Premiums are earned on a daily pro rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums and are earned in subsequent periods over the remaining term of the policy. Our insurance policies typically have a term of one year. Thus, for a one-year policy written on July 1, 2006 for an employer with constant payroll during the term of the policy, we would earn half of the premiums in 2006 and the other half in 2007. On a monthly basis, we also recognize net premium earned from mandatory pooling arrangements.
Net Investment Income. Net investment income in 2005 was $16.9 million, compared to $12.2 million in 2004, an increase of 38.2%. The change was attributable to an increase in our investment portfolio, including cash and cash equivalents, from a monthly average of $350.9 million in 2004 to a monthly average of $467.0 million in 2005, an increase of 33.0%. Pre-tax investment yield on our investment portfolio was 3.5% in both 2005 and 2004.
Equity securities represented 12.9% of shareholders’ equity plus redeemable preferred stock as of December 31, 2006.
The Company’s net proceeds from the initial public offering were $63.2 million, after deducting $5.0 million in underwriting discounts and commissions and $3.7 million in other expenses related to the offering. The Company used $10.2 million of net proceeds to redeem shares of Series A preferred stock and Series E preferred stock. The Company retained $53.0 million of the net proceeds from the offering. Of this amount, the Company contributed $45 million to its insurance company subsidiaries. The remaining $8.0 million will be used to make additional capital contributions to the Company’s insurance company subsidiaries as necessary to support anticipated growth and for general corporate purposes, including to pay interest on the Company’s outstanding subordinated notes and to fund other holding company operations.
Contingent commissions are earned from certain reinsurance companies based on the financial results of the applicable risks underwritten by the Company. Contingent commission revenue on reinsurance contracts is recognized during the related reinsurance treaty period and is based on the same assumptions used for recording loss and allocated loss adjustment expenses. These commissions are reflected as a reduction in underwriting and other operating costs and are adjusted as necessary as experience develops or new information becomes known. Any such adjustments are included in current operations. Contingent commissions recognized reduced underwriting and other operating costs by $66,000 in 2006 and $200,000 in 2004, and increased underwriting and other costs by $251,000 in 2005.
On April 29, 2004, the Company entered into a second trust preferred securities transaction pursuant to which it issued $25,780,000 aggregate principal amount of subordinated debt securities due in 2034. To effect the transaction, the Company formed a Delaware statutory trust, Amerisafe Capital Trust II (“ACT II”). ACT II issued $25,000,000 of preferred securities to investors and $780,000 of common securities to the Company. ACT II used the proceeds from these issuances to purchase the subordinated debt securities. The Company pays interest on its ACT II subordinated debt securities quarterly at a rate equal to LIBOR plus 3.80% per annum (9.17% at December 31, 2006). ACT II pays interest on its preferred securities at the same rate. The Company subordinated debt securities and ACT II preferred securities are repayable on or after April 29, 2009. Payments of principal, interest and premium, if any, on the ACT II preferred securities are guaranteed by the Company.
There were no outstanding shares of Series E preferred stock as of December 31, 2006 and 2005.
The Company recognized compensation expenses of $850,000 in 2006 and $53,000 in 2005 related to the 2005 Incentive Plan.