Our U.S. subsidiary operates in jurisdictions where they are subject to taxation. Current and deferred income taxes are charged or credited to net income based upon enacted tax laws and rates applicable in the relevant jurisdiction in the period in which the tax becomes accruable or realizable. Deferred income taxes are provided for all temporary differences between the bases of assets and liabilities used in the financial statements and those used in the various jurisdictional tax returns. When our assessment indicates that it is more likely than not that all or some portion of deferred income tax assets will not be realized, a valuation allowance is recorded against the deferred tax assets.
Our net premiums earned were $11,348,596 for the year ended December 31, 2019 compared to $10,132,515 for the year ended December 31, 2018, an increase of $1,216,081 or 12%. The net premiums earned during 2019 and 2018 were attributable to net premium cessions from C&F under the Reinsurance Agreement. The increase in net premiums earned under the Reinsurance Agreement resulted from increased cessions from C&F in 2019, arising from a higher volume of underwriting activity under the Agency Agreement. The higher volume of underwriting activity was due to the continued marketing of the program by Protexure resulted in increased penetration in targeted markets.
We recorded net investment income of $478,111 for the year ended December 31, 2019 compared to $384,409 for the year ended December 31, 2018, an increase of $93,702 or 24.4%. The increase in net investment income was attributable to higher yielding fixed income securities held in the Company’s investment portfolio during 2019 compared to the same period in 2018 and to certain higher yielding equity securities held in our investment portfolio during 2019 compared to the same period in 2018. Annualized investment yield, calculated as total interest and dividends divided by the net average amount of total investments and cash and cash equivalents, was 1.3% in 2019, a marginal increase from the 1.1% yield earned in 2018.
Unrealized gains on our fixed income investments were $103,630 at December 31, 2019 compared to unrealized losses of $218,348 at December 31, 2018. As a result of our adoption of ASU-2016-01 on January 1, 2018, the unrealized gain or loss position of our equity investments subsequent to January 1, 2018 are no longer recognized within accumulated other comprehensive income on our consolidated balance sheet. We consider our entire fixed income investment portfolio to be available for sale and accordingly all fixed income investments are reported at fair value, with changes in net unrealized gains and losses reflected as an adjustment to accumulated other comprehensive income. Given the nature of our investments in fixed maturities and the average duration of our fixed maturity securities, the return of our fixed maturities investments will be impacted by changes in interest rates. As a result to the current declining rate environment, our fixed income securities have experienced realized gains prior to maturity. Declines in the fair value of fixed income investments below cost are evaluated for other than temporary impairment losses. The evaluation for other than temporary impairment losses is a quantitative and qualitative process which is subject to risks and uncertainties in the determination of whether declines in the fair value of fixed income investments are other than temporary. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition or near term recovery prospects, and the effects of changes in interest rates. Our accounting policy requires that a decline in the fair value of a fixed income security below its cost basis be assessed to determine if the decline is other than temporary. If so, the fixed income security is deemed to be impaired, and a charge is recorded in net realized losses equal to the difference between the fair value and the cost basis of the security. The fair value of the impaired fixed income investment becomes its new cost basis.
Our losses and loss adjustment expenses increased by 28.8% to $8,028,735 in 2019 from $6,235,474 in 2018. The increase in the 2019 amount was mainly attributable to the increase in current year losses and loss
We recorded policy acquisition costs of $4,199,239 for the year ended December 31, 2019 compared to policy acquisition costs of $3,748,958 for the year ended December 31, 2018. Policy acquisition costs, which are primarily ceding commissions paid to the ceding insurer, are established as a percentage of premiums written. Therefore, any increase or decrease in premiums written will result in a similar increase or decrease in policy acquisition costs. The policy acquisition costs recorded for the years ended December 31, 2019 and 2018 were 37% of the premiums earned under the Reinsurance Agreement of $11,348,596 and $10,132,515, respectively.
Our equity securities are managed by two external large cap value advisors. Our investment approach is to focus on increasing the fair market value of our equity securities by investing in companies that may or may not be paying a dividend but whose market values may increase over time. Some of the key factors we consider in a prospective company to invest in include the discount to value and the quality of the management team.
There have been no material changes to any of our valuation techniques from what was used as of December 31, 2018. Since the fair value of a financial instrument is an estimate of what a willing buyer would pay for our asset if we sold it, we will not know the ultimate value of our financial instruments until they are sold. We believe the valuation techniques utilized provide us with the best estimate of the price that would be received to sell our assets or transfer our liabilities in an orderly transaction between participants at the measurement date.
