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, 2011, are as follows:
We are an insurance holding company based in Bermuda owned primarily by accounting firms, persons associated with accounting firms, and individual CPA practitioners. We were formed in response to concerns about the pricing and availability of accountants’ professional liability insurance in a difficult or “hard” market. Our mission is to be a company that provides insurance protection for professional service firms and engages in investment activities. Through APSL, a Delaware corporation and a wholly-owned subsidiary of Mezco which is a wholly-owned subsidiary of AmerInst, we act as the exclusive agent for C&F 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. 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.
AmerInst has two operating segments: (1) reinsurance activity, which includes investments and other activities, and (2) insurance activity, which offers professional liability solutions to professional service firms. See Note 12, Segment Information, of the notes to the consolidated financial statements contained in Item 12 of this annual report on Form 10-K for financial information concerning these segments.
The insurance segment had revenues of $388,717 for the year ended December 31, 2011 and $85,249 for the year ended December 31, 2010. Operating and management expenses were $2,680,058 for the year ended December 31, 2011 and $2,652,938 for the year ended December 31, 2010. This resulted in segment losses of $2,291,341 and $2,567,689 for the years ended December 31, 2011 and 2010, respectively.
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, 2011 and 2010 is as follows:
We recorded policy acquisition costs of $156,599 for the year ended December 31, 2011 compared to policy acquisition recoveries of $12,209 for the year ended December 31, 2010. 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 year ended December 31, 2011 were 37.3% of the premiums earned under the Reinsurance Agreement of $423,364, net of policy acquisition recoveries in the amount of $1,192 that were attributable to the revisions to the CAMICO premium estimates for prior years as noted above. The policy acquisition recoveries recorded during the year ended December 31, 2010 were attributable to recoveries in the amount of $28,116 in relation to the revisions to the CAMICO premium estimates for prior years, net of policy acquisition costs representing 37.0% of the premiums earned under the Reinsurance Agreement of $42,990.
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, 2011 and what level within the fair value hierarchy each valuation technique resides;
National Mortgage Association. The fair values of U.S. government agency securities are priced using the spread above the risk-free U.S. Treasury yield curve. As the yields for the risk-free U.S. Treasury yield curve are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy. AmerInst considers that there is a liquid market for the types of securities held. Broker quotes are not used for fair value pricing.
Because of CNA’s election not to renew its reinsurance agreement with AMIC Ltd. in 2009, we experienced a significant decrease in our net premiums earned which has adversely affected our revenues over the past two years. As a result we have experienced a decrease in our total investments in 2010 and 2011 due to net cash outflows in order to fund our operational expenses. The reduction in the value of our investment portfolio has been accompanied by a corresponding reduction in our shareholders’ equity during this two-year period. Unless we are able to significantly increase our revenues under new or existing agency and/or reinsurance agreements in future periods, we would expect the value of our investment portfolio and our shareholders’ equity to continue to decrease as investment assets are used to cover our revenue shortfall.
The assumed reinsurance balances receivable represents the current assumed premiums receivable less commissions payable to the fronting carriers and recoveries in relation to reinsurance contacts. As of December 31, 2011, the balance was $183,518 compared to $45,909 as of December 31, 2010. The increase resulted from a higher level of premiums assumed under the Reinsurance Agreement.
The assumed reinsurance payable represents current reinsurance losses payable to the fronting carriers. As of December 31, 2011, the balance was $86,685 compared to $76,918 as of December 31, 2010. This balance fluctuates due to the timing of reported losses.
AmerInst paid two semi-annual dividends of $0.47 per share during 2011 and 2010. During 2011, the total dividend amount was reduced by $39,513, which represents a write back of uncashed dividends issued prior to 2006 to shareholders that we have been unable to locate. During 2010, the total dividend amount was reduced by $38,611, which represents a write back of uncashed dividends issued prior to 2005 to shareholders that we were unable to locate. Since AmerInst began paying consecutive dividends in 1995, our original shareholders have received approximately $18.87 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 9.85% 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 $33.23 per share as of December 31, 2011.
Total dividends declared were $615,993 and $647,913 in 2011 and 2010, 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.
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 at December 31, 2011 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 of December 31, 2011, approximately $32 million was available for the declaration of dividends to shareholders. However, due to the requirement to provide the ceding companies with collateral, approximately $22 million was available for the payment of dividends to the shareholders. In addition, AMIC Ltd. must be able to pay its liabilities as they fall 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 AMIC Ltd., including its subsidiary Investco, 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, 2011 and 2010 these requirements have been met as follows:
C&F was a new program for the Company in 2010. To calculate the policy year ultimate losses and allocated loss adjustment expenses for C&F, the actuary applied incurred loss development, incurred BF, and expected loss and allocated loss adjustment expense ratio methods to the actual C&F experience as of December 31, 2011. In the calculations, the actuary used an industry benchmark incurred loss and allocated loss adjustment expense development pattern. The a priori loss and allocated loss adjustment expenses ratio used in the BF and expected loss and allocated loss adjustment expense method calculations was selected based on previous work performed for AmerInst related to the pricing of accountants’ professional liability insurance. The actuary judgmentally selected low and high scenario loss ratio estimates around the central loss ratio estimate. The low and high scenario ultimate loss and allocated loss adjustment expense estimates were calculated by multiplying net earned premium through December 31, 2011 by the low and high scenario loss ratio selections.
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 2005 year end liability was originally $28,885,000. As of December 31, 2011, we had paid $13,747,000 of the currently estimated $13,784,000 of losses and LAE that had been incurred for 2005 and prior years through the end of 2011; thus an estimated $37,000 in losses incurred through 2005 remain unpaid as of the current financial statement date.
On January 1, 2003, we entered into a 15% participation of Professionals Direct Insurance Company’s (PDIC) attorneys’ professional liability 1st excess cover. This participation terminated on December 31, 2003. The final reported claim was closed during 2011 and although we no longer anticipate we will be liable for further claims related to this period of coverage, there is a remote possibility further claims could be reported.
AmerInst classifies all of its investments as available-for-sale. Accordingly, AmerInst reports these securities at their estimated fair values with unrealized holding gains and losses being reported as other comprehensive income. 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.
In May 2011, the Financial Accounting Standards Board (“FASB”) issued amendments to disclosure requirements for common fair value measurement. These amendments, effective for the interim and annual periods beginning on or after December 15, 2011 (early adoption is prohibited), result in a common definition of fair value and common requirements for measurement and disclosure under U.S. GAAP and IFRS. Consequently, the amendments change some fair value measurement principles and disclosure requirements. The implementation of this amended accounting guidance is not expected to have a material impact on the consolidated financial statements.
As of December 31, 2010, there were approximately six securities in an unrealized loss position with an estimated fair value of $2,071,084. Of these securities, there is one security that has been in an unrealized loss position for 12 months or greater. As of December 31, 2010, none of these securities were considered to be other than temporarily impaired. 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, 2011 and 2010 are as follows:
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, 2011 and 2010.
To validate prices, we complete quantitative analyses to compare the performance of the above investments to the performance of appropriate benchmarks, with significant differences identified and investigated.
Details of the liability for unpaid losses and loss adjustment expenses at December 31, 2011 and 2010 are as follows:
On February 25, 2011, the Board of Directors amended and restated AmerInst’s Statement of Share Ownership Policy to better manage the Company’s expenditures from year to year. Under the new policy that became effective immediately, the Company will limit Investco’s repurchase of Company stock to $500,000 per calendar year. In addition, Investco will only be authorized to repurchase shares, without Board approval, from shareholders upon their death, disability or retirement from the practice of public accounting. Except as approved
by the Board, negotiated purchases that do not satisfy these criteria will be discontinued for the foreseeable future. At the Board meeting, the Board approved all outstanding requests for repurchase of shares amounting to $300,359, and for the remainder of 2011, authorized Investco to repurchase shares up to $500,000.
Under current Bermuda law, the Company and its subsidiaries are not required to pay taxes in Bermuda on either income or capital gains. The Company has received an undertaking from the Bermuda government that, in the event of income or capital gains taxes being imposed, the Company will be exempted from such taxes until the year 2035. However, APSL which is a Delaware corporation domiciled in the State of Illinois is subject to taxation in the United States.
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, 2011 and 2010, 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.
The disclosure of RINITS™ as a separate operating segment was discontinued in the fourth quarter of 2010 as it no longer met the quantitative thresholds prescribed by ASC 280, “Segment Reporting”.
AmerInst Professional Services Limited (“APSL”), a subsidiary of AmerInst, has entered into employment agreements with four key members of senior management, 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. 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, 2011, 1,987 phantom shares were granted arising from the dividends declared on the Company’s common shares. 78,872 phantom shares were outstanding at December 31, 2011.