of the loss and loss adjustment expenses. As of December 31, 2020, the range of actuarially determined liability for loss and loss adjustment expense reserves was as follows: the low estimate was $17.9 million, the high estimate was $24.4 million, and the central estimate was $20.9 million. Due to 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 $20,936,677 as of December 31, 2020, which is marginally greater than the central estimate of our independent actuary.
The decrease in net income was mainly attributable to the decrease in net realized and unrealized gains on investments of $5,839,273 - from a gain of $4,074,997 for the year ended December 31, 2019 to a $1,764,276 loss for the year ended December 31, 2020, which is due to unfavorable market conditions attributable to the impact of the COVID-19 coronavirus pandemic on the worldwide economy and to the increase in loss and loss adjustment expenses of $10,827,635 - from $8,028,735 for the year ended December 31, 2019 to $18,856,370 for the year ended December 31, 2020, which is due to higher than expected loss emergence on the Company’s lawyers’ book of business in accident years 2017, 2018 and 2019.
Our net premiums earned were $11,848,463 for the year ended December 31, 2020 compared to $11,348,596 for the year ended December 31, 2019, an increase of $499,867 or 4.4%. The net premiums earned during 2020 and 2019 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 during the first nine months of 2020, arising from a higher volume of underwriting activity under the Agency Agreement. The higher volume of underwriting activity during this time period was due to the continued
marketing of the program by Protexure resulted in increased penetration in targeted markets. In October 2020, C&F advised us to cease writing business in eight states under the Agency Agreement, which resulted in a lower volume of underwriting activity under the Agency Agreement, which resulted in decreased cessions from C&F during the fourth quarter of 2020. We are currently in discussions with alternative carriers to write policies impacted by this directive. Policies written by insurers other than C&F are not subject to the 50% quota share reinsurance to AMIC Ltd. under the Reinsurance Agreement.
We recorded net realized and unrealized losses on investments of $1,764,276 for the year ended December 31, 2020 compared to net realized gains of $4,074,997 for the year ended December 31, 2019, a decrease of $5,839,273 or 143.3%. The decrease was primarily related to the decrease in the fair value of our equity investments during the nine months ended September 30, 2020, due to unfavorable market conditions attributable to the impact of the COVID-19 coronavirus pandemic on the worldwide economy. During the first quarter of 2020, our investment portfolios that hold equity securities incurred significant negative valuation adjustments as spreads widened and perceived risks elevated as was reflected in first quarter financial results. During the second and third quarters of 2020, our investment portfolio partially recovered as markets responded to unprecedented monetary and fiscal stimulus in the U.S. and around the world. In September 2020, the Company liquidated its equity securities portfolios as a measure to preserve its capital base, as referred to above.
Unrealized gains on our fixed income investments were $582,896 at December 31, 2020 compared to unrealized gains of $103,630 at December 31, 2019. We consider our entire fixed income investment portfolio to be available for sale and accordingly all fixed income investments are reported at fair value, with changes in net unrealized gains and losses reflected as an adjustment to accumulated other comprehensive income. Given the nature of our investments in fixed maturities and the average duration of our fixed maturity securities, the return of our fixed maturities investments will be impacted by changes in interest rates. As a result to the current declining rate environment, our fixed income securities have experienced realized gains prior to maturity. Declines in the fair value of fixed income 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 income 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 fixed income security below its cost basis be assessed to determine if the decline is other than temporary. If so, the fixed income 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 fixed income investment becomes its new cost basis.
The composition of the investment portfolio at December 31, 2020 and 2019 was as follows:
Our losses and loss adjustment expenses increased by 134.9% to $18,856,370 in 2020 from $8,028,735 in 2019. The increase in loss and loss adjustment expenses was due to higher than expected loss emergence on the Company’s lawyers’ book of business in accident years 2017, 2018 and 2019. Our loss ratio under the Reinsurance Agreement, calculated as the ratio of losses and loss adjustment expenses to net premiums earned, was 159.1% in 2020 and 70.7% in 2019.