The current market conditions present additional risks and uncertainties for our business. In particular, the recent severe deterioration in the equity markets could lead to additional investment losses. Depending on market conditions going forward, particularly if current market conditions do not improve in the near future, we could incur substantial additional realized and unrealized losses in future periods, which could have an adverse impact on our results of operations and financial condition. The current market volatility may also make it more difficult to value certain of our securities if trading becomes less frequent. As such, valuations may include assumptions or estimates that may have significant period-to-period changes that could have a material adverse effect on our results of operations or financial condition.
As of December 31, 2019, our total investments were $31,033,616, an increase of $3,000,310 or 10.7%, from $28,033,306 at December 31, 2018. This increase was primarily due to the increase in the fair value of certain equity securities as a result of favorable market conditions and to the purchase of additional equity securities and fixed income securities with net premiums received under the Reinsurance Agreement. The cash and cash equivalents balance increased from $5,498,914 at December 31, 2018 to $6,589,810 at December 31, 2019, an increase of $1,090,896 or 19.8%. The amount of cash and cash equivalents varies depending on the maturities of fixed term investments and on the level of funds invested in money market funds. The restricted cash and cash equivalents balance increased from $472,132 at December 31, 2018 to $1,169,805 at December 31, 2019, an increase of $697,673 or 147.8%. This increase was due to the timing of sales and maturities of investments held as restricted cash at December 31, 2019 that have not been reinvested. The ratio of cash, total investments and other invested assets to total liabilities at December 31, 2019 was 1.22:1, compared to a ratio of 1.30:1 at December 31, 2018. The decrease in the ratio was primarily attributable to an increase in unpaid losses and loss adjustment expenses, unearned premium and the reinsurance payable balance assumed under the Reinsurance Agreement.
We did not intend to sell any fixed maturity investments classified as available-for-sale that were in an unrealized loss position at December 31, 2019. In assessing whether it is more likely than not that we will be required to sell a fixed maturity investment before its anticipated recovery, we consider various factors including our future cash flow requirements, legal and regulatory requirements, the level of its cash, cash equivalents, short term investments and fixed maturity investments available for sale in an unrealized gain position, and other relevant factors. For the year ended December 31, 2019, we did not recognize any other-than-temporary impairments due to sales.
If we conclude a fixed income security is other-than-temporarily impaired, we write down the amortized cost of the security to fair value, with a charge to net realized investment gains (losses) in the Consolidated Statement of Operations. Gross unrealized losses on the investment portfolio as of December 31, 2019 and December 31, 2018, relating to 8 and 35 fixed maturity securities, amounted to $9,495 and $226,369, respectively. We have the ability and intent to hold these securities either to maturity or until the fair value recovers above the adjusted cost. The unrealized losses on these available for sale fixed maturity securities were not as a result of credit, collateral or structural issues. During the year ended 2019, no other-than-temporary impairment charges were recorded.
The assumed reinsurance balances receivable represents the current assumed premiums receivable less commissions payable to C&F. As of December 31, 2019, the balance was $5,695,847 compared to $2,651,863 as of December 31, 2018. This balance fluctuates due to the timing of the net premium received from C&F under the Reinsurance Agreement.
The assumed reinsurance payable represents current reinsurance losses payable to the fronting carriers. As of December 31, 2019, the balance was $6,756,177 compared to $2,171,767 as of December 31, 2018. This balance fluctuates due to the timing of reported losses and to the timing of loss payments to C&F under the Reinsurance Agreement.
Prepaid expenses and other assets were $2,019,622 at December 31, 2019, an increase of $37,709 from December 31, 2018. The balance primarily related to (1) prepaid directors’ and officers’ liability insurance costs, (2) the prepaid directors’ retainer, (3) prepaid professional fees and (4) premiums due to Protexure under the Agency Agreement. This balance fluctuates due to the timing of the prepayments and to the timing of the premium receipts by Protexure.
Accrued expenses and other liabilities primarily represent premiums payable by Protexure to C&F under the Agency Agreement and expenses accrued relating largely to professional fees. The balance decreased from $5,934,408 at December 31, 2018 to $5,873,130 at December 31, 2019, a decrease of $67,278 or 1%. This balance fluctuates due to the timing of the premium payments to C&F and payments of professional fees.
Total dividends paid were $295,691 and $313,147 in 2019 and 2018, respectively, net of the recorded write backs. Continuation of dividend payments is subject to the Board of Directors’ continuing evaluation of our level of surplus compared to our capacity to accept more business. One of our objectives is to retain sufficient surplus to enable the continued implementation of our business plan.
