APSL leases office space in Lisle, Illinois under a non-cancellable lease agreement. The lease is renewable at the option of the lessee under certain conditions. Minimum lease payments, subsequent to December 31, 2013, are as follows:
The insurance segment had revenues of $1,376,991 for the year ended December 31, 2013 and $856,085 for the year ended December 31, 2012. Operating and management expenses were $2,998,912 for the year ended December 31, 2013 and $2,535,193 for the year ended December 31, 2012. This resulted in segment losses of $1,621,921 and $1,679,108 for the years ended December 31, 2013 and 2012, respectively.
We recorded a net loss of $363,010 and $743,093 in 2013 and 2012, respectively. The decrease in the net loss is mainly attributable to (ii) the increase in commission income from $855,597 in 2012 to $1,376,622 in 2013 as a result of a higher volume of premiums written under the Agency Agreement and (ii) the increase in net realized gains on investments from $1,615,628 in 2012 to $2,857,323 in 2013, partially offset by (i) unfavorable development in the CAMICO book of business and (ii) the increase in operating and management expenses incurred by APSL, as discussed in further detail below.
Our net premiums earned were $2,063,277 for the year ended December 31, 2013 compared to $1,267,470 for the year ended December 31, 2012, an increase of $795,807 or 62.8%. The net premiums earned during 2013 were attributable to net premium cessions from C&F under the Reinsurance Agreement. The net premiums earned during 2012 were attributable to net premium cessions from C&F under the Reinsurance Agreement in the amounts of $1,231,436 and to revisions to CAMICO premium estimates for prior years in the amounts of $36,034. The increase in net premiums earned under the Reinsurance Agreement resulted from increased cessions from C&F in 2013, arising from a higher level of underwriting activity under the Agency Agreement due to the continued marketing of the program by APSL resulting in increasing penetration in targeted markets.
We recorded net investment income of $276,084 for the year ended December 31, 2013 compared to $392,542 for the year ended December 31, 2012, a decrease of $116,458 or 29.7%. The decline in net investment income is due to (i) the reduction in the investment portfolio due to the disposition of certain fixed income and
Sales of securities during the year ended December 31, 2013 resulted in realized gains on investments net of impairment of $2,857,323 compared to $1,615,628 during the year ended December 31, 2012, an increase of $1,241,695 or 76.9%. The increase in realized gains primarily related to increased sales of equity securities in an unrealized gain position in 2013 compared to 2012.
earned under the Reinsurance Agreement of $1,231,436, net of some immaterial policy acquisition costs and recoveries that were attributable to the revisions to the CAMICO premium estimates for prior years, respectively, as noted above.
There were no transfers between Levels 1 and 2 during the years ended December 31, 2013 and 2012.
There were no transfers into or from the Level 3 hierarchy during the years ended December 31, 2013 and 2012.
While we obtain pricing from independent pricing services, management is ultimately responsible for determining the fair value measurements for all securities. To ensure fair value measurement is applied consistently and in accordance with U.S. GAAP, we periodically update our understanding of the pricing
There have been no material changes to any of our valuation techniques from what was used as of December 31, 2012. 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.
As of December 31, 2013, our total investments were $21,260,387, an increase of $1,011,085, or 5%, from $20,249,302 at December 31, 2012. This was primarily due to the increase in the fair value of certain equity securities as a result of favorable market conditions, partially offset by the sales of certain equity securities in an unrealized gain position. The cash and cash equivalents balance increased from $1,034,485 at December 31, 2012 to $2,333,806 at December 31, 2013, an increase of $1,299,321 or 125.6%. 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 decreased from $1,349,744 at December 31, 2012 to $151,414 at December 31, 2013, a decrease of $1,198,330 or 88.8%. The decrease is due to the timing of sales and maturities of investments held as restricted cash at December 31, 2013 that have been reinvested. Other invested assets remained unchanged at $1,470,000 as at December 31, 2013 and December 31, 2012. The ratio of cash, total investments and other invested assets to total liabilities at December 31, 2013 was 4.43:1, compared to a ratio of 6.34:1 at December 31, 2012. The decrease in the ratio was attributable to an increase in unpaid losses and loss adjustment expenses and unearned premium assumed under the Reinsurance Agreement.
