UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(Mark One)
☒ | Quarterly report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the Quarterly Period ended June 30, 2017.March 31, 2018.
☐ | Transition report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934. |
For the transition period from to .
Commission file number000-28249
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 Citadel Management Bermuda 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 ☒ 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 RegulationS-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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☒ | |||
Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of The Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). YES ☐ NO ☒.
As of AugustMay 1, 2017,2018, 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 Form10-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 Form10-Q, as well as:
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 June 30, 2017 | As of December 31, 2016 | As of March 31, 2018 | As of December 31, 2017 | |||||||||||||
ASSETS | ||||||||||||||||
INVESTMENTS | ||||||||||||||||
Fixed maturity investments, available for sale, at fair value (amortized cost $11,390,760 and $11,406,979) | $ | 11,429,332 | $ | 11,362,421 | ||||||||||||
Equity securities, available for sale, at fair value (cost $12,239,697 and $11,321,578) | 16,443,998 | 15,165,544 | ||||||||||||||
Investments (Notes 3 and 4): | ||||||||||||||||
Fixed maturity investments, at fair value (amortized cost $15,061,297 and $14,574,417) | $ | 14,833,315 | $ | 14,510,627 | ||||||||||||
Equity securities, at fair value (cost $11,260,543 and $10,411,747) | 15,737,552 | 15,504,697 | ||||||||||||||
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TOTAL INVESTMENTS | 27,873,330 | 26,527,965 | 30,570,867 | 30,015,324 | ||||||||||||
Cash and cash equivalents | 5,251,270 | 4,631,709 | 4,223,171 | 5,008,138 | ||||||||||||
Restricted cash and cash equivalents | 17,729 | 23,392 | 221,784 | 710,818 | ||||||||||||
Other invested assets | 490,000 | 490,000 | ||||||||||||||
Assumed reinsurance balances receivable | 1,506,216 | 1,285,126 | ||||||||||||||
Assumed reinsurance premiums receivable | 2,614,660 | 2,375,629 | ||||||||||||||
Accrued investment income | 67,525 | 76,975 | 99,562 | 83,345 | ||||||||||||
Property and equipment | 228,452 | 226,988 | 414,522 | 316,066 | ||||||||||||
Deferred policy acquisition costs | 1,726,807 | 1,384,915 | 1,800,224 | 1,622,676 | ||||||||||||
Prepaid expenses and other assets | 1,709,710 | 1,398,739 | 1,794,439 | 1,682,301 | ||||||||||||
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TOTAL ASSETS | $ | 38,871,039 | $ | 36,045,809 | $ | 41,739,229 | $ | 41,814,297 | ||||||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
LIABILITIES | ||||||||||||||||
Unpaid losses and loss adjustment expenses | $ | 11,080,766 | $ | 8,941,991 | $ | 12,588,242 | $ | 11,228,507 | ||||||||
Unearned premium | 4,665,930 | 3,743,006 | ||||||||||||||
Assumed reinsurance balances payable | 1,537 | 1,254,687 | ||||||||||||||
Unearned premiums | 4,864,839 | 4,385,354 | ||||||||||||||
Assumed reinsurance payable | 967,444 | 1,883,879 | ||||||||||||||
Accrued expenses and other liabilities | 4,195,240 | 4,035,617 | 4,092,287 | 4,610,781 | ||||||||||||
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TOTAL LIABILITIES | $ | 19,943,473 | $ | 17,975,301 | $ | 22,512,812 | $ | 22,108,521 | ||||||||
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COMMITMENTS AND CONTINGENCIES | ||||||||||||||||
SHAREHOLDERS’ EQUITY | ||||||||||||||||
Common shares, $1 par value, 2017 and 2016: 2,000,000 shares authorized, 995,253 issued and outstanding | $ | 995,253 | $ | 995,253 | ||||||||||||
Additional paid-in capital | 6,287,293 | 6,287,293 | ||||||||||||||
Common shares, $1 par value, 2018 and 2017: 2,000,000 shares authorized, 995,253 issued and outstanding | $ | 995,253 | $ | 995,253 | ||||||||||||
Additionalpaid-in-capital | 6,323,450 | 6,323,450 | ||||||||||||||
Retained earnings | 15,722,938 | 15,379,345 | 20,590,202 | 15,812,419 | ||||||||||||
Accumulated other comprehensive income | 4,242,873 | 3,799,408 | (227,982 | ) | 5,029,160 | |||||||||||
Shares held by Subsidiary (346,057 and 348,605 shares) at cost | (8,320,791 | ) | (8,390,791 | ) | ||||||||||||
Shares held by Subsidiary (350,930 and 350,930 shares) at cost | (8,454,506 | ) | (8,454,506 | ) | ||||||||||||
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TOTAL SHAREHOLDERS’ EQUITY | 18,927,566 | 18,070,508 | 19,226,417 | 19,705,776 | ||||||||||||
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 38,871,039 | $ | 36,045,809 | $ | 41,739,229 | $ | 41,814,297 | ||||||||
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See the accompanying notes to the unaudited condensed consolidated financial statements.
3
AMERINST INSURANCE GROUP, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS, COMPREHENSIVE (LOSS) INCOME (LOSS)
AND RETAINED EARNINGS
(Unaudited, expressed in U.S. dollars)
Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | |||||||||||||||||||
REVENUE | ||||||||||||||||||||||||
Net premiums earned | $ | 4,001,139 | $ | 3,116,435 | $ | 2,208,528 | $ | 1,500,827 | $ | 2,135,175 | $ | 1,792,611 | ||||||||||||
Commission income | 2,387,863 | 1,980,758 | 1,172,819 | 947,273 | 1,428,980 | 1,215,044 | ||||||||||||||||||
Net investment income | 236,160 | 146,117 | 85,493 | 81,438 | 88,469 | 150,667 | ||||||||||||||||||
Net realized gain on investments | 851,572 | 760,114 | 373,316 | 516,861 | ||||||||||||||||||||
Net realized and unrealized (loss) gain on investments | (161,060 | ) | 478,256 | |||||||||||||||||||||
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TOTAL REVENUE | 7,476,734 | 6,003,424 | 3,840,156 | 3,046,399 | 3,491,564 | 3,636,578 | ||||||||||||||||||
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LOSSES AND EXPENSES | ||||||||||||||||||||||||
Losses and loss adjustment expenses | 2,580,735 | 2,041,266 | 1,424,500 | 983,043 | 1,377,188 | 1,156,235 | ||||||||||||||||||
Policy acquisition costs | 1,480,015 | 1,153,085 | 817,157 | 555,307 | 789,877 | 662,858 | ||||||||||||||||||
Operating and management expenses | 2,768,472 | 2,528,253 | 1,382,088 | 1,279,718 | 1,639,666 | 1,386,384 | ||||||||||||||||||
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TOTAL LOSSES AND EXPENSES | 6,829,222 | 5,722,604 | 3,623,745 | 2,818,068 | 3,806,731 | 3,205,477 | ||||||||||||||||||
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NET INCOME BEFORE TAX | 647,512 | 280,820 | 216,411 | 228,331 | ||||||||||||||||||||
NET (LOSS) INCOME BEFORE TAX | $ | (315,167 | ) | $ | 431,101 | |||||||||||||||||||
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Income tax expense | — | — | — | — | — | — | ||||||||||||||||||
NET INCOME AFTER TAX | $ | 647,512 | $ | 280,820 | $ | 216,411 | $ | 228,331 | ||||||||||||||||
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OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||||||||||
Net unrealized holding gains arising during the period | 1,295,037 | 175,720 | 661,765 | 227,745 | ||||||||||||||||||||
NET (LOSS) INCOME AFTER TAX | $ | (315,167 | ) | $ | 431,101 | |||||||||||||||||||
OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||||||||||||||||||
Net unrealized holding (losses) gains arising during the period | (164,192 | ) | 633,272 | |||||||||||||||||||||
Reclassification adjustment for gains included in net income | (851,572 | ) | (760,114 | ) | (373,316 | ) | (516,861 | ) | — | (478,256 | ) | |||||||||||||
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OTHER COMPREHENSIVE INCOME (LOSS) | 443,465 | (584,394 | ) | 288,449 | (289,116 | ) | ||||||||||||||||||
OTHER COMPREHENSIVE (LOSS) INCOME | (164,192 | ) | 155,016 | |||||||||||||||||||||
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COMPREHENSIVE INCOME (LOSS) | $ | 1,090,977 | $ | (303,574 | ) | $ | 504,860 | $ | (60,785 | ) | ||||||||||||||
COMPREHENSIVE (LOSS) INCOME | $ | (479,359 | ) | $ | 586,117 | |||||||||||||||||||
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RETAINED EARNINGS, BEGINNING OF PERIOD | $ | 15,379,345 | $ | 14,213,781 | $ | 15,810,446 | $ | 14,123,576 | $ | 15,812,419 | $ | 15,379,345 | ||||||||||||
Net income | 647,512 | 280,820 | 216,411 | 228,331 | ||||||||||||||||||||
Net (loss) income | (315,167 | ) | 431,101 | |||||||||||||||||||||
Dividends | (303,919 | ) | (142,694 | ) | (303,919 | ) | — | — | — | |||||||||||||||
Cumulative effect of adoption of accounting guidance (ASU2016-01) | 5,092,950 | — | ||||||||||||||||||||||
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RETAINED EARNINGS, END OF PERIOD | $ | 15,722,938 | $ | 14,351,907 | $ | 15,722,938 | $ | 14,351,907 | 20,590,202 | 15,810,446 | ||||||||||||||
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Per share amounts | ||||||||||||||||||||||||
Net Income per share | ||||||||||||||||||||||||
Net loss per share | ||||||||||||||||||||||||
Basic | $ | 1.00 | $ | 0.43 | $ | 0.33 | $ | 0.35 | $ | (0.49 | ) | $ | 0.67 | |||||||||||
Diluted | $ | 1.00 | $ | 0.43 | $ | 0.33 | $ | 0.35 | $ | (0.49 | ) | $ | 0.66 | |||||||||||
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Dividends | $ | 0.50 | $ | 0.25 | $ | 0.50 | $ | 0.00 | $ | — | $ | — | ||||||||||||
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Weighted average number of shares outstanding for the entire period | ||||||||||||||||||||||||
Basic | 646,497 | 650,516 | 646,422 | 650,952 | 644,323 | 646,648 | ||||||||||||||||||
Diluted | 650,421 | 650,516 | 647,826 | 650,952 | 647,593 | 647,691 | ||||||||||||||||||
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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)
Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 | |||||||
OPERATING ACTIVITIES | ||||||||
Net Cash provided by Operating Activities | $ | 1,036,140 | $ | 1,327,928 | ||||
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INVESTING ACTIVITIES | ||||||||
Movement in restricted cash and cash equivalents | 5,663 | 571,148 | ||||||
Purchases of property and equipment | (33,499 | ) | (27,485 | ) | ||||
Purchases of available-for-sale securities | (4,675,291 | ) | (4,449,623 | ) | ||||
Proceeds from sales of available-for-sale securities | 3,028,927 | 2,543,936 | ||||||
Proceeds from redemptions of fixed maturity investments | 611,540 | — | ||||||
Proceeds from maturities of fixed maturity investments | 950,000 | 705,000 | ||||||
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Net Cash used in Investing Activities | (112,660 | ) | (657,024 | ) | ||||
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FINANCING ACTIVITIES | ||||||||
Dividends paid | (303,919 | ) | (142,694 | ) | ||||
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Net Cash used in Financing Activities | (303,919 | ) | (142,694 | ) | ||||
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NET INCREASE IN CASH AND CASH EQUIVALENTS | 619,561 | 528,210 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | $ | 4,631,709 | $ | 3,073,747 | ||||
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CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 5,251,270 | $ | 3,601,957 | ||||
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Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | |||||||
OPERATING ACTIVITIES | ||||||||
Net Cash used in Operating Activities | $ | (259,950 | ) | $ | (243,837 | ) | ||
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INVESTING ACTIVITIES | ||||||||
Purchases of property and equipment | (118,125 | ) | (11,419 | ) | ||||
Purchases ofavailable-for-sale securities | (1,874,297 | ) | (2,928,035 | ) | ||||
Proceeds from sales ofavailable-for-sale securities | 978,371 | 1,234,621 | ||||||
Proceeds from redemptions of fixed maturity investments | — | 446,540 | ||||||
Proceeds from maturities of fixed maturity investments | — | 675,000 | ||||||
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Net Cash used in Investing Activities | (1,014,051 | ) | (583,293 | ) | ||||
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NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (1,274,001 | ) | (827,130 | ) | ||||
CASH, CASH EQUIVALENTS AND RESTRCITED CASH AT BEGINNING OF PERIOD | $ | 5,718,956 | $ | 4,655,101 | ||||
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CASH, CASH EQUIVALENTS AND CASH EQUIVALENTS AT END OF PERIOD | $ | 4,444,955 | $ | 3,827,971 | ||||
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See the accompanying notes to the unaudited condensed consolidated financial statements.
5
AMERINST INSURANCE GROUP, LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017March 31, 2018
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 (the “Commission”). These financial statements 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 in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany transactions and balances have been eliminated on consolidation. These statements are condensed and do not incorporate all the information required under U.S. GAAP 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, 20162017 and notes thereto, included in AmerInst’s Annual Report on Form10-K for the year then ended.
New Accounting Pronouncements
New Accounting Standards Adopted in 20172018
Revenue from Contracts with Customers
In May 2014, the FASB issuedFinancial Accounting Standards Update Board (“FASB”) issued ASU2014-09, “Revenue from Contracts with Customers” (“ASU2014-09”). ASU2014-09 provides provided a framework, through a five-step process, for recognizing revenue from customers, improves comparability and consistency of recognizing revenue across entities, industries, jurisdictions and capital markets, and requires enhanced disclosures. Certain contracts with customers are specifically excluded from the scope of ASU2014-09, including; without limitation, insurance contracts accounted for under Accounting Standard Codification 944,Financial Services—Insurance.Insurance. ASU2014-09 was effective on January 1,for annual reporting periods beginning after December 15, 2017 with retrospective adoption required for the comparative periods. The adoption of ASU2014-09 did not have a material impact on the Company’s consolidated financial statements.
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU2016-15, “Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments” which addressed diversity in practice in how eight specific cash receipts and cash payments should be presented and classified on the statement of cash flows. This guidance was effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. As this guidance relates solely to financial statement disclosures, the adoption of ASU2016-18, did not impact the Company’s results of operations, financial condition and liquidity.
Statement of Cash Flows—Restricted Cash
In November 2016, the FASB issued ASU2016-18, which required that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling thebeginning-of-period andend-of-period total amounts shown on the statement of cash flows. This ASU was effective for periods beginning after December 15, 2017.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU Update2016-01, “Financial Instruments—Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU2016-01”). ASU2016-01 changed current U.S. GAAP for public entities by requiring the following, among others: (1) equity securities, except those accounted for under the equity method of accounting, to be measured at fair value with changes in fair value recognized in net income; (2) the use of the exit price when measuring fair value of financial instruments for disclosure purposes; (3) an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; and (4) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or notes to the financial statements. ASU2016-01 was effective for annual periods beginning after December 15, 2017, including interim periods. Early application was permitted.
6
We adopted ASU2016-01 on January 1, 2018. As a result, we recorded a cumulative-effect adjustment to increase beginning Retained earnings by $5.1 million, representing the unrealized appreciation on our equity investments with an offsetting adjustment to decrease Accumulated other comprehensive income. All subsequent changes in fair value of our equity investments are recognized within realized and unrealized gains (losses) on the consolidated statement of operations. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance.
Accounting Standards Not Yet Adopted
Financial Instruments Credit Losses-Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU2016-13, which amends the guidance on impairment of financial instruments and significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU will replace the existing “incurred loss” approach, with an “expected loss” model for instruments measured at amortized cost and require entities to record allowances foravailable-for-sale debt securities rather than reduce the carrying amount under the existing other-than temporary-impairment model. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019.
Test for Goodwill Impairment
In January 2017, the FASB issued ASU2017-04, which simplifies the accounting for goodwill impairments by eliminating Step 2 from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The ASU is effective for any interim and annual impairment tests for periods beginning after December 15, 2019. Early adoption is permitted for any interim and annual impairment tests occurring after January 1, 2017. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU2018-02 “Income Statement—Reporting Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” in response to a financial reporting issue that arose as a consequence of the U.S. federal government tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (“U.S. Tax Reform”) which became law on December 22, 2017.
U.S. GAAP currently requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. This guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income rather than in income from continuing operations. As the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate is required to be included in income from continuing operations, the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects for purposes of this Update) do not reflect the appropriate tax rate.
7
The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from U.S. Tax Reform. Consequently, the amendments eliminate the stranded tax effects resulting from U.S. Tax Reform and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of U.S. Tax Reform, the underlying guidance that requires the effect of a change in tax laws or rates be included in income from continuing operations is not affected.
8
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 June 30, 2017March 31, 2018 and December 31, 20162017 are as follows:
Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||||||||||||
As of June 30, 2017 | ||||||||||||||||||||||||||||||||
As of March 31, 2018 | ||||||||||||||||||||||||||||||||
Fixed maturity investments: | ||||||||||||||||||||||||||||||||
U.S. government agency securities | $ | 1,903,283 | $ | 4,143 | $ | (329 | ) | $ | 1,907,097 | $ | 4,897,705 | $ | 274 | $ | (69,825 | ) | $ | 4,828,154 | ||||||||||||||
Obligations of states and political subdivisions | 3,274,313 | 35,273 | (555 | ) | 3,309,031 | 3,977,865 | 11,041 | (17,304 | ) | 3,971,602 | ||||||||||||||||||||||
Corporate debt securities | 6,213,164 | 25,384 | (25,344 | ) | 6,213,204 | 6,185,727 | — | (152,168 | ) | 6,033,559 | ||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total fixed maturity investments | 11,390,760 | 64,800 | (26,228 | ) | 11,429,332 | 15,061,297 | 11,315 | (239,297 | ) | 14,833,315 | ||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Equity securities | 12,206,389 | 4,233,917 | (52,336 | ) | 16,387,970 | 11,252,748 | 4,623,549 | (150,797 | ) | 15,725,500 | ||||||||||||||||||||||
Hedge fund | 33,308 | 22,720 | — | 56,028 | 7,795 | 4,257 | — | 12,052 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total equity securities | 12,239,697 | 4,256,637 | (52,336 | ) | 16,443,998 | 11,260,543 | 4,627,806 | (150,797 | ) | 15,737,552 | ||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total investments | $ | 23,630,457 | $ | 4,321,437 | $ | (78,564 | ) | $ | 27,873,330 | $ | 26,321,840 | $ | 4,639,121 | $ | (390,094 | ) | $ | 30,570,867 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||||||||||||
As of December 31, 2016 | ||||||||||||||||||||||||||||||||
As of December 31, 2017 | ||||||||||||||||||||||||||||||||
Fixed maturity investments: | ||||||||||||||||||||||||||||||||
U.S. government agency securities | $ | 1,462,040 | $ | 6,408 | $ | (1,642 | ) | $ | 1,466,806 | $ | 4,394,864 | $ | 948 | $ | (15,312 | ) | $ | 4,380,500 | ||||||||||||||
Obligations of states and political subdivisions | 4,098,069 | 37,309 | (634 | ) | 4,134,744 | 3,984,633 | 18,065 | (9,565 | ) | 3,993,133 | ||||||||||||||||||||||
Corporate debt securities | 5,846,870 | 1,662 | (87,661 | ) | 5,760,871 | 6,194,920 | 367 | (58,293 | ) | 6,136,994 | ||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total fixed maturity investments | 11,406,979 | 45,379 | (89,937 | ) | 11,362,421 | 14,574,417 | 19,380 | (83,170 | ) | 14,510,627 | ||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Equity securities | 11,235,802 | 3,917,670 | (128,395 | ) | 15,025,077 | 10,403,952 | 5,098,001 | (8,749 | ) | 15,493,204 | ||||||||||||||||||||||
Hedge fund | 85,776 | 54,691 | — | 140,467 | 7,795 | 3,698 | — | 11,493 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total equity securities | 11,321,578 | 3,972,361 | (128,395 | ) | 15,165,544 | 10,411,747 | 5,101,699 | (8,749 | ) | 15,504,697 | ||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total investments | $ | 22,728,557 | $ | 4,017,740 | $ | (218,332 | ) | $ | 26,527,965 | $ | 24,986,164 | $ | 5,121,079 | $ | (91,919 | ) | $ | 30,015,324 | ||||||||||||||
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|
|
|
|
|
79
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 | 12 months or greater | Less than 12 months | Total | |||||||||||||||||||||||||||||||||||||||||||
Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||||||||||
As of June 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
As of March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity investments: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government agency securities | $ | — | $ | — | $ | 504,095 | $ | (329 | ) | $ | 504,095 | $ | (329 | ) | $ | — | $ | — | $ | 4,580,991 | $ | (69,825 | ) | $ | 4,580,991 | $ | (69,825 | ) | ||||||||||||||||||||
Obligations of states and political subdivisions | — | — | 499,445 | (555 | ) | 499,445 | (555 | ) | — | — | 1,974,488 | (17,304 | ) | 1,974,488 | (17,304 | ) | ||||||||||||||||||||||||||||||||
Corporate debt securities | 464,922 | (11,905 | ) | 2,365,052 | (13,439 | ) | 2,829,974 | (25,344 | ) | 2,736,918 | (104,368 | ) | 3,296,641 | (47,800 | ) | 6,033,559 | (152,168 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total fixed maturity investments | 464,922 | (11,905 | ) | 3,368,592 | (14,323 | ) | 3,833,514 | (26,228 | ) | 2,736,918 | (104,368 | ) | 9,852,120 | (134,929 | ) | 12,589,038 | (239,297 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Equity securities | 114,724 | (5,297 | ) | 1,363,761 | (47,039 | ) | 1,478,485 | (52,336 | ) | 76,270 | (15,467 | ) | 1,417,981 | (135,330 | ) | 1,494,251 | (150,797 | ) | ||||||||||||||||||||||||||||||
Hedge fund | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total equity securities | 114,724 | (5,297 | ) | 1,363,761 | (47,039 | ) | 1,478,485 | (52,336 | ) | 76,270 | (15,467 | ) | 1,417,981 | (135,330 | ) | 1,494,251 | (150,797 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total investments | $ | 579,646 | $ | (17,202 | ) | $ | 4,732,353 | $ | (61,362 | ) | $ | 5,311,999 | $ | (78,564 | ) | $ | 2,813,188 | $ | (119,835 | ) | $ | 11,270,101 | $ | (270,259 | ) | $ | 14,083,289 | $ | (390,094 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
12 months or greater | Less than 12 months | Total | 12 months or greater | Less than 12 months | Total | |||||||||||||||||||||||||||||||||||||||||||
Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||||||||||
As of December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity investments: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government agency securities | $ | — | $ | — | $ | 507,735 | $ | (1,642 | ) | $ | 507,735 | $ | (1,642 | ) | $ | — | $ | — | $ | 3,424,024 | $ | (15,312 | ) | $ | 3,424,024 | $ | (15,312 | ) | ||||||||||||||||||||
Obligations of states and political subdivisions | 542,968 | (402 | ) | 420,050 | (232 | ) | 963,018 | (634 | ) | — | — | 1,286,103 | (9,565 | ) | 1,286,103 | (9,565 | ) | |||||||||||||||||||||||||||||||
Corporate debt securities | — | — | 4,549,756 | (87,661 | ) | 4,549,756 | (87,661 | ) | 2,794,836 | (51,149 | ) | 1,974,024 | (7,144 | ) | 4,768,860 | (58,293 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total fixed maturity investments | 542,968 | (402 | ) | 5,477,541 | (89,535 | ) | 6,020,509 | (89,937 | ) | 2,794,836 | (51,149 | ) | 6,684,151 | (32,021 | ) | 9,478,987 | (83,170 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Equity securities | 119,411 | (6,743 | ) | 1,671,859 | (121,652 | ) | 1,791,270 | (128,395 | ) | — | — | 207,701 | (8,749 | ) | 207,701 | (8,749 | ) | |||||||||||||||||||||||||||||||
Hedge fund | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total equity securities | 119,411 | (6,743 | ) | 1,671,859 | (121,652 | ) | 1,791,270 | (128,395 | ) | — | — | 207,701 | (8,749 | ) | 207,701 | (8,749 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total investments | $ | 662,379 | $ | (7,145 | ) | $ | 7,149,400 | $ | (211,187 | ) | $ | 7,811,779 | $ | (218,332 | ) | $ | 2,794,836 | $ | (51,149 | ) | $ | 6,891,852 | $ | (40,770 | ) | $ | 9,686,688 | $ | (91,919 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017March 31, 2018 and December 31, 2016,2017, there were 2046 and 2729 securities in an unrealized loss position with an estimated fair value of $5,311,999$14,083,289 and $7,811,779,$9,686,688, respectively. As of June 30, 2017March 31, 2018 and December 31, 2016, four2017, nine and sixseven of these securities had been in an unrealized loss position for 12 months or greater, respectively. As of June 30, 2017March 31, 2018 and December 31, 2016,2017, none of these securities were considered to be other-than-temporarily impaired. The Company has the intent to hold these securities for a sufficient period of time for the value to recover and it is not more likely than not that the Company will be required to sell these securities before their fair valuevalues recover above the adjusted cost. The unrealized losses from these securities were not as a result of credit, collateral or structural issues.
