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 14, 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.
The reinsurance segment had revenues of $5,196,315 for the year ended December 31, 2013 and $3,373,308 for the year ended December 31, 2012. Total losses and expenses for this segment were $3,937,404 for the year ended December 31, 2013 and $2,428,293 for the year ended December 31, 2012. This resulted in segment income of $1,258,911 and $945,015 for the years ended December 31, 2013 and 2012, respectively.
Our results of operations for the years ended December 31, 2013 and December 31, 2012 are discussed below.
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
equity securities and (ii) lower yielding fixed income securities held in the Company’s investment portfolio during 2013 compared to 2012. Annualized investment yield, calculated as total interest and dividends divided by the net average amount of total investments and cash and cash equivalents, was 1.1% in 2013, a marginal decrease from the 1.7% yield earned in 2012.
Unrealized gain on investments was $5,789,076 at December 31, 2012 compared to $6,287,293 at December 31, 2013. 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 increase in unrealized gain on investments was due primarily to an improvement in the market 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 fair 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 composition of the investment portfolio at December 31, 2013 and 2012 is as follows:
The Company incurred operating and management expenses of $4,227,036 for the year ended December 31, 2013 compared to $3,795,409 for the year ended December 31, 2012, an increase of $431,627 or 11.4%. The increase was primarily attributable to increased salaries and related costs associated with APSL’s hiring of additional producer personnel in 2013.
The following tables show the fair value of the Company’s investments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” as of December 31, 2013 and 2012.
The Company assesses whether declines in the fair value of its fixed maturity investments classified as available-for-sale represent impairments that are other-than-temporary by reviewing each fixed maturity investment that is impaired and (1) determining if the Company has the intent to sell the fixed maturity investment or if it is more likely than not that the Company will be required to sell the fixed maturity investment before its anticipated recovery; and (2) assessing whether a credit loss exists, that is, where the Company expects that the present value of the cash flows expected to be collected from the fixed maturity investment are less than the amortized cost basis of the investment.
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, 2013. 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
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, 2013 and December 31, 2012, relating to eleven and three fixed maturity securities and none and one equity securities, amounted to $85,226 and $17,440, respectively. The reduction in the fair values of our fixed maturity securities was attributable to higher interest rates combined with the widening of credit spreads on our fixed income portfolio during 2013 compared to 2012. 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 $81,154 and $229,697 on one and three equity securities during the years ended December 31, 2013 and 2012, respectively.
Under existing accounting principles generally accepted in the United States, we are required to recognize certain assets at their fair value in our consolidated balance sheets. This includes our fixed maturity investments and equity securities. In accordance with the Fair Value Measurements and Disclosures Topic of FASB’s ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level
Level 3: Inputs to the valuation methodology that are unobservable for the asset or liability.
Hedge fund: Comprised of a hedge fund whose objective is to seek attractive long-term returns with lower volatility by investing in a range of diversified investment strategies. The fund invests in a diversified pool of hedge fund managers, generally across six different strategies: long/short equities, long/short credit, macro, multi-strategy opportunistic, event-driven, and portfolio hedge. The fair value of the hedge fund is based on the net asset value of the fund as reported by the external fund manager. The use of net asset value as an estimate of the fair value for investments in certain entities that calculate net asset value is a permitted practical expedient. The fair value of our hedge fund is classified as Level 3 in the fair value hierarchy.
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.
At December 31, 2013 and December 31, 2012, the Company had investments in certificates of deposit (“CD”) in the amount of $1,470,000 comprising of fully insured time deposits placed with Federal Deposit Insurance Corporation (“FDIC”) insured commercial banks and savings associations. The FDIC, an independent agency of the United States government, protects depositors up to an amount of $250,000 per depositor, per insured institution. FDIC insurance is backed by the full faith and credit of the United States government. The stated interest rate of an FDIC insured CD varies greatly among commercial banks and savings associations, depending on the term of the CD and the institution’s need for funding. The liquidity of “marketable” CDs is marginal, even though they are assigned an FDIC number, a CUSIP number and are held in book-entry form through the Depository Trust Company. Depending on market liquidity and conditions, the bid price for an FDIC insured CD would reflect the supply of and the demand for deposits of the particular bank or savings association, as well as prevailing interest rates, the remaining term of the deposit, specific features of the CD, and compensation of the broker arranging the sale of the CD. These time deposits have maturities ranging from two to five years and are classified as other invested assets on the Company’s consolidated balance sheet.
cash inflows in relation to net investment income and net premiums received under the Reinsurance Agreement in the amount of $1,051,681. These increases were partially offset by net cash outflows to fund the operations of APSL and dividends of $316,426 paid during the year.
The assumed reinsurance payable represents current reinsurance losses payable to the fronting carriers. As of December 31, 2013, the balance was $101,809 compared to $178,880 as of December 31, 2012. This balance fluctuates due to the timing of reported losses.
Deferred policy acquisition costs, which represent the deferral of ceding commission expense related to premiums not yet earned, increased from $268,643 at December 31, 2012 to $402,607 at December 31, 2013. The increase in deferred policy acquisition costs in 2013 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%.
AmerInst paid two semi-annual dividends of $0.25 per share during 2013 and 2012. During 2013, the total dividend amount was reduced by $22,096 which represents a write back of uncashed dividends issued prior to 2008 to shareholders that we have been unable to locate. During 2012, the total dividend amount was reduced by $14,585, which represents a write back of uncashed dividends issued prior to 2007 to shareholders that we were unable to locate. Since AmerInst began paying consecutive dividends in 1995, our original shareholders have received approximately $19.87 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 9.41% 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 $32.40 per share as of December 31, 2013.
of surplus compared to our capacity to accept more business. One of our objectives is to retain sufficient surplus to enable the successful implementation of our new business plan.
