Annual Reports

 
Quarterly Reports

 
8-K

 
Other

AmCOMP 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
sec document

================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  ------------

                                    FORM 10-Q
(Mark One)

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

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007

   |_| 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               (I.R.S. Employer
        incorporation or organization)             Identification Number)

                              701 U.S. HIGHWAY ONE
                         NORTH PALM BEACH, FLORIDA 33408
                            TELEPHONE: (561) 840-7171

      (Address of registrant's principal executive offices and registrant's
                     telephone number, including area code)

                                       N/A
                                  ------------
 (former name, former address, 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, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act (check one):

Large accelerated filer |_|  Accelerated filer |X|  Non-accelerated filer |_|

      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 10, 2007, the registrant had 15,769,160 shares of common stock
outstanding.

===============================================================================



                               AMCOMP INCORPORATED

                                      INDEX


PART I........................................................................2

  Item 1.  Financial Statements...............................................2
  Item 2.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations.........................................16
  Item 3.  Quantitative and Qualitative Disclosure about Market Risk.........28
  Item 4.  Controls and Procedures...........................................30

PART II. OTHER INFORMATION...................................................31

  Item 6.  Exhibits..........................................................31

SIGNATURES...................................................................31


                                       i


                                     PART I

ITEM 1.  FINANCIAL STATEMENTS

                                     AMCOMP INCORPORATED AND SUBSIDIARIES

                                          CONSOLIDATED BALANCE SHEETS
                                            (AMOUNTS IN THOUSANDS)

                                                                                 March 31,          December 31,
                                                                                   2007                2006
                                                                                 ---------           ---------
                                                                                (unaudited)
ASSETS
Investments:
   Fixed maturity securities available-for-sale at fair value (amortized
   cost  of  $348,931 in 2007 and $349,487 in 2006)                              $ 346,005           $ 345,318
   Fixed maturity securities held-to-maturity at amortized cost
   (fair value of $87,032 in 2007 and $75,933 in 2006)                              87,116              76,198
                                                                                 ---------           ---------
Total investments                                                                  433,121             421,516
Cash and cash equivalents                                                           10,689              15,259
Accrued investment income                                                            4,910               5,120
Premiums receivable - net                                                          117,408             106,270
Assumed reinsurance premiums receivable                                              1,858               1,822
Reinsurance recoverable:
   On paid losses and loss adjustment expenses                                       2,169               3,064
   On unpaid losses and loss adjustment expenses                                    73,772              72,296
Prepaid reinsurance premiums                                                         1,844               3,326
Deferred policy acquisition costs                                                   23,591              20,749
Property and equipment - net                                                         2,926               2,705
Income taxes recoverable                                                              --                 3,102
Deferred income taxes - net                                                         22,462              21,613
Goodwill                                                                             1,260               1,260
Other assets                                                                         6,402               6,395
                                                                                 ---------           ---------
TOTAL ASSETS                                                                     $ 702,412           $ 684,497
                                                                                 =========           =========

LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES
Policy reserves and policyholders' funds:
   Unpaid losses and loss adjustment expenses                                    $ 337,827           $ 334,363
   Unearned and advance premiums                                                   130,676             115,218
   Policyholder retention dividends payable                                          8,234               8,504
                                                                                 ---------           ---------
     Total policy reserves and                                                     476,737             458,085
        policyholders' funds
Reinsurance payable                                                                  1,769               3,774
Accounts payable and accrued expenses                                               37,578              39,416
Notes payable                                                                       37,804              38,250
Income tax payable                                                                     344                --
Other liabilities                                                                    3,881               5,684
                                                                                 ---------           ---------
TOTAL LIABILITIES                                                                  558,113             545,209
                                                                                 ---------           ---------

STOCKHOLDERS' EQUITY
Common stock (par value $.01; 45,000 authorized shares;
15,895 in 2007 and 15,893 in 2006 issued; 15,760 in 2007
and 15,758 in 2006 outstanding)                                                        158                 158
Additional paid-in capital                                                          74,162              73,952
Retained earnings                                                                   72,010              67,990
Accumulated other comprehensive loss (net of deferred
taxes of $1,089 in 2007 and $1,553 in 2006)                                         (1,832)             (2,613)
Treasury stock (135 shares in 2007 and 2006)                                          (199)               (199)
                                                                                 ---------           ---------
TOTAL STOCKHOLDERS' EQUITY                                                         144,299             139,288
                                                                                 ---------           ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                       $ 702,412           $ 684,497
                                                                                 =========           =========


                                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,           March 31,
                                                   2007                2006
                                                 -------             -------
Revenue:
   Net premiums earned                           $59,213             $65,970
   Net investment income                           4,862               4,043

   Net realized investment gains                    --                     1
   Other income                                       30                  85
                                                 -------             -------
       Total revenue                              64,105              70,099

Expenses:
   Losses and loss adjustment expenses            34,918              37,467
   Dividends to policyholders                      2,241               2,663
   Underwriting and acquisition expenses          19,896              19,801
   Interest expense                                  954                 838
                                                 -------             -------
       Total expenses                             58,009              60,769
                                                 -------             -------

Income before income taxes                         6,096               9,330
Income tax expense                                 2,076               3,355
                                                 -------             -------

Net income                                       $ 4,020             $ 5,975
                                                 =======             =======
Earnings per common share - basic                $  0.26             $  0.54
                                                 =======             =======
Earnings per common share - diluted              $  0.25             $  0.46
                                                 =======             =======


                 See notes to consolidated financial statements.


                                       3


                                                AMCOMP INCORPORATED AND SUBSIDIARIES

                                     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                               (2007 UNAUDITED, AMOUNTS IN THOUSANDS)

                                                                                                         Accumulated
                                                      Convertible    Additional                            Other
                                           Common      Preferred       Paid-in    Treasury   Retained   Comprehensive  Stockholders'
                                            Stock    Stock Series A    Capital      Stock    Earnings   Income (Loss)     Equity
                                           --------  --------------  ----------   --------  ---------   -------------  ------------
BALANCE AT DECEMBER 31, 2005               $     54     $ 23,098      $    536   $   (199)  $ 51,428      $ (2,936)      $ 71,981
                                           --------     --------      --------   --------   --------      --------       --------

Net income                                     --           --            --         --       16,562          --           16,562

Unrealized gain on investments (net
of tax expense of $121)                        --           --            --         --         --             323            323
                                                                                                                         --------

Comprehensive income                           --           --            --         --         --            --           16,885

Conversion of Series A Preferred
into Common Stock                                42      (23,098)       23,056       --         --            --             --


Stock issued during initial public
offering (net of offering costs of $2,341)       60         --          47,912       --         --            --           47,972

Stock option compensation expense              --           --             545       --         --            --              545

Stock option exercise                             2         --           1,826       --         --            --            1,828

Tax benefit on stock options                   --           --              77       --         --            --               77
                                           --------     --------      --------   --------   --------      --------       --------

BALANCE AT DECEMBER 31, 2006                    158         --          73,952       (199)    67,990        (2,613)       139,288

Net income                                     --           --            --         --        4,020          --            4,020

Unrealized gain on investments (net
of tax expense of $464)                        --           --            --         --         --             781            781
                                                                                                                         --------

Comprehensive income                           --           --            --         --         --            --            4,801

Stock option compensation expense              --           --             193       --         --            --              193

Stock option exercise                          --           --              15       --         --            --               15

Tax benefit on stock options                   --           --               2       --         --            --                2

                                           --------     --------      --------   --------   --------      --------       --------
BALANCE AT MARCH 31, 2007                  $    158     $   --        $ 74,162   $   (199)  $ 72,010      $ (1,832)      $144,299
                                           ========     ========      ========   ========   ========      ========       ========


                                           See notes to consolidated financial statements


                                                                 4


                                          AMCOMP INCORPORATED AND SUBSIDIARIES

                                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                                           (UNAUDITED, AMOUNTS IN THOUSANDS)
                                                                                                 Three Months Ended
                                                                                             -------------------------
                                                                                             March 31,        March 31,
                                                                                                2007             2006
                                                                                             --------         --------
Operating Activities:
  Net income                                                                                 $  4,020         $  5,975
  Adjustments to reconcile net income to net cash provided by operating activities:
    Depreciation and amortization                                                                 394              470
    Amortization of investment premiums/discounts                                                 451              667
    Excess tax benefits from stock option exercise                                                 (4)            --
    Stock option expense                                                                          193             --
    Provision for deferred income taxes                                                        (1,313)            (680)
    Net gains on investments                                                                     --                 (1)
    (Gain) loss on sale of property and equipment                                                  (2)              12
    Policy acquisition costs deferred                                                         (14,091)         (15,888)
    Policy acquisition costs amortized                                                         11,249           11,528
  Change in operating assets and liabilities:
    Accrued investment income                                                                     210             (233)
    Premiums receivable                                                                       (11,138)         (17,171)
    Reinsurance balances                                                                       (1,140)          (3,617)
    Other assets                                                                                   (7)             905
    Unpaid losses and loss adjustment expenses                                                  3,464            9,920
    Unearned and advance premiums and policyholder deposits                                    15,458           19,812
    Policyholder retention dividends payable                                                     (270)             656
    Accounts payable and accrued expenses                                                      (1,838)           2,150
    Income tax recoverable/payable                                                              3,448            6,003
    Other liabilities                                                                          (1,803)          (2,614)
                                                                                             --------         --------
      Net cash provided by operating activities                                                 7,281           17,894

