APSL leases office space in Lisle, Illinois under a non cancellable lease agreement. The lease is renewable at the option of the lessee under certain conditions. Minimum lease payments, subsequent to December 31, 2010, are as follows:
Certain statements contained in this Form 10-K, including this MD&A section, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and contain information relating to us that is based on the beliefs of our management as well as assumptions made by, and information currently available to, our management. The words “anticipate,” “expect,” “believe” and similar expressions as they relate to us or our management are intended to identify forward-looking statements.
The insurance segment had revenues of $85,249 for the year ended December 31, 2010 and generated no revenues for the year ended December 31, 2009. Operating and management expenses were $2,652,938 for the year ended December 31, 2010 and $771,088 for the year ended December 31, 2009. This resulted in segment losses of $2,567,689 and $771,088 for the years ended December 31, 2010 and 2009, respectively.
Our results of operations for the years ended December 31, 2010 and December 31, 2009 are discussed below.
We recorded a net loss of $1,101,793 in 2010, compared to net income of $5,751,537 in 2009.
For the years ended December 31, 2010 and December 31, 2009, we recorded commission income of $85,051 and $0, respectively, under the Agency Agreement.
We recorded realized gains, net of impairment, of $2,356,544 for the year ended December 31, 2010 compared to $2,437,589 for the year ended December 31, 2009. The decrease in realized gains recorded in 2010 is due to the reduced sales of fixed maturity securities and equity securities in an unrealized gain position during the year ended December 31, 2010. Net investment income earned for the year ended December 31, 2010 was $405,210 compared to $766,512 for the year ended December 31, 2009. The decline in net investment income is due to the reduction in the investment portfolio following the liquidation of certain fixed maturity investments in May 2009 to settle the payment of $20.55 million due to CNA as a result of the Commutation Agreement entered into between the Company and CNA in 2009. Additionally, in 2010 we disposed of certain fixed maturity and equity investments to fund the operations of APSL, further reducing the total investment portfolio and the net investment income earned. Annualized investment yield, calculated as total interest and dividend income divided by the net average amount of total investments, was 1.4% in 2010 and 2.0% in 2009.
to accumulated other comprehensive income. The decrease in unrealized gain on investments was due primarily to the reduction in the 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, 2010 and 2009 is 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, 2010 and 2009.
Upon the adoption of ASC 320, Investments-Debt and Equity Securities effective April 1, 2009, the Company changed its process for assessing whether declines in the fair value of its fixed maturity investments represented impairments that are other-than-temporary. The process now includes reviewing each fixed maturity investment that is impaired and determining: (1) if the Company has the intent to sell the fixed maturity investment or (2) if it is more likely than not that the Company will be required to sell the fixed maturity investment before its anticipated recovery; and (3) 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 as of December 31, 2010. 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, 2010, the Company did not recognize any other-than-temporary impairments due to required sales.
There have been no material changes to any of our valuation techniques from what was used as of December 31, 2009. 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.
The decrease in the ratio at December 31, 2010, as well as the decrease in cash and total investments at December 31, 2010, compared to December 31, 2009 results primarily from i) net cash outflows relating to APSL, which is still in the development stage, ii) dividends of $647,913 paid during 2010 and iii) $1,440,558 incurred in share repurchases during 2010, partially offset by positive cash inflows from investment operations.
Our cash needs consist of settlement of losses and expenses under our reinsurance treaties and funding day-to-day operations. During the implementation of our business plan, our management expects to meet these cash needs from 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 $45,909 at December 31, 2010 and $0 at December 31, 2009. The December 31, 2010 balance is attributable to net premiums due under the Reinsurance Agreement.
Assumed reinsurance payable represents current reinsurance losses payable to the fronting carriers. This balance was $76,918 at December 31, 2010 and $148,850 at December 31, 2009.
The funds deposited with a reinsurer at December 31, 2009 represented cash placed with the ceding company as collateral for obligations assumed under the attorneys’ liability program written in 2003. The funds were released by the ceding company in 2010.
Deferred policy acquisition costs, which represent the deferral of ceding commission expense related to premiums not yet earned, increased from $0 at December 31, 2009 to $35,060 at December 31, 2010. The deferred policy acquisition costs at December 31, 2010 were attributable to the Reinsurance Agreement.
Prepaid expenses and other assets were $170,606 at December 31, 2010, a decrease of 20.7% from December 31, 2009. These expenses primarily relate to prepaid directors’ and officers’ liability insurance costs and directors’ retainer.
