The following summary sets forth selected financial data with respect to us for the five fiscal years ended December 31, 2005. The balance sheet and income statement data have been derived from our consolidated financial statements which have been audited by Deloitte & Touche, our independent registered public accounting firm. The data set forth below should be read in conjunction with the audited financial statements and notes thereto included elsewhere in this annual report.
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 CPA’s in all 50 states of the United States, representing a broad cross section of small and mid-size firms.
In an effort to maximize the value of our shares, we have been looking at ways to expand our business, including possibly entering into other lines of insurance business. During 2003 we provided reinsurance of attorneys’ professional liability policies provided by Professional Direct Insurance Company. That activity was not a significant portion of our business in 2003 and was terminated at the end of that year. Effective June 1, 2005, we wrote 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. The premiums under the CAMICO treaty vary with the losses incurred, between a minimum and a maximum.
AmerInst has entered into a confidentiality agreement with several investment banking organizations. There can be no assurance that a patent will be issued or that AmerInst will be able to license the patent if it is issued.
In addition to the patent application, AmerInst has filed an application for a trademark under which the concept will be marketed.
Our results of operations for the years ended December 31, 2005, December 31, 2004 and December 31, 2003 are discussed below. Results in 2003 were significantly impacted by the reduction of $5.0 million in our loss reserves as a result of our actuaries gaining more complete information from the primary carrier with respect to its experience under the AICPA plan.
Our net income increased to $3,095,121 in 2005, compared to net income of $1,749,007 in 2004. We had net income of $4,770,148 in 2003.
The significant increase in net income from 2004 to 2005 is primarily due to the reduction of loss reserves by $2.3 million, as well as an increase in net premiums earned and net realized gain. In 2004 loss reserves were reduced by $2.5 million, and in 2003 were reduced by $5.0 million. Due to the uncertainty inherent in the reinsurance policies written by the Company, we have always adopted a conservative policy concerning our loss reserving. In the last three years, our actuary was able to obtain additional information which included breaking out loss development on CNA’s “premier” and “value” plans which we reinsure. Our actuary determined in the course of his analysis that experience under the CNA plans has been more favorable than industry performance reflected in the reserves we established for our reinsurance of the plans. In light of this new information, we believed it was reasonable to reduce the 2003 loss reserves by $5.0 million, which resulted in an increase in net income in 2003 by that amount. For 2004, we believed it reasonable that the reduction in loss reserves should be limited to $2.5 million, and for 2005 the reduction in loss reserves should be limited to $2.3 million. Our loss reserves are still near the high end of the reserve range provided by the actuary, which is consistent with our long established loss reserving philosophy. The Company will continue to review loss reserves periodically and, based on the actuarial projections, determine whether reserves are required to be increased or decreased.
Net realized gains increased $613,370 in 2005 to $1,345,861 from $732,491 in 2004. Net realized gains in 2004 decreased by $201,504 from a $933,995 gain in 2003.
Invested assets, including investments and cash equivalents, decreased by $3,616,763 or 6.8% to $49,699,382 in 2005 compared to $53,316,145 in 2004. The decrease was primarily due to the sale of fixed income securities to fund the tender offer payments in January 2005. 2004 invested assets decreased by 2.4% from $54,617,095 as of December 31, 2003. Investment yield including net realized gains and losses in 2005 as of December 31 was 4.8% as compared to 3.7% in 2004 and 4.4% in 2003. Excluding realized gains and losses, the yield was 2.2% in 2005, 2.3% in 2004 and 2.7% in 2003. The decrease in investment yield excluding realized gains and losses from 2004 to 2005 and from 2003 to 2004 was due to a general decrease in interest rates on investments held in our portfolio as a result of the shortening of the average duration of the fixed income portfolio in order to reduce the risk of principal loss in the expected future environment of rising interest rates.
Unrealized gain on investments was $5,422,382 at December 31, 2005 compared to $6,282,073 at December 31, 2004. We consider our entire investment portfolio to be available for sale and accordingly all investments are reported at market value, with changes in net unrealized gains and losses reflected as an adjustment to accumulated other comprehensive income. The 13.7% decrease in unrealized gain on investments was due primarily to a reduction in the value of the company’s equity portfolio. Unrealized gain on investments was $6,039,616 at December 31, 2003. Declines in the market 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 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, 2005 and 2004 is as follows:
Our Company’s fixed income, equity and hedge fund portfolios are invested in accordance with a written Investment Policy Statement adopted by our Board of Directors. Our Company engages professional advisors to manage day to day investment matters under the oversight of our Investment Committee.
Our losses and loss adjustment expenses decreased by 19.6% to $4,105,121 in 2005 from $5,104,341 in 2004, and for 2004 increased by 104% from $2,502,884 in 2003. These amounts included favorable development of prior years’ estimates of losses and loss adjustment expenses of approximately $2,275,832 in 2005, $2,494,106 in 2004 and $5,016,302 in 2003. Our loss ratio, calculated as the ratio of losses and loss adjustment expenses to net premiums earned, was 45.2% in 2005, 57.6% in 2004 and 29.8% in 2003. The reason for the favorable development of prior years’ estimates is discussed in more detail below under the caption “Losses and Loss Adjustment Expenses.” As noted above, the decrease in losses and loss adjustment expenses as a result of favorable development of prior years’ estimates of losses and loss adjustment expenses was the primary reason for our substantial increase in net income in 2003.
Operating and management expenses increased by 25.5% in 2005 to $1,722,245 from $1,371,950 in 2004. The primary reasons for this increase were patent and business development expenses. Operating and management expenses for 2004 increased by 24.5% from $1,101,528 in 2003 due to increased audit and legal fees, costs of SEC compliance, and expenses related to a shareholder’s revised offer to acquire the Company. That offer was made in September 2004 to purchase all of AmerInst’s shares for 82.54% of book value. That offer was rejected by the Board because it presented an inadequate price for control of AmerInst, and because it was inconsistent with our mission.
Based in part upon the analysis that resulted in the $5.0 million reduction in our loss reserves in 2003 discussed previously, our Board of Directors determined that we had capital in excess of the amount required at that time. Therefore, on December 22, 2003, the Board declared a special dividend of $10.50 per share, ($3.5 million in the aggregate) to return a portion of our capital to our shareholders. The special dividend was paid January 15, 2004.
The Bermuda Monetary Authority previously authorized the purchase of up to 15,000 of our shares by AmerInst Investment Company, Ltd. Such purchases are made through privately negotiated transactions and are in addition to our practice of purchasing the shares of individuals who have died or retired from the practice of public accounting. Subsequently, the Authority authorized blanket permission for AmerInst Investment Company, Ltd. to purchase common shares without limit from individuals who have died or retired from the practice of public accounting and on a negotiated case-by-case basis. Through March 1, 2006, AmerInst Investment Company, Ltd had purchased in negotiated transactions at various prices 18,533 common shares for a total purchase price of $615,513. In addition, through that date, AmerInst Investment Company, Ltd. had purchased 21,701 common shares from individuals who had died or retired for a total purchase price of $1,133,232. In connection with the tender offer described below, the Authority separately authorized the acquisition by AmerInst Investment Company, Ltd. of up to 20% of our outstanding shares.
On December 17, 2004, AmerInst, through its indirect wholly owned subsidiary, AmerInst Investment Company, Ltd., commenced a “modified Dutch auction” self-tender offer for AmerInst shares. Pursuant to the tender offer, which expired on January 21, 2005, 65,959 shares were accepted for purchase at a price of $60.00 per share, for a total purchase price of $4,298,229, including tender offer expenses of $340,698.
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 $2.3 million from unpaid losses and loss adjustment reserves occurred in the fourth quarter of 2005.
In preparing ultimate loss and allocated loss adjustment expenses, the Company’s actuary examined a variety of methods. The actuary applied traditional loss development and generalized “Cape Cod” methods separately to case incurred loss and allocated loss adjustment expense data and to paid loss and allocated loss adjustment expense data. As noted above, separate calculations were done for the value and premier plans.
of $1 million frequency and severity amounts. Based on historical allocated loss adjustment expenses data, the actuary selected a 1.65% and a 1.84% frequency provision and a $524,804 and a $449,425 severity provision for 2005 and 2004, respectively, for allocated loss adjustment expense in addition to limits.
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 1995 year end liability was originally $18,629,000. As of December 31, 2005, we had paid $7,084,000 of the currently estimated $8,018,000 of losses and LAE that had been incurred for 1995 and prior years through the end of 2005; thus an estimated $934,000 in losses incurred through 1995 remain unpaid as of the current financial statement date.
The following table provides an analysis of our contractual obligations at December 31, 2005:
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AmerInst Insurance Group, Ltd. and subsidiaries as at December 31, 2005 and 2004 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
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”). In 1999, as part of the redomestication and restructuring, AMIC Ltd. assumed the rights and obligations of its predecessor under the reinsurance agreements.
AMIG Ltd. classifies 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.
Basic earnings per share is determined as net income available to common shareholders divided by the weighted average number of common shares outstanding for the period. There are no dilutive securities.
impairment is other than temporary, and the measurement of an impairment loss by reference to various existing accounting literatures. The FSP replaces the guidance set forth in paragraphs 10-18 of EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” with references to existing other-than-temporary impairment guidance. The FSP supersedes EITF D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value” and clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made.
As a result of the change in estimates of insured events in prior years, the provision for losses and loss expenses decreased by $2,275,832, $2,494,106 and $5,016,302 in 2005, 2004 and 2003, respectively. 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 policy years 1995 to 2002. The 2003 decrease related mainly to positive loss development in the fiscal years 1988 to 2000.
Premiums written were $9,027,666, $8,885,926, and $8,903,576 during 2005, 2004 and 2003, respectively.
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, 2005 and 2004 these requirements have been met. The minimum required statutory capital and surplus was $4,332,693 and $4,455,276 and actual statutory capital and surplus was $18,990,429 and $16,579,531 at December 31, 2005 and 2004. The minimum required level of liquid assets was $33,393,992 and $33,786,651 and actual liquid assets were $63,485,386 and $61,491,071 at December 31, 2005 and 2004, respectively.