The reinsurance segment had revenues of $6,648,589 for the year ended December 31, 2014 and $5,196,315 for the year ended December 31, 2013. Total losses and expenses for this segment were $4,969,999 for the year ended December 31, 2014 and $3,937,404 for the year ended December 31, 2013. This resulted in segment income of $1,678,590 and $1,258,911 for the years ended December 31, 2014 and 2013, respectively.
Our net premiums earned were $3,669,493 for the year ended December 31, 2014 compared to $2,063,277 for the year ended December 31, 2013, an increase of $1,606,216 or 77.8%. The net premiums earned during 2014 and 2013 were attributable to net premium cessions from C&F under the Reinsurance Agreement. The increase in net premiums earned under the Reinsurance Agreement resulted from increased cessions from C&F in 2014, arising from a higher level of underwriting activity under the Agency Agreement due to the continued marketing of the program by APSL resulting in increasing penetration in targeted markets.
For the years ended December 31, 2014 and 2013, we recorded commission income under the Agency Agreement of $2,221,538 and $1,376,622, respectively, an increase of $844,916 or 61.4%. This increase resulted from a higher volume of premiums written under the Agency Agreement in 2014.
We recorded net investment income of $270,898 for the year ended December 31, 2014 compared to $276,084 for the year ended December 31, 2013, a decrease of $5,186 or 1.9%. The decline in net investment income is due to (i) the reduction in the investment portfolio due to the disposition of certain fixed income and equity securities and (ii) lower yielding fixed income securities held in the Company’s investment portfolio during 2014 compared to 2013. 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 2014 and 2013.
Sales of securities during the year ended December 31, 2014 resulted in realized gains on investments, net of impairment, of $2,709,187 compared to $2,857,323 during the year ended December 31, 2013, a decrease of $148,136 or 5.2%. The decrease in realized gains primarily related to decreased sales of equity securities in an unrealized gain position in 2014 compared to 2013.
Unrealized gain on investments was $6,425,384 at December 31, 2013 compared to $5,265,981 at December 31, 2014. 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 decrease in unrealized gain on investments was due primarily to a decline 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.
We recorded policy acquisition costs of $1,357,718 for the year ended December 31, 2014 compared to policy acquisition costs of $763,423 for the year ended December 31, 2013. 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, 2014 and 2013 were 37% of the premiums earned under the Reinsurance Agreement of $3,669,493 and $2,063,277, respectively.
There were no transfers between Levels 1 and 2 during the years ended December 31, 2014 and 2013.
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, 2014. 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, 2014, the Company did not recognize any other-than-temporary impairments due to required sales.
The following describes the valuation techniques we used to determine the fair value of investments held as of December 31, 2014 and what level within the fair value hierarchy each valuation technique resides:
Total cash, investments and other invested assets increased from $25,215,607 at December 31, 2013 to $26,244,248 at December 31, 2014, an increase of $1,028,641 or 4.1%. The net increase resulted primarily from positive cash inflows in relation to net investment income and net premiums received under the Reinsurance Agreement in the amount of $1,900,598. These increases were partially offset by net cash outflows to fund the operations of APSL and dividends of $322,328 paid during the year.
The assumed reinsurance balances receivable represents the current assumed premiums receivable less commissions payable to the fronting carriers. As of December 31, 2014, the balance was $837,712 compared to $468,438 as of December 31, 2013. The increase resulted from a higher level of premiums assumed under the Reinsurance Agreement during 2014.
The assumed reinsurance payable represents current reinsurance losses payable to the fronting carriers. As of December 31, 2014, the balance was $28,533 compared to $101,809 as of December 31, 2013. This balance fluctuates due to the timing of reported losses.
Prepaid expenses and other assets were $834,067 at December 31, 2014, an increase of 51.5% from December 31, 2013. The balance primarily relates to (1) prepaid directors’ and officers’ liability insurance costs, (2) the prepaid directors’ retainer, (3) prepaid professional fees and (4) premiums due to APSL under the Agency Agreement. The increase in the balance was attributable to an increase in premiums due to APSL under the Agency Agreement. This balance fluctuates due to the timing of the prepayments and to the timing of the premium receipts by APSL.
AmerInst paid two semi-annual dividends of $0.25 per share during 2014 and 2013. During 2014, the total dividend amount was reduced by $10,054 which represents a write back of uncashed dividends issued prior to 2009 to shareholders that we have been unable to locate. 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 were unable to locate. Since AmerInst began paying consecutive dividends in 1995, our original shareholders have received approximately $20.37 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 9.16% 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 $31.03 per share as of December 31, 2014.
Total dividends paid were $322,328 and $316,426 in 2014 and 2013, 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.
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, 2015, Investco had purchased 178,260 common shares from shareholders who had died or retired for a total purchase price of $5,042,417. 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, 2014. We review the actuarial estimates throughout the year for the possible impact on our financial position. Loss reserves relate only to accountants’ and attorneys’ professional liability from CAMICO and C&F programs, and were calculated under the methodologies described below. During 2014, for the C&F program, more losses emerged than expected for the attorneys’ business which related to a few large claims from the 2013 policy year. We note that claim frequency for the attorneys business under the C&F program is at or below expected levels. C&F accountants’ business performed consistent with, if not better than, expectations during 2014; and fewer losses from the CAMICO run-off program emerged than expected in 2014.
CAMICO was a new program for the Company in 2005. The program provides professional liability coverage to accountants. To calculate the policy year ultimate losses and allocated loss adjustment expenses for CAMICO the actuary applied paid and incurred loss development, paid and incurred Bornhuetter-Ferguson, and paid and incurred Cape Cod methods to the actual CAMICO experience as of December 31, 2014. 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 Bornhuetter-Ferguson method calculations were selected based on the Company’s unpaid claim liability review of CAMICO experience as of December 31, 2013. Low and high scenario ultimate loss and allocated loss adjustment expense estimates were selected by the actuary based on sensitivity testing of results of the CAMICO actuarial analysis to reasonable alternative assumptions.
The following table shows the development of the estimated liability for the previous 10 years of the Company’s operations:
The above table presents the development of balance sheet liabilities for 2004 through 2014 as of year-end 2014, and includes the CNA program liabilities through 2008 (the CNA program was commuted at year-end 2008). The top line of the table shows the original recorded unpaid liability for losses and LAE recorded at the balance sheet date for each of the indicated years.
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, 2014, we had paid $17,705,000 of the currently estimated $17,747,000 of losses and LAE that had been incurred for 2007 and prior years through the end of 2014; thus an estimated $42,000 in losses incurred through 2007 remain unpaid as of the current financial statement date.
We have audited the accompanying consolidated balance sheets of AmerInst Insurance Group, Ltd. and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended. These financial statements 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, 2014 and 2013, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
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, 2014.
Ceding commissions related to assumed reinsurance agreements are deferred and amortized pro rata over the terms of the underlying policies to which they relate.
The liability for unpaid losses and loss adjustment expenses includes case basis estimates of reported losses plus supplemental amounts for projected losses incurred but not reported (IBNR), calculated based upon loss projections utilizing certain actuarial assumptions and AMIC Ltd.’s historical loss experience supplemented with industry data. The aggregate liability for unpaid losses and loss adjustment expenses at year end represents management’s best estimate, based upon the available data, of the amount necessary to cover the ultimate cost of loss, based upon an actuarial analysis prepared by independent actuaries. However, because of the volatility inherent in professional liability coverage, actual loss experience may not conform to the assumptions used in determining the estimated amounts for such liability at the balance sheet date. Accordingly, the ultimate liability could be significantly in excess of or less than the amount indicated in the financial statements. As adjustments to these estimates become necessary, such adjustments are reflected in current operations. AMIC Ltd. does not discount its loss reserves for purposes of these financial statements.
As of December 31, 2014, there were twenty-three securities in an unrealized loss position with an estimated fair value of $3,532,420. Of these securities, nine had been in an unrealized loss position for 12 months or greater. As of December 31, 2014, 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, 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.
Information on sales and maturities of investments during the twelve months ended December 31, 2014 and 2013 are as follows:
There were no transfers into or from Level 3 investments during the years ended December 31, 2014 and 2013.
Level 2: Observable inputs to the valuation methodology other than quoted market prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
There have been no material changes to any of our valuation techniques from what was used as of December 31, 2013. 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.
Major categories of net interest and dividend income are summarized as follows:
As a result of the change in estimates of insured events in prior years, the provision for losses and loss adjustment expenses increased by $915,976 and $1,127,530 in 2014 and 2013, respectively. The 2014 increase resulted from unfavorable development on the Reinsurance Agreement book of business, specifically in the 2013 policy year. The 2013 increase resulted from (1) reserves established under the Reinsurance Agreement and (2) unfavorable development on the CAMICO treaty, specifically in the 2007/2008 and 2008/2009 policy years.
AmerInst currently does not have a public market for its common stock, but the Company has historically purchased shares from the Company’s shareholders upon their death, disability or retirement from the practice of public accounting. The repurchase price has been equal to the year-end net book value per share for the most
Premiums written were $4,657,738 and $2,425,358 during 2014 and 2013, respectively. The premiums written during the year ended December 31, 2014 and 2013 were attributable to premium cessions from C&F under the Reinsurance Agreement
Operating and management expenses include compensation paid to members of the Board of Directors and various committees of the Board totaling $525,681 in 2014 and $545,681 in 2013. 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 and $105,000 for the years ended December 31, 2014 and 2013, 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.
Deferred income taxes, arising from APSL, 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. As of December 31, 2014 and 2013, management set up full valuation allowances against the deferred tax assets as disclosed below since the success of APSL was not certain and therefore, it was more likely than not that a tax benefit would not be realized.
At December 31, 2014, the deferred tax assets (after valuation allowance) are based on loss carryforwards of $9,619,836, which expire in 16 to 20 years.
AmerInst’s ability to pay common shareholders’ dividends and its operating expenses is dependent on cash dividends from AMIC Ltd. and its other subsidiaries. The payment of such dividends by AMIC Ltd. to AmerInst 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, 2014 and 2013 these requirements have been met as follows:
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, 2014, 1,248 phantom shares were granted arising from the dividends declared on the Company’s common shares. 81,787 phantom shares were outstanding at December 31, 2014.