The Company reported net income of $.3 million for the year ended December 31, 2007 compared to net income of $4.7 million for the year ended December 31, 2006. The Company reported basic earnings per common share of $0.004 for the year ended December 31, 2007 compared to $0.080 for the year ended December 31, 2006. Fully diluted earnings per common share for the year ended December 31, 2007 was $0.004 compared to $0.075 for the year ended December 31, 2006. 2006 results include an income tax benefit of $2.0 million. Pre-tax earnings decreased $1.9 million for period ended December 31, 2007 compared to the comparable 2006 period.
Contributing factors towards the Company’s 2007 decline in net income includes a decline in net income from the Company’s retail operations. This factor was partially offset by increases in earned premium in AAIC and related increases in commission and fee income in the MGA. Increased loss and loss adjustment expenses (“Loss Ratio”) in AAIC, from 73.4% in 2006 to 74.3% in 2007 partially offset these increases in revenues. Fee income improvements in the MGA reflect fees associated with increased premium production in AAIC in the states of Florida, Louisiana, Texas and Alabama and fees associated with entry into the state of Texas through an unaffiliated insurance company. Commission and fee income declines in TrustWay are, in part, representative of changes in the regulatory environment in Florida as well as a decline in the construction industry. The state of Florida’s mandatory insurance coverage for personal injury protection sunset in 2007, which contributed to a decline in revenue for the retail agencies. The personal injury protection has been reinstated by the state of Florida on January 1, 2008.
Premiums written refers to the total amount of premiums billed to the policyholder less the amount of premiums returned, generally as a result of cancellations, during a given period. Premiums written become premiums earned as the policy ages. Barring premium rate changes, if an insurance company writes the same mix of business each year, premiums written and premiums earned will be equal and the unearned premium reserve will remain constant. During periods of growth, the unearned premium reserve will increase, causing premiums earned to be less than premiums written. Conversely, during periods of decline, the unearned premium reserve will decrease, causing premiums earned to be greater than premiums written. The Company’s net earned premium, after deducting reinsurance, was $25.4 million for the year ended December 31, 2007 and compares to $20.9 million for the year ended December 31, 2006.
MGA and TrustWay produce and service non-standard personal automobile insurance business for AAIC and other insurers. We receive service fees for agency, underwriting, policy administration, and claims adjusting
Insurance losses and loss adjustment expenses include payments made to settle claims, estimates for future claim payments and changes in those estimates for current and prior periods, as well as loss adjustment expenses incurred in connection with settling claims. Insurance losses and loss adjustment expenses are influenced by many factors, such as claims frequency and severity trends, the impact of changes in estimates for prior accident years, and increases in the cost of medical treatment and automobile repairs. The anticipated impact of inflation is considered when we establish our premium rates and set loss reserves. We perform a rolling quarterly actuarial analysis each month and establish or adjust (for prior accident quarters) reserves, based upon our estimate of the ultimate incurred losses and loss adjustment expenses to reflect loss development information and trends that have been updated for the most recent quarter’s activity. Each month our estimate of ultimate loss and loss adjustment expenses is evaluated by accident quarter, by state and by major coverage grouping (e.g., bodily injury, physical damage) and changes in estimates are reflected in the period the additional information becomes known.
The provision for income taxes for the year ended December 31, 2007 in the amount of $.5 million consists of federal and state income taxes at an effective rate of 66%. The company experienced a higher tax rate due to the impact of incentive stock option compensation expense in 2007. The Company had a tax benefit of $2.0 million for the period ended December 31, 2006, representing an effective tax rate of negative 74%. The negative tax rate primarily results from a reversal of prior year valuation allowances on net operating loss carry-forwards and additional recognition of deferred tax assets realized in connection with the acquisition of The Insurance Center, Inc. subsequent to the acquisition. The recognition of these additional deferred tax assets, including the reversal of the valuation allowance were recorded in the fourth quarter of 2006.
Investments and cash as of December 31, 2007, increased $2.2 million from investments and cash of $21.5 million as of December 31, 2006. The increase was due in part to $4.7 million in cash and income generated through operating activities. The increase was offset by $0.4 million in net investments made in agencies during the year: the purchase of the assets of Frontline Insurance Group, LLC on January 1, 2007, the purchases of Covenant Insurance Group, Inc. on September 30, 2007 and Bush Insurance, Inc. on October 31, 2007. The Company issued new promissory notes in connection with these acquisitions in the amount of $.2 million. The Company’s investments of $17.6 million are primarily in direct obligations of the U.S. Treasury as well as those securities unconditionally guaranteed as to the payment of principal and interest by the United States government or any agency thereof and in high-quality corporate and municipal bonds of Georgia-based issuers. The Company’s investment activities are made in accordance with the Company’s policy. The objectives of the investment policy are to obtain favorable after-tax returns on investments through a diversified portfolio of fixed income, equity and real estate holdings. The Company’s investment criteria and practices reflect the short-term duration of its contractual obligations with policyholders and regulators. Tax considerations include federal and state income tax as well as premium tax abatement and credit opportunities offered to insurance companies in the states where AAIC writes policies.
Prepaid reinsurance premiums as of December 31, 2007, increased $7.1 million to $21.1 million compared to December 31, 2006. The increase results from AAIC’s continued growth, and represents premiums ceded to its reinsurers which have not been fully earned.
Property and equipment, net of depreciation, decreased $.1 million as of December 31, 2007 from December 31, 2006 to $2.4 million. The decrease is attributable to depreciation on the purchase of computer software and hardware at the Company’s corporate headquarters and furniture and leasehold improvements in both its agencies and corporate headquarters.
Other receivables as of December 31, 2007 increased $2.4 million to $2.9 million compared to December 31, 2006. The balances represent TrustWay receivables from insurance carriers for direct bill commissions and balances due to the MGA from insurance carriers for amounts owed in accordance with the terms of its managing general agency agreements. The change in the TrustWay receivables is directly attributable to the change in direct bill commissions from carriers as we transition more business from an agency bill basis to a direct bill basis. Policies issued under a direct bill basis traditionally have higher renewal rates than policies issued on an agency bill basis. The increase in the MGA receivables is directly attributable to increases in business placed by the MGA in the state of Florida and Texas on behalf of a two non-affiliated insurers.
Unearned premium as of December 31, 2007 increased $10.4 million to $31.0 million from December 31, 2006, and represents premiums written but not earned. This is directly attributable to the increase in AAIC’s premium writings during 2007.
Reinsurance payable as of December 31, 2007 increased $8.4 million to $25.2 million, compared to the balance at December 31, 2006. The amount represents premiums owed to the Company’s reinsurers. AAIC maintains two quota-share reinsurance treaties with its reinsurers in which it cedes 70% of the both premiums and losses for the majority of its states and 100% of a portion of its Florida business. The increase is directly attributable to the increase in AAIC’s premium writings during 2007.
Provisional commission reserves represent the difference between our minimum ceding commission and the provisional amount paid by the reinsurers. These balances as of December 31, 2007 increased $0.6 million to $2.9 million, compared to the balance at December 31, 2006. The increase is related to increases in AAIC writings.
Notes payable as of December 31, 2007, decreased approximately $1.3 million compared to December 31, 2006. The change results from the certain notes issued totaling $.2 million in connection with three agency acquisitions made during 2007 less payments of $1.5 million paid on promissory notes.
purchased from the Trust 155 of the Trust’s floating rate common securities, with a liquidation amount of $1,000 per common security (the “Common Securities”). The Trust used the proceeds from the issuance and sale of the Capital Securities and the Common Securities to purchase $5,155,000 in aggregate principal amount of the floating rate junior subordinated debentures of the Company (the “Debentures”). These debentures are classified as debt and are presented net of the discount to be amortized over the life of the debentures on the Company’s statements of financial position. The interest paid and accrued on these debentures is classified as interest expense in the consolidated statements of operations.
Net cash provided by operating activities for the year ended December 31, 2007, was $5.1 million compared to net cash provided by operating activities of $7.8 million for the same period of 2006.
Investing activities for the year ended December 31, 2007 consisted of the purchase of leasehold improvements and property and equipment in the amount of $.4 million in our headquarter’s and in TrustWay, $.4 million for the purchase of three Alabama agencies during the year, and $4.9 million in net purchases of investments.
On December 22, 2005, the Company, through a newly-formed Delaware statutory trust, AssuranceAmerica Capital Trust I (the “Trust”), consummated the private placement of 5,000 of the Trust’s floating rate capital securities, with a liquidation amount of $1,000 per capital security (the “Capital Securities”). In connection with the Trust’s issuance and sale of the Capital Securities, the Company purchased from the Trust 155 of the Trust’s floating rate common securities, with a liquidation amount of $1,000 per common security (the “Common Securities”). The Trust used the proceeds from the issuance and sale of the Capital Securities and the Common Securities to purchase $5,155,000 in aggregate principal amount of the floating rate junior subordinated debentures of the Company (the “Debentures”). The Capital Securities mature on December 31, 2035, but may be redeemed at par beginning December 31, 2010 if and to the extent the Company exercises its right to redeem the Debentures. The Capital Securities require quarterly distributions by the Trust to the holders of the Capital Securities, at a floating rate of three-month LIBOR plus 5.75% per annum, reset quarterly. Distributions are cumulative and will accrue from the date of original issuance but may be deferred for a period of up to 20 consecutive quarterly interest payment periods if the Company exercises its right under the Indenture to defer the payment of interest on the Debentures.
The growth of the Company has and will continue to strain its liquidity and capital resources. AAIC is required by the state of South Carolina to maintain minimum Capital and Surplus of $3.0 million. As of December 31, 2007, AAIC’s Capital and Surplus was $11.9 million.