THE SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 AND THE SELECTED CONSOLIDATED BALANCE SHEET DATA AS OF DECEMBER 31, 2006 AND 2005 ARE DERIVED FROM OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THE SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 AND THE SELECTED CONSOLIDATED BALANCE SHEET DATA AS OF DECEMBER 31, 2004, 2003, 2002 ARE DERIVED FROM OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS NOT INCLUDED IN THIS REPORT. THESE FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH GAAP. OUR HISTORICAL RESULTS MAY NOT BE INDICATIVE OF THE OPERATING RESULTS TO BE EXPECTED IN ANY FUTURE PERIOD.
(5) Reflects the write off of negative goodwill upon adoption of Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
We are directly liable for losses and LAE under the terms of insurance policies our insurance subsidiaries underwrite. We are also liable for a proportional share of losses from state mandated involuntary pools. The state mandated involuntary pools a mechanism used to reinsure the risk underwritten by state created workers' compensation insurance. Insurance companies are generally required to participate in these state created workers' compensation insurance programs as a condition to conducting business in these states. The NWCRP, the largest of the state mandated involuntary pools, is administered by NCCI. Each year, NCCI establishes an estimated reserve for losses arising from this pool and notifies us of our proportionate share of loss reserves from this pool. We add our share of the loss reserves from this pool to the loss reserves for the insurance policies our insurance subsidiaries underwrite. Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the insurer's payment of that loss. To recognize liabilities for unpaid loss and LAE, insurers establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported net losses and loss expenses. Except as mandated by Texas statutes on fatality claims where the calculation takes into account the life expectancy of a surviving spouse, we do not discount our reserves for estimated losses and LAE.
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.
2. Changes in the paid loss development pattern--We varied the paid loss development pattern by + / - 5% (e.g., if paid losses were expected to develop by 50% for a particular state and accident year, we calculated the sensitivity of reserves to a change in paid loss development factors of 2.5% = 5% x 50%). Changes in the paid loss development factors affect the results of the Paid Loss Bornhuetter-Ferguson Method and the Paid Loss Development Method.
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.
NET PREMIUMS EARNED. Net premiums earned represent that portion of net premiums written equal to the expired portion of the time for which the insurance policy was in effect during the financial year and is recognized as revenue. It represents the portion of premium that belongs to us on the part of the policy period that has passed and for which coverage has been provided. Net premium earned is used to calculate the net loss, net expense and dividend ratios, as indicated below.
NET 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.
Dividends to policyholders increased $1.6 million, or 23.3% in 2005 as compared to 2004. This was due to an increase in gross premiums earned in Wisconsin and Florida, the states in which policyholders are eligible for dividend plans. Additionally, the percentage of direct premiums written in Florida on a dividend plan increased to 36.8% in 2005 from 32.3% in 2004. Wisconsin's direct written premiums on dividend plans decreased to 86.4 % from 89.4% in 2004. The company wide direct premiums written on a dividend plan increased to 24.9% from 21.1% in 2004.
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
(3) The municipal bonds' yields to maturity have been shown on a tax-equivalent basis. The tax impact was 1.37% on the yield to maturity for municipal bonds and 0.3% on the yield to maturity for total cash and investments.
ORGANIZATION--AmCOMP Incorporated and subsidiaries (collectively, the "Company") consist of the following entities at December 31, 2006, 2005 and 2004:
GOODWILL--Goodwill is reviewed for impairment on an annual basis, or more frequently if circumstances indicate that a possible impairment has occurred. The assessment of impairment involves a two step process whereby an initial assessment for potential impairment is performed, followed by a measurement of the amount of impairment, if any. No impairment has been recorded by AmCOMP in 2006, 2005 or 2004.
warrants, and convertible securities are excluded from the calculation. Diluted earnings per share consider the effects of dilutive convertible securities and stock options.
Available-for-sale securities at December 31, 2005: U.S. Treasury securities ........................ $ 38,136 $ 1,094 $ 636 $ 38,594 Agency .......................................... 29,895 9 580 29,324 Municipalities .................................. 44,472 -- 781 43,691 Corporate debt securities ....................... 176,180 68 3,577 172,671 Mortgage-backed securities ...................... 11,591 2 209 11,384 -------- -------- -------- -------- Total fixed maturity securities ................ $300,274 $ 1,173 $ 5,783 $295,664 ======== ======== ======== ======== Held-to-maturity securities at December 31, 2005: Mortgage-backed securities ...................... $ 31,793 $ 11 $ 478 $ 31,326 ======== ======== ======== ========
The following methods and assumptions were used by the Company in estimating the fair value of financial instruments:
Payments of principal due on the notes payable at December 31, 2006 are as follows (in thousands):
COMMON STOCK--There were 45 million and 28 million authorized shares of $.01 par value common stock as of December 31, 2006 and 2005, respectively. At December 31, 2006 and 2005, 15,893,162 and 5,501,936 shares, respectively, were issued and 15,758,252 and 5,367,025, respectively, were outstanding. During 2005, the Company repurchased 873 shares at a purchase price of $4.24. The repurchased shares are recorded as treasury stock on the consolidated balance sheets. Dividends are payable as declared by the Board and are subordinate to the CPS.