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Amcomp Inc Fl (1009667) SEC Filing 10-Q Quarterly report for the period ending Monday, March 31, 2008

Amcomp Inc Fl

CIK: 1009667
 
Exhibit 99.1
 
 
 
AmCOMP Reports First Quarter 2008 Financial Results

North Palm Beach, FL, May 6, 2008 -
AmCOMP Incorporated (Nasdaq: AMCP) today announced results for the first quarter ended March 31, 2008.
 
For the first quarter of 2008, net income was $4.5 million, or $0.29 per diluted share, compared to net income of $4.0 million, or $0.25 per diluted share, for the same period in 2007.  Weighted average diluted shares outstanding for the first quarter of 2008 were 15,402,000 compared to 15,779,000 for the first quarter of 2007. Total revenue for the first quarter of 2008 was $57.5 million versus $64.1 million in the comparable period in 2007.
 
The net combined ratio for the first quarter improved to 95.5% compared to 96.4% for the same period in 2007.  Book value per outstanding share was $10.79 at March 31, 2008, compared to a book value per outstanding share of $10.35 as of December 31, 2007.  AmCOMP’s return on equity was 11.2% at the end of the first quarter of 2008 compared to 11.3% at March 31, 2007.
 
Commenting on the Company’s first quarter 2008 financial results, Debra Ruedisili, AmCOMP’s Executive Vice President and Chief Operating Officer, said:  “This quarter’s financial performance underscores AmCOMP’s ability to successfully manage its business and make an underwriting profit in a challenging market.  By maintaining underwriting discipline and pricing integrity, despite the continuation of the soft cycle, we improved our year-over-year first quarter bottom line results and combined ratio.  We accomplished this by focusing, among other things, on our loss and loss adjustment expenses, reporting a notable 52.7% loss ratio for the quarter.  Additionally, we extended our record of redundancies to 13 consecutive years as we released $6.8 million for the first quarter 2008, less reinsurance, as a result of favorable loss development.
 
“It appears that we are quickly approaching the close of our merger with EMPLOYERS.  The members of AmCOMP’s management team would like to take this opportunity to thank all of our employees, independent agents, policyholders and service providers for their support of the AmCOMP brand over the past 26 years.  We also commend our employees for their dedication and hard work as they delivered industry-leading customer service, our independent agents for their proud representation of AmCOMP in the market place, our policyholders for their willingness to work with us to reduce their workers’ compensation costs, our service providers for their facilitation of our business and you, our stockholders, for your belief in the value of the name ‘AmCOMP’.  We hope you are well pleased with the return on your investment.”
 
Previously Announced Definitive Agreement
 
On January 10, 2008, AmCOMP announced that it signed a definitive agreement to be acquired by Employers Holdings, Inc. (“EMPLOYERS®”) (NYSE: EIG), a provider of workers’ compensation insurance to small U.S. businesses.  Under the terms of the merger agreement, EMPLOYERS will acquire 100% of AmCOMP’s outstanding stock and its subsidiaries for approximately $194 million in cash, or $12.50 per share of common stock. The transaction, which is subject to regulatory approval by the Florida Office of Insurance Regulation, approval by AmCOMP stockholders and customary conditions of closing, is expected to be completed by the end of the second quarter of 2008.
 
 

The following information was filed by Amcomp Inc Fl on Wednesday, May 7, 2008 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

or

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                 to                                

Commission File Number: 000-51767

 AmCOMP Incorporated
(Exact name of registrant as specified in its charter)

 Delaware
 65-0636842
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

 701 U.S. Highway One North Palm Beach, Florida
33408
(Address of principal executive offices)
(Zip Code)

 (561) 840-7171
(Registrant’s telephone number, including area code)
 
 N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x     No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer ¨
Accelerated filer x
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ¨     No x

As of May 7, 2008, the registrant had 15,291,982 shares of common stock outstanding.

 
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Item 1.  Financial Statements
 
AmCOMP INCORPORATED AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
 
   
March 31,
2008
   
December 31, 2007
 
   
(Unaudited)
       
Assets
           
Investments:
           
Fixed maturity securities available-for-sale at fair value (amortized cost  of  $347,000 in 2008  and $327,656 in 2007)
  $ 352,477     $ 329,847  
 Fixed maturity securities held-to-maturity at amortized cost (fair value of $98,790 in 2008 and $94,414 in 2007)
    97,011       93,661  
Total investments
    449,488       423,508  
Cash and cash equivalents
    10,989       30,691  
Accrued investment income
    4,565       4,721  
Premiums receivable – net
    95,753       88,486  
Assumed reinsurance premiums receivable
    1,795       1,809  
Reinsurance recoverable:
               
On paid losses and loss adjustment expenses
    1,358       1,454  
On unpaid losses and loss adjustment expenses
    65,662       66,353  
Prepaid reinsurance premiums
    263       1,215  
Deferred policy acquisition costs
    20,459       19,116  
Property and equipment – net
    3,078       3,352  
Income taxes recoverable
    817       962  
Deferred income taxes – net
    18,655       19,889  
Goodwill
    1,260       1,260  
Other assets
    6,487       6,347  
                 
Total assets
  $ 680,629     $ 669,163  
                 
Liabilities and stockholders’ equity
               
Liabilities
               
Policy reserves and policyholders’ funds:
               
Unpaid losses and loss adjustment expenses
  $ 317,214     $ 324,224  
Unearned and advance premiums
    111,633       102,672  
Policyholder retention dividends payable
    10,387       10,276  
Total policy reserves and policyholders’ funds
    439,234       437,172  
Reinsurance payable
    266       622  
Accounts payable and accrued expenses
    32,093       30,868  
Notes payable
    36,018       36,464  
Income tax payable
    3,565       1,441  
Other liabilities
    4,476       4,419  
                 
Total liabilities
    515,652       510,986  
                 
Stockholders’ equity
               
Common stock (par value $.01; 45,000 authorized shares; 15,922 in 2008 and 2007 issued; 15,293 in 2008 and 15,290 in 2007 outstanding)
    159       159  
Additional paid-in capital
    75,620       75,392  
Retained earnings
    91,306       86,826  
Accumulated other comprehensive income (net of deferred taxes of ($1,996) in 2008 and ($799) in 2007)
    3,480       1,392  
Treasury stock (628 shares in 2008 and 631 in 2007)
    (5,588 )     (5,592 )
                 
Total stockholders’ equity
    164,977       158,177  
                 
Total liabilities and stockholders’ equity
  $ 680,629     $ 669,163  
                 
See notes to consolidated financial statements.
 

2

 
AmCOMP INCORPORATED AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited, amounts in thousands, except per share amounts)
 
   
Three Months Ended
 
   
March 31,
2008
   
March 31,
2007
 
Revenue:
           
Net premiums earned
  $ 52,249     $ 59,213  
Net investment income
    5,309       4,862  
Net realized investment losses
    (98 )      
Other income
    15       30  
Total revenue
    57,475       64,105  
                 
Expenses:
               
Losses and loss adjustment expenses
    27,556       34,918  
Dividends to policyholders
    2,369       2,241  
Underwriting and acquisition expenses
    19,999       19,896  
Interest expense
    807       954  
Total expenses
    50,731       58,009  
                 
Income before income taxes
    6,744       6,096  
Income tax expense
    2,264       2,076  
                 
Net income
  $ 4,480     $ 4,020  
                 
Earnings per common share – basic
  $ 0.29     $ 0.26  
                 
Earnings per common share – diluted
  $ 0.29     $ 0.25  

See notes to consolidated financial statements.
 
 
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AmCOMP INCORPORATED AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(2008 Unaudited, amounts in thousands)
 
                                     
   
 
Common Stock
   
Additional Paid-In Capital
   
 
Treasury Stock
   
 
Retained Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
 
Stockholders’
Equity
 
                                     
BALANCE AT DECEMBER 31, 2006
  $ 158     $ 73,952     $ (199 )   $ 67,990     $ (2,613 )   $ 139,288  
                                                 
Net income
                      18,836             18,836  
                                                 
Unrealized gain on investments (net of  tax expense of $2,356)
                            4,005       4,005  
                                                 
Comprehensive income
                                  22,841  
                                                 
Stock option compensation expense
          702                         702  
                                                 
Stock option exercise
    1       723       88                   812  
                                                 
Tax benefit on stock options
          15                         15  
                                                 
Purchase of treasury stock (560 shares)
                (5,481 )                 (5,481 )
                                                 
BALANCE AT DECEMBER 31, 2007
    159       75,392       (5,592 )     86,826       1,392       158,177  
                                                 
Net income
                      4,480             4,480  
                                                 
Unrealized gain on investments (net of  tax expense of $1,198)
                            2,088       2,088  
                                                 
Comprehensive income
                                  6,568  
                                                 
Stock option compensation expense
          204                         204  
                                                 
Stock option exercise
          24       4                   28  
                                                 
BALANCE AT MARCH  31, 2008
  $ 159     $ 75,620     $ (5,588 )   $ 91,306     $ 3,480     $ 164,977  
                                                 
 
See notes to consolidated financial statements.
 