Investing Activities:
  Securities available-for-sale:
    Purchases                                                                                 (23,966)         (47,572)
    Sales and maturities                                                                       24,082            2,099
  Securities held-to-maturity:
    Purchases                                                                                 (14,072)          (6,044)
    Redemptions and maturities                                                                  3,145            1,575
  Purchases of property and equipment                                                            (623)            (227)
  Sale of property and equipment                                                                   10             --
  Regulatory restricted deposit                                                                  --                 10
                                                                                             --------         --------
      Net cash used in investing activities                                                   (11,424)         (50,159)

Financing Activities:
  Proceeds from initial public offering, net of offering costs of $2,341                         --             47,972
  Proceeds from stock option exercise                                                              15             --
  Excess tax benefits from stock option exercise                                                    4             --
  Payment of note payable                                                                        (446)            (447)
                                                                                             --------         --------
       Net cash (used in) provided by financing activities                                       (427)          47,525
                                                                                             --------         --------

Net (decrease) increase in cash and cash equivalents                                           (4,570)          15,260

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                 15,259           11,089
                                                                                             --------         --------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                   $ 10,689         $ 26,349

                                                                                             ========         ========

Supplemental Cash Flow Data:
  Cash paid- interest                                                                        $    956         $    830
                                                                                             ========         ========
  Cash paid- income taxes                                                                    $      3         $    601
                                                                                             ========         ========


                                     See notes to consolidated financial statements


                                                           5



                      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, 2006. 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, 2007 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2007.

      NEW ACCOUNTING PRONOUNCEMENTS -- In July 2006, the Financial Accounting
Standards Board ("FASB") issued an interpretation of FASB Statement No. 109,
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES ("FIN 48"). This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
ACCOUNTING FOR INCOME TAXES. FIN 48 prescribes a recognition threshold and
measurement attributes for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. This
interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. The
Interpretation establishes a "more likely than not" recognition threshold for
tax benefits to be recognized in the financial statements. The "more likely than
not" determination is to be based solely on the technical merits of the
position. This interpretation was adopted by the Company on January 1, 2007. As
of the adoption date and as of March 31, 2007, the Company had no material
unrecognized tax benefits and no adjustments to liabilities or operations were
required.

      In September 2006, the FASB issued SFAS No. 157, FAIR VALUE Measurements
("SFAS 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. SFAS No. 157 is effective for the
Company beginning January 1, 2008. The Company is currently evaluating the
impact of this standard.

      Statement of Position ("SOP") 05-1, ACCOUNTING BY INSURANCE ENTERPRISES
FOR DEFERRED ACQUISITION COSTS IN CONNECTION WITH MODIFICATIONS OR EXCHANGES OF
INSURANCE CONTRACTS, issued September 2005, became effective January 1, 2007.
SOP 05-1 provides guidance on accounting for deferred acquisition costs on
internal replacements of insurance and investment contracts other than those
specifically described in SFAS No. 97, ACCOUNTING AND REPORTING BY INSURANCE
ENTERPRISES FOR CERTAIN LONG-DURATION CONTRACTS AND FOR REALIZED GAINS AND
LOSSES FROM THE SALE OF INVESTMENTS. The SOP defines an internal replacement as
a modification in product benefits, features, rights, or coverage that occurs by
the exchange of a contract for a new contract, or by amendment, endorsement, or
rider to a contract, or by the election of a feature or coverage within a
contract. The adoption of SOP 05-01 did not have a material impact upon
adoption.


                                       6





      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. SFAS No. 159 is effective as of January
1, 2008. The Company is currently evaluating the impact of this standard.

2.    STOCK OPTIONS

      Effective January 1, 2006, the Company adopted SFAS No. 123R, using the
modified prospective application transition method. Under this method, all
outstanding employee stock options are being expensed over the remaining 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. As a result of the
adoption of SFAS No. 123R, the Company recognized approximately $0.2 million and
$0.1 million of stock option compensation expense for the three months ended
March 31, 2007and 2006, respectively. The related tax benefit was less than $0.1
million in the three months ended March 31, 2007. The recognition of the expense
reduced diluted earnings per share by $0.02 and $0.01 for the three months ended
March 31, 2007 and March 31, 2006. As of March 31, 2007, total unrecognized
compensation expense related to non-vested stock options was approximately $1.8
million. This cost is expected to be recognized over the weighted average period
of 2.6 years.

      A summary of the Company's stock option activity for the three months
ended March 31, 2007 and March 31, 2006 is as follows:

                                      Three Months Ended                Three Months Ended
                                        March 31, 2007                    March 31, 2006
                                  ---------------------------      --------------------------
                                   Employees, Directors, and        Employees, Directors, and
                                          Executives                        Executives
                                  ---------------------------      ---------------------------
                                    Average                         Average
                                   Exercise        Number of        Exercise          Number of
                                     Price           Shares          Price              Shares
                                  ---------         ---------      ---------         ---------
Outstanding-beginning balance     $   10.08         1,221,558      $   11.12           645,579
  Granted                             10.66            54,737           9.00           798,442
  Exercised                            8.89            (1,637)          --                --
  Forfeited                            9.00            (1,638)          9.30            (2,292)
  Expired                             13.73          (218,847)          --                --
                                  ---------         ---------      ---------         ---------
Outstanding-ending balance        $    9.36         1,054,173      $    9.95         1,441,729
                                  =========         =========      =========         =========


      As of March 31, 2007, and 2006 options to purchase 378,134 shares and
586,164 shares, respectively, were exercisable. The weighted average remaining
contractual life of the exercisable options was 2.7 years and 1.0 years as of
March 31, 2007 and 2006, respectively. The per-share weighted average grant date
fair value of options granted in the three months ended March 31, 2007 and 2006
was $3.60 and $3.04, 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, 2007: zero expected dividend yield, 4.63%
risk-free interest rate, 5 year expected life, and 30.3% volatility. For the
three months ended March 31, 2006 the following assumptions were used: zero
expected dividend yield, 4.55% risk-free interest rate, 5 year expected life,
and 28.2% 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, 2007 and 2006 was $2.91 and $1.72, respectively. As of
March 31, 2007 the aggregate intrinsic value of options outstanding and options
exercisable was approximately $1.7 million and $0.6 million, respectively. The
total aggregate intrinsic value of options exercised during the three months
ending March 31, 2007 was less than $0.1 million.


                                       7


Summary information for option awards expected to vest is as follows:

                                         Options Outstanding
                            ---------------------------------------------
                               Number     Weighted
                            Outstanding    Average   Weighted
                                 at      Remaining    Average  Aggregate
                              March 31, Contractual  Exercise  Intrinsic
Range of Exercise Price         2007        Life       Price     Value
--------------------------  ----------- -----------  --------  ----------
           $ 0.00 - $ 8.99      84,593      0.79      $ 8.83   $  164,859
             9.00 -   9.99     796,958      3.78        9.02    1,405,857
            10.00 -  14.00     124,238      3.10       11.97       14,321
                            -----------  ----------  --------  ----------
                             1,005,789      3.44      $ 9.37   $1,585,037
                            ===========  ==========  ========  ==========

Summary information for total outstanding option awards is as follows:

                                    Options Outstanding          Options Exercisable
                            ---------------------------------  -----------------------
                               Number     Weighted
                            Outstanding    Average   Weighted     Number     Weighted
                                 at      Remaining    Average   Exercisable  Average
                              March 31,  Contractul  Exercise    at March    Exercise
Range of Exercise Price         2007        Life       Price     31, 2007     Price
--------------------------  -----------  ----------  --------  ----------    --------
           $ 0.00 - $ 8.99      84,942      0.79      $ 8.83       81,449     $8.84
             9.00 -   9.99     839,919      3.78        9.02      242,110      9.03
             10.00 - 14.00     129,312      3.16       11.92       54,575     13.74
                            -----------  ----------  --------  ----------    --------
                             1,054,173      3.47      $ 9.36      378,134     $9.67
                            ===========  ==========  ========  ==========    ========

      In the event that currently outstanding options are exercised, the Company
intends to first issue treasury shares to the extent available,  followed by 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, and $1.2
million for the three months ended March 31, 2007 and 2006, respectively. The
Company has deferred approximately $1.3 million and $1.2 million as of March 31,
2007 and December 31, 2006, respectively, related to guaranty fund assessments,
which is included in deferred policy acquisition costs. Maximum contributions
required by law in any one state in which we offer insurance vary between 0.3%
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 expenses were $0.9
million, and $2.0 million for the three months ended March 31, 2007 and 2006,
respectively. The Company has deferred approximately $2.2 million and $1.8
million as of March 31, 2007 and December 31, 2006, respectively, related to
second injury fund assessments, which is included in deferred policy acquisition
costs.


                                       8


      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 collectibility 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, and $0.2 million in the three months ended March 31,
2007, and 2006, respectively.

      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 Preferred and/or result in the discontinuation of the Florida SDTF and
thus could have an adverse effect on AmCOMP Preferred'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, and $0.4 million for the three months ended March
31, 2007 and 2006, respectively. The Company has deferred approximately $0.3
million and $0.3 million as of March 31, 2007, and December 31, 2006,
respectively, related to these assessments, which are included in deferred
policy acquisition costs.

4.    INVESTMENTS

      The Company's investments in available-for-sale securities and
held-to-maturity securities are summarized as follows at March 31, 2007 and
December 31, 2006 (in thousands):


                                                    Gross        Gross
                                       Amortized  Unrealized   Unrealized
                                          Cost       Gains       Losses     Fair Value
                                       --------   -----------  ----------   ----------
Available-for-sale securities at
  March 31,2007:
    U.S. Treasury securities             $ 33,980   $    822     $    541      $ 34,261
    Agency                                 46,837         18          332        46,523
    Municipalities                         79,541        120          796        78,865
    Corporate debt securities             181,158        344        2,411       179,091
    Mortgage-backed securities              7,415          1          151         7,265
                                         --------   --------     --------      --------
  Total fixed maturity securities        $348,931   $  1,305     $  4,231      $346,005
                                         ========   ========     ========      ========

Held-to-maturity securities at
  March 31, 2007:
                                         --------   --------     --------      --------
    Mortgage-backed securities           $ 87,116   $    346     $    430      $ 87,032
                                         ========   ========     ========      ========

      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, 2007 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                          $ 55,633   $ 55,329   $   --     $   --
  After one through five                163,278    160,961       --         --
  After five through ten                107,652    106,676       --         --
  After ten                              14,953     15,774       --         --
  Mortgage-backed securities              7,415      7,265     87,116     87,032
                                       --------   --------   --------   --------
Total                                  $348,931   $346,005   $ 87,116   $ 87,032
                                       ========   ========   ========   ========

      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.


                                       9


      At March 31, 2007 and December 31, 2006, bonds with an amortized cost of
$13.2 million and a fair value of $14.0 million, were on deposit with various
states' departments of insurance in accordance with regulatory requirements.
Additionally, at March 31, 2007 and December 31, 2006, bonds with an amortized
cost of $6.0 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, 2007 and 2006 are summarized as follows (in thousands):

                                       Three Months Ended
                                     March 31,    March 31,
                                       2007         2006
                                     --------     ---------
Income:
    Fixed maturity securities         $4,915        $3,760
    Cash and cash equivalents            168           477
                                      ------        ------
   Investment income                  $5,083        $4,237
   Investment expenses                 (221)         (194)
                                      ------        ------
Net investment income                 $4,862        $4,043
                                      ======        ======

      During the three months ended March 31, 2007 and 2006, there were no sales
of available-for-sale fixed maturity securities.

      The Company continuously monitors its portfolio to preserve principal
values whenever possible. All securities in an unrealized loss position are
reviewed to determine whether the impairment is other-than-temporary. An
investment in a fixed maturity security is impaired if its fair value falls
below its book value. 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, 2007 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                   $     85     $   --               1
  Agency                                        8,533          (13)            3
  Municipalities                               14,575         (131)            6
  Corporate debt securities                    15,872          (78)            6
  Mortgage-backed securities                   17,227          (34)            7
                                             --------     --------      --------
Total                                        $ 56,292     $   (256)           23
                                             ========     ========      ========

Greater than 12 months:
  U.S. Treasury securities                   $ 28,283     $   (541)           26
  Agency                                       21,770         (319)           15
  Municipalities                               37,064         (665)           27
  Corporate debt securities                   130,570       (2,333)           94
  Mortgage-backed securities                   26,983         (547)           20
                                             --------     --------      --------
Total                                        $244,670     $ (4,405)          182
                                             ========     ========      ========

Total fixed maturity securities:
  U.S. Treasury securities                   $ 28,368     $   (541)           27
  Agency                                       30,303         (332)           18
  Municipalities                               51,639         (796)           33
  Corporate debt securities                   146,442       (2,411)          100
  Mortgage-backed securities                   44,210         (581)           27
                                             --------     --------      --------
Total fixed maturity securities              $300,962     $ (4,661)          205
                                             ========     ========      ========


                                       10


      At March 31, 2007, there were no investments in fixed maturity securities
with individual material unrealized losses. 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 (in thousands):

                                                                                                 Twelve Months
                                                                                   Three Months      Ended
                                                                                 Ended March 31,  December 31,
                                                                                      2007            2006
                                                                                 --------------- --------------
                                                                                    (dollars in thousands)
Unpaid losses and LAE, gross of related reinsurance recoverables, at
  beginning of period                                                              $ 334,363       $ 309,857
Less reinsurance recoverables on unpaid losses and LAE at beginning of
  period                                                                              72,296          78,659
                                                                                   ---------       ---------
Unpaid losses and LAE, net of related reinsurance recoverables, at
  beginning of the period                                                          $ 262,067       $ 231,198
                                                                                   ---------       ---------

Add provision for losses and LAE, net of reinsurance, occurring in:
          Current period                                                           $  40,747       $ 177,841
          Prior periods                                                               (5,829)        (14,171)
                                                                                   ---------       ---------
Incurred losses during the current period                                          $  34,918       $ 163,670
                                                                                   ---------       ---------

Deduct payments for losses and LAE, net of reinsurance, occurring in:
          Current period                                                           $   4,961       $  56,448
          Prior periods                                                               27,969          76,353
                                                                                   ---------       ---------
Payments for losses and LAE during the current period, net of reinsurance          $  32,930       $ 132,801
                                                                                   ---------       ---------

Unpaid losses and LAE, net of related reinsurance recoverables, at end of
period                                                                             $ 264,055       $ 262,067
Reinsurance recoverable on unpaid losses and LAE at end of period                     73,772          72,296
                                                                                   ---------       ---------
Unpaid losses and LAE, gross of related reinsurance recoverables, at end of
period                                                                             $ 337,827       $ 334,363
                                                                                   =========       =========

      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, 2007 and the year ended December 31, 2006 by $5.8 million and $14.2 million,
respectively, as a result of actual loss development emerging more favorably
than expected. Excluding business assumed from state mandated pools, this
redundancy was attributable to prior year reserve decreases in Florida ($3.2
million), Wisconsin ($1.9 million), and less significant decreases in several
other states. 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 LAE.


                                       11


6.    COMMITMENTS AND CONTINGENCIES

      LITIGATION --AmCOMP along with AmCOMP Preferred and AmCOMP Assurance are
collectively defendants in identical actions commenced in Pennsylvania and
Florida courts by the Insurance Commissioner of Pennsylvania, acting in the
capacity as liquidator of Reliance Insurance Company. The complaints in those
actions allege that preferential payments were made by Reliance Insurance
Company under the formerly existing reinsurance agreement with AmCOMP Preferred
and AmCOMP Assurance and seek damages in the amount of approximately $2.3
million. AmCOMP, along with AmCOMP Preferred and AmCOMP Assurance, 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 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 $9.9 million under the reinsurance agreement.
Although the ultimate results of these legal actions and related claims cannot
presently be determined, the Company had accrued liabilities of $1.2 million as
of March 31, 2007 and December 31, 2006 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.

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, 2007 and December 31,
2006, the principal balance was $5.8 million and $6.3 million respectively. The
interest rate was 7.8% at March 31, 2007. Interest paid through March 31, 2007
and 2006 totaled $118,000 and $132,000, respectively.

      The Loan contains various restrictive covenants and certain financial
covenants. At March 31, 2007, the Company was in compliance with all restrictive
and financial covenants.

      On April 30, 2004, AmCOMP Preferred issued a $10 million surplus note in
return for $10 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, 2007 and 2006 totaled $0.2 million and $0.3 million,
respectively. Interest accrued as of March 31, 2007 and December 31, 2006 was
$0.1 million.

      On May 26, 2004, AmCOMP Preferred issued a $12 million surplus note, in
return for $12 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, 2007 and 2006 totaled $0.3 million and $0.3 million,
respectively. Interest unpaid as of March 31, 2007 and December 31, 2006 was
$0.1 million.

      On September 14, 2004, AmCOMP Preferred issued a $10 million surplus note,
in return for $10 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, 2007
and 2006 totaled $0.2 million and $0.2 million, respectively. Interest unpaid as
of March 31, 2007 and December 31, 2006 was $39,000.

                                       12



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, 2007, the Company had no material unrecognized tax benefits
and no adjustments to liabilities or operations were required. Income tax
related interest recognized in the three months ended March 31, 2007 was
approximately $0.1 million. Tax years 2003 through 2006 and 2002 through 2006
are subject to examination by the federal and state taxing authorities,
respectively. There are no income tax examinations currently in process.

      Significant components of income tax for the three months ended March 31,
2007 and 2006 are as follows (in thousands):

                                         Three Months Ended
                                        ---------------------
                                        March 31,    March 31,
                                          2007         2006
                                        ---------    --------
Current expense
  Federal                               $ 3,065      $ 3,632
  State                                     324          403
                                        -------      -------
   Total current tax expense            $ 3,389      $ 4,035
Deferred tax benefit
  Federal                               $(1,186)     $  (614)
  State                                    (127)         (66)
                                        -------      -------
   Total deferred tax benefit            (1,313)        (680)
                                        -------      -------
Income tax expense                      $ 2,076      $ 3,355
                                        =======      =======

      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, 2007 and 2006 (in thousands):

                                                             Three Months Ended
                                                 ------------------------------------------
                                                       March 31,                March 31,
                                                         2007                    2006
                                                 ------------------      ------------------
Income tax at statutory rate                     $ 2,134      35.0%      $ 3,266      35.0%
Permanent differences:
  State income taxes                                 157       2.6           265       2.8
  Tax-exempt interest                               (304)     (5.0)         (224)     (2.4)
  Non-deductible meals and entertainment              43       0.7            63       0.7
  Provision to return adjustment                     (39)     (0.6)            3       --
  Non-deductible option expense                       42       0.7            --       --
  Other expense--net                                  43       0.7           (18)     (0.1)
                                                 -------    ------       -------      ----
Effective income tax expense                     $ 2,076      34.1%      $ 3,355      36.0%
                                                 =======    ======       =======      ====

      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.


                                       13


      The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and tax liabilities as of March 31, 2007 and
December 31, 2006 are presented below (in thousands):

                                        March 31,    March 31,
                                          2007         2006
                                        ---------    ---------
Deferred tax assets:
  Loss and LAE reserve adjustments       $ 13,654    $ 13,551
  Unearned and advance premiums             9,249       8,112
  Allowance for bad debts                   2,138       1,531
  Policyholder dividends                    3,069       3,170
  FAS 115 unrealized losses                 1,090       1,553
  Deferred compensation                       521         650
  Disallowed capital losses                   326         326
  Other                                     1,394         689
                                         --------    --------
   Total deferred tax assets               31,441      29,582
Deferred tax liabilities:
  Deferred policy acquisition expenses     (8,794)     (7,734)
  Other                                      (185)       (235)
                                         --------    --------
   Total deferred tax liabilities          (8,979)     (7,969)
                                         --------    --------
   Net deferred tax assets               $ 22,462    $ 21,613
                                         ========    ========

9.    EARNINGS PER SHARE

      The following table sets forth the computation of basic and diluted
earnings per share computations (amounts in thousands, except per share
amounts):

                                                   Three Months Ended
                                                 ----------------------
                                                  March 31,  March 31,
                                                    2007       2006
                                                 ---------- -----------
Numerator:
  Net income attributable to common stockholders   $ 4,020   $ 5,975
                                                   =======   =======

Denominator:
   Weighted-average shares outstanding
     (denominator for basic earnings per share)     15,760    11,029
   Plus effect of dilutive securities:
           Convertible preferred stock                --       1,863
           Employee stock options                       19      --
                                                   -------   -------
   Weighted-average shares and assumed
     conversions (denominator for diluted
     earnings per share)                            15,779    12,892
                                                   -------   -------
Basic earnings per share                           $  0.26   $  0.54
                                                   =======   =======
Diluted earnings per share                         $  0.25   $  0.46
                                                   =======   =======

      For the three months ended March 31, 2007 and 2006, outstanding employee
stock options of 918,643, and 1,441,729 have been excluded from the computation
of diluted earnings per share because they are anti-dilutive.

      All share and per share amounts in the consolidated financial statements
have been restated to give effect to the 1-for-2.2904 reverse common stock split
effected by AmCOMP on February 6, 2006. The stock split was effected as a stock
dividend.

10.   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) ("excessive profits") in the amount of $5,663,805 have been
realized by the Company. 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


                                       14


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 excessive profits. These filings amend and increase the expenses
the Company believes are permitted by the statute in calculating excessive
profits.

      The Company, through outside regulatory counsel, has submitted their
amended filings to Florida OIR for the years 2002, 2003 and 2004. The amended
filings report no 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 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 input from legal counsel, that "excessive
profits" were not, in fact, earned in Florida for the years 2002, 2003, and
2004. No accrual for excessive profits has been provided as of March 31, 2007.


                                       15


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 to provide workers' compensation insurance in 25
states, but currently focus our resources in 15 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:

      o  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

      o  investment income that we earn on invested assets.

      EXPENSES

      Our expenses primarily consist of:

      o  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;

      o  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;

      o  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;


                                       16


      o  assessments and premium surcharges related to our insurance activities,
         including assessments and premium surcharges for state guaranty funds
         and other second injury funds; and

      o  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, 2006, except as noted below.

      INCOME TAXES

      In July 2006, the Financial Accounting Standards Board ("FASB") issued an
interpretation of FASB Statement No. 109, ACCOUNTING FOR UNCERTAINTY IN INCOME
TAXES ("FIN 48"). This interpretation clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements in accordance
with FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES. FIN 48 prescribes a
recognition threshold and measurement attributes for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The Interpretation establishes a "more likely than
not" recognition threshold for tax benefits to be recognized in the financial
statements. The "more likely than not" determination is to be based solely on
the technical merits of the position. This interpretation was adopted by the
Company on January 1, 2007. As of the adoption date and as of March 31, 2007,
the Company had no material unrecognized tax benefits and no adjustments to
liabilities or operations were required. We recognize income tax related
interest in interest expense and penalties in income tax expense. Income tax
related interest recognized in the three months ended March 31, 2007 was
approximately $0.1 million. Tax years 2003 through 2006 and 2002 through 2006
are subject to examination by the federal and state taxing authorities,
respectively. There are no income tax examinations currently in process.

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. 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, net expense and dividend
ratios, as indicated below.


                                       17


      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


                                       18


(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, 2007 and 2006 is as follows:

                                                 Three Months Ended March 31,
                                               ---------------------------------
                                                                        Increase
                                                                       (Decrease)
                                                                        2007 Over
                                                2007         2006         2006
                                               ------       ------       ------
                                                     (Dollars in Thousands)
SELECTED FINANCIAL DATA:
Gross premiums written                         $75,579      $89,540      (15.6)%
Net premiums written                            75,070       86,696      (13.4)%
Gross premiums earned                           61,187       68,866      (11.2)%

Net premiums earned                             59,213       65,970      (10.2)%
Net investment income                            4,862        4,043       20.3%
Net realized investment gain                      --              1     (100.0)%
Other income                                        30           85      (64.7)%
                                                ------       ------
  Total revenue                                 64,105       70,099       (8.6)%
                                                ------       ------
Loss and loss adjustment expenses               34,918       37,467       (6.8)%
Policy acquisition expenses                      9,203       12,022      (23.4)%
Underwriting and other expenses                 10,693        7,779       37.5%
Dividends to policyholders                       2,241        2,663      (15.8)%
Interest expense                                   954          838       13.8%
Federal and state income taxes                   2,076        3,355      (38.1)%
                                                ------       ------      -----
Net Income                                     $ 4,020      $ 5,975      (32.7)%
                                                ======       ======      =====

KEY FINANCIAL RATIOS:
Net loss ratio                                    59.0%        56.8%
Policy acquisition expense ratio                  15.5%        18.2%
Underwriting and other expense ratio              18.1%        11.8%
                                                  ----         ----
Net combined ratio, excluding
  policyholder dividends                          92.6%        86.8%
Dividend ratio                                     3.8%         4.0%
                                                  ----         ----
Net combined ratio, including
  policyholder dividends                          96.4%        90.8%
                                                  ====         ====
Return on equity                                  11.3%        24.3%

      GROSS PREMIUMS WRITTEN decreased by $14.0 million, or 15.6% for the three
months ending March 31, 2007 as compared to the same period in 2006. This
decrease is attributable to direct premiums, as assumed premiums were relatively
unchanged. Direct premiums written decreased due to decreases in direct premiums
written in Florida ($11.9 million), Indiana ($2.5 million), and Wisconsin ($1.0
million), offset by increases in Illinois ($1.2 million), and Georgia ($0.8
million), combined with other smaller decreases. The decrease in Florida
premiums is the result of a 15.7% rate decrease in 2007, a 5.6% decline in
in-force policies in Florida as of March 31, 2007 from March 31, 2006, and a
reduction in 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.


                                       19


      NET PREMIUMS WRITTEN decreased $11.6 million, or 13.4% for the three
months ending March 31, 2007 as compared to the same period in 2006. This
decrease is the result of the decrease in gross premiums written, combined with
a decrease in ceded premiums written of $2.3 million. The decrease in ceded
premiums written is the result a change in the ceded reinsurance agreement to
ceding on an earned basis from ceding on a written basis. The ceded reinsurance
premium rates and retention in our 2007 excess-of-loss reinsurance treaty were
relatively unchanged from 3.2% of direct premium and $2.0 million of losses,
respectively.

