AmerInst has filed an application with the U.S. Patent and Trademark Office for a 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, 2011. 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, 2011, the range of actuarially determined liability for loss and loss adjustment expense reserves was as follows: the low estimate was $0.8 million, the high estimate was $1.1 million, and the central estimate was $1.0 million. We selected reserves of $1,043,443 as of December 31, 2011, 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.
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 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 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.
We recorded a net loss of $1,069,160 and $1,101,793 in 2011 and 2010, respectively.
The net loss recorded for the year ended December 31, 2011 was largely attributable to operating and management expenses incurred by APSL, which were partially offset by net realized gains on investments and the recognition of the additional recoveries associated with the Arbitration. The net loss recorded during the year ended December 31, 2010 was largely attributable to operating and management expenses incurred by APSL, which were partially offset by net realized gains on investments.
Our net premiums earned were $412,840 for the year ended December 31, 2011 compared to $157,140 for the year ended December 31, 2010, an increase of $255,700 or 162.7%. The net premiums earned during 2011 and 2010 were attributable to net premium cessions from C&F under the Reinsurance Agreement in the amounts of $423,364 and $42,990 and to revisions to CAMICO premium estimates for prior years in the amounts of $(10,524) and $114,150, respectively. The increase in net premiums earned under the Reinsurance Agreement resulted from increased cessions from C&F in 2011, as a result of a higher level of underwriting activity under the Agency Agreement resulting from the continued and successful marketing of the program by APSL.
For the years ended December 31, 2011 and 2010, we recorded commission income under the Agency Agreement of $388,488 and $85,051, respectively, an increase of $303,437 or 356.8%. This increase resulted from a higher volume of premiums written under the Agency Agreement in 2011.
We recorded net investment income of $409,434 for the year ended December 31, 2011 compared to $405,210 for the year ended December 30, 2010, an increase of $4,224 or 1.0%. The increase is primarily attributable to the decrease in investment managers’ fees that resulted from the reduction in the investment portfolio and a decrease in the amortization of premium on fixed income securities in 2011 as a result of (1) the purchase of securities with lower coupon rates and premiums and (2) the maturity of older securities with higher coupon rates and premiums. Annualized investment yield, calculated as total interest and dividends divided by the net average amount of total investments and cash and cash equivalents, was 1.6% in 2011, a marginal increase from the 1.4% yield earned in 2010.
Sales of securities during the year ended December 31, 2011 resulted in realized gains on investments net of impairment of $1,779,892 compared to $2,356,544 during the year ended December 31, 2010, a decrease of $576,652 or 24.5%. The decrease in realized gains primarily related to decreased sales of equity securities in an unrealized gain position in 2011 compared to 2010.
Unrealized gain on investments was $5,256,349 at December 31, 2011 compared to $6,477,553 at December 31, 2010. 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 to accumulated other comprehensive income. The decrease in unrealized gain on investments was due primarily to the reduction 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 Company expensed operating and management expenses of $4,056,243 and $4,091,078 during 2011 and 2010, respectively. The decline is largely attributable to a reduction in professional and marketing expenses incurred by APSL during the year compared to 2010 as a result of APSL bringing in-house most of its marketing and promotional work and reducing its reliance on third party contractors and service providers.
The Company had no planned sales of its fixed maturity investments classified as available-for-sale that were in an unrealized loss position at December 31, 2011. In assessing whether it is more likely than not that the Company will be required to sell a fixed maturity investment before its anticipated recovery, the Company considers various factors including its 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, 2011, the Company did not recognize any other-than-temporary impairments due to required sales.
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, 2011 and December 31, 2010, relating to two and six fixed maturity securities and two and no equity securities, amounted to $39,791 and $84,406, respectively. This decrease was primarily attributable to the increase in the fair value of fixed maturity securities as a result of the decline in interest rates during the year. 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 available for sale fixed maturity 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 $152,450 and $123,310 on two equity securities during the years ended December 31, 2011 and 2010, respectively.
Our hedge fund portfolio is managed to reduce overall portfolio risk and it is required to invest over all major strategies.
U.S. government agency securities: Comprised primarily of bonds issued by the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, Federal Farm Credit Bank and the Federal
Though current market conditions appear to have improved recently, there is still the potential for further instability. This could present additional risks and uncertainties for our business and make it more difficult to value certain of our securities if trading becomes less frequent. As such, valuations may include assumptions and estimates that may have significant period-to-period changes that could have a material adverse effect on our results of operations or financial condition.
