The Company reported a net loss of $3.2 million for the year ended December 31, 2008 compared to net income of $.3 million for the year ended December 31, 2007. The Company reported a basic loss per common share of $0.050 for the year ended December 31, 2008 compared to basic earnings of $0.004 for the year ended December 31, 2007. Fully diluted losses per common share for the year ended December 31, 2008 were $0.050 compared to earnings of $0.004 for the year ended December 31, 2007. The 2008 results include a $2.4 million after tax charge from a goodwill write down from the Company’s review of goodwill after which it concluded that the carrying value of goodwill related to its retail operations exceeded its fair value by that amount. Pre-tax losses excluding the goodwill impairment was $1.2 million for the period ended December 31, 2008 as compared to pre-tax income of $.8 million for the comparable 2007 period.
In addition to the goodwill impairment, contributing factors towards the Company’s 2008 include a decline in net income from the Company’s retail operations. This decline was partially offset by increases in earned premium in AAIC and related increases in commission and fee income in MGA. Increased loss and loss adjustment expenses as a percentage of earned premiums (“Loss Ratio”) in AAIC (from 74.3% in 2007 to 82.5%) in 2008 offset these increases in revenues. Fee income improvements in MGA reflect fees associated with increased premium production in AAIC in the states of Louisiana and Arizona. Commission and fee income decreases in TrustWay are related to the decline in the construction industry and high unemployment rates in Florida as well as the recession.
MGA and TrustWay produce and service non-standard personal automobile insurance business for our own carrier and other insurers. We receive service fees for agency, underwriting, policy administration, and claims adjusting 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 between carriers and are applied to premiums written to determine commission income.
Commission income for the year ended December 3, 2008, as a result of business produced in both TrustWay and the MGA increased $0.5 million compared to the same period ended December 31, 2007. The increase primarily relates to an increase in MGA commissions on premium production for the 2008 period over the comparable 2007 period. Also AAIC pays MGA commission on 30% of premium which AAIC retains and this amount is subsequently eliminated upon consolidation.
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 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, 2008, was $54.5 million compared to $41.6 million as of December 31, 2007.
After making deductions for the effect of reinsurance, losses and loss adjustment expenses were $23.7 million for the period ended December 31, 2008. As a percentage of earned premiums, this amount increased for the period ended December 31, 2008, from 74.3% to 82.5%, when compared with the same period in 2007. The amount represents actual payments made and changes in estimated future payments to be made to or on behalf of AAIC’s policyholders, including the expenses associated with settling claims. The increase in the year-over-year loss ratio is mainly attributable to the Company’s increase in writings and adverse development in certain states.
Other operating expenses, including selling, general and administrative expenses increased $2.0 million for the year ended December 31, 2008 when compared to the same period of 2007. These increases are associated, in part, with the growth of AAIC and related operations. AAIC and MGA experience proportionate increases in selling costs as the premiums written increase. As a percentage of revenue, selling, general and administrative expenses for the twelve-month period ended December 31, 2008 decreased from 62.0% to 61.1% when compared to the 2007 period. This decrease is primarily attributable to the increase in revenue production in proportion to the increase in expenses related to the MGA. Depreciation and amortization expense increased $0.1 million for the year ended December 31, 2008 when compared to the same period of 2007. This increase is associated with the increase in fixed and intangible assets, including the added depreciable and amortizable assets from acquisitions.
The provision for income taxes for the year ended December 31, 2008 amounted to a benefit of $1.4 million, and consists of federal and state income taxes at an effective rate of 30%. The Company had a tax expense of $0.5 million for the period ended December 31, 2007, representing an effective tax rate of 65%. The company experienced a more normal tax rate in 2008 as the 2007 effective tax rate was skewed due to the impact certain permanent differences had on the relatively small 2007 pre-tax income.
premium tax abatement and credit opportunities offered to insurance companies in the states where AAIC writes policies.
Prepaid reinsurance premiums as of December 31, 2008, increased $1.8 million to $22.9 million compared to December 31, 2007. The increase results from AAIC’s continued growth and represents premiums ceded to its reinsurers which have not been fully earned.
Prepaid income tax increased to $0.1 million as of December 31, 2008 compared $1.8 million as of December 31, 2007. This increase represents income tax on the loss from operations excluding the goodwill impairment charge.
Unpaid losses and loss adjustment expenses increased $8.9 million to $42.6 million as of December 31, 2008 from $33.7 million at December 31, 2007. 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.
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, 2008 increased $0.4 million to $3.4 million, compared to the balance at December 31, 2007. The increase is related to increases in AAIC writings.