The BMA has authorized Investco to purchase our common shares from shareholders who have died or retired from the practice of public accounting and on a negotiated basis. Through March 1, 2020, Investco had purchased 224,538 common shares from shareholders who had died or retired for a total purchase price of $6,379,286. From time to time, Investco has also purchased shares in privately negotiated transactions. Through that date, Investco had purchased an additional 75,069 common shares in such privately negotiated transactions for a total purchase price of $1,109,025.
We have audited the accompanying consolidated balance sheets of AmerInst Insurance Group, Ltd. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
On September 25, 2009, Protexure Insurance Agency, Inc. (formerly AmerInst Professional Services, Limited), an indirect wholly-owned subsidiary (“Protexure”), entered into an agency agreement (the “Agency Agreement”) with The North River Insurance Company, United States Fire Insurance Company, Crum & Forster Indemnity Company, Crum and Forster Insurance Company, and Crum & Forster Specialty Insurance Company (collectively, “C&F”) pursuant to which C&F appointed Protexure as an agent for the purposes of soliciting, underwriting, quoting, binding, issuing, cancelling, non-renewing and endorsing accountants’ professional liability and lawyers’ professional liability insurance coverage in all 50 states of the United States and the District of Columbia. The initial term of the Agency Agreement was for four years with automatic one-year renewals thereafter. The Agency Agreement automatically renewed on September 25, 2019.
Deferred tax assets and liabilities are recognized for the future tax consequences and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized. Management evaluates the reliability of the deferred tax assets and assesses the need for additional valuation allowance annually.
Basic earnings per share is determined as net income available to common shareholders divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the impact of the Company’s stock option plan.
In July 2018, the FASB also issued ASU 2018-11, which adds a transition option for all entities and a practical expedient only for lessors to ASU 2016-02. The transition option, which we elected on adoption of the guidance, allows entities to choose not to apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. Under the transition option, entities can instead opt to continue to apply the legacy guidance in ASC 840-Leases, including its disclosure requirements, in the comparative periods presented in the year they adopt the new leases standard. This means that entities that elect this option will only provide annual disclosures for the comparative periods because ASC 840 does not require interim disclosures. Entities that elect this transition option will still be required to adopt the new leases standard using the modified retrospective transition method required by the standard, but they will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The practical expedient provides lessors with an option to not separate the non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the revenue recognition standard in ASC 606 if the associated non-lease components are the predominant components.
In August 2018, the FASB issued ASU 2018-13, which amended the fair value measurement guidance in ASC 820-Fair Value Measurement, by removing and modifying certain existing disclosure requirements, while also adding new disclosure requirements. . We adopted the new standard as of December 31, 2019 however these new or modified disclosures did not have a material impact on the fair value measurement disclosures included in our consolidated financial statements.
In January 2017, Protexure acquired the renewal rights to a book of lawyers’ professional liability business, at a cost of $468,821. Protexure procured a loan in the amount of $385,000 to assist in the completion of this purchase. In accordance with the related loan agreement, this loan was 100% secured by assets held by Protexure. At December 31, 2018, the outstanding amount of this loan was $250,250 and it was fully repaid January 2019.
Cash and Cash Equivalents at December 31, 2019 and 2018 include $4,337,506 and $3,962,032 held by Protexure in a fiduciary capacity, respectively.
The cost or amortized cost, gross unrealized holding gains and losses, and estimated fair value of fixed maturity investments, by major security type, and equity securities at December 31, 2019 and 2018 are as follows:
The following tables summarize the Company’s fixed maturity and equity securities in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
The cost or amortized cost and estimated fair value of fixed maturity investments at December 31, 2019 and 2018 by contractual maturity are shown below. Expected maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations without penalties.
At each measurement date, we estimate the fair value of the security using various valuation techniques. We utilize, to the extent available, quoted market prices in active markets or observable market inputs in estimating the fair value of our investments. When quoted market prices or observable market inputs are not available, we utilize valuation techniques that rely on unobservable inputs to estimate the fair value of investments. The following describes the valuation techniques we used to determine the fair value of investments held as of December 31, 2019 and what level within the fair value hierarchy each valuation technique resides:
Equity securities, at fair value: Comprised primarily of investments in the common stock of publicly traded companies in the U.S. All of the Company’s equities are classified as Level 1 in the fair value hierarchy. The Company receives prices based on closing exchange prices from independent pricing sources to measure fair values for the equities.
