(4) Other insurance general and administrative expenses represent those costs other than policy acquisition expenses, as well as salaries and benefits, that are directly attributable to insurance activities.
(5) Other operating expenses are those expenses including amortization of intangible assets and fee and commission generating activities in which the Company engages.
(6) The foreign currency gain from discontinued operations relates to our wholly-owned subsidiary, AmTrust Pacific Limited, a New Zealand real estate operating company (“APL”). Income (loss) from discontinued operations reflects the results of operations of APL and AFS Capital Corp., a premium finance company. The real estate in the balance sheet reflects the carrying value of real estate held by APL in 2004 and 2003. The mortgage notes in the balance sheet reflect mortgage debt on this real estate. All of these real estate assets were liquidated as of November 2005. For more information about these transactions, see the consolidated financial statements and related notes included elsewhere in this document.
(8) Net loss ratio is calculated by dividing the loss and loss adjustment expense by net premiums earned.
(11) Calculated by dividing net income, by the average stockholders’ equity.
• Workers’ compensation for small businesses (average premium less than $5,000 per policy) in the United States;
• WIC, which underwrites workers’ compensation insurance, specialty risk insurance and extended warranty coverage, and specialty middle-market property and casualty coverages in the United States;
• AIU, which underwrites specialty risk and extended warranty coverage plans in the European Union;
Insurance, particularly workers’ compensation, is, generally, affected by seasonality. The first quarter generally produces greater premiums than subsequent quarters. Nevertheless, the impact of seasonality on our
small business workers’ compensation and specialty middle market segments has not been significant. We believe that this is because we serve many small businesses in different geographic locations. In addition, we believe seasonality may have been muted by our acquisition activity.
One of the key financial measures that we use to evaluate our operating performance is return on average equity. Our return on average equity was 24.7%, 21.3% and 31.7% for the years ended December 31, 2007, 2006 and 2005, respectively. Our overall financial objective is to produce a return on average equity of 15.0% or more over the long term. In addition, we target a net combined ratio of 95.0% or lower over the long term, while seeking to maintain optimal operating leverage in our insurance subsidiaries commensurate with our A.M. Best rating objectives. Our net combined ratio was 83.2%, 91.9% and 95.1% for the years ended December 31, 2007, 2006 and 2005, respectively. A key factor in achieving our targeted net combined ratio is improvement of our net expense ratio. Our strategy across our segments is to maintain premium rates, deploy capital judiciously, manage our expenses and focus on the sectors in which we have expertise, which we believe will provide opportunities for greater returns.
The use of reinsurance is an important component of our business strategy. See “Business - Reinsurance.” As losses are incurred and recorded, we record amounts recoverable from third party reinsurers for the portion of the paid and unpaid losses ceded to the reinsurers. We have purchased reinsurance for our small business workers’ compensation segment, which also reinsures the workers’ compensation portion of the specialty middle-market property and casualty business we recently acquired. We purchased reinsurance to cover the property portion of this business. At present, we do not plan to reinsure the general liability and auto liability portions of this business.
Recent Developments In December 2007, we announced that we entered into an agreement to acquire the Unitrin Business Insurance unit (“UBI”) of Unitrin, Inc. UBI conducts business in 30 states with geographic emphasis in the South, Northwest and Midwest and had total premium revenues of approximately $165 million in 2006. The purchase price is $55 million plus an amount equal to the combined statutory surplus of the 4 entities which we will acquire as part of the acquisition. As of December 31, 2007, the combined statutory surplus of the
UBI entities was approximately $36 million. The transaction is expected to close at the end of the first quarter of 2008. The purchase is contingent on obtaining customary regulatory approvals.
In November 2007, the Board of Directors authorized the Company to repurchase up to three million shares of common stock in one or more transactions at prevailing prices in the open market or in privately negotiated transactions. Management plans to utilize the authority at such times and to the extent that management determines it is in the best interests of the Company. The Company repurchased 5,000 shares during 2007 related to this authorization.