As of December 31, 2011, our total investments were $22,745,550, a decrease of $3,813,939, or 14.4%, from $26,559,489 at December 31, 2010. The decrease was primarily due to sales of certain equity securities, the maturity of two fixed maturity securities and the decrease in the fair value of certain equity securities as a result of adverse market conditions. The cash and cash equivalents balance decreased from $970,697 at December 31, 2010 to $904,485 at December 31, 2011, a decrease of $66,212 or 6.8%. 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 funds. The restricted cash and cash equivalents balance increased from $84,256 at December 31,
2010 to $435,924 at December 31, 2011, an increase of $351,668 or 417.4%. The increase is due to the timing of sales and maturities of investments held as restricted cash at December 31, 2011 that have not yet been reinvested. The ratio of cash and total investments to total liabilities at December 31, 2011 was 8.25:1, compared to a ratio of 11.04:1 at December 31, 2010.
Deferred policy acquisition costs, which represent the deferral of ceding commission expense related to premiums not yet earned, increased from $35,060 at December 31, 2010 to $146,226 at December 31, 2011. The increase in deferred policy acquisition costs in 2011 was due to the increase in both net premiums written and unearned premiums assumed under the Reinsurance Agreement compared to the prior year. The ceding commission rate under the Reinsurance Agreement is approximately 37%.
Prepaid expenses and other assets were $378,257 at December 31, 2011, an increase of 121.7% from December 31, 2010. The balance primarily relates to (1) prepaid directors’ and officers’ liability insurance costs, (2) prepaid directors’ retainer and (3) premiums due to APSL under the Agency Agreement. The increase in the balance was attributable to an increase in premiums due to APSL arising from a higher level of underwriting activity under the Agency Agreement in 2011
Accrued expense and other liabilities primarily represents premiums payable by APSL to C&F under the Agency Agreement and expenses accrued relating largely to professional fees. The balance increased from $1,126,409 at December 31, 2010 to $1,396,332 at December 31, 2011, an increase of $269,923 or 24%. The increase in the balance was attributable to an increase in premiums payable by APSL to C&F as a result of a higher level of underwriting activity under the Agency Agreement in 2011.
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, 2012, Investco had purchased 141,526 common shares from shareholders who had died or retired for a total purchase price of $3,860,345. From time to time, Investco has also purchased shares in privately negotiated transactions. Through that date, Investco had purchased an additional 75,069 common shares in such privately negotiated transactions for a total purchase price of $1,109,025.
An actuarial review and projection was performed for us by our independent actuary as of December 31, 2011. We review the actuarial estimates throughout the year for the possible impact on our financial position.
PDIC 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. To calculate the policy year ultimate losses and allocated loss adjustment expenses for PDIC the actuary applied incurred loss development, incurred Bornhuetter-Ferguson (“BF”), and expected loss methods to the actual PDIC experience. In the calculations, the actuary used industry incurred loss and allocated loss adjustment expenses development patterns and an a priori loss and allocated loss adjustment expenses ratio for use in the BF and expected loss and allocated loss adjustment expenses method calculations. The a priori loss and allocated loss adjustment expenses ratio was selected judgmentally based on the Company’s unpaid claim liability review as of December 31, 2010. The actuary judgmentally selected low and high scenario loss ratio estimates around the central loss ratio estimates. The low and high scenario ultimate loss and allocated loss adjustment expenses estimates were calculated by multiplying net earned premium through December 31, 2011 by the low and high scenario loss ratio selections. The final reported claim was closed during 2011 and although we no longer anticipate we will be liable for further claims related to this period of coverage, there is a remote possibility further claims could be reported.
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, 2011. 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 were selected judgmentally based on the Company’s unpaid claim liability review of CAMICO experience as of December 31, 2010. Low and high scenario ultimate loss and allocated loss adjustment expense estimates were calculated by selecting and applying lower and higher a priori loss and allocated loss adjustment expense ratios for use in the actuarial methods, and by selecting low and high estimates of ultimate loss and allocated loss adjustment expense amounts from the results of the applied actuarial methods.
The following table shows the development of the estimated liability for the previous ten years of the Company’s operations:
The above table presents the development of balance sheet liabilities for 2001 through 2011 as of year-end 2011, 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. 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 2005 liability has developed a $15,101,000 redundancy which has been reflected in income in subsequent years as the reserves were re-estimated.
