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 12, 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 insurance segment had revenues of $5,507,405 for the year ended December 31, 2018 and $4,782,921 for the year ended December 31, 2017. Operating and management expenses were $5,055,104 for the year ended December 31, 2018 and $4,514,036 for the year ended December 31, 2017. Tax benefits for this segment were $2,701,396 for the year ended December 31, 2018 and $0 for the year ended December 31, 2017. This resulted in segment income of $3,153,697 and $268,885 for the years ended December 31, 2018 and 2017, respectively.
Our results of operations for the years ended December 31, 2018 and December 31, 2017 are discussed in greater detail below.
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 our financial statements include but are not limited to the liability for loss and loss adjustment expenses and other than temporary impairment of investments.
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 December 31, 2018. 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 of December 31, 2018, the range of actuarially determined liability for loss and loss adjustment expense reserves was as follows: the low estimate was $9.3 million, the high estimate was $14.8 million, and the central estimate was $12.0 million. 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, we selected reserves of $12,989,260 as of December 31, 2018, which is marginally greater than the midpoint of the central estimate of our independent actuary.
We recognize a tax benefit relating to uncertain tax positions only where the position is more likely than not to be sustained assuming examination by tax authorities. A liability is recognized for any tax benefit (along with any interest and penalty, if applicable) claimed in a tax return in excess of the amount allowed to be recognized.
of underwriting activity was due to the continued marketing of the program by Protexure resulted in increased penetration in targeted markets.
For the years ended December 31, 2018 and 2017, we recorded commission income under the Agency Agreement of $5,497,779 and $4,779,796, respectively, an increase of $717,983 or 15%. This increase resulted from the higher volume of premiums written under the Agency Agreement in 2018, as referred to above.
The composition of the investment portfolio at December 31, 2018 and 2017 was as follows:
We recorded policy acquisition costs of $3,748,958 for the year ended December 31, 2018 compared to policy acquisition costs of $3,256,202 for the year ended December 31, 2017. Policy acquisition costs, which are primarily ceding commissions paid to the ceding insurer, are established as a percentage of premiums written. Therefore, any increase or decrease in premiums written will result in a similar increase or decrease in policy acquisition costs. The policy acquisition costs recorded for the years ended December 31, 2018 and 2017 were 37% of the premiums earned under the Reinsurance Agreement of $10,132,515 and $8,800,758, respectively.
The following tables show the fair value of our investments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” as of December 31, 2018 and 2017.
(a) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.
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
Equity securities, at fair value: Comprised primarily of investments in the common stock of publicly traded companies in the U.S. All of our equities are classified as Level 1 in the fair value hierarchy. We receive prices based on closing exchange prices from independent pricing sources to measure fair values for the equities.
As stated above, in May 2016, the manager of our hedge fund portfolio chose to liquidate the fund and return its capital to the investors.
As of December 31, 2018, our total investments were $28,033,306, a decrease of $1,982,018 or 6.6%, from $30,015,324 at December 31, 2017. This decrease was primarily due to the decrease in the fair value of certain equity securities as a result of unfavorable market conditions, partially offset by the purchase of additional equity securities and fixed income securities with net premiums received under the Reinsurance Agreement. The cash and cash equivalents balance increased from $5,008,138 at December 31, 2017 to $5,498,914 at December 31, 2018, an increase of $490,776 or 9.8%. 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 funds. The restricted cash and cash equivalents balance decreased from $710,818 at December 31, 2017 to $472,132 at December 31, 2018, a decrease of $238,686 or 33.6%. This decrease was due to the timing of sales and maturities of investments held as restricted cash at December 31, 2018 that have been reinvested. The ratio of cash, total investments and other invested assets to total liabilities at December 31, 2018 was 1.30:1, compared to a ratio of 1.56:1 at December 31, 2017. The decrease in the ratio was primarily attributable to an increase in unpaid losses and loss adjustment expenses and unearned premium assumed under the Reinsurance Agreement and the decrease in the fair value of certain equity securities as a result of unfavorable market conditions.
Total cash, investments and other invested assets decreased from $35,734,280 at December 31, 2017 to $34,004,352 at December 31, 2018, a decrease of $1,729,928 or 4.8%. The net decrease resulted primarily from (i) the decrease in the fair value of certain equity securities as a result of unfavorable market conditions, (ii) net cash outflows to fund our operations and (iii) dividends of $313,417 paid during the year. These decreases were partially offset by positive cash inflows in relation to net investment income and net premiums received under the Reinsurance Agreement in the amount of $2,357,973.
We assess whether declines in the fair value of our 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 we intend to sell the fixed maturity investment or if it is more likely than not we will be required to sell the fixed maturity investment before its anticipated recovery; and
(2) assessing whether a credit loss exists, that is, where we expect 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.
Deferred policy acquisition costs, which represent the deferral of ceding commission expense related to premiums not yet earned, increased from $1,622,676 at December 31, 2017 to $1,869,368 at December 31, 2018. The increase in deferred policy acquisition costs in 2018 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 37%.
Prepaid expenses and other assets were $1,981,913 at December 31, 2018, an increase of 17.8% from December 31, 2017. 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 Protexure under the Agency Agreement. This balance fluctuates due to the timing of the prepayments and to the timing of the premium receipts by Protexure.
We paid an annual dividend of $0.50 per share during 2018 and 2017. During 2018, the total dividend amount was reduced by $8,745 which represents a write back of uncashed dividends issued prior to 2013 to shareholders that we have been unable to locate. During 2017, the total dividend amount was reduced by $19,404 which represents a write back of uncashed dividends issued prior to 2012 to shareholders that we have been unable to locate. Since we began paying consecutive dividends in 1995, our original shareholders have received approximately $22.37 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 8.51% 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 $28.50 per share as of December 31, 2018.
The BMA has authorized Investco to purchase our common shares from shareholders who have died or retired from the practice of public accounting and on a negotiated basis. Through March 1, 2019, Investco had purchased 217,661 common shares from shareholders who had died or retired for a total purchase price of $6,186,730. 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.
An actuarial review and projection was performed for us by our independent actuary as of December 31, 2018. We review the actuarial estimates throughout the year for the possible impact on our financial position.
Loss reserves relate to accountants’ and attorneys’ professional liability from C&F programs, and were calculated under the methodologies described below. During 2018, losses emerged at levels consistent with expectations.
We have audited the accompanying consolidated balance sheets of AmerInst Insurance Group, Ltd. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive (loss) income, changes in shareholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
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., Protexure and AmerInst Investment Company, Ltd. (“Investco”). Intercompany accounts and transactions have been eliminated on consolidation.
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.
As a result of the following adjustment, amounts previously reported have been immaterially restated:
In January 2010, Investco, a Bermuda affiliate and Protexure, a US affiliate entered into a loan agreement whereby Investco advanced funds to Protexure. Although no interest has been paid on the loan, as of December 31, 2018, interest amounting to $2,681,108 has been accrued as receivable and payable in the books of Investco and Protexure, respectively. An internal review of the loan agreement was completed in early 2018, and it was determined that a Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, would be required to be filed by Protexure at the time of payment of interest to Investco and the 30% withholding tax would be remitted to the IRS at that time. It was also determined that since the January 2010 inception of this loan, Investco has properly recorded the interest income applicable to this loan, but did not recognize the 30% US withholding tax applicable to this interest. As a result, Investco has recorded a $804,332 withholding tax liability as of December 31, 2018. Of this total withholding tax liability, a cumulative amount of $750,662 is considered an error in prior periods and, the recording in the 2018 financial statements would have a material effect on the results of operations for 2018. Therefore, management determined a restatement of prior periods was necessary.
Underwriting Committee then considers the reasonableness of loss reserves recommended by our independent actuaries, in light of actual loss development during the year and approve the loss reserves to be recorded by AMIC Ltd.
AmerInst classifies its fixed maturity investments as available-for-sale. Accordingly, AmerInst reports these fixed income securities at their estimated fair values with unrealized holding gains and losses being reported as other comprehensive income (loss). Realized gains and losses on sales of fixed maturity investments are accounted for by specifically identifying the cost and are reflected in the income statement in the period of sale.
Declines in the fair value of fixed maturity 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 fixed maturity investments are other than temporary. The risks and uncertainties include the Company’s intent and ability to hold the security, changes in general economic conditions, the issuer’s financial condition or near term recovery prospects, and the effects of changes in interest rates. AmerInst’s accounting policy requires that a decline in the value of a fixed maturity security below its cost basis be assessed to determine if the decline is other than temporary. If so, the fixed maturity 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.
AmerInst classifies its equity securities as available-for-sale. Our equity investments are carried at fair value and as a result of our adoption of ASU-2016-01 on January 1, 2018, the changes in fair value of our equity investments subsequent to January 1, 2018 are recognized within net realized and unrealized gains (losses) on the consolidated statement of operations.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers. ASU 2014-09 provided 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.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230)-Classification of Certain Cash Receipts and Cash Payments” which addressed diversity in practice in how eight specific cash receipts and cash payments should be presented and classified on the statement of cash flows. This guidance was effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. As this guidance relates solely to financial statement disclosures, the adoption of ASU 2016-15, did not impact the Company’s results of operations, financial condition and liquidity.
In November 2016, the FASB issued ASU 2016-18, which required that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU was effective for periods beginning after December 15, 2017.
We adopted ASU 2016-01 on January 1, 2018. As a result, we recorded a cumulative-effect adjustment to increase beginning retained earnings by $5.1 million, representing the unrealized appreciation on our equity investments with an offsetting adjustment to decrease accumulated other comprehensive income. All subsequent changes in fair value of our equity investments are recognized within realized and unrealized gains (losses) on the consolidated statement of operations. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance.
In July 2018, the FASB also issued ASU 2018-11, which adds a transition option for all entities and a practical expedient only for lessors to ASU 2016-02. The transition option, which we elected on adoption of the guidance, allows entities to choose not to apply the new leases standard in the comparative periods they present
in their financial statements in the year of adoption. Under the transition option, entities can instead opt to continue to apply the legacy guidance in ASC 840-Leases, including its disclosure requirements, in the comparative periods presented in the year they adopt the new leases standard. This means that entities that elect this option will only provide annual disclosures for the comparative periods because ASC 840 does not require interim disclosures. Entities that elect this transition option will still be required to adopt the new leases standard using the modified retrospective transition method required by the standard, but they will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The practical expedient provides lessors with an option to not separate the non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the revenue recognition standard in ASC 606 if the associated non-lease components are the predominant components.
In February 2018, the FASB issued ASU 2018-02 “Income Statement-Reporting Comprehensive Income (Topic 220)-Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” in response to a financial reporting issue that arose as a consequence of the U.S. federal government tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (“U.S. Tax Reform”) which was enacted on December 22, 2017.
beginning after December 15, 2019, although early adoption is permitted, with the amendments being applied either prospectively or retrospectively, as specified in the ASU. In addition, an entity may elect to early adopt the removal or modification of disclosures immediately and delay the adoption of the new disclosure requirements until the effective date. We are currently assessing the impact of adopting this guidance however we do not expect the new or modified disclosures to have a material impact on our consolidated financial statements.
In January 2017, Protexure acquired the renewal rights to a book of lawyers’ professional liability business, at a cost of $468,821. Protexure 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 Protexure. At December 31, 2018, the outstanding amount of this loan was $250,250 and it was fully repaid January 2019.
Cash and Cash Equivalents at December 31, 2018 and 2017 include $3,926,032 and $3,051,3639 held by Protexure 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, 2018 and 2017 are as follows:
As of December 31, 2018, there were 35 fixed income securities (2017: 23 securities) in an unrealized loss position with an estimated fair value of $13,094,781 (2017: $9,478,987). Of these fixed income securities, 21 (2017: 7) had been in an unrealized loss position for 12 months or greater. As of December 31, 2018, none of the fixed income securities were considered to be other than temporarily impaired. The Company has the intent to hold these fixed income securities and it is not more likely than not that the Company will be required to sell these fixed income securities before their fair values recover above the adjusted cost. The unrealized losses from these fixed income 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, 2018 and 2017 are as follows:
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, 2018 and what level within the fair value hierarchy each valuation technique resides:
There have been no material changes to any of our valuation techniques from what was used as of December 31, 2017. 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.
Details of the liability for unpaid losses and loss adjustment expenses at December 31, 2018 and 2017 are as follows:
The following tables set forth information about incurred and paid loss development information related to our professional liability business under the Reinsurance Agreement within the Reinsurance segment as at December 31, 2018. The information related to incurred and paid loss development for the years ended December 31, 2011 through 2017 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 for all claims reported as at December 31, 2018 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.
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
With the exception of Protexure, AmerInst and its other direct and indirect subsidiaries have no employees. Their operating activities, as well as certain management functions, are performed by contracted professional service providers. Citadel Management Bermuda Limited (formerly 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, our President, was formerly a director and officer of Cedar Management Limited, and Mr. Thomas R. McMahon, our Treasurer and Chief Financial Officer, is a shareholder, officer, director and employee of Citadel Management Bermuda Limited. The Company paid Citadel Management Bermuda Limited $327,500 and $329,500 in fees during 2018 and 2017, respectively.
Operating and management expenses include compensation paid to members of the Board of Directors and various committees of the Board totaling $504,150 in 2018 and $576,300 in 2017. 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 $70,000 for the years ended December 31, 2018 and 2017, 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.
On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting Protexure.
If a provisional estimate cannot be determined, ASC 740 should still be applied on the basis of tax law provisions that were in effect immediately before the enactment of the Tax Act.
At December 31, 2017, the Company originally recorded a provisional estimate of income tax effects of the Tax Act of $1,040,000 attributable to the reduction in the U.S. corporate income tax rate. Our provisional estimate of $1 million was based in part on a reasonable estimate of the effects of the statutory income tax rate reduction on existing deferred tax balances and of certain provisions of the Tax Act. We recently filed our 2017 U.S. income tax return and have substantially completed our review of the primary impact of the Tax Act provisions on our deferred taxes. As a result, we consider the accounting for the effects of the rate change on deferred tax balances to be complete and no material measurement period changes were recorded for this item. As further guidance is issued by the U.S. tax authority, any resulting changes in our estimates will be treated in accordance with the relevant accounting guidance.
As of December 31, 2017, Protexure had established a full valuation allowance against its deferred tax asset in the amount of $2.8 million since the profitability of Protexure was not certain and, therefore, it was more likely than not that a tax benefit would not be realized. At December 31, 2018, Protexure reexamined the valuation allowance and has determined that a valuation allowance against the deferred tax asset is no longer necessary.
In performing our assessment of the recoverability of the deferred tax asset under this framework, we consider tax laws governing the utilization of the net operating loss carryforwards in each applicable jurisdiction.
Estimates of future taxable income, including income generated from prudent and feasible actions and tax planning strategies could change in the near term, perhaps materially, which may require us to consider any potential impact to our assessment of the recoverability of the deferred tax asset. Such potential impact could be material to our consolidated financial condition or results of operations for an individual reporting period.
Deferred income taxes, arising from Protexure, 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 lowered 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, management set up full valuation allowances against the deferred tax assets as disclosed below since the success of Protexure was not certain and therefore, it was more likely than not that a tax benefit would not be realized. At December 31, 2018, management now believes there is sufficient evidence to support the reversal of the full valuation allowance. The release of this allowance has resulted in the recognition of Protexure’s deferred tax assets and to the recording of an income tax benefit.
At December 31, 2018, the deferred tax assets are based on loss carryforwards of $6.3 million, which expire in 12 to 18 years.
Protexure has employment agreements with four key members of senior management, including one of our named executive officers, Kyle Nieman, the President of Protexure, which grant them phantom shares of the Company. Under these agreements, these employees were initially granted an aggregate 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 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, 2018, 1,442 phantom shares were granted arising from the dividends declared on the Company’s common shares. 87,636 phantom shares were outstanding at December 31, 2018.
The Company has a nonqualified stock option plan to advance the development, growth and financial condition of the Company. This plan provides incentives through participation in the appreciation of its common stock in order to secure, retain and motivate directors and employees and align such person’s interests with those of its shareholders. A total of 100,000 shares are authorized under the stock option plan.
During the quarter ended March 31, 2018, 7,000 stock options were granted to Protexure employees at a strike price of $30.58, which represented the fair market value based on the net book value of the Company’s common stock as of December 31, 2017. These options vest in five equal annual installments beginning on January 1, 2019. Each vested option shall be deemed exercised on the earlier to occur of (i) the 6th anniversary of the date of grant, or (ii) the date of a Change of Control. The Plan states that upon the date of death of a participant, all awards granted pursuant to the agreement for that participant shall become fully vested and remain exercisable for the option grant’s remaining term.