We recorded policy acquisition costs of $5,369,752 for the year ended December 31, 2020 compared to $4,199,239 for the same period in 2019. Policy acquisition costs, which are primarily ceding commissions paid to the ceding insurer, are established as a percentage of premiums earned. Therefore, any increase or decrease in premiums earned will result in a similar increase or decrease in policy acquisition costs. The policy acquisition costs recorded during the year ended December 31, 2020 and 2019 were 45.3% and 37% of the net premiums earned under the Reinsurance Agreement of $11,848,463 and $11,348,596, respectively. The increase to the percentage applied to net premiums earned during the year ended December 31, 2020 was attributable to the recording of a premium deficiency reserve in December 2020 in the amount of $985,876. This reserve was recorded as management believes that the Company’s unearned premium position at December 31, 2020 may not be sufficient to meet future expected claims and expenses, as a result of recent adverse claim activity, as discussed above.
We incurred operating and management expenses of $5,711,222 for the year ended December 31, 2020 compared to $6,847,921 for the year ended December 31, 2019, a decrease of $1,136,699 or 16.6%. The decrease was primarily attributable to the reversal of a withholding tax accrual recorded by AMIC Ltd. in the amount of $817,745. The withholding tax accrual related to withholding tax payable on interest payable by Protexure to AMIC Ltd. on an intercompany loan. During 2020, the Company decided to reverse inception to date interest on the loan and thus the interest and the withholding tax accrual were reversed. The decrease was also attributable to decreased board and committee meetings related expenses due to the reduction in physical meetings held during the second, third and fourth quarters as the result of travel restrictions imposed in relation to COVID-19.
Our equity securities were managed by two external large cap value advisors. Our investment approach was to focus on increasing the fair market value of our equity securities by investing in companies that may or may not be paying a dividend but whose market values may increase over time. Some of the key factors we considered in a prospective company to invest in included the discount to value and the quality of the management team. Our equity portfolios were managed with the target objectives of achieving an annualized rate of return over a trailing 3-year to 5-year period of 400 basis points over the Consumer Price Index, total returns at least equal to representative benchmarks such as the various S&P indices, and a ranking in the top half of the universe of other actively managed equity funds with similar objectives and risk profiles.
At each measurement date, we estimate the fair value of the security using various valuation techniques. We utilize, to the extent available, quoted market prices in active markets or observable market inputs in estimating 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.
conditions going forward, particularly if current market conditions do not improve in the near future, we could incur substantial additional realized and unrealized losses in future periods, which could have an adverse impact on our results of operations and financial condition. The current market volatility may also make it more difficult to value certain of our securities if trading becomes less frequent. As such, valuations may include assumptions or estimates that may have significant period-to-period changes that could have a material adverse effect on our results of operations or financial condition.
We did not intend to sell any fixed maturity investments classified as available-for-sale that were in an unrealized loss position at December 31, 2020. In assessing whether it is more likely than not that we will be required to sell a fixed maturity investment before its anticipated recovery, we consider various factors including our 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, 2020, we did not recognize any other-than-temporary impairments due to sales.
If we conclude a fixed income security is other-than-temporarily impaired, we write down the amortized cost of the security to fair value, with a charge to net realized investment gains (losses) in the Consolidated Statement of Operations. Gross unrealized losses on the investment portfolio as of December 31, 2020 and December 31, 2019, relating to 3 and 8 fixed maturity securities, amounted to $2,053 and $9,495, respectively. We have the ability and intent to hold these securities either to maturity or until the fair value recovers above the adjusted cost. The unrealized losses on these available for sale fixed maturity securities were not as a result of credit, collateral or structural issues. During the years ended 2020 and 2019, no other-than-temporary impairment charges were recorded.
The assumed reinsurance balances receivable represents the current assumed premiums receivable less commissions payable to C&F. As of December 31, 2020, the balance was $2,221,664 compared to $5,695,847 as of December 31, 2019. This balance fluctuates due to the timing of the net premium received from C&F under the Reinsurance Agreement.
