We are an insurance company owned by 1,985 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 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.
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 “Loss and Loss Adjustment Expenses,” the amount that we reserve is based on actuarial estimates which are prepared as of June 30 and December 31 each year. 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,” “middle” and “high” estimate of the loss and loss adjustment expenses. As at December 31, 2005 the range of actuarially determined net liability for loss and loss adjustment expense reserves was as follows: the low estimate was $15.1 million, the high estimate was $29.6 million, and the middle estimate was $20.0 million. We selected reserves of $28.9 million as of December 31, 2005, which is near the 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.
Net premiums earned increased by 2.5% in 2005 to $9,075,405 from $8,856,809 in 2004. Net premiums earned for 2004 increased by 5.5% from $8,392,172 in 2003. The increase in net premiums earned during 2005 was primarily attributable to new premiums written under the CAMICO treaty, and in 2004 was primarily attributable to an increase in the number of AICPA insureds and rate increases under the current AICPA Professional Liability Plan treaty compared to the prior periods.
Net premiums written in 2005 were $9,027,666, an increase of $141,740 from $8,885,926 in 2004. The increase in net premiums written was primarily attributable to new premiums written under the CAMICO treaty. The Company is satisfied that it has reasonable probability of significant loss and therefore accounted for the treaty as an insurance contract under FAS 113. 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 premiums written in 2004 decreased by $17,650 to $8,885,926 from $8,903,576 in 2003. The decrease in net premium written during 2004 was attributable primarily to there being no premiums written for the attorney’s professional liability business. Our participation in that business terminated on December 31, 2003. This was partially offset by an increase in the number of insureds and rate increases under the AICPA Professional Liability Plan.
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 decreased $111,256, or 9.1%, in 2005 to $1,116,354 from $1,227,610 in 2004. Net investment income in 2004 decreased by $267,761, or 17.9%, from the $1,495,371 reported in 2003. The decrease in 2005 and in 2004 was due to overall lower interest rates for the fixed income portion of the portfolio as a result of the shortening of the average duration of that portfolio in order to reduce the risk of principal loss in the expected future environment of rising interest rates.
Assumed reinsurance premiums receivable represent current assumed premiums receivable less commissions payable to the fronting carriers. This balance was $710,534 at December 31, 2005 and $877,846 at December 31, 2004. This balance fluctuates due to the timing of renewal premiums written.
Prepaid expenses and other assets were $282,339 at December 31, 2005, an increase of 31.2% from 2004. These expenses relate to prepaid directors and officers’ liability insurance costs, director fees, management fees, as well as, in 2005, an investment banking retainer relating to the insurance securitization project described above under “Business Overview.”
During 2005 the Board of Directors declared quarterly dividends payable on March 15 and June 15 of $0.65 per share, and beginning September 1, 2005 the Board of Directors declared a semi-annual dividend payable on September 30 of $1.30 per share. During 2004 and 2003, the Board of Directors declared quarterly dividends payable on March 15, June 15, September 15 and December 15 of each year of $0.65 per share.
Total dividends declared were $596,029, $449,558 (net of adjustment to special dividend), and $4,272,067, in 2005, 2004 and 2003, 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. We do not have any current plans to declare any more special dividends.
AmerInst Insurance Company, Ltd.’s ability to pay dividends to AmerInst is subject to the provisions of the Bermuda insurance and companies laws. Under the Companies Act, that subsidiary would be prohibited from declaring or paying a dividend at December 31, 2005 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 at December 31, 2005, approximately $14 million was available for the payment of dividends to shareholders. In addition, that subsidiary must be able to pay its liabilities as they come 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 AmerInst Insurance Company, Ltd., including its subsidiary, AmerInst Investment Company, Ltd., to us is also limited under Bermuda law by the Insurance Act and related regulations which require that AmerInst Insurance Company, Ltd. maintain minimum levels of solvency and liquidity. For the years ended December 31, 2005 and 2004 these requirements have been met as follows:
The consolidated financial statements include our established liability for unpaid losses and loss adjustment expenses (“LAE”) for our insurance operations. LAE is determined utilizing both case-basis evaluations and actuarial projections, which together represent an estimate of the ultimate net cost of all unpaid losses and LAE
In 2003, for the first time, our actuary was able to analyze the loss and allocated loss adjustment expenses separately for CNA’s value plan and premier plan policies. The analysis of this additional data, not previously available from the ceding company, resulted in a decrease in the actuary’s estimate of ultimate loss and loss adjustment expenses. In addition, the actuary was able to obtain more detailed information concerning the distribution of policy limits purchased by insureds under the value plan. The use of such more detailed limits information also resulted in a decrease in ultimate loss and loss adjustment expenses. Detailed information for value plan policies was only available for treaty periods December 1, 1999 and after. Consequently, value plan experience for periods earlier than December 1, 1999 was included in the premier plan analysis.
For premier plan and value plan business, many policies provide allocated loss adjustment expense coverage in addition to the standard $1 million per claim indemnity limit. The effect of a provision for allocated loss adjustment expense in addition to limits was estimated by performing a paid loss and allocated loss adjustment expense Bornhuetter-Ferguson (BF) calculation on the paid loss and allocated loss adjustment expense in addition to the limits. This is a change in methodology implemented for 2003. Previously, the actuary calculated an expected amount for the allocated loss adjustment expense in addition to limits loading. The change in methodology was made to begin to recognize the actual experience of allocated loss adjustment expense in addition to policies’ limits instead of selecting an expected amount. This change in methodology resulted in a decrease in the ultimate loss and allocated loss adjustment expense estimate. Based on the actuarial analysis, we believed it was reasonable to reduce loss reserves by $5.0 million in 2003. Our loss reserves are still near the high end of the reserve range provided by the actuary, which is consistent with our loss reserving philosophy.
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
The attorneys’ professional liability coverage was a new program for the Company in 2003. The relationship with the carrier of that insurance ended on December 31, 2003. Therefore, policies written during 2003 are the only ones we have reinsured. An estimated ultimate loss and allocated loss adjustment expense ratio of 75% was selected for this business.
The above table of losses reestimated has been prepared on a net basis-i.e., loss and loss adjustment expenses and reinsurance recoveries receivable have not been grossed-up. The schedule has been prepared on a net basis due to the relative immateriality of reinsurance balances when considered in relation to total loss and loss adjustment expense reserves, and due to the costs of providing such information relative to any benefits of providing it.
The above table presents the development of balance sheet liabilities for 1995 through 2005 as of year-end 2005. 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.
The “cumulative redundancy (deficiency)” represents the aggregate change in the estimates over all prior years. For example, the 1995 liability has developed a $10,611,000 redundancy which has been reflected in income in subsequent years as the reserves were reestimated.
Effective June 1, 2005, AMIC Ltd. entered into 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.
In November 2005, the Financial Accounting Standards Board (FASB) issued FSP Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (FSP). The FSP addresses the determination as to when an investment is considered impaired, whether that
This new guidance will be applied prospectively and will be effective for other-than-temporary impairment analysis conducted in periods beginning after December 15, 2005. The adoption of the FSP is not expected to have a significant impact on the equity or net income of the Company.
Pursuant to the reinsurance agreements, AMIC Ltd. is required to provide the ceding companies with collateral for AMIC Ltd.’s liabilities to them. At December 31, 2005 and 2004 $113,382 and $137,328, respectively, was held in deposits pursuant to the 2003 excess reinsurance agreement with PDIC. Also at December 31, 2005 and 2004, the carrying value of investments in a trust account held by Bank of New York pursuant to reinsurance agreements in effect from 1989 to mid-1993 was $123,856 and $121,642, respectively. Additionally, at December 31, 2005 and 2004, AMIC Ltd. had provided CNA with a Section 114 Trust, held by JPMorgan Chase Bank, with restricted cash and cash equivalents and investments with a carrying value of $18,336,207 and $17,102,599 respectively. At December 31, 2005 AMIC Ltd. provided CAMICO with a Letter of Credit held by National City Bank with supporting investments with a carrying value of $2,350,053.
The gross unrealized loss on investments at December 31, 2005 is categorized as follows:
As of December 31, 2005, there were approximately 37 securities in an unrealized loss position with an estimated fair value of $21,548,774. Of these securities, there are 11 securities that have been in an unrealized position for 12 months or greater with an estimated fair value of $9,178,932. As of December 31, 2005, none of these securities were considered to be other than temporarily impaired. The unrealized losses from these securities were not a result of credit, collateral or structural issues.
The cost or amortized cost and estimated fair value of fixed maturity investments at December 31, 2005 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.
AMIG Ltd., AMIC Ltd., Mezco and Investco have no employees. Their operating activities, as well as certain management functions, are performed by contracted professional service providers. USA Risk Group (Bermuda) Ltd. provides AMIG Ltd. and AMIC Ltd. certain management, administrative and operations services under the direction of the AMIG Ltd.’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. Operating and management expenses include compensation paid to members of the Board of Directors and various committees of the Board totaling $360,435 in 2005, $312,848 in 2004 and $228,367 in 2003.