Reinsurance Agreement with Maiden During the third quarter of 2007, the Company and Maiden Holdings, Inc. (“Maiden”) entered into master agreement, as amended, by which they caused the Company’s Bermuda affiliate, AmTrust International Insurance, Ltd. (“AII”) and Maiden Insurance to enter into a quota share reinsurance agreement (the “Reinsurance Agreement”) by which (a) AII retrocedes to Maiden Insurance an amount equal to 40% of the premium written by AmTrust’s U.S., Irish and U.K. insurance companies (the “AmTrust Ceding Insurers”), net of the cost of unaffiliated inuring reinsurance (and in the case of AmTrust’s U.K. insurance subsidiary, IGI Insurance Company Limited (“IGI”), net of commissions) and 40% of losses and (b) AII transferred to Maiden Insurance 40% of the AmTrust Ceding Insurer’s unearned premium reserves, effective as of July 1, 2007, with respect to current lines of business, excluding risks for which the AmTrust Ceding Insurers’ net retention exceeds $5 million (“Covered Business”). AmTrust also has agreed to cause AII, subject to regulatory requirements, to reinsure any insurance company which writes Covered Business in which AmTrust acquires a majority interest to the extent required to enable AII to cede to Maiden Insurance 40% of the premiums and losses related to such Covered Business. The Agreement further provides that the AII receives a ceding commission of 31% of ceded written premiums. The Reinsurance Agreement has an initial term of three years and will automatically renew for successive three year terms thereafter, unless either AII or Maiden Insurance notifies the other of its election not to renew not less than nine months prior to the end of any such three year term. In addition, either party is entitled to terminate on thirty day’s notice or less upon the occurrence of certain early termination events, which include a default in payment, insolvency, change in control of AII or Maiden Insurance, run-off, or a reduction of 50% or more of the shareholders’ equity of Maiden Insurance or the combined shareholders’ equity of AII and the AmTrust Ceding Insurers. The Company recorded approximately $59.1 million of ceding commission during 2007 as a result of this transaction.
IGI Group In April 2007, we acquired, through a subsidiary, 100% the issued and outstanding stock of IGI Group, Ltd. (“IGI”), a United Kingdom specialty issuer. The acquisition should enable the Company to expand its presence in the United Kingdom through IGI’s distribution network and to leverage IGI’s experienced administration and claims handling capabilities. We paid approximately $15.2 million for IGI. From the date of acquisition, IGI wrote approximately $58.2 million of premiums in 2007.
Warrantech In February 2007, the Company participated with H.I.G. Capital, a Miami-based private equity firm, in financing H.I.G. Capital’s acquisition of Warrantech Corporation (“Warrantech”) in a cash merger. The Company contributed $3.8 million for a 27% equity interest in Warrantech. Additionally, the Company provided Warrantech with a $20 million secured note due January 30, 2012 (Note receivable - related party). Interest on the note is accrued monthly at a rate of 15% per annum and consists of a cash component at 11% per annum and 4% per annum for the issuance of additional notes (“PIK Notes”) in a principal amount equal to the interest not paid in cash on such date. Warrantech is an independent developer, marketer and third party administrator of service contracts and after-market warranties primarily for the motor vehicle and consumer products industries. The Company currently provides insurance coverage for Warrantech’s consumer product programs and on certain nationwide warranty programs, which produced premium of approximately $41.3 million during 2007. As the Company does not exhibit control over Warrantech, the Company accounts for this investment under the equity method. The Company recorded an investment loss of approximately $0.7 million from its equity investment for 2007. As of December, 2007 the carrying value of the note receivable was $20.7 million (Note receivable - related party).
Net Premium Earned. Net premium earned is the earned portion of our net premiums written. Insurance premiums are earned on a pro rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums and are earned in subsequent periods over the remaining term of the policy. Our workers’ compensation insurance policies typically have a term of one year. Thus, for a one-year policy written on July 1, 2007 for an employer with a constant payroll during the term of the policy, we would earn half of the premiums in 2007 and the other half in 2008. Our specialty risk and extended warranty coverages are earned over the estimated exposure time period. The terms vary depending on the risk and have an average duration of approximately 31 months, but range in duration from one month to 84 months.
for product warranty registration and claims handling services provided to unaffiliated third parties. We also recognize brokerage and asset management fees in association with our reinsurance agreement with Maiden.
Salaries and Benefits. Salaries and benefits expenses are those salaries and benefits expenses for employees that are directly involved in the origination, issuance and maintenance of policies, claims adjustment and accounting for insurance transactions. Salaries and benefits associated with employees that are involved in fee generating activities are classified as other expenses.
