Protexure 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, 2018, are as follows:
Our reinsurance segment had revenues of $8,258,126 for the year ended December 31, 2018 and $10,644,947 for the year ended December 31, 2017. Total losses and expenses for this segment were $11,527,532 for the year ended December 31, 2018 and $10,284,179 for the year ended December 31, 2017. This resulted in a segment (loss) income of $(3,269,406) and $360,768 for the years ended December 31, 2018 and 2017, respectively.
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 our 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. Our accounting policy requires that a decline in the 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 fixed income security. The fair value of the impaired fixed income investment becomes its new cost basis.
Certain of our subsidiaries operate 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.
We recorded a net loss of $115,709 in 2018 compared to net income of $629,653 in 2017. The decrease in net income was mainly attributable to an increase in operating and management expenses of $626,440-from $5,971,764 for the year ended December 31, 2017 to $6,598,204 for the year ended December 31, 2018 and to the decrease in realized and unrealized gain on investments of $3,804,350-from a gain of $1,555,178 for the year ended December 31, 2017 to a loss of $2,249,172 for the year ended December 31, 2018, as discussed in further detail below. This was partially offset by the increase in commission income of $717,983-from $4,779,796 for the year ended December 31, 2017 to $5,497,779 for the year ended December 31, 2018 as a result of a higher volume of premiums written under the Agency Agreement and to the increase in income tax benefits-from $0 for the year ended December 31, 2017 to $2,701,396 for the year ended December 31, 2018, as discussed in further detail below.
Our net premiums earned were $10,132,515 for the year ended December 31, 2018 compared to $8,800,758 for the year ended December 31, 2017, an increase of $1,331,757 or 15.1%. The net premiums earned during 2018 and 2017 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 2018, arising from a higher volume of underwriting activity under the Agency Agreement. The higher volume
We recorded net investment income of $384,409 for the year ended December 31, 2018 compared to $399,476 for the year ended December 31, 2017, a decrease of $15,067 or 3.8%. The decrease in net investment income was primarily due to the decrease in dividend income, which was attributable to a certain higher yielding equity security held in our investment portfolio during 2017 compared to 2018. This decrease was partially offset by the increase in net interest income, which was attributable to higher yielding fixed income securities held in our investment portfolio during 2018 compared to 2017. Annualized investment yield, calculated as total interest and dividends divided by the net average amount of total investments and cash and cash equivalents, was 1.5% in 2018, a marginal increase from the 1.2% yield earned in 2017.
We recorded net realized and unrealized losses on investments of $2,249,172 for the year ended December 31, 2018 compared to net realized gains of $1,555,178 for the year ended December 31, 2017, a decrease of $3,804,350 or 244.6%. The decrease was primarily related to the decrease in the fair value of our equity investments of $3,792,846 during the year ended December 31, 2018, which was attributable to unfavorable market conditions at the end of 2018. As a result of our adoption of ASU-2016-01 on January 1, 2018, the changes in fair value of our equity investments subsequent to January 1, 2018 are recognized within net realized and unrealized gains (losses) on the consolidated statement of operations.
Our losses and loss adjustment expenses increased by 9.8% to $6,235,474 in 2018 from $5,677,589 in 2017. The increase in the 2018 amount was mainly attributable to the increase in current year losses and loss adjustment expenses under the Reinsurance Agreement due to increased cessions from C&F, as discussed above. Our loss ratio under the Reinsurance Agreement, calculated as the ratio of losses and loss adjustment expenses to net premiums earned, was 61.5% in 2018 and 64.5% in 2017. The decrease in this loss ratio was primarily due to favorable settlements on claims in accident years 2015 and 2016, partially offset by higher than expected large loss emergence in accident year 2017.
We incurred operating and management expenses of $6,598,204 for the year ended December 31, 2018 compared to $5,971,764 for the year ended December 31, 2017, an increase of $626,440 or 10.5%. The increase was primarily attributable to increased salaries and related costs associated with Protexure’s hiring of additional personnel during 2018 and to increased net commissions paid to outside brokers in association with the Agency Agreement during 2018 compared to 2017.
820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows:
Level 1: Observable inputs to the valuation methodology that are quoted prices (unadjusted) for identical assets or liabilities in active markets.
The following describes the valuation techniques we used to determine the fair value of investments held as of December 31, 2018 and what level within the fair value hierarchy each valuation technique resides:
There have been no material changes to any of our valuation techniques from what was used as of December 31, 2017. 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.
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, 2018. 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, 2018, we did not recognize any other-than-temporary impairments due to sales.
In evaluating credit losses, we consider a variety of factors in the assessment of a fixed maturity investment including: (1) the time period during which there has been a significant decline below cost; (2) the extent of the decline below cost and par; (3) the potential for the fixed maturity investment to recover in value; (4) an analysis of the financial condition of the issuer; (5) the rating of the issuer; and (6) failure of the issuer of the fixed maturity investment to make scheduled interest or principal payments.
The assumed reinsurance balances receivable represents the current assumed premiums receivable less commissions payable to the fronting carriers. As of December 31, 2018, the balance was $2,651,863 compared to $2,375,629 as of December 31, 2017. The increase resulted from a higher level of premiums assumed under the Reinsurance Agreement during 2018.
The assumed reinsurance payable represents current reinsurance losses payable to the fronting carriers. As of December 31, 2018, the balance was $2,171,767 compared to $1,883,879 as of December 31, 2017. This balance fluctuates due to the timing of reported losses.
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 increased from $5,361,443 at December 31, 2017 to $5,934,408 at December 31, 2018, an increase of $572,965 or 10.7%. The increase in the balance was attributable to an increase in premiums payable by Protexure to C&F under the Agency Agreement. This balance fluctuates due to the timing of the premium payments to C&F and payments of professional fees.
Total dividends paid were $313,417 and $303,919 in 2018 and 2017, 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 successful implementation of our business plan.
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. As of December 31, 2018, approximately $18.4 million was available for the declaration of dividends to shareholders. Under the Companies Act, AMIC Ltd. would be prohibited from declaring or paying a dividend 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, 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., including its subsidiary Investco, 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. For the years ended December 31, 2018 and 2017 these requirements have been met as follows:
AMIC Ltd. has received the BMA’s approval for the utilization of its investment in Investco as a relevant asset up to an aggregate amount sufficient to meet and maintain the minimum liquidity ratio, but not exceeding $11,000,000.
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, 2018, separately for accountants and lawyers experience. Policy year ultimate losses are projected to December 31, 2018 on a combined accountants and lawyers experience basis by reviewing the actual loss emergence in the 4th calendar quarter of 2018 compared to the expected emergence implied by the average of the paid and incurred loss development patterns selected as of September 30, 2018. 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, 2017. 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.
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, 2018.
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 is 100% secured by assets held by Protexure. At December 31, 2018, the outstanding amount of this loan was $250,250 and was fully repaid January 2019.
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
The impact of the adjustments are shown in the tables below:
The impact of the adjustments to the net book value of the company’s common shares as at December 31, 2017 was a decrease from $30.58 per share to $29.42 per share.
We review the independent actuaries’ reports for consistency and appropriateness of methodology and assumptions, including assumptions of industry benchmarks and discuss any concerns or changes with them. Our
In January 2016, the FASB issued ASU Update 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 changed current U.S. GAAP for public entities by requiring the following, among others: (1) equity securities, except those accounted for under the equity method of accounting, to be measured at fair value with changes in fair value recognized in net income; (2) the use of the exit price when measuring fair value of financial instruments for disclosure purposes; (3) an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; and (4) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or notes to the financial statements. ASU 2016-01 was effective for annual periods beginning after December 15, 2017, including interim periods. Early application was permitted.
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 other instruments that are not measured at fair value through net income. The ASU will replace the existing “incurred loss” approach, with an “expected loss” model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount under the existing other-than temporary-impairment model. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
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. The ASU is effective for interim and annual reporting periods
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, 2018 and 2017, 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 $18,247,384 and $15,205,708, respectively.
The cost or amortized cost and estimated fair value of fixed maturity investments at December 31, 2018 and 2017 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.
(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01. The change in fair value of equity securities is now recognized in net realized and unrealized gain (loss) on investment.
Obligations of U.S. state and political subdivisions: Comprised of fixed income obligations of U.S. 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.
In May 2016, the manager of our hedge fund portfolio chose to liquidate the fund and return its capital to the investors.
Property and equipment, primarily associated with Protexure, at December 31, 2018 and 2017 at cost, less accumulated depreciation and amortization, totaled $776,382 and $316,066, respectively 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 $785,074 and $55,476 in 2018 and 2017, respectively. 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 2017 unfavorable development was primarily due to higher than expected large loss emergence in accident year 2016, partially offset by favorable settlements on claims in accident years 2013 and 2015.
Premiums written were $10,799,007 and $9,443,106 during 2018 and 2017, respectively. The premiums written during the year ended December 31, 2018 and 2017 were attributable to premium cessions from C&F under the Reinsurance Agreement.
Under current Bermuda law, the Company and its subsidiaries are not required to pay taxes in Bermuda on either income or capital gains. The Company has received an undertaking from the Bermuda government that, in the event of income or capital gains taxes being imposed, the Company will be exempted from such taxes until the year 2035.
Income tax effects of those aspects of the Tax Act for which accounting under ASC 740 is complete
Protexure’s cumulative tax losses have totaled approximately $9.6 million through 2015. However, since 2016, Protexure generated net book income and net taxable income. The primary driver of this turnaround was the cumulative growth of policy renewals to the point that fixed expenses were covered by the net revenue from renewal policies. Since renewal rates have consistently exceeded 90% since inception, Protexure anticipates continued growth in future years. During 2017, Protexure elected to change its accounting methods used for income tax purposes for unearned commission income and unpaid interest expense owed to another subsidiary under common control. These changes will result in recognition in additional taxable income of $2 million which will reduce the operating loss carryforwards by the same amount. Protexure anticipates that the entire operating loss carryforward of $6.3 million will be used before the expiration of the operating loss carry forward from the combination of the accounting changes and pre-tax profits generated from operations.
As of December 31, 2018, based on all available evidence, it is more likely than not that the U.S. net operating loss carryforwards will be utilized prior to expiration and, thus, the existing valuation allowance has been reversed.
Statutory loss for the years ended December 31, 2018 and 2017 was $680,725 and $843,663, respectively.
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 net 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, 2018.
During the quarter ended December 31, 2018, 5,000 stock options were granted to Protexure employees at a strike price of $30.14, which represented the fair market value based on the net book value of the Company’s common stock as of September 30, 2018. These options vest in five equal annual installments beginning on October 1, 2019. Each vested option shall be deemed exercised on the earlier to occur of (i) the 6th anniversary of the date of grant, or (ii) the date of a Change of Control. The Plan states that upon the date of death of a participant, all awards granted pursuant to the agreement for that participant shall become fully vested and remain exercisable for the option grant’s remaining term.
During the quarter ended March 31, 2017, 35,000 stock options were granted to the Company’s directors at a strike price of $27.99, which represented the fair market value based on the net book value of the Company’s common stock as of December 31, 2016. These options vest in five equal annual installments beginning on March 3, 2018. Each vested option shall be deemed exercised on the earlier to occur of (i) the 6th anniversary of the date of grant, or (ii) the date of a Change of Control. The Plan states that upon the date of death of a participant, all awards granted pursuant to the agreement for that participant shall become fully vested and remain exercisable for the option grant’s remaining term. As of December 31, 2018, there were 7,000 option grants fully vested and exercisable.
The fair value of each option granted during 2018 and 2017 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions.
Information pertaining to options outstanding at December 31, 2018 is as follows:
Information pertaining to options outstanding at December 31, 2017 is as follows:
At December 31, 2018, there was intrinsic value associated with the 35,000 options granted March 3, 2017 where the market value of the stock as of the close of business at year end was $28.50 per share as compared with the option exercise price of $27.99. There was no intrinsic value associated with the 7,000 and 5,000 options granted January 1, 2018 and October 1, 2018, respectively, as their exercise price exceeded the market value of the stock as of the close of business at year end.
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 $70,280 and $36,230 of compensation expense for stock options in the years ended December 31, 2018 and 2017, respectively.
Protexure entered into a non-cancellable operating lease for office space in Lisle, Illinois. The lease is renewable at the option of the lessee under certain conditions. Future lease payments for the years ended December 31 are as follows: