fixed maturity securities during the years
ended December 31, 2007, 2006 and 2005 were $23.1 million, $5.3 million and
$33.4 million, respectively.  Gross gains of less than $0.1 million,
less than $0.1 million, and $0.2 million were realized in the years ended
December 31, 2007, 2006 and 2005 respectively.  Gross losses of $0.4
million, $0.2 million and $0.6 million were realized in the years ended December
31, 2007, 2006 and 2005, respectively, on those sales.
  The
Company continuously monitors its 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 other-than-temporary.  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.
   86
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  The
following table summarizes, for all fixed maturity securities in an unrealized
loss position at December 31, 2007, the aggregate fair value and gross
unrealized loss by length of time the security has continuously been in an
unrealized loss position:
  Fair
      Value
              
              
              Unrealized
      Losses
              
              
              Number
      of Issues(In
      thousands)Less
      than 12 months:U.S.
      Treasury securities
              
              $
              -
              
              
              $
              -
              
              
              ­-Agency
              
              
              -
              
              
              
              -
              
              
              
              -Municipalities
              
              
              -
              
              
              
              -
              
              
              
              -Corporate
      debt securities
              
              
              13,348
              
              
              
              (75
              )
              
              
              6Mortgage-backed
      securities
              
              
              10,814
              
              
              
              (49
              )
              
              
              2Total
              
              $
              24,162
              
              
              $
              (124
              )
              
              
              8Greater
      than 12 months:U.S.
      Treasury securities
              
              $
              4,887
              
              
              $
              (17
              )
              
              
              6Agency
              
              
              9,001
              
              
              
              (35
              )
              
              
              6Municipalities
              
              
              33,555
              
              
              
              (101
              )
              
              
              24Corporate
      debt securities
              
              
              88,476
              
              
              
              (1,026
              )
              
              
              60Mortgage-backed
      securities
              
              
              17,320
              
              
              
              (273
              )
              
              
              13Total
              
              $
              153,239
              
              
              $
              (1,452
              )
              
              
              109Total
      fixed maturity securities:U.S.
      Treasury securities
              
              $
              4,887
              
              
              $
              (17
              )
              
              
              6Agency
              
              
              9,001
              
              
              
              (35
              )
              
              
              6Municipalities
              
              
              33,555
              
              
              
              (101
              )
              
              
              24Corporate
      debt securities
              
              
              101,824
              
              
              
              (1,101
              )
              
              
              66Mortgage-backed
      securities
              
              
              28,134
              
              
              
              (322
              )
              
              
              15Total
      fixed maturity securities
              
              $
              177,401
              
              
              $
              (1,576
              )
              
              
              117
 
 At
December 31, 2007, there were no investments in fixed maturity securities
with individual material unrealized losses.  One other-than-temporary
impairment totaling $0.1 million and three other-than-temporary impairments
totaling approximately $0.2 million were recorded on our investments during the
years ended December 31, 2007 and 2006, respectively.  Substantially,
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, 2007 and 2006
are summarized as follows (in thousands):
  2007
              
              
              2006Direct
      billed premiums receivable
              
              $
              14,984
              
              
              $
              20,722Estimated
      future audit premiums
              
              
              6,010
              
              
              
              11,318Collateralized
      premiums receivable
              
              
              6
              
              
              
              31Premiums
      receivable deferred installments
              
              
              70,224
              
              
              
              78,30591,224
              
              
              
              110,376Less
      allowance for doubtful accounts
              
              
              (2,738
              )
              
              
              (4,106
              )Net
      premiums receivable
              
              $
              88,486
              
              
              $
              106,270
   87
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
 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 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
              
              
              OccurrenceAccident
      Year
              
              Retention
              
              
              Retention
              
              
              Limit1989
      and 1990
              
              $
              500
              
              
              Unlimited
              
              
              Unlimited1991
      through 1993
              
              
              500
              
              
              Unlimited
              
              
              Unlimited1994
              
              
              400
              
              
              Unlimited
              
              
              Unlimited1995
              
              
              400
              
              
              $
              28,000
              
              
              Unlimited1996
      through 1998
              
              
              500
              
              
              Unlimited
              
              
              Unlimited1999
      through 2001
              
              
              250
              
              
              Unlimited
              
              
              Unlimited2002
      (a)
              
              
              500
              
              
              Unlimited
              
              
              $
              50,0002003
              
              
              1,000
              
              
              Unlimited
              
              
              
              20,0002004
      (b)
              
              
              1,000
              
              
              Unlimited
              
              
              
              20,0002005
              
              
              2,000
              
              
              Unlimited
              
              
              
              20,0002006
      and 2007
              
              
              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.
   88
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  Insurance
premiums for the years ended December 31, 2007, 2006 and 2005 are summarized as
follows (in thousands):
  2007
              
              
              2006
              
              
              2005Written
              
              
              Earned
              
              
              Written
              
              
              Earned
              
              
              Written
              
              
              EarnedDirect
              
              $
              220,565
              
              
              $
              231,667
              
              
              $
              266,827
              
              
              $
              269,752
              
              
              $
              270,331
              
              
              $
              267,809Assumed
              
              
              4,979
              
              
              
              5,330
              
              
              
              6,886
              
              
              
              7,266
              
              
              
              6,764
              
              
              
              8,308Ceded
              
              
              (4,460
              )
              
              
              (7,648
              )
              
              
              (8,925
              )
              
              
              (10,562
              )
              
              
              (9,443
              )
              
              
              (19,514
              )Net
              
              $
              221,084
              
              
              $
              229,349
              
              
              $
              264,788
              
              
              $
              266,456
              
              
              $
              267,652
              
              
              $
              256,603
 
 Incurred
losses and loss adjustment expenses for the years ended December 31, 2007, 2006
and 2005 are summarized as follows (in thousands):
  2007
              
              
              2006
              
              
              2005Direct
      losses and loss adjustment expenses incurred
              
              $
              121,709
              
              
              $
              157,005
              
              
              $
              144,832Assumed
      losses and loss adjustment expenses incurred
              
              
              2,708
              
              
              
              6,376
              
              
              
              8,164Ceded
      losses and loss adjustment expenses incurred
              
              
              2,145
              
              
              
              289
              
              
              
              (9,333
              )Net
      losses and loss adjustment expenses incurred
              
              $
              126,562
              
              
              $
              163,670
              
              
              $
              143,663
 
 Reinsurance
recoverables on paid and unpaid losses and loss adjustment expenses were $67.8
million and $75.4 million at December 31, 2007 and 2006, respectively, of which
$32.2 million and $39.1 million, respectively, was recoverable from a single
reinsurer, Continental Casualty Company, a subsidiary of CNA Financial
Corporation.  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
  Effective
January 1, 2007, the Company adopted FIN 48. This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements, prescribes a recognition threshold and measurement
attributes 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, and
accounting in interim periods.  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.  As of the
adoption date and as of December 31, 2007, the Company had no material
unrecognized tax benefits and no adjustments to liabilities or operations were
required. We recognize income tax related interest in interest expense and
penalties in income tax expense. Income tax related interest recognized in the
years ended December 31, 2007 and 2006 was $0.2 million and $0.3 million,
respectively.  Tax related interest accrued as of December 31, 2007,
and December 31, 2006 was $0.6 million and $0.4 million,
respectively.  Tax years 2004 through 2006 and 2003 through 2006 are
subject to examination by the federal and state taxing authorities,
respectively.  There are no income tax examinations currently in
process.
   89
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
 
 Significant
components of income tax expense for the years ended December 31, 2007, 2006 and
2005 are as follows (in thousands):
  2007
              
              
              2006
              
              
              2005Current
      tax expenseFederal
              
              $
              11,579
              
              
              $
              8,690
              
              
              $
              9,555State
              
              
              515
              
              
              
              425
              
              
              
              1,205Total
      current tax expense
              
              
              12,094
              
              
              
              9,115
              
              
              
              10,760Deferred
      tax benefitFederal
              
              
              (505
              )
              
              
              (827
              )
              
              
              (1,123
              )State
              
              
              (127
              )
              
              
              (32
              )
              
              
              (311
              )Total
      deferred tax benefit
              
              
              (632
              )
              
              
              (859
              )
              
              
              (1,434
              )Income
      tax expense
              
              $
              11,462
              
              
              $
              8,256
              
              
              $
              9,326
 
 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, 2007, 2006
and 2005 (in thousands):
  2007
              
              
              %
              
              
              2006
              
              
              %
              
              
              2005
              
              
              %Income
      tax at statutory rate
              
              $
              10,604
              
              
              
              35.0
              %
              
              $
              8,687
              
              
              
              35.0
              %
              
              $
              9,139
              
              
              
              35.0
              %Permanent
      differences:State
      income taxes
              
              
              594
              
              
              
              2.0
              
              
              
              255
              
              
              
              1.1
              
              
              
              844
              
              
              
              3.2Tax-exempt
      interest
              
              
              (1,112
              )
              
              
              (3.7
              )
              
              
              (942
              )
              
              
              (3.8
              )
              
              
              (584
              )
              
              
              (2.2
              )Non-deductible
      meals and entertainment
              
              
              461
              
              
              
              1.5
              
              
              
              197
              
              
              
              0.8
              
              
              
              350
              
              
              
              1.3Change
      in deferred tax rate
              
              
              —
              
              
              
              —
              
              
              
              (513
              )
              
              
              (2.0
              )
              
              
              —
              
              
              
              —Provision
      to return adjustment
              
              
              748
              
              
              
              2.4
              
              
              
              278
              
              
              
              1.1
              
              
              
              (4
              )
              
              
              —Non-deductible
      option expense
              
              
              138
              
              
              
              0.5
              
              
              
              133
              
              
              
              0.5
              
              
              
              —
              
              
              
              —Other
      expense—net
              
              
              29
              
              
              
              0.1
              
              
              
              161
              
              
              
              0.6
              
              
              
              (419
              )
              
              
              (1.6
              )Effective
      income tax expense
              
              $
              11,462
              
              
              
              37.8
              %
              
              $
              8,256
              
              
              
              33.3
              %
              
              $
              9,326
              
              
              
              35.7
              %
 
 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, 2007 and 2006 are
presented below (in thousands):
  2007
              
              
              2006Deferred
      tax assets:Loss
      and LAE reserve adjustments
              
              $
              13,094
              
              
              $
              13,551Unearned
      and advance premiums
              
              
              7,325
              
              
              
              8,112Allowance
      for bad debt
              
              
              998
              
              
              
              1,531Policyholder
      dividends
              
              
              3,746
              
              
              
              3,170FAS
      115 unrealized losses
              
              
              —
              
              
              
              1,553Deferred
      compensation
              
              
              974
              
              
              
              650Disallowed
      capital losses
              
              
              491
              
              
              
              326Other
              
              
              1,335
              
              
              
              689Total
      deferred tax assets
              
              
              27,963
              
              
              
              29,582Deferred
      tax liabilities:Deferred
      policy acquisition expenses
              
              
              (6,968
              )
              
              
              (7,734
              )FAS
      115 unrealized gains
              
              
              (799
              )
              
              
              —Other
              
              
              (307
              )
              
              
              (235
              )Total
      deferred tax liabilities
              
              
              (8,074
              )
              
              
              (7,969
              )Total
      net deferred tax assets
              
              $
              19,889
              
              
              $
              21,613
   90
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
 
 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, 2007 and 2006 (in thousands):
  2007
              
              
              2006
              
              
              2005Unpaid
      losses and LAE, gross of related reinsurance recoverables, at beginning of
      period
              
              $
              334,363
              
              
              $
              309,857
              
              
              $
              297,698Less
      reinsurance recoverables on unpaid losses and LAE at beginning of
      period
              
              
              72,296
              
              
              
              78,659
              
              
              
              107,155Unpaid
      losses and LAE, net of related reinsurance recoverables, at beginning of
      period
              
              
              262,067
              
              
              
              231,198
              
              
              
              190,543Add
      provision for losses and LAE, net of reinsurance, occurring
      in:Current
      period
              
              
              163,070
              
              
              
              177,841
              
              
              
              168,355Prior
      periods
              
              
              (36,508
              )
              
              
              (14,171
              )
              
              
              (24,692
              )Incurred
      losses during the current period, net of reinsurance
              
              
              126,562
              
              
              
              163,670
              
              
              
              143,663Deduct
      payments for losses and LAE, net of reinsurance, occurring
    in:Current
      period
              
              
              52,974
              
              
              
              56,448
              
              
              
              48,299Prior
      periods
              
              
              77,784
              
              
              
              76,353
              
              
              
              54,709Payments
      for losses and LAE during the current period, net of
      reinsurance
              
              
              130,758
              
              
              
              132,801
              
              
              
              103,008Unpaid
      losses and LAE, net of related reinsurance recoverables, at end of
      period
              
              
              257,871
              
              
              
              262,067
              
              
              
              231,198Reinsurance
      recoverables on unpaid losses and LAE at end of period
              
              
              66,353
              
              
              
              72,296
              
              
              
              78,659Unpaid
      losses and LAE, gross of reinsurance recoverables, at end of
      period
              
              $
              324,224
              
              
              $
              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 December 31, 2007 and 2006
by $36.5 million and $14.2 million, respectively, as a result of actual loss
development emerging more favorably than expected.  Excluding business
assumed from state mandated pools, the redundancy in the year ended December 31,
2007 was attributable to prior year reserve decreases in Florida ($17.6
million), Tennessee ($4.9 million), Wisconsin ($2.8 million), Indiana ($2.8
million), South Carolina ($2.2 million), Texas ($2.2 million), North Carolina
($1.7 million), Georgia ($1.2 million) and less significant decreases in several
other states.  The accident years with the largest redundancies were
2006 ($13.4 million), 2005 ($11.1 million) and 2004 ($6.4
million).  Excluding assumed business, the redundancy in the year
ended December 31, 2006 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.  The redundancy in the year ended
December 31, 2005 was attributable to loss development experience being 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 years
leading up to 2005, Florida loss development experience decreased from previous
levels.
  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.
   91
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  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 28%,
26% and 25% of the total business was subject to dividend participation during
the years ended December 31, 2007, 2006 and 2005, 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 2007, 2006 and 2005 policies reflect the full potential
amount allowed under the respective policies.
 10.
                  COMMITMENTS
      AND CONTINGENCIES
 As of
December 31, 2007, the Company had accrued $0.5 million for estimated additional
Florida dividends based on its statutory underwriting results pursuant to
Florida Statute 627.215 and applicable regulations (“Florida excessive
profits”). AmCOMP’s ultimate liability will be based on its premiums earned,
loss reserves and expenses compiled in accordance with the statute and
regulations.
  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 but not limited
to 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 $7.8 million under the reinsurance
agreement.  However, on November 14, 2007 the trial court in Florida
granted the plaintiff liquidator’s motion for partial summary judgment, finding
that the approximate $2.3 million in payments were “preferential” under
Pennsylvania law.  This order is not yet a final, appealable order
under Florida law.  There are a number of remaining issues, including
AmCOMP’s affirmative defenses, which must be determined by the court before a
final order or judgment could be entered.  Although the ultimate
results of these legal actions and related claims (including any future appeals)
are uncertain, the Company had accrued liabilities of $1.2 million, included in
accounts payable and accrued expenses, as of December 31, 2007 and 2006 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, $3.2 million and $2.6 million for 2007, 2006 and 2005,
respectively.  Future minimum payments under noncancelable capital and
operating leases with initial terms of one year or more as of December 31, 2007
are as follows (in thousands):
  Year
      Ended December 31,
              
              Capital
      Leases
              
              
              Operating
      Leases
              
              
              Total
      Lease Commitments2008
              
              $
              340
              
              
              $
              2,563
              
              
              $
              2,9032009
              
              
              340
              
              
              
              1,918
              
              
              
              2,2582010
              
              
              116
              
              
              
              1,296
              
              
              
              1,4122011
              
              
              –
              
              
              
              754
              
              
              
              7542012
      and thereafter
              
              
              –
              
              
              
              626
              
              
              
              626$
              796
              
              
              $
              7,157
              
              
              $
              7,953
   92
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
 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.
  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
$753,000, $619,000 and $570,000 for the years ended December 31, 2007, 2006 and
2005, 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, 2007 and 2006, the principal balance was $4.5 million and $6.3
million respectively.  The interest rate was 6.83% and 7.85% at
December 31, 2007 and 2006, respectively.  Interest paid during 2007,
2006 and 2005 totaled $0.4 million, $0.5 million and $0.5 million,
respectively.
  The Loan
contains various restrictive covenants and certain financial
covenants.  At December 31, 2007, the Company was in compliance with
all restrictive and financial covenants.
  On
April 30, 2004, AmCOMP Preferred issued a $10.0 million surplus note in
return for $10.0 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
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 during the years ended December 31, 2007, 2006 and 2005
totaled $1.0 million and $0.9 million, and $0.7 million,
respectively.  Interest accrued as of December 31, 2007 and 2006 was
$0.1 million.
   93
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  On
May 26, 2004, AmCOMP Preferred issued a $12.0 million surplus note, in
return for $12.0 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 during the years ended December 31, 2007, 2006 and 2005 totaled
$1.2 million, $1.1 million and $0.9 million, respectively. Interest accrued as
of December 31, 2007 and 2006 was $0.1 million.
  On
September 14, 2004, AmCOMP Preferred issued a $10.0 million surplus note,
in return for $10.0 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 during
the years ended December 31, 2007, 2006 and 2005 totaled $1.0 million, $0.9
million and $0.7 million, respectively. Interest accrued as of December 31, 2007
and 2006 was less than $0.1 million.
  Payments
of principal due on the notes payable at December 31, 2007 are as follows (in
thousands):
  2008
                
                $
                1,7862009
                
                
                1,7862010
                
                
                8922011
                
                
                –2012
      and thereafter
                
                
                32,000Total
                
                $
                36,464
 
 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, 2007, 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 authorized shares of $.01 par value common
stock as of December 31, 2007 and 2006, respectively.  At December 31,
2007 and 2006, 15,921,540 and 15,893,162 shares, respectively, were issued and
15,290,181 and 15,758,252, respectively, were outstanding.  Dividends
are payable as declared by the Board.
  As of
December 31, 2007, 1,081,314 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.
  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.  In August 2007, the Company’s Board of
Directors authorized a share repurchase program to acquire up to 1.5 million
shares of the Company’s common stock. The program was intended to be implemented
through purchases made from time to time in either the open market or through
private transactions, in accordance with the Securities and Exchange
Commission’s requirements.  Repurchases under this authorization
commenced in August 2007, and were suspended in December 2007, in connection
with the potential acquisition of the Company by Employers Holdings,
Inc.  As of December 31, 2007, 559,954 shares have been repurchased
pursuant to this authorization at an average cost of $9.76 per
share.  Additional shares may be repurchased as conditions
warrant.
   94
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  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.  In April 2007, the Directors plan expired, which had no effect
on options outstanding thereunder.
  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 54,575 and 272,877 common shares are still outstanding as of December
31, 2007 and 2006, respectively. 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.
  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.
  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 calculating the expense related to stock-based
compensation.  As a result of the adoption of SFAS No. 123R, the
Company recognized approximately $0.7 million and $0.6 million of stock option
compensation expense and less than $0.1million of related tax benefit in the
years ended December 31, 2007 and 2006, respectively.  As of December
31, 2007, total unrecognized compensation expense related to non-vested stock
options was approximately $1.3 million.  This cost is expected to be
recognized over the weighted average period of 1.9 years.
  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.
   95
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  A summary
of the Company’s stock option activity through December 31, 2007 is as
follows:
  Employees,
      Directors, and ExecutivesAverage
      Exercise Price
                
                
                Number
      of SharesOutstanding–December
      31, 2004
                
                $
                11.09
                
                
                
                673,703Granted
                
                
                –
                
                
                
                –Exercised
                
                
                –
                
                
                
                –Forfeited
                
                
                10.13
                
                
                
                (28,124
                )Outstanding–
      December 31, 2005
                
                
                11.12
                
                
                
                645,579Granted
                
                
                9.03
                
                
                
                818,442Exercised
                
                
                9.32
                
                
                
                (239,757
                )Forfeited
                
                
                8.89
                
                
                
                (132
                )Expired
                
                
                9.26
                
                
                
                (2,574
                )Outstanding–
      December 31, 2006
                
                
                10.08
                
                
                
                1,221,558Granted
                
                
                10.66
                
                
                
                54,737Exercised
                
                
                8.85
                
                
                
                (91,883
                )Forfeited
                
                
                9.04
                
                
                
                (56,362
                )Expired
                
                
                13.67
                
                
                
                (221,628
                )Outstanding–
      December 31, 2007
                
                $
                9.43
                
                
                