Total cash, investments and other invested assets increased from $24,103,531 at December 31, 2012 to $25,215,607 at December 31, 2013, an increase of $1,112,076 or 4.6%. The net increase resulted primarily from the increase in the fair value of certain equity securities as a result of favorable market conditions and positive
Prepaid expenses and other assets were $550,456 at December 31, 2013, an increase of 33.6% from December 31, 2012. The balance primarily relates to (1) prepaid directors’ and officers’ liability insurance costs, (2) the prepaid directors’ retainer, (3) prepaid professional fees and (4) premiums due to APSL under the Agency Agreement. The increase in the balance was attributable to an increase in premiums due to APSL under the Agency Agreement. This balance fluctuates due to the timing of the prepayments and to the timing of the premium receipts by APSL.
Accrued expenses and other liabilities primarily represent premiums payable by APSL to C&F under the Agency Agreement and expenses accrued relating largely to professional fees. The balance increased from $1,490,727 at December 31, 2012 to $1,779,595 at December 31, 2013, an increase of $288,868 or 19.4%. The increase in the balance was attributable to an increase in premiums payable by APSL to C&F under the Agency Agreement, which were partially offset by a reduction in expenses accrued in relation to professional fees. This balance fluctuates due to the timing of the premium payments to C&F and payments of professional fees.
Total dividends paid were $316,426 and $327,992 in 2013 and 2012, respectively, net of the recorded write backs. Continuation of dividend payments is subject to the Board of Directors’ continuing evaluation of our level
An actuarial review and projection was performed for us by our independent actuary as of December 31, 2013. We review the actuarial estimates throughout the year for the possible impact on our financial position.
CAMICO was a new program for the Company in 2005. The program provides professional liability coverage to accountants. To calculate the policy year ultimate losses and allocated loss adjustment expenses for
C&F was a new program for the Company in 2010. The program provides professional liability coverage to accountants and lawyers. To calculate the policy year ultimate losses and allocated loss adjustment expenses for C&F, the actuary applied incurred loss development, incurred BF, and expected loss and allocated loss adjustment expense ratio methods to the actual C&F experience as of December 31, 2013, separately for accountants and lawyers experience. In the calculations, the actuary used an industry benchmark incurred loss and allocated loss adjustment expense development patterns. The Low, Central, and High a priori loss and allocated loss adjustment expenses ratios used in the BF and expected loss and allocated loss adjustment expense method calculations were selected based on previous work performed for AmerInst related to the pricing of accountants’ and lawyers’ professional liability insurance as well as on a review of industry ultimate loss ratios for accountants’ professional liability and lawyers’ professional liability coverages from publicly available data. The low and high scenario ultimate loss and allocated loss adjustment expense estimates were calculated by applying the selected Low and High a priori loss and allocated loss adjustment expense ratios in the actuarial methods, and by selecting low and high estimates of ultimate loss and allocated loss adjustment expense amounts from the results of the applied actuarial methods.
In 2003 and 2004, the Company participated in a program insuring lawyers’ professional liability coverage through PDIC. No unpaid claim liability related to the PDIC program remains as of year-end 2013; therefore no analysis related to this program was performed in 2013 nor will any analysis be performed going forward.
The above table presents the development of balance sheet liabilities for 2003 through 2013 as of year-end 2013, and includes the CNA program liabilities through 2008 (the CNA program was commuted at year-end 2008). The top line of the table shows the original recorded unpaid liability for losses and LAE recorded at the balance sheet date for each of the indicated years.
We do not have any off-balance sheet arrangements required to be disclosed under Item 303(a)(4) of Regulation S-K promulgated by the Securities and Exchange Commission.
We have audited the accompanying consolidated balance sheets of AmerInst Insurance Group, Ltd. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AmerInst Insurance Group, Ltd. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The major estimates reflected in the Company’s financial statements include but are not limited to the liability for loss and loss adjustment expenses.
Cash equivalents include money market funds and highly liquid debt instruments purchased with an original maturity of three months or less. Cash and cash equivalents are recorded at amortized cost, which approximates fair value due to the short-term, liquid nature of these securities.
In December 2011 (with a clarification amendment in January 2013), the FASB issued Accounting Standards Update No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). The objective of ASU 2011-11 was to enhance disclosures by requiring improved information about financial instruments and derivative instruments in relation to netting arrangements. The Company adopted ASU 2011-11 on ASU on January 1, 2013. The adoption of ASU 2011-11 did not have a material impact on the Company’s consolidated financial statements.
Pursuant to its reinsurance agreements, AMIC Ltd. is required to provide its ceding companies with collateral to secure its obligations to them. At December 31, 2013 and 2012, AMIC Ltd. provided CAMICO with a letter of credit issued by Comerica Bank with supporting investments with a carrying value of $823,905 and $1,664,407, respectively. Also, at December 31, 2013 and 2012, AMIC Ltd. has provided C&F with a Section 114 Trust, held by Comerica Bank, with restricted cash and cash equivalents and investments with a carrying value of $6,998,324 and $7,030,415, respectively.
The cost or amortized cost and estimated fair value of fixed maturity investments at December 31, 2013 and 2012 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.
The following tables show the fair value of the Company’s investments in accordance with ASC 820, “Fair Value Measurements and Disclosures” as of December 31, 2013 and 2012.
The following is a reconciliation of the beginning and ending balance of investments measured at fair value on a recurring basis using significant unobservable (Level 3) inputs for the year ended December 31, 2013 and 2012.
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, 2013 and what level within the fair value hierarchy each valuation technique resides:
Obligations of state and political subdivisions: Comprised of fixed income obligations of state and local governmental municipalities. The fair values of these securities are based on quotes and current market spread relationships, and are classified as Level 2 in the fair value hierarchy. AmerInst considers that there is a liquid market for the types of securities held. Broker quotes are not used for fair value pricing.
Details of the liability for unpaid losses and loss adjustment expenses at December 31, 2013 and 2012 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 $1,127,530 and $202,553 in 2013 and 2012, respectively. The 2013 increase resulted from (1) reserves established under the Reinsurance Agreement and (2) unfavorable development on the CAMICO treaty, specifically in the 2007/2008 and 2008/2009 policy years. The 2012 increase resulted from reserves established under the Reinsurance Agreement, partially offset by favorable development on the PDIC treaty.
AmerInst currently does not have a public market for its common stock, but the Company has historically purchased shares from the Company’s shareholders upon their death, disability or retirement from the practice of 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.
With the exception of APSL, AmerInst and its other direct and indirect subsidiaries have no employees. Their operating activities, as well as certain management functions, are performed by contracted professional service providers. Cedar Management Limited provides AmerInst and AMIC Ltd. certain management, administrative and operations services under the direction of AmerInst’s Board of Directors pursuant to an agreement. The agreement may be terminated by either party upon not more than 90 days nor less than 60 days prior written notice. Mr. Stuart Grayston, our President, was formerly a director and officer of Cedar Management Limited, and Mr. Thomas R. McMahon, our Treasurer and Chief Financial Officer, is a shareholder, officer, director and employee of Cedar Management Limited. The Company paid Cedar Management Limited $320,000 in fees during 2013 and 2012.
AMIC Ltd.’s ability to pay dividends to AmerInst is subject to the provisions of the Bermuda insurance and companies laws and the requirement to provide the ceding companies with collateral. Under the Companies Act, AMIC Ltd. would be prohibited from declaring or paying a dividend at December 31, 2013 if such payment would reduce the realizable value of its assets to an amount less than the aggregate value of its liabilities, issued share capital, and share premium accounts. As of December 31, 2013, approximately $33.7 million was available for the declaration of dividends to shareholders. However, due to the requirement to provide the ceding companies with collateral, approximately $27 million was available for the payment of dividends to the shareholders. In addition, AMIC Ltd. must be able to pay its liabilities as they fall due after the payment of a dividend. Our ability to pay dividends to common shareholders and to pay our operating expenses is dependent on cash dividends from our subsidiaries. The payment of such dividends by AMIC Ltd. to us is also limited under Bermuda law by the Insurance Act and Related Regulations which require that AMIC Ltd. maintain minimum levels of solvency and liquidity.
During the first quarter of 2013, one former key member of APSL’s senior management forfeited his interest in his 12,009 phantom shares as a result of his departure from APSL prior to the phantom shares’ January 1, 2015 vesting date. Also during the first quarter of 2013, a new key member of APSL’s senior management entered into an employment agreement with APSL and was granted 11,252 phantom shares of the Company on the date of his employment.
The following table provides a reconciliation of the beginning and ending balance of non-vested phantom shares for the year ended December 31, 2013:
The liability relating to these phantom shares is recalculated quarterly based on the net book value of the Company’s common shares at the end of each quarter. As a result of the overall decrease in the book value of the Company’s common shares since the grant dates, no liability has been recorded by the Company relating to these phantom shares at December 31, 2013 or December 31, 2012.