In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Our actual results in future periods may differ from those referred to herein due to a number of factors, including the risks described in the sections entitled “Risk Factors” and “Forward-Looking Statements and Associated Risks” and elsewhere in this report.
assessments and premium surcharges related to our insurance activities, including assessments and premium surcharges for state guaranty funds and other second injury funds; and
There are five other actuarial methods considered by us and some of these methods rely on assumptions about frequency and loss trends. The results of these methods generally track with the four methods listed above. Any changes in frequency and/or loss trends would impact the claim reporting and payment patterns. Therefore, we believe the effect of these changes are implicitly considered in the sensitivity of reserve estimates to the four actuarial methods listed above.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued an interpretation of FASB Statement No. 109, Accounting for Uncertainty in Income Taxes (“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Interpretation establishes a “more likely than not” recognition threshold for tax benefits to be recognized in the financial statements. The “more likely than not” determination is to be based solely on the technical merits of the position. This interpretation was adopted by the Company on January 1, 2007. As of the adoption date and as of December 31, 2007, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. We recognize income tax related interest in interest expense and penalties in income tax expense. Income tax related interest recognized in the year ended December 31, 2007 was $0.2 million. Tax years 2003 through 2006 and 2002 through 2006 are subject to examination by the federal and state taxing authorities, respectively. There are no income tax examinations currently in process.
Losses and loss adjustment expenses decreased $37.1 million, or 22.7% in 2007 as compared to 2006. Loss and loss adjustment expenses were 55.2% and 61.4% of net premiums earned in 2007 and 2006, respectively. These changes are the result of a few factors. First, reflected in our losses and LAE in 2007 is a $36.5 million redundancy, net of reinsurance, for years prior to 2007. Excluding business assumed from state mandated pools, the redundancy in the year ended December 31, 2007 was attributable to prior accident year reserve decreases in Florida ($17.6 million), Tennessee ($4.9 million), Wisconsin ($2.8 million), Indiana ($2.8 million), South Carolina ($2.2 million), Texas ($2.2 million), North Carolina ($1.7 million), Georgia ($1.2 million) and less significant decreases in several other states. The accident years with the largest redundancies were 2006 ($13.4 million), 2005 ($11.1 million) and 2004 ($6.4 million). The redundancy for 2007 was more than the redundancy of $14.2 million in 2006. Second, loss and loss adjustment expenses decreased as a result of the decrease in net premiums earned discussed above. These decreases in loss and loss adjustment expense were partially offset by an increase in the current net accident year loss ratio. The current net accident year loss ratio, excluding business assumed from state mandated pools and adjusting and other expense, increased to 66.6% for 2007 from 63.4% in 2006. Additionally, adjusting and other expense was 4.8% of net premiums earned in 2007, up from 3.9% in 2006.
Carrying amount is amortized cost for bonds held-to-maturity. Carrying value is market value for bonds available-for-sale. As of December 31, 2007, $329.8 million of our bonds was classified as available-for-sale and $93.7 million were classified as held-to-maturity.
AmCOMP Assurance Corporation (“AmCOMP Assurance”), a wholly owned property and casualty insurance company; and
The Company’s long-term source of consolidated earnings is principally the income from its workers’ compensation insurance business and investment income from its investment portfolio. Workers’ compensation insurance provides coverage for the statutorily prescribed benefits that employers are required to provide to their employees injured in the course of employment. The Company is licensed as an insurance carrier in 25 states and the District of Columbia, but currently focuses its resources in 17 states that it believes provide greater opportunity for near-term profitable growth, with the most significant concentrations in Florida, Wisconsin, Texas, Indiana, Tennessee, and Georgia.
Single class and multiclass mortgage-backed/asset-backed securities designated held-to-maturity are valued at amortized cost using the interest method including anticipated prepayments. Changes in anticipated prepayment assumptions are accounted for using the retrospective method. Prepayment assumptions are obtained from dealer surveys or internal estimates and are based on the current interest rate and economic environment.
Unpaid Losses and LAE-Unpaid losses and LAE represent the estimated ultimate net cost of all reported and unreported losses incurred through December 31, 2007 and 2006. The reserves for unpaid losses and LAE are estimated using individual case basis valuations and statistical analyses. Those estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, management believes that the reserves for losses and LAE are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations.
Stock-Based Compensation- The Company grants stock options to its employees, officers and directors. Effective January 1, 2006, the Company adopted the provisions of SFAS 123R, for its stock based compensation plans. Among other things, SFAS 123R requires that compensation expense for all share-based awards be recognized in the financial statements over the requisite service period based upon the grant-date fair value of those awards.
At December 31, 2007, there were no investments in fixed maturity securities with individual material unrealized losses. One other-than-temporary impairment totaling $0.1 million and three other-than-temporary impairments totaling approximately $0.2 million were recorded on our investments during the years ended December 31, 2007 and 2006, respectively. Substantially, all the unrealized losses on the fixed maturity securities are interest rate related.
On May 26, 2004, AmCOMP Preferred issued a $12.0 million surplus note, in return for $12.0 million in cash, to ICONS, Inc., as part of a pooled transaction. The note matures in 30 years and is callable by the Company after five years. The terms of the note provide for quarterly interest payments at a rate 425 basis points in excess of the 90-day LIBOR. Interest paid during the years ended December 31, 2007, 2006 and 2005 totaled $1.2 million, $1.1 million and $0.9 million, respectively. Interest accrued as of December 31, 2007 and 2006 was $0.1 million.
A summary of the Company’s stock option activity through December 31, 2007 is as follows:
On August 24, 2007, the National Council on Compensation Insurance (“NCCI”) submitted its annual workers’ compensation rate filing to the Florida Office of Insurance Regulation (the “Florida OIR”), which called for a statewide average 16.5% rate decrease. Significant declines in claim frequency and an improvement in loss development since the legislature enacted the 2003 reforms are the two main reasons for the proposed premium level decrease. On October 29, 2007, NCCI submitted an amended filing calling for a statewide decrease of 18.4%, which was approved by the Florida OIR on October 31, 2007. The new rates apply to all new and renewal policies as of January 1, 2008. The effect of the approved decrease cannot currently be ascertained.