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.
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.
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.
Net premiums written decreased $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 investment income increased $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.
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.
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.
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.
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.
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:
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.
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.
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.
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.