Each of the regions, except for Southwest, recorded premium declines in 2007 from 2006. The percent of premium (decrease) increase by region for 2007 from 2006 is as follows: Southeast (10)%, South Central (15)%, Southwest 23% and West (55)%. Planned rate increases and selective reduction in the agency force to reduce unprofitable business are the main reasons for the decrease in the gross written premiums, which resulted in the policies in force declining 14%, except for the Southwest region. In the Southwest region, where rates remained stable, the agency force grew and marketing efforts were increased which accounts for their increase in gross premiums written. Net premiums earned increased 3% in 2007 over 2006 primarily as a result of the growth in gross premiums written in the fourth quarter of 2006 and the first quarter of 2007 over their respective prior year quarters.
Agency revenues increased $432,000 (3%) in 2007 primarily as a result of the increase in writings in the fourth quarter of 2006 and the first quarter of 2007 over their respective prior years’ quarters. Agency revenues are primarily fees charged on insureds’ premiums due.
The net proceeds of the offering were used by GAINSCO Capital Trust I to acquire Subordinated debentures of the Company that have the same maturity and bear interest at the same rate as the capital securities. The Company acquired 100% of the common securities of GAINSCO Capital Trust I. The Company used the proceeds to redeem its outstanding Series A Preferred Stock and to provide $5 million of capital to its insurance company. The balance was used for general corporate purposes.
Deferred policy acquisition costs are principally commissions, premium taxes, marketing expenses and some underwriting expenses which are deferred. Deferred policy acquisition costs decreased primarily as a result of the decrease in writings, reduced commission rates, decreases in marketing expenses and in some underwriting expenses. The Company also recorded a premium deficiency, net of anticipated investment income, of $623,000 in 2007 against deferred policy acquisition costs for expected underwriting losses on the South Central business.
In February 2006, the FASB issued Statement No. 155, “Accounting for Certain Hybrid Financial Instruments-an amendment of Statements No. 133 and 140.” Statement No. 155 (i) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (ii) clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement No. 133, (iii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (iv) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (v) amends Statement No. 140 to eliminate the exemption from applying the requirements of Statement No. 133 on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. Statement No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006 (the fiscal year beginning January 1, 2007 for the Company). The Company adopted SFAS No. 155 as of January 1, 2007 and has determined there has been no impact on our consolidated financial position or results of operations and financial condition.