Accrued expenses and other liabilities primarily represent premiums payable by Protexure to C&F under the Agency Agreement and expenses accrued relating largely to professional fees. The balance decreased from $5,873,130 at December 31, 2019 to $3,689,620 at December 31, 2020, a decrease of $2,183,510 or 37.2%. This balance fluctuates due to the timing of the premium payments to C&F and payments of professional fees.
During 2020, we paid no ordinary cash dividends as a measure to preserve the Company’s capital base. During 2019, we paid an annual dividend of $0.50 per share. During 2019, the total dividend amount was reduced by $19,335 which represents a write back of uncashed dividends issued prior to 2014 to shareholders that we have been unable to locate. Since we began paying dividends in 1995, our original shareholders have received approximately $22.87 in cumulative dividends per share.
to our capacity to accept more business. No dividends were paid during 2020 as a measure to preserve the Company’s capital bases, as referred to above.
Our ability to pay dividends to our shareholders and to pay our operating expenses is dependent on cash dividends from our subsidiaries. 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 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. In addition, AMIC Ltd. must be able to pay its liabilities as they become due in the ordinary course of its business, and fund its collateral obligations to ceded companies, after the payment of a dividend. The payment of such dividends by AMIC Ltd 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 as described above. For the years ended December 31, 2020 and 2019 these requirements have been met as follows:
The BMA has authorized AMIC Ltd. 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, 2021, AMIC Ltd. had purchased 231,259 common shares from shareholders who had died or retired for a total purchase price of $6,597,786. From time to time, AMIC Ltd. has also purchased shares in privately negotiated transactions. Through that date, AMIC Ltd. had purchased an additional 75,069 common shares in such privately negotiated transactions for a total purchase price of $1,109,025.
We have audited the accompanying consolidated balance sheets of AmerInst Insurance Group, Ltd. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Our audit procedures related to the liability for unpaid losses and loss adjustment expenses balance included the following, among others:
We tested the process used by the Company to develop the estimate, which includes management’s review and consideration of the independent actuary’s report.
We tested the completeness and accuracy of the underlying data used by the independent actuary, including, claims.
AmerInst Insurance Group, Ltd., (“AmerInst”, “Company”, “we”, “our” or “us.”) was formed under the laws of Bermuda in 1998. The Company, through its wholly owned subsidiary AmerInst Insurance Company, Ltd. (“AMIC Ltd.”) and its predecessor AmerInst Insurance Company, Inc. (“AIIC Inc.”), were engaged in the reinsurance of claims-made insurance policies of participants in an American Institute of Certified Public Accountants (“AICPA”) sponsored insurance program that provided accountants’ professional liability insurance coverage (“AICPA Plan”) through December 31, 2008. Effective December 30, 2020, AMIC Ltd. merged with its wholly owned subsidiary, AmerInst Investment Company, Ltd., with AMIC Ltd. being the surviving entity.
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., and Protexure. Intercompany accounts and transactions have been eliminated on consolidation.
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.
between the fair value and the cost basis of the security. The fair value of the impaired investment becomes its new cost basis.
other instruments that are not measured at fair value through net income. The ASU will replace the existing “incurred loss” approach, with an “expected loss” model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount under the existing other-than temporary-impairment model. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. The Company’s insurance premium balances receivables are also more significant financial assets within the scope of ASU 2016-13. The guidance requires financial assets to be presented at the net amount expected to be collected. The tentative effective date for the ASU is January 1, 2023. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
Pursuant to its reinsurance agreements, AMIC Ltd. is required to provide its ceding companies with collateral to secure its obligations to them. At December 31, 2020 and 2019, AMIC Ltd.’s collateral obligation to C&F amounted to $31,705,419 and $21,509,585, respectively. During 2020, AMIC Ltd.’s collateral obligations to C&F substantially increased due to the emergence of losses during 2020 at levels significantly greater than expectations. The adverse loss development is likely attributable to changes in case reserving practices that led to material increases in average case reserves, and was possibly exacerbated by social inflation and delays in legal resolutions due to the COVID-19 pandemic.
At December 31, 2020 and 2019, AMIC Ltd. has provided C&F with a Section 114 Trust, held by Comerica Bank, with restricted cash and cash equivalents and investments with a carrying value of $25,437,267 and $20,940,689, respectively. At December 31, 2020, AMIC Ltd. failed to meet its collateral obligations to C&F by $6,268,152 as AMIC Ltd. did not have sufficient restricted cash and cash equivalents and investments to meet this obligation. AMIC Ltd. and C&F are currently in discussions on this matter and are jointly seeking its resolution.
Cash and Cash Equivalents at December 31, 2020 and 2019 include $2,163,741 and $2,965,676 held by Protexure in a fiduciary capacity, respectively.
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, 2020 and 2019.
In accordance with U.S. GAAP, 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 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows:
calculate fair value; (ii) quantitative analysis; (iii) a review of multiple quotes obtained in the pricing process and the range of resulting fair values for each security, if available, and (iv) randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates provided by the independent pricing sources.
For prior policy years, the (i) the paid loss development method, (ii) the case incurred development method, (iii) the Bornhuetter-Ferguson (“B-F”) method and (iv) the Cape Cod method are principally used by the Company’s actuaries to estimate the ultimate cost of claims and claim adjustment expenses.
The Company has accumulated claims count information by accident year from the loss data for all claims reported as at December 31, 2020 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.
Premiums written were $11,162,731 and $11,605,148 during 2020 and 2019, respectively. The premiums written during the year ended December 31, 2020 and 2019 were attributable to premium cessions from C&F under the Reinsurance Agreement.
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. Davies Captive Management Limited (formerly Citadel Management Bermuda 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. Thomas R. McMahon, our Treasurer and Chief Financial Officer, is an officer, director and employee of Davies Captive Management Limited. The Company paid Davies Captive Management Limited $362,000 and $353,000 in fees during 2020 and 2019, respectively.
Operating and management expenses include compensation paid to members of the Board of Directors and various committees of the Board totaling $381,650 in 2020 and $493,250 in 2019. 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, 2020 and 2019, 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.
Our ability to pay dividends to common shareholders and to pay our operating expenses is dependent on cash dividends from our subsidiaries. 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 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. In addition, AMIC Ltd. must be able to pay its liabilities as they become due in the ordinary course of business, and fund its collateral obligations to ceded companies, after the payment of a dividend. The payment of such dividends by AMIC Ltd. 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, 2020 and 2019 these requirements have been met as follows:
At December 31, 2020, approximately $1 million was available for the declaration of dividends by AMIC Ltd. to us. Management expects that any dividend AMIC, Ltd. declares to us over the next twelve-month time period will be utilized entirely by us to fund our day-to-day operations. Therefore, as of December 31, 2020, no amount was available for the declaration of dividends by us to our shareholders.
Statutory loss for the years ended December 31, 2020 and 2019 was $16,483,222 and $1,237,746, respectively.
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 net book value of the Company’s common shares since the grant dates, no liability has been recorded by the Company relating to these phantom shares at December 31, 2020.
A summary of the status of the stock option plan as of December 31, 2020 is as follows:
Information pertaining to options outstanding at December 31, 2019 is as follows:
At December 31, 2020, there was no intrinsic value associated with (i) the 35,000 options granted March 3, 2017, (ii) the 7,000 options granted on January 1, 2018 and (iii) the 5,000 optioned granted on October 1, 2018 where the market value of the stock as of the close of business at year end was $9.50 per share as compared with the option exercise prices of $27.99, $30.58 and $30.14, respectively.
Protexure leased office space in Lisle, Illinois under a non-cancellable lease agreement that commenced on December 14, 2009 and expired December 31, 2020. In December 2020, the Company executed a lease extension to December 31, 2021. Minimum lease payments, subsequent to December 31, 2020 are $112,290 in 2021.