      GROSS PREMIUMS EARNED decreased $7.7 million, or 11.2% for the three
months ending March 31, 2007 as compared to the same period in 2006. This
decrease was the direct result of decreases in direct earned premiums, with the
largest decreases being in Florida ($7.2 million) and Indiana ($2.1 million),
offset by increases in Illinois ($0.9 million), Virginia ($0.7 million), and
Georgia ($0.6 million). All other states decreased by $0.6 million.

      NET PREMIUMS EARNED decreased $6.8 million, or 10.2% for the three months
ended March 31, 2007 as compared to the same period in 2006. This change is
primarily the result of the decrease in gross premiums earned. The change in
gross premiums earned was partially offset by a $0.9 million decrease in ceded
premiums earned, caused by decrease is the reinsurance premiums rates from 4.5%
of direct premiums on the 2005 treaties to 3.2% on the 2006 and 2007 treaties.
As the 2005 treaty was settled on a run-off basis, the rate on the 2005 treaty
continued to impact ceded premiums earned in 2006.

      The table below sets forth the calculation of net premiums earned and this
amount as a percentage of gross premiums earned:

                                         For the                For the
                                          Three      Percent     Three     Percent
                                          Months       of        Months       of
                                          Ended      Gross       Ended      Gross
                                         March 31,  Premiums    March 31,  Premiums
                                           2007      Earned       2006      Earned
                                       -----------  ---------  ----------  --------
                                                  (Dollars in thousands)
Gross premiums earned                  $ 61,187      100.0%     $ 68,866    100.0%
Excess reinsurance premiums              (1,945)      (3.2%)      (2,899)    (4.2%)
Quota share reinsurance premiums            (29)      (0.0%)           3      0.0%
                                       --------       ----      --------     ----
Net premiums earned                    $ 59,213       96.8%     $ 65,970     95.8%
                                       ========       ====      ========     ====

      NET INVESTMENT INCOME increased $0.8 million, or 20.3% for the three
months ended March 31, 2007 as compared to the same period in 2006. The increase
is primarily attributable to an increase in the average balance of the
investment portfolio. The average investment portfolio balance increased $76.8
million, or 21.9% from March 31, 2006 to March 31, 2007. The additional funds
available for investment were provided by $48.0 million of net initial public
offering proceeds, and cash provided by operating activities.

      LOSSES AND LOSS ADJUSTMENT EXPENSES decreased $2.5 million, or 6.8% for
the three months ended March 31, 2007 as compared to the same period in 2006.
Loss and loss adjustment expenses were 59.0% and 56.8% of net premiums earned in
the three months ended March 31, 2007, and 2006, respectively. Theses changes
are the result of a few factors. First, reflected in our losses and LAE in three
months ended March 31, 2007, is a $5.8 million redundancy, net of reinsurance,
for years prior to 2007. Excluding business assumed from state mandated pools,
this redundancy was attributable to prior year reserve decreases in Florida
($3.2 million), Wisconsin ($1.9 million), and less significant decreases in
several other states. The redundancy for the three months ended March 31, 2007,
was less than the redundancy of $8.4 million in the three months ending March
31, 2006. The net accident year loss ratio, excluding business assumed from
state mandated pools, was 65.2% for both the three months ended March 31, 2007
and 2006, respectively.

      POLICY ACQUISITION EXPENSES decreased $2.8 million, or 23.4% for the three
months ended March 31, 2007 as compared to the same period in 2006. Policy
acquisition expenses were 15.5% and 18.2% of net premiums earned in the three
months ended March 31, 2007 and 2006, respectively. This decrease is the result
of decreases in net commissions and assessments. The decrease in commissions is
due to a decrease in direct commissions of $2.1 million, offset by a decrease in
ceding commission received of $0.8 million. The decrease in direct commissions
resulted from a decrease in the commission payable accrual. The decrease in the
ceding commission received is the result of receiving no ceding commission on
the 2006 and 2007 excess-of-loss reinsurance treaties, compared to the 35%
commission received on the 2005 treaty, which was in run-off through 2006. The
decrease in assessments is primarily made up of decreases in the South Carolina


                                       20


Second Injury Fund assessment ($0.9 million), and a decrease in Florida
Insurance Guarantee Association assessment ($0.5 million). The South Carolina
Second Injury Fund assessment decreased as a result of notification being
received that the unpaid portion of the assessment on loss payments occurring in
2005 would not be billed. The decrease in the Florida Insurance Guarantee
Association assessment results from the 2007 rate used for the 2006 premium
assessment by the Florida Insurance Guarantee Association being reduced to 1.5%
from the original 2% accrued during 2006. The Florida Insurance Guarantee
Association did not assess the 2006 premiums in 2006; however, it reserved the
right to assess on 2006 premiums in 2007 if any solvency issues arose that
required additional cash flow for the Florida Insurance Guarantee Association.
As no assessment was made during the first quarter of 2007, and there have been
no new insolvencies that we believe would lead to an assessment, the accrual for
assessment of the 2006 premium was reduced to 1.5%.

      UNDERWRITING AND OTHER EXPENSES increased $2.9 million, or 37.5% for the
three months ended March 31, 2007 as compared to the same period in 2006.
Underwriting and other expenses were 18.1% and 11.8% of net premiums earned in
the three months ended March 31, 2007 and 2006, respectively. The increase in
underwriting and other expenses is attributable to increases in payroll related
expenses ($1.3 million), bad debt expense ($0.7 million), professional services
($0.4 million), and other less significant increases. The increase in payroll is
primarily the result of a 7.8% increase in the number of employees from March
31, 2006 to March 31, 2007, combined with an increase in average pay rates. Bad
debt expense increased due to increased consideration given to reserving for
balances less than 90 days old, combined with an increase in the premiums
receivable that have aged over 90 days. The increase in professional services is
principally due to increases in legal and accounting fees.

      DIVIDENDS TO POLICYHOLDERS decreased $0.4 million, or 15.8% for the three
months ended March 31, 2007 as compared to the same period in 2006. Dividends to
policyholders were 3.8% and 4.0% of net premiums earned in the three months
ended March 31, 2007 and 2006, respectively. This is due to decreases in direct
premiums earned in Florida, one of the states in which policyholders are
eligible for dividend plans. The percentage of direct premiums written in
Florida on a dividend plan increased slightly to 41.8% from 39.1% as of March
31, 2007 and 2006, respectively. The percentage of direct premiums written in
Wisconsin on a dividend plan remained relatively unchanged at 88.0% as of March
31, 2007 from 87.6% as of March 31, 2006. The Company wide direct premiums
written on a dividend plan was 26.9% at March 31, 2007 and 2006.

      INTEREST EXPENSE increased $0.1 million, or 13.8% for the three months
ended March 31, 2007 compared to the same period in 2006. The increase is
attributable to an interest rate increase of approximately 0.6% on our variable
rate debt. Additionally, during the three months ended March 31, 2007, interest
expense increased as the result of accruing approximately $60,000 of interest in
connection with an interest bearing payable.

      FEDERAL AND STATE INCOME TAXES decreased $1.3 million, or 38.1% for the
three months ended March 31, 2007 as compared to the same period in 2006.
Federal and state income taxes were 34.1% and 36.0% of pretax income in three
months ended March 31, 2007 and 2006, respectively. The primary cause of the
change is an increase in tax exempt interest received, which is the result of an
increase in the investment portfolio combined with an increased allocation of
the portfolio to tax-exempt municipal bonds. The average investment portfolio
balance increased $76.8 million, or 21.9% from March 31, 2006 to March 31, 2007.
Municipal bonds increased to 17.8% of total invested assets at March 31, 2007,
from 12.2% at March 31, 2006.

      NET INCOME decreased $2.0 million, or 32.7% for the three months ended
March 31, 2007 compared to the same period in 2006. A decrease in net premiums
earned of $6.8 million combined with an increase in underwriting and other
expenses of $2.9 million, offset by an increase in investment income of $0.8
million and decreases in losses and LAE, policy acquisition expenses, and
federal and state income taxes of $2.5 million, $2.8 million and $1.3 million,
respectively, comprised the change.

      RETURN ON EQUITY Our annualized return on equity for the three months
ended March 31, 2007 and 2006 is 11.3% and 24.3%, respectively.

LIQUIDITY AND CAPITAL RESOURCES

      We are a holding company and our insurance subsidiaries are the primary
source of funds for our operations. We have historically received dividend
payments solely from Pinnacle Administrative and Pinnacle Benefits. These
dividend payments are funded by fee payments under service agreements between
Pinnacle Administrative and Pinnacle Benefits and our insurance subsidiaries.
Fee payments under the service agreements are subject to review by the Florida


                                       21


Office of Insurance Regulation (the "Florida OIR"), as are dividend payments by
our insurance subsidiaries. There are no restrictions on the payment of
dividends by our non-insurance subsidiaries, Pinnacle Administrative, Pinnacle
Benefits and AmSERV, Inc., other than customary state corporation laws regarding
solvency. The cash requirements of these non-insurance subsidiaries are
primarily for the payment of salaries, employee benefits and other operating
expenses.

      LIQUIDITY

      The primary source of cash flow for Pinnacle Benefits and Pinnacle
Administrative is service fees paid by our insurance subsidiaries. Our insurance
subsidiaries' primary cash sources are insurance premiums, investment income and
the proceeds from the sale, redemption or maturity of invested assets. The cash
requirements of the insurance subsidiaries are primarily for the payment of
losses and LAE, guaranty fund and second-injury fund assessments, commissions,
reinsurance premiums, premium taxes, services fees, interest on surplus notes
and purchase of investment securities. We maintain cash reserves to meet our
obligations that comprise current outstanding loss and LAE, reinsurance premiums
and administrative expenses. Due to the uncertainty regarding the timing and
amount of settlement of unpaid losses, the liquidity requirements of the
insurance subsidiaries vary. The insurance subsidiaries' investment guidelines
and investment portfolio take into account historical payout patterns. If loss
payments were to accelerate beyond our ability to fund them from current
operating cash flows, we would need to liquidate a portion of our investment
portfolio and/or arrange for financing. For example, several catastrophic
injuries occurring in a relatively short period of time could cause such a
liquidity strain. Our insurance subsidiaries have historically purchased excess
reinsurance to mitigate the effects of large losses and to help stabilize
liquidity. These reinsurance agreements require initial outlays of reinsurance
premiums, based on premiums written, which is in advance of our receipt of cash
premiums, and the reinsurers reimburse us after losses and LAE are paid by us.
These reinsurance agreements exclude coverage for losses arising out of
terrorism and nuclear, biological and chemical attacks.

      CAPITAL RESOURCES

      We have historically met our cash requirements and financed our growth
principally from operations, the proceeds of borrowings, investment income and
more recently, the initial public offering completed February 10, 2006 that
raised $48.0 million. Cash flow is summarized in the table below.

                                                     For the Three Months
                                                        Ended March 31,
                                                        2007        2006
                                                     ---------   ----------

Cash and cash equivalents provided by (used in):
Operating activities                                 $  7,281     $ 17,894
Investing activities                                  (11,424)     (50,159)
Financing activities                                     (427)      47,525
                                                     --------     --------
Change in cash and cash equivalents                  $ (4,570)    $ 15,260
                                                     ========     ========

      REINSURANCE

      We have historically operated with a limited amount of capital and, as a
result, have made extensive use of the reinsurance market to maintain our net
exposures within our capital resources. We have ceded premiums and losses to
unaffiliated insurance companies under quota share, excess of loss and
catastrophe reinsurance agreements. We evaluate the financial condition of our
reinsurers and monitor various credit risks to minimize our exposure to losses
from reinsurer insolvencies. However, we remain obligated for amounts ceded
irrespective of whether the reinsurers meet their obligations. We ceded a high
percentage of our premiums and the associated losses prior to July 1, 2004. A
failure of one of our reinsurers to pay could have a significant adverse effect
on our capital and our financial condition and results of operations. At March
31, 2007 and December 31, 2006, reinsurance recoverables on paid and unpaid
losses and LAE were $75.9 million and $75.4 million, respectively. Our largest
recoverable from a single reinsurer as of March 31, 2007 was $30.9 million owed
to us by Continental Casualty Company, a subsidiary of CNA Financial
Corporation, representing 21.4% of our total stockholders' equity as of that
date. Of the $30.9 million, $1.7 million was the current recoverable on paid
losses. The balance of $29.2 million is recoverable from Continental Casualty
Company on losses that may be paid by us in the future and therefore is not
currently due. The unpaid losses will become current as we pay the related
claimants.


                                       22


      As a result of raising $32.0 million from surplus notes issued by one of
our insurance subsidiaries, we eliminated the need for quota share reinsurance
on new and renewal business since July 1, 2004. In addition, we increased our
retention in our excess of loss reinsurance program to $2.0 million in 2005.

      INVESTMENTS

      Our insurance subsidiaries employ an investment strategy that emphasizes
asset quality to minimize the credit risk of our investment portfolio. As
economic conditions change, our insurance subsidiaries' investment committees
recommend strategy changes and adjustments to our investment portfolio. We have
maintained a high portion of our portfolio in short-term investments recently to
mitigate the risk of falling prices for fixed maturity securities if rates
should rise. Changes in interest rates impact our investment income and cause
fluctuations in the carrying values of the majority of our investments (these
changes are reflected as changes in stockholders' equity).

      We may sell securities due to changes in the investment environment, our
expectation that fair value may deteriorate further, our desire to reduce our
exposure to an issuer or an industry and changes in the credit quality of the
security. In addition, depending on changes in prevailing interest rates, our
investment strategy may shift toward long-term securities, and we may adjust
that portion of our investment portfolio that is held-to-maturity rather than
available-for-sale. Except for recognizing other-than-temporary impairments, our
held-to-maturity portfolio is carried at amortized cost because we have the
ability and intent to hold those securities to maturity. As of March 31, 2007,
79.9% of our entire portfolio was classified as available-for-sale and as of
December 31, 2006, approximately 81.9% of our entire portfolio was classified as
available-for-sale.

      The amount and types of investments that may be made by our insurance
subsidiaries are regulated under the Florida Insurance Code and the rules and
regulations promulgated by the Florida OIR. As of March 31, 2007 and December
31, 2006, our insurance subsidiaries' combined portfolio consisted entirely of
investment grade fixed-income securities. As of March 31, 2007, our investments
(excluding cash and cash equivalents) had an average duration of 3.8 years, and
the bond portfolio was heavily weighted toward short- to intermediate-term
securities.

      Our insurance subsidiaries employ Regions Bank to act as their independent
investment advisor. Regions Bank follows the insurance subsidiaries' written
investment guidelines based upon strategies approved by our insurance
subsidiaries' board of directors. Our insurance subsidiaries have no investments
in common stock (other than AmCOMP Preferred's investment in AmCOMP Assurance
and certain institutional money market accounts), preferred stock, real estate,
asset-backed securities (other than mortgage-backed) or derivative securities.
Regions Bank has discretion to enter into investment purchase transactions
within our insurance subsidiaries' investment guidelines. In the case of sales
of securities prior to maturity or the acquisition of securities that differ
from the types of securities already present in the portfolio, Regions Bank is
required to obtain approval from our insurance subsidiaries' executive officers,
who report regularly to our insurance subsidiaries' investment committees, prior
to executing the transactions. Regions Bank's fee is based on the amount of
assets in the portfolio and is not dependent upon investment results or
portfolio turnover.


                                       23


      The table below contains information concerning the composition of our
investment portfolio at March 31, 2007:

                                                               Percentage
                                     Carrying      Yield to    of Carrying
                                    Amount (1)     Maturity    Amount (1)
                                    ----------     --------    ----------
                                            (Dollars in Thousands)

Bonds:(2)
U.S. government                     $ 34,261         4.8%          7.7%
Agencies                              46,523         5.4          10.5
Municipalities(3)                     78,865         5.2          17.8
Corporate "A" rated and above        161,080         5.2          36.3
Corporate "BBB"/"Baa" rated           18,011         5.5           4.1
Mortgage-backed securities            94,381         5.5          21.2
                                    --------         ---         -----
   Total Bonds                      $433,121         5.3%         97.6%
Cash and cash equivalents             10,689         5.9           2.4
                                    --------         ---         -----
   Total                            $443,810         5.4%        100.0%
                                    ========         ===         =====

(1)   Carrying amount is amortized cost for bonds held-to-maturity. Carrying
      amount is fair value for bonds available-for-sale and common stock. As of
      March 31, 2007, $346.0 million of our bonds was classified as
      available-for-sale and $87.1 million were classified as held-to-maturity.

(2)   Standard & Poor's highest rating is "AAA" and signifies that a company's
      capacity to meet its financial commitment on the obligation is extremely
      strong, followed by "AA" (very strong), "A" (strong) and "BBB" (adequate).
      Ratings may be modified by the addition of a plus or minus sign to show
      relative standing within the major rating categories. Moody's Investors
      Service, Inc.'s highest rating is "Aaa" (best quality), followed by "Aa"
      (high quality), "A" (strong) and "Baa" (adequate). For investments with
      split ratings, the higher rating has been used.

(3)   The municipal bonds' yield to maturity have been shown on a tax-equivalent
      basis. The tax impact was 1.4% on the yield to maturity for municipal
      bonds and 0.3% on the yield to maturity for total cash and investments.

