The following discussion presents our financial condition and results of operation for the periods and as of the dates indicated
We have satisfied our mission by reinsuring accountants professional liability insurance issued under a plan sponsored by the AICPA since 1989. This plan currently insures approximately 24,000 accounting firms in all 50 states of the United States. These firms are a broad cross section of firms other than the four largest firms.
We are a holding company based in Bermuda. We conduct our reinsurance business through, AmerInst Insurance Company, our subsidiary, which is a registered insurer in Bermuda. Our investment portfolio is held in and managed by AmerInst Investment Company, which is a subsidiary of AmerInst Insurance Company. In 1999 we changed our domicile from Delaware to Bermuda in a registered share exchange transaction.
We operate our business with no long-term debt, no capital or operating lease obligations, no purchase obligations, no other long-term liabilities and no off-balance sheet arrangements required to be disclosed under applicable rules of the Securities and Exchange Commission. Therefore, we are not required to present disclosure under the headings “Off-Balance Sheet Arrangements” and “Contractual Commitments” required from companies with more complex capital structures. AmerInst’s access to operating cash flows of its subsidiaries is from the payment of dividends.
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. Based on data received from the ceding company (the insurance company 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, 2003 the actuarially determined net liability for loss and loss adjustment expense reserves low estimate was $13.1 million, the high estimate was $30.1 million, and the middle estimate was $18.8 million. We selected reserves of $28.7 million, 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 at the higher end of the actuarial estimates. However, in recognition of the fact that, as more historical information becomes available, losses will become more predictable, management has implemented a transition plan to bring our loss reserves for a policy year to the actuary’s middle estimate over the five succeeding years.
Our net income increased to $4,770,148 in 2003, compared to a net loss of $741,560 in 2002. Our net income was $751,092 in 2001.
The increase in net premium earned in 2003 was due to higher net premium written, which increased by 27.2% to $8,903,576 from $6,998,378 in 2002. The increase in net premiums written was primarily attributable to an increase in the number of insureds and rate increases under the current AICPA Professional Liability Plan treaty, compared to 2002. A portion of the $1,905,198 increase in premiums written was due to the $265,265 in premiums written for the attorneys’ professional liability business in the year ended December 31, 2003. Our relationship with the attorneys’ professional liability carrier was terminated on December 31, 2003 because the ceding company advised that the treaty was oversubscribed by other reinsurers. 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 2002 increased by 3.9% from $6,738,231 in 2001. The increase in net premium written during 2002 was attributable to an increase in the number of insureds and rate increases under the AICPA Professional Liability Plan.
Invested assets including investments and cash equivalents increased by $5,190,244 or 10.5% to $54,617,095 in 2003 compared to $49,426,851 in 2002. 2002 invested assets increased by 1.0% from $48,941,214 in 2001. Investment yield including net realized gains and losses in 2003 was 4.7% as compared to 1.8% in 2002 and 6.4% in 2001. Excluding realized gains and losses, the yield was 2.9% in 2003, 3.8% in 2002 and 4.4% in 2001. The decrease in investment yield excluding realized gains and losses from 2002 to 2003 and from 2001 to 2002 was primarily due to a general decrease in the yields for fixed term investments over the last three years.
Our hedge fund portfolio is managed to reduce overall portfolio risk. It is required to invest over all major strategies and is limited to 10% of the total equity portfolio. At December 31, 2003 our hedge fund portfolio was less than 5% of our total equity portfolio.
Operating and management expenses increased by 16.2% in 2003 to $1,101,528 from $947,750 in 2002. The primary reason for this increase was increased legal fees for investigation of ways in which we may be able to expand our business, increased costs of SEC compliance and our response to a shareholder’s offer to acquire the Company. The offer was made in August 2003 and was to purchase all AmerInst’s shares for 75% of book value, subject to certain adjustments. Our board rejected this proposal as an inadequate price for control of AmerInst and inconsistent with our mission. Operating and management expenses for 2002 increased by 18.5% from $800,064 in 2001 due to increased legal fees for SEC compliance in 2002. Also due to the events of September 11th, 2001, there was one less meeting of our Board of Directors resulting in a reduction in Director’s fees and travel expenses in 2001.
Effective December 2, 1999, the date we changed our domicile to Bermuda, we ceased to pay corporate income taxes, which meant the Company’s deferred tax asset could not be utilized. We reported a tax loss for the period ended December 2, 1999, which resulted in a tax benefit. This amount was received in 2002.
Our cash needs consist of settlement of losses and expenses under our reinsurance treaty and funding day-to-day operations. Our management expects to be able to meet these needs from premiums received and cash flows arising from our investment portfolio. Because substantially all of our assets are marketable securities, we have sufficient flexibility to provide for unbudgeted cash needs which may arise without resorting to borrowing.
Reinsurance balances recoverable represent our estimate of losses to be reimbursed by our reinsurer from future loss payments. We entered into excess of loss retrocession agreements to limit our retained risk on any one claim underwritten by Coregis Group, Inc. (formerly Crum and Forster Managers Corporation), to $50,000 in 1989 and 1990 and $62,500 in 1991 through mid-1993, subject to specified maximum recoveries for each contract year. Retrocession premiums which we have ceded are adjustable within a specified range based on actual experience under each contract. Amounts recoverable from the reinsurers pursuant to retrocession agreements have been estimated using actuarial assumptions consistent with those used in establishing the liability for unpaid losses and loss adjustment expenses. As part of the actuarial review for 2003, we estimated that no further recoveries would be recoverable, and as a result the prior year balance was written off. The balance at December 31, 2002 was $674,223.
