A determination must be made for deferred tax assets regarding whether it is more likely than not that sufficient taxable income will exist in future periods when deductible temporary differences are expected to reverse
The following table shows our direct premiums written by major geographical market for the years ended December 31, 2007 and 2006.
Direct premiums written decreased 13.7% in 2007. Overall our retention rate, the ratio of previously insured physicians compared to the number of physicians that we renew, was good in 2007, with 85% of policies that expired renewing. Our insured physician count was down only 2.5% to 9,217 at December 31, 2007 from 9,454 at December 31, 2006. However, premium rates decreased an average of 7.8%, and there were minor changes in the composition of our book of business, especially in Illinois where we saw a decrease in the number of insureds representing higher-risk, higher-premium specialties. Although these accounts were largely replaced, they were replaced with policies that had a lower annual premium. We believe that the medical professional liability market will remain competitive in the near future. This competition, combined with favorable loss trends, is likely to continue to place downward pricing pressure on premium rates. As a result, we do not anticipate significant premium growth in the coming year.
A portion of the decrease in direct premiums written was related to the deconsolidation of PIC-Florida and the exit from our other lines of business discussed more fully in Note 1 to the Consolidated Financial Statements. The remaining decrease was attributable to price competition in our core professional liability markets, primarily in our Illinois, Kentucky and Ohio markets. Our insured physician count at December 31, 2006 was 9,454, a decrease of 1.1% compared to December 31, 2005. Our retention ratio was 82% in 2006 and 2005.
The primary sources of our liquidity, on both a short and long-term basis, are funds provided by insurance premiums collected, net investment income, recoveries from reinsurers, proceeds from the maturity or sale of invested assets and principal receipts from our mortgage-backed securities. The primary uses of cash, on both a short and long-term basis, are losses, loss adjustment expenses, operating expenses, the acquisition of invested assets and fixed assets, reinsurance premiums, interest payments, taxes, the repayment of long-term debt, the payment of cash dividends on APCapital common stock and the purchase of outstanding common stock.
We continue to repurchase shares of our outstanding common stock, including 1,472,121 shares for $57.7 million in 2007. See Note 11 of the Notes to Consolidated Financial Statements as well as “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for further details of our share repurchase plans.
In evaluating our financial condition, two factors are the most critical. First, the availability of adequate statutory capital and surplus to satisfy state regulators and to support our current A.M. Best rating, and second, the adequacy of our reserves for unpaid loss and loss adjustment expenses.
Deferred policy acquisition costs (“DAC”) (carried on the accompanying Consolidated Balance Sheets in other assets) include commissions, premium taxes and other costs incurred in and that vary with premium generation. These costs are deferred and amortized over the period in which the related premiums are earned, typically one year. After considering future investment income, management has determined that all deferred policy acquisition costs are recoverable as of December 31, 2007.
The Company’s reinsurers are reviewed for financial solvency, at least quarterly. This review includes, among other quantitative and qualitative factors, a ratings analysis of each reinsurer participating in a reinsurance contract.
January 1, 2009 for nonfinancial assets and nonfinancial liabilities except those items recognized or disclosed at fair value on an annual or more frequently recurring basis. The adoption of SFAS No. 157 is not expected to have a material effect on its consolidated results of operations, financial position or liquidity, based on assets and liabilities reported at December 31, 2007. However, additional disclosures concerning fair values will be required.