      The table below sets forth the maturity profile of our bond portfolio at
amortized cost and fair values as of March 31, 2007:

                                 Available-for-sale     Held-to-maturity
                                 -------------------   -------------------
                                 Amortized   Fair      Amortized   Fair
                                   Cost      Value        Cost     Value
                                 -------------------   -------------------
Years to maturity (1) :
  One or less                    $ 55,633   $ 55,329   $   --     $   --
  After one through five          163,278    160,961       --         --
  After five through ten          107,652    106,676       --         --
  After ten                        14,953     15,774       --         --
  Mortgage-backed securities        7,415      7,265     87,116     87,032
                                 --------   --------   --------   --------
Total                            $348,931   $346,005   $ 87,116   $ 87,032
                                 ========   ========   ========   ========

(1)   Based on the stated maturities of the securities. Actual maturities may
      differ as obligors may have the right to call or prepay obligations.


                                       24


      We continuously monitor our 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 a decline is
considered to be other-than-temporary include length of time and the extent to
which fair value has been below book value, the financial condition and
near-term prospects of the issuer, and our 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, 2007, the aggregate fair value and gross
unrealized loss by length of time the security has continuously been in an
unrealized loss position:

                                                 Unrealized    Number of
                                     Fair Value    Losses       Issues
                                     ----------  -----------  ----------
Less than 12 months:

  U.S. Treasury securities           $     85     $     --          1
  Agency                                8,533          (13)         3
  Municipalities                       14,575         (131)         6
  Corporate debt securities            15,872          (78)         6
  Mortgage-backed securities           17,227          (34)         7
                                     --------     --------        ---
Total                                $ 56,292     $   (256)        23
                                     ========     ========        ===

Greater than 12 months:
  U.S. Treasury securities           $ 28,283     $   (541)        26
  Agency                               21,770         (319)        15
  Municipalities                       37,064         (665)        27
  Corporate debt securities           130,570       (2,333)        94
  Mortgage-backed securities           26,983         (547)        20
                                     --------     --------        ---
Total                                $244,670     $ (4,405)       182
                                     ========     ========        ===

Total fixed maturity
securities:
  U.S. Treasury securities           $ 28,368     $   (541)        27
  Agency                               30,303         (332)        18
  Municipalities                       51,639         (796)        33
  Corporate debt securities           146,442       (2,411)       100
  Mortgage-backed securities           44,210         (581)        27
                                     --------     --------        ---
Total fixed maturity securities      $300,962     $ (4,661)       205
                                     ========     ========        ===

      At March 31, 2007, there were no investments in fixed maturity securities
with individual material unrealized losses. All the unrealized losses on the
fixed maturity securities are interest rate related.

      We believe our future cash flow generated by operations and our cash and
investments will be sufficient to fund continuing operations, service our
outstanding obligations and provide for required capital expenditures for at
least the next 12 months.

      LITIGATION

      Prior to 2001, no material amounts due from reinsurers were written off as
uncollectible, because most of our reinsurance was recoverable from large,
well-capitalized reinsurance companies. On October 3, 2001, the Commonwealth
Court of Pennsylvania approved an Order of Liquidation for Reliance Insurance
Company in response to a petition from the Pennsylvania Department of Insurance.
In 2001, we wrote off all balances due from Reliance. The write off resulted in
an increase in underwriting and other expenses of approximately $8.3 million. We
are continuing to pursue the collection of amounts recoverable from Reliance in
its liquidation proceeding.

      AmCOMP and both of our insurance subsidiaries are defendants in an action
commenced in Florida by the Insurance Commissioner of Pennsylvania, acting in
its capacity as liquidator of Reliance Insurance Company. The complaints in
those actions allege that preferential payments were made to us by Reliance
under the formerly existing reinsurance agreement with the insurance
subsidiaries and seek damages in the amount of approximately $2.3 million. We
have answered the complaint and we expect the matter to be scheduled for trial.
We believe that we have multiple factual and legal defenses to the claim made in


                                       25


this action, including a right of recoupment related to the statement of claim
filed by us in the Reliance liquidation proceeding for the recovery of
approximately $9.9 million under the reinsurance agreement. Although the
ultimate results of these legal actions and related claims cannot presently be
determined, the Company had accrued a $1.2 million liability as of March 31,
2007 and December 31, 2006, respectively, related to those matters.

      OTHER

      In August 1998, in an effort to expand its customer base, AmCOMP Assurance
began selling insurance policies for a third party insurance company. This
arrangement included insurance policies with effective dates of August 1, 1998
through November 1, 2000. Pinnacle Administrative performed marketing,
underwriting, loss prevention and other administrative functions, and Pinnacle
Benefits provided claim adjusting services, including the payment of claims,
related to these policies. This arrangement also provided for a reinsurance
agreement between AmCOMP Assurance as the reinsurer and the third party
insurance company as the reinsured. At March 31, 2007, the amount to be
recovered from this insurance company on these claims and LAE expenses paid by
us that is included in other assets on the balance sheet was $1.7 million.

OFF-BALANCE SHEET ARRANGEMENTS

      We have no off-balance sheet arrangements.

EFFECTS OF INFLATION

      The effects of inflation could impact our financial statements and results
of operations. Our estimates for losses and loss expenses include assumptions
about future payments for closure of claims and claims handling expenses, such
as medical treatments and litigation costs. To the extent inflation causes these
costs to increase above reserves established, we will be required to increase
reserves for losses and loss expenses with a corresponding reduction in our
earnings in the period in which the deficiency is identified. We consider
inflation in the reserving process by reviewing cost trends and our historical
reserving results. Additionally, an actuarial estimate of increased costs is
considered in setting adequate rates, especially as it relates to medical and
hospital rates where historical inflation rates have exceeded general inflation
rates. We are able to mitigate the effects of inflation on medical costs due to
the fee schedules imposed by most of the states where we do business and the
utilization of preferred provider networks. However, providers are not obligated
to invoice us per the fee schedule or the negotiated rate. We review medical
bills for appropriate coding and pay the lower of the negotiated or fee schedule
rate. Disputes are resolved by negotiation.

      Fluctuations in rates of inflation also influence interest rates, which in
turn impact the market value of our investment portfolio and yields on new
investments. Operating expenses, including payrolls, are impacted to a certain
degree by the inflation rate.

RECENT ACCOUNTING PRONOUNCEMENTS

      In July 2006, the Financial Accounting Standards Board ("FASB") issued an
interpretation of FASB Statement No. 109, ACCOUNTING FOR UNCERTAINTY IN INCOME
TAXES ("FIN 48"). This interpretation clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements in accordance
with FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES. FIN 48 prescribes a
recognition threshold and measurement attributes for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The Interpretation establishes a "more likely than
not" recognition threshold for tax benefits to be recognized in the financial
statements. The "more likely than not" determination is to be based solely on
the technical merits of the position. This interpretation was adopted by the
Company on January 1, 2007. As of the adoption date and as of March 31, 2007,
the Company had no material unrecognized tax benefits and no adjustments to
liabilities or operations were required. We recognize income tax related
interest in interest expense and penalties in income tax expense. Income tax
related interest recognized in the three months ended March 31, 2007 was
approximately $0.1 million.

      In September 2006, the FASB issued SFAS No. 157, FAIR VALUE Measurements
("SFAS 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands


                                       26


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. SFAS No. 157 is effective for the Company beginning
January 1, 2008. The Company is currently evaluating the impact of this
standard.

      Statement of Position ("SOP") 05-1, ACCOUNTING BY INSURANCE ENTERPRISES
FOR DEFERRED ACQUISITION COSTS IN CONNECTION WITH MODIFICATIONS OR EXCHANGES OF
INSURANCE CONTRACTS, issued September 2005, became effective January 1, 2007.
SOP 05-1 provides guidance on accounting for deferred acquisition costs on
internal replacements of insurance and investment contracts other than those
specifically described in SFAS No. 97, ACCOUNTING AND REPORTING BY INSURANCE
ENTERPRISES FOR CERTAIN LONG-DURATION CONTRACTS AND FOR REALIZED GAINS AND
LOSSES FROM THE SALE OF INVESTMENTS. The SOP defines an internal replacement as
a modification in product benefits, features, rights, or coverage that occurs by
the exchange of a contract for a new contract, or by amendment, endorsement, or
rider to a contract, or by the election of a feature or coverage within a
contract. The adoption of SOP 05-01 did not have a material impact upon
adoption.

      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. SFAS No. 159 is effective as of January
1, 2008. The Company is currently evaluating the impact of this standard.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

      This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 (the "Exchange Act") relating to our
operations and our results of operations that are based on our current
expectations, estimates and projections. Words such as "expects," "intends,"
"plans," "projects," "believes," "estimates" and similar expressions are used to
identify these forward-looking statements. These statements are not guarantees
of future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Forward-looking statements are based upon assumptions as
to future events that may not prove to be accurate. Actual outcomes and results
may differ materially from what is expressed or forecast in these
forward-looking statements. The reasons for these differences include changes in
general economic and political conditions, including fluctuations in exchange
rates, and the factors discussed under the section entitled "Business--Risks
Related to Our Business and Industry" in our Annual Report on Form 10-K filed
with the Securities and Exchange Commission.

AVAILABLE INFORMATION

      Our website address is WWW.AMCOMP.COM. We make available free of charge on
the Investor Relations section of our website (IR.AMCOMP.COM) our Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
all amendments to those reports as soon as reasonably practicable after such
material is electronically filed or furnished with the Securities and Exchange
Commission (the "SEC") pursuant to Section 13(a) or 15(d) of the Exchange Act.
We also make available through our website other reports filed with or furnished
to the SEC under the Exchange Act, including our proxy statements and reports
filed by officers and directors under Section 16(a) of that Act, as well as our
Code of Business Conduct and Ethics. We do not intend for information contained
in our website to be part of the Quarterly Report on Form 10-Q.

      You also may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, DC, 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site (WWW.SEC.GOV) that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.


                                       27


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

      We believe we are principally exposed to two types of market risk:
interest rate risk and credit risk.

INTEREST RATE RISK

      INVESTMENTS. Our investment portfolio consists primarily of debt
securities, of which 79.9% were classified as available-for-sale as of March 31,
2007. The primary market risk exposure to our debt securities portfolio is
interest rate risk, which we strive to limit by managing duration. As of March
31, 2007, our investments (excluding cash and cash equivalents) had an average
duration of 3.8 years. Interest rate risk includes the risk from movements in
the underlying market rate and in the credit spread of the respective sectors of
the debt securities held in our portfolio. The fair value of our fixed maturity
portfolio is directly impacted by changes in market interest rates. As interest
rates rise, the market value of our fixed-income portfolio falls, and the
converse is also true. We expect to manage interest rate risk by instructing our
investment manager to select investments consistent with our investment strategy
based on characteristics such as duration, yield, credit risk and liquidity.

      CREDIT FACILITY AND THIRD PARTY SURPLUS NOTES. Our exposure to market risk
for changes in interest rates also relates to the interest expense of variable
rate debt under our bank credit facility and our insurance subsidiaries' surplus
notes issued to unaffiliated third parties. The interest rates we pay on these
obligations increase or decrease with changes in LIBOR.

      SENSITIVITY ANALYSIS Sensitivity analysis is a measurement of potential
loss in future earnings, fair values or cash flows of market sensitive
instruments resulting from one or more selected hypothetical changes in interest
rates and other market rates or prices over a selected time. In our sensitivity
analysis model, we select a hypothetical change in market rates that reflects
what we believe are reasonably possible near-term changes in those rates. The
term "near-term" means a period of time going forward up to one year from the
date of the consolidated financial statements. Actual results may differ from
the hypothetical change in market rates assumed in this disclosure, especially
since this sensitivity analysis does not reflect the results of any action that
we may take to mitigate such hypothetical losses in fair value.

      In this sensitivity analysis model, we use fair values to measure our
potential loss. The sensitivity analysis model includes fixed maturities and
cash equivalents.

      For invested assets, we use modified duration modeling to calculate
changes in fair values. Durations on invested assets are adjusted for call, put,
and interest rate reset features. Durations on tax-exempt securities are
adjusted for the fact that the yield on such securities is less sensitive to
changes in interest rates compared to Treasury securities. Invested asset
portfolio durations are calculated on a market value weighted basis, including
accrued investment income, using holdings as of March 31, 2007.

      The following table summarizes the estimated change in fair value on our
fixed maturity portfolio including cash equivalents based on specific changes in
interest rates:

                                 Estimated Increase        Estimated Percentage
                                 (Decrease) in Fair              Increase
Change in Interest Rates                Value           (Decrease) in Fair Value
------------------------         ------------------     -------------------------
March 31, 2007:                            (Dollars in Thousands)

300 basis point rise                 ($42,832)                  (10.1%)
200 basis point rise                  (28,416)                   (6.7%)
100 basis point rise                  (13,842)                   (3.3%)
50 basis point decline                  6,203                     1.5%
100 basis point decline                11,970                     2.8%


                                       28


      The sensitivity analysis model used by us produces a predicted pre-tax
loss in fair value of market-sensitive instruments of $13.8 million or 3.3%
based on a 100 basis point increase in interest rates as of March 31, 2007. This
loss amount only reflects the impact of an interest rate increase on the fair
value of our fixed maturities and cash equivalents, which constituted
approximately 97.6% of our total invested assets as of March 31, 2007.

      Interest expense would also be affected by a hypothetical change in
interest rates. As of March 31, 2007 we had $37.8 million in variable rate debt
obligations. Assuming this amount remains constant, a hypothetical 100 basis
point increase in interest rates would increase annual interest expense by
approximately $0.4 million, a 200 basis point increase would increase interest
expense by approximately $0.8 million and a 300 basis point increase would
increase interest expense by approximately $1.1 million.

      With respect to investment income, the most significant assessment of the
effects of hypothetical changes in interest rates on investment income would be
based on Statement of Financial Accounting Standards No. 91, ACCOUNTING FOR
NONREFUNDABLE FEES AND COSTS ASSOCIATED WITH ORIGINATING OR ACQUIRING LOANS AND
INITIAL DIRECT COSTS OF LEASES ("FAS 91"), issued by the FASB, which requires
amortization adjustments for mortgage backed securities. The rates at which the
mortgages underlying mortgage backed securities are prepaid, and therefore the
average life of mortgage backed securities, can vary depending on changes in
interest rates (for example, mortgages are prepaid faster and the average life
of mortgage backed securities falls when interest rates decline). The
adjustments for changes in amortization, which are based on revised average life
assumptions, would have an impact on investment income if a significant portion
of our mortgage backed securities holdings had been purchased at significant
discounts or premiums to par value. As of March 31, 2007, the par value of our
mortgage backed securities holdings was $94.3 million. Amortized cost divided by
par value equates to an average price of 100.3% of par. Since a majority of our
mortgage backed securities were purchased at a premium or discount that is
significant as a percentage of par, a FAS 91 adjustment could have a significant
effect on investment income.

      However, given the current interest rate environment, which has exhibited
higher rates resulting in lower values for fixed maturity securities over the
last few years, the possibility of additional significant declines such that
prepayment speeds are significantly impacted is unlikely. The mortgage backed
securities portion of the portfolio totaled approximately 21.8% of total
investments as of March 31, 2007. Of this total, 100% was in agency pass through
securities.

CREDIT RISK

      INVESTMENTS. Our debt securities portfolio is also exposed to credit risk,
which we attempt to manage through issuer and industry diversification. We
regularly monitor our overall investment results and review compliance with our
investment objectives and guidelines. Our investment guidelines include
limitations on the minimum rating of debt securities in our investment
portfolio, as well as restrictions on investments in debt securities of a single
issuer. As of March 31, 2007 and December 31, 2006, all of the debt securities
in our portfolio were rated investment grade by the NAIC, Standard & Poor's,
Moody's and Fitch.

      REINSURANCE. We are subject to credit risk with respect to our reinsurers.
Although our reinsurers are liable to us to the extent we cede risk to them, we
are ultimately liable to our policyholders on all risks we have reinsured. As a
result, reinsurance agreements do not limit our ultimate obligations to pay
claims to policyholders and we may not recover claims made to our reinsurers


                                       29


ITEM 4.  CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

      AmCOMP's management, with the participation of AmCOMP's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of AmCOMP's
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this report. Based on
such evaluation, AmCOMP's Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of such period, AmCOMP's disclosure controls
and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by AmCOMP in
the reports that it files or submits under the Exchange Act and are effective in
ensuring that information required to be disclosed by AmCOMP in the reports that
it files or submits under the Exchange Act is accumulated and communicated to
AmCOMP's management, including AmCOMP's Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.

      There have not been any changes in AmCOMP's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the quarter ended March 31, 2007 to which this
report relates that have materially affected, or are reasonably likely to
materially affect, AmCOMP's internal control over financial reporting.


                                       30


                           PART II. OTHER INFORMATION

ITEM 6.  EXHIBITS.

                                  EXHIBIT INDEX

Number     Description of Exhibit

 *31.1     Certification of Chief Executive Officer pursuant to Section 302 of
           the Sarbanes-Oxley Act of 2002.

 *31.2     Certification of Chief Financial Officer pursuant to Section 302 of
           the Sarbanes-Oxley Act of 2002.

 *32.1     Certification of Chief Executive Officer pursuant to 18 U.S.C.
           Section 1350, as adopted pursuant to Section 906 of the
           Sarbanes-Oxley Act of 2002.

 *32.2     Certification of Chief Financial Officer pursuant to 18 U.S.C.
           Section 1350, as adopted pursuant to Section 906 of the
           Sarbanes-Oxley Act of 2002.

*Filed herewith.

                                   SIGNATURES

      Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized, in the
City of North Palm Beach, State of Florida on the day of May 10, 2007.

AMCOMP INCORPORATED
(Registrant)


                                  By: /s/ Fred R. Lowe
                                      ------------------------------------------
                                      Fred R. Lowe
                                      President and Chief Executive Officer


                                  By: /s/ Kumar Gursahaney
                                      ------------------------------------------
                                      Kumar Gursahaney
                                      Senior Vice President and Chief Financial
                                      Officer and Treasurer (principal financial
                                      accounting officer)


Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki