10-Q 1 d434179d10q.htm FORM 10-Q FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934

For the Quarterly Period ended September 30, 2012.

 

¨ Transition report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934.

For the transition period from              to             .

Commission file number 000-28249

 

 

AMERINST INSURANCE GROUP, LTD.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

BERMUDA   98-0207447

(State or other jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

c/o Cedar Management Limited

25 Church Street, Continental Building

P.O. Box HM 1601, Hamilton, Bermuda

  HMGX
(Address of Principal Executive Offices)   (Zip Code)

(441) 295-6015

(Telephone number)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x.

As of November 1, 2012, the Registrant had 995,253 common shares, $1.00 par value per share, outstanding.

 

 

 


Introductory Note

Caution Concerning Forward-Looking Statements

Certain statements contained in this Form 10-Q, or otherwise made by our officers, including statements related to our future performance, our outlook for our businesses and respective markets, projections, statements of our management’s plans or objectives, forecasts of market trends and other matters, 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. Such statements reflect our management’s current views with respect to future events and are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially from those reflected in any forward-looking statements. Our actual future results may differ materially from those set forth in our forward-looking statements. Factors that might cause such actual results to differ materially from those reflected in any forward-looking statements include, but are not limited to the factors discussed in detail in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q, as well as:

 

   

our ability to generate increased revenues and positive earnings in future periods;

 

   

the occurrence of catastrophic events with a frequency or severity exceeding our expectations;

 

   

a decrease in the level of demand for professional liability insurance and reinsurance or an increase in the supply of professional liability insurance and reinsurance capacity;

 

   

the successful implementation of our new business plan without a significant depletion of our cash resources, the maintenance of sufficient capital levels and the retention of our current A.M. Best financial strength rating of “A-” (Excellent);

 

   

a worsening of the current global economic market conditions and global credit crisis and changing rates of inflation and other economic conditions;

 

   

increased competitive pressures, including the consolidation and increased globalization of reinsurance providers;

 

   

actual losses and loss expenses exceeding our loss reserves, which are necessarily based on the actuarial and statistical projections of ultimate losses;

 

   

increased rate pressure on premiums;

 

   

adequacy of our risk management and loss limitation methods;

 

   

the integration of businesses we may acquire or new business ventures we may start;

 

   

acts of terrorism, political unrest, outbreak of war and other hostilities or other non-forecasted and unpredictable events;

 

   

changes in the legal or regulatory environments in which we operate; and

 

   

other risks, including those risks identified in any of our other filings with the Securities and Exchange Commission.

The foregoing review of important factors 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.

 

2


Part I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

AMERINST INSURANCE GROUP, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, expressed in U.S. dollars)

 

     As of
September 30,
2012
    As of
December 31,
2011
 

ASSETS

    

INVESTMENTS

    

Fixed maturity investments, available for sale, at fair value (amortized cost $7,853,501 and $9,914,515)

   $ 8,222,018      $ 10,448,847   

Equity securities, available for sale, at fair value (cost $7,212,486 and $7,574,686)

     12,840,652        12,296,703   
  

 

 

   

 

 

 

TOTAL INVESTMENTS

     21,062,670        22,745,550   

Cash and cash equivalents

     1,002,060        904,485   

Restricted cash and cash equivalents

     2,318,808        435,924   

Assumed reinsurance balances receivable

     283,775        183,518   

Accrued investment income

     88,599        94,539   

Property and equipment

     599,418        745,784   

Deferred policy acquisition costs

     251,294        146,226   

Prepaid expenses and other assets

     269,316        378,257   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 25,875,940      $ 25,634,283   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

LIABILITIES

    

Unpaid losses and loss adjustment expenses

   $ 1,489,900      $ 1,043,443   

Unearned premium

     679,144        392,595   

Assumed reinsurance balances payable

     —          86,685   

Accrued expenses and other liabilities

     1,144,699        1,396,332   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 3,313,743      $ 2,919,055   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Common shares, $1 par value, 2012 and 2011: 2,000,000 shares authorized, 995,253 issued and outstanding

   $ 995,253      $ 995,253   

Additional paid-in capital

     6,287,293        6,287,293   

Retained earnings

     16,413,168        17,411,533   

Accumulated other comprehensive income

     5,996,683        5,256,349   

Shares held by Subsidiary (308,560 and 311,633 shares) at cost

     (7,130,200     (7,235,200
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     22,562,197        22,715,228   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 25,875,940      $ 25,634,283   
  

 

 

   

 

 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

3


AMERINST INSURANCE GROUP, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF

OPERATIONS, COMPREHENSIVE INCOME (LOSS)

AND RETAINED EARNINGS

(Unaudited, expressed in U.S. dollars)

 

     Nine Months
Ended
September 30,
2012
    Nine Months
Ended
September 30,
2011
    Three Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
 

REVENUE

        

Net premiums earned

   $ 878,616      $ 221,844      $ 425,344      $ 96,283   

Commission income

     615,239        235,874        209,663        91,529   

Other income

     98,156        —          —          —     

Net investment income

     299,256        308,953        92,136        96,128   

Net realized gain on investments

     1,106,299        1,400,792        494,271        84,653   
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL REVENUE

     2,997,566        2,167,463        1,221,414        368,593   
  

 

 

   

 

 

   

 

 

   

 

 

 

LOSSES AND EXPENSES

        

Losses and loss adjustment expenses (recoveries)

     526,614        (170,078     243,319        (248,544

Policy acquisition costs

     313,073        85,818        144,406        38,482   

Operating and management expenses

     2,828,252        3,179,022        884,915        911,864   
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LOSSES AND EXPENSES

     3,667,939        3,094,762        1,272,640        701,802   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS BEFORE TAX

     (670,373     (927,299     (51,226     (333,209

Income tax expense

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS AFTER TAX

   $ (670,373   $ (927,299   $ (51,226   $ (333,209
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS)

        

Net unrealized holding gain (loss) arising during the period

     1,846,633        (696,544     864,033        (1,740,737

Reclassification adjustment for (gain) included in net (loss)

     (1,106,299     (1,400,792     (494,271     (84,653
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS)

     740,334        (2,097,336     369,762        (1,825,390
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS)

   $ 69,961      $ (3,024,635   $ 318,536      $ (2,158,599
  

 

 

   

 

 

   

 

 

   

 

 

 

RETAINED EARNINGS, BEGINNING OF PERIOD

   $ 17,411,533      $ 19,096,686      $ 16,636,066      $ 18,213,418   

Net loss

     (670,373     (927,299     (51,226     (333,209

Dividends

     (327,992     (615,993     (171,672     (326,815
  

 

 

   

 

 

   

 

 

   

 

 

 

RETAINED EARNINGS, END OF PERIOD

   $ 16,413,168      $ 17,553,394      $ 16,413,168      $ 17,553,394   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share amounts

        

Basic and diluted loss

   $ (0.98   $ (1.33   $ (0.07   $ (0.48
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends

   $ 0.50      $ 0.94      $ 0.25      $ 0.47   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding for the entire period (for basic and diluted)

     685,157        697,361        686,693        695,350   
  

 

 

   

 

 

   

 

 

   

 

 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

4


AMERINST INSURANCE GROUP, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, expressed in U.S. dollars)

 

     Nine Months
Ended
September 30, 2012
    Nine Months
Ended
September 30, 2011
 

OPERATING ACTIVITIES

    

Net Cash used in Operating Activities

   $ (1,198,510   $ (2,671,669
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Movement in restricted cash and cash equivalents

     (1,882,884     29,137   

Purchases of property and equipment

     —          (78,343

Purchases of available-for-sale securities

     (2,689,710     (1,562,478

Proceeds from sales of available-for-sale securities

     4,996,671        4,338,292   

Proceeds from redemptions of fixed maturity investments

     1,000,000        —     

Proceeds from maturities of fixed maturity investments

     200,000        500,000   
  

 

 

   

 

 

 

Net Cash provided by Investing Activities

     1,624,077        3,226,608   
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Purchase of shares by subsidiary, net

     —          (148,409

Dividends paid

     (327,992     (289,178
  

 

 

   

 

 

 

Net Cash used in Financing Activities

     (327,992     (437,587
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     97,575        117,352   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

   $ 904,485      $ 970,697   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 1,002,060      $ 1,088,049   
  

 

 

   

 

 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

5


AMERINST INSURANCE GROUP, LTD.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

1. BASIS OF PREPARATION AND CONSOLIDATION

The condensed consolidated financial statements included herein have been prepared by AmerInst Insurance Group, Ltd. (“AmerInst”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC” or the “Commission”), and reflect all adjustments consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations as of the end of and for the periods presented. All intercompany transactions and balances have been eliminated on consolidation. These statements are condensed and do not incorporate all the information required under generally accepted accounting principles to be included in a full set of financial statements. In these notes, the terms “we”, “us”, “our” or the “Company” refer to AmerInst and its subsidiaries. These condensed statements should be read in conjunction with the audited consolidated financial statements at and for the year ended December 31, 2011 and notes thereto, included in AmerInst’s Annual Report on Form 10-K for the year then ended.

New Accounting Pronouncements

(a) Adoption of New Accounting Standards

Fair Value Measurement and Disclosures

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), resulted in a common definition of fair value and common requirements for measurement and disclosure under accounting principles generally accepted in the United States of America (“U.S. GAAP”) and International Financial Reporting Standards (“IFRS”). Consequently, the amendments have changed some fair value measurement principles and disclosure requirements. The implementation of this amended accounting guidance has not had a material impact on the Company’s consolidated financial statements.

Comprehensive Income

In June 2011, the FASB issued new guidance revising the manner in which entities present comprehensive income in their financial statements. The option to report other comprehensive income and its components in the statement of changes in shareholders’ equity is eliminated. Components of comprehensive income may be reported in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The new requirements were effective for the interim and annual periods beginning on or after December 15, 2011 and require retrospective application; early adoption was permitted. As the new guidance does not change the items that constitute net income and/or other comprehensive income, the timing of reclassifications from other comprehensive income to net income or the earnings per share computation, the adoption of this guidance has not impacted our results of operations, financial condition or liquidity.

(b) Recently Issued Accounting Standards Not Yet Adopted

In December 2011, the FASB issued Accounting Standards Update No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). The objective of ASU 2011-11 is to enhance disclosures by requiring improved information about financial instruments and derivative instruments in relation to netting arrangements. ASU 2011-11 is effective for interim and annual periods beginning on or after January 1, 2013. The Company is currently evaluating the impact of this guidance; however, since this update affects disclosures only, it is not expected to have a material impact on the Company’s consolidated financial statements.

The Company has determined that all other recently issued accounting pronouncements do not apply to its operations.