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, 2013 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, 2013, approximately $33.7 million was available for the declaration of dividends to shareholders. However, due to the requirement to provide the ceding companies with collateral, approximately $27 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. For the years ended December 31, 2013 and 2012 these requirements have been met as follows:
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, 2014, Investco had purchased 167,798 common shares from shareholders who had died or retired for a total purchase price of $4,708,680. 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 severity and frequency. 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 severity 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.
Loss reserves relate only to accountants’ and attorneys’ professional liability from CAMICO and C&F programs, and were calculated under the methodologies described below.
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, 2013. In the calculations, the actuary used CAMICO and industry benchmark paid and incurred loss and allocated loss adjustment expenses development information. 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 based on the Company’s unpaid claim liability review of CAMICO experience as of December 31, 2011. 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 “cumulative redundancy (deficiency)” represents the aggregate change in the estimates over all prior years. For example, the 2007 liability has developed a $9,621,000 redundancy which has been reflected in income in subsequent years as the reserves were re-estimated.
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 2007 year end liability was originally $27,411,000. As of December 31, 2013, we had paid $17,657,000 of the currently estimated $17,790,000 of losses and LAE that had been incurred for 2007 and prior years through the end of 2013; thus an estimated $133,000 in losses incurred through 2007 remain unpaid as of the current financial statement date.
Schedules II, III, IV, V, and VI are omitted as they are inapplicable, immaterial, or because the required information may be found in the audited consolidated financial statements and notes thereto.
On September 25, 2009, AmerInst Professional Services, Limited, an indirect wholly-owned subsidiary (“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 was for four years with automatic one-year renewals thereafter. The Agency Agreement automatically renewed on September 25, 2013.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of 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.
Effective January 1, 2013, we adopted Accounting Standard Update No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). The objective of ASU 2013-02 was to enhance disclosures about reclassification adjustments from AOCI. The adoption of ASU 2013-02 did not have a material impact on the Company’s consolidated financial statements.
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, 2013 and 2012 are as follows:
As of December 31, 2013, there were eleven securities in an unrealized loss position with an estimated fair value of $3,169,340. Of these securities, one had been in an unrealized loss position for 12 months or greater. As of December 31, 2013, 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.
As of December 31, 2012, there were four securities in an unrealized loss position with an estimated fair value of $705,610. Of these securities, none had been in an unrealized loss position for 12 months or greater. As of December 31, 2012, 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.
Information on sales and maturities of investments during the twelve months ended December 31, 2013 and 2012 are as follows:
There were no transfers into or from Level 3 investments during the years ended December 31, 2013 and 2012.
In accordance with U.S. GAAP, we are required to recognize certain assets at their fair value in our consolidated balance sheets. This includes our fixed maturity investments and equity securities. In accordance with the Fair Value Measurements and Disclosures Topic of FASB’s ASC 820 (“ASC 820”), fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows:
Property and equipment, primarily associated with APSL, at December 31, 2013 and 2012 at cost, less accumulated depreciation and amortization, totaled $486,234 and $589,296, respectively as follows:
Premiums written were $2,425,358 and $1,600,919 during 2013 and 2012, respectively. The premiums written during the year ended December 31, 2013 were attributable to premium cessions from C&F under the Reinsurance Agreement. The premiums written during the year ended December 31, 2012 were attributable to premium cessions from C&F under the Reinsurance Agreement in the amount of $1,564,885 and to revisions to CAMICO premium estimates for prior years in the amount of $36,034.
Operating and management expenses include compensation paid to members of the Board of Directors and various committees of the Board totaling $545,681 in 2013 and $525,317 in 2012. Included as a part of this compensation are annual retainers paid to directors in the form of common shares of the Company in the amount of $105,000 and $90,417 for the years ended December 31, 2013 and 2012, respectively. Such amounts are included as part of purchase of shares by subsidiary, net, in the consolidated statements of changes in shareholders’ equity and cash flows.
Statutory loss for the years ended December 31, 2013 and 2012 was $1,382,860 and $340,078, respectively.
APSL has employment agreements with four key members of senior management, including one of our named executive officers, Kyle Nieman, the President of APSL, which grant them phantom shares of the Company. Under these agreements, these employees were initially granted a total of 75,018 phantom shares of the Company on the date of their employment, subject to certain vesting requirements. The phantom shares are eligible for phantom dividends paid 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, 2013, 1,222 phantom shares were granted arising from the dividends declared on the Company’s common shares. 80,539 phantom shares were outstanding at December 31, 2013.
For three of these employees, including Mr. Nieman, the phantom shares initially granted as well as any additional shares granted from dividends declared will vest on January 1, 2015. For the fourth employee, the phantom shares initially granted as well as any additional shares granted from dividends declared will vest on January 1, 2018. The liability payable to these employees under this phantom share plan is equal to the value of the phantom shares based on the net book value of the Company’s actual common shares at the end of the previous quarter less the value of phantom shares initially granted and is payable in cash upon the earlier of the employee attaining 65 years of age or within 60 days of such employee’s death or permanent disability, including if such death or permanent disability occurs before January 1, 2015 for three of these employees and January 1, 2018 for the fourth employee.