                906,422
 
 As of
December 31, 2007, 2006 and 2005, options to purchase 304,515, 360,505 and
588,453 shares were exercisable.  The weighted average remaining
contractual life of the exercisable options was 2.4 years and 0.6 years as of
December 31, 2007 and 2006, respectively.  The per-share weighted
average grant date fair value of options granted in the years ended December 31,
2007 and 2006 were $3.78 and $3.05, 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 2007 grant date fair value: zero expected dividend
yield, 4.63% risk-free interest rate, 5 year expected life, and 30.3%
volatility.  The expected life was based on historical exercise
behavior and the contractual life of the options.  Due to
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 2007, 2006 and 2005 was $2.84, $1.48 and $1.68,
respectively.  As of December 31, 2007 the aggregate intrinsic value
of options outstanding and options exercisable was approximately $0.6 million
and $0.2 million, respectively.  The total aggregate intrinsic value
of options exercised during 2007 and 2006 was approximately $0.1 million and
$0.3 million, respectively.  No options were exercised in
2005.
  Summary
information for option awards expected to vest is as follows:
  Options
      OutstandingRange
      of Exercise Prices
                
                
                Number
      Outstanding at December 31, 2007
                
                
                Weighted
      Average Remaining Contractual Life
                
                
                Weighted
      Average Exercise Price
                
                
                Aggregate
      Intrinsic Value$
                0.00
      – $ 8.99
                
                
                
                6,701
                
                
                
                0.00
                
                
                $
                8.89
                
                
                $
                6,4559.00
      – 9.99
                
                
                
                735,036
                
                
                
                3.00
                
                
                
                9.02
                
                
                
                611,88810.00
      – 14.00
                
                
                
                123,527
                
                
                
                2.33
                
                
                
                11.98
                
                
                
                –865,264
                
                
                
                2.88
                
                
                $
                9.44
                
                
                $
                618,343
   96
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
 
 Summary
information for total outstanding option awards is as follows:
  Options
      Outstanding
                
                
                Options
      ExercisableRange
      of Exercise Prices
                
                
                Number
      Outstanding at December 31, 2007
                
                
                Weighted
      Average Remaining Contractual Life
                
                
                Weighted
      Average Exercise Price
                
                
                Number
      Exercisable at December 31, 2007
                
                
                Weighted
      Average Exercise Price$
                0.00
      – $ 8.99
                
                
                
                6,701
                
                
                
                0.00
                
                
                $
                8.89
                
                
                
                6,701
                
                
                $
                8.899.00
      – 9.99
                
                
                
                771,610
                
                
                
                3.01
                
                
                
                9.02
                
                
                
                238,239
                
                
                
                9.0410.00
      – 14.00
                
                
                
                128,111
                
                
                
                2.39
                
                
                
                11.93
                
                
                
                59,575
                
                
                
                13.46906,422
                
                
                
                2.90
                
                
                $
                9.43
                
                
                
                304,515
                
                
                $
                9.90
 
 In the event that currently outstanding
options are exercised, the Company intends to first issue treasury shares to the
extent available, or 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, 2007, 2006 and 2005 (in thousands, except
per share data):
  2007
                
                
                2006
                
                
                2005Numerator:Net
      income attributable to common stockholders
                
                $
                18,836
                
                
                $
                16,562
                
                
                $
                16,785Denominator:Weighted-average
      shares outstanding (denominator for basic earnings per
    share)
                
                
                15,647
                
                
                
                14,452
                
                
                
                5,367Plus
      effect of dilutive securities:Convertible
      preferred stock
                
                
                —
                
                
                
                459
                
                
                
                4,191Employee
      stock options
                
                
                9
                
                
                
                20
                
                
                
                4Weighted-average
      shares outstanding and assumed conversions (denominator for diluted
      earnings per share)
                
                
                15,656
                
                
                
                14,931
                
                
                
                9,562Basic
      earnings per share
                
                $
                1.20
                
                
                $
                1.15
                
                
                $
                3.13Diluted
      earnings per share
                
                $
                1.20
                
                
                $
                1.11
                
                
                $
                1.76
 
 For the
years ended December 31, 2007, 2006 and 2005, outstanding employee stock options
of 879,856, 1,134,979 and 558,483 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.
  17.
                REGULATORY
      EVENTS
  On August
24, 2007, 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 16.5% 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 29, 2007, NCCI
submitted an amended filing calling for a statewide decrease of 18.4%, which was
approved by the Florida OIR on October 31, 2007. The new rates apply to all new
and renewal policies as of January 1, 2008.  The effect of the
approved decrease cannot currently be ascertained.
   97
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  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) in the amount
of $5,663,805 have been realized by the Company.  Florida 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 Florida excessive profits.
These filings amend and increase the expenses the Company believes are permitted
by the statute in calculating Florida excessive profits.
 
 The
Company, through outside regulatory counsel, has submitted its amended filings
to Florida OIR for the years 2002, 2003 and 2004. The amended filings report no
Florida 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
Florida 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 advice from legal counsel, that Florida
excessive profits were not, in fact, earned in Florida for the years 2002, 2003,
and 2004. As of December 31, 2007, no accrual for Florida excessive profits has
been provided for the 2002, 2003 and 2004 years.
 
 18.
                QUARTERLY
      RESULTS FOR 2007 AND 2006
(UNAUDITED)
  First
                  Quarter
                
                
                Second
                  Quarter
                
                
                Third
                  Quarter
                
                
                Fourth
                  Quarter2007Revenues
                
                $
                64,105
                
                
                $
                60,171
                
                
                $
                62,961
                
                
                $
                61,868Expenses
                
                
                58,009
                
                
                
                51,596
                
                
                
                52,133
                
                
                
                57,069Net
      income
                
                
                4,020
                
                
                
                5,527
                
                
                
                6,876
                
                
                
                2,413Basic
      earnings per share
                
                
                0.26
                
                
                
                0.35
                
                
                
                0.44
                
                
                
                0.16Diluted
      earnings per share
                
                
                0.25
                
                
                
                0.35
                
                
                
                0.44
                
                
                
                0.162006Revenues
                
                $
                70,099
                
                
                $
                72,524
                
                
                $
                72,572
                
                
                $
                68,748Expenses
                
                
                60,769
                
                
                
                65,428
                
                
                
                65,376
                
                
                
                67,552Net
      income
                
                
                5,975
                
                
                
                5,007
                
                
                
                4,324
                
                
                
                1,256Basic
      earnings per share
                
                
                0.54
                
                
                
                0.31
                
                
                
                0.28
                
                
                
                0.08Diluted
      earnings per share
                
                
                0.46
                
                
                
                0.31
                
                
                
                0.28
                
                
                
                0.08
 
 19.
                SUBSEQUENT
      EVENTS
 
 On
September 4, 2007, the Company obtained a commitment for a $30 million secured
non-revolving line of credit from Regions Bank.  Under the terms of
the commitment for the loan, the interest rate is a floating rate of 160 basis
points over LIBOR.  Advances under the commitment will be available
for up to two years from the date of closing.  Fundings under the
commitment will have a seven-year fully amortizing term and can be repaid at any
time without penalty.  The loan has no fees associated with it other
than a 1⁄4% non-usage fee per annum pro-rated for the amount of loan principal
which is not drawn down by AmCOMP.  Any advances under the line of
credit are to be collateralized by the stock of a wholly-owned insurance
subsidiary of AmCOMP and certain intercompany surplus notes.  The loan
is designated for strategic and general corporate purposes.  At
AmCOMP’s request Regions Bank extended the closing date of the commitment
through June 15, 2008.
   98
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  On
January 10, 2008, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Employers Holdings, Inc., a Nevada corporation
("Employers") and Sapphire Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of Employers ("Merger Sub"), providing for the
acquisition of the Company by Employers.
  Pursuant
to the Merger Agreement, each issued and outstanding share of common stock,
$0.01 par value, of the Company, other than dissenting shares or shares owned by
the Company as treasury stock, or by Employers or Merger Sub, will be converted
into the right to receive $12.50 per share in cash. As part of the Merger
Agreement, Merger Sub will merge with and into the Company with the Company
being the surviving corporation in the merger. The Board of Directors of the
Company and Employers each approved the entry into the Merger
Agreement.
  The
Merger Agreement and related transactions are subject to the approval of the
Company's stockholders, the expiration or termination of applicable waiting
periods under the Hart–Scott–Rodino Antitrust Improvements Act of 1976, as
amended, the receipt of other material regulatory approvals, including from the
Florida Office of Insurance Regulation, and certain other customary closing
conditions.  The merger and related transactions are expected to be
completed by the end of the second quarter of 2008.
  Employers
may terminate the Merger Agreement under certain circumstances, including if the
Company’s Board of Directors changes or withdraws its recommendation that the
Company stockholders adopt the Merger Agreement or under other circumstances
involving a competing offer to acquire the Company. In connection with such
termination, the Company may be required to pay a fee of $8 million to
Employers. The Company may terminate the Merger Agreement as a result of
Employers’ material breach of any of its representations, warranties, covenants
or agreements under the Merger Agreement. In connection with Employers’ breach
of any of its covenants or agreements or of its representation and warranty that
is has sufficient funds to complete the transaction, Employers may be required
to pay a termination fee of $8 million to the Company.
 
 In
connection with the Merger Agreement, the Company and Employers entered into
Integration Bonus and Enhanced Severance Agreements, effective as of January 10,
2008 (together, the “Severance Agreements”), with Employers and each of Debra
Cerre-Ruedisili, the Executive Vice President and Chief Operating Officer of the
Company, and Kumar Gursahaney, the Senior Vice President and Chief Financial
Officer of the Company (the “Executives”).
  Under the
Severance Agreements, each of the Executive’s employment with the Company will
terminate on the date that is 60 calendar days following the closing of the
Merger (the “Separation Date”).  The Executives have each agreed to
use best efforts to ensure a smooth transition and integration in the Merger and
to perform certain other duties prior to and following the closing of the
Merger.  In consideration of the above, and subject to the
consummation of the Merger, provided that the Executive either remains employed
by the Company through the Separation Date or is terminated by Employers or the
Company other than for cause on or prior to the Separation Date, the Executive
will be entitled to receive a bonus in an amount equal to $200,000 in the case
of Ms. Cerre-Ruedisili and $110,000 in the case of Mr. Gursahaney, as soon as
practicable, but in no event later than, 15 calendar days following the
Separation Date.
   99
 Index
 AmCOMP
INCORPORATED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
  In
addition, provided that such Executive remains employed by the Company through
the Separation Date, or is terminated by the Company or Employers other than due
to death, disability or for cause at any time following the closing of the
Merger, then in lieu of payments set forth in Section 7(c) of such Executive’s
employment agreement, Employers will pay or will cause the Company to pay to
such Executive 18 months of severance pay, each monthly payment in an amount
equal to the sum of (i) one-sixth of annual salary in the case of Ms.
Cerre-Ruedisili, and one-eighth of annual salary in the case of Mr. Gursahaney,
each as in effect immediately prior to such termination and (ii) one-twelfth of
the amount of incentive compensation and bonuses approved and accrued for such
Executive in respect of the most recent fiscal year preceding such termination.
The Executives will also be entitled to continued eligibility to participate in
any medical and health plans or other employee welfare benefit plans that may be
provided by the Company for its senior executive employees for 18 months
following the Separation Date.
  Each
Executive has also acknowledged and agreed that such Executive will continue to
be subject to the terms and conditions of the restrictive covenants set forth in
Section 9 of such Executive’s employment agreement with the Company for the
18-month period set forth therein (the “Restricted Period”).  The
Executives have each further agreed to be available to the Company and Employers
and to assist the Company and Employers during the Restricted Period in
performing such duties as the Company or Employers may request from time to
time.
  On March
4, 2008, a purported class-action complaint was filed in the Circuit Court of
the 15th
Judicial Circuit, in and for Palm Beach County, Florida, on behalf of Broadbased
Equities, an alleged stockholder of the Company, and all others similarly
situated. The complaint, which names as defendants the Company, the Company’s
directors Fred R. Lowe, Debra Cerre-Ruedisili, Sam A. Stephens, Paul B. Queally,
Donald C. Stewart and Spencer L. Cullen, Jr., and Employers, asserts claims
related to the proposed transaction with Employers for breaches of fiduciary
duty and, in the case of Employers, aiding and abetting such breaches, in
connection with the directors’ determination to sell the Company.  The
complaint seeks a declaratory judgment that the defendants have breached their
fiduciary duties to plaintiff and the purported class members and/or, in the
case of Employers, aided and abetted such breaches, compensatory and/or
rescissory damages, as well as pre and post-trial interest, as allowed by law,
and the costs and disbursements of the action, including reasonable attorneys'
and experts' fees and other costs. The Company believes that these claims are
without merit and intends to defend this action vigorously and, therefore, no
provision for this litigation has been made in the current financial
statements.
 100
 Index
  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.
  Management’s
Report on Internal Control Over Financial Reporting
  Management
is also responsible for establishing and maintaining effective internal control
over financial reporting. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles. The Company’s
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles and that receipts
and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements. Management recognizes that there
are inherent limitations in the effectiveness of any internal control over
financial reporting, including the possibility of human error and the
circumvention or overriding of internal control. Accordingly, even effective
internal control over financial reporting can provide only reasonable assurance
with respect to financial statement preparation. Further, because of changes in
conditions, the effectiveness of internal control over financial reporting may
vary over time.
 
 In order
to ensure that the Company’s internal control over financial reporting is
effective, management regularly assesses such controls and did so most recently
as of December 31, 2007. This assessment was based on criteria for
effective internal control over financial reporting described in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes the Company maintained effective internal control over financial
reporting as of December 31, 2007. Johnson Lambert & Co. LLP, the
Company’s independent registered public accounting firm, has issued an opinion
on the Company’s internal control over financial reporting as of
December 31, 2007, which appears herein.
  Changes
in Internal Control Over Financial Reporting.
  No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
December 31, 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
  Item
9B.  Other Information
  Not
Applicable.
   101
 Index
  PART III
  Item
10.  Directors and Executive Officers of the Registrant
  The
information required by this Item will be contained in our definitive proxy
statement issued in connection with the 2008 annual meeting of stockholders
filed with the SEC within 120 days after December 31, 2007 and is incorporated
herein by reference.  If we do not file a definitive proxy statement
in connection with the 2008 annual meeting of stockholders with the SEC within
120 days after December 31, 2007, we will file such information with the SEC
pursuant to an amendment to this Form 10-K within 120 days after December 31,
2007.
  Item
11.  Executive Compensation
  The
information required by this Item will be contained in our definitive proxy
statement issued in connection with the 2008 annual meeting of stockholders
filed with the SEC within 120 days after December 31, 2007 and is incorporated
herein by reference.  If we do not file a definitive proxy statement
in connection with the 2008 annual meeting of stockholders with the SEC within
120 days after December 31, 2007, we will file such information with the SEC
pursuant to an amendment to this Form 10-K within 120 days after December 31,
2007.
  Item
12.  Security Ownership of Certain Beneficial Owners
and Management
  The
information required by this Item will be contained in our definitive proxy
statement issued in connection with the 2008 annual meeting of stockholders
filed with the SEC within 120 days after December 31, 2007 and is incorporated
herein by reference.  If we do not file a definitive proxy statement
in connection with the 2008 annual meeting of stockholders with the SEC within
120 days after December 31, 2007, we will file such information with the SEC
pursuant to an amendment to this Form 10-K within 120 days after December 31,
2007.
  Item
13.  Certain Relationships and Related
Transactions
  The
information required by this Item will be contained in our definitive proxy
statement issued in connection with the 2008 annual meeting of stockholders
filed with the SEC within 120 days after December 31, 2007 and is incorporated
herein by reference.  If we do not file a definitive proxy statement
in connection with the 2008 annual meeting of stockholders with the SEC within
120 days after December 31, 2007, we will file such information with the SEC
pursuant to an amendment to this Form 10-K within 120 days after December 31,
2007.
  Item
14.  Principal Accounting Fees and
Services
  The
information required by this Item will be contained in our definitive proxy
statement issued in connection with the 2008 annual meeting of stockholders
filed with the SEC within 120 days after December 31, 2007 and is incorporated
herein by reference.  If we do not file a definitive proxy statement
in connection with the 2008 annual meeting of stockholders with the SEC within
120 days after December 31, 2007, we will file such information with the SEC
pursuant to an amendment to this Form 10-K within 120 days after December 31,
2007.
   102
 Index
  PARTIV
  Item
15.  Exhibits and Financial Statement Schedules
  (a)
List of documents filed as part of this report:
  1.
Financial Statements as of December 31, 2007 and December 31, 2006 and for the
three years ended December 31, 2007 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.
   103
 Index
  AmCOMPIncorporated
 Schedule
II—Condensed Financial Information of Parent Company
 Condensed
Balance Sheets
  December
      31,2007
                
                
                2006(In
      Thousands)AssetsCash
      and cash equivalents
                
                $
                3,534
                
                
                $
                5,799Fixed
      maturity securities available-for-sale at fair value (amortized cost of
      $5,000,000 in 2006)
                
                
                –
                
                
                
                5,000Investment
      in subsidiaries
                
                
                148,495
                
                
                
                127,518Surplus
      notes receivable from affiliates
                
                
                25,500
                
                
                
                25,500Interest
      receivable on surplus notes receivable from affiliates
                
                
                2,539
                
                
                
                2,552Other
      assets
                
                
                157
                
                
                
                91Income
      tax recoverable
                
                
                962
                
                
                
                3,102$
                181,187
                
                
                $
                169,562Liabilities and Stockholders’
      EquityDeferred
      income taxes
                
                $
                926
                
                
                $
                951Note
      payable
                
                
                4,464
                
                
                
                6,250Payable
      to affiliated companies
                
                
                16,105
                
                
                
                22,824Income
      tax payable
                
                
                1,441
                
                
                
                –Other
      liabilities
                
                
                74
                
                
                
                249Stockholders’
      EquityCommon
      stock
                
                
                159
                
                
                
                158Other
      stockholders’ equity
                
                
                158,018
                
                
                
                139,130Total
      stockholders’ equity
                
                
                158,177
                
                
                
                139,288$
                181,187
                
                
                $
                169,562
 
 See
accompanying notes to condensed financial statements
   104
 Index
  AmCOMPIncorporated
 Condensed
Statements of Operations
  Year
      Ended December 31,2007
                
                
                2006
                
                
                2005(In Thousands)RevenuesInterest
      income
                
                $
                2,944
                
                
                $
                2,770
                
                
                $
                1,955ExpensesOther
      operating expenses
                
                
                235
                
                
                
                159
                
                
                
                62Interest
      expense
                
                
                393
                
                
                
                529
                
                
                
                545Total
      expenses
                
                
                628
                
                
                
                688
                
                
                
                607Income
      before income taxes and equity in undistributed earnings of consolidated
      subsidiaries
                
                
                2,316
                
                
                
                2,082
                
                
                
                1,348Income
      tax (benefit) expense
                
                
                452
                
                
                
                797
                
                
                
                (279
                )Equity
      in undistributed earnings of consolidated subsidiaries
                
                
                16,972
                
                
                
                15,277
                
                
                
                15,158Net
      Income
                
                $
                18,836
                
                
                $
                16,562
                
                
                $
                16,785
 
 See
accompanying notes to condensed financial statements
   105
 Index
  AmCOMPIncorporated
 Condensed
Statements of Cash Flows
  Year
      Ended December 31,2007
                
                
                2006
                
                
                2005(In
      Thousands)Operating
      Activities:Net
      income
                
                $
                18,836
                
                
                $
                16,562
                
                
                $
                16,785Adjustments
      to reconcile net income to net cash provided by operating
      activities:Excess
      tax benefits from exercise of options
                
                
                (41
                )
                
                
                (162
                )
                
                
                —Equity
      in earnings of subsidiaries
                
                
                (16,972
                )
                
                
                (15,277
                )
                
                
                (15,158
                )Stock
      Option expense
                
                
                702
                
                
                
                545
                
                
                
                —Interest
      receivable on surplus notes receivable from affiliates
                
                
                13
                
                
                
                2,100
                
                
                
                (1,917
                )Deferred
      income taxes
                
                
                (25
                )
                
                
                (576
                )
                
                
                24Income
      tax recoverable
                
                
                3,596
                
                
                
                (2,023
                )
                
                
                1,961Other
      assets and other liabilities
                
                
                (66
                )
                
                
                1,389
                
                
                
                (1,365
                )Payable
      to affiliated companies
                
                
                (6,719
                )
                
                
                4,372
                
                
                
                890Accounts
      payable and accrued expenses
                
                
                (175
                )
                
                
                (290
                )
                
                
                542Net
      cash provided by operating activities
                
                
                (851
                )
                
