We are an insurance holding company based in Bermuda owned primarily by accounting firms, persons associated with accounting firms, and individual CPA practitioners. We were formed in response to concerns about the pricing and availability of accountants’ professional liability insurance in a difficult or “hard” market. Our mission is to be a company that provides insurance protection for professional service firms and engages in investment activities. Through APSL, a Delaware corporation and a wholly-owned subsidiary of Mezco which is a wholly-owned subsidiary of AmerInst, we act as the exclusive agent for C&F for the purposes of soliciting, underwriting, quoting, binding, issuing, cancelling, non-renewing and endorsing accountants’ professional liability and lawyers’ professional liability insurance coverage within the 50 states of the United States and the District of Columbia. We conduct our reinsurance business through AMIC Ltd., our wholly-owned subsidiary, which is a registered insurer in Bermuda. We are prepared, subject to obtaining the required licenses and registrations, to act as a direct issuer of accountants’ professional liability insurance policies. Our investment portfolio is held in and managed by Investco, which is a subsidiary of AMIC Ltd.
The reinsurance segment had revenues of $2,918,696 for the year ended December 31, 2010 and $6,439,547 for the year ended December 31, 2009. Total losses and expenses for this segment were $1,452,800 for the year ended December 31, 2010 and $(83,078) for the year ended December 31, 2009. This resulted in segment income of $1,465,896 of $6,522,625 for the years ended December 31, 2010 and 2009, respectively.
AmerInst has filed an application for a U.S. patent on a unique financing concept called RINITS™ that it has developed to securitize insurance and reinsurance risk, involving property, casualty, life and health. Such securitization would be by equity and debt financing of Bermuda special purpose companies licensed as reinsurers. It is AmerInst’s intention to grant patent licenses to the special purpose companies and investment banking organizations which will market the securities. In addition to the license royalties, AmerInst would manage the special purpose companies for a fee, and at its option could invest in them as well. However, AmerInst may not be issued a patent, and even if so, may not be able to license such patent.
The amount that we record as our liability for loss and loss adjustment expenses is a major determinant of net income each year. As discussed in more detail below under the heading “Losses and Loss Adjustment Expenses,” the amount that we have reserved is based on actuarial estimates which were prepared as of December 31, 2010. Based on data received from the ceding companies (the insurance companies whose policies we reinsure) our independent actuary produces a range of estimates with a “low,” “central” and “high” estimate of the loss and loss adjustment expenses. As of December 31, 2010, the range of actuarially determined liability for loss and loss adjustment expense reserves was as follows: the low estimate was $1.0 million, the high estimate was $1.3 million, and the central estimate was $1.1 million. We selected reserves of $1,203,016 as of December 31, 2010, which is between the central and high end of the range. Due to our concerns about the severity and volatility of the type of business we reinsure and the length of time that it takes for claims to be reported and ultimately settled, our management’s policy has been to reserve conservatively at the higher end of the actuarial estimates.
The net loss recorded for the year ended December 31, 2010 was attributable to the following; (1) the increased expenses incurred by APSL which commenced operations in late 2009 following the execution of its Agency Agreement with C&F effective September 25, 2009; (2) the reduction in net premiums earned from $3,235,446 in 2009 to $157,140 following the commutation and termination of the CNA relationship and non-renewal of the CAMICO policies in 2009 and (3) the reduced net investment income from $766,512 in 2009 to $405,210 in 2010 due to the reduction in the investment portfolio following the liquidation of fixed maturity investments in May 2009 to settle the payment of $20.55 million due to CNA as a result of the Commutation Agreement entered into between the Company and CNA in 2009. The net income recorded for the year ended December 31, 2009 was mainly attributable to the reduction of approximately $5,400,000 in loss and loss adjustment expenses in recognition of the positive development recorded as a result of updating the estimated liability for unpaid losses and loss adjustment expenses on the finalization of the Commutation Agreement with CNA.
Our net premiums earned were $157,140 for the year ended December 31, 2010 compared to $3,235,446 for the year ended December 31, 2009, a decrease of $3,078,306 or 95.1%. The decrease is due to i) the Commutation Agreement entered into with CNA in 2009 and ii) the non-renewal of the CAMICO contract effective June 1, 2009. The net premiums earned for the year ended December 31, 2010 were attributable to premiums written under the Reinsurance Agreement and to revisions to CAMCO premium estimates for prior years.
Unrealized gain on investments was $6,477,553 at December 31, 2010 compared to $6,611,053 at December 31, 2009. We consider our entire investment portfolio to be available for sale and accordingly all investments are reported at fair value, with changes in net unrealized gains and losses reflected as an adjustment
We will continue to monitor our reserve for losses and loss expenses for any new claims information and adjust our reserve for losses and loss expenses accordingly.
We recorded policy acquisition recoveries of $12,209 for the year ended December 31, 2010 compared to acquisition costs of $868,155 for year ended December 31, 2009. The policy acquisition recoveries recorded for the year ended December 31, 2010 were attributable to the revisions to the CAMICO premium estimates for prior years, net of policy acquisition costs recorded at 37% of premium earned under the Reinsurance Agreement. For the year ended December 31, 2009, policy acquisition costs were 26.8% of net premiums earned. Policy acquisition costs are the sum of ceding commissions paid to ceding companies determined contractually pursuant to reinsurance agreements and federal excise taxes paid on premiums written.
The following is a reconciliation of the beginning and ending balance of investments using significant unobservable inputs (Level 3) for the year ended December 31, 2010 and 2009.
If we conclude a 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, 2010 amounted to $84,406 compared to $42,142 as of December 31, 2009. This increased loss was mainly attributable to fixed income securities which we determined were not other than temporarily impaired. The Company has the intent and ability to hold these securities either to maturity or until the fair value recovers above the adjusted cost. The unrealized losses on these securities were not as a result of credit, collateral or structural issues. As a result of the decline in fair value below cost, the Company recorded a total other-than-temporary impairment charge of $123,310 and $847,889 on two and twenty-eight equity securities during the years ended December 31, 2010 and 2009, respectively.
Our hedge fund portfolio is managed to reduce overall portfolio risk. It is required to invest over all major strategies and is limited to 10% of the total equity portfolio.
Hedge fund: Comprised of a hedge fund whose objective is to seek attractive long-term returns with lower volatility by investing in a range of diversified investment strategies. The fund invests in a diversified pool of hedge fund managers, generally across six different strategies: long/short equities, long/short credit, macro, multi-strategy opportunistic, activist, and portfolio hedge. The fair value of the hedge fund is based on the net asset value of the fund as reported by the fund manager. The fair value of our hedge fund is included in the Level 3 fair value hierarchy.
As of December 31, 2010, our total investments were $26,559,489, a decrease of $589,500, or 2.17%, from $27,148,989 at December 31, 2009. The cash and cash equivalents balance decreased from $3,472,529 at December 31, 2009 to $970,697 at December 31, 2010, a decrease of $2,501,832, or 72.1%. 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 mutual funds. The restricted cash and cash equivalents balance decreased from $734,020 at December 31, 2009 to $84,256 at December 31, 2010, a decrease of $649,764 or 88.5%. The ratio of cash and total investments to total liabilities at December 31, 2010 was 11.04:1, compared to a ratio of 13.14:1 at December 31, 2009.
AmerInst paid two semi-annual dividends of $0.47 per share during 2010 and 2009. During 2010, the dividend amount was reduced by $38,611, which represents a write back of uncashed dividends issued in 2004 and prior to shareholders that we have been unable to locate. During 2009, the dividend amount was reduced by $33,862, which represents a write back of uncashed dividends issued prior to 2003 to shareholders that we were unable to locate. Since AmerInst began paying consecutive dividends in 1995, our original shareholders have received approximately $17.93 in cumulative dividends per share, which when measured by a total rate of return calculation has resulted in an effective annual rate of return of approximately 10.38% from the inception of the Company, based on a per share purchase price of $8.33 paid by the original shareholders, and using a book value of $37.46 per share as of December 31, 2010.
