API provides medical professional liability insurance primarily in Texas, where it has written business for over 30 years. API is authorized to do business in the States of Texas, Arkansas and Oklahoma and specializes in writing medical professional liability insurance for physicians and other healthcare providers. API became authorized to do business in Oklahoma in August 2007. Historically, we operated as the attorney-in-fact manager for API since 1975. In April 2007, we acquired API, thus combining our insurance management experience with an insurance underwriting entity to allow for the increased possibility for expansion into new markets and for continued growth in existing markets.
As of December 31, 2008, ACE Tempest Re USA and Swiss Reinsurance (“Swiss Re”) are A.M. Best rated “A+” (Superior). However, subsequent to year-end, A.M. Best down rated the financial strength rating of Swiss Re to “A” (Excellent) with a stable outlook based on its quantitative and qualitative assessment of risk capital that Swiss Re does not have sufficient cushion to weather more negative effects of the continuing turmoil in the financial markets and other unexpected events. As of December 31, 2008, Transatlantic Reinsurance (“Transatlantic”) and Hannover Ruckversicherrungs are A.M. Best rated “A” (Excellent), but Transatlantic Reinsurance’s financial strength rating was down-rated from A+ (Superior) to its current rating of “A” (Excellent) in September 2008. This rating action was based on the rapid deterioration of the financial condition of American International Group (“AIG”). Transatlantic is an independently publicly traded company (NYSE) and, while AIG owns 59% of Transatlantic, the Transatlantic board of directors is not controlled by AIG. To date, both Swiss Re and Transatlantic, as well as our other reinsurers, have continued to reimburse us for paid claims in a manner consistent with past practices.
Our Financial Services expenses decreased $9,281,000 (49%) for the year ended December 31, 2008 compared to 2007. The primary reason for the current year decrease is a reduction of commission expenses of $9,107,000 (73%) for the year ended December 31, 2008 compared to 2007 resulting from the decline in trading activity and associated commission revenues mentioned above. In addition, incentive compensation costs decreased $1,201,000 (95%) in 2008 as a result of the net loss incurred for the year in this operating segment. Partially offsetting these decreases was an increase in legal and professional expenses of $1,040,000 (117%) for the year ended December 31, 2008 compared to 2007 due primarily to costs incurred related to legal disputes. Lastly, payroll and employee benefits expense increased $99,000 (3%) due primarily to certain increases in staff at the investment banking and bank debt/trade claims businesses in early 2008. During the latter half of 2008, significant cost cutting measures were implemented in response to the sub-par performance of this segment in 2008 with cost reductions in personnel, compensation, consulting services, information services, rent and travel continuing throughout the remainder of the year.
General and administrative expenses increased $293,000 (5%) for the year ended December 31, 2008 compared to 2007. The increase in general and administrative expenses in the current year includes higher salaries of $284,000 or 26% resulting in part from expensing a full year's salary of our new Chief Operating Officer compared to only eight months in 2007 and expensing a full year's salary for a new Treasurer position for all of 2008 compared to just two months in 2007. Normal annual merit raises also affected the year-to-year salary variance. Board compensation and fees increased $421,000 (67%) resulting primarily from a full year's expensing of options granted in 2007 as a result of record earnings in 2007 and deferred compensation awarded to board members. In addition, there were a greater number of directors and increased fees paid to each non-management board member. Finally, a note receivable was written off to bad debt in 2008 in the amount of $323,000. Partially offsetting these increases was a decrease in incentive compensation totaling $274,000 (16%) and is the result of the lower earnings in 2008 compared to 2007. Legal and professional fees declined $143,000 (24%), the result of lower Sarbanes-Oxley (SOX) related consulting and audit fees in 2008. Finally, options and other expense to non-board member executives and key employees decreased $143,000 (59%) in 2008 compared to 2007 resulting from deferred compensation awarded and expensed in 2007 as a result of the successful merger with API and record earnings in 2007.
General and administrative expenses for the years ended December 31, 2007 and 2006 are included in the following table:
In addition to an adjustment to premiums ceded, estimates of ultimate reinsurance ceded premium amounts compared to the amounts paid on a provisional basis give rise to a balance sheet asset classified as “Other Amounts Receivable Under Reinsurance Contracts” or a balance sheet liability classified as “Funds Held Under Reinsurance Treaties.” Furthermore, each retrospective treaty requires a 24 or 36 month holding period before any premium adjustments or cash can be returned or paid. The ultimate settlement amount is not determined until all losses have been settled under the respective treaties. As of December 31, 2008, we have recorded a balance sheet asset, “Other Amounts Receivable Under Reinsurance Contracts” of $1,497,000 and a balance sheet liability, “Funds Held Under Reinsurance Treaties” of $3,978,000, which represent the differences between the estimates of ultimate reinsurance premiums ceded amounts for the 2002 through 2008 treaty years as compared to the amounts paid on a provisional basis.