AMERINST INSURANCE GROUP LTD – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

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 2012 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 Commission 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

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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. 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 $2,765,968 and $602,098 for the six months ended June 30, 2013 compared to $1,370,328 and $405,824 for the six months ended June 30, 2012, 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 was 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 was 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.

Attorneys' Professional Liability Coverage

On January 1, 2003, we entered into a 15% participation of Professionals Direct Insurance Company's ("PDIC") attorneys' professional liability first excess cover. This participation terminated on December 31, 2003. The final reported claim was closed during 2011. Although we no longer anticipate any claims, we may be liable for further 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, 2013 and ending December 31, 2013. 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.

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Lawrence Carlson, a certified public accountant and an independent contractor, provides the primary accounting functions to APSL. Our agreement with him, which was effective January 1, 2013, has no ending date but can be terminated by either party upon 30 days written notice.

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.

RESULTS OF OPERATIONS

Six months ended June 30, 2013 compared to six months ended June 30, 2012

We recorded a net income of $251,183 for the six months ended June 30, 2013 compared to a net loss of $619,147 for the same period in 2012. The increase in net income is attributable to (i) the increase in commission income from $405,576 for the six months ended June 30, 2012 to $601,910 for the six months ended June 30, 2013 as a result of a higher volume of premiums written under the Agency Agreement and (ii) the increase in net realized gains on investments from $612,028 in 2012 to $1,827,747 in 2013, as discussed in further detail below.

Our net premiums earned for the six months ended June 30, 2013 were $790,333 compared to $453,272 for the six months ended June 30, 2012, an increase of $337,061 or 74.4%. The net premiums earned for the six months ended June 30, 2013 and 2012 were attributable to cessions from C&F under the Reinsurance Agreement. The increase in net premiums earned under the Reinsurance Agreement during the first six months of 2013 compared to the corresponding period in 2012 resulted from increased cessions from C&F in 2013, arising from a higher level of underwriting activity under the Agency Agreement due to the continued marketing of the program by APSL resulting in increasing penetration in targeted markets.

During the six months ended June 30, 2013 and 2012, we recorded commission income under the Agency Agreement of $601,910 and $405,576, respectively, an increase of $196,334 or 48.4%. This increase resulted from a higher volume of premiums written under the Agency Agreement in 2013.

We recorded other income of $98,156 for the six months ended June 30, 2012, which included (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 during the six months ended June 30, 2013.

We recorded net investment income of $148,076 for the six months ended June 30, 2013 compared to $207,120 for the six months ended June 30, 2012. 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 the six months ended June 30, 2013 compared to the same period in 2012. 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 1.2% for the six months ended June 30, 2013, compared to the 1.7% yield earned for the six months ended June 30, 2012.

Sales of securities during the six months ended June 30, 2013 resulted in realized gains on investments net of impairment of $1,827,747 compared to $612,028 for the six months ended June 30, 2012, an increase of $1,215,719. The increase in realized gains primarily related to increased sales of equity securities in an unrealized gain position during the first six months of 2013 compared to the same period in 2012.

For the six months ended June 30, 2013, we recorded loss and loss adjustment expenses of $704,725, which represents (i) $493,958 in losses incurred derived by multiplying our estimated loss ratio of 62.5% and the net premiums earned under the Reinsurance Agreement of $790,333 and (ii) a $210,767 increase in CAMICO Incurred But Not Reported ("IBNR") loss reserves which resulted from unfavorable development in policy years 2007/2008 and 2008/2009 during the second quarter. For the six months ended June 30, 2012, we recorded loss and loss adjustment expenses of $283,295 derived by multiplying our estimated loss ratio of 62.5% and the net premiums earned under the Reinsurance Agreement of $453,272.

We recorded policy acquisition costs of $292,431 for the six months ended June 30, 2013 compared to $168,667 for the same period in 2012. 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 six months ended June 30, 2013 and 2012 were approximately 37% of the net premiums earned under the Reinsurance Agreement of $790,333 and $453,272, respectively.

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We expensed operating and management expenses of $2,119,727 for the six months ended June 30, 2013 compared to $1,943,337 for the same period in 2012, an increase of $176,390 or 9.1%. The increase was primarily attributable to increased salaries and related costs associated with APSL's hiring of additional marketing personnel in 2013.

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.

                                              Six Months Ended June 30, 2013                                    Reinsurance       Insurance                                      Segment          Segment           Total        Revenues                    $  2,765,968$   602,098$  3,368,066        Total losses and expenses      1,696,573       1,420,310         3,116,883        Segment income (loss)       $  1,069,395$  (818,212 )$    251,183        Identifiable assets         $         -      $   492,544$    492,544                                             Six Months Ended June 30, 2012                                    Reinsurance       Insurance                                      Segment          Segment           Total        Revenues                    $  1,370,328$   405,824$  1,776,152        Total losses and expenses      1,126,450       1,268,849         2,395,299        Segment income (loss)       $    243,878$  (863,025 )$   (619,147 )        Identifiable assets         $         -      $   648,207$    648,207

Three months ended June 30, 2013 compared to three months ended June 30, 2012

We recorded a net income of $130,213 for the second quarter of 2013 compared to a net loss of $701,535 for the same period in 2012. The increase in net income is mainly attributable to (i) the increase in commission income from $190,632 in the second quarter of 2012 to $298,348 in the second quarter of 2013 as a result of a higher volume of premiums written under the Agency Agreement and (ii) the increase in net realized gains on investments from $2,935 in 2012 to $1,067,045 in 2013, as discussed in further detail below.

Our net premiums earned for the second quarter of 2013 were $460,457 compared to $276,451 for the second quarter of 2012, an increase of $184,006 or 66.6%. The net premiums earned for the quarters ended June 30, 2013 and 2012 were attributable to cessions from C&F under the Reinsurance Agreement. The increase in net premiums earned under the Reinsurance Agreement during the second quarter of 2013 compared to the same period in 2012 resulted from increased cessions from C&F in 2013, arising from a higher level of underwriting activity under the Agency Agreement due to the continued marketing of the program by APSL resulting in increasing penetration in targeted markets.

For the quarters ended June 30, 2013 and 2012, we recorded commission income under the Agency Agreement of $298,348 and $190,632, respectively, an increase of $107,716 or 56.5%. This increase resulted from a higher volume of premiums written under the Agency Agreement in 2013.

We recorded net investment income of $82,784 for the quarter ended June 30, 2013 compared to $111,854 for the quarter ended June 30, 2012. 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 the second quarter of 2013 compared to the same period in 2012. 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 1.4% for the quarter ended June 30, 2013, compared to the 1.8% yield earned for the quarter ended June 30, 2012.

Sales of securities for the quarter ended June 30, 2013 resulted in realized gains on investments net of impairment of $1,067,045 compared to $2,935 during the quarter ended June 30, 2012, an increase of $1,064,110. The increase in realized gains primarily related to increased sales of equity securities in an unrealized gain position compared to 2012 and to the decrease in other-than-temporary impairment charges during the second quarter of 2013 compared to the second quarter of 2012.

For the quarter ended June 30, 2013, we recorded loss and loss adjustment expenses of $498,552, which represents (i) $287,785 in losses incurred derived by multiplying our estimated loss ratio of 62.5% and the net premiums earned under the Reinsurance Agreement of $460,457 and (ii) a $210,767 increase in CAMICO IBNR loss reserves which resulted from unfavorable development in policy years 2007/2008 and 2008/2009 during the second quarter. For the quarter ended June 30, 2012, we recorded loss and loss adjustment expenses of $172,781 derived by multiplying our estimated loss ratio of 62.5% and the net premiums earned under the Reinsurance Agreement of $276,451.

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We recorded policy acquisition costs of $170,370 in the second quarter of 2013 compared to $103,243 for the same period in 2012. 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 second quarter of 2013 and 2012 were approximately 37% of the net premiums earned under the Reinsurance Agreement of $460,457 and $276,451, respectively.

We expensed operating and management expenses of $1,109,499 in the second quarter 2013 compared to $1,007,383 for the same period in 2012, an increase of $102,116 or 10.1%. The increase was primarily attributable to increased salaries and related costs associated with APSL's hiring of additional marketing personnel in 2013.

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 June 30, 2013                                    Reinsurance       Insurance                                      Segment          Segment           Total        Revenues                    $  1,610,223$  298,411$  1,908,634        Total losses and expenses      1,061,921         716,500         1,778,421        Segment income (loss)       $    548,302$ (418,089 )$    130,213        Identifiable assets         $          -      $  492,544$    492,544                                            Three Months Ended June 30, 2012                                    Reinsurance       Insurance                                      Segment          Segment           Total        Revenues                    $    391,129$  190,743$    581,872        Total losses and expenses        686,027         597,380         1,283,407        Segment income (loss)       $   (294,898 )$ (406,637 )$   (701,535 )        Identifiable assets         $         -       $  648,207$    648,207   FINANCIAL CONDITION  

As of June 30, 2013, our total investments were $21,106,247, an increase of $856,945 or 4.2%, from $20,249,302 at December 31, 2012. This 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 in an unrealized gain position. The cash and cash equivalents balance increased from $1,034,485 at December 31, 2012 to $1,458,465 at June 30, 2013, an increase of $423,980 or 41%. 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 $1,349,744 at December 31, 2012 to $684,008 at June 30, 2013, a decrease of $665,736. The decrease is due to the timing of sales and maturities of investments held as restricted cash at June 30, 2013 that have not yet been reinvested. Other invested assets remained unchanged at $1,470,000 as at June 30, 2013 and December 31, 2012. The ratio of cash, total investments and other invested assets to total liabilities at June 30, 2013 was 5.48:1, compared to a ratio of 6.34:1 at December 31, 2012.

The assumed reinsurance balances receivable represents the current assumed premiums receivable less commissions payable to the fronting carriers. As of June 30, 2013, the balance was $372,241 compared to $274,526 as of December 31, 2012. 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 June 30, 2013, the balance was $171,348 compared to $178,880 as of December 31, 2012. This balance fluctuates due to the timing of reported losses under the policies we insure.

Deferred policy acquisition costs, which represent the deferral of ceding commission expense related to premiums not yet earned, increased from $268,643 at December 31, 2012 to $398,068 at June 30, 2013. The increase in deferred policy acquisition costs in 2013 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%.

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Prepaid expenses and other assets were $594,131 at June 30, 2013, an increase of 44.2% from December 31, 2012. 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 mainly attributable to the directors' retainer payments made in May 2013 relating to the period from June 1, 2013 to May 31, 2014.

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 $1,490,727 at December 31, 2012 to $1,362,430 at June 30, 2013, a decrease of $128,297 or 8.6%. The decrease in the balance was attributable to a reduction in expenses accrued in relation to professional fees.

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.

Total cash, investments and other invested assets increased from $24,103,531 at December 31, 2012 to $24,718,720 at June 30, 2013, an increase of $615,189 or 2.6%. The net increase 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 $435,091. These increases were partially offset by net cash outflows to fund the operations of APSL and dividends of $168,854 paid during the first quarter of 2013.

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 six months and three months ended June 30, 2013, no such transactions occurred. Through June 30, 2013, Investco had purchased 152,801 common shares from shareholders who had died or retired for a total purchase price of $4,229,376. From time to time, Investco has also purchased shares in privately negotiated transactions. Through June 30, 2013, 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 dividends of $0.25 per share during the first quarter of 2013, which amounted to total ordinary cash dividends of $168,854. Since we began paying dividends in 1995, our original shareholders have received $19.62 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 9.5% 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 $32.63 per share as of June 30, 2013. 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.

OFF-BALANCE SHEET ARRANGEMENTS

AmerInst is not a party to any off-balance sheet arrangements.

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, 2012.

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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.