The Bermuda Monetary Authority has authorized Investco to purchase the Company’s common shares from shareholders who have died or retired from the practice of public accounting and on a negotiated basis. Through March 1, 2011, Investco had purchased 123,913 common shares from shareholders who had died or retired for a total purchase price of $3,214,353. From time to time, Investco has also purchased shares in privately negotiated transactions. Through that date, Investco had purchased an additional 75,040 common shares in such privately negotiated transactions for a total purchase price of $1,108,228.
As a result of the commutation, the Company does not carry any loss reserves relating to the CNA program. Loss reserves relate only to the attorneys’ professional liability coverage (“PDIC”), CAMICO Mutual Insurance Company (“CAMICO”) and Crum & Forster (“C&F”) programs and were calculated under the methodologies described below.
CAMICO was a new program for the Company in 2005. To calculate the policy year ultimate losses and allocated loss adjustment expenses for CAMICO the actuary applied paid and incurred loss development, paid and incurred BF, and expected loss and allocated loss adjustment expenses ratio methods to the actual CAMICO experience as of December 31, 2010. In the calculations, the actuary used industry benchmark paid and incurred loss and allocated loss adjustment expenses development patterns. The a priori loss and allocated loss adjustment expenses ratios used in the BF and expected loss and allocated loss adjustment expenses method calculations
The above table presents the development of balance sheet liabilities for 2000 through 2010 as of year-end 2010, and includes the CNA program liabilities through 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.
The “cumulative redundancy (deficiency)” represents the aggregate change in the estimates over all prior years. For example, the 2005 liability has developed a $15,050,000 redundancy which has been reflected in income in subsequent years as the reserves were re-estimated.
Effective September 25, 2009, AmerInst Professional Services, Limited (“APSL”), a Delaware corporation and wholly-owned subsidiary of AmerInst Mezco, Ltd. (“Mezco”) which is a wholly-owned subsidiary of AmerInst, 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 APSL as its exclusive agent for the purposes of soliciting, underwriting, quoting, binding, issuing, cancelling, non-renewing and endorsing accountants’ professional liability and lawyers’ professional liability insurance coverage within the 50 states of the United States and the District of Columbia. The initial term of the Agency Agreement is for four years with automatic one year renewals.
We conduct our reinsurance business through AMIC Ltd., our subsidiary, which is a registered insurer in Bermuda. On September 25, 2009, AMIC Ltd. entered into a professional liability quota share agreement with C&F (the “Reinsurance Agreement”) pursuant to which C&F agrees to cede and AMIC Ltd. agrees to accept as reinsurance a fifty percent (50%) quota share of C&F’s liability under insurance written by APSL on behalf of C&F and classified by C&F as accountants’ professional liability and lawyers’ professional liability, subject to AMIC Ltd. surplus limitations. The initial term of the Reinsurance Agreement is for four years with automatic one year renewals.
Our reinsurance activity depends upon agreements with outside parties. AMIG, our predecessor entity, began our reinsurance relationship with CNA in 1993.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include the accounts of AmerInst and its operating wholly-owned subsidiaries, AmerInst Mezco, Ltd. (“Mezco”), AMIC Ltd., APSL and AmerInst Investment Company, Ltd. (“Investco”). Intercompany accounts and transactions have been eliminated on consolidation.
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.
Property and equipment, associated with the APSL office, at December 31, 2010 and 2009 at cost, less accumulated depreciation and amortization, totaled $716,230 and $100,157, respectively as follows:
Developmental costs for internal use software are capitalized in accordance with the provisions of ASC 350-40, generally, when the preliminary project stage is completed, management commits to funding and it is probable that the project will be completed and the software will be used to perform the functions intended. Capitalized internal use software costs are amortized on a straight-line basis over their estimated useful lives, generally for a period not to exceed 5 years.
Pursuant to the reinsurance agreements, AMIC Ltd. is required to provide the ceding companies with collateral to secure its obligations to them. At December 31, 2010 and 2009 AMIC Ltd. provided CAMICO with a Letter of Credit held by Comerica Bank and National City Bank with supporting investments with a carrying value of $2,713,631 and $3,631,714, respectively. Also, at December 31, 2010, AMIC Ltd. had 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 $7,039,652. Additionally, at December 31, 2010 and 2009, $0 and $113,382 was held in deposit pursuant to the 2003 excess reinsurance agreement with PDIC, respectively.
The cost or amortized cost, gross unrealized holding gains and losses, and estimated fair value of investments in fixed maturity investments, by major security type, and equity securities at December 31, 2010 and 2009 are as follows:
The cost or amortized cost and estimated fair value of fixed maturity investments at December 31, 2010 and 2009 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.
Information on sales and maturities of investments during the twelve months ended December 31, 2010 and 2009 are as follows:
At each measurement date, we estimate the fair value of the financial instruments 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, 2010 and what level within the fair value hierarchy the valuation technique resides.
AmerInst currently does not have a public market for its common stock, but the Company has historically caused Investco to purchase 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 BMA has authorized Investco to purchase shares on a negotiated case-by-case basis, and Investco has typically negotiated share repurchases when requested by Company shareholders.
calendar year. In addition, Investco will only be authorized to repurchase shares, without Board approval, from shareholders upon their death, disability or retirement from the practice of public accounting. Except as approved by the Board, negotiated purchases that do not satisfy these criteria will be discontinued for the foreseeable future. At the Board meeting, the Board approved all outstanding requests for repurchase of shares amounting to $300,359, and for the remainder of 2011, Investco will still be authorized to repurchase shares up to $500,000.
Deferred income taxes, arising from APSL, reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, 2010 and 2009, management set up full valuation allowances against the deferred tax assets as disclosed below since the success of APSL was not certain and therefore, it was more likely than not that a tax benefit would not be realized.
AmerInst’s ability to pay common shareholders’ dividends and its operating expenses is dependent on cash dividends from AMIC Ltd. and its other subsidiaries. The payment of such dividends by AMIC Ltd. to AmerInst is limited under Bermuda law by the Bermuda Insurance Act 1978 and Related Regulations, as amended, which require that AMIC Ltd. maintain minimum levels of solvency and liquidity. For the years ended December 31, 2010 and 2009 these requirements have been met. The minimum required statutory capital and surplus was $1,000,000 and $1,000,000 and actual statutory capital and surplus was $32,209,291 and $31,177,595 at December 31, 2010 and 2009, respectively. The minimum required level of relevant assets was $9,231,848 and $9,445,328 and actual relevant assets was $10,869,403 and $9,445,328 at December 31, 2010 and 2009, respectively. Statutory (loss) income for the years ended December 31, 2010 and 2009 was $(294,498) and $6,704,829, respectively.
AmerInst has two operating segments: 1) reinsurance activity, which also includes investments and other activities, and 2) insurance activity, which offers professional liability solutions to professional service firms under the Agency Agreement with C&F.
The 2009 balances have been recast to reflect the discontinuation of the disclosure of RINITS™ as a separate operating segment in 2010 and the inclusion of the related balances within the reinsurance segment.
AmerInst Professional Services Limited (“APSL”), a subsidiary of AmerInst, has entered into employment agreements with four key members of senior management, which grant them phantom shares of the Company. Under these agreements, these employees were initially granted a total of 75,018 phantom shares of the Company on the date of their employment. The phantom shares are eligible for phantom dividends paid at the same rate as regular dividends on the Company’s common shares. The phantom dividends may be used only to purchase additional phantom shares with the purchase price of such phantom shares being the net book value of the Company’s actual common shares as of the end of the previous quarter. During the year ended December 31, 2010, approximately 1,867 phantom shares were granted arising from the dividends declared on the Company’s common shares. Approximately 76,885 phantom shares were outstanding at December 31, 2010.
The employees’ interest in the phantom shares initially granted as well as any additional shares granted from dividends declared will vest on January 1, 2015. The liability payable to the employees under this phantom share plan is equal to the difference between 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 initial value and is payable in cash upon the earlier of the employee attaining 65 years of age or within 60 days of death or permanent disability, including if such death or permanent disability occurs before January 1, 2015.