 
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AmCOMP INCORPORATED AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
 
   
Three Months Ended
 
   
March 31,
 2008
   
March 31,
 2007
 
             
Operating Activities:
           
 Net income
  $ 4,480     $ 4,020  
 Adjustments to reconcile net income to net cash provided by operating activities:
               
  Depreciation and amortization
    436       394  
  Amortization of investment premiums/discounts
    370       451  
  Excess tax benefits from stock option exercise
          (4 )
  Stock option expense
    204       193  
  Provision for deferred income taxes
    36       (1,313 )
  Net realized losses on investments
    98        
  Loss (gain) on sale of property and equipment
    9       (2 )
  Policy acquisition costs deferred
    (11,811 )     (14,091 )
  Policy acquisition costs amortized
    10,468       11,249  
 Change in operating assets and liabilities:
               
  Accrued investment income
    156       210  
  Premiums receivable
    (7,267 )     (11,138 )
  Reinsurance balances
    1,397       (1,140 )
  Other assets
    (140 )     (7 )
  Unpaid losses and loss adjustment expenses
    (7,010 )     3,464  
  Unearned and advance premiums and policyholder deposits
    8,961       15,458  
  Policyholder retention dividends payable
    111       (270 )
  Accounts payable and accrued expenses
    1,225       (1,838 )
  Income tax recoverable/payable
    2,269       3,448  
  Other liabilities
    106       (1,803 )
                                              Net cash provided by operating activities
    4,098       7,281  
                 
Investing Activities:
Securities available-for-sale:
               
  Purchases
    (53,673 )     (23,966 )
  Sales and maturities
    33,869       24,082  
Securities held-to-maturity:
               
  Purchases
    (7,485 )     (14,072 )
  Redemptions and maturities
    4,127       3,145  
Purchases of property and equipment
    (174 )     (623 )
Sale of property and equipment
    12       10  
                                              Net cash used in investing activities
    (23,324 )     (11,424 )
                 
Financing Activities:
               
Proceeds from stock option exercise
    28       15  
Excess tax benefits from stock option exercise
          4  
Payment on capital lease
    (58 )      
Payment of note payable
    (446 )     (446 )
                                              Net cash used in financing activities
    (476 )     (427 )
                 
Net decrease in cash and cash equivalents
    (19,702 )     (4,570 )
                 
Cash and Cash Equivalents at Beginning of Year
    30,691       15,259  
                 
Cash and Cash Equivalents at End of Period
  $ 10,989     $ 10,689  
                 
Supplemental Cash Flow Data:
               
Cash paid- interest
  $ 821     $ 956  
Cash paid- income taxes
  $ 8     $ 3  

 
See notes to consolidated financial statements
 
 
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AmCOMP INCORPORATED AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1.             BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“United States”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring accruals) considered necessary for a fair presentation have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The unaudited consolidated financial statements include the accounts of AmCOMP, AmCOMP Preferred Insurance Company (“AmCOMP Preferred”), Pinnacle Administrative, Inc. (“Pinnacle Administrative”), Pinnacle Benefits, Inc. (“Pinnacle Benefits”), AmCOMP Assurance Corporation (“AmCOMP Assurance”) and AmServ Incorporated (“AmServ”). All intercompany accounts and transactions have been eliminated in consolidation.

Results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

New Accounting Pronouncements —In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. This statement addresses how to calculate fair value measurements required or permitted under other accounting pronouncements. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. This interpretation was adopted by the Company on January 1, 2008.  FASB Staff Position (FSP)FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), delays the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.  The delay is intended to allow the Board and constituents additional time to consider the effect of various implementation issues that have arisen, or that may arise, from the application of FAS 157.  The partial adoption of SFAS No. 157 had no impact on our financial position or results of operations.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), which permits entities to elect to measure many financial instruments and certain other items at fair value.  Upon adoption of SFAS No. 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption, the election of the fair value option should only be made at the initial recognition of the asset or liability or upon a re-measurement event that gives rise to the new-basis of accounting. All subsequent changes in fair value for that instrument are reported in earnings.  SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be recorded at fair value nor does it eliminate disclosure requirements included in other accounting standards.  This interpretation was adopted by the Company on January 1, 2008. We have elected not to implement the fair value option with respect to any existing assets or liabilities; therefore, the adoption of SFAS No. 159 had no impact on our financial position or results of operations.
 
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree and recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase.   SFAS No. 141(R) also sets forth the disclosures required to be made in the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Accordingly, SFAS No. 141(R) will be applied by the Company to business combinations occurring on or after January 1, 2009.
 
 
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2.             STOCK OPTIONS
 
In accordance with SFAS No. 123R, Accounting for Stock-Based Compensation (“SFAS 123R”), the Company expenses all outstanding employee stock options over the vesting period based on the fair value of the options at the date they were granted.  Additionally, SFAS No. 123R requires the estimation of forfeitures in calculating the expense related to stock-based compensation.  The Company recognized approximately $0.2 million of stock option compensation expense for the three months ended March 31, 2008 and 2007. The related tax benefit was less than $0.1 million in the three months ended March 31, 2008 and 2007. As of March 31, 2008, total unrecognized compensation expense related to non-vested stock options was approximately $1.1 million.  This cost is expected to be recognized over the weighted average period of 1.7 years.
 
A summary of the Company’s stock option activity for the three months ended March 31, 2008 and March 31, 2007 is as follows:
 
   
Three Months Ended
   
Three Months Ended
 
   
March 31, 2008
   
March 31, 2007
 
   
Employees, Directors, and Executives
   
Employees, Directors, and Executives
 
   
Average Exercise Price
   
Number of Shares
   
Average Exercise Price
   
Number of Shares
 
Outstanding–beginning balance
  $ 9.43       906,422     $ 10.08       1,221,558  
  Granted
    9.35       5,648       10.66       54,737  
  Exercised
    9.00       (3,099 )     8.89       (1,637 )
      Forfeited
    9.00       (656 )     9.00       (1,638 )
      Expired
    8.89       (7,028 )     13.73       (218,847 )
Outstanding–ending balance
  $ 9.43       901,287     $ 9.36       1,054,173  


As of March 31, 2008, and 2007 options to purchase 509,839 shares and 378,134 shares, respectively, were exercisable.  The weighted average remaining contractual life of the exercisable options was 2.5 years and 2.7 years as of March 31, 2008 and 2007, respectively.  The per-share weighted average grant date fair value of options granted in the three months ended March 31, 2008 and 2007 was $2.56 and $3.60, respectively. The fair value of stock options granted was estimated on the dates of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used to perform the calculations for the three months ended March 31, 2008: zero expected dividend yield, 3.26% risk-free interest rate, 5 year expected life, and 25.0% volatility.  For the three months ended March 31, 2007 the following weighted average assumptions were used: zero expected dividend yield, 4.63% risk-free interest rate, 5 year expected life, and 30.3% volatility.  The expected life was based on historical exercise behavior and the contractual life of the options.  Due to unavailability of historical company information, volatility was based on average volatilities of similar entities for the appropriate period.  Forfeitures were estimated at 20% for board members, 5% for executives and 10% for all remaining employees.  The weighted-average grant date fair value of options vesting during the three months ending March 31, 2008 and 2007 was $3.09 and $2.91, respectively.  As of March 31, 2008 the aggregate intrinsic value of options outstanding and options exercisable was approximately $2.2 million and $1.2 million, respectively.  The total aggregate intrinsic value of options exercised during the three months ending March 31, 2008 and 2007 was less than $0.1 million.
 
 
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Summary information for option awards expected to vest is as follows:
 
     
Options Outstanding
 
Range of Exercise Prices
   
Number Outstanding at March 31, 2008
   
Weighted Average Remaining Contractual Life
   
Weighted Average
 Exercise Price
   
Aggregate Intrinsic Value
 
  $9.00 – $ 9.99       749,412       2.78     $ 9.02     $ 2,074,052  
  10.00 – 11.99       69,990       3.63       10.58       84,155  
  12.00 – 14.00       54,575       0.13       13.74        
          873,977       2.68     $ 9.44     $ 2,158,207  

Summary information for total outstanding option awards is as follows:
 
     
Options Outstanding
   
Options Exercisable
 
 
Range of Exercise Prices
   
 
Number Outstanding at March 31, 2008
   
Weighted Average Remaining
Contractual Life
   
 
Weighted Average Exercise Price
   
 
Number Exercisable at March 31, 2008
   
 
Weighted Average Exercise Price
 
  $9.00 – $ 9.99       773,176       2.78     $ 9.02       436,481     $ 9.02  
  10.00 – 11.99       73,536       3.63       10.59       18,783       10.59  
  12.00 – 14.00       54,575       0.14       13.74       54,575       13.74  
          901,287       2.69     $ 9.43       509,839     $ 9.59  

In the event that currently outstanding options are exercised, the Company intends to first issue treasury shares to the extent available, or new shares as necessary.

 3.           ASSESSMENTS
 
Guaranty Fund Assessments— Most states have guaranty fund laws under which insurers doing business in the state are required to fund policyholder liabilities of insolvent insurance companies.  Generally, assessments are levied by guaranty associations within the state, up to prescribed limits, on all insurers doing business in that state on the basis of the proportionate share of the premiums written by insurers doing business in that state in the lines of business in which the impaired, insolvent or failed insurer is engaged.  The Company accrues a liability for estimated assessments as direct premiums are written and defers these costs and recognizes them as an expense as the related premiums are earned.  The Company is continually notified of assessments from various states relating to insolvencies in that particular state; however, the Company estimates the potential future assessment in the absence of an actual assessment.  Guaranty fund assessment expenses were $0.5 million for the three months ended March 31, 2008 and 2007.  The Company has deferred approximately $1.0 million as of March 31, 2008 and December 31, 2007 related to guaranty fund assessments, which is included in deferred policy acquisition costs.  Additionally, guarantee fund receivable assets of $1.5 million as of March 31, 2008 and December 31, 2007 are included in other assets, as they can be used as a credit against future premium taxes owed.  Maximum contributions required by law in any one state in which we offer insurance vary between 0.2% and 2.0% of direct premiums written.
 
 
8

 
Second Injury Fund Assessments and Recoveries — Many states have laws that established second injury funds to reimburse employers and insurance carriers for workers’ compensation benefits paid to employees who are injured and whose disability is increased by a prior work-related injury.  The source of these funds is an assessment charged to workers’ compensation insurance carriers doing business in such states.  Assessments are based on paid losses or premium surcharge mechanisms.  Several of the states in which we operate maintain second injury funds with material assessments.  The Company accrues a liability for second injury fund assessments as net premiums are written or as losses are incurred based on individual state guidelines, and for premium based assessments, we defer these costs and recognize them as an expense as the related premiums are earned.  Second Injury Fund assessment expense was $1.0 million and $0.9 million for the three months ended March 31, 2008 and 2007, respectively.  The Company has deferred approximately $1.6 million and $1.5 million as of March 31, 2008 and December 31, 2007, respectively, related to second injury fund assessments, which is included in deferred policy acquisition costs.
 
The Company submits claims to the appropriate state’s second injury fund for recovery of applicable claims paid on behalf of the Company’s insureds.  Because of the uncertainty of the collectability of such amounts, second injury fund recoverables are reported in the accompanying consolidated financial statements when received.  Cash collections from the second injury funds were approximately $0.3 million in the three months ended March 31, 2008 and 2007.
 
The Florida Second Disability Trust Fund  (“Florida SDTF”) currently has significant unfunded liabilities.  It is not possible to predict how the Florida SDTF will operate, if at all, in the future after further legislative review.  Changes in the Florida SDTF’s operations could decrease the availability of recoveries from the Florida SDTF, increase Florida SDTF assessments payable by AmCOMP and/or result in the discontinuation of the Florida SDTF and thus could have an adverse effect on AmCOMP’s business, financial condition, and its operations.  Under current law, future assessments are capped at 4.52% of net written premiums, and no recoveries can be made for losses or submitted on claims occurring after January 1, 1998.
 
Other Assessments— Various other assessments are levied by states in which the Company transacts business, and are primarily based on premiums written or collected in the applicable state.  The total expense related to these assessments was $0.2 million for the three months ended March 31, 2008 and 2007.  The Company has deferred approximately $0.3 million as of March 31, 2008 and December 31, 2007, related to these assessments, which are included in deferred policy acquisition costs.
 
Liabilities for assessments are expected to be paid over the next five years.  Guarantee fund receivable assets are expected to be realized over the next five to ten years.
 
4.             INVESTMENTS
 
The Company's investments in available-for-sale securities and held-to-maturity securities are summarized as follows at March 31, 2008 (in thousands):


         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
       
   
Cost
   
Gains
   
Losses
   
Fair Value
 
Available-for-sale securities at March 31, 2008:
                       
U.S. Treasury securities
  $ 22,806     $ 2,048     $     $ 24,854  
Agency
    31,270       580       14       31,836  
    Municipalities
    81,859       1,131       57       82,933  
    Corporate debt securities
    150,974       1,929       1,087       151,816  
Mortgage-backed securities
    60,091       1,010       63       61,038  
Total fixed maturity securities
  $ 347,000     $ 6,698     $ 1,221     $ 352,477  
                                 
Held-to-maturity securities at March 31, 2008:
                               
Mortgage-backed securities
  $ 97,011     $ 1,841     $ 62     $ 98,790  

 
9


The amortized cost and estimated fair values of investments in fixed maturity securities, segregated by available-for-sale and held-to-maturity, at March 31, 2008 are summarized by maturity as follows (in thousands):

   
Available-for-sale
   
Held-to-maturity
 
   
Amortized
         
Amortized
       
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
Years to maturity:
                       
One or less
  $ 45,019     $ 44,942     $     $  
After one through five
    117,256       118,969              
    After five through ten
    118,595       120,238              
    After ten
    6,039       7,290              
Mortgage-backed securities
    60,091       61,038       97,011       98,790  
Total
  $ 347,000     $ 352,477     $ 97,011     $ 98,790  

The foregoing data is based on the stated maturities of the securities. Actual maturities may differ as borrowers may have the right to call or prepay obligations.

At March 31, 2008 and December 31, 2007, bonds with an amortized cost of $13.8 million and $7.9 million and a fair value of $15.6 million and $9.0 million, respectively, were on deposit with various states' departments of insurance in accordance with regulatory requirements.  Additionally, as of December 31, 2007, $6.0 million of cash, representing a matured security not yet reinvested, was on deposit with a department of insurance.  At March 31, 2008 and December 31, 2007, bonds with an amortized cost of $6.5 million and a fair value $6.6 million were held in a reinsurance trust for the benefit of members of the Orion Insurance Group in accordance with the terms of a reinsurance agreement between the Company and the Orion Companies.

Major categories of the Company's net investment income for the three months ended March 31, 2008 and 2007 are summarized as follows (in thousands):
 
   
Three Months Ended
 
   
March 31,
   
March 31,
 
   
2008
   
2007
 
Income:
           
  Fixed maturity securities
  $ 5,253     $ 4,915  
  Cash and cash equivalents
    267       168  
Investment income
  $ 5,520     $ 5,083  
Investment expenses
    (211 )     (221 )
Net investment income
  $ 5,309     $ 4,862  

Proceeds from the sale of available-for-sale fixed maturity securities during the three months ended March 31, 2008 were $12.0 million. No gains or losses were realized on the sales.  During the three months ended March 31, 2007, there were no sales of available-for-sale fixed maturity securities.

The Company continuously monitors its portfolio to preserve principal values whenever possible.  An investment in a fixed maturity security is impaired if its fair value falls below its book value.  All securities in an unrealized loss position are reviewed to determine whether the impairment is other-than-temporary.  Factors considered in determining whether an impairment is considered to be other-than-temporary include length of time and the extent to which fair value has been below cost, the financial condition and near-term prospects of the issuer, and the Company’s ability and intent to hold the security until its expected recovery.
 