                
                6,640
                
                
                
                1,762Investing
      Activities:Securities
      available-for-sale:Purchases
                
                
                (5,000
                )
                
                
                (7,000
                )
                
                
                —Sales
      and maturities
                
                
                10,000
                
                
                
                2,000
                
                
                
                —Investment
      in subsidiary
                
                
                —
                
                
                
                (45,000
                )
                
                
                —Net
      cash used in investing activities
                
                
                5,000
                
                
                
                (50,000
                )
                
                
                —Financing
      activities:Proceeds
      from initial public offering
                
                
                —
                
                
                
                47,972
                
                
                
                —Proceeds
      from option exercise
                
                
                812
                
                
                
                1,828
                
                
                
                —Excess
      tax benefits from exercise of options
                
                
                41
                
                
                
                162
                
                
                
                —Purchase
      of treasury stock
                
                
                (5,481
                )
                
                
                —
                
                
                
                —Payment
      of note payable
                
                
                (1,786
                )
                
                
                (1,786
                )
                
                
                (1,785
                )Net
      cash provided by (used in) financing activities
                
                
                (6,414
                )
                
                
                48,176
                
                
                
                (1,785
                )Net
      increase(decrease) in cash
                
                
                (2,265
                )
                
                
                4,816
                
                
                
                (23
                )Cash
      at beginning of year
                
                
                5,799
                
                
                
                983
                
                
                
                1,006Cash
      at end of the year
                
                $
                3,534
                
                
                $
                5,799
                
                
                $
                983
 
 See
accompanying notes to condensed financial statements
   106
 Index
 AmCOMPIncorporated
 Notes
to Condensed Financial Statements
 Years
Ended December 31, 2007, 2006 and 2005
  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 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, 2007 and 2006, the principal balance was $4.5 million and $6.3
million, respectively.
 
 Maturities
of the Loan at December 31, 2007 are as follows (in thousands):
  2008
                
                $
                1,7862009
                
                
                1,7862010
                
                
                892Total
                
                $
                4,464
 
 
 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 9.25% at December 31,
2007.  Both the payment of interest and principal require approval of
the Florida Department of Financial Services (“FDFS”).  Interest
income was $0.9 million, $0.8 million and $0.6 million for the years ended
December 31, 2007, 2006 and 2005, respectively.  Approved interest
paid during the years ended December 31, 2007 and 2006 totaled $1.8 million and
$1.6 million, respectively.  Earned but unpaid interest as of
December 31, 2007 and 2006 was $0.1 million and $0.8 million,
respectively.
   107
 Index
 AmCOMP
Incorporated
 Notes
to Condensed Financial Statements
 Years
Ended December 31, 2007, 2006 and 2005
  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, 2007, 2006 and 2005,
respectively.  Approved interest paid during the year ended December
31, 2006 totaled $1.4 million. Earned but unpaid interest as of
December 31, 2007 and 2006 was $1.1 million and $0.6 million,
respectively.
  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 9.86% at December 31,
2007.  Both the payment of interest and principal require approval of
the FDFS.  Interest income was $0.2 million, $0.2 million and $0.2
million for the years ended December 31, 2007, 2006 and 2005,
respectively.  Approved interest paid during the years ended December
31, 2007 and 2006 totaled $0.4 million and $0.3 million,
respectively.  Earned but unpaid interest as of December 31, 2007
and 2006 was less than $0.1 million and $0.2 million, respectively.
  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 9.86% at December 31,
2007.  Both the payment of interest and principal require approval of
the FDFS.  Interest income was $0.2 million, $0.2 million and $0.2
million for the years ended December 31, 2007, 2006 and 2005,
respectively.  Approved interest paid during the years ended December
31, 2007 and 2006 totaled $0.4 million and $0.3 million,
respectively.  Earned but unpaid interest as of December 31, 2007
and 2006 was less than $0.1 million and $0.2 million, respectively.
  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 9.86% at
December 31, 2007.  Both the payment of interest and principal
require approval of the FDFS.  Interest income was $0.6 million, $0.6
million and $0.5 million for the years ended December 31, 2007, 2006 and
2005 respectively. Approved interest paid during the year ended December 31,
2006 totaled $0.8 million.  Earned but unpaid interest as of
December 31, 2007 and 2005 was $1.3 million and $0.7 million,
respectively
  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, 2007 and 2006,
the Company had recorded approximately $16.1 million and $22.8 million,
respectively, of net payables to affiliates.
   108
 Index
 AmCOMP
Incorporated
 Notes
to Condensed Financial Statements
 Years
Ended December 31, 2007, 2006 and 2005
  4.  Federal
and State Income Taxes
  Income
tax expense (benefit) for the years ended December 31, 2007, 2006 and 2005 was
allocated as follows:
  2007
                
                
                2006
                
                
                2005Current
      expense (benefit)Federal
                
                $
                472
                
                
                $
                1,371
                
                
                $
                (329
                )State
                
                
                5
                
                
                
                164
                
                
                
                26Total
      current (benefit) expense
                
                
                477
                
                
                
                1,535
                
                
                
                (303
                )Deferred
      (benefit) expenseFederal
                
                
                (25
                )
                
                
                (665
                )
                
                
                22State
                
                
                —
                
                
                
                (73
                )
                
                
                2Total
      deferred (benefit) expense
                
                
                (25
                )
                
                
                (738
                )
                
                
                24Total
      tax expense (benefit)
                
                $
                452
                
                
                $
                797
                
                
                $
                (279
                )
 
 AmCOMP’s
effective income tax rate differed from the statutory income tax rate for the
years ended December 31, 2007, 2006 and 2005 as follows:
  2007
                
                %
                
                2006
                
                %
                
                2005
                
                %Statutory
      federal income tax rate
                
                $
                811
                
                
                
                35.0
                %
                
                $
                729
                
                
                
                35.0
                %
                
                $
                457
                
                
                
                35.0
                %Increases
      (reductions) in tax resulting from:Surplus
      notes interest income deferred
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (647
                )
                
                
                (49.6
                )Tax-exempt
      interest
                
                
                (84
                )
                
                
                (3.6
                )
                
                
                (39
                )
                
                
                (0.9
                )
                
                
                —
                
                
                
                —Prior
      year provision to return adjustment
                
                
                (241
                )
                
                
                (10.4
                )
                
                
                (3
                )
                
                
                (0.1
                )
                
                
                122
                
                
                
                9.3State
      tax
                
                
                (34
                )
                
                
                (1.5
                )
                
                
                59
                
                
                
                2.8
                
                
                
                (211
                )
                
                
                (16.1
                )Other
                
                
                —
                
                
                
                —
                
                
                
                51
                
                
                
                1.5
                
                
                
                —
                
                
                
                —$
                452
                
                
                
                19.5
                %
                
                $
                797
                
                
                
                38.3
                %
                
                $
                (279
                )
                
                
                (21.4
                )%
 
 The tax
effects of temporary differences that give rise to significant portions of the
deferred tax liabilities included at December 31, 2007 and 2006 are
presented below:
  2007
                
