The corporate headquarters of the Company is located at RiverEdge One, Suite 600, 5500 Interstate North Parkway, Atlanta, Georgia 30328. The Company currently leases its office space at the RiverEdge One facility under a 12-year lease that commenced on May 1, 2003.
Gross premiums written for the year ended December 31, 2007 were $88.4 million. In the comparable period for 2006, AAIC recorded $69.1 million in gross premiums written. 2007 gross premiums written includes insurance premiums written directly by AAIC, “direct premiums written,” of $86.8 million, plus $1.6 million of premiums associated with the insurance risk transferred to AAIC by two unaffiliated insurance company’s pursuant to a reinsurance contract, referred to as “assumed premiums written.” AAIC’s recorded assumed premiums written was $0.3 million in the year ended December 31, 2006. The majority of our growth occurred in Florida, where AAIC began writing policies in early 2006. Entry into Florida accounted for $22.1 million of the increase, over the comparable 2006 period. Entry into the states of Louisiana and Mississippi during 2007 accounted for $4.4 million year-over-year increase in direct premiums written in AAIC. Georgia the state from which we receive the majority of our premiums, representing 40% of our direct written premium, declined $7.0 million due to a continued soft market and pricing pressures. Direct premiums written in South Carolina decreased 21% in 2007 from the prior year reflecting increased competition in the state. Policies in force increased 27% from December 31, 2006 to December 31, 2007. The Company cedes approximately 70% of its direct premiums written to its reinsurers. The amount ceded for the year ended December 31, 2007, was $59.8 million as compared to $47.0 million in 2006.
services performed on behalf of these insurers. We also receive commission and service fee income in TrustWay on other insurance products produced for unaffiliated insurance companies on which we do not bear underwriting risk, including travel protection, vehicle protection and hospital indemnity insurance policies. Commission rates vary among carriers and are applied to written premium to determine commission income.
Commission income, as a result of business produced in both TrustWay and the MGA, for the year ended December 31, 2007 decreased $1.4 million compared to the same period ended December 31, 2006. The decrease primarily relates to the TrustWay agency commission income for the 2007 period over the comparable 2006 period, which was negatively impacted by the Florida regulatory change and the decline in the Florida construction industry, which supports many of our insureds in the state of Florida. The decrease was offset by commissions earned from two non-affiliated insurers from whom the Company generates premium. Also AAIC pays MGA commission on the 30% of premium which AAIC retains. The commission is subsequently eliminated upon consolidation. The amount eliminated was $6.7 million for the year ended December 31, 2007.
Managing general agent fees for the period ended December 31, 2007 were $10.9 million, an increase of $1.7 million when compared to the same period of 2006. 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 related investment expenses. Net investment income increased to $0.8 million period ended December 31, 2007 from $0.7 million in the comparable 2006 period. This is primarily a result of an increase in average invested assets.
We have historically used reinsurance to manage our exposure to loss by ceding a portion of our gross losses and loss adjustment expenses to reinsurers. We remain obligated for amounts covered by reinsurance, however, in the event that the reinsurers do not meet their obligations under the agreements (due to, for example, disputes with the reinsurer or the reinsurer’s insolvency). The Company cedes approximately 70% of its direct loss and loss adjustment expenses incurred to its reinsurers and the amount ceded for the year ended December 31, 2007, was $41.6 million.
After making deductions for the effect of reinsurance, losses and loss adjustment expenses were $18.9 million for the period ended December 31, 2007. As a percentage of earned premiums, this amount increased for the period ended December 31, 2007, from 73.4% to 74.3%, when compared with the same period in 2006. The amount represents actual payments made and changes in estimated future payments to be made to or on behalf of its policyholders, including the expenses associated with settling claims. The increase in the year-over-year loss ratio is directly attributable to the Company’s increase in writings and exposure in certain states.
Other operating expenses, including selling and general and administrative expenses increased $3.1 million for the year ended December 31, 2007 when compared to the same period of 2006. These increases are associated, in part, with the growth of AAIC and related operations. AAIC and MGA experienced proportionate increases in selling costs as the premiums written increase. As a percentage of revenue, selling and general and administrative expenses for the twelve-month period ended December 31, 2007 increased from 61.6% to 62.0% when compared to the 2006 period. This increase is primarily attributable to the increase in production related to the MGA. Depreciation and amortization expense increased $0.1 million for the year ended December 31, 2007 when compared to the same period of 2006. This increase is associated with the increase in fixed and intangible assets, including the added depreciable and amortizable assets from three Alabama agency acquisitions in 2007.
Premiums receivable as of December 31, 2007, increased $10.1 million to $28.8 million compared to December 31, 2006. The balance represents amounts due from AAIC’s insured and the increase is directly attributable to the increase in AAIC’s premium writings during 2007. The Company’s policy is to write off receivable balances immediately upon cancellation or expiration, and the Company does not consider an allowance for doubtful accounts to be necessary.
Reinsurance recoverable as of December 31, 2007, increased $6.7 million, to $29.3 million compared to December 31, 2006. The increase is directly related to AAIC’s continued growth. AAIC maintains a quota-share reinsurance treaty with its reinsurers in which it generally cedes 70% of both premiums and losses. The $29.3 million represents the reinsurers’ portion of losses and loss adjustment expense, both paid and unpaid. All amounts are considered current.
Intangible assets as of December 31, 2007, increased $.3 million to $11.4 million from the balance of $11.1 million as of December 31, 2006. This increase is directly related to the Company’s acquisition of three Alabama insurance agencies, less amortization of identifiable intangible assets for 2007.
Prepaid income tax decreased $0.5 million compared to the balance as of December 31, 2006. This decrease represents income tax refunds anticipated of $.6 million for 2007 less current taxes payable of $0.1 million.
Deferred tax assets decreased $.7 million compared to the balance as of December 31, 2006. This decrease primarily represents the utilization of net operating loss carry forwards available to the Company as of January 1, 2006 and an increase in deferred taxes for policy acquisition costs.
Accounts payable and accrued expenses as of December 31, 2007, increased $2.2 million from December 31, 2006 to $7.2 million. $.4 million of the balance represents the Company’s liability due to carriers related to an increase in direct bill agency business, $0.7 million represents an increase in unclaimed property, $0.7 million represents an increase in accrued expenses for payroll and general expense and $.2 million represents an increase in deferred revenue.
Unpaid losses and loss adjustment expenses increased $8.8 million to $33.7 million as of December 31, 2007 from $24.9 million at December 31, 2006. This amount represents management’s estimates of future amounts needed to pay claims and related expenses and the increase correlates with the increase in AAIC’s writings and anticipated future losses.
Financing activities for the year ended December 31, 2007 included the issuance of common stock resulting in additional capital of $0.1 million. Debt repayments for the year ended December 31, 2007 were $1.3 million and the Company issued new promissory notes in connection with the acquisition of three agencies in an amount totaling $.2 million.
The Company’s liquidity and capital needs have been met in the past through premium, commission and fee income, loans from its Chairman, and its Chief Executive Officer, and 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 and its Chief Executive Officer. 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. All the series A convertable stock has been converted to common stock. 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. During 2007, 840,000 shares of preferred stock converted to 8,400,000 shares of common stock.
The Company did not have any off-balance sheet arrangements during the year ended December 31, 2007.
All information required to be disclosed in Item 8 is incorporated by reference from the section entitled “Index to Financial Statements” in Item 15 of this Annual Report.