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 provide insurance protection for professional service firms and engage in investment activities. Through Protexure, we act as an 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 in 42 states of the United States and the District of Columbia. Prior to October 2020, Protexure had acted as an agent for C&F for all aforementioned business in all 50 states of the United States and the District of Columbia. In October 2020, C&F advised Protexure to cease writing business in eight states. We are currently in discussions with alternative carriers to write policies impacted by this directive. We conduct our reinsurance business through AMIC Ltd., our wholly owned subsidiary, which is a registered insurer in Bermuda. Our investment portfolio is held in and managed by AMIC Ltd.
Our reinsurance segment had revenues of $10,463,588 for the year ended December 31, 2020 and $15,853,490 for the year ended December 31, 2019. Total losses and expenses for this segment were $27,498,921 for the year ended December 31, 2020 and $13,838,051 for the year ended December 31, 2019. This resulted in a segment (loss) income of $(17,035,333) and $2,015,439 for the years ended December 31, 2020 and 2019, respectively.
Our results of operations for the years ended December 31, 2020 and December 31, 2019 are discussed in greater detail below.
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, 2020. 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
We recorded a net loss of $14,592,215 in 2020 compared to net income of $2,412,519 in 2019.
For the years ended December 31, 2020 and 2019, we recorded commission income under the Agency Agreement of $5,698,299 and $5,800,987, respectively, a decrease of $102,688 or 1.8%. This decrease resulted from the lower volume of premiums written under the Agency Agreement in 2020 compared to 2019, as discussed above.
We recorded net investment income of $383,810 for the year ended December 31, 2020 compared to $478,111 for the year ended December 31, 2019, a decrease of $94,301 or 19.7%. The decrease in net investment income was attributable to a decrease in interest earned on short term investments and cash and cash equivalents as the result of lower interest rates in place during 2020 compared to the same period in 2019 and to a decrease in dividend income attributable the decrease in equity investments held in our investment portfolio during 2020 compared 2019. In September 2020, the Company liquidated its equity securities portfolios as a measure to preserve its capital base. Annualized investment yield, calculated as total interest and dividends divided by the net average amount of total investments and cash and cash equivalents, was 1.1% in 2020, a marginal decrease from the 1.3% yield earned in 2019.
We recorded income tax expense of $988,500 for the year ended December 31, 2020 compared to $214,277 for the year ended December 31, 2019. At December 31, 2020 and 2019, we recorded an income tax expense as the result of changes in Protexure’s deferred tax asset position during the year, which was primarily attributable to Protexure’s usage of its loss carryforward from prior years plus its state income taxes for the current year. See Note 10 to our financial statements included in this Annual Report on Form 10-K for additional details.
The following tables show the fair value of our investments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” as of December 31, 2020 and 2019.
The following describes the valuation techniques we used to determine the fair value of investments held as of December 31, 2020 and what level within the fair value hierarchy each valuation technique resides:
The current market conditions present additional risks and uncertainties for our business. In particular, severe deterioration in the equity markets could lead to additional investment losses. Depending on market
Total cash and investments decreased from $38,793,231 at December 31, 2019 to $31,040,363 at December 31, 2020, a decrease of $7,752,868 or 20%. The net decrease resulted primarily from the decrease in the fair value of certain equity securities during the year as a result of unfavorable market conditions attributable to the impact of the COVID-19 coronavirus pandemic on the worldwide economy and to net losses paid under the Reinsurance Agreement.
Our cash needs consist of i) settlement of losses and expenses, (ii) funding collateral obligation under our reinsurance treaties and (iii) funding day-to-day operations. During the continued implementation of our business plan, our management expects that our unrestricted cash balance will be sufficient to meet our cash needs to fund our day-to-day operations over the next twelve-month time period.
Deferred policy acquisition costs, which represent the deferral of ceding commission expense related to premiums not yet earned, decreased from $1,964,052 at December 31, 2019 to $724,509 at December 31, 2020. The decrease in deferred policy acquisition costs in 2020 was due to the decrease in unearned premiums assumed under the Reinsurance Agreement compared to the prior year and to the recording of a premium deficiency reserve in December 2020 in the amount of $985,876. This reserve was recorded as management believes that the Company’s unearned premium position at December 31, 2020 may not be sufficient to meet future expected claims and expenses, as a result of recent adverse claim activity, as discussed above.
Prepaid expenses and other assets were $1,476,187 at December 31, 2020, a decrease of $543,435 from $2,019,622 at December 31, 2019. 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.
Total dividends paid were $0 and $295,691 in 2020 and 2019, respectively, net of the recorded write backs. Dividend payments are subject to the Board of Directors’ continuing evaluation of our level of surplus compared
An actuarial review and projection was performed for us by our independent actuary as of December 31, 2020. We review the actuarial estimates throughout the year for the possible impact on our financial position.
Loss reserves relate to accountants’ and attorneys’ professional liability from C&F programs, and were calculated under the methodologies described below.. During 2020, losses emerged at levels significantly greater than expectations. The adverse development is likely attributable to changes in case reserving practices that led
to material increases in average case reserves, and was possibly exacerbated by social inflation and delays in legal resolutions due to the COVID-19 pandemic. Note that fourth quarter experience was more in line with expectations.
C&F was a new program for us 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 paid and incurred loss development, paid and incurred Bornhuetter-Ferguson, and paid and incurred Cape Cod methods to the actual C&F experience as of September 30, 2020, separately for accountants and lawyers experience. Policy year ultimate losses are projected to December 31, 2020 on a combined accountants and lawyers experience basis by reviewing the actual loss emergence in the 4th calendar quarter of 2020 compared to the expected emergence implied by the paid and incurred loss development patterns selected as of September 30, 2020. In the calculations, the actuary relied on company and industry benchmark loss and allocated loss adjustment expense development patterns. The a priori loss and allocated loss adjustment expense ratios used in the Bornhuetter-Ferguson method calculations were selected based on our unpaid claim liability review of C&F experience as of December 31, 2020. Low and high scenario ultimate loss and allocated loss adjustment expense estimates were selected by the actuary based on sensitivity testing of results of the C&F actuarial analysis to reasonable alternative assumptions.
To the shareholders and the Board of Directors of AmerInst Insurance Group, Ltd.
The Company’s estimate of the liability for unpaid losses and loss adjustment expenses is derived utilizing certain actuarial assumptions and the Company’s historical loss experience supplemented with industry data and other factors that may vary significantly as claims are settled. The balance as at December 31, 2020 is $20.9M. The estimate is sensitive to significant assumptions, including ultimate loss and allocated loss adjustment expense estimates.
Given the subjectivity of estimating these key assumptions, performing audit procedures to evaluate whether the liability for unpaid losses and loss adjustment expenses were appropriately recorded as of December 31, 2020, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists.
On September 25, 2009, 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 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 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, 2020.
In October 2020, C&F advised us to cease writing business in eight states under the Agency Agreement. We are currently in discussions with alternative carriers to write policies impacted by this directive.
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 agreed to cede, and AMIC Ltd. agreed to accept as reinsurance, a 50% quota share of C&F’s liability under insurance written by Protexure on behalf of C&F and classified by C&F as accountants’ professional liability and lawyers’ professional liability, subject to AMIC Ltd.’s surplus limitations. Policies written by insurers other than C&F are not subject to the 50% quota share reinsurance to AMIC Ltd. The term of the Reinsurance Agreement is continuous and may be terminated by either party upon at least 120 days’ prior written notice to the other party.
Declines in the fair value of fixed maturity 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 maturity investments are other than temporary. The risks and uncertainties include the Company’s intent and ability to hold the security, changes in general economic conditions, the issuer’s financial condition or near term recovery prospects, and the effects of changes in interest rates. AmerInst’s accounting policy requires that a decline in the value of a fixed maturity security below its cost basis be assessed to determine if the decline is other than temporary. If so, the fixed maturity security is deemed to be impaired and a charge is recorded in net realized losses equal to the difference
AmerInst had classified its equity securities as available-for-sale. Our equity investments were carried at fair value, with changes in fair value recognized within net realized and unrealized gains (losses) on the consolidated statement of operations.
In June 2016, the FASB issued ASU 2016-13, which amends the guidance on impairment of financial instruments and significantly changes how entities will measure credit losses for most financial assets and certain
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, 2020 and 2019 are as follows:
The cost or amortized cost and estimated fair value of fixed maturity investments at December 31, 2020 and 2019 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, 2020 and 2019 are as follows:
There were no transfers between Levels 1 and 2 during the years ended December 31, 2020 and 2019.
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, 2020 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 were classified as Level 1 in the fair value hierarchy. The Company received prices based on closing exchange prices from independent pricing sources to measure fair values for the equities.
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 methodologies used by the independent pricing services. We also challenge any prices we believe may not be representative of fair value under current market conditions. Our review process includes, but is not limited to: (i) initial and ongoing evaluation of the pricing methodologies and valuation models used by outside parties to
There have been no material changes to any of our valuation techniques from what was used as of December 31, 2019. 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.
Property and equipment, all associated with Protexure, at December 31, 2020 and 2019 at cost, less accumulated depreciation and amortization, totaled $1,098,420 and $1,105,513, respectively as follows:
Details of the liability for unpaid losses and loss adjustment expenses at December 31, 2020 and 2019 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 $8,343,976 and $1,453,679 in 2020 and 2019, respectively. The 2020 unfavorable development was primarily due to higher than expected large loss emergence in accident years 2017, 2018 and 2019.
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, 2020. The information related to incurred and paid loss development for the years ended December 31, 2011 through 2019 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.
A claim file is created when the Company is notified of an actual demand for payment, notified of an event that may lead to a demand for payment or when it is determined that a demand for payment could possibly lead to a future demand for payment on another policy. Claim files are created for a policy at the claimant by coverage level, depending on the particular facts and circumstances of the underlying event.
On February 25, 2011, the Board of Directors amended and restated AmerInst’s Statement of Share Ownership Policy to better manage our cash flow from year to year. Under the revised policy, we limit AMIC Ltd.’s repurchase of our common stock to $500,000 per calendar year. In addition, AMIC Ltd.is only authorized to repurchase shares, with Board approval, from shareholders upon their death, disability or retirement from the practice of public accounting. In October 2020, the Board temporarily (i) suspended the amended and restated AmerInst’s Statement of Share Ownership Policy and (ii) discontinued the repurchases of our common stock, as a measure to preserve the Company’s capital base. During 2021, the Board will consider reinstating the amended and restated AmerInst’s Statement of Share Ownership Policy if market conditions and the Company’s capital base support reinstatement.
Deferred income taxes, arising from Protexure, reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The components of net deferred income tax assets and liabilities are comprised of the following:
At December 31, 2020, the deferred tax assets are based on loss carryforwards of $5.2 million, which expire in 11 to 15 years.
Protexure has employment agreements with three key members of senior management, including one of our named executive officers, Kyle Nieman, the President of Protexure, which grant them phantom shares of the Company. Under these agreements, these employees were initially granted an aggregate of 63,765 phantom shares of the Company on the date of their employment, subject to certain vesting requirements. The phantom shares are eligible for phantom dividends payable 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, 2020, no phantom shares were granted as no dividends were declared during the year on the Company’s common shares. 76,403 phantom shares were outstanding at December 31, 2020.
The fair value of each option granted during 2020, 2019 and 2018 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 2020 and 2019.
Information pertaining to options outstanding at December 31, 2020 is as follows:
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 $(178,483) and $72,046 of compensation expense for stock options in the years ended December 31, 2020 and 2019, respectively.