                
                2006Deferred
      Tax Liabilities:Surplus
      Notes Interest Receivable
                
                $
                926
                
                
                $
                951
   109
 Index
  AmCOMP
Incorporated and Subsidiaries
 Schedule
V—Valuation and Qualifying Accounts
 (in
thousands)
 
 
 AdditionsBalance
      at beginning of period
                
                
                (Credited)/
      charged to costs and expenses
                
                
                Charged
      to other accounts
                
                
                Deductions
      (1)
                
                
                Balance
      at end of periodYear
      ended December 31, 2007Allowance
      for uncollectible:Premiums
      in course of collection
                
                $
                4,106
                
                
                $
                (80
                )
                
                $
                —
                
                
                $
                (1,288
                )
                
                $
                2,738Year
      ended December 31, 2006Allowance
      for uncollectible:Premiums
      in course of collection
                
                $
                4,887
                
                
                $
                987
                
                
                $
                —
                
                
                $
                (1,768
                )
                
                $
                4,106Year
      ended December 31, 2005Allowance
      for uncollectible:Premiums
      in course of collection
                
                $
                6,000
                
                
                $
                1,525
                
                
                $
                —
                
                
                $
                (2,638
                )
                
                $
                4,887
 _________________
 (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)
  Affiliations
                
                Deferred
      Policy
                
                
                Reserves
      for Unpaid Claims and Claims
                
                
                Discount
      if any Deducted
                
                
                Unearned
      and
                
                
                Net
                
                
                Net
                
                
                Claims
      and Claims Adjustment Expense Incurred Related to
                
                
                Amortization
      of Deferred Policy
                
                
                Paid
      Claims and Claims
                
                
                NetWith
      Registrant
                
                Acquisition
      Costs
                
                
                Adjustment
      Expenses
                
                
                in
      Column C (1)
                
                
                Advanced
      Premiums
                
                
                Premiums
      Earned
                
                
                Investment
      Income
                
                
                Current
      Year
                
                
                Prior
      Years
                
                
                Acquisition
      Costs
                
                
                Adjustment
      Expenses
                
                
                Premiums
      WrittenConsolidated
      Property and Casualty Subsidiaries2007
                
                
                $
                19,116
                
                
                $
                324,224
                
                
                $
                –
                
                
                $
                102,672
                
                
                $
                229,349
                
                
                $
                20,102
                
                
                $
                163,070
                
                
                $
                (36,508
                )
                
                $
                44,469
                
                
                $
                130,758
                
                
                $
                221,0842006
                
                
                
                20,749
                
                
                
                334,363
                
                
                
                –
                
                
                
                115,218
                
                
                
                266,456
                
                
                
                17,461
                
                
                
                177,841
                
                
                
                (14,171
                )
                
                
                49,410
                
                
                
                132,801
                
                
                
                264,7882005
                
                
                
                19,413
                
                
                
                309,857
                
                
                
                –
                
                
                
                115,574
                
                
                
                256,603
                
                
                
                10,798
                
                
                
                168,355
                
                
                
                (24,692
                )
                
                
                42,955
                
                
                
                103,008
                
                
                
                267,652
 _________________
 (1)
                We
      discount the indemnity portion of loss reserves for select policies issued
      in Texas that have fixed or determinable future payment.  The
      total amount of this discount is not material to the financial
      statements.
   110
 Index
 
 3.
Exhibit Index
  The
following is a list of exhibits filed as part of this Form 10-K:
  Exhibit
Index
  Number
                Description of
      Exhibit2.1
                Agreement
      and Plan of Merger by and among the Registrant, Employers Holdings, Inc.
      and Sapphire Acquisition Corp., dated as of January 10, 2008 (incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form
      8-K, filed on January 11, 2008).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).3.3
                Amended
      and Restated Bylaws of the Registrant, as of September 28, 2007
      (incorporated by reference to Exhibit 3.1 to the Registrant’s Current
      Report on Form 8-K, filed on October 4, 2007).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).
   111
 Index
  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).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).
   112
 Index
  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).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
      (incorporated by reference Exhibit 10.51 to the Registrant’s Annual Report
      on Form 10-K for the fiscal year ended December 31,
      2006)..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
      (incorporated by reference Exhibit 10.52 to the Registrant’s Annual Report
      on Form 10-K for the fiscal year ended December 31,
      2006).*10.53
                Excess
      Workers’ Compensation Reinsurance Contract, effective January 1,
      2008, 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 – 75%
      participation.*10.54
                Excess
      Workers’ Compensation Reinsurance Contract, effective January 1,
      2008, 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 – 25%
      participation.*10.55
                Catastrophe
      Workers’ Compensation Reinsurance Contract, effective January 1,
      2008, 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.10.56
                Integration
      Bonus and Enhanced Severance Agreement by and among the Registrant,
      Employers Holdings, Inc. and Debra Cerre-Ruedisili, dated as of January
      31, 2008, effective as of January 10, 2008 (incorporated by reference to
      the Registrant’s Current Report on Form 8-K, filed on February 1,
      2008).
   113
 Index
  10.57
                Integration
      Bonus and Enhanced Severance Agreement by and among the Registrant,
      Employers Holdings, Inc. and Kumar Gursahaney, dated as of January 31,
      2008, effective as of January 10, 2008 (incorporated by reference to the
      Registrant’s Current Report on Form 8-K, filed on February 1,
      2008).14
                Code
      of Business Ethics and Conduct.16
                Letter
      from Deloitte & Touche LLP dated April 11, 2007 (incorporated by
      reference to Exhibit 16 to the Registrant’s Current Report on Form 8-K,
      filed on April 11, 2007).21
                Subsidiaries
      of the Registrant (incorporated by reference to Exhibit 21 to the Form
      S-1).*23.1
                Consent
      of Independent Registered Public Accounting Firm – Deloitte & Touche
      LLP*23.2
                Consent
      of Independent Registered Public Accounting Firm – Johnson Lambert &
      Co., 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.
   114
 Index
  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 5th day of March, 2008.
  AMCOMP
      INCORPORATED(Registrant)By:
                /s/
      Fred R. LoweFred
      R. LowePresident
      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/s/ Fred R. Lowe
                
                Chairman
      of the Board, President and Chief Executive Officer (principal executive
      officer)
                March
      5, 2008Fred
      R. Lowe/s/ Debra Cerre-Ruedisili
                
                Executive
      Vice President, Chief Operating Officer and Director
                March
      5, 2008Debra
      Cerre-Ruedisili/s/ Kumar Gursahaney
                
                Senior
      Vice President, Chief Financial Officer and Treasurer (principal financial
      and accounting officer)
                March
      5, 2008Kumar
      Gursahaney/s/ Sam A. Stephens
                
                Director
                March
      5, 2008Sam
      A. StephensDirectorPaul
      B. Queally/s/ Spencer L. Cullen, Jr.
                
                Director
                March
      5, 2008Spencer
      L. Cullen, Jr./s/ Donald C. Stewart
                
                Director
                March
      5, 2008Donald
      C. Stewart
 
 115