Total dividends declared were $647,913 and $662,249 in 2010 and 2009, respectively, net of the recorded write backs. Continuation of 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 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, 2010 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, 2010, approximately $31 million was available for the declaration of dividends to shareholders. However, due to the requirement to provide the ceding companies with collateral, approximately $21 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, 2010 and 2009 these requirements have been met as follows:
An actuarial review and projection was performed for us by our independent actuary as of December 31, 2010. We review the actuarial estimates throughout the year for the possible impact on our financial position. As noted in our discussion of our results of operations for the year ended December 31, 2009, we recorded a reduction of approximately $5,400,000 in recognition of positive development realized 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.
PDIC was a new program for the Company in 2003. The relationship with the carrier of that insurance ended on December 31, 2003. Therefore, policies written during 2003 are the only ones we have reinsured. To calculate the policy year ultimate losses and allocated loss adjustment expenses for PDIC the actuary applied incurred loss development, incurred Bornhuetter-Ferguson (“BF”), and expected loss methods to the actual PDIC experience. In the calculations, the actuary used industry incurred loss and allocated loss adjustment expenses development patterns and an a priori loss and allocated loss adjustment expenses ratio for use in the BF and expected loss and allocated loss adjustment expenses method calculations. The a priori loss and allocated loss adjustment expenses ratio was selected judgmentally based on the Company’s unpaid claim liability review as of December 31, 2009. The actuary judgmentally selected low and high scenario loss ratio estimates around the central loss ratio estimates. The low and high scenario ultimate loss and allocated loss adjustment expenses estimates were calculated by multiplying net earned premium through December 31, 2010 by the low and high scenario loss ratio selections.
were selected judgmentally based on the Company’s unpaid claim liability review of CAMICO experience as of December 31, 2009. Low and high scenario ultimate loss and allocated loss adjustment expense estimates were calculated by applying faster and slower loss development patterns in the actuarial method calculations.
C&F was a new program for the Company in 2010. To calculate the policy year ultimate losses and allocated loss adjustment expenses for C&F, the actuary applied incurred loss development, incurred BF, and expected loss and allocated loss adjustment expense ratio methods to the actual C&F experience as of December 31, 2010. In the calculations, the actuary used an industry benchmark incurred loss and allocated loss adjustment expense development pattern. The "a priori" loss and allocated loss adjustment expenses ratio used in the BF and expected loss and allocated loss adjustment expense method calculations was selected based on previous work performed for AmerInst related to the pricing of accountants' professional liability insurance. The actuary judgmentally selected low and high scenario loss ratio estimates around the central loss ratio estimate. The low and high scenario ultimate loss and allocated loss adjustment expense estimates were calculated by multiplying net earned premium through December 31, 2010 by the low and high scenario loss ratio selections.
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 2005 year end liability was originally $28,885,000. As of December 31, 2010, we had paid $13,687,000 of the currently estimated $13,835,000 of losses and LAE that had been incurred for 2005 and prior years through the end of 2010; thus an estimated $148,000 in losses incurred through 2005 remain unpaid as of the current financial statement date.
We have no off-balance sheet arrangements required to be disclosed under Item 303(a)(4) of Regulation S-K promulgated by the Securities and Exchange Commission.
We have audited the accompanying consolidated balance sheets of AmerInst Insurance Group, Ltd. and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations and other comprehensive (loss) income, 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.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AmerInst Insurance Group, Ltd. and subsidiaries as of December 31, 2010 and 2009 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
From June 1, 2005 through May 31, 2009, we were a party to a reinsurance contract with CAMICO Mutual Insurance Company (“CAMICO”), a California-based writer of accountants’ professional liability business. Effective June 1, 2009, we decided not to renew the CAMICO contract and permitted the contract to expire pursuant to its terms. In 2008, the business relationship with CAMICO accounted for approximately 5% of AmerInst’s net premiums earned. We remain potentially liable for claims related to coverage through May 31, 2009.
On July 22, 2009, the Company received a payment of $500,891 from Virginia Surety Company (“VSC”) in satisfaction of certain recoveries not previously remitted by VSC under retrocession contracts between the Company and VSC for the years 1989 - 1993. The $500,891 payment was recorded as a decrease in losses and loss adjustment expenses in the year ended December 31, 2009. The Company and VSC are in dispute with respect to over $500,000 in additional recoveries, fees and interest, which is currently in arbitration.
AmerInst has filed an application for a U.S. patent on a unique financing concept called RINITS™ that it has developed to securitize insurance and reinsurance risk, involving property, casualty, life and health. Such securitization would be by equity and debt financing of Bermuda special purpose companies licensed as reinsurers. It is AmerInst’s intention to grant patent licenses to the special purpose companies and investment banking organizations which will market the securities. In addition to the license royalties, AmerInst would manage the special purpose companies for a fee and at its option could invest in them as well. However, AmerInst may not be issued a patent, and, even if so, may not be able to license such patent.
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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
In January 2010, the Company adopted the revised guidance issued by the FASB 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 was effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which was effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of the revised guidance did not have an impact on the consolidated financial statements.
On February 24, 2010, the FASB amended its guidance on subsequent events to no longer require companies filing periodic reports with the Commission to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements in order to alleviate potential conflicts between the FASB’s guidance and the SEC’s filing requirements. This guidance was effective immediately upon issuance. The adoption of this guidance had no impact on the Company’s results of operations or financial condition. While the Company’s consolidated financial statements no longer disclose the date through which it has evaluated subsequent events, it continues to be required to evaluate subsequent events through the date when the Company’s financial statements are issued.
As of December 31, 2010, there were approximately six securities in an unrealized loss position with an estimated fair value of $2,071,084. Of these securities, there is one security that has been in an unrealized loss position for 12 months or greater. As of December 31, 2010, none of these securities were considered to be other than temporarily impaired. The Company has no intent to sell 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, 2009, there were approximately six 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.
Details of the liability for unpaid losses and loss adjustment expenses at December 31, 2010 and 2009 are as follows:
As a result of the change in estimates of insured events in prior years and the establishment of current year reserves, the provision for losses and loss expenses increased (decreased) by $26,869 and $(2,924,184) in 2010 and 2009, respectively. The increase in 2010 resulted from reserves established pursuant to the Reinsurance Agreement offset by favorable development on CAMICO and PDIC. The 2009 decrease related mainly to 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, as discussed in detail in Note 1.
On February 25, 2011, the Board of Directors amended and restated AmerInst’s Statement of Share Ownership Policy to better manage the Company’s expenditures from year to year. Under the new policy that became effective immediately, the Company will limit Investco’s repurchase of Company stock to $500,000 per
Premiums written were $251,896 and $(383,926) during 2010 and 2009, respectively. The premiums written during the year ended December 31, 2010 were attributable to premiums written under the Reinsurance Agreement and to revisions to CAMICO premium estimates for prior years. The negative premium written during the year ended December 31, 2009 resulted from the Reinsurance Treaties being rescinded and terminated retroactive to their inception and the decision not to renew the CAMICO contract.
The Company expensed operating and management expenses of $4,091,078 and $2,744,039 during 2010 and 2009, respectively. 2010 represented the first full year of operations for APSL following its entry into the Agency Agreement with C&F effective September 25, 2009 which mainly explains the increase in the expenses incurred during the year as follows (1) salaries and wages amounting to $1,181,926 paid to APSL employees hired in 2010. In 2009, no payroll costs were incurred since APSL did not have any employees, and (2) increased professional, marketing, consulting and office expenses from $1,236,181 in 2009 to $1,731,177 in 2010 mainly to develop and grow APSL’s new business.
With the exception of APSL, 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, our President, was formally a director and officer of Cedar Management Limited, and Mr. Thomas R. McMahon, our Vice President and Treasurer, is an officer, director and employee of Cedar Management Limited. The company paid $335,000 and $340,000 in fees during 2010 and 2009, respectively.
Operating and management expenses include compensation paid to members of the Board of Directors and various committees of the Board totaling $431,809 in 2010 and $533,055 in 2009.
Under current Bermuda law, the Company and its subsidiaries are not required to pay taxes in Bermuda on either income or capital gains. The Company has received an undertaking from the Bermuda government that, in the event of income or capital gains taxes being imposed, the Company will be exempted from such taxes until the year 2016. However, APSL which is a Delaware corporation domiciled in the State of Illinois is subject to taxation in the United States.
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, 2010 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, 2010, approximately $31 million was available for the declaration of dividends to shareholders. However, due to the requirement to provide the ceding companies with collateral, approximately $21 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.
The liability relating to these phantom shares is recalculated quarterly based on the net book value of the Company’s common shares at the end of each quarter. As a result of the overall decrease in the book value of the Company’s common shares during the year ended December 31, 2010, no liability has been recorded by the Company relating to these phantom shares at December 31, 2010.