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, 2015, are as follows:
The following discussion addresses our financial condition and results of operations for the periods and as of the dates indicated.
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. We conduct our reinsurance business through AMIC Ltd., our wholly owned subsidiary, which is a registered insurer in Bermuda. We are prepared, subject to obtaining the required licenses and registrations, to act as a direct issuer of accountants’ professional liability insurance policies. Our investment portfolio is held in and managed by Investco, which is a subsidiary of AMIC Ltd.
Our reinsurance segment had revenues of $5,873,847 for the year ended December 31, 2015 and $6,648,589 for the year ended December 31, 2014. Total losses and expenses for this segment were $6,794,589 for the year ended December 31, 2015 and $4,969,999 for the year ended December 31, 2014. This resulted in a segment loss of $920,742 and segment income of $1,678,590 for the years ended December 31, 2015 and 2014, respectively.
Our insurance segment had revenues of $3,095,798 for the year ended December 31, 2015 and $2,222,527 for the year ended December 31, 2014. Operating and management expenses were $3,571,540 for the year ended December 31, 2015 and $3,322,329 for the year ended December 31, 2014. This resulted in segment losses of $475,742 and $1,099,802 for the years ended December 31, 2015 and 2014, respectively.
AmerInst has filed an application with the U.S. Patent and Trade Office for a patent on a unique financing concept called RINITS™ that it has developed to securitize insurance and reinsurance risk, involving property, casualty, life and health risks. Such securitization would be accomplished through 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 utilizing this structure and investment banking organizations which would 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.
Our results of operations for the years ended December 31, 2015 and December 31, 2014 are discussed below.
We operate our business with no long-term debt, no capital lease obligations, no purchase obligations, and no off-balance sheet arrangements required to be disclosed under applicable rules of the SEC. AmerInst’s access to operating cash flows is through the payment of dividends from its subsidiaries.
We recorded a net loss of $1,396,484 in 2015 compared to net income of $578,788 in 2014. The decrease in net income is mainly attributable to the decrease in realized gains on investments, net of impairment, from $2,709,187 for the year ended December 31, 2014 to $195,796 for the year ended December 31, 2015. The decrease in realized gains, net of impairment, resulted from decreased sales of equity securities in an unrealized gain position during 2015 compared to 2014 and to the increase in other-than-temporary impairment charges during 2015 compared to 2014. This was partially offset by the increase in commission income from 2,221,538 in 2014 to $3,093,980 in 2015 as a result of a higher volume of premiums written under the Agency Agreement, as discussed in further detail below.
Our net premiums earned were $5,423,599 for the year ended December 31, 2015 compared to $3,669,493 for the year ended December 31, 2014, an increase of $1,754,106 or 47.8%. The net premiums earned during 2015 and 2014 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 2015, arising from a higher volume of underwriting activity under the Agency Agreement. The continued marketing of the program by APSL resulted in increased penetration in targeted markets.
We recorded net investment income of $256,270 for the year ended December 31, 2015 compared to $270,898 for the year ended December 31, 2014, a decrease of $14,628 or 5.4%. 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 2015 compared to 2014. Annualized investment yield, calculated as total interest and dividends divided by the net average amount of total investments and cash and cash equivalents, was 1.0% in 2015, compared to 1.1% in 2014.
Unrealized gain on investments was $5,265,981 at December 31, 2014 compared to $4,337,510 at December 31, 2015. 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.
The composition of the investment portfolio at December 31, 2015 and 2014 is as follows:
We recorded policy acquisition costs of $2,006,741 for the year ended December 31, 2015 compared to policy acquisition costs of $1,357,718 for the year ended December 31, 2014. 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, 2015 and 2014 were 37% of the premiums earned under the Reinsurance Agreement of $5,423,599 and $3,669,493, respectively.
The Company incurred operating and management expenses of $4,765,725 for the year ended December 31, 2015 compared to $4,604,482 for the year ended December 31, 2014, an increase of $161,243 or 3.5%. The increase was primarily attributable to increased salaries and related costs associated with APSL’s hiring of additional producer personnel in 2015.
The following tables show the fair value of the Company’s investments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” as of December 31, 2015 and 2014.
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, 2015. 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, 2015, the Company did not recognize any other-than-temporary impairments due to sales.
If we conclude a 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, 2015 and December 31, 2014, relating to eleven and nine fixed maturity securities, amounted to $18,853 and $22,093, respectively, and fifteen and fourteen equity securities, amounted to $87,838 and $62,458, respectively. The Company has the intent and ability 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. As a result of the decline in fair value below cost, the Company recorded a total other-than-temporary impairment charge of $783,005 and $121,623 on nine and eight equity securities during the years ended December 31, 2015 and 2014, respectively.
Our fixed income, equity and hedge fund portfolios are invested in accordance with a written Investment Policy Statement adopted by our Board of Directors. We engage professional advisors to manage day-to-day investment matters under the oversight of our Investment Committee.
The following describes the valuation techniques we used to determine the fair value of investments held as of December 31, 2015 and what level within the fair value hierarchy each valuation technique resides:
At December 31, 2015 and December 31, 2014, the Company had investments in certificates of deposit (“CD”) in the amount of $980,000 and $1,470,000, respectively, comprising of fully insured time deposits placed with Federal Deposit Insurance Corporation (“FDIC”) insured commercial banks and savings associations. The FDIC, an independent agency of the United States government, protects depositors up to an amount of $250,000 per depositor, per insured institution. FDIC insurance is backed by the full faith and credit of the United States government. The stated interest rate of an FDIC insured CD varies greatly among commercial banks and savings associations, depending on the term of the CD and the institution’s need for funding. The liquidity of “marketable” CDs is marginal, even though they are assigned an FDIC number, a CUSIP number and are held in book-entry form through the Depository Trust Company. Depending on market liquidity and conditions, the bid price for an FDIC insured CD would reflect the supply of and the demand for deposits of the particular bank or savings association, as well as prevailing interest rates, the remaining term of the deposit, specific features of the CD, and compensation of the broker arranging the sale of the CD. These time deposits have maturities ranging from two to five years and are classified as other invested assets on the Company’s consolidated balance sheet.
Total cash, investments and other invested assets increased from $26,244,248 at December 31, 2014 to $27,056,148 at December 31, 2015, an increase of $811,900 or 3.1%. 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 $2,913,882. These increases were partially offset by net cash outflows to fund the operations of APSL and dividends of $316,207 paid during the year.
Our cash needs consist of settlement of losses and expenses under our reinsurance treaties and funding day-to-day operations. During the continued 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 that may arise without having to resort to borrowing, which would be subject to regulatory limitations.
The assumed reinsurance payable represents current reinsurance losses payable to the fronting carriers. As of December 31, 2015, the balance was $269,055 compared to $28,533 as of December 31, 2014. This balance fluctuates due to the timing of reported losses.
Prepaid expenses and other assets were $1,042,249 at December 31, 2015, an increase of 25.0% from December 31, 2014. 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.
increase in the balance was attributable to an increase in premiums payable by APSL to C&F under the Agency Agreement. This balance fluctuates due to the timing of the premium payments to C&F and payments of professional fees.
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, 2016, Investco had purchased 186,283 common shares from shareholders who had died or retired for a total purchase price of $5,287,360. 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.
C&F was a new program for the Company in 2010. The program provides professional liability coverage to accountants and lawyers. To calculate the policy year ultimate losses and allocated loss adjustment expenses for C&F, the actuary applied paid and incurred loss development, paid and incurred Bornhuetter-Ferguson, and paid and incurred Cape Cod methods to the actual C&F experience as of December 31, 2015, separately for accountants and lawyers experience. In the calculations, the actuary relied on company and industry benchmark loss and allocated loss adjustment expense development patterns. 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 C&F experience as of December 31, 2014. 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 C&F actuarial analysis to reasonable alternative assumptions.
The above table presents the development of balance sheet liabilities for 2005 through 2015 as of year-end 2015, 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 “cumulative redundancy (deficiency)” represents the aggregate change in the estimates over all prior years. For example, the 2008 liability has developed a $3,399,000 redundancy which has been reflected in income in subsequent years as the reserves were re-estimated.
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, 2015.
On January 5, 2009, AMIC Ltd. received written notice from CNA that CNA did not intend to renew the reinsurance program encompassed by the Reinsurance Treaties. In 2008, the business relationship with CNA accounted for approximately 95% of AmerInst’s net premiums earned.
We decided not to renew the CAMICO contract and permitted the contract to expire pursuant to its terms on May 31, 2009. We remain potentially liable for claims related to coverage through May 31, 2009.
The anticipated effect of inflation is implicitly considered when estimating liabilities for unpaid losses and loss adjustment expenses. Future average severities are projected based on historical trends adjusted for anticipated trends, are monitored based on actual developments and are modified if necessary.
Developmental costs for internal use software are capitalized in accordance with the provisions of the Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) topic 350 “Intangibles-Goodwill and Other”, generally, when the preliminary project stage is completed, management commits to funding and it is probable that the project will be completed and the software will be used to perform the functions intended. Capitalized internal use software costs are amortized on a straight-line basis over their estimated useful lives, generally for a period not to exceed 5 years.
In August 2014, the FASB issued Accounting Standards Update 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). Currently, there is no guidance under U.S. GAAP regarding management’s responsibility to assess whether there is substantial doubt about an entity’s ability to continue as a going concern. Under ASU 2014-15, the Company will be required to assess its
As of December 31, 2015, there were twenty-six securities in an unrealized loss position with an estimated fair value of $4,585,513. Of these securities, ten had been in an unrealized loss position for 12 months or greater. As of December 31, 2015, 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.
The cost or amortized cost and estimated fair value of fixed maturity investments at December 31, 2015 and 2014 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.
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, 2015 and 2014.
There were no transfers between Levels 1 and 2 during the years ended December 31, 2015 and 2014.
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. The following describes the valuation techniques we used to determine the fair value of investments held as of December 31, 2015 and what level within the fair value hierarchy each valuation technique resides:
hierarchy. The Company receives prices based on closing exchange prices from independent pricing sources to measure fair values for the equities.
Property and equipment, primarily associated with APSL, at December 31, 2015 and 2014 at cost, less accumulated depreciation and amortization, totaled $130,740 and $291,983, respectively 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 $1,637,787 and $915,976 in 2015 and 2014, respectively. The 2015 increase resulted from reserves established under the Reinsurance Agreement, specifically in the 2014 policy year. The 2014 increase resulted from unfavorable development on the Reinsurance Agreement book of business, specifically in the 2013 policy year.
Operating and management expenses include compensation paid to members of the Board of Directors and various committees of the Board totaling $488,581 in 2015 and $525,681 in 2014. 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, 2015 and 2014, 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
At December 31, 2015, the deferred tax assets (after valuation allowance) are based on loss carryforwards of $10,408,580, which expire in 15 to 20 years.
shares of the Company on the date of their employment, subject to certain vesting requirements. The phantom shares are eligible for phantom dividends payable 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, 2015, 1,369 phantom shares were granted arising from the dividends declared on the Company’s common shares. 83,156 phantom shares were outstanding at December 31, 2015.
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, 2015.