Gross premiums written for the year ended December 31, 2008 were $93.3 million. In the comparable period for 2007, AAIC recorded $88.4 million in gross premiums written. 2008 gross premiums written includes insurance premiums written directly by AAIC, “direct premiums written,” of $92.2 million, plus $1.0 million of premiums associated with the insurance risk transferred to AAIC by two unaffiliated insurance companies pursuant to a reinsurance contract, referred to as “assumed premiums written.” AAIC recorded assumed premiums written of $1.6 million in the year ended December 31, 2007. The decrease in assumed premiums written in 2008 as compared to 2007 is due to a shift of business away from the unaffiliated carriers to AAIC in order to increase profit margins.
The majority of our growth in 2008 occurred in Louisiana and Arizona as AAIC began writing policies in Louisiana in 2007 and Arizona in 2008. Louisiana accounted for $7.0 million of the increase during 2008 over the comparable 2007 period. During 2008 Arizona accounted for $2.3 million year-over-year increase in direct premiums written in AAIC. Georgia, the state from which we receive the majority of our premiums, which represented 35% of our direct business in 2008, declined $3.0 million due to a continued soft market and pricing pressures. Direct premiums written in Florida decreased 8% in 2008 from the prior year due to depressed economic conditions in the state. Policies in force increased 10% from December 31, 2007 to December 31, 2008. The Company cedes approximately 70% of its direct premiums written to its reinsurers and the total amount ceded for the year ended December 31, 2008, was $64.4 million.
Managing general agent fees for the period ended December 31, 2008 were $12.3 million, an increase of $1.5 million when compared to the same period of 2007. Increases in the number of policies sold are the largest contributing factor.
Our investment portfolio is generally highly liquid and consists substantially of readily marketable, investment-grade debt and equity securities. Net investment income is primarily comprised of interest and dividends earned on these securities, net of realized gains, losses and related investment expenses. Net investment income decreased to $0.3 million for the period ended December 31, 2008 from $0.8 million in the comparable 2007 period. The decrease is primarily a result of realized losses on investments of $0.4 million during 2008.
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.
Investments and cash as of December 31, 2008 decreased $4.7 million to $19.1 million from $23.8 million as of December 31, 2007. The decrease was due in part to the repayment of notes payable in the amount of $3.0 million, a $1.2 million decline in the market value of bonds and stocks and $1.2 million of net purchases of property and equipment. This decrease was offset by $0.9 million in cash from operations. The Company’s long-term investments of $8.2 million are equally spread 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. The Company’s investment activities are made in accordance with the company’s investment 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
Reinsurance recoverables as of December 31, 2008, increased $9.7 million, to $39.0 million compared to $29.3 million as of December 31, 2007. The increase is directly related to AAIC’s continued growth. AAIC maintains a quota-share reinsurance treaty with its reinsurers in which it cedes approximately 70% of both premiums and losses. The $39.0 million represents the reinsurers’ portion of losses and loss adjustment expense, both paid and unpaid.
Property and equipment, net of depreciation, increased $0.2 million to $2.5 million as of December 31, 2008 compared to December 31, 2007. The increase is attributable to new purchases 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, 2008 decreased $1.3 million to $1.7 million compared to $3.0 million as of December 31, 2007. The balances represent TrustWay receivables from insurance carriers for direct bill commissions and balances due to MGA from insurance carriers for amounts owed in accordance with the terms of its managing general agency agreements. The decrease in the receivable is directly attributable to cash received for business placed by MGA in the states of Florida and Texas on behalf of two non-affiliated insurers.
Intangible assets as of December 31, 2008, decreased $3.6 million to $7.8 million from the balance of $11.4 million as of December 31, 2007. This decrease is directly related to the $3.4 million goodwill impairment charge attributable to its retail operations.
Deferred tax assets increased $1.9 million as of December 31, 2008 compared to the balance as of December 31, 2007. This increase primarily relates to the deferred tax asset arising from the net operating loss carry-forward generated in 2008.
Accounts payable and accrued expenses as of December 31, 2008, increased $0.4 million from December 31, 2007 to $7.6 million. The increase is related to $0.5 million in unclaimed property and $0.2 million in accrued expenses for payroll and general expense. The increase was offset by $0.3 million of collections of the balances due to carriers related to an increase in direct bill agency business.
Unearned premium as of December 31, 2009 increased $1.9 million to $32.9 million as of December 31, 2008 from $30.9 million as of December 31, 2007, and represents premiums written but not earned. This is directly attributable to the increase in AAIC’s premium writings during 2008.
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 2008.
Notes payable as of December 31, 2008, decreased approximately $2.8 million compared to December 31, 2007. The change resulted primarily from a $1.7 million payment to former owners of The Insurance Center, Inc. acquired in 2006 and $1.0 million in payments applied to the principal balances payable on promissory notes to the Company’s Chairman and the former CEO.
Investing activities for the year ended December 31, 2008 consisted of $5.8 million in net sales of investments, offset by the purchase of computer software and hardware and leasehold improvements in the amount of $1.2 million in our headquarters and in TrustWay.
Financing activities for the year ended December 31, 2008 included debt repayments for the year ended December 31, 2007 in the amount of $2.9 million offset by a newly issued promissory note in the amount of $0.3 million in connection with the purchase from the software vendor of the source code for our policy management system (“PMS”).
The Company’s liquidity and capital needs have been met in the past through premium, commission and fee income, loans from its Chairman, its Chief Executive Officer, and a Division President of the Company and the issuance of its Series A Convertible Preferred Stock, Common Stock and Debt Securities. The Company’s related party debt consists of unsecured promissory notes payable to its Chairman. The promissory notes carry an interest rate of 8% per annum and provide for the repayment of principal on an annual basis. During the first nine months of 2005, the Company issued 840,000 shares of its Series A Convertible Preferred Stock for an aggregate consideration of $4.2 million. The Series A Convertible Stock paid a semi-annual dividend of $0.20 per share. During the fourth quarter of 2005, the Company issued 669,821 shares of its Common Stock for an aggregate consideration of $435,000. During the first quarter of 2006, the Company issued 600,000 shares of its Common Stock for an aggregate consideration of $390,000. On December 22, 2005, the Company 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. See subsequent event Note 17 to the consolidated financial statements.
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 Statutory Capital and Surplus of $3.0 million. As of December 31, 2008, AAIC’s statutory Capital and Surplus was $10.7 million.
The Company did not have any off-balance sheet arrangements during the year ended December 31, 2008.