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 APSL, 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 all 50 states of the United States and the District of Columbia. We conduct our reinsurance business through AMIC Ltd., our wholly owned subsidiary, which is a registered insurer in Bermuda. We are prepared, subject to obtaining the required licenses and registrations, to act as a direct issuer of accountants’ professional liability insurance policies. Our investment portfolio is held in and managed by Investco, which is a subsidiary of AMIC Ltd.
AmerInst has two reportable segments: (1) reinsurance activity, which includes investments and other activities, and (2) insurance activity, which offers professional liability solutions to professional service firms. See Note 13, Segment Information, of the notes to the consolidated financial statements contained in Item 8 of this annual report on Form 10-K for financial information concerning these segments.
Our reinsurance segment had revenues of $10,752,287 for the year ended December 31, 2017 and $9,954,786 for the year ended December 31, 2016. Total losses and expenses for this segment were $10,284,179 for the year ended December 31, 2017 and $8,491,488 for the year ended December 31, 2016. This resulted in segment income of $468,108 and $1,463,298 for the years ended December 31, 2017 and 2016, respectively.
Our results of operations for the years ended December 31, 2017 and December 31, 2016 are discussed in greater detail below.
We recorded net income of $736,993 in 2017 compared to net income of $1,471,323 in 2016. The decrease in net income was mainly attributable to the decrease in realized gains on investments net of impairment from $2,555,767 for the year ended December 31, 2016 to $1,555,178 for the year ended December 31, 2017 as a result of decreased sales of equity securities in an unrealized gain position during 2017 compared to 2016 and to the increase in operating and management expenses from $5,211,450 in 2016 to $5,864,424 in 2017, as discussed in further detail below. This was partially offset by the increase in commission income from $4,044,726 in 2016 to $4,779,796 in 2017 as a result of a higher volume of premiums written under the Agency Agreement.
Our net premiums earned were $8,800,758 for the year ended December 31, 2017 compared to $7,124,066 for the year ended December 31, 2016, an increase of $1,676,692 or 23.5%. The net premiums earned during 2017 and 2016 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 2017, arising from a higher volume of underwriting activity under the Agency Agreement. The higher volume of underwriting activity was due to (i) the continued marketing of the program by APSL resulted in increased penetration in targeted markets and (ii) the acquisition of the renewal rights to a book of professional liability business in July 2017.
For the years ended December 31, 2017 and 2016, we recorded commission income under the Agency Agreement of $4,779,796 and $4,044,726, respectively, an increase of $735,070 or 18.2%. This increase resulted from the higher volume of premiums written under the Agency Agreement in 2017, as referred to above.
Sales of securities during the year ended December 31, 2017 resulted in realized gains on investments, net of impairment, of $1,555,178 compared to $2,555,767 during the year ended December 31, 2016, a decrease of $1,000,589 or 39.2%. The decrease in realized gains primarily related to the decreased sales of equity securities in an unrealized gain position in 2017 compared to 2016.
The composition of the investment portfolio at December 31, 2017 and 2016 is as follows:
Our losses and loss adjustment expenses increased by 21.2% to $5,677,589 in 2017 from $4,683,409 in 2016. The increase in the 2017 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 64.5% in 2017 and 65.7% in 2016. The decrease in this loss ratio was primarily due to favorable settlements on claims in accident years 2013 and 2015, partially offset by higher than expected large loss emergence in accident year 2016.
We incurred operating and management expenses of $5,864,424 for the year ended December 31, 2017 compared to $5,211,450 for the year ended December 31, 2016, an increase of $652,974 or 12.5%. The increase was primarily attributable to increased salaries and related costs associated with APSL’s hiring of additional personnel during 2017 and to increased net commissions paid to outside brokers in association with the Agency Agreement during 2017 compared to 2016.
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 calculate fair value; (ii) quantitative analysis; (iii) a review of multiple quotes obtained in the pricing process and the range of resulting fair values for each security, if available, and (iv) randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates provided by the independent pricing sources.
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.
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, 2017. 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, 2017, we did not recognize any other-than-temporary impairments due to sales.
The assumed reinsurance balances receivable represents the current assumed premiums receivable less commissions payable to the fronting carriers. As of December 31, 2017, the balance was $2,375,629 compared to $1,285,126 as of December 31, 2016. The increase resulted from a higher level of premiums assumed under the Reinsurance Agreement during 207.
The assumed reinsurance payable represents current reinsurance losses payable to the fronting carriers. As of December 31, 2017, the balance was $1,883,879 compared to $1,254,687 as of December 31, 2016. This balance fluctuates due to the timing of reported losses.
Prepaid expenses and other assets were $1,682,301 at December 31, 2017, an increase of 20.3% from December 31, 2016. 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 APSL under the Agency Agreement. This balance fluctuates due to the timing of the prepayments and to the timing of the premium receipts by APSL.
Accrued expenses and other liabilities primarily represent premiums payable by APSL to C&F under the Agency Agreement and expenses accrued relating largely to professional fees. The balance increased from $4,035,617 at December 31, 2016 to $4,610,781 at December 31, 2017, an increase of $575,164 or 14.3%. The increase in the balance was attributable to an increase in premiums payable by APSL 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.
The BMA 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, 2018, Investco had purchased 201,069 common shares from shareholders who had died or retired for a total purchase price of $5,678,643. 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.
The consolidated financial statements include our estimated 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 incurred through December 31 of each year. These estimates are subject to the effect of trends in future claim development. The estimates are continually reviewed and, as experience develops and new information becomes known, the liability is adjusted as appropriate, and reflected in current financial reports. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. Future average claim development is projected based on historical trends adjusted for anticipated changes in underwriting standards, policy provisions and general economic trends. These anticipated trends are monitored based on actual developments and are modified as necessary.