10


 
The following table summarizes, for all fixed maturity securities in an unrealized loss position at March 31, 2008 the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position (in thousands):

         
Unrealized
   
Number of
 
   
Fair Value
   
Losses
   
Issues
 
Less than 12 months:
                 
U.S. Treasury securities
  $     $        
Agency
                 
    Municipalities
    8,675       (57 )     4  
    Corporate debt securities
    30,317       (322 )     18  
Mortgage-backed securities
    14,613       (38 )     8  
Total
  $ 53,605     $ (417 )     30  
                         
Greater than 12 months:
                       
U.S. Treasury securities
  $     $        
Agency
    4,001       (14 )     1  
Municipalities
                 
Corporate debt securities
    15,541       (765 )     10  
Mortgage-backed securities
    9,222       (87 )     7  
Total
  $ 28,764     $ (866 )     18  
                         
Total fixed maturity securities:
                       
U.S. Treasury securities
  $     $        
Agency
    4,001       (14 )     1  
Municipalities
    8,675       (57 )     4  
Corporate debt securities
    45,858       (1,087 )     28  
Mortgage-backed securities
    23,835       (125 )     15  
Total fixed maturity securities
  $ 82,369     $ (1,283 )     48  

At March 31, 2008, there were no investments in fixed maturity securities with individual material unrealized losses.  One other-than-temporary impairment totaling $0.1 million was recorded on an investment during the three months ended March 31, 2008.  Substantially all the unrealized losses on the fixed maturity securities are interest rate related.
 
 
11

 
5.             UNPAID LOSSES AND LAE
 
The following table provides a reconciliation of the beginning and ending balances for unpaid losses and loss adjustment expenses (“LAE”), reported in the accompanying consolidated balance sheets:
 
   
Three Months Ended March 31, 2008
   
Twelve Months Ended December 31, 2007
 
   
(Dollars in thousands)
 
Unpaid losses and LAE, gross of related reinsurance recoverables, at beginning of period
  $ 324,224     $ 334,363  
Less reinsurance recoverables on unpaid losses and LAE at beginning of period
     66,353        72,296  
Unpaid losses and LAE, net of related reinsurance recoverables, at beginning of the period
    257,871       262,067  
                 
Add provision for losses and LAE, net of reinsurance, occurring in:
               
  Current period
    34,344       163,070  
  Prior periods
    (6,788 )     (36,508 )
Incurred losses during the current period, net of reinsurance
    27,556       126,562  
                 
Deduct payments for losses and LAE, net of reinsurance, occurring in:
               
  Current period
    5,229       52,974  
  Prior periods
    28,646       77,784  
Payments for losses and LAE during the current period, net of reinsurance
    33,875       130,758  
                 
Unpaid losses and LAE, net of related reinsurance recoverables, at end of period
    251,552       257,871  
Reinsurance recoverables on unpaid losses and LAE at end of period
    65,662       66,353  
Unpaid losses and LAE, gross of related reinsurance recoverables, at end of period
  $ 317,214     $ 324,224  

The Company’s estimate for losses and LAE related to prior years, net of related reinsurance recoverables, decreased during the three months ended March 31, 2008 and the year ended December 31, 2007 by $6.8 million and $36.5 million, respectively, as a result of actual loss development emerging more favorably than expected. Excluding business assumed from state mandated pools, the redundancy in the three months ended March 31, 2008 was attributable to prior year reserve decreases in Florida ($1.6 million), Texas ($1.5 million), Tennessee ($1.0 million), North Carolina ($0.8 million), and less significant decreases in several other states.  The accident years with the largest redundancies were 2007 ($2.3 million), 2006 ($1.9 million) and 2005 ($2.1 million).  Management believes the historical experience of the Company is a reasonable basis for estimating future losses. However, future events beyond the control of management, such as changes in law, judicial interpretations of law, and inflation may favorably or unfavorably impact the ultimate settlement of the Company’s loss and loss adjustment expenses.
 
6.             COMMITMENTS AND CONTINGENCIES
 
As of March 31, 2008 and December 31, 2007, the Company had accrued $0.5 million for estimated additional Florida dividends based on its statutory underwriting results pursuant to Florida Statute 627.215 and applicable regulations (“Florida excessive profits”). AmCOMP’s ultimate liability will be based on its premiums earned, loss reserves and expenses compiled in accordance with the statute and regulations.
 
Litigation—AmCOMP along with AmCOMP Preferred and AmCOMP Assurance are collectively defendants in an action commenced in Florida by the Insurance Commissioner of Pennsylvania, acting in the capacity as liquidator of Reliance Insurance Company.  The complaint in this action alleges that preferential payments were made by Reliance Insurance Company under the formerly existing reinsurance agreement with AmCOMP Preferred and AmCOMP Assurance and seeks damages in the amount of approximately $2.3 million.  AmCOMP, along with AmCOMP Preferred and AmCOMP Assurance, has filed a response and has made various motions addressed to these complaints.  The Company, based on the advice of counsel, believes that it has a variety of factual and legal defenses, including but not limited to a right of offset related to the statement of claim filed by the Company and Preferred in the Reliance Insurance Company liquidation proceeding for the recovery of approximately $7.8 million under the reinsurance agreement.  However, on November 14, 2007 the trial court in Florida granted the plaintiff liquidator’s motion for partial summary judgment, finding that the approximate $2.3 million in payments were “preferential” under Pennsylvania law.  This order is not yet a final, appealable order under Florida law.  There are a number of remaining issues, including AmCOMP’s affirmative defenses, which must be determined by the court before a final order or judgment could be entered.  Although the ultimate results of these legal actions and related claims (including any future appeals) are uncertain, the Company had accrued liabilities of $1.2 million, included in accounts payable and accrued expenses, as of March 31, 2008 and December 31, 2007 related to those matters.
 
 
12

 
The Company is named as a defendant in various legal actions arising principally from claims made under insurance policies and contracts.  Those actions are considered by the Company in estimating the losses and LAE reserves.
 
On September 4, 2007, the Company obtained a commitment for a $30 million secured non-revolving line of credit from Regions Bank.  Under the terms of the commitment for the loan, the interest rate is a floating rate of 160 basis points over LIBOR.  Advances under the commitment will be available for up to two years from the date of closing.  Fundings under the commitment will have a seven-year fully amortizing term and can be repaid at any time without penalty.  The loan has no fees associated with it other than a ¼% non-usage fee per annum pro-rated for the amount of loan principal which is not drawn down by AmCOMP.  Any advances under the line of credit are to be collateralized by the stock of a wholly-owned insurance subsidiary of AmCOMP and certain intercompany surplus notes.  The loan is designated for strategic and general corporate purposes.  At AmCOMP’s request Regions Bank extended the closing date of the commitment through June 15, 2008.  The loan transaction has not yet been consummated.

7.             NOTES PAYABLE
 
On October 12, 2000, the Company entered into a credit facility (the “Loan”) with a financial institution under which the Company borrowed $11.3 million.  The Loan calls for monthly interest payments at the 30-day London Interbank Offered Rate (“LIBOR”) plus a margin.  The expiration date on the loan is April 10, 2010.  The Loan is collateralized by $25.5 million of surplus notes issued by AmCOMP Preferred and AmCOMP Assurance and the stock of AmCOMP Preferred.  During 2003, the remaining balance of the Loan was refinanced and the Company borrowed an additional $5.5 million.  At March 31, 2008 and December 31, 2007, the principal balance was $4.0 million and $4.5 million, respectively.  The interest rate was 4.72% and 6.83% at March 31, 2008 and December 31, 2007, respectively.  Interest paid during the three months ended March 31, 2008 and 2007 totaled $0.1 million.
 
The Loan contains various restrictive covenants and certain financial covenants.  At March 31, 2008, the Company was in compliance with all restrictive and financial covenants.
 
On April 30, 2004, AmCOMP Preferred issued a $10.0 million surplus note in return for $10.0 million in cash to Dekania CDO II, Ltd., 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.  Both the payment of interest and repayment of the principal under this note and the surplus notes described in the succeeding two paragraphs are subject to the prior approval of the Florida Department of Financial Services. Interest paid during the three months ending March 31, 2008 and 2007 totaled $0.2 million. Interest accrued as of March 31, 2008 and December 31, 2007 was $0.1 million.
 
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 three months ending March 31, 2008 and 2007 totaled $0.3 million. Interest accrued as of March 31, 2008 and December 31, 2007 was $0.1 million.
 
 
13

 
On September 14, 2004, AmCOMP Preferred issued a $10.0 million surplus note, in return for $10.0 million in cash, to Alesco Preferred Funding V, LTD, as part of a pooled transaction.  The note matures in approximately 30 years and is callable by the Company after approximately five years.  The terms of the note provide for quarterly interest payments at a rate 405 basis points in excess of the 90-day LIBOR. Interest paid during the three months ending March 31, 2008 and 2007 totaled $0.2 million.  Interest accrued as of March 31, 2008 and December 31, 2007 was less than $0.1 million.
 
8.             FEDERAL AND STATE INCOME TAXES

Effective January 1, 2007, the Company adopted FIN 48. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements, 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, and accounting in interim periods.  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.  As of the adoption date and as of March 31, 2008, 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 three months ended March 31, 2008 and 2007 was less than $0.1 million.  Tax related interest accrued as of March 31, 2008 and December 31, 2007 was $0.6 million.  Tax years 2004 through 2007 are subject to examination by the federal and state taxing authorities.  There are no income tax examinations currently in process.

Significant components of income tax for the three months ended March 31, 2008 and 2007 are as follows (in thousands):

   
Three Months Ended
 
   
March 31,
   
March 31,
 
   
2008
   
2007
 
Current expense
           
Federal
  $ 2,076     $ 3,065  
State
    152       324  
Total current tax expense
    2,228       3,389  
Deferred tax expense (benefit)
               
Federal
    34       (1,186 )
State
    2       (127 )
Total deferred tax expense (benefit)
    36       (1,313 )
Income tax expense
  $ 2,264     $ 2,076  

The effective federal income tax rates on income before income taxes differ from the maximum statutory rates as follows for the three months ended March 31, 2008 and 2007 (in thousands):

   
Three Months Ended
 
   
March 31,
   
March 31,
 
   
2008
   
2007
 
Income tax at statutory rate
  $ 2,360       35.0 %   $ 2,134       35.0 %
Permanent differences:
                               
State income taxes
    93       1.4       157       2.6  
Tax-exempt interest
    (289 )     (4.3 )     (304 )     (5.0 )
Non-deductible meals and entertainment
    53       0.8       43       0.7  
Provision to return adjustment
    (7 )     (0.1 )     (39 )     (0.6 )
Non-deductible option expense
    46       0.7       42       0.7  
Other expense—net
    8       0.1       43       0.7  
Effective income tax expense
  $ 2,264       33.6 %   $ 2,076       34.1 %
 
 
14


 
The Company records deferred federal income taxes on certain temporary differences between the amounts reported in the accompanying consolidated financial statements and the amounts reported for federal and state income tax reporting purposes.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and tax liabilities as of March 31, 2008 and December 31, 2007 are presented below (in thousands):

   
March 31,
   
December 31,
 
   
2008
   
2007
 
Deferred tax assets:
           
Loss and LAE reserve adjustments
  $ 12,773     $ 13,094  
Unearned and advance premiums
    8,005       7,325  
Allowance for bad debts
    1,071       998  
Policyholder dividends
    3,786       3,746  
Deferred compensation
    591       974  
Disallowed capital losses
    527       491  
Other
    1,715       1,335  
Total deferred tax assets
    28,468       27,963  
Deferred tax liabilities:
               
Deferred policy acquisition expenses
    (7,458 )     (6,968 )
FAS 115 unrealized gains
    (1,996 )     (799 )
Other
    (359 )     (307 )
Total deferred tax liabilities
    (9,813 )     (8,074 )
Net deferred tax assets
  $ 18,655     $ 19,889  

9.             EARNINGS PER SHARE
 
The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2008 and 2007 (in thousands, except per share data):
 
 
   
Three Months Ended
 
   
March 31,
   
March 31,
 
   
2008
   
2007
 
Numerator:
           
Net income attributable to common stockholders
  $ 4,480     $ 4,020  
Denominator:
               
   Weighted-average shares outstanding
               
   (denominator for basic earnings per share)
    15,291       15,760  
   Plus effect of dilutive securities:
               
               Employee stock options
    111       19  
   Weighted-average shares outstanding and assumed
               
      conversions (denominator for diluted earnings per share)
    15,402       15,779  
Basic earnings per share
  $ 0.29     $ 0.26  
Diluted earnings per share
  $ 0.29     $ 0.25  
 
For the three months ended March 31, 2008 and 2007, outstanding employee stock options of 133,759 and 918,643 have been excluded from the computation of diluted earnings per share since they are anti-dilutive.
 
 
15

 
10.           FAIR VALUE MEASUREMENTS
 
     The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in SFAS No. 157. The framework is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the SFAS No. 157 hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions. The three levels of the hierarchy are as follows:
 
·  
Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.
 
 
·  
Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
 
 
·  
Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.
 
 
Valuation of InvestmentsFor investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. When quoted market prices are unavailable, the Company estimates fair value based on objectively verifiable information, if available. The fair value estimates determined by using objectively verifiable information are included in the amount disclosed in Level 2 of the hierarchy. If quoted market prices and an estimate determined by using objectively verifiable information are unavailable, the Company produces an estimate of fair value based on internally developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3. The Company bases all of its estimates of fair value for assets on the bid price as it represents what a third party market participant would be willing to pay in an arm’s length transaction. The following section describes the valuation methods used by the Company for each type of financial instrument it holds that are carried at fair value.
 
Fixed Maturities—The Company utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, estimates of fair value measurements for these securities are estimated using relevant inputs, including available relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Additionally, an Option Adjusted Spread model is used to develop prepayment and interest rate scenarios.
 
Each asset class is evaluated based on relevant market information, relevant credit information, perceived market movements and sector news. The market inputs utilized in the pricing evaluation include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each market input depends on the asset class and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities additional inputs may be necessary.
 
This method of valuation will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If objectively verifiable information is not available, the Company would be required to produce an estimate of fair value using some of the same methodologies, but would have to make assumptions for market based inputs that are unavailable due to market conditions.
 
Because the fair value estimates of most fixed maturity investments are determined by evaluations that are based on observable market information rather than market quotes, all estimates of fair value for fixed maturities, other than U.S. Treasury securities, priced based on estimates using objectively verifiable information are included in the amount disclosed in Level 2 of the hierarchy. The estimated fair value of U.S. Treasury securities are included in the amount disclosed in Level 1 as the estimates are based on unadjusted market prices.
 
 
16

 
Fair Value HierarchyThe following table presents the level within the fair value hierarchy at which the Company’s financial assets and financial liabilities are measured on a recurring basis.

   
March 31, 2008
 
   
Fair Value Measurements Using
 
   
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
       
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
   
(in thousands)
 
Invested assets:
                       
   Fixed maturity securities available-for-sale
  $ 24,854     $ 327,623     $     $ 352,477  
Total
  $ 24,854     $ 327,623     $     $ 352,477  

As noted in the above table, we do not have any assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period.
 
Assets and Liabilities Recorded at Fair Value on a Non-recurring BasisAs allowed under FSP 157-2, as of January 1, 2008, we have elected not to fully adopt SFAS 157 and are deferring adoption for certain nonfinancial assets and liabilities until January 1, 2009.  On our balance sheet, this deferral would apply to goodwill.  As of March 31, 2008, $1.3 million of goodwill was recorded on the balance sheet.

 11.          REGULATORY EVENTS
 
On March 19, 2007, the Company received a Notice of Intent to Issue Order to Return Excessive Profit signed March 14, 2007 (the “Notice”) from the Florida Office of Insurance Regulation (the “Florida OIR”).  The Notice indicates on a preliminary basis that Florida OIR proposes to make a finding, following its review of data submitted by the Company on July 1, 2006 for accident years 2002, 2003 and 2004, that “Florida excessive profits” (as defined in Florida Statute Section 627.215) in the amount of $5,663,805 have been realized by the Company.  Florida excessive profits under the statute are required to be returned to policyholders under methods defined in the statute. Upon receipt of the Notice, and upon further review by the Company of the data previously submitted, the Company amended its filings to the Florida OIR responding to the Notice and amending the deductible expense items that are utilized in the calculation of Florida excessive profits. These filings amend and increase the expenses the Company believes are permitted by the statute in calculating Florida excessive profits.

The Company, through outside regulatory counsel, has submitted its amended filings to Florida OIR for the years 2002, 2003 and 2004. The amended filings report no Florida excessive profits for the reporting periods. In the event Florida OIR does not agree with the amended filings as submitted by the Company, there would be a disputed issue of material fact and law regarding the calculation of Florida excessive profits. The Company has preserved its right to an administrative hearing under the provisions of the Notice and Florida Statute Chapter 120 (the Florida Administrative Procedures Act). Under Chapter 120, the Company is entitled to a de novo proceeding on the issues described above.  If the administrative ruling is adverse to the Company, the Company would have further appellate rights to the District Court of Appeal.  Management of the Company believes, in part based on advice from legal counsel, that Florida excessive profits were not, in fact, earned in Florida for the years 2002, 2003, and 2004. As of March 31, 2008, no accrual for Florida excessive profits has been provided for the 2002, 2003 and 2004 years.

12.           MERGER AGREEMENT

On January 10, 2008, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Employers Holdings, Inc., a Nevada corporation ("Employers") and Sapphire Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Employers ("Merger Sub"), providing for the acquisition of the Company by Employers.
 
Pursuant to the Merger Agreement, each issued and outstanding share of common stock, $0.01 par value, of the Company, other than dissenting shares or shares owned by the Company as treasury stock, or by Employers or Merger Sub, will be converted into the right to receive $12.50 per share in cash. As part of the Merger Agreement, Merger Sub will merge with and into the Company with the Company being the surviving corporation in the merger.
 
 
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The Board of Directors of the Company and Employers each approved the entry into the Merger Agreement.  The Merger Agreement and related transactions are subject to the approval of the Company's stockholders, the receipt of other material regulatory approvals, including from the Florida Office of Insurance Regulation, and certain other customary closing conditions.  The merger and related transactions are expected to be completed by the end of the second quarter of 2008. 

Employers may terminate the Merger Agreement under certain circumstances, including if the Company’s Board of Directors changes or withdraws its recommendation that the Company stockholders adopt the Merger Agreement or under other circumstances involving a competing offer to acquire the Company.  In connection with such termination, the Company may be required to pay a fee to Employers. The amount of such fee would be $8.0 million or $5.0 million depending upon the timing of agreement to a consummation of a competing transaction.  The Company may terminate the Merger Agreement as a result of Employers’ material breach of any of its representations, warranties, covenants or agreements under the Merger Agreement. In connection with Employers’ breach of any of its covenants or agreements or of its representation and warranty that is has sufficient funds to complete the transaction, Employers may be required to pay a termination fee of $8 million to the Company.

In connection with the Merger Agreement, the Company and Employers entered into Integration Bonus and Enhanced Severance Agreements, effective as of January 10, 2008 (together, the “Severance Agreements”), with Employers and each of Debra Cerre-Ruedisili, the Executive Vice President and Chief Operating Officer of the Company, and Kumar Gursahaney, the Senior Vice President and Chief Financial Officer of the Company (the “Executives”).
 
Under the Severance Agreements, each of the Executive’s employment with the Company will terminate on the date that is 60 calendar days following the closing of the Merger (the “Separation Date”).  The Executives have each agreed to use best efforts to ensure a smooth transition and integration in the Merger and to perform certain other duties prior to and following the closing of the Merger.  In consideration of the above, and subject to the consummation of the Merger, provided that the Executive either remains employed by the Company through the Separation Date or is terminated by Employers or the Company other than for cause on or prior to the Separation Date, the Executive will be entitled to receive a bonus in an amount equal to $200,000 in the case of Ms. Cerre-Ruedisili and $110,000 in the case of Mr. Gursahaney, as soon as practicable, but in no event later than, 75 days following the effective time of the merger.
 
In addition, provided that such Executive remains employed by the Company in 60 days after the effective time of the merger, or is terminated by the Company or Employers other than due to death, disability or for cause at any time following the closing of the Merger, then in lieu of payments set forth in Section 7(c) of such Executive’s employment agreement, Employers will pay or will cause the Company to pay to such Executive 18 months of severance pay, each monthly payment in an amount equal to the sum of (i) one-sixth of annual salary in the case of Ms. Cerre-Ruedisili, and one-eighth of annual salary in the case of Mr. Gursahaney, each as in effect immediately prior to such termination and (ii) one-twelfth of the amount of incentive compensation and bonuses approved and accrued for such Executive in respect of the most recent fiscal year preceding such termination. The Executives will also be entitled to continued eligibility to participate in any medical and health plans or other employee welfare benefit plans that may be provided by the Company for its senior executive employees for 18 months following 60 days after the effective time of the merger.
 
Each Executive has also acknowledged and agreed that such Executive will continue to be subject to the terms and conditions of the restrictive covenants set forth such Executive’s employment agreement with the Company for the 18-month period set forth therein (the “Restricted Period”).  The Executives have each further agreed to be available to the Company and Employers and to assist the Company and Employers during the Restricted Period in performing such duties as the Company or Employers may request from time to time.

On March 4, 2008, a purported class-action complaint was filed in the Circuit Court of the 15th Judicial Circuit, in and for Palm Beach County, Florida, on behalf of Broadbased Equities, an alleged stockholder of the Company, and all others similarly situated. The complaint, which names as defendants the Company, the Company’s directors Fred R. Lowe, Debra Cerre-Ruedisili, Sam A. Stephens, Paul B. Queally, Donald C. Stewart and Spencer L. Cullen, Jr., and Employers, asserts claims related to the proposed transaction with Employers for breaches of fiduciary duty and, in the case of Employers, aiding and abetting such breaches, in connection with the directors’ determination to sell the Company.  The complaint seeks a declaratory judgment that the defendants have breached their fiduciary duties to plaintiff and the purported class members and/or, in the case of Employers, aided and abetted such breaches, compensatory and/or rescissory damages, as well as pre and post-trial interest, as allowed by law, and the costs and disbursements of the action, including reasonable attorneys' and experts' fees and other costs. The Company believes that these claims are without merit and is vigorously defending this action, and therefore, no provision for this litigation has been made in the current financial statements.
 
 
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In contemplation of a potential settlement of the action, we agreed to make certain additional disclosures to our stockholders in our proxy materials.  We have also entered into an amendment to the Merger Agreement to provide that the termination fee payable to Parent would be reduced from $8.0 million to $5.0 million in cash in certain circumstances.
 
The parties are currently discussing the possible terms of a memorandum of understanding providing for a settlement of the action.  If the memorandum is executed, the parties will, subject to certain conditions, enter into and seek court approval for a stipulation of settlement.  There can be no assurance that the memorandum of understanding or the stipulation will be executed or that any stipulation will be approved by the court.  Any potential settlement will not affect the amount of consideration to be paid to stockholders of the Company in the merger or, other than the amendment of the provisions regarding payment of the termination fee referenced above, any other terms of the Merger Agreement.
 
On April 30, 2008, the Company filed definitive proxy materials related to the potential merger and began mailing such materials to the stockholders.  A special meeting of stockholders to approve the merger agreement has been set for May 29, 2008.
 
 
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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the accompanying notes appearing in our Annual Report on Form 10-K and elsewhere in this report.
 
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.
 
Overview
 
AmCOMP Incorporated, a Delaware corporation, is a holding company engaged through its wholly-owned subsidiaries, including AmCOMP Preferred and AmCOMP Assurance, in the workers’ compensation insurance business.  Our long-term source of consolidated earnings is principally the income from our workers’ compensation insurance business and investment income from our investment portfolio.  Workers’ compensation insurance provides coverage for the statutorily prescribed wage replacement and medical care benefits that employers are required to make available to their employees injured in the course of employment.  We are licensed as an insurance carrier in 25 states and the District of Columbia, but currently focus our resources in 17 states that we believe provide the greatest opportunity for near-term profitable growth.
 
Our results of operations are affected by the following business and accounting factors and critical accounting policies:
 
Revenues
 
Our revenues are principally derived from:
 
 
·
premiums we earn from the sale of workers’ compensation insurance policies and from the portion of the premiums assumed from the National Workers’ Compensation Reinsurance Pool (“NWCRP”) and other state mandated involuntary pools, which we refer to as gross premiums, less the portion of those premiums that we cede to other insurers, which we refer to as ceded premiums. We refer to the difference between gross premiums and ceded premiums as net premiums; and
 
 
·
investment income that we earn on invested assets.
 
