Our losses and loss adjustment expenses decreased by 20.0% to $3,287,658 in 2006 from $4,105,121 in 2005, and for 2005 decreased by 19.6% from $5,104,341 in 2004. These amounts included favorable development of prior years’ estimates of losses and loss adjustment expenses of $3,072,636 in 2006, $2,275,832 in 2005 and $2,494,106 in 2004. Our loss ratio, calculated as the ratio of losses and loss adjustment expenses to net premiums earned, was 38.1% in 2006, 45.2% in 2005 and 57.6% in 2004. 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 of December 31, 2006, total investments amounted to $52,621,213, an increase of $6,369,192, or 13.8%, from $46,252,021 at December 31, 2005. The increase was due to an increase in the purchase of investments due to funds received from the rights offering and an increase in market values of the investment portfolio. Cash and cash equivalents decreased from $3,447,361 at December 31, 2005 to $2,840,210 at December 31, 2006. The amount of cash and cash equivalents varies depending on the maturities of fixed maturity investments and on the level of funds invested in money market mutual funds. Our liability for unpaid losses and loss adjustment expenses at December 31, 2006 was $28,161,369.
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. Management believes that its aggregate liability for unpaid losses and loss adjustment expenses at year end represents its 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.
In September 2006, the FASB issued FAS 157, Fair Value Measurement. This Statement provides guidance for using fair value to measure assets and liabilities. Under this standard, the definition of fair value focuses on
Pursuant to the reinsurance agreements, AMIC Ltd. is required to provide the ceding companies with collateral for AMIC Ltd.’s liabilities to them. At December 31, 2006 and 2005 $113,382 was held in deposits pursuant to the 2003 excess reinsurance agreement with PDIC. Also at December 31, 2006 and 2005, the carrying value of investments in a trust account held by Bank of New York pursuant to reinsurance agreements in effect from 1989 to mid-1993 was $115,273 and $123,856, respectively. Additionally, at December 31, 2006 and 2005, AMIC Ltd. had provided CNA with a Section 114 Trust, held by JPMorgan Chase Bank, with restricted cash and cash equivalents and investments with a carrying value of $19,922,503 and $18,336,207, respectively. At December 31, 2006 and 2005 AMIC Ltd. provided CAMICO with a Letter of Credit held by National City Bank with supporting investments with a carrying value of $4,110,082 and $2,350,053, respectively.
AMIG filed a registration statement on Form S-3 with the Securities and Exchange Commission on June 15, 2006 to register a rights offering to existing shareholders. The registration statement was amended on July 20, 2006 and declared effective July 24, 2006. Each shareholder received a right to purchase one common share for each share currently owned, at a price of $23.33 per share (after giving effect to the share dividend). A total of 97,927 rights were exercised under the rights offering, and 97,927 shares were subsequently sold by Investco for a total purchase price of $2,284,637, before rights offering costs of $277,057. AmerInst recognized the excess in proceeds over the cost of these shares as an increase in additional paid-in capital of $148,925.