We are an insurance holding company based in Bermuda owned by 1,949 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 primary mission is to exert a stabilizing influence on the design, pricing and availability of professional liability insurance to reduce the likelihood of a hard market. 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 step into a hard market and 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.
In an effort to maximize the value of our shares, we have been looking at ways to expand our business, including possibly entering into other lines of insurance business. During 2003 we provided reinsurance for attorneys’ professional liability policies provided by Professionals Direct Insurance Company. That activity was not a significant portion of our business in 2003 and was terminated at the end of that year. Effective June 1, 2005, we wrote a 5% share in CAMICO Mutual Insurance Company’s first excess layer of $2,000,000 excess of $1,000,000. CAMICO is a California based writer of accountants’ professional liability business. At the June 1, 2007 renewal we wrote a 2.5% share of a $4 million excess $1 million layer. The premiums under the CAMICO treaty vary with the losses incurred, between a minimum and a maximum.
Our results of operations for the years ended December 31, 2007 and December 31, 2006 are discussed below.
The decrease in net income from 2006 to 2007 is primarily due to the reduction of loss reserves by $2.8 million compared to a reduction in loss reserves in 2006 by $3.1 million. Due to the uncertainty inherent in the reinsurance policies written by the Company, we have always adopted a conservative policy concerning our loss reserving. In the last three years, our actuary was able to obtain additional information which included breaking out loss development on CNA’s “premier” and “value” plans which we reinsure. Our actuary determined in the course of its analysis that experience under the CNA plans has been more favorable than industry performance reflected in the reserves we established for our reinsurance of the plans. In light of this new information, we believed it was reasonable to reduce the 2006 loss reserves by $3.1 million and for 2007 the reduction in loss reserves was limited to $2.8 million. Our loss reserves are still near the high end of the reserve range provided by the actuary, which is consistent with our long established loss reserving philosophy. The Company will continue to review loss reserves periodically and, based on the actuarial projections, determine whether reserves are required to be increased or decreased.
Net premiums written in 2007 were $7,681,860, a decrease of $998,743 from $8,680,603 in 2006. The decrease in net premiums written was primarily attributable to an adjustment for premiums over ceded to AmerInst in prior years and due to rate decreases under the current AICPA Professional Liability Plan treaty. We continue to look for ways in which it may be advantageous to expand our business to include the reinsurance of lines of coverage other than accountants’ professional liability.
Net investment income includes amounts earned on the Company’s investment portfolio and cash equivalents, and dividends on equity investments, net of investment expenses. Net investment income increased by $246,425, or 18.0%, in 2007 to $1,612,384 from $1,365,959 in 2006. The primary reasons for the increase were the general increase in interest rates from 2006 to 2007 and a higher amount invested in 2007 compared to 2006.
investments are reported at fair value, with changes in net unrealized gains and losses reflected as an adjustment to accumulated other comprehensive income. The 2.1% increase in unrealized gain on investments was due primarily to an improvement in the value of the Company’s equity portfolio. Declines in the fair value of 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 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 security below its cost basis be assessed to determine if the decline is other than temporary. If so, the 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 investment becomes its new cost basis.
The composition of the investment portfolio at December 31, 2007 and 2006 is as follows:
Our fixed income, equity and hedge fund portfolios are invested in accordance with a written Investment Policy Statement adopted by our Board of Directors. We engage professional advisors to manage day to day investment matters under the oversight of our Investment Committee.
Our losses and loss adjustment expenses decreased by 8.9% to $2,993,065 in 2007 from $3,287,658 in 2006. These amounts included favorable development of prior years’ estimates of losses and loss adjustment expenses of $2,790,997 in 2007 and $3,072,636 in 2006. Our loss ratio, calculated as the ratio of losses and loss adjustment expenses to net premiums earned, was 37.5% in 2007 and 38.1% in 2006. The reason for the favorable development of prior years’ estimates is discussed in more detail below under the caption “Losses and Loss Adjustment Expenses.”
Total operating and management expenses were $2,187,072 for 2007 and $1,968,124 for 2006, an increase of 11.1%, primarily due to expenses relating to RINITS™. The operating and management expenses relating to the RINITS™ segment spent in the development phase were $703,609 in 2007 and $554,574 in 2006.
As of December 31, 2007, total investments amounted to $53,620,028, an increase of $998,815, or 1.9%, from $52,621,213 at December 31, 2006. The increase was due to an increase in the purchase of investments and an increase in fair values of the investment portfolio. Cash and cash equivalents decreased from $1,784,344 at December 31, 2006 to $1,778,798 at December 31, 2007. The amount of cash and cash equivalents varies depending on the maturities of fixed maturity investments and on the level of funds invested in money market mutual funds. Our liability for unpaid losses and loss adjustment expenses at December 31, 2007 was $27,409,622.
Assumed reinsurance premiums receivable represent current assumed premiums receivable less commissions payable to the fronting carriers. This balance was $605,756 at December 31, 2007 and $556,822 at December 31, 2006. This balance fluctuates due to the timing of renewal premiums written.
Deferred policy acquisition costs, which represent the deferral of ceding commission expense related to premiums not yet earned, decreased from December 31, 2006 along with the decrease in unearned premiums. The current ceding commission rate, which became effective August 1, 1995, is 28.5% for CNA. The ceding rate for the carrier for the CAMICO treaty we began reinsuring in 2005 is 10% and for the attorneys’ professional liability we reinsured in 2003 was 10%. In addition a federal excise tax of 1% is applied on premiums earned. The 4.4% decrease in deferred policy acquisition costs in 2007 was due to the decrease in unearned premiums compared to the prior year.
Prepaid expenses and other assets were $235,402 at December 31, 2007, an increase of 7.4% from 2006. These expenses relate to prepaid directors and officers’ liability insurance costs, director’s retainer, and management fees.
Total dividends declared were $1,209,850 and $595,924 (net of adjustment for special dividend) in 2007 and 2006, respectively. 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 build surplus to retain flexibility for future business expansions.
The Bermuda Monetary Authority has authorized Investco to purchase up to 20% of the Company’s common shares from shareholders who have died or retired from the practice of public accounting and on a negotiated case-by-case basis. From January 1, 2000 through March 1, 2008 Investco had purchased 79,713 common shares, as adjusted for the share dividend pursuant to such program, from shareholders who had died or retired for a total purchase price of $1,563,434. In addition, from January 1, 2000 through March 1, 2008, Investco had purchased in negotiated transactions at various prices 65,904 common shares, as adjusted for the share dividend pursuant to such program, for a total purchase price of $860,135. See “Rights Offering” below for a description of the sale of shares by Investco in connection with the rights offering.
AmerInst filed a registration statement on Form S-3 with the SEC on June 15, 2006 to register a rights offering to existing shareholders. The registration statement was amended on July 20, 2006 and declared effective July 24, 2006. Pursuant to the rights offering, which was mailed to shareholders on July 28, 2006, each shareholder received a right to purchase one common share for each share currently owned, at a price of $23.33 per share (after giving effect to the share dividend). Further information concerning the rights offering is contained in the prospectus dated July 28, 2006 and in our S-3 registration statement on file with the SEC. A total of 97,927 rights were exercised prior to October 4, 2006, the expiration date of the oversubscription right under the rights offering. As a result, 97,927 shares were subsequently sold by Investco to shareholders exercising rights, for a total purchase price of $2,284,637, before rights offering costs of $277,057. Of the shares sold in the rights offering, 21,461 shares were purchased by AmerInst directors for a total purchase price of $500,685.
The BF method essentially blends together an expected loss result and a loss development result. The expected losses used in the BF calculation were selected by multiplying expected claim counts by average excess of $1 million frequency and severity amounts. Based on historical allocated loss adjustment expenses data, the actuary selected a 1.50% and a 1.50% frequency provision and a $875,000 and a $750,000 severity provision for 2007 and 2006, respectively, for allocated loss adjustment expense in addition to limits.
Twice a year, the actuary has made recommendations of a range of ultimate loss estimate to our Board of Directors, which for each period has selected ultimate loss estimates that fall within that range. Based on this practice, the estimated loss ratio has been updated by the Board of Directors at least once each year, and has historically been near the high end of the range.
The above table presents the development of balance sheet liabilities for 1997 through 2007 as of year-end 2007. 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. This liability represents the estimated amount of losses and LAE for claims arising in all prior years, both paid and unpaid at the balance sheet date, including losses that had been incurred, but not yet reported, to the Company. The upper portion of the table shows the experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims.
In February 2007, FASB issued FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. The fair value option established will permit all entities to choose to measure eligible items at fair value at specified election dates. An entity shall record unrealized gains and losses on items for which the fair value option has been elected through net income in the statement of operations at each subsequent reporting date. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the potential impact of FAS 159 on its financial statements.
The gross unrealized loss on investments at December 31, 2007 and 2006 are categorized as follows:
AmerInst filed a registration statement on Form S-3 with the Securities and Exchange Commission (“SEC” or the “Commission”) on June 15, 2006 to register a rights offering to existing shareholders. The registration statement was amended on July 20, 2006 and declared effective July 24, 2006. Pursuant to the rights offering, which was mailed to shareholders on July 28, 2006, each shareholder received a right to purchase one common share for each share currently owned, at a price of $23.33 per share (after giving effect to the share dividend). Further information concerning the rights offering is contained in the prospectus dated July 28, 2006 and in our S-3 registration statement on file with the SEC. A total of 97,927 rights were exercised prior to October 4, 2006, the expiration date of the oversubscription right under the rights offering. As a result, 97,927 shares were subsequently sold by Investco to shareholders exercising rights, for a total purchase price of $2,284,637, before rights offering costs of $277,057. Of the shares sold in the rights offering, 21,461 shares were purchased by AmerInst directors for a total purchase price of $500,685.
Premiums written were $7,681,860 and $8,680,603 during 2007 and 2006, respectively.
Under the Bermuda Companies Act, AmerInst is prohibited from declaring or paying a dividend at December 31, 2007 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. In addition, it must be able to pay its liabilities as they come due after the payment of a dividend. As of December 31, 2007, $20 million was available to stockholders in accordance with these provisions.
Effective in 2006, AmerInst had two operating segments: 1) reinsurance activity and 2) the new insurance financing product (RINITS™), which was in the initial marketing phase of development. The results for the reinsurance activity were as follows:
The RINITS™ segment offers a mechanism to securitize insurance and reinsurance risk, involving property, casualty, life and health lines of insurance. This segment as of December 31, 2007, had generated no revenue. Operating and management expenses are as follows: