Management's discussion and analysis ("MD&A") provides supplemental information,
which sets forth the major factors that have affected our financial condition
and results of operation and should be read in conjunction with our condensed
consolidated financial statements and notes thereto included in this Form 10-Q.
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Certain statements contained in this Form 10-Q, including this MD&A section, are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, and contain information relating to us that is
based on the beliefs of our management as well as assumptions made by, and
information currently available to, our management. The words "expect,"
"believe," "may," "could," "should," "would," "estimate," "anticipate,"
"intend," "plan," "target," "goal" and similar expressions as they relate to us
or our management are intended to identify forward-looking statements.
All forward-looking statements, by their nature, are subject to risks and
uncertainties. Our actual future results may differ materially from those set
forth in our forward-looking statements. Please see the Introductory Note and
Item 1A "Risk Factors" of our 2011 Annual Report on Form 10-K, as updated in our
subsequent quarterly reports filed on Form 10-Q, and in our other filings made
from time to time with the SEC after the date of this report for a discussion of
factors that could cause our actual results to differ materially from those in
the forward-looking statements. However, the risk factors listed in Item 1A
"Risk Factors" or discussed in this Form 10-Q should not be construed as
exhaustive and should be read in conjunction with other cautionary statements
that are included herein. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect our management's analysis only
as of the date they are made. We undertake no obligation to release publicly the
results of any future revisions we may make to forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
The following discussion addresses our financial condition and results of
operations for the periods and as of the dates indicated.
OVERVIEW
Unless otherwise indicated by the context, in this quarterly report we refer to
AmerInst Insurance Group, Ltd. and its subsidiaries as the "Company",
"AmerInst," "we" or "us." "AMIC Ltd." means AmerInst's wholly-owned subsidiary,
AmerInst Insurance Company, Ltd. "APSL" means AmerInst Professional Services,
Limited, a Delaware corporation and wholly-owned subsidiary of AmerInst Mezco,
Ltd. ("Mezco") which is a wholly-owned subsidiary of AmerInst. "Investco" means
AmerInst Investment Company, Ltd., a wholly-owned subsidiary of AMIC Ltd. "AMIG"
means our predecessor entity, AmerInst Insurance Group, Inc., a Delaware
corporation. Our principal offices are c/o Cedar Management Limited, 25 Church
Street, Continental Building, P.O. Box HM 1601, Hamilton, Bermuda, HM GX.
AmerInst Insurance Group, Ltd. is a Bermuda holding company formed in 1998 that
provides insurance protection for professional service firms and engages in
investment activities. 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. The revenues of the reinsurance activity operating segment and the
insurance activity operating segment were $979,199 and $215,081 for the three
months ended March 31, 2012 compared to $957,558 and $72,653 for the three
months ended March 31, 2011, respectively. The revenues for both operating
segments were derived from business operations in the United States other than
interest income on bank accounts maintained in Bermuda.
Entry into Agency Agreement
On September 25, 2009, 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 is for four years with
automatic one-year renewals thereafter.
Entry into Reinsurance Agreement
We conduct our reinsurance business through AMIC Ltd., our subsidiary, which is
a registered insurer in Bermuda. On September 25, 2009, AMIC Ltd. entered into a
professional liability quota share agreement with C&F (the "Reinsurance
Agreement") pursuant to which C&F agreed to cede, and AMIC Ltd. agreed to accept
as reinsurance, a 50% quota share of C&F's liability under insurance written by
APSL on behalf of C&F and classified by C&F as accountants' professional
liability and lawyers' professional liability, subject to AMIC Ltd.'s surplus
limitations. The initial term of the Reinsurance Agreement is for four years
with automatic one-year renewals thereafter.
Historical Relationship with CAMICO
From June 1, 2005 through May 31, 2009, we were a party to a reinsurance
contract with CAMICO Mutual Insurance Company ("CAMICO"), a California-based
writer of accountants' professional liability business.
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.
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VSC Payment
On July 22, 2009, the Company received a payment of $500,891 from FFG Insurance
Company, formerly known as Virginia Surety Company ("VSC"), in satisfaction of
certain recoveries not previously remitted by VSC under retrocession contracts
between the Company and VSC for the years 1989 through 1993. The $500,891
payment was recorded as a decrease in losses and loss adjustment expenses for
the year ended December 31, 2009. Following this payment, the Company initiated
arbitration with VSC (the "Arbitration") to seek additional recoveries in
respect of unpaid losses, unpaid premiums, fees and interest. During the
arbitration, VSC conceded that $25,785 in unpaid premiums was due and a payment
was remitted to the Company. On October 8, 2011, the Company was formally
awarded $289,514 as a result of the Arbitration's final outcome. The award
represented unpaid losses of $241,943, fees of $11,280 and interest of
$36,291. The total net award of $315,299 from VSC was recorded as a decrease in
losses and loss adjustment expenses in the third quarter of 2011.
Attorneys' Professional Liability Coverage
On January 1, 2003, we entered into a 15% quota share participation of the
attorneys' professional liability coverage provided by Professionals Direct
Insurance Company ("PDIC"). This participation terminated on December 31, 2003.
We remain potentially liable for claims related to this period of coverage.
Third-party Managers and Service Providers
Cedar Management Limited provides the day-to-day services necessary for the
administration of our business. Our agreement with Cedar Management Limited
renewed for one year beginning January 1, 2012 and ending December 31, 2012.
Mr. Stuart Grayston, our President, was formerly a director and officer of Cedar
Management Limited, and Mr. Thomas R. McMahon, our Treasurer and Chief Financial
Officer, is a shareholder, officer, director and employee of Cedar Management
Limited.
Mowery & Schoenfeld, LLC, an accounting firm affiliated with a former director
and chairman emeritus, provides accounting functions to APSL. Our agreement with
Mowery & Schoenfeld, LLC renewed for one year beginning January 1, 2012 and
ending December 31, 2012, pursuant to a letter of understanding dated
February 20, 2012. While the letter of understanding has no termination notice
clause, it can be terminated by either party.
The Country Club Bank of Kansas City, Missouri, provides portfolio management of
fixed-income securities and directs our investments pursuant to guidelines
approved by us. Harris Associates L.P. and Aurora Investment Management, LLC
provide discretionary investment advice with respect to our equity investments.
We have retained Oliver Wyman, an independent casualty actuarial consulting
firm, to render advice regarding actuarial matters.
OPERATIONS
Three months ended March 31, 2012 compared to three months ended March 31, 2011
We recorded net income of $82,388 during the first quarter of 2012 compared to a
net loss of $178,925 for the same period in 2011. The net income recorded during
the first quarter of 2012 was largely attributable to (1) net realized gains on
investments, (2) increased net premiums and commission income earned and (3) the
reduction in operating and management expenses, as discussed below in further
detail. The net loss recorded during the first quarter of 2011 was largely
attributable to operating and management expenses incurred by APSL, partially
offset by net realized gains on investments.
Our net premiums earned during the first quarter of 2012 were $176,821 compared
to $45,490 during the first quarter of 2011, an increase of $131,331 or 288.7%.
The net premiums earned during the quarters ended March 31, 2012 and 2011 were
attributable to 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 2012, arising from a higher level of underwriting activity
under the Agency Agreement due to the continued successful marketing of the
program by APSL.
For the quarters ended March 31, 2012 and 2011, we recorded commission income
under the Agency Agreement of $214,944 and $72,609, respectively, an increase of
$142,335 or 196.0%. This increase resulted from a higher volume of premiums
written under the Agency Agreement in 2012.
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We recorded other income of $98,156 during the quarter ended March 31, 2012,
which represents (1) a $60,000 refund of non-resident withholding tax that was
erroneously deducted from dividend income earned on our equity investment
portfolio in prior years and (2) net interest received from PDIC in the amount
of $38,156 in relation to funds that were held in deposit by PDIC pursuant to
the 2003 excess of loss reinsurance agreement between AMIC Ltd. and PDIC. No
other income was recorded for the quarter ended March 31, 2011.
We recorded net investment income of $95,266 for the quarter ended March 31,
2012 compared to $95,344 for the quarter ended March 31, 2011. The marginal
decrease resulted from lower yielding fixed income securities held in the
Company's investment portfolio during the first quarter of 2012 compared to the
same period of 2011, partially offset by the decrease in investment managers'
fees that resulted from the reduction in the amount of assets under management
in the total investment portfolio. The annualized investment yield, calculated
as total interest and dividends divided by the net average amount of total
investments and cash and cash equivalents, was 1.6% for the quarter ended
March 31, 2012, compared to the 1.4% yield earned for the quarter ended
March 31, 2011.
Sales of securities during the quarter ended March 31, 2012 resulted in realized
gains on investments net of impairment of $609,093 compared to $816,768 during
the quarter ended March 31, 2011, a decrease of $207,675 or 25.4%. The decrease
in realized gains recorded in the first quarter of 2012 primarily related to
decreased sales of equity securities in an unrealized gain position compared to
2011.
For the quarters ended March 31, 2012 and 2011, we recorded loss and loss
adjustment expenses of $110,514 and $28,452, respectively, derived by
multiplying our estimated loss ratio of 62.5% and the net premiums earned under
the Reinsurance Agreement of $176,821 and $45,490, respectively.
We recorded policy acquisition costs of $65,424 in the first quarter of 2012
compared to $16,831 for the same period in 2011. 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 during the first
quarter of 2012 and 2011 were 37% of the net premiums earned under the
Reinsurance Agreement of $176,821 and 45,490.
We expensed operating and management expenses of $935,954 in the first quarter
of 2012 compared to $1,163,853 for the same period in 2011, a decrease of
$227,899 or 19.6%. The decline is largely attributable to (1) a reduction in
professional and marketing expenses incurred by APSL during the quarter compared
to 2011 as a result of APSL bringing in-house most of its marketing and
promotional work and reducing its reliance on third party contractors and
service providers and, (2) a reduction in legal expenses associated with the
Arbitration during the quarter compared to the same quarter in 2011.
The tables below summarize the results of the following AmerInst operating
segments: (1) reinsurance activity, which also includes investments and other
activities, and (2) insurance activity, which offers professional liability
solutions to professional service firms under the Agency Agreement with C&F.
Three Months Ended March 31, 2012
Reinsurance Insurance
Segment Segment Total
Revenues $ 979,199 $ 215,081 $ 1,194,280
Total losses and expenses $ 440,423 $ 671,469 $ 1,111,892
Segment income (loss) $ 538,776 $ (456,388 ) $ 82,388
Identifiable assets $ - $ 696,995 $ 696,995
Three Months Ended March 31, 2011
Reinsurance Insurance
Segment Segment Total
Revenues $ 957,558 $ 72,653 $ 1,030,211
Total losses and expenses $ 396,107 $ 813,029 $ 1,209,136
Segment income (loss) $ 561,451 $ (740,376 ) $ (178,925 )
Identifiable assets $ - $ 730,015 $ 730,015
LIQUIDITY AND CAPITAL RESOURCES
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 which may
arise without resorting to borrowing, subject to regulatory limitations.
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As of March 31, 2012, our total investments were $23,397,229, an increase of
$651,679, or 2.9%, from $22,745,550 at December 31, 2011. The increase was
primarily due to the increase in the fair value of certain equity securities as
a result of favorable market conditions, partially offset by the sales of
certain equity securities. The cash and cash equivalents balance increased from
$904,485 at December 31, 2011 to $937,256 at March 31, 2012, an increase of
$32,771 or 3.6%. The amount of cash and cash equivalents varies depending on the
maturities of fixed term investments and on the level of funds invested in money
market funds. The restricted cash and cash equivalents balance decreased from
$435,924 at December 31, 2011 to $280,418 at March 31, 2012, a decrease of
$155,506 or 35.7%. The decrease is due to the timing of sales and maturities of
investments held as restricted cash at March 31, 2012 that have not yet been
reinvested. The ratio of cash and total investments to total liabilities at
March 31, 2012 was 8.50:1, compared to a ratio of 8.25:1 at December 31, 2011.
The increase in total cash and investments at March 31, 2012, compared to
December 31, 2011 resulted primarily from the increase in the fair value of
certain equity securities as a result of favorable market conditions and
positive cash inflows in relation to net investment income and net premiums
received under the Reinsurance Agreement in the amount of $183,518. These
increases were partially offset by net cash outflows to fund the operations of
APSL and dividends of $156,320 paid during the first quarter of 2012.
The assumed reinsurance balances receivable represents the current assumed
premiums receivable less commissions payable to the fronting carriers. As of
March 31, 2012, the balance was $249,260 compared to $183,518 as of December 31,
2011. 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 March 31, 2012, the balance was $0 compared to
$86,685 as of December 31, 2011. This balance fluctuates due to the timing of
reported losses.
Deferred policy acquisition costs, which represent the deferral of ceding
commission expense related to premiums not yet earned, increased from $146,226
at December 31, 2011 to $227,194 at March 31, 2012. The increase in deferred
policy acquisition costs in 2012 was due to the increase in both net premiums
written and unearned premiums assumed under the Reinsurance Agreement compared
to the prior year. The ceding commission rate under the Reinsurance Agreement is
37%.
Prepaid expenses and other assets were $291,153 at March 31, 2012, a decrease of
23.0% from December 31, 2011. The balance primarily relates to (1) prepaid
directors' and officers' liability insurance costs, (2) prepaid directors'
retainer and (3) premiums due to APSL under the Agency Agreement. The decrease
in the balance was attributable to a decrease in premiums due to APSL under the
Agency Agreement. This balance fluctuates due to the timing of the premium
receipts by APSL.
Accrued expenses and other liabilities primarily represent premiums payable by
APSL to C&F under the Agency Agreement and expenses accrued relating largely to
professional fees. The balance decreased from $1,396,332 at December 31, 2011 to
$1,138,051 at March 31, 2012, a decrease of $258,281 or 18.5%. The decrease in
the balance was attributable to a decrease 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.
The Bermuda Monetary Authority 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. During the quarter ended March 31,
2012, no such transactions occurred. Through March 31, 2012, Investco had
purchased 141,526 common shares from shareholders who had died or retired for a
total purchase price of $3,860,345. From time to time, Investco has also
purchased shares in privately negotiated transactions. Through March 31, 2012,
Investco had purchased an additional 75,069 common shares in such privately
negotiated transactions for a total purchase price of $1,109,025.
Cash Dividends
We paid a dividend of $0.25 per share during the first quarter of 2012, which
amounted to total ordinary cash dividends of $170,905. The dividends paid during
the first quarter of 2012 have been reduced by $14,585, which represents a write
back of uncashed dividends issued prior to 2007 to shareholders that we have
been unable to locate. Since we began paying dividends in 1995, our original
shareholders have received $19.12 in cumulative dividends per share. When
measured by a total rate of return calculation, this has resulted in an
effective annual rate of return of approximately 9.88% from the inception of the
Company, based on a per share purchase price of $8.33 paid by the original
shareholder, and using an unaudited book value of $34.16 per share as of
March 31, 2012. Although we have paid cash dividends on a regular basis in the
past, the declaration and payment of cash dividends in the future will be at the
discretion of our board of directors and will depend on among other things, our
financial condition, results of operations, current and anticipated cash needs
and other factors that our board of directors considers relevant.
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Critical Accounting Policies
The Company's critical accounting policies are discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in our Annual Report on Form 10-K for the year ended December 31,
2011.
Available Information
We file annual, quarterly, and current reports, proxy statements and other
information with the Commission. You may read any public document we file with
the Commission at the Commission's public reference room at 100 F Street, NE,
Washington, DC 20549. Please call the Commission at 1-800-SEC-0330 for
information on the public reference room. The Commission maintains an internet
site that contains annual, quarterly, and current reports, proxy and information
statements and other information that issuers (including AmerInst) file
electronically with the Commission. The Commission's internet site is
www.sec.gov.
Our internet site is www.amerinst.bm. We make available free of charge through
our internet site our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any
amendments to those reports filed or furnished pursuant to the Securities
Exchange Act of 1934, as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the Commission. We also make
available, through our internet site, via links to the Commission's internet
site, statements of beneficial ownership of our equity securities filed by our
directors, officers, 10% or greater shareholders and others under Section 16 of
the Securities Exchange Act. In addition, we post on www.amerinst.bm our
Memorandum of Association, our Bye-Laws, our Statement of Share Ownership
Policy, Charters for our Audit Committee and Governance and Nominations
Committee, as well as our Code of Business Conduct and Ethics. You can request a
copy of these documents, excluding exhibits, at no cost, by writing or
telephoning us c/o Cedar Management Limited, 25 Church Street, Continental
Building, P.O. Box HM 1601 Hamilton, Bermuda HMGX, Attention: Investor Relations
(441) 295-6015. The information on our internet site is not incorporated by
reference into this report.
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