AmerInst has three operating segments: 1) reinsurance activity, 2) RINITS™, its insurance financing product, which is in the marketing phase of development, and 3) insurance activity under the Agency Agreement. See Note 12, Segment Information, of the notes to the consolidated financial statements contained in Item 12 of this annual report on Form 10-K for financial information concerning these segments.
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 reserve is based on actuarial estimates which were prepared as of September 30 and December 31, 2009 and June 30 and December 31, 2008. 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 at December 31, 2009, the range of actuarially determined liability for loss and loss adjustment expense reserves was as follows: the low estimate was $1.2 million, the high estimate was $1.5 million, and the central estimate was $1.3 million. We selected reserves of $1,510,478 as of December 31, 2009, which is at 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.
The net income recorded for the year ended December 31, 2009 is mainly attributable to the reduction of approximately $5,400,000 in loss and loss adjustment expenses in recognition of the positive development recorded as a result of updating the estimated liability for unpaid losses and loss adjustment expenses on the finalization of the Commutation Agreement with CNA, and the recovery from VSC, offset by a reduction in net premiums, as discussed below in further detail.
Invested assets, including investments, cash and cash equivalents and restricted cash and cash equivalents, decreased by $15,883,334 or 33.6%, to $31,355,538 in 2009 compared to $47,238,872 in 2008. The decrease was primarily due to the sale of investments from the Company’s fixed income investment portfolio to fund the payment to CNA of $20,550,000 as required by the Commutation Agreement. Investment yield of net investment income and net realized gains and losses in 2009 as of December 31 was 8.2% as compared to (5.9%) in 2008, due to the realized gains on sales of equity securities and a reduction in the recorded impairment charges in 2009 compared to 2008, and compared to the realized loss on investments in 2008. The investment yield of net investment income was 2.0% in 2009 and 2.9% in 2008.
The composition of the investment portfolio at December 31, 2009 and 2008 is as follows:
Loss and loss adjustment recoveries of $2,924,184 were recorded in 2009 compared to loss and loss adjustment expenses of $1,261,347 in 2008. The 2009 recorded recoveries are as a result of, (1) the reduction in loss reserves related to the CNA treaty following the determination of the ultimate settlement amount in view of the finalization of the Commutation Agreement, and (2) the recognition of the payment of $500,891 received from VSC in satisfaction of certain recoveries not previously remitted by VSC under retrocession contracts between AMIC Ltd. and VSC for the years 1989-1993. Our loss ratio, calculated as the ratio of losses and loss adjustment expenses to net premiums earned, was (90.4%) in 2009 and 15.1% in 2008. The reason for the favorable development of prior years’ estimates is discussed in more detail on page 27 under the caption “Losses and Loss Adjustment Expenses.”
The Company had no planned sales of its fixed maturity investments classified as available-for-sale as at December 31, 2009. 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, 2009, the Company did not recognize any other-than-temporary impairments due to required sales.
In evaluating credit losses, the Company considers 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.
There have been no material changes to any of our valuation techniques from what was used as of December 31, 2008. 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 noted in “Historical Relationship with CNA” section above, the Company paid to CNA $20,550,000 on May 22, 2009. Subsequent to the payment of this settlement, the Company will continue to meet its cash flow requirements from its investment portfolios and the investment income that it earns on these, and the Company believes it will continue to remain in compliance with the minimum solvency and liquidity requirements of the insurance regulations of Bermuda. Management believes the Company will have sufficient existing resources to meet future operating expenses and implement its new business plan.
Our cash needs consist of settlement of losses and expenses under our reinsurance treaties 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 expect that we will have sufficient flexibility to provide for unbudgeted cash needs which may arise without resorting to borrowing, subject to regulatory limitations.
Assumed reinsurance premiums receivable represent current assumed premiums receivable less commissions payable to the fronting carriers. This balance was nil at December 31, 2009 and $352,085 at December 31, 2008. This balance fluctuates due to the timing of renewal premiums written.
Assumed reinsurance payable represents current reinsurance losses payable to the fronting carriers. This balance was $148,850 at December 31, 2009.
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.