We have audited the accompanying consolidated balance sheets of AmerInst Insurance Group, Ltd. and subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations and other comprehensive loss, changes in shareholders’ equity and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index and included in Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AmerInst Insurance Group, Ltd. and subsidiaries as of December 31, 2011 and 2010 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
On September 25, 2009, APSL 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 in all 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.
Historically, the primary business activity of our wholly owned insurance subsidiary, AMIC Ltd., had been to act as a reinsurer of professional liability insurance policies that were issued under the Professional Liability Insurance Plan sponsored by the AICPA. The AICPA plan offers professional liability coverage to accounting firms and individual CPAs in all 50 states.
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 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 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 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, 2011 and 2010 are as follows:
As of December 31, 2011, there were approximately four securities in an unrealized loss position with an estimated fair value of $1,394,125. Of these securities, no securities have been in an unrealized loss position for 12 months or greater. As of December 31, 2011, none of these securities were considered to be other than temporarily impaired. The Company has no intent to sell and it is not more likely than not that the Company will be required to sell these securities before their fair values recover above the adjusted cost. The unrealized losses from these securities were not a result of credit, collateral or structural issues.
The following is a reconciliation of the beginning and ending balance of investments measured at fair value on a recurring basis using significant unobservable (Level 3) inputs for the year ended December 31, 2011 and 2010.
There were no transfers into or from the Level 3 hierarchy during the years ended December 31, 2011 and 2010.
U.S. government agency securities: Comprised primarily of bonds issued by the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, Federal Farm Credit Bank and the Federal National Mortgage Association. The fair values of U.S. government agency securities are priced using the spread above the risk-free U.S. Treasury yield curve. As the yields for the risk-free U.S. Treasury yield curve are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 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.
There have been no material changes to any of our valuation techniques from what was used as of December 31, 2010. 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.
As a result of the change in estimates of insured events in prior years, the provision for losses and loss adjustment expenses decreased by $428,532 and $5,131 in 2011 and 2010, respectively. The 2011 decrease resulted from (1) favorable development on the CAMICO and PDIC treaties and (2) the recoveries from VSC as a result of the Arbitration’s final outcome, partially offset by reserves established pursuant to the Reinsurance Agreement. The decrease in 2010 resulted from favorable development on CAMICO and PDIC treaties, partially offset by reserves established under the Reinsurance Agreement.
Premiums written were $710,679 and $251,896 during 2011 and 2010, respectively. The premiums written during the year ended December 31, 2011 and 2010 were attributable to premium cessions from C&F under the Reinsurance Agreement in the amount of $721,203 and $137,746 and to revisions to CAMICO premium estimates for prior years in the amount of $(10,524) and $114,150, respectively. The increase in premiums written under the Reinsurance Agreement resulted from increased cessions from C&F in 2011, as a result of a higher level of underwriting activity under the Agency Agreement resulting from the continued and successful marketing of the program by APSL.
With the exception of APSL, AmerInst, AMIC Ltd., Mezco and Investco have no employees. Their operating activities, as well as certain management functions, are performed by contracted professional service providers. Cedar Management Limited provides AmerInst and AMIC Ltd. certain management, administrative and operations services under the direction of AmerInst’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. Mr. Stuart Grayston, our President, was formerly a director and officer of Cedar Management Limited, and Mr. Thomas R. McMahon, our Treasurer and Chief Financial Officer, is a shareholder, officer, director and employee of Cedar Management Limited. The company paid Cedar Management Limited $320,000 and $335,000 in fees during 2011 and 2010, respectively.
Operating and management expenses include compensation paid to members of the Board of Directors and various committees of the Board totaling $466,247 in 2011 and $431,809 in 2010.
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. Under the Companies Act, AMIC Ltd. would be prohibited from declaring or paying a dividend at December 31, 2011 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 of December 31, 2011, approximately $32 million was available for the declaration of dividends to shareholders. However, due to the requirement to provide the ceding companies with collateral, approximately $22 million was available for the payment of dividends to the shareholders. 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.
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, 2011 and 2010 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 $33,315,313 and $32,209,291 at December 31, 2011 and 2010, respectively. The minimum required level of relevant assets was $9,342,872 and $9,231,848 and actual relevant assets was $10,815,518 and $10,869,403 at December 31, 2011 and 2010, respectively. Statutory loss for the years ended December 31, 2011 and 2010 was $209,202 and $294,498, respectively.