We believe this method, which tracks the development of claims incurred in a particular time period, is the best method for projecting our ultimate liability. These factors are dependent on a number of elements, including frequency and severity of claims, length of time to achieve ultimate settlement of claims, projected inflation of medical costs and wages (for workers’ compensation), insurance policy coverage interpretations, judicial determinations and existing laws and regulations. The predictive ability of loss development factors is dependent on consistent underwriting, claims handling, and inflation, among other factors, and predictable legislatively and judicially imposed legal requirements. If all things remain equal, losses incurred in 2007 should develop similarly to losses incurred in 2006 and prior years. Thus, if the Net Loss Ratio for premiums written in year one is 55.0% we expect that the Net Loss Ratio for premiums written in year two also would be 55.0%. However, due to the inherent uncertainty in the loss development factors, our actual liabilities may differ significantly from our original estimates.
Notwithstanding the inherent uncertainty, the Company has not experienced material variability in its loss development factors. We believe that it is reasonably likely that we could experience a 5% deviation in our loss and loss adjustment expense reserves due to changes in the elements that underlie loss development, such as claims frequency or severity. As of December 31, 2007, the average cost per claim was $10,821, which was a 7% increase over the claims severity from 2001-2006 of $10,112. In 2007, claims frequency (number of claims per $1.0 million of payroll) increased to 0.89 from 0.82, an increase of 8.4%, for the period between 2001 and 2006.
On a quarterly basis, and in some cases more frequently, we review our reserves to determine whether they are consistent with our actual results. In the event of a discrepancy, we would seek to determine the causes (underwriting, claims, inflation, regulatory) and would adjust our reserves accordingly. For example, if the development of our total incurred losses were 5% greater than the loss development factors would have predicted, we would adjust our reserves for the periods in question. In 2005, we recognized a $1.0 million redundancy in prior year’s reserves. In 2006, we recognized a $0.5 million deficiency in the prior year’s reserves. In 2007, we recognized a $2.1 million deficiency in prior year’s reserves, related to NCCI Pools. We do not anticipate that we will make any material reserve adjustments, but will continue to monitor the accuracy of our loss development factors and adequacy of our reserves. Additional information regarding our reserves for loss and loss adjustment expenses can be found in “Risk Factors” and “Business - Loss Reserves.”
Assessments Related to Insurance Premiums. We are subject to various assessments and premium surcharges related to our insurance activities, including assessments and premium surcharges for state guaranty funds and second injury funds. Assessments based on premiums are generally paid within one year after the calendar year in which the policies are written. Assessments based on losses are generally paid within one year of when claims are paid by us. State guaranty fund assessments are used by state insurance oversight agencies to pay claims of policyholders of impaired, insolvent or failed insurance companies and the operating expenses of those agencies. Second injury funds are used by states to reimburse insurers and employers for claims paid to injured employees for aggravation of prior conditions or injuries. In some states, these assessments and premium surcharges may be partially recovered through a reduction in future premium taxes.
its premium percentage as required. Allowance for doubtful accounts were approximately $7,828 and $8,744 at December 31, 2007 and 2006, respectively.
As of December 31, 2007, if the actual results of the future premiums audits were 1% lower than the historical results used in calculating EBUB, the result would be a decrease in EBUB and net earned premium of $1.8 million or $1.2 million after tax. If the actual results of the future premiums audits were 1% higher than the historical results used in calculating EBUB, the result would be an increase in EBUB, and net earned premium of $1.8 million or $1.2 million after tax.
Under FIN 48, the Company recognizes tax benefits only for tax positions that are more likely than not to be sustained upon examination by taxing authorities. The Company’s policy is to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in its income tax provision. At the date of adoption, the amount of interest and penalties included in the consolidated balance sheet was $0. The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. Tax years 2003 through 2006 are still subject to examination. The Company does not anticipate any significant changes to its total unrecognized tax benefits within the next 12 months.
Consolidated Results of Operations 2007 Compared to 2006 Gross Premium Written. Gross premium written increased $313.3 million or 59.6% from $526.1 million for the year ended December 31, 2006 to $839.4 million for the year ended December 31, 2007. The increase was attributable to a $49.9 million increase in our small business workers’ compensation business, a $173.5 million increase in our specialty risk and extended warranty business and a $89.9 million increase in our specialty middle-market property and casualty business. The increase in the Small Business Workers’ Compensation segment related primarily to $17.1 million of additional premiums resulting from the acquisition from Muirfield Underwriters, Ltd. of its distribution network and the renewal rights to its existing business during the second quarter of 2006, additional premiums of $17.7 million related to the acquisition of AIIC in the third quarter of 2007 and $15.1 million from organic growth. The increase in premiums for the
Net Premium Earned. Net premium earned increased $115.2 million or 35.0% from $329.0 million to $444.2 million for the year ended December 31, 2006 and 2007, respectively. The increase of $115.2 million was net of earned premium ceded to Maiden Insurance during the second half of 2007 under the terms of a reinsurance agreement entered into during the third quarter of 2007. Before cessions to Maiden Insurance, earned premium increased $225.4 million for 2007 compared 2006. The increase by segment before cessions was: small business workers’ compensation - $64.0 million; specialty risk and extended warranty - $86.5 million; and specialty middle market property and casualty - $74.9 million.