AmerInst paid two semi-annual dividends of $0.47 per share during 2009 and 2008. During 2009, the dividend amount was reduced by $33,862, which represents a write back of uncashed dividends issued prior to 2003 to shareholders that we have been unable to locate. During 2008, the dividend amount was reduced by $29,080, which represents a write back of uncashed dividends issued prior to 2001 to shareholders that we have been unable to locate. Since AmerInst began paying consecutive dividends in 1995, our original shareholders have received approximately $16.96 in cumulative dividends per share, which when measured by a total rate of
return calculation has resulted in an effective annual rate of return of approximately 10.83% from the inception of the Company, based on a per share purchase price of $8.33 paid by the original shareholders, and using a book value of $39.99 per share as of December 31, 2009.
recorded a reduction of approximately $5,400,000 in recognition of positive development recorded as a result of updating the estimated liability for unpaid loss and loss adjustment expenses on the finalization of the Commutation Agreement with CNA, and the recovery from VSC.
As a result of the commutation, the Company does not carry any loss reserves relating to the CNA program. Loss reserves relate only to the attorneys’ professional liability coverage (“PDIC”) and CAMICO Mutual Insurance Company (“CAMICO”) programs and were calculated under the methodologies described below.
We have audited the accompanying consolidated balance sheets of AmerInst Insurance Group, Ltd. and subsidiaries (the “Company”) as at December 31, 2009 and 2008, and the related consolidated statements of operations and other comprehensive income (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.
On May 15, 2009, AMIC Ltd. and CNA entered into a Commutation and Release Agreement whereby:
Included in net income for the year ended December 31, 2009 is earned premium of approximately $2,800,000, losses and loss adjustment expenses and policy acquisition costs of approximately $2,000,000 and $800,000, respectively, relating to the commuted treaties. Since the Commutation Agreement rescinded and terminated the 2009 Reinsurance Treaties retroactive to their inception, such treaties are not recorded in these consolidated financial statements.
AmerInst classifies all of its investments as available-for-sale. Accordingly, AmerInst reports these securities at their estimated fair values with unrealized holding gains and losses being reported as other
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized. Management evaluates the reliability of the deferred tax assets and assesses the need for additional valuation allowance quarterly.
ASC 820-10-35 relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what the objective of fair value measurement is to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive.
The adoption of these provisions did not have a material impact on the Company’s consolidated financial statements.
In January 2010, the FASB issued the revised guidance for the disclosures about fair value measurements. The revised guidance requires additional disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The revised guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The revised guidance is effective for the first reporting period
The gross unrealized loss on investments at December 31, 2009 and 2008 are categorized as follows:
As of December 31, 2009, there were approximately 6 securities in an unrealized loss position with an estimated fair value of $2,506,958. Of these securities, there is no security that has been in an unrealized loss position for 12 months or greater. As of December 31, 2009, 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.
As of December 31, 2008, there were approximately 9 securities in an unrealized loss position with an estimated fair value of $2,759,187. Of these securities, there was 1 security that had been in an unrealized loss position for 12 months or greater with an estimated fair value of $105,959. As of December 31, 2008, 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, 2009 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.
Notwithstanding the absence of a public market for our common shares, we have a policy of having Investco, which holds our investment portfolio, purchase shares owned by our shareholders who have retired from the practice of accounting or have died. We are currently prepared to repurchase those shares at a price equal to the greater of the last year-end net book value per share or $39.99 per share.
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, a director and President of the Company, and Mr. Thomas McMahon, Vice President and Treasurer of the Company, are Vice President and President of Cedar Management Limited, respectively. The company paid $340,000 and $300,000 in fees during 2009 and 2008, respectively. Operating and management expenses include compensation paid to members of the Board of Directors and various committees of the Board totaling $533,055 in 2009 and $590,115 in 2008.
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. Management has reduced deferred tax assets by a valuation allowance as the success of APSL is not certain at December 31, 2009. The components of net deferred income tax assets and liabilities are comprised of the following at December 31, 2009:
The RINITS™ segment offers a mechanism to securitize insurance and reinsurance risk, involving property, casualty, life and health lines of insurance. This segment as of December 31, 2009, had generated no revenue. Operating and management expenses are as follows:
The insurance segment offers accountants’ professional liability and lawyers’ professional liability insurance coverage. This segment as of December 31, 2009, had generated no revenue. Operating and management expenses are as follows: