In December 2005, we expanded into the specialty middle-market property and casualty business through our acquisition from Alea of access to its distribution network, renewal rights to substantially all of its specialty middle market property and casualty business, certain employees, including senior management and non-competition covenants. The business in this segment produced approximately $134 million of gross premiums written in the first year of 2006. See “Business-Business Segments-Specialty Middle-Market Property and Casualty.”
Stock Compensation Expense. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R) “Share-Based Payment” and began recognizing compensation expense for its share-based payments based on the fair value of the awards. Share-based payments include restricted stock and stock option grants under the Company’s 2005 Equity Incentive Plan. SFAS 123(R) requires share-based compensation expense recognized since January 1, 2006, to be based on the following: a) grant date fair value estimated in accordance with the original provisions of SFAS 123 for unvested options granted prior to the adoption date; and b) grant date fair value estimated in accordance with the provisions of SFAS 123(R) for unvested options granted subsequent to the adoption date.
Net Premiums Earned. Net premiums earned increased from $216.0 million for the year ended December 31, 2005 to $329.0 million for the year ended December 31, 2006. This $113.0 million or 52.3% increase is the result of the increase in net premiums written over the twelve preceding months of December 31, 2006, relative to the increase in net premiums written over the twelve months preceding December 31, 2005. The increase by segment was: small business workers’ compensation - $55.1 million; specialty risk and extended warranty - $13.1 million; and specialty middle market property and casualty - $44.8 million.
Fee income. Fee income increased from $8.2 million for the year ended December 31, 2005 to $12.4 million for the year ended December 31, 2006. This $4.2 million or 51.2% increase is the result of increased fee revenue from the both the administration of the Georgia Plan and specialty risk and extended warranty clients for which a subsidiary of the Company acts as program administrator.
AmTrust’s income is generated primarily from our insurance subsidiaries. The laws of New York, New Hampshire, Delaware, Ireland and Bermuda regulate and restrict, under certain circumstances, the ability of our insurance subsidiaries to pay dividends to AmTrust. In addition, the terms of AmTrust’s junior subordinated debentures limit AmTrust’s ability to pay dividends on its common stock, and future borrowings may include prohibitions and restrictions on dividends. See “Dividend Policy,” “Regulation” and “Risk Factors.” We paid a dividend of $9.6 million to the holders of our preferred stock in July 2005 and an additional dividend of $1.2 million in December 2005. On September 1, 2006 our board of directors approved a quarterly cash dividend of $0.02 per share on its Common Stock beginning in the fourth quarter of 2006, subject to financial results quarterly approval and declaration by our board of directors.