The funds deposited with a reinsurer represent cash placed with the ceding company as collateral for obligations assumed under the attorneys liability program written in 2003.
Deferred policy acquisition costs, which represent the deferral of ceding commission expense related to premiums not yet earned, increased from December 31, 2002 along with the increase in unearned premiums. The current ceding commission rate, which became effective August 1, 1995, is 28.5% for CNA. The ceding rate for Professionals Direct was 10%. In addition a federal excise tax of 1% is applied on premiums earned. The 17% increase over 2002 was due to the increase in gross premiums written by the Company.
During 2003, 2002 and 2001, the Board of Directors declared quarterly dividends payable on March 15, June 15, September 15 and December 15, 2003 of $0.65 per share. The fourth quarter 2003 dividend was our thirty-fourth consecutive quarterly dividend of $0.65 per share.
AmerInst Insurance Company’s ability to pay dividends to AmerInst is subject to the provisions of the Bermuda insurance laws. Under the Companies Act, that subsidiary was prohibited from declaring or paying a dividend at December 31, 2003 if such payment would reduce the realizable value of its assets ($63,356,117) to an amount less than the aggregate value of its liabilities ($46,337,414) issued share capital ($120,000) and share premium (additional paid-in capital in the amount of $5,879,981) accounts. As at December 31, 2003, $11,018,722 was available for the payment of dividends to shareholders.
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, including its subsidiary, AmerInst Investment Company, to us is limited under Bermuda law by the Insurance Act and related regulations which require that AmerInst Insurance Company maintain minimum levels of solvency and liquidity. For the years ended December 31, 2003 and 2002 these requirements have been met as follows:
For non-value 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
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.
The above table presents the development of balance sheet liabilities for 1993 through 2003 as of year-end 2003. 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 $9,537,000 redundancy which has been reflected in income in subsequent years as the reserves were reestimated.
The lower section of the table shows the cumulative amount paid in respect of the previously recorded liability as of the end of each succeeding year. For example, the 1995 year end liability was originally $18,629,000. As of December 31, 2003, we had paid $7,864,000 of the currently estimated $9,092,000 of losses and LAE that had been incurred for 1995 and prior years through the end of 2003; thus an estimated $1,228,000 in losses incurred through 1995 remain unpaid as of the current financial statement date.
We have audited the accompanying consolidated balance sheets of AmerInst Insurance Group, Ltd. and subsidiaries (the “Company”) as at December 31, 2003 and 2002, and the related consolidated statements of operations and other comprehensive income (loss), of changes in stockholders’ equity, and of cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AmerInst Insurance Group, Ltd. and subsidiaries as at December 31, 2003 and 2002 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.
AIIC entered into excess of loss retrocession agreements to limit its retained risk on any one claim underwritten by CGI to $50,000 in 1989 and 1990 and $62,500 in 1991 through mid-1993, subject to specified maximum recoveries for each contract year. Retrocession premiums ceded by the Company are adjustable within a specified range based on actual experience under each contract. Retrocession transactions do not relieve AMIC Ltd. from its obligation to the ceding companies.
Reinsurance recoveries receivable is comprised of estimated amounts of losses and loss adjustment expenses paid and unpaid which are expected to be recoverable from reinsurers. Amounts recoverable from the reinsurers pursuant to retrocession agreements have been estimated using actuarial assumptions consistent with those used in establishing the liability for unpaid losses and loss adjustment expenses.
$30,889 of the gross unrealized losses have been unrealized losses for greater than 12 months and $214,129 of the gross unrealized losses have been unrealized losses for less than 12 months
The cost or amortized cost and estimated fair value of fixed maturity investments at December 31, 2003, 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.
Revisions to the estimates of ultimate premiums pursuant to the retrocession agreements resulted in additional reductions to retroceded premiums recorded of $0, $59,577 and $0 during 2003, 2002 and 2001, respectively.
Under the Bermuda Companies Act, AMIG Ltd. is prohibited from declaring or paying a dividend at December 31, 2003 if such payment would reduce the realizable value of its assets to an amount less than the aggregate value of its liabilities ($36,292,350), issued share capital ($331,751) and share premium (additional paid-in capital in the amount of $6,801,870) accounts. As at December 31, 2003, $14,740,688 was available to stockholders.
AMIG Ltd.’s ability to pay common shareholders’ dividends and its operating expenses is dependent on cash dividends from AMIC Ltd. including its subsidiary, Investco (collectively the “reinsurance subsidiaries”). The payment of such dividends by the reinsurance subsidiaries to AMIG Ltd. 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, 2003 and 2002 these requirements have been met. The minimum required statutory capital and surplus was $4,478,785 and $4,669,163 and actual statutory capital and surplus was $15,755,781 and $16,005,873 at December 31, 2003 and 2002. The minimum required level of liquid assets was $34,753,061 and $34,365,186 and actual liquid assets were $62,099,923 and $61,826,121 at December 31, 2003 and 2002, respectively.