The following summary sets forth selected financial data with respect to us for the five fiscal years ended December 31, 2004. The balance sheet and income statement data have been derived from our consolidated financial statements which have been audited by Deloitte & Touche, our independent registered public accounting firm. The data set forth below should be read in conjunction with the audited financial statements and notes thereto included elsewhere in this annual report.
We are a holding company based in Bermuda. We conduct our reinsurance business through AmerInst Insurance Company, Ltd., our subsidiary, which is a registered insurer in Bermuda. Our investment portfolio is held in and managed by AmerInst Investment Company, Ltd., which is a subsidiary of AmerInst Insurance Company, Ltd. 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 for companies with more complex capital structures. AmerInst’s access to operating cash flows of its subsidiaries is from the payment of dividends.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The major estimates reflected in the Company’s financial statements include but are not limited to the liability for loss and loss adjustment expenses.
Invested assets including investments and cash equivalents decreased by $1,300,950 or 2.4% to $53,316,145, in 2004 compared to $54,617,095 in 2003. 2003 invested assets increased by 10.5% from $49,426,851 as of December 31, 2002. Investment yield including net realized gains and losses in 2004 as of December 31 was 3.6% as compared to 4.7% in 2003 and 1.8% in 2002. Excluding realized gains and losses, the yield was 2.3% in 2004, 2.9% in 2003 and 3.8% in 2002. The decrease in investment yield excluding realized gains and losses from 2003 to 2004 and from 2002 to 2003 was due to a general decrease in interest rates and the shortening of the average duration of the fixed income portfolio in order to reduce the risk of principal loss in the expected future environment of rising interest rates.
The composition of the investment portfolio at December 31, 2004 and 2003 is as follows:
As of December 31, 2004, total invested assets amounted to $51,792,217, a decrease of $644,836 or 1.2% from $52,437,053 at December 31, 2003. Cash balances decreased from $2,180,042 at December 31, 2003 to $1,523,838 at December 31, 2004. 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 mutual funds. Our liability for unpaid losses and loss adjustment expenses at December 31, 2004 was $29,701,842. We maintain fixed income securities and cash balances sufficient to meet the unpaid loss and loss adjustment expense amount.
Assumed reinsurance premiums receivable represent current assumed premiums receivable less commissions payable to the fronting carriers. This balance was $877,846 at December 31, 2004 and $570,309 at December 31, 2003. This balance fluctuates due to the timing of renewal premiums written.
Prepaid expenses and other assets were $215,268 at December 31, 2004, an increase of 35.5% from 2003. These expenses relate to prepaid directors and officers’ liability insurance costs, director fees and management fees.
Total dividends declared were $449,558 (net of adjustment to special dividend), $4,272,067 and $803,430, in 2004, 2003 and 2002, respectively. Continuation of quarterly 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.
An actuarial review and projection is performed for us by our independent actuary as of June 30 and December 31 of each year. We review the actuarial estimates throughout the year and the possible impact on our financial position. Unless a significant trend is evident during the year, our policy has been to make adjustments in the fourth quarter. As noted in our discussion of our results of operations, based on the analysis by the Company’s actuaries, a reduction of $2.5 million from unpaid losses and loss adjustment reserves occurred in the fourth quarter of 2004.
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 of $1 million frequency and severity amounts. The actuary selected a 1.84% and a 2.01% frequency provision and a $449,425 and a $408,349 severity provision for allocated loss adjustment expense in addition to limits, based on historical allocated loss adjustment expense data, for 2004 and 2003, respectively.
However, in recognition of the fact that, as more historical information becomes available, losses will become more predictable, management has a policy to bring our loss reserves for each policy year to the actuary’s middle estimate over succeeding years.
The above table presents the development of balance sheet liabilities for 1994 through 2004 as of year-end 2004. 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 $9,905,000 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, 2004, we had paid $7,588,000 of the currently estimated $8,724,000 of losses and LAE that had been incurred for 1995 and prior years through the end of 2004; thus an estimated $1,136,000 in losses incurred through 1995 remain unpaid as of the current financial statement date.
We have no long-term debt, no capital or operating lease obligations, no purchase obligations, and no other long-term liabilities, contingent liabilities or other contractual obligations or commitments required to be disclosed under Item 303(a)(5) of Regulation S-K.
We have audited the accompanying consolidated balance sheets of AmerInst Insurance Group, Ltd. and subsidiaries (the “Company”) as at December 31, 2004 and 2003, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedules listed in the Index and included in Item 15. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
AMIC Ltd. entered into an excess loss arrangement with Professional Direct Insurance Company (“PDIC”) for a 15% quota share participation of the lawyer professional liability coverage provided by PDIC. The participation commenced January 1, 2003 and terminated December 31, 2003.
Details of the liability for unpaid losses and loss adjustment expenses and related reinsurance recoveries receivable at December 31, 2004 and 2003 are as follows:
As a result of the change in estimates of insured events in prior years, the provision for losses and loss expenses decreased by $2,494,106, $5,016,302 and $577,001 in 2004, 2003 and 2002, respectively. The 2004 decrease related mainly to positive loss development in the policy years 1995 to 2002. The 2003 decrease related mainly to positive loss development in the policy years 1988 to 2000. The 2002 decrease related mainly to positive loss development in the fiscal years 1988 to 1999.
Revisions to the estimates of ultimate premiums pursuant to the retrocession agreements resulted in additional reductions to retroceded premiums recorded of $0, $0 and $59,577 during 2004, 2003 and 2002, respectively.
Under the Bermuda Companies Act, AMIG Ltd. is prohibited from declaring or paying a dividend at December 31, 2004 if such payment would reduce the realizable value of its assets to an amount less than the aggregate value of its liabilities ($33,824,678), issued share capital ($331,751) and share premium (additional paid-in capital in the amount of $6,801,870) accounts. As at December 31, 2004, $16,282,594 was available to stockholders in accordance with these provisions.
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, 2004 and 2003 these requirements have been met. The minimum required statutory capital and surplus was $4,455,276 and $4,478,785 and actual statutory capital and surplus was $16,579,531 and $15,755,781 at December 31, 2004 and 2003. The minimum required level of liquid assets was $33,786,651 and $34,753,061 and actual liquid assets were $61,491,071 and $62,099,923 at December 31, 2004 and 2003, respectively.