The following summary sets forth selected financial data with respect to us for the five fiscal years ended December 31, 2006. The balance sheet and income statement data have been derived from our consolidated financial statements. The financial data set forth below should be read in conjunction with the audited financial statements and notes thereto included elsewhere in this annual report.
* The per share amounts have been adjusted retroactively for all periods presented to reflect the share dividend of two shares for every share outstanding completed in the second quarter of 2006.
We have satisfied our mission by reinsuring accountants professional liability insurance issued under a plan sponsored by the AICPA since 1989. This plan currently insures approximately 24,000 accounting firms and individual CPAs in all 50 states of the United States, representing a broad cross section of small and mid-size firms.
Effective in 2006 AmerInst has two operating segments: 1) reinsurance activity and 2) the new insurance financing product (RINITS™), described below, which is in the initial marketing phase of development. See Note 11, 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.
AmerInst has filed an application for a U.S. patent on a unique financing concept 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.
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.
Our results of operations for the years ended December 31, 2006, December 31, 2005 and December 31, 2004 are discussed below.
Net premiums earned decreased by 4.9% in 2006 to $8,628,534 from $9,075,405 in 2005. Net premiums earned for 2005 increased by 2.4% from $8,856,809 in 2004. The decrease in net premiums earned during 2006 was primarily attributable to rate decreases under the current AICPA Professional Liability Insurance Plan treaty, and in 2005, the increase net premiums earned was primarily attributable to an increase in the number of AICPA insureds and rate increases under the current AICPA Professional Liability Insurance Plan treaty compared to the prior periods.
Net realized gains decreased $225,598 in 2006 to $1,120,263 from $1,345,861 in 2005. Net realized gains in 2005 increased $613,370 to $1,345,861 from $732,491 in 2004.
During 2006 the Board of Directors declared semi-annual dividends payable on March 31 and September 30 of $0.45 per share. During 2005 the Board of Directors declared quarterly dividends payable on March 15 and June 15 of $0.216 per share, and beginning September 1, 2005 the Board of Directors declared a semi-annual dividend payable on September 30 of $0.433 per share. In 2004 the Board of Directors declared quarterly dividends payable on March 15, June 15, September 15 and December 15 of $0.216 per share.
Total dividends declared were $595,924, $596,029 and $449,558 (net of adjustment for special dividend) in 2006, 2005 and 2004, respectively. 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 build surplus to retain flexibility for future business expansions.
AmerInst Insurance Company, Ltd.’s ability to pay dividends to AmerInst is subject to the provisions of the Bermuda insurance and companies laws. Under the Companies Act, that subsidiary would be prohibited from declaring or paying a dividend at December 31, 2006 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 at December 31, 2006, approximately $18 million was available for the payment of dividends to shareholders. In addition, that subsidiary must be able to pay its liabilities as they come 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 AmerInst Insurance Company, Ltd., including its subsidiary, AmerInst Investment Company, Ltd., to us is also limited under Bermuda law by the Insurance Act and related regulations which require that AmerInst Insurance Company, Ltd. maintain minimum levels of solvency and liquidity. For the years ended December 31, 2006 and 2005 these requirements have been met as follows:
Because AmerInst Insurance Company, Ltd. is not admitted as an insurer in Illinois, CNA has the right to annually require AmerInst Insurance Company, Ltd. to procure a letter of credit issued by a U.S. bank in an amount equal to the total unearned premiums for the fiscal year plus CNA’s share of AmerInst Insurance Company, Ltd.’s loss reserves.
The Bermuda Monetary Authority has authorized AmerInst Investment Company, Ltd. to purchase up to 20% of the Company’s common shares from individuals who have died or retired from the practice of public accounting and on a negotiated case-by-case basis. Through March 1, 2007 AmerInst Investment Company, Ltd. had purchased 75,513 common shares, as adjusted for the share dividend, from individuals who had died or retired for a total purchase price of $1,424,450. In addition, through that date, AmerInst Investment Company, Ltd. had purchased in negotiated transactions at various prices 61,791 common shares, as adjusted for the share dividend, for a total purchase price of $755,228. See “Rights Offering” below for a description of the sale of shares by AmerInst Investment Company, Ltd. in connection with the rights offering.
On March 2, 2006, the board of directors of AmerInst approved a share dividend of two shares of common stock for every share held by shareholders of record on April 2, 2006, subject to shareholder approval of an increase in the number of our authorized shares. Such approval was received at the AmerInst 2006 Annual General Meeting on June 1, 2006, which increased the authorized share capital of the Company from $500,000 to $2,000,000. The total issued shares were 331,751 prior to the share dividend and 995,253 afterwards. Unless otherwise noted, all share and per share numbers in these financial statements and this annual report on Form 10-K reflect the share dividend.
AmerInst filed a registration statement on Form S-3 with the SEC on June 15, 2006 to register a rights offering to existing shareholders. The registration statement was amended on July 20, 2006 and declared effective July 24, 2006. Pursuant to the rights offering, which was mailed to shareholders on July 28, 2006, each shareholder received a right to purchase one common share for each share currently owned, at a price of $23.33 per share (after giving effect to the share dividend). Further information concerning the rights offering is contained in the prospectus dated July 28, 2006 and in our S-3 registration statement on file with the SEC. A total of 97,927 rights were exercised prior to October 4, 2006, the expiration date of the oversubscription right under the rights offering. As a result 97,927 shares were subsequently sold by AmerInst Investment Company, Ltd. to shareholders exercising rights, for a total purchase price of $2,284,637, before rights offering costs of $277,057. Of the shares sold in the rights offering, 21,461 shares were purchased by AmerInst directors for a total purchase price of $500,685.
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.
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 for the possible impact on our financial position. As noted in our discussion of our results of operations, based on the analysis by the Company’s actuaries, a reduction of $3.1 million from unpaid losses and loss adjustment reserves occurred in the fourth quarter of 2006. This reduction was the result of the completion of the December 31 actuarial review, which indicated positive loss development in policy years 1994 to 2001.
The above table of losses re-estimated has been prepared on a net basis-i.e., loss and loss adjustment expenses and reinsurance recoveries receivable have not been grossed-up. The schedule has been prepared on a net basis due to the relative immateriality of reinsurance balances when considered in relation to total loss and loss adjustment expense reserves, and due to the costs of providing such information relative to any benefits of providing it.
The “cumulative redundancy (deficiency)” represents the aggregate change in the estimates over all prior years. For example, the 1996 liability has developed a $9,688,000 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 1996 year end liability was originally $18,280,000. As of December 31, 2006, we had paid $7,471,000 of the currently estimated $8,592,000 of losses and LAE that had been incurred for 1996 and prior years through the end of 2006; thus an estimated $1,121,000 in losses incurred through 1996 remain unpaid as of the current financial statement date.
The amounts included for unpaid losses and loss adjustment expenses reflect the estimated timing of expected loss payments on known claims and anticipated future claims. Both the amount and timing of cash flows are uncertain and do not have contractual payout terms. For a discussion of these uncertainties, see “Critical Accounting Policies - Unpaid Losses and Loss Adjustment Expense Reserves” beginning page 15. Due to the inherent uncertainty in the process of estimating the timing of these payments, there is a risk that the amounts paid in any period will differ significantly from those disclosed. Total estimated obligations will be funded by existing cash, investments and future premium income.
We have audited the accompanying consolidated balance sheets of AmerInst Insurance Group, Ltd. and subsidiaries (the “Company”) as at December 31, 2006 and 2005, 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, 2006. 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.
* The dividends per share amounts have been adjusted retroactively for all periods presented to reflect the share dividend of two shares for every share outstanding completed in the second quarter of 2006.
AmerInst Insurance Group, Ltd., (“AMIG Ltd.” or the “Company”) was formed under the laws of Bermuda on July 16, 1998. The Company, through its wholly-owned subsidiary AmerInst Insurance Company, Ltd. (“AMIC Ltd.”) and its predecessor (“AIIC Inc.”), has been engaged in the reinsurance of claims-made insurance policies of participants in an AICPA-sponsored insurance program that provides accountants’ professional liability insurance coverage (“AICPA Plan”).
The reinsurance activity of AMIC Ltd. depends upon agreements entered into with outside parties. In August 1993, the AICPA Plan endorsed the CNA Financial Corporation (“CNA”) insurance group as its insurance carrier. AIIC Inc. then began a reinsurance relationship with CNA, taking a 10% participation of the first $1,000,000 of liability of each policy written under the plan. Effective in December 1999, the Company began taking a 10% share of the “value plan” business from CNA. The “value plan” provides for separate $1,000,000 limits for losses and separate $1,000,000 limits for expenses per occurrence and $2,000,000 in the aggregate. Our maximum limits under the “value plan” are $2,000,000 per occurrence and $4,000,000 in the aggregate.
AMIC Ltd. entered into an excess loss arrangement with Professional Direct Insurance Company (“PDIC”) for a 15% quota share participation in the 1st excess layer of $500,000 excess of $500,000 of the attorneys’ professional liability coverage provided by PDIC. The participation commenced January 1, 2003 and terminated December 31, 2003.
Effective June 1, 2005, AMIC Ltd. entered into a 5% share in CAMICO Mutual Insurance Company’s first excess layer of $2,000,000 excess of $1,000,000. CAMICO is a California-based writer of accountants’ professional liability business. This contract renewed on June 1, 2006.
AMIG Ltd. classifies all of its investments as available-for-sale. Accordingly, AMIG Ltd. reports these securities at their estimated fair values with unrealized holding gains and losses being reported as other comprehensive income. Fair value of investments is based on market quotations. Realized gains and losses on sales of investments are accounted for by specifically identifying the cost and are reflected in the income statement in the period of sale.
the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). FAS 157 clarifies that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets and the lowest priority to unobservable data. Further, FAS 157 requires tabular disclosures of the fair value measurements by level within the fair value hierarchy. FAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted as of the beginning of a fiscal year. The Company is currently evaluating the potential impact of FAS 157 on its financial statements when adopted.
The cost or amortized cost and estimated fair value of fixed maturity investments at December 31, 2006 by contractual maturity are shown below. Expected maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations without penalties.
Details of the liability for unpaid losses and loss adjustment expenses and related reinsurance recoveries receivable at December 31, 2006 and 2005 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 $3,072,636, $2,275,832 and $2,494,106 in 2006, 2005 and 2004, respectively. The 2006 decrease related mainly to positive loss development in the policy years 1994 to 2001. The 2005 decrease related mainly to positive loss development in the policy years 1993 to 2000. The 2004 decrease related mainly to positive loss development in the fiscal years 1995 to 2002.
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, 2006 and 2005 these requirements have been met. The minimum required statutory capital and surplus was $4,224,205 and $4,332,693 and actual statutory capital and surplus was $23,118,869 and $18,960,063 at December 31, 2006 and 2005, respectively. The minimum required level of liquid assets was $33,233,869 and $33,393,992 and actual liquid assets were $67,505,696 and $63,485,386 at December 31, 2006 and 2005, respectively. Statutory income for the years ended December 31, 2006 & 2005 was $2,382,272 and $1,994,906.