An actuarial review and projection was performed for us by our independent actuary as of December 31, 2017. We review the actuarial estimates throughout the year for the possible impact on our financial position.
Loss reserves relate only to accountants’ and attorneys’ professional liability from CAMICO and C&F programs, and were calculated under the methodologies described below. During 2017, losses emerged at levels consistent with expectations in total for both CAMICO and C&F business.
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 December 31, 2017, separately for accountants and lawyers experience. 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 the Company’s unpaid claim liability review of C&F experience as of December 31, 2016. 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.
Schedules I, II, III, IV, V, and VI are omitted as they are inapplicable.
We have audited the accompanying consolidated balance sheets of AmerInst Insurance Group, Ltd. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
In January 2017, APSL acquired the renewal rights to a book of lawyers’ professional liability business, at a cost of $468,821. APSL 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 APSL. At December 31, 2017, the outstanding amount of this loan was $327,250.
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 APSL 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. The term of Reinsurance Agreement is continuous and may be terminated by either party for any reason on or not less than 120 days’ prior written notice to the other party.
AmerInst and its operating wholly owned subsidiaries, AmerInst Mezco, Ltd. (“Mezco”), AMIC Ltd., APSL and AmerInst Investment Company, Ltd. (“Investco”). Intercompany accounts and transactions have been eliminated on consolidation.
In March 2016, the FASB issued Accounting Standards Update 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”) which simplified several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU was effective for interim and annual reporting periods beginning after December 15, 2016. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements and disclosures.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 provides a framework, through a five-step process, for recognizing revenue from customers, improves comparability and consistency of recognizing revenue across entities, industries, jurisdictions and capital markets, and requires enhanced disclosures. Certain contracts with customers are specifically excluded from the scope of ASU 2014-09, including; without limitation, insurance contracts accounted for under Accounting Standard Codification 944, Financial Services-Insurance. ASU 2014-09 was effective for annual reporting periods beginning after December 15, 2017 with retrospective adoption required for the comparative periods. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements.
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, 2017 and 2016, AMIC Ltd. provided CAMICO with a letter of credit issued by Comerica Bank with supporting investments with a carrying value of $105,807 and $103,623, respectively. Also, at December 31, 2017 and 2016, 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 $15,205,708 and $11,330,173, respectively.
Included in Cash and Cash Equivalents at December 31, 2017 and 2016 is $3,051,369 and $2,691,082 held by APSL in a fiduciary capacity, respectively.
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, 2017 and 2016 are as follows:
As of December 31, 2017, there were 29 securities (2016: 27 securities) in an unrealized loss position with an estimated fair value of $9,686,688 (2016: $7,811,779). Of these securities, seven (2016: 6) had been in an unrealized loss position for 12 months or greater. As of December 31, 2017, none of these securities were considered to be other than temporarily impaired. The Company has the intent to hold these securities 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 cost or amortized cost and estimated fair value of fixed maturity investments at December 31, 2017 and 2016 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, 2017 and 2016 are as follows:
The following tables show the fair value of the Company’s investments in accordance with ASC 820, “Fair Value Measurements and Disclosures” as of December 31, 2017 and 2016.
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, 2017 and what level within the fair value hierarchy each valuation technique resides:
In May 2016, the manager of our hedge fund portfolio chose to liquidate the fund and return its capital to the investors. The liquidation of the fund and the return of capital to its investors is expected to be completed in 2018.
The Company’s investments in the CD were categorized in their entirety in Level 2 of the fair value hierarchy, in accordance with ASC 820.
Details of the liability for unpaid losses and loss adjustment expenses at December 31, 2017 and 2016 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 $55,476 in 2017 and increased by $499,546 in 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. The 2016 unfavorable development was primarily due to higher than expected large loss emergence in accident year 2015, partially offset by favorable settlements on claims in accident years 2012 through 2014.
December 31, 2011 through 2016 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.
The Company has accumulated claims count information by accident year from the loss data as at December 31, 2017 it received from C&F. The Company’s methodology for determining reported claims count information is on a per claims basis by accident year and is inclusive of claims that are open, re-opened, closed with payment and closed without payment.
Premiums written were $9,443,106 and $7,983,869 during 2017 and 2016, respectively. The premiums written during the year ended December 31, 2017 and 2016 were attributable to premium cessions from C&F under the Reinsurance Agreement
Deferred income taxes, arising from APSL, reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. United States tax laws enacted in 2017 lower tax rates beginning in 2018. The deferred tax assets and liabilities have been reduced to reflect the newly enacted rates. As of December 31, 2017 and 2016, management set up full valuation allowances against the deferred tax assets as disclosed below since the success of APSL was not certain and therefore, it was more likely than not that a tax benefit would not be realized.
At December 31, 2017, the deferred tax assets (after valuation allowance) are based on loss carryforwards of $8,607,000, which expire in 13 to 18 years.
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 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, 2017, approximately $36.4 million was available for the declaration of dividends to shareholders. However, due to the requirement to provide the ceding companies with collateral, approximately $21.2 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
Statutory loss for the years ended December 31, 2017 and 2016 was $811,210 and $762,411, respectively.
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, 2017, 1,467 phantom shares were granted arising from the dividends declared on the Company’s common shares. 86,194 phantom shares were outstanding at December 31, 2017.
There was intrinsic value associated with the 35,000 options outstanding at December 31, 2017, where the market value of the stock as of the close of business at year end was $30.58 per share as compared with the option exercise price of $27.99 for 35,000 options.