 

6


2. INVESTMENTS

The cost or amortized cost, gross unrealized holding gains and losses, and estimated fair value of the Company’s fixed maturity investments, by major security type, and equity securities as of September 30, 2012 and December 31, 2011 are as follows:

 

     Cost or
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 

As of September 30, 2012

          

Fixed maturity investments:

          

U.S. government agency securities

   $ 446,591       $ 18,466       $ —        $ 465,057   

Obligations of states and political subdivisions

     7,078,407         345,447         (13,252     7,410,602   

Corporate debt securities

     328,503         17,856         —          346,359   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturity investments

     7,853,501         381,769         (13,252     8,222,018   
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities*

     6,212,486         5,181,647         —          11,394,133   

Hedge fund

     1,000,000         446,519         —          1,446,519   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     7,212,486         5,628,166         —          12,840,652   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments

   $ 15,065,987       $ 6,009,935       $ (13,252   $ 21,062,670   
  

 

 

    

 

 

    

 

 

   

 

 

 
     Cost or
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 

As of December 31, 2011

          

Fixed maturity investments:

          

U.S. government agency securities

   $ 1,446,223       $ 7,882       $ —        $ 1,454,105   

Obligations of states and political subdivisions

     8,135,268         531,523         (1,257     8,665,534   

Corporate debt securities

     333,024         —           (3,816     329,208   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturity investments

     9,914,515         539,405         (5,073     10,448,847   
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities*

     6,574,686         4,360,802         (34,718     10,900,770   

Hedge fund

     1,000,000         395,933         —          1,395,933   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     7,574,686         4,756,735         (34,718     12,296,703   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments

   $ 17,489,201       $ 5,296,140       $ (39,791   $ 22,745,550   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

 

  * The Company’s equity securities are managed by an external large cap value advisor. Our investment approach is to focus on increasing the fair market value of our equity securities by investing in companies that may or may not be paying a dividend but whose market values may increase over time. Some of the key factors we consider in a prospective company to invest in include the discount to value and the quality of the management team.

The following tables summarize the Company’s fixed maturity and equity securities in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:

 

     12 months or greater      Less than 12 months     Total  
     Estimated
Fair Value
     Unrealized
Losses
     Estimated
Fair Value
     Unrealized
Losses
    Estimated
Fair Value
     Unrealized
Losses
 

As of September 30, 2012

                

Fixed maturity investments:

                

U.S. government agency securities

   $ —         $ —         $ —         $ —        $ —         $ —     

Obligations of states and political subdivisions

     —           —           1,168,797         (13,252     1,168,797         (13,252

Corporate debt securities

     —           —           —           —          —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity investments

     —           —           1,168,797         (13,252     1,168,797         (13,252
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Equity securities

     —           —           —           —          —           —     

Hedge fund

     —           —           —           —          —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total equity securities

     —           —           —           —          —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ —         $ —         $ 1,168,797       $ (13,252   $ 1,168,797       $ (13,252
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

7


     12 months or greater      Less than 12 months     Total  
     Estimated
Fair Value
     Unrealized
Losses
     Estimated
Fair Value
     Unrealized
Losses
    Estimated
Fair Value
     Unrealized
Losses
 

As of December 31, 2011

                

Fixed maturity investments:

                

U.S. government agency securities

   $ —         $ —         $ —         $ —        $ —         $ —     

Obligations of states and political subdivisions

     —           —           200,046         (1,257     200,046         (1,257

Corporate debt securities

     —           —           329,208         (3,816     329,208         (3,816
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity investments

     —           —           529,254         (5,073     529,254         (5,073
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Equity securities

     —           —           864,871         (34,718     864,871         (34,718

Hedge fund

     —           —           —           —          —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total equity securities

     —           —           864,871         (34,718     864,871         (34,718
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ —         $ —         $ 1,394,125       $ (39,791   $ 1,394,125       $ (39,791
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

As of September 30, 2012 and December 31, 2011, there were four securities in an unrealized loss position with an estimated fair value of $1,168,797 and $1,394,125, respectively. Of these securities, none had been in an unrealized loss position for 12 months or greater. As of September 30, 2012 and December 31, 2011, none of these securities were considered to be other-than-temporarily impaired. The Company has no intent to sell 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 as a result of credit, collateral or structural issues.

Other-Than-Temporary Impairment Process

The Company assesses whether declines in the fair value of its fixed maturity investments classified as available-for-sale represent impairments that are other-than-temporary by reviewing each fixed maturity investment that is impaired and (1) determining if the Company has the intent to sell the fixed maturity investment or if it is more likely than not that the Company will be required to sell the fixed maturity investment before its anticipated recovery; and (2) assessing whether a credit loss exists, that is, where the Company expects that the present value of the cash flows expected to be collected from the fixed maturity investment are less than the amortized cost basis of the investment.

The Company had no planned sales of its fixed maturity investments classified as available-for-sale that were in an unrealized loss position at September 30, 2012. 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 nine months ended September 30, 2012, the Company did not recognize any other-than-temporary impairments due to required sales.

In evaluating credit losses, the Company considers a variety of factors in the assessment of a fixed maturity investment including: (1) the time period during which there has been a significant decline below cost; (2) the extent of the decline below cost and par; (3) the potential for the fixed maturity investment to recover in value; (4) an analysis of the financial condition of the issuer; (5) the rating of the issuer; and (6) failure of the issuer of the fixed maturity investment to make scheduled interest or principal payments.

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 September 30, 2012 and December 31, 2011, relating to four and two fixed maturity securities and none and two equity securities, amounted to $13,252 and $39,791, respectively. This decrease was attributable to equity securities which we determined were not other than temporarily impaired based on the process described above. The unrealized losses on these available for sale fixed maturity securities were not as a result of credit, collateral or structural issues. During the nine months and three months ended September 30, 2012, the Company recorded a total other-than-temporary impairment charge of $198,579 and $32,968 on three equity securities and one equity security, respectively, as a result of the decline in fair value below cost. During the nine months and three months ended September 30, 2011, the Company recorded a total other-than-temporary impairment charge of $152,450 on two equity securities, as a result of the decline in fair value below cost.

 

8


Fair Value of Investments

Under existing U.S. GAAP, we are required to recognize certain assets at their fair value in our consolidated balance sheets. This includes our fixed maturity investments and equity securities. In accordance with the Fair Value Measurements and Disclosures Topic of FASB’s Accounting Standards Codification (“ASC”) 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows:

 

   

Level 1: Observable inputs to the valuation methodology that are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

   

Level 2: Observable inputs to the valuation methodology other than quoted market prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

 

   

Level 3: Inputs to the valuation methodology that are unobservable for the asset or liability.

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 September 30, 2012 and what level within the fair value hierarchy each valuation technique resides:

 

   

U.S. government agency securities: Comprised primarily of bonds issued by the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, Federal Farm Credit Bank and the Federal 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 a liquid market to exist for these types of securities held. Broker quotes are not used for fair value pricing.

 

   

Obligations of state and political subdivisions: Comprised of fixed income obligations of state and local governmental municipalities. The fair values of these securities are based on quotes and current market spread relationships, and are included in the Level 2 fair value hierarchy. AmerInst considers a liquid market to exist for these types of securities held. Broker quotes are not used for fair value pricing.

 

   

Corporate debt securities: Comprised of bonds issued by corporations. The fair values of these securities are based on quotes and current market spread relationships, and are included in the Level 2 fair value hierarchy. AmerInst considers a liquid market to exist for these types of securities held. Broker quotes are not used for fair value pricing.

 

   

Equity securities, at fair value: Comprised primarily of investments in the common stock of publicly traded companies in the U.S. All of the Company’s equities are included in the Level 1 fair value hierarchy. The Company receives prices based on closing exchange prices from independent pricing sources to measure fair values for the equities.

 

   

Hedge fund: Comprised of a hedge fund whose objective is to seek attractive long-term returns with lower volatility by investing in a range of diversified investment strategies. The fund invests in a diversified pool of hedge fund managers, generally across six different strategies: long/short equities, long/short credit, macro, multi-strategy opportunistic, event-driven, and portfolio hedge. The fair value of the hedge fund is based on the net asset value of the fund as reported by the external fund manager. The use of net asset value as an estimate of the fair value for investments in certain entities that calculate net asset value is a permitted practical expedient. The fair value of our hedge fund is included in the Level 3 fair value hierarchy.

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.

 

9


There have been no material changes to any of our valuation techniques from what was used as of December 31, 2011. Since the fair value of a security is an estimate of what a willing buyer would pay for our asset if we sold it, we will not know the ultimate value of our securities until they are sold. We believe the valuation techniques utilized provide us with a reasonable estimate of the price that would be received to sell our assets or transfer our liabilities in an orderly market transaction between participants at the measurement date. The following tables show the fair value of the Company’s investments in accordance with ASC 820 as of September 30, 2012 and December 31, 2011:

 

                   Fair value measurement using:  
     Carrying
amount
     Total fair
value
     Quoted prices
in active
markets
(Level 1)
     Significant other
observable inputs
(Level 2)
     Significant
unobservable inputs
(Level 3)
 

As of September 30, 2012

              

U.S. government agency securities

   $ 465,057       $ 465,057       $ —         $ 465,057       $ —     

Obligations of state and political subdivisions

     7,410,602         7,410,602            7,410,602      

Corporate debt securities

     346,359         346,359            346,359      
  

 

 

    

 

 

          

Total fixed maturity investments

     8,222,018         8,222,018            
  

 

 

    

 

 

          

Equity securities (excluding the hedge fund)

     11,394,133         11,394,133         11,394,133         

Hedge fund

     1,446,519         1,446,519               1,446,519   
  

 

 

    

 

 

          

Total equity securities

     12,840,652         12,840,652            
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 21,062,670       $ 21,062,670       $ 11,394,133       $ 8,222,018       $ 1,446,519   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                   Fair value measurement using:  
     Carrying
amount
     Total fair
value
     Quoted prices
in active
markets
(Level 1)
     Significant other
observable inputs
(Level 2)
     Significant
unobservable inputs
(Level 3)
 

As of December 31, 2011

              

U.S. government agency securities

   $ 1,454,105       $ 1,454,105       $ —         $ 1,454,105       $ —     

Obligations of state and political subdivisions

     8,665,534         8,665,534            8,665,534      

Corporate debt securities

     329,208         329,208            329,208      
  

 

 

    

 

 

          

Total fixed maturity investments

     10,448,847         10,448,847            
  

 

 

    

 

 

          

Equity securities (excluding the hedge fund)

     10,900,770         10,900,770         10,900,770         

Hedge fund

     1,395,933         1,395,933               1,395,933   
  

 

 

    

 

 

          

Total equity securities

     12,296,703         12,296,703            
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 22,745,550       $ 22,745,550       $ 10,900,770       $ 10,448,847       $ 1,395,933   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers between Levels 1 and 2 during the nine months ended September 30, 2012 and the year ended December 31, 2011.

 

10


The following table presents a reconciliation of the beginning and ending balance of investments measured at fair value on a recurring basis using significant unobservable (Level 3) inputs for the nine months ended September 30, 2012 and 2011:

 

     Hedge Fund  Investment
Nine Months
ended
 
     September 30,
2012
     September 30,
2011
 

Balance classified as Level 3, beginning of period

   $ 1,395,933       $ 1,484,884   

Total gains or losses included in earnings:

     —           —     

Net realized gains

     —           —     

Change in fair value of hedge fund investment

     50,586         (47,218

Purchases

     —           —     

Sales

     —           —     

Transfers in and/or out of Level 3

     —           —     
  

 

 

    

 

 

 

Ending balance, end of period

   $ 1,446,519       $ 1,437,666   
  

 

 

    

 

 

 

There were no transfers into or from the Level 3 category during the nine months ended September 30, 2012 and 2011.

The following table presents a reconciliation of the beginning and ending balance of investments measured at fair value on a recurring basis using significant unobservable (Level 3) inputs for the three months ended September 30, 2012 and 2011:

 

     Hedge Fund  Investment
Three Months
ended
 
     September 30,
2012
     September 30,
2011
 

Balance classified as Level 3, beginning of period

   $ 1,432,621       $ 1,506,409   

Total gains or losses included in earnings:

     —           —     

Net realized gains

     —           —     

Change in fair value of hedge fund investment

     13,898         (68,743

Purchases

     —           —     

Sales

     —           —     

Transfers in and/or out of Level 3

     —           —     
  

 

 

    

 

 

 

Ending balance, end of period

   $ 1,446,519       $ 1,437,666   
  

 

 

    

 

 

 

There were no transfers into or from the Level 3 category during the three months ended September 30, 2012 and 2011.

The cost or amortized cost and estimated fair value of fixed maturity investments as of September 30, 2012 and December 31, 2011 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.

 

     Amortized
Cost
     Estimated
Fair Value
 

As of September 30, 2012

     

Due in one year or less

   $ 1,587,212       $ 1,610,417   

Due after one year through five years

     3,413,787         3,629,319   

Due after five years through ten years

     2,852,502         2,982,282   

Due after ten years

     —           —     
  

 

 

    

 

 

 

Total

   $ 7,853,501       $ 8,222,018   
  

 

 

    

 

 

 

 

11


     Amortized
Cost
     Estimated
Fair Value
 

As of December 31, 2011

     

Due in one year or less

   $ 510,949       $ 516,938   

Due after one year through five years

     5,885,709         6,210,596   

Due after five years through ten years

     3,517,857         3,721,313   

Due after ten years

     —           —     
  

 

 

    

 

 

 

Total

   $ 9,914,515       $ 10,448,847   
  

 

 

    

 

 

 

Information on sales and maturities of investments during the nine months ended September 30, 2012 and 2011 are as follows:

 

     September 30,
2012
    September 30,
2011
 

Total proceeds on sales of available-for-sale securities

   $ 4,996,671      $ 4,338,292   

Proceeds from redemptions of fixed maturity investments

     1,000,000        —     

Total proceeds from maturities of fixed maturity investments

     200,000        500,000   

Gross gains on sales

     1,304,878        1,565,380   

Gross losses on sales

     —          (12,138

Impairment losses

     (198,579     (152,450

Information on sales and maturities of investments during the three months ended September 30, 2012 and 2011 are as follows:

 

     September 30,
2012
    September 30,
2011
 

Total proceeds on sales of available-for-sale securities

   $ 3,482,839      $ 1,290,697   

Proceeds from redemptions of fixed maturity investments

     500,000        —     

Total proceeds from maturities of fixed maturity investments

     —          —     

Gross gains on sales

     527,239        249,241   

Gross losses on sales

     —          (12,138

Impairment losses

     (32,968     (152,450

Major categories of net interest and dividend income during the nine months ended September 30, 2012 and 2011 are summarized as follows:

 

     September 30,
2012
    September 30,
2011
 

Interest earned:

    

Fixed maturity investments

   $ 259,794      $ 258,828   

Cash and cash equivalents

     463        259   

Dividends earned

     135,611        155,994   

Investment expenses

     (96,612     (106,128
  

 

 

   

 

 

 

Net investment income

   $ 299,256      $ 308,953   
  

 

 

   

 

 

 

Major categories of net interest and dividend income during the three months ended September 30, 2012 and 2011 are summarized as follows:

 

     September 30,
2012
    September 30,
2011
 

Interest earned:

    

Fixed maturity investments

   $ 85,439      $ 84,581   

Cash and cash equivalents

     138        69   

Dividends earned

     38,314        46,012   

Investment expenses

     (31,755     (34,534
  

 

 

   

 

 

 

Net investment income

   $ 92,136      $ 96,128   
  

 

 

   

 

 

 

 

12


3. SEGMENT INFORMATION

AmerInst has two 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, as defined in the “Overview” section below.

The tables below summarize the results of our operating segments for the nine months ended September 30, 2012 and 2011.

 

     Nine Months Ended September 30, 2012  
     Reinsurance
Segment
     Insurance
Segment
    Total  

Revenues

   $ 2,381,972       $ 615,594      $ 2,997,566   

Total losses and expenses

     1,811,075         1,856,864        3,667,939   

Segment income (loss)

   $ 570,897       $ (1,241,270   $ (670,373

Identifiable assets

   $ —         $ 599,418      $ 599,418   
     Nine Months Ended September 30, 2011  
     Reinsurance
Segment
     Insurance
Segment
    Total  

Revenues

   $ 1,931,448       $ 236,015      $ 2,167,463   

Total losses and expenses

     994,895         2,099,867        3,094,762   

Segment income (loss)

   $ 936,553       $ (1,863,852   $ (927,299

Identifiable assets

   $ —         $ 794,573      $ 794,573   

The tables below summarize the results of our operating segments for the three months ended September 30, 2012 and 2011.

 

     Three Months Ended September 30, 2012  
     Reinsurance
Segment
     Insurance
Segment
    Total  

Revenues

   $ 1,011,644       $ 209,770      $ 1,221,414   

Total losses and expenses

     684,625         588,015        1,272,640   

Segment income (loss)

   $ 327,019       $ (378,245   $ (51,226

Identifiable assets

   $ —         $ 599,418      $ 599,418   
     Three Months Ended September 30, 2011  
     Reinsurance
Segment
     Insurance
Segment
    Total  

Revenues

   $ 277,006       $ 91,587      $ 368,593   

Total losses and expenses

     86,370         615,432        701,802   

Segment income (loss)

   $ 190,636       $ (523,845   $ (333,209

Identifiable assets

   $ —         $ 794,573      $ 794,573   

4. STOCK COMPENSATION

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 three months and nine months ended September 30, 2012, 609 and 1,202 phantom shares were granted, respectively, arising from the dividends declared on the Company’s common shares. 80,074 phantom shares were outstanding at September 30, 2012.

 

13


The employees’ interest in the phantom shares initially granted as well as any additional shares granted from dividends declared will vest on January 1, 2015. The liability payable to the employees under this phantom share plan is equal to the value of the phantom shares based on the net book value of the Company’s actual common shares at the end of the previous quarter less the value of phantom shares initially granted and is payable in cash upon the earlier of the employee attaining 65 years of age or within 60 days of such employee’s death or permanent disability, including if such death or permanent disability occurs before January 1, 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 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 September 30, 2012.

 

Item 2. 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 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 $2,381,972 and $615,594 for the nine months ended September 30, 2012 compared to $1,931,448 and $236,015 for the nine months ended September 30, 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.

 

14


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.

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, provided primary accounting functions to APSL through August 1, 2012. Subsequent to August 1, 2012 accounting functions were provided by an independent contractor, L. Carlson Consulting, Inc., although a formal contract between APSL and L. Carlson Consulting, Inc. was not in place until October 12, 2012. While the contract with L. Carlson Consulting, Inc., has no ending date, it can be terminated by either party upon 30 days written notice. Mowery & Schoenfeld, LLC, will continue to provide accounting and tax advisory services through the year-ended December 31, 2012 pursuant to its letter of understanding dated February 20, 2012.

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

Nine months ended September 30, 2012 compared to nine months ended September 30, 2011

We incurred a net loss of $670,373 during the nine months ended September 30, 2012 compared to a net loss of $927,299 for the same period in 2011. The net loss incurred during the nine months ended September 30, 2012 was largely attributable to operating and management expenses incurred by APSL, which were partially offset by (1) net realized gains on investments, (2) net premiums earned under the Reinsurance Agreement, (3) commission income earned under the Agency Agreement, and (4) other income, as discussed below in further detail. The net loss incurred during the nine months ended September 30, 2011 was largely attributable to operating and management expenses incurred by APSL, which were partially offset by net realized gains on investments and the recognition of the additional recoveries associated with the Arbitration.

 

15


Our net premiums earned for the nine months ended September 30, 2012 were $878,616 compared to $221,844 for the nine months ended September 30, 2011, an increase of $656,772 or 296.1%. The net premiums earned during the nine months ended September 30, 2012 were attributable to cessions from C&F under the Reinsurance Agreement in the amount of $842,582 and to revisions to CAMICO premium estimates for prior years in the amounts of $36,034. The net premiums earned during the nine months ended September 30, 2011 were attributable to cessions from C&F under the Reinsurance Agreement in the amount of $232,368 and to revisions to CAMICO premium estimates for prior years in the amount of $(10,524). 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.

During the nine months ended September 30, 2012 and 2011, we recorded commission income under the Agency Agreement of $615,239 and $235,874, respectively, an increase of $379,365 or 160.8%. This increase resulted from a higher volume of premiums written under the Agency Agreement in 2012.

We recorded other income of $98,156 during the nine months ended September 30, 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 nine months ended September 30, 2011.

We recorded net investment income of $299,256 during the nine months ended September 30, 2012 compared to $308,953 for the nine months ended September 30, 2011. The marginal decline in net investment income was due to the reduction in the investment portfolio due to sales of certain equity securities. 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 nine months ended September 30, 2012, similar to the 1.6% yield earned for the nine months ended September 30, 2011.

Sales of securities during the nine months ended September 30, 2012 resulted in realized gains on investments net of impairment of $1,106,299 compared to $1,400,792 during the nine months ended September 30, 2011, a decrease of $294,493 or 21.0%. The decrease in realized gains primarily related to decreased sales of equity securities in an unrealized gain position compared to 2011.

For the nine months ended September 30, 2012, we recorded loss and loss adjustment expenses of $526,614 derived by multiplying our estimated loss ratio of 62.5% and the net premiums earned under the Reinsurance Agreement of $842,582. For the nine months ended September 30, 2011, we recorded loss and loss adjustment recoveries of $170,078 as a result of the recognition of the additional recoveries awarded to the Company following the Arbitration in the amount of $315,299, net of loss and loss adjustment expenses of $145,221 derived by multiplying our estimated loss ratio of 62.5% and the premiums earned under the Reinsurance Agreement of $232,368.

We recorded policy acquisition costs of $313,073 during the nine months ended September 30, 2012 compared to $85,818 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 nine months ended September 30, 2012 were approximately 37% of the premiums earned under the Reinsurance Agreement of $842,582 plus some immaterial policy acquisition costs that were attributable to the revisions to the CAMICO premium estimates for prior years as noted above. The policy acquisition costs recorded during the nine months ended September 30, 2011 were approximately 37% of the premiums earned under the Reinsurance Agreement of $232,368, 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.

We expensed operating and management expenses of $2,828,252 for the nine months ended September 30, 2012 compared to $3,179,022 for the same period in 2011, a decrease of $350,770 or 11.0%. The decline is largely attributable to (1) a reduction in professional and marketing expenses incurred by APSL during the nine months to September 30, 2012 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 nine months ended September 30, 2012 compared to the same period in 2011.

 

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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.

 

     Nine Months Ended September 30, 2012  
     Reinsurance
Segment
     Insurance
Segment
    Total  

Revenues

   $ 2,381,972       $ 615,594      $ 2,997,566   

Total losses and expenses

     1,811,075         1,856,864        3,667,939   

Segment income (loss)

   $ 570,897       $ (1,241,270   $ (670,373

Identifiable assets

   $ —         $ 599,418      $ 599,418   
     Nine Months Ended September 30, 2011  
     Reinsurance
Segment
     Insurance
Segment
    Total  

Revenues

   $ 1,931,448       $ 236,015      $ 2,167,463   

Total losses and expenses

     994,895         2,099,867        3,094,762   

Segment income (loss)

   $ 936,553       $ (1,863,852   $ (927,299

Identifiable assets

   $ —         $ 794,573      $ 794,573   

Three months ended September 30, 2012 compared to three months ended September 30, 2011

We incurred a net loss of $51,226 during the third quarter of 2012 compared to a net loss of $333,209 for the same period in 2011. The net loss incurred during the third quarter of 2012 was largely attributable to operating and management expenses incurred by APSL, which were partially offset by (1) net realized gains on investments, (2) net premiums earned under the Reinsurance Agreement and (3) commission income earned under the Agency Agreement. The net loss incurred during the third quarter of 2011 was largely attributable to operating and management expenses incurred by APSL, partially offset by net realized gains on investments and the recognition of the additional recoveries associated with the Arbitration.

Our net premiums earned during the third quarter of 2012 were $425,344 compared to $96,283 during the third quarter of 2011, an increase of $329,061 or 341.8%. The net premiums earned during the quarter ended September 30, 2012 were attributable to cessions from C&F under the Reinsurance Agreement in the amount of $389,310 and to revisions to CAMICO premium estimates for prior years in the amount of $36,034. The net premiums earned during the quarter ended September 30, 2011 were attributable to cessions from C&F under the Reinsurance Agreement in the amount of $106,807 and to revisions to CAMICO premium estimates for prior years in the amount of $(10,524). 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 September 30, 2012 and 2011, we recorded commission income under the Agency Agreement of $209,663 and $91,529, respectively, an increase of $118,134 or 129.1%. This increase resulted from a higher volume of premiums written under the Agency Agreement in 2012.

We recorded net investment income of $92,136 for the quarter ended September 30, 2012 compared to $96,128 for the quarter ended September 30, 2011. The marginal decline in net investment income is due to the reduction in the investment portfolio due to sales of certain equity securities. 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 1.5% for the quarter ended September 30, 2012, similar to the 1.5% yield earned for the quarter ended September 30, 2011.

Sales of securities during the quarter ended September 30, 2012 resulted in realized gains on investments net of impairment of $494,271 compared to $84,653 during the quarter ended September 30, 2011, an increase of $409,618. The increase in realized gains primarily related to increased sales of fixed income securities in an unrealized gain position compared to 2011 and to the decrease in other-than-temporary impairment charges compared to 2011.

For the quarters ended September 30, 2012, we recorded loss and loss adjustment expenses of $243,319 derived by multiplying our estimated loss ratio of 62.5% and the net premiums earned under the Reinsurance Agreement of $389,310. For the quarter ended September 30, 2011, we recorded loss and loss adjustment recoveries of $248,544 as a result of the recognition of the additional recoveries awarded to the Company following the Arbitration in the amount of $315,299, net of loss and loss adjustment expenses of $66,755 derived by multiplying our estimated loss ratio of 62.5% and the premiums earned under the Reinsurance Agreement of $106,807.

 

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We recorded policy acquisition costs of $144,406 in the third quarter of 2012 compared to $38,482 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 third quarter of 2012 were approximately 37% of the premium earned under the Reinsurance Agreement of $389,310 plus some immaterial policy acquisition costs that were attributable to the revisions to the CAMICO premium estimates for prior years as noted above. The policy acquisition costs recorded during the third quarter of 2011 were approximately 37% of the premium earned under the Reinsurance Agreement of $106,807, 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.

We expensed operating and management expenses of $884,915 in the third quarter of 2012 compared to $911,864 for the same period in 2011, a decrease of $26,949 or 3.0%. 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 period 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 September 30, 2012  
     Reinsurance
Segment
     Insurance
Segment
    Total  

Revenues

   $ 1,011,644       $ 209,770      $ 1,221,414   

Total losses and expenses

     684,625         588,015        1,272,640   

Segment income (loss)

   $ 327,019       $ (378,245   $ (51,226

Identifiable assets

   $ —         $ 599,418      $ 599,418   
     Three Months Ended September 30, 2011  
     Reinsurance
Segment
     Insurance
Segment
    Total  

Revenues

   $ 277,006       $ 91,587      $ 368,593   

Total losses and expenses

     86,370         615,432        701,802   

Segment income (loss)

   $ 190,636       $ (523,845   $ (333,209

Identifiable assets

   $ —         $ 794,573      $ 794,573   

FINANCIAL CONDITION

As of September 30, 2012, our total investments were $21,062,670, a decrease of $1,682,880, or 7.4%, from $22,745,550 at December 31, 2011. The decrease was primarily due to the sales of certain equity and fixed income securities. The cash and cash equivalents balance increased from $904,485 at December 31, 2011 to $1,002,060 at September 30, 2012, an increase of $97,575 or 10.8%. 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 increased from $435,924 at December 31, 2011 to $2,318,808 at September 30, 2012, an increase of $1,882,884. The increase is due to the timing of sales and maturities of investments held as restricted cash at September 30, 2012 that have not yet been reinvested. The ratio of cash and total investments to total liabilities at September 30, 2012 was 7.36:1, compared to a ratio of 8.25:1 at December 31, 2011.

The assumed reinsurance balances receivable represents the current assumed premiums receivable less commissions payable to the fronting carriers. As of September 30, 2012, the balance was $283,755 compared to $183,518 as of December 31, 2011. The increase resulted from a higher level of premiums assumed under the Reinsurance Agreement and to revisions to the CAMICO premium estimates for prior years as noted above.

The assumed reinsurance payable represents current reinsurance losses payable to the fronting carriers. 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 $251,294 at September 30, 2012. The increase in deferred policy acquisition costs in 2012 was primarily 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 $269,316 at September 30, 2012, a decrease of 28.8% from December 31, 2011. The balance primarily relates to (1) prepaid directors’ and officers’ liability insurance costs, (2) the 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 $1,144,699 at September 30, 2012, a decrease of $251,633 or 18.0%. The decrease in the balance was attributable to a reduction in expenses accrued in relation to professional fees. This balance fluctuates due to the timing of the payments.

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 and investments increased from $24,085,959 at December 31, 2011 to $24,383,538 at September 30, 2012, an increase of $297,579 or 1.2%. 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 $585,656. These increases were partially offset by net cash outflows to fund the operations of APSL and dividends of $327,992 paid during the year.

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 nine months and three months ended September 30, 2012, no such transactions occurred. Through September 30, 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 September 30, 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 dividends of $0.25 per share during the first and third quarters of 2012, which amounted to total ordinary cash dividends of $170,905 and $171,672, respectively. The dividends paid in 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 $19.37 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 9.68% 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 $32.86 per share as of September 30, 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.

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, 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,

 

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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.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2012, the end of the period covered by this Form 10-Q, our management, including our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer each concluded that as of September 30, 2012, the end of the period covered by this Form 10-Q, we maintained effective disclosure controls and procedures.

Changes in Internal Control over Financial Reporting

Our management, including our Principal Executive Officer and Principal Financial Officer, has reviewed our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). There have been no significant changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II—OTHER INFORMATION

 

Item 1. Legal Proceedings

We are party to various legal proceedings generally arising in the normal course of our business. While any proceeding contains an element of uncertainty, we do not believe that the eventual outcome of any litigation or arbitration proceeding to which we are presently a party could have a material adverse effect on our financial condition or business. Pursuant to our insurance and reinsurance agreements, disputes are generally required to be finally settled by arbitration.

 

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 2011 Annual Report on Form 10-K, as updated in our subsequent quarterly reports. The risks described in our 2011 Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Item 6. Exhibits

(a) Exhibits

 

Exhibit
Number

  

Description

31.1      Certification of Stuart H. Grayston pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2      Certification of Thomas R. McMahon pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1      Certification of Stuart H. Grayston pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2      Certification of Thomas R. McMahon pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: November 14, 2012   AMERINST INSURANCE GROUP, LTD.
  (Registrant)
  By:  

  /s/ STUART H. GRAYSTON

    Stuart H. Grayston
    President (Principal Executive Officer, duly authorized to sign this Report in such capacity and on behalf of the Registrant)
  By:  

  /S/ THOMAS R. MCMAHON

    Thomas R. McMahon
    Chief Financial Officer (Principal Financial Officer, duly authorized to sign this Report in such capacity and on behalf of the Registrant)

 

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AMERINST INSURANCE GROUP, LTD.

INDEX TO EXHIBITS

Filed with the Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2012

 

Exhibit
Number

  

Description

31.1      Certification of Stuart H. Grayston pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2      Certification of Thomas R. McMahon pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1      Certification of Stuart H. Grayston pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2      Certification of Thomas R. McMahon pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document

 

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