Property and equipment, all associated with Protexure, at December 31, 2019 and 2018 at cost, less accumulated depreciation and amortization, totaled $1,105,513 and $776,382, respectively as follows:
Details of the liability for unpaid losses and loss adjustment expenses at December 31, 2019 and 2018 are as follows:
As a result of the change in estimates of insured events in prior years, the provision for losses and loss adjustment expenses increased by $1,453,679 and $785,074 in 2019 and 2018, respectively. The 2019 unfavorable development was primarily due to higher than expected large loss emergence in accident years 2015 and 2018, partially offset by favorable settlements on claims in accident year 2014. The 2018 unfavorable development was primarily due to higher than expected large loss emergence in accident year 2017, partially offset by favorable settlements on claims in accident years 2015 and 2016.
The following tables set forth information about incurred and paid loss development information related to our professional liability business under the Reinsurance Agreement within the Reinsurance segment as at December 31, 2019. The information related to incurred and paid loss development for the years ended December 31, 2011 through 2018 is presented as supplementary information and is unaudited. The information is presented from 2011, the year the Company began incurring claims on the C&F policies.
Claims and claim adjustment expense reserves represent management’s estimate of the ultimate liability for unpaid losses and allocated loss adjustment expenses (“ALAE”) for claims that have been reported as of the balance sheet date. Claims and claim adjustment expense reserves do not represent an exact calculation of the liability, but instead represent management estimates, primarily utilizing actuarial expertise and projection methods that develop estimates for the ultimate cost of claims and claim adjustment expenses. Because the establishment of claims and claims adjustment expense reserves is an inherently uncertain process involving estimates and judgment, currently estimated claims and claim adjustment expense reserves may change. The Company reflects changes to the reserves in the results of operations in the period the estimates are changed.
The Company has accumulated claims count information by accident year from the loss data for all claims reported as at December 31, 2019 it received from C&F. The Company’s methodology for determining reported claims count information is on a per claims basis by accident year and is inclusive of claims that are open, re-opened, closed with payment and closed without payment.
public accounting. The repurchase price has been equal to the year-end net book value per share for the most recently completed fiscal year reduced by the amount of any dividends already paid on the repurchased shares during the calendar year of the repurchase and any dividends the shareholder would be entitled to receive on the repurchased shares that have not been paid. In addition, the Bermuda Monetary Authority (“BMA”) has authorized additional purchase on a negotiated case-by-case basis, and such purchases have typically been negotiated share repurchases when requested by Company shareholders.
Operating and management expenses include compensation paid to members of the Board of Directors and various committees of the Board totaling $493,250 in 2019 and $504,150 in 2018. Included as a part of this compensation are annual retainers paid to directors in the form of common shares of the Company in the amount of $70,000 for the years ended December 31, 2019 and 2018, respectively. Such amounts are included as part of purchase of shares by subsidiary, net, in the consolidated statements of changes in shareholders’ equity and cash flows.
For these three employees, including Mr. Nieman, the phantom shares initially granted, as well as any additional shares granted from dividends declared, vested on January 1, 2015. The liability payable to each of these employees under the phantom share agreements is equal to the value of the phantom shares based on the net book value of the Company’s actual common shares at the end of the previous quarter less the value of phantom shares initially granted and is payable in cash upon (i) the participant’s death, termination of employment due to disability, retirement at or after age 65 or resignation for good reason, (ii) upon termination of the participant by the Company without cause, (iii) upon termination by Participant without good reason and (iv) change in control.
A summary of the status of the stock option plan as of December 31, 2019 is as follows:
The fair value of each option granted during 2019, 2018 and 2017 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions. No options were granted during 2019.
At December 31, 2019, there was intrinsic value associated with (i) the 35,000 options granted March 3, 2017, (ii) the 7,000 options granted on January 1, 2018 and (iii) the 5,000 optioned granted on October 1, 2018 where the market value of the stock as of the close of business at year end was $32.51 per share as compared with the option exercise prices of $27.99, $30.58 and $30.14, respectively.
The Company accounts for these options in accordance with GAAP, which requires that the fair value of the equity awards be recognized as compensation expense over the period during which the employee is required to provide service in exchange for such an award. The Company is amortizing compensation expense over the vesting period, or five years. The Company recognized $72,046 and $70,280 of compensation expense for stock options in the years ended December 31, 2019 and 2018, respectively.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. For the year ended December 31, 2019, the total lease amortization was $98,800. Cash outflows for this lease was $106,900. The right of use asset of $203,618 is included in Prepaid expenses and other assets and the lease liability is included on the Accrued expenses and other liabilities line on Consolidated Balance Sheet as of December 31, 2019.
Minimum lease payments, subsequent to December 31, 2018 are as follows:
The Company is evaluating its lease needs at the current time.