The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, and in the case of unpaid losses and LAE, an actuarial valuation. Management regularly reevaluates these significant factors and makes adjustments where facts and circumstances dictate. In selecting the best estimate, we utilize various actuarial methodologies. Each of these methodologies is designed to forecast the number of claims we will be called upon to pay and the amounts we will pay on average to settle those claims. In arriving at our best estimate, our actuaries consider the likely predictive value of the various loss development methodologies employed in light of underwriting practices, premium rate changes and claim settlement practices that may have occurred, and weight the credibility of each methodology. Our actuarial methodologies take into account various factors, including, but not limited to, paid losses, liability estimates for reported losses, paid allocated LAE, salvage and other recoveries received, reported claim counts, open claim counts and counts for claims closed with and without payment of loss.
Annually - Our policy is to select a single point estimate that best reflects our in-house actuarial determination for unpaid loss and LAE. Our independent actuaries, examining the exact same data set, will independently select a point estimate which determines a high point and low point range. Both processes rely on objective and subjective determinations. If our point estimate falls within the range determined from the point estimate of our actuaries, then no adjustments by management would be required. In consideration thereof, management does not have a policy for adjusting the liability for unpaid loss and LAE to an amount that is different than an amount set forth within the range determined by the independent actuaries.
The investments held at December 31, 2008 and December 31, 2007 were comprised mainly of United States government and agency bonds, as well as municipal bonds which are viewed by the Company as conservative and less risky holdings, though sensitive to interest rate changes. There is a smaller concentration of corporate bonds, predominantly held in the financial and conglomerate industries. At December 31, 2008, approximately 89% of the equity holdings are in mutual funds and 11% are in equities related to the financial industry and insurance industry.
Our commercial general liability insurance premiums receivable decreased $0.9 million, or 34.1%, to $1.7 million as of December 30, 2008, compared with $2.6 million as of December 31, 2007.
Net investment income increased $2.0 million, or 34.2%, to $8.0 million in 2007, compared with $5.9 million in 2006. The increase in investment income is primarily a result of the additional amounts of invested assets. Also affecting our net investment income was an increase in overall yield to 6.10 % in 2007 compared with a yield of 5.28 % in 2006.
Our loss ratio, as determined in accordance with GAAP, in 2007 was 48.0%, compared with 49.7% in 2006. The table below reflects the loss ratios by product line.
Operating and underwriting expenses decreased $0.5 million, or 3.6%, to $12.7 million in 2007, compared with $13.2 million in 2006. The change is primarily due to a $2.3 million aggregate decrease in fees paid to boards, bureaus and associations, bad debts, real estate taxes, motor vehicle reports, telephone, temporary employment, postage and bank fees, offset by a $1.8 million aggregate increase in legal fees, building rent, premium taxes, consulting fees, licensing, accounting fees and a one time settlement payment to State National.
Federated National is authorized to underwrite fire, allied lines, personal automobile, homeowners’ property and casualty insurance in Florida as an admitted carrier. American Vehicle is authorized to underwrite commercial multi peril, inland marine and personal and commercial automobile insurance in Florida as an admitted carrier. In addition, American Vehicle is authorized to underwrite commercial general liability insurance in fifteen states, of which eleven states had ongoing operations in 2008, as either an admitted or non-admitted carrier. American Vehicle will continue its expansion of commercial general liability insurance into new states.
During 2008 Federated National applied for and was granted, by the State of Florida, a license to underwrite fire and allied lines insurance as an admitted carrier. Operations under Federated National’s newly granted allied lines began in 2008 as a cedant for the insurance policies it underwrites to the federal flood program. Operations under Federated National’s newly granted fire line of business is pending approval by the Florida OIR and is expected to begin operations in 2009.
We recognize the income and expense on reinsurance contracts principally on a pro-rata basis over the term of the reinsurance contracts or until the reinsurers maximum liability is exhausted, whichever comes first. We are reinsured under separate reinsurance agreements for the different lines of business underwritten. Reinsurance contracts do not relieve us from our obligations to policyholders. We continually monitor our reinsurers to minimize our exposure to significant losses from reinsurer insolvencies. We only cede risks to reinsurers whom we believe to be financially sound. At December 31, 2008, all reinsurance recoverables are considered current and deemed collectable, except for a particular reinsurer in connection with the 2005 - 2006 reinsurance treaties, for whom we have recorded a $0.2 million pretax valuation allowance.
In September 2006, FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (“SFAS No. 158”). This statement requires an employer to recognize the overfunded or underfunded status of a single-employer defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 is effective for years ending after December 15, 2006. The Company does not have a single-employer defined benefit postretirement plan, and accordingly, there is no impact on our consolidated financial statements.
Our articles of incorporation, bylaws and Florida law may discourage takeover attempts and may result in entrenchment of management.
As of December 31, 2008, the fair value of investments written down was $1.4 million; there were no impaired investments written down as of December 31, 2007 and 2006.
Our Amended and Restated Articles of Incorporation authorize the issuance of one million shares of preferred stock with designations, rights and preferences determined from time to time by our board of directors. Accordingly, our Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock. We have not issued preferred shares as of December 31, 2008.
Assets measured at fair value on a recurring basis, for which the Company has elected the fair value option, are summarized below: