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.
PART I
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.
|
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.
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 | |||||||||||
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
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.
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.
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.
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 |
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.
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.
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.
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.
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 | % |
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.
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
Investments—For
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.
Fair Value
Hierarchy—The
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 Basis—As 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.
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.
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.
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;
|
|
·
|
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.
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.
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.
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.
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