Ceding Commission. Ceding commission represents commission earned through its quota share agreement with Maiden Insurance, whereby AmTrust receives a 31% ceding commission on ceded written premiums to Maiden. The ceding commission earned in 2007 was $59.1 million.
Net Investment Income. Net investment income increased $23.3 million or 84.5% from $27.6 million to $50.9 million for the year ended December 31, 2006 and 2007, respectively. The increase resulted from an increase of average invested assets. Average invested assets (excluding equity securities) were approximately $1,057 million for the year ended December 31, 2007 compared to approximately $631 million for the year ended December 31, 2006, an increase of $426 million or 67.5%. In addition, yields on the Company’s fixed maturities have increased from 4.9% in 2006 to 5.3% in 2007.
Net Premium Written. Net premiums written increased from $259.2 million to $436.3 million for the years ended December 31, 2005 and 2006, respectively. This $177.1 million or 68.3% increase was the result of an increase in gross premiums written in the year ended 2006. The increase by segment was: small business workers’ compensation - $51.2 million; specialty risk and extended warranty - $42.6 million; and specialty middle market property and casualty - $83.3 million.
Net Premium Earned. Net premiums earned increased from $216.0 million for the year ended December 31, 2005 to $329.0 million for the year ended December 31, 2006. This $113.0 million or 52.3% increase is the result of the increase in net premiums written over the twelve preceding months of December 31, 2006, relative to the increase in net premiums written over the twelve months preceding December 31, 2005. The increase by segment was: small business workers’ compensation - $55.1 million; specialty risk and extended warranty - $13.1 million; and specialty middle market property and casualty - $44.8 million.
Net Investment Income. Net investment income for the year ended December 31, 2006, was $27.6 million, compared to $11.5 million for the same period in 2005, an increase of $16.1 million or 140.0%. The increase in net investment income was the result of increased invested assets. Average invested assets (excluding equity securities) was approximately $551 million for the year ended December 31, 2006 compared to approximately $258 million for the year ended December 31, 2005 an increase of $293 million or 98.8%. In addition, yields on fixed maturities have increased over the same time period from 3.7% to 5.1%.
Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $69.1 million or 48.0% from $142.0 million for the year ended December 31, 2005 to $210.1 million for the year ended December 31, 2006. Nevertheless, the Company’s loss ratio for the year ended December 31, 2006 decreased to 63.9% from 65.7% for the year ended December 31, 2005. The decrease in the loss ratio resulted from revised actuarially projected ultimate losses based on the Company’s experience. As the Company writes more business in the small workers’ compensation segment and its data becomes more reliable, the Company assigns more weight to its individual loss development factors than to industry-wide factors in setting its reserves. Because the Company’s losses (with the exception of losses attributable to the NCCI Pools) have developed more favorably than the industry, as a whole, the Company’s actuarially projected reserves have proportionally decreased.
Income from Continuing Operations. Operating income from continuing operations increased to $70.9 million for the year ended December 31, 2006, from $29.6 million for the year ended December 31, 2005, an increase of $40.3 million or 136.1%. This increase is attributable to strong growth in revenue combined with a slight improvement in the both the loss ratio and the net expense ratio.
Policy Acquisition Expense, Salaries and Benefits Expense and Other Insurance General and Administrative Expense. Policy acquisition expense, salaries and benefits expense and other insurance general and administrative expense increased from $51.6 million for the year ended December 31, 2005 to $68.8 million for the year ended December 31, 2006, an increase of $17.2 million or 33.2%. The expense ratio remained consistent at 31.1% for both periods.
Net Premiums Earned less Expenses Included in Combined Ratio (Underwriting Income) Operating income from continuing operations excluding investment income increased to $19.5 million for the year ended December 31, 2006, from $6.4 million for the year ended December 31, 2005, an increase of $13.1 million or 204.7%. This increase is attributable to strong growth in revenue combined with an improvement in the loss ratio and a consistent expense ratio.
Specialty Risk and Extended Warranty Segment Results of Operation 2007 Compared to 2006 Gross Premium Written. Gross premium written increased $173.6 or 130.6% from $132.8 million to $306.4 million for the year ended December 31, 2006 and 2007, respectively. The increase in premium consisted, primarily, of $79.4 million and $36.0 million from new coverage plans in the United States and Europe, respectively, and $58.2 million from an acquisition of IGI in the second quarter of 2007. $30.6 million of the premium increase in the United States in 2007 was generated by two customers, including Warrantech.
Policy Acquisition Expense, Salaries and Benefits Expense and Other Insurance General and Administrative Expense less Ceding Commission. Policy acquisition expense, salaries and benefits expense and other insurance general and administrative expense less ceding commission increased $2.2 million or 23.4% from $9.7 million to $11.9 million for the year ended December 31, 2006 and 2007, respectively. The expense ratio for the same periods decreased from 15.3% to 10.3%, respectively. The decrease in expense ratio resulted
Net Premiums Earned less Expenses Included in Combined Ratio (Underwriting Income). Underwriting income increased to $22.3 million for the year ended December 31, 2007 from $4.3 million for the year ended December 31, 2006, an increase of $18.0 million or 421%. This increase is attributable to growth in revenue and an improvement in the loss ratio and expense ratio.
Net Premiums Earned. Net premiums earned increased from $50.1 million for the year ended December 31, 2005 to $63.2 million for the year ended December 31, 2006. This $13.1 million or 26.3% increase was the result of the increase in net premiums written. Mitigating the increase somewhat is the effect of the increase in premiums written in the second half of 2006 which were not fully recognized as earned in 2006.
Specialty Middle Market Property and Casualty Segment Results of Operations The specialty middle market segment was acquired as part of the Alea transaction which closed on December 13, 2005. The Company acquired access to Alea’s distribution network and the renewal rights to substantially all of its specialty middle market property and casualty business, among other things. The specialty middle market segment comprises three main lines of business: workers’ compensation, general liability and commercial automobile. These coverages are provided to small to middle market businesses.
Specialty Middle Market Segment Result of Operations 2007 Compared to 2006 Gross Premium Written. Gross premium written increased $89.9 million or 66.9% from $134.3 million to $224.2 million for the year ended 2006 and 2007, respectively. Premium increased for all lines of business in 2007. The increase resulted primarily from new general liability and worker’s compensation programs and growth of existing facilities. In addition, the increase includes $6.4 million in gross premium written which is fully reinsured by HSBC Insurance Company of Delaware pursuant to an agreement entered into in connection with the Company’s acquisition of Wesco Insurance Company in June 2006.
Net Premium Written. Net premium written increased $5.4 million or 6.5% from $83.3 million to $88.7 million for the year ended 2006 and 2007, respectively. The increase of $5.4 million was net of $59.8 million of written premium ceded to Maiden Insurance during the second half of 2007 under the terms of a reinsurance agreement entered into during the third quarter of 2007. Before cessions to Maiden Insurance, net written premium increased $65.2 million for the year ended 2007 compared to the year ended 2006. The increase of $65.2 million resulted from an increase in gross premium written in 2007.
Net Premiums Earned less Expenses Included in Combined Ratio (Underwriting Income). Underwriting income increased $6.1 million to $8.9 million for the year ended December 31, 2007 from $2.8 million for the year ended December 31, 2006. This increase is attributable to growth in revenue and an improvement in the expense ratio.
Investment Portfolio The first priority of our investment strategy is preservation of capital, with a secondary focus on maximizing an appropriate risk adjusted return. We expect to maintain sufficient liquidity from funds generated from operations to meet our anticipated insurance obligations and operating and capital expenditure needs, including debt service and additional payments in connection with our past producer network and renewal rights acquisitions. The excess funds will be invested in accordance with both the overall corporate investment guidelines as well as an individual subsidiary’s investment guidelines. Our investment guidelines are designed to maximize investment returns through a prudent distribution of cash and cash equivalents, fixed maturities and equity positions. Cash and cash equivalents include cash on deposit, commercial paper, pooled short-term money market funds and certificates of deposit with an original maturity of 90 days or less. Our fixed maturity securities include obligations of the U.S. Treasury or U.S. government agencies, obligations of U.S. and Canadian corporations, mortgages guaranteed by the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, Federal Farm Credit entities, and asset-backed securities and commercial mortgage obligations. Our equity securities include common stocks of U.S. and Canadian corporations.
