o premiums we earn from the sale of workers' compensation insurance policies and from the portion of the premiums assumed from the NWCRP, which we refer to in this report as gross premiums, less the portion of those premiums that we cede to other insurers, which we refer to in this report as ceded premiums. We refer to the difference between gross premiums and ceded premiums as net premiums; and
Accident Years Method Weight -------------- ------ ------ 2000 to 2005......... Paid Bornhuetter-Ferguson Method 25% 2000 to 2005......... Incurred Bornhuetter-Ferguson Method 25% 2000 to 2005......... Paid Loss Development Method 25% 2000 to 2005......... Incurred Loss Development Method 25% 1982 to 1999......... Paid Bornhuetter-Ferguson Method 0% 1982 to 1999......... Incurred Bornhuetter-Ferguson Method 0% 1982 to 1999......... Paid Loss Development Method 50% 1982 to 1999......... Incurred Loss Development Method 50%
KEY FINANCIAL RATIOS: Net loss ratio 56.0% 65.7% 66.7% Net policy acquisition expense ratio 20.1 10.8 13.2 Underwriting and other expense ratio 13.4 17.8 18.4 --------- --------- --------- Net combined ratio, excluding policyholder dividends 89.5% 94.3% 98.3% Dividend ratio 3.4 3.9 3.5 --------- --------- --------- Net combined ratio, including policyholder dividends 92.9% 98.2% 101.8% ========= ========= =========
NET INVESTMENT INCOME increased by $4.7 million or 77.7% in 2005 over 2004, and $1.3 million, or 26.5%, in 2004 over 2003. The increase in investment income is a result of the increase in our investment portfolio due to the commutation of two of our reinsurance treaties, an increase in our net operating cash flow as a result of the elimination of the use of quota share reinsurance and an increase in the size of our investment portfolio. Additionally, at December 31, 2005 the market yield to maturity increased to 4.9% from 3.6% in 2004. Declining interest rates reduced our investment yield to 3.6 % in 2004 from 3.9% in 2003.
POLICY ACQUISITION EXPENSES were $51.5 million, or 20.1% of net premiums earned, in 2005 compared to $19.5 million, or 10.8%, in 2004 and $21.7 million, or 13.2%, in 2003. Policy acquisition expenses are recorded net of ceding commissions. In 2005, as a result of the elimination of quota share reinsurance, ceding commission decreased $17.5 million to $7.4 million. An increase in the ceding commission rate to 31.0% in 2004 from 30.0% in 2003 is responsible for the increase in ceding commission to $24.9 million in 2004 from $22.9 million in 2003. During 2003, the ceding commission recorded relating to the 2003 quota share treaty was only related to premiums ceded on new and renewal business. Agents' commissions also increased in the current year. Direct commissions as a percent of direct premiums earned increased to 9.4% 2005 from 8.7% for 2004. The increase is due to the change in geographic mix of our book of business. Florida, which had an average commission rate of 10.2% (the highest of our 11 states), accounted for 40.3% of direct premiums written as compared to only 35.5% for the prior year. Georgia, North Carolina, South Carolina and Virginia, which had an average commission rate of only 7.7%, accounted for only 13.0% of direct premiums written for 2005, down from 17.6% in the prior year. Assessments increased to 6.8% of direct premiums earned for 2005 from 3.8% for the prior year due primarily to the doubling of the South Carolina Second Disability Trust Fund assessment rate in the third quarter of 2005. The impact of this rate increase was a pre-tax charge of $3.3 million in the third quarter of 2005. Premium tax expense increased to 1.6% from 1.4% of direct premiums earned during 2005 and 2004, respectively. This is due to Florida's increased effective rate from the reduction of the credits allowed for the administrative assessment. Administrative assessments paid in Florida are allowed as a credit against premium taxes. The administrative assessment rate decreased in 2005 thereby reducing the amount of credit allowed and resulting in an increase in the Florida premium tax effective rate.
---------- (1) Long-Term Debt Obligations reflect payments for the principal and estimated interest expense that is based on variable LIBOR rates plus a margin. The estimated interest expense was based on the contractual obligations of the debt as of December 31, 2005. The rates ranged from 6.86% to 8.64%.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AmCOMP Incorporated and subsidiaries at December 31, 2005 and 2004 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Statutory-basis net income (loss) for AmCOMP Preferred and AmCOMP Assurance for the years ended December 31, 2005, 2004 and 2003 is as follows (in thousands):
AmCOMP Preferred submits claims to the SDTF for recovery of applicable claims paid on behalf of AmCOMP Preferred's insured. Because of the uncertainty of the collectibility of such amounts, SDTF recoverables are reported in the accompanying consolidated financial statements when received. Cash collections from the SDTF were approximately $1,151,000, $2,547,000, and $1,493,000 in the years ended December 31, 2005, 2004 and 2003, respectively.
Reinsurance recoverables on paid and unpaid losses and loss adjustment expenses were $83,861,000 and $112,417,000 at December 31, 2005 and 2004, respectively, of which $45,630,000 and $43,795,000, respectively, was recoverable from one reinsurer. Management evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to minimize its exposure to significant losses from reinsurer insolvencies. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company.
2005 2004 2003 -------- -------- -------- Current expense (benefit) Federal .................................. $ 9,555 $ 1,891 $ 5,587 State .................................... 1,205 (277) 929 -------- -------- -------- Total current tax expense .............. $ 10,760 $ 1,614 $ 6,516 -------- -------- -------- Deferred expense (benefit) Federal .................................. $ (1,123) $ 1,461 $ (5,370) State .................................... (311) 1,200 (514) -------- -------- -------- Total deferred tax expense (benefit) ... (1,434) 2,661 (5,884) -------- -------- -------- Income tax expense ..................... $ 9,326 $ 4,275 $ 632 ======== ======== ========