The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, and in the case of unpaid loss and LAE, an actuarial valuation. Management regularly reevaluates these significant factors and makes adjustments where facts and circumstances dictate. In selecting the best estimate, we utilize various actuarial methodologies. Each of these methodologies is designed to forecast the number of claims we will be called upon to pay and the amounts we will pay on average to settle those claims. In arriving at our best estimate, our actuaries consider the likely predictive value of the various loss development methodologies employed in light of underwriting practices, premium rate changes and claim settlement practices that may have occurred, and weight the credibility of each methodology. Our actuarial methodologies take into account various factors, including, but not limited to, paid losses, liability estimates for reported losses, paid allocated LAE, salvage and other recoveries received, reported claim counts, open claim counts and counts for claims closed with and without payment of loss.
Prepaid reinsurance premiums decreased $6.0 million, or 41.4%, to $8.5 million as of December 31, 2007, compared to $14.5 million as of December 31, 2006. The decrease is due primarily to reduced reinsurance costs as compared to the prior year in connection with our homeowners’ book of business.
For further discussion, see Note 7 to the Consolidated Financial Statements included under Part II, Item 8, of this Report.
Gross premiums ceded increased to a debit balance of ($67.5) million for the year ended December 31, 2006, compared to a debit balance of ($31.4) million for year ended December 31, 2005. The increase was associated with the change in our prepaid reinsurance premiums in connection with our 2006-2007 hurricane season. For further discussion please see Footnote 6 titled “Reinsurance Agreements”.
On February 15, 2007, FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of SFAS 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This option is available to all entities, including not-for-profit organizations. Most of the provisions in Statement are elective; however, the amendment to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. FASB's stated objective in issuing this standard is as follows: "to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions."
Our failure to pay claims accurately could adversely affect our business, financial results and capital requirements.
United States Treasury Notes with a book value of $1,046,000, each, and maturing in 2012 were on deposit with the Florida OIR as of December 31, 2007, as required by law for both Federated National and American Vehicle and are included with other investments held until maturity.
Federated National’s 2004 regularly scheduled statutory triennial examination during 2005 for the three years ended December 31, 2004 was performed by the Florida OIR. American Vehicle's examination was for the three years ended December 31, 2005 was also performed by the Florida OIR. A loss reserve deficiency totaling approximately $1.3 million (net of income taxes) was recorded in the fourth quarter of on American Vehicle in connection with this OIR examination.
As a direct premium writer in the State of Florida, we are required to participate in certain insurer solvency associations under Florida Statutes 631.57(3) (a). Participation in these pools is based on our written premium by line of business to total premiums written statewide by all insurers. Participation may result in assessments against us as it did in 2006. During 2006 we were assessed $3.9 million in connection with the association. For statutory accounting purposes these assessments are not charged to operations in contrast GAAP treatment to charge current operations for the assessments. Through policyholder surcharges, as approved by the OIR, we recouped $1.6 million in connection with these assessments during 2007. There were no assessments made for the years ended December 31, 2007 or 2005.
Rent expense for the years ended December 31, 2007, 2006 and 2005 were $0.6 million, $0.5 million and nothing, respectively.
Options outstanding as of December 31, 2007 are exercisable as follows:
As a result of adopting SFAS 123R on January 1, 2006, the Company’s income from continuing operations before provision for income taxes and net income for the years ended December 31, 2007 and 2006, are lower by approximately $618,000 and 405,000, and $539,000 and $336,000, respectively, than if it had continued to account for share-base compensation under ABP Opinion No. 25.