The Company’s Investment Committee (“Committee”) reviews quarterly for other-than-temporary-impairment, whereby it evaluates each security which has an unrealized loss as of the end of each reporting period. The Committee uses a set of quantitative and qualitative criteria to review our investment portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of our investments. Some of the criteria we consider include:
During 2007, based on the criteria above, we determined that four equity securities were other-than-temporarily-impaired and accordingly wrote them down resulting in a $8.4 million realized loss.
comprised $28.6 million, or 92.6%, of the unrealized loss. Six securities in the consumer products sector represent approximately 23 percent of the total fair value and 27 percent of the Company’s unrealized loss. Four securities in the media sector represent approximately 14 percent of the total fair value and 23 percent of the Company’s total unrealized losses. The Company also owns 10 common stocks in the health care, industrial and financial sectors which have fair values of approximately 12 percent, 9 percent and 10 percent, respectively, and approximately 10 percent, 12 percent and 11 percent, respectively, of the Company’s total unrealized losses. The duration of these impairments ranges from one to 16 months. Additionally, the Company holds 43 securities in a loss position of approximately $2.0 million which are not considered individually significant. The duration of impairment on these marketable securities is primarily less than 10 months.
• financial and accounting services, including, but not limited to, tax compliance, investment management, statutory and GAAP accounting, loss reserving, regulatory compliance, development of premium and commission rates, and premium collection and refunds;
Pursuant to a General Agency Agreement, RIC, TIC and WIC have appointed our wholly-owned subsidiary, AmTrust North America, Inc. (“ANA”), as agent to solicit and accept applications for policies and to perform compliance, marketing, underwriting, administrative, billing and reporting duties. ANA also handles all reinsurance reporting for RIC, TIC and WIC. RIC, TIC and WIC pay ANA a commission for its services equal to 20% of gross premiums written.
We forecast claim payments based on our historical trends. We seek to manage the funding of claim payments by actively managing available cash and forecasting cash flows on a short- and long-term basis. Cash payments for claims were $76.6 million, $108.8 million and $180.1 million in 2005, 2006 and 2007, respectively. Since December 31, 2001, we have funded claim payments from cash flow from operations (principally premiums) net of amounts ceded to our third party reinsurers. We presently expect to maintain sufficient cash flow from operations to meet our anticipated claim obligations and operating and capital expenditure needs. Our cash and investment portfolio has increased from $810.3 million (excluding $13.9 million of other investments) at December 31, 2006 to $1,261.6 million (excluding $28.0 million of other investments) at
December 31, 2007. We do not anticipate selling securities in our investment portfolio to pay claims or to fund operating expenses. Should circumstances arise that would require us to do so, we may incur losses on such sales, which would adversely affect our results of operations and could reduce investment income in future periods. If as the result of such sales we could no longer classify any portion of our fixed maturity portfolio as held-to-maturity we would be required to carry all of our fixed maturity securities at the market value. If the aggregate market value at the given balance sheet is below the aggregate amortized cost we would have a reduction to stockholders’ equity. At December 31, 2007 our held-to-maturity fixed maturity portfolio had an aggregate unrealized gain of $0.8 million. If at December 31, 2007 we could not classify our fixed maturity portfolio as held-to-maturity our stockholders’ equity would be increased on an after tax basis by approximately $0.5 million.
(1) As per the NWCRP Articles of Agreement reinsurance is provided through a 100% Quota Share Reinsurance Agreement entered into among the Servicing Carrier (TIC) and the participating companies (all carriers writing in the state) pursuant to the Articles of Agreement.
Net cash used in investing activities was $343.1 million for the year ended December 31, 2007. Net cash used in investing activities was $421.9 million for the year ended December 31, 2006. In 2007, major components of net cash used in investing activities primarily included net purchases of equity, fixed maturity securities, other investments and short term investments of $285.8 million and the purchase of Associated and IGI for $35.5 million. In 2006, major components of net cash used in investing activities included purchases of equity and fixed maturity securities of $802.4 offset by proceeds of $398.7 from sales of similar investments.