Expenses
 
Our expenses primarily consist of:
 
 
·
insurance losses and LAE relating to the insurance policies we write directly and to the portion of the losses assumed from the state mandated involuntary pools, including estimates for losses incurred during the period and changes in estimates from prior periods, which we refer to as gross losses and LAE, less the portion of those insurance losses and LAE that we cede to our reinsurers, which we refer to as ceded losses and LAE. We refer to the difference as net losses and LAE;
 
 
·
dividends paid to policyholders, primarily in administered pricing states where premium rates are set by the regulators;
 
 
·
commissions and other underwriting expenses, which consist of commissions we pay to agents, premium taxes and company expenses related to the production and underwriting of insurance policies, less ceding commissions reinsurers pay to us under our reinsurance contracts;
 
 
·
other operating and general expenses, which include general and administrative expenses such as salaries, rent, office supplies and depreciation and other expenses not otherwise classified separately;
 
 
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·
assessments and premium surcharges related to our insurance activities, including assessments and premium surcharges for state guaranty funds and other second injury funds; and
 
 
·
interest expense under our bank credit facility and surplus notes issued to third parties.
 
 
Critical Accounting Policies
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), requires management to make estimates and assumptions that affect amounts reported in the financial statements. As more information becomes known, these estimates and assumptions could change, which would have an impact on the amounts reported in the future. There were no changes from Critical Accounting Policies as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
 
Measurement of Results
 
We evaluate our operations by monitoring key measures of growth and profitability. We measure our growth by examining our gross premiums. We measure our operating results by examining our net income, return on equity, and our loss and LAE expense, dividend and combined ratios. The following provides further explanation of the key measures that we use to evaluate our results:
 
Gross Premiums Written.  Gross premiums written is the sum of direct premiums written and assumed premiums written. Direct premiums written is the sum of the total policy premiums, net of cancellations, associated with policies underwritten by our insurance subsidiaries. Assumed premiums written represent our share of the premiums assumed from state mandated involuntary pools. We use gross premiums written, which excludes the impact of premiums ceded to reinsurers, as a measure of the underlying growth of our insurance business from period to period.
 
Net Premiums Written.  Net premiums written is the sum of direct premiums written and assumed premiums written less ceded premiums written. Ceded premiums written is the portion of our direct premiums that we cede to our reinsurers under our reinsurance contracts. We use net premiums written, primarily in relation to gross premiums written, to measure the amount of business retained after cession to reinsurers.
 
Gross Premiums Earned.  Gross premiums earned represent that portion of gross premiums written equal to the expired portion of the time for which the insurance policy was in effect during the financial year and is recognized as revenue. For each day a one-year policy is in force, we earn 1/365th of the annual premium.
 
Net Premiums Earned.  Net premiums earned represents that portion of net premiums written equal to the expired portion of the time for which the insurance policy was in effect during the financial year and is recognized as revenue. It represents the portion of premium that belongs to us on the part of the policy period that has passed and for which coverage has been provided. Net premium earned is used to calculate the net loss, policy acquisition expense, underwriting and other expense and dividend ratios, as indicated below.
 
Net Loss Ratio.  The net loss ratio is a measure of the underwriting profitability of an insurance company’s business. Expressed as a percentage, this is the ratio of net losses and LAE incurred to net premiums earned.
 
Like many insurance companies, we analyze our loss ratios on a calendar year basis and on an accident year basis. A calendar year loss ratio is calculated by dividing the losses and LAE incurred during the calendar year, regardless of when the underlying insured event occurred, by the premiums earned during that calendar year. The calendar year net loss ratio includes changes made during the calendar year in reserves for losses and LAE established for insured events occurring in all prior periods. A calendar year net loss ratio is calculated using premiums and losses and LAE that are net of amounts ceded to reinsurers.
 
An accident year loss ratio is calculated by dividing the losses and LAE, regardless of when such losses and LAE are incurred, for insured events that occurred during a particular year by the premiums earned for that year. An accident year net loss ratio is calculated using premiums and losses and LAE that are net of amounts ceded to reinsurers. An accident year loss ratio for a particular year can decrease or increase when recalculated in subsequent periods as the reserves established for insured events occurring during that year develop favorably or unfavorably, respectively, whereas the calendar year loss ratio for a particular year will not change in future periods.
 
 
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We analyze our calendar year loss ratio to measure our profitability in a particular year and to evaluate the adequacy of our premium rates charged in a particular year to cover expected losses and LAE from all periods, including development (whether favorable or unfavorable) of reserves established in prior periods. In contrast, we analyze our accident year loss ratios to evaluate our underwriting performance and the adequacy of the premium rates we charged in a particular year in relation to ultimate losses and LAE from insured events occurring during that year.
 
While calendar year loss ratios are useful in measuring our profitability, we believe that accident year loss ratios are more useful in evaluating our underwriting performance for any particular year because an accident year loss ratio better matches premium and loss information.  Furthermore, accident year loss ratios are not distorted by adjustments to reserves established for insured events that occurred in other periods, which may be influenced by factors that are not generally applicable to all years.  The loss ratios provided in this report are calendar year loss ratios, except where they are expressly identified as accident year loss ratios.
 
Policy Acquisition Expense Ratio.  The policy acquisition expense ratio is a measure of an insurance company’s operational efficiency in producing and underwriting its business. Expressed as a percentage, this is the ratio of premium acquisition expenses to net premiums earned.
 
Underwriting and Other Expense Ratio.  The underwriting and other expense ratio is a measure of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of underwriting and other expenses to net premiums earned. For underwriting and other expense ratio purposes, underwriting and other expenses of an insurance company exclude investment expenses and dividends to policyholders.
 
Dividend Ratio.  The dividends to policyholders ratio equals policy dividends incurred in the current year divided by net premiums earned for the year.
 
Net Combined Ratio.  The net combined ratio is a measure of an insurance company’s overall underwriting profit. This is the sum of the net loss, policy acquisition expense, underwriting and other expense, and dividend ratios. If the net combined ratio is at or above 100%, an insurance company cannot be profitable without investment income, and may not be profitable if investment income is insufficient.
 
Return on Equity.  This percentage is the sum of return on equity (“ROE”) from underwriting, ROE from investing, the ROE impact of debt and ROE from other income, multiplied by one minus the effective tax rate.   ROE from underwriting is calculated as one minus the combined ratio, representing our underwriting profit percentage, multiplied by our operating leverage (annualized net premiums earned divided by average equity).  ROE from investing is calculated by multiplying the investment yield for the period by our investment leverage (average investments divided by average equity).  The ROE impact of debt is calculated by multiplying the effective interest rate on debt for the period by our financial leverage (average debt divided by average equity).  We use return on equity to measure our growth and profitability. We can compare our return on equity to that of other companies in our industry to see how we are performing compared to our competition.
 
 
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Results of Operations
 
Financial information relating to our unaudited Consolidated Financial Results for the three month periods ended March 31, 2008 and 2007 is as follows:

   
Three Months Ended March 31,
 
               
Increase (decrease) 2008 over
 
   
2008
   
2007
   
2007
 
   
(Dollars in thousands)
 
Selected Financial Data:
                 
Gross premiums written
  $ 63,699     $ 75,579       (15.7 )%
Net premiums written
    62,201       75,070       (17.1 )%
Gross premiums earned
    53,747       61,187       (12.2 )%
                         
Net premiums earned
    52,249       59,213       (11.8 )%
Net investment income
    5,309       4,862       9.2 %
Net realized investment gain
    (98 )           (100.0 )%
Other income
    15       30       (50.0 )%
Total revenue
    57,475       64,105       (10.3 )%
Loss and loss adjustment expenses
    27,556       34,918       (21.1 )%
Policy acquisition expenses
    10,065       9,203       9.4 %
Underwriting and other expenses
    9,934       10,693       (7.1 )%
Dividends to policyholders
    2,369       2,241       5.7 %
Interest expense
    807       954       (15.4 )%
Federal and state income taxes
    2,264       2,076       9.1 %
Net Income
  $ 4,480     $ 4,020       11.4 %
                         
                         
Key Financial Ratios:
                       
Net loss ratio
    52.7 %     59.0 %        
Policy acquisition expense ratio
    19.3 %     15.5 %        
Underwriting and other expense ratio
    19.0 %     18.1 %        
Net combined ratio, excluding
                       
  policyholder dividends
    91.0 %     92.6 %        
Dividend ratio
    4.5 %     3.8 %        
Net combined ratio, including
                       
  policyholder dividends
    95.5 %     96.4 %        
Return on equity
    11.2 %     11.3 %        

Gross premiums written decreased $11.9 million, or 15.7% for the three months ended March 31, 2008 as compared to the same period in 2007.  Direct premiums written decreased $11.5 million, while assumed premiums written decreased $0.4 million.  Direct premiums written decreased due to decreases in writings in Florida ($10.4 million) and Texas ($2.0 million), offset by an increase in Illinois ($0.9 million), combined with other smaller changes.  The decrease in Florida premiums is the result of the 18.4% rate decrease in 2008, a 0.9% decline in the number of in-force policies as of March 31, 2008 from March 31, 2007, and a reduction in construction-related payrolls.  For all other states with significant changes in direct premiums written, generally, the change in the number of policies is consistent with the change in premiums written.  Overall, the average written premium per in-force policy decreased 10.0% from March 31, 2007 to March 31, 2008.  The decrease in assumed premiums written is primarily the result of a decrease in Indiana premiums assumed through involuntary pools.  Such increases or decreases in premiums assumed from involuntary pools are the result of changes in the total written premiums in the pool and/or a change in the Company’s premiums as a percentage of total premiums written in the state for the same line of business.
 
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Net premiums written decreased $12.9 million, or 17.1% for the three months ended March 31, 2008 as compared to the same period in 2007.  This decrease is the result of the decrease in gross premiums written, combined with an increase in ceded premiums written of $1.0 million.  The increase in ceded premiums written is the result of a change in the 2007 ceded reinsurance agreement to ceding on an earned basis from ceding on a written basis in 2006, which resulted in reduced 2007 ceded premiums written.  The retention in our 2008 and 2007 excess-of-loss treaties was unchanged at $2.0 million.
 
Gross premiums earned decreased $7.4 million, or 12.2% for the three months ended March 31, 2008 as compared to the same period in 2007.  This decrease is primarily the result of a decrease in direct earned premiums, with the largest decrease being in Florida ($7.1 million), combined with off-setting smaller changes in other states.  Assumed premiums earned also decreased by $0.4 million, as a result of the decrease in assumed premiums written.
 
Net premiums earned decreased $7.0 million, or 11.8% for the three months ended March 31, 2008 as compared to the same period in 2007. This decrease is primarily the result of the decrease in gross premiums earned.  The change in gross premiums earned was partially offset by a $0.4 million decrease in ceded premiums earned.  Ceded premiums earned are calculated as a percentage of direct premiums earned, and decreased as a result of the decrease in direct premiums earned. The ceded reinsurance premiums rates decreased slightly to 3.0% in 2008 from 3.2% in 2007.  Additionally, during the three months ended March 31, 2008 a reduction in ceded earned premiums related to prior year treaties of approximately $0.1 million was recorded as a result of normal true-ups to accruals for premium to be determined at audit.
 
The table below sets forth the calculation of net premiums earned and this amount as a percentage of gross premiums earned:
 
   
For the Three
   
Percent of
   
For the Three
   
Percent of
 
   
Months Ended
   
Gross
   
Months Ended
   
Gross
 
   
March 31,
   
Premiums
   
March 31,
   
Premiums
 
   
2008
   
Earned
   
2007
   
Earned
 
   
(Dollars in thousands)
 
Gross premiums earned
  $ 53,747       100.0 %   $ 61,187       100.0 %
Excess reinsurance premiums
    (1,498 )     (2.8 %)     (1,945 )     (3.2 %)
Quota share reinsurance premiums
          (0.0 %)     (29 )     (0.0 %)
Net premiums earned
  $ 52,249       97.2 %   $ 59,213       96.8 %

Net investment income increased $0.4 million or 9.2% for the three months ended March 31, 2008 as compared to the same period in 2007. The increase is attributable to a 3.9% increase in the average balance of invested assets for the three months ended March 31, 2008 as compared to the same period in 2007.  The additional funds available for investment were provided by cash generated from operating activities.  Additionally, the current yield increased to 5.1% as of March 31, 2008 from 5.0% at March 31, 2007, and investment expenses decreased 4.3%.
 
Losses and loss adjustment expenses decreased $7.4 million, or 21.1% for the three months ended March 31, 2008 as compared to the same period in 2007. Loss and loss adjustment expenses were 52.7% and 59.0% of net premiums earned for the three months ended March 31, 2008 and 2007, respectively.  These changes are the result of a few factors.  First, reflected in our losses and LAE the three months ended March 31, 2008 is a $6.8 million redundancy, net of reinsurance, for years prior to 2008.  Excluding business assumed from state mandated pools, the redundancy in the three months ended March 31, 2008 was attributable to prior year reserve decreases in Florida ($1.6 million), Texas ($1.5 million), Tennessee ($1.0 million), North Carolina ($0.8 million), and less significant decreases in several other states.  The accident years with the largest redundancies were 2007 ($2.3 million), 2006 ($1.9 million) and 2005 ($2.1 million).  The redundancy for the three months ended March 31, 2008 was more than the redundancy of $5.9 million for the comparable period in 2007.  Second, loss and loss adjustment expenses decreased as a result of a decrease 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, decreased to 63.3% for the three months ended March 31, 2008 from 65.2% for the three months ended March 31, 2007.  Third, loss and loss adjustment expenses decreased as a result of the decrease in net premiums earned discussed above.  Additionally, adjusting and other expense was 3.9% of net premiums earned for the three months ended March 31, 2008, down from 5.1% for the comparable period in 2007.
 
 
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Policy acquisition expenses increased $0.9 million, or 9.4% for the three months ended March 31, 2008 as compared to the same period in 2007. Policy acquisition expenses increased to 19.3% from 15.5% of net premiums earned for the three months ended March 31, 2008 and 2007, respectively.  This increase is primarily the result of increases in commissions ($0.6 million), assessments ($0.4 million), and the general and administrative component of policy acquisition expenses ($0.1 million), offset by a decrease premium tax ($0.2 million).  The increase in commissions is the result of an increase in direct commissions, and is due to a reduction in the commission payable accrual in the first quarter of 2007.  The increase in the assessment expense is primarily the result of a decrease in the South Carolina Second Injury Fund assessment in the first quarter of 2007, which exceeds the decrease in the Indiana Second Injury Fund assessment that occurred in the first quarter of 2008.  In the first quarter of 2007, the Company received notification that the unpaid portion of the South Carolina Second Injury Fund assessment on loss payments occurring in 2005 would not be billed, which resulted in a $0.9 million expense reduction.  In the first quarter of 2008 the rate on the Indiana second injury fund decreased from 0.65% to 0.26% of written premiums, which resulted in a $0.2 million expense reduction in the first quarter of 2008. Additionally, overall assessment expense decreased in the first quarter of 2008 due to a decrease in earned premiums.  The increase in general and administrative expenses is the result of an increase in employee time spent prior to or at policy initiation.  The decrease in premium tax is primarily the result of a decrease in earned premiums.
 
Underwriting and other expenses decreased $0.8 million, or 7.1% for the three months ended March 31, 2008 as compared to the same period in 2007. Underwriting and other expenses were 19.0% and 18.1% of net premiums earned for the three months ended March 31, 2008 and 2007, respectively.  The increase in underwriting and other expense is primarily attributable to decreases in bad debt expense ($0.9 million) and payroll related expense ($0.3 million), offset by increases in legal expense ($0.4 million) and other professional expenses ($0.4 million), combined with other smaller changes.  In the first quarter of 2007 bad debt expense increased due to increased consideration given to reserving for balances less than 90 days old.  The decrease in payroll related expense is the result of a 3.6% decrease in the average number of employees for the three months ended March 31, 2008 compared to the same period in 2007. The increase in legal and other professional expenses is due to additional expenses being incurred by the Company in connection with the potential merger with Employers.
 
Dividends to policyholders increased $0.1 million, or 5.7% for the three months ended March 31, 2008 as compared to the same period in 2007.  Divid