We are an insurance holding company, which, through our subsidiaries and our contractual relationships with our independent agents and general agents, controls substantially all aspects of the insurance underwriting, distribution and claims process. We are authorized to underwrite homeowners’ property and casualty insurance, commercial general liability insurance, personal automobile insurance and commercial automobile insurance in various states with various lines of authority through our wholly owned subsidiaries, Federated National and American Vehicle.
· Loss trend factors which are used to establish expected loss ratios for subsequent accident years based on the projected loss ratio for prior accident years.
Income taxes receivable decreased to nothing as of December 31, 2007, compared to $0.8 million as of December 31, 2006. The decrease is due to tax payment patterns in connection with our tax liabilities. The 2004, 2003 and 2002 consolidated Federal Income Tax Returns filed by the Company have been examined by the Internal Revenue Service (“IRS”) during 2006 and 2005. We have concurred with certain IRS conclusions and have appealed other conclusions. Irrespective of the ongoing appellate process, we do not believe that a material adjustment will occur. Income taxes receivable are net of $160,000 reserve established in conjunction with this process.
Other assets decreased $1.6 million, or 36.0%, to $2.9 million as of December 31, 2007, compared to $4.6 million as of December 31, 2006. Major components of other assets are as follows:
Loss and LAE increased by $3.2 million, or 7.3%, to $47.6 million for the year ended December 31, 2007, compared to $44.4 million for year ended December 31, 2006. The increase includes $1.2 million adverse development associated with the hurricanes.
The increase in prepaid reinsurance premiums was $20.2 million for the year ended December 31, 2006, compared to $6.6 million for year ended December 31, 2005. The increased credit to written premium was primarily associated with the timing of our reinsurance payments measured against the term of the underling reinsurance policies.
Net realized investment gains increased $0.6 million, or 131.9%, to $1.1 million for the year ended December 31, 2006, compared to $0.5 million for year ended December 31, 2005. The table below depicts the gains (losses) by investment category.
Interest expense decreased $0.7 million, or 53.1%, to $0.7 million for the year ended December 31, 2006, compared to $1.4 million for year ended December 31, 2005. The change was primarily attributed to our decreased reliance upon outside sources for financing our contracts receivable.
We continue to offer direct billing in connection with our automobile program, where the insurance company accepts from the insured, as a receivable, a promise to pay the premium, as opposed to requiring the full amount of the policy, either directly from the insured or from a premium finance company. The advantage of direct billing a policyholder by the insurance company is that we are not reliant on our credit facility, but remain able to charge and collect interest from the policyholder.
On July 31, 2003, we completed a private placement of 6% Senior Subordinated Notes (the “July 2003 Notes”), which were offered and sold to accredited investors as units consisting of one July 2003 Note with a principal amount of $1,000 and warrants (the “2003 Warrants”) to purchase shares of our Common Stock. We sold an aggregate of $7.5 million of July 2003 Notes in this placement, which resulted in proceeds to us (net of placement agent fees of $450,724 and offering expenses of $110,778) of $6,938,498.
The Company holds collateral under related reinsurance agreements in the form of letters of credit totaling $4.1 million that can be drawn on for amounts that remain unpaid for more than 120 days.
We have established a profit sharing plan under Section 401(k) of the Internal Revenue Code. This plan allows eligible employees, except key and highly compensated employees, to contribute up to 100 percent of their compensation on a pre-tax basis, not to exceed statutory limits. For the years ended December 31, 2007, 2006 and 2005, we did not contribute to the plan. Our contributions, if any, are vested incrementally over five years.