Net cash provided by financing activities was $180.2 million for the year ended December 31, 2007 compared to net cash provided in 2006 of $170.0 million. In 2007 cash provided from financing included primarily $146.4 million received from entering into repurchase agreements and the issuance of the $40.0 million of junior subordinated debentures, offset by dividend payments of $5.4 million. In 2006, cash from financing activities arose primarily from proceeds of approximately $165.9 million received in a private placement and the issuance of $30.0 million of junior subordinated debentures offset by the repayment of $25.0 million of notes.
of $108.8 million. Major components of cash provided by operating activities for the year ended December 31, 2005 were premiums collected of $234.6 million, partially offset by claim payments of $76.6 million.
Net cash used in investing activities was $421.9 million for the year ended December 31, 2006. Net cash provided by investing activities was $12.5 million for the year ended December 31, 2005. In 2006, major components of net cash used in investing activities included purchases of equity and fixed maturity securities of $802.4 offset by proceeds of $398.7 from sales similar investments. In 2005, major components of net cash provided by investing activities included proceeds of $115.0 million from sales and maturities of investments and $161.6 million from the sale of all of the real estate assets which comprised the discontinued operations of APL, partially offset by net cash used in investing activities in the amount of $244.2 million for investment purchases.
Net cash provided by financing activities was $170.0 million for the year ended December 31, 2006 compared to net cash provided in 2005 of $43.4 million. The increase in cash provided by financing activities primarily arises from the proceeds of approximately $165.9 million received in the private placement in 2006 and the issuance by the Company of $30.0 million in principal amount of junior subordinated debentures.
Investments increased $379,986, premium receivables increased $109,977, loss and loss expense reserves increased $479,587 and unearned premium increased $204,603. A majority of these increases were through the acquisition of AIIS and IGI in 2007. Reinsurance recoverable increased $237,787, prepaid reinsurance premium increased 172,245 and note payable - related party increased $113,228 primarily from entering into a reinsurance contract with Maiden Insurance in the third quarter of 2007. Securities sold under arrangements to repurchase, at contract value, increased by 146,403 as the Company did not participate in these types of investments in 2006.
Line of Credit The Company entered into an agreement for an unsecured line of credit on June 30, 2007 with JP Morgan Chase Bank, N.A. in the aggregate amount of $50 million. The line will be used for general corporate purposes as required, as well as collateral for letters of credit. The agreement matures on June 30, 2008. Interest payments are required to be paid monthly on any unpaid principal and bears interest at LIBOR
plus 150 basis points. As of December 31, 2007 there was no outstanding balance on the line of credit. The Company has an outstanding letter of credit in place at September 30, 2007 for $17.4 million that reduced the availability on the line of credit to $32.6 million as of December 31, 2007.
(1) The loss and loss adjustment expense payments due by period in the table above are based upon the loss and loss adjustment expense estimates as of December 31, 2007 and actuarial estimates of expected payout patterns and are not contractual liabilities as to a time certain. Our contractual liability is to provide benefits under the policy. As a result, our calculation of loss and loss adjustment expense payments due by period is subject to the same uncertainties associated with determining the level of loss and loss adjustment expenses generally and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our loss and loss adjustment expense estimate process, see “Business - Loss Reserves.” Actual payments of loss and loss adjustment expenses by period will vary, perhaps materially, from the table above to the extent that current estimates of loss and loss adjustment expenses vary from actual ultimate claims amounts and as a result of variations between expected and actual payout patterns. See “Risk Factors - Risks Related to Our Business - Our loss reserves are based on estimates and may be inadequate to cover our actual losses” for a discussion of the uncertainties associated with estimating loss and loss adjustment expenses.
(2) We are subject to various annual assessments imposed by certain of the states in which we write insurance policies. These assessments are generally based upon the amount of premiums written or losses paid during the applicable year. Assessments based on premiums are generally paid within one year after the calendar year in which the policies are written, while assessments based on losses are generally paid
within one year after the loss is paid. When we establish a reserve for loss and loss adjustment expenses for a reported claim, we accrue our obligation to pay any applicable assessments. If settlement of the claim is to be paid out over more than one year, our obligation to pay any related loss-based assessments extends for the same period of time. Because our reserves for loss and loss adjustment expenses are based on estimates, our accruals for loss-based insurance assessments are also based on estimates. Actual payments of loss and loss adjustment expenses may differ, perhaps materially, from our reserves. Accordingly, our actual loss-based insurance assessments may vary, perhaps materially, from our accruals.