At June 30, 2017 and December 31, 2016, the Company had investments in certificates of deposit (“CD”) in the amount of $490,000 comprised of fully insured time deposits placed with Federal Deposit Insurance Corporation (“FDIC”) insured commercial banks and savings associations. The FDIC, an independent agency of the United States government, protects depositors up to an amount of $250,000 per depositor, per insured institution. FDIC insurance is backed by the full faith and credit of the United States government. The stated interest rate of an FDIC insured CD varies greatly among commercial banks and savings associations, depending on the term of the CD and the institution’s need for funding. The liquidity of “marketable” CDs is marginal, even though they are assigned an FDIC number, a CUSIP number and are held in book-entry form through the Depository Trust Company. Depending on market liquidity and conditions, the bid price for an FDIC insured CD would reflect the supply of and the demand for deposits of the particular bank or savings association, as well as prevailing interest rates, the remaining term of the deposit, specific features of the CD, and compensation of the broker arranging the sale of the CD. These time deposits mature in less than one year and are classified as other invested assets on the Company’s consolidated balance sheet.
8
Other-Than-Temporary Impairment Process
The Company assesses whether declines in the fair value of its fixed maturity investments classified asavailable-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 asavailable-for-sale that were in an unrealized loss position at June 30, 2017.March 31, 2018. 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 sixthree months ended June 30, 2017,March 31, 2018, the Company did not recognize any other-than-temporary impairments due to sales.
10
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.
Equity securities are reviewed on a regular basis to determine if they have sustained an impairment of value that is considered to be other than temporary. Several factors are considered in the assessment of an investment, which include (i) the extent of the decline below cost, and (ii) the potential for the security to recover in value.
If we conclude a securityfixed income investment 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 June 30, 2017March 31, 2018 and December 31, 2016,2017, relating to nine31 and 1623 fixed maturity securities, amounted to $26,228$239,297 and $89,937, respectively, and 11 and 22 equity securities, amounted to $52,336 and $128,395,$83,170, respectively. The unrealized losses on these available for sale fixed maturity securities were not as a result of credit, collateral or structural issues. During the six months ended and three months ended June 30, 2017, the Company recorded a totalNo other-than-temporary impairment charge of $25,272 on one equity security as a result ofcharges were recorded during the decline in fair value below cost. During the six monthsquarter ended March 31, 2018 and three months ended June 30, 2016, the Company recorded a total other-than-temporary impairment charge of $121,116 and $15,196 on two and one equity securities, respectively, as a result of the decline in fair value below cost.2017.
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 Financial Accounting Standards Board’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 inputs that are significant to determining such measurement. The three levels are defined as follows:
911
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 June 30, 2017March 31, 2018 and December 31, 20162017 and what level within the fair value hierarchy each valuation technique resides:
In May 2016, the manager of our hedge fund portfolio chose to liquidate the fund and return its capital to the investors. The liquidation of the fund and the return of capital to its investors is expected to take place over a 15-month period.be completed in 2018.
While we obtain pricing from independent pricing services, management is ultimately responsible for determining the fair value measurements for all securities. To ensure fair value measurement is applied consistently and in accordance with U.S. GAAP, we periodically update our understanding of the pricing methodologies used by the independent pricing services. We also undertake further analysis with respect to prices we believe may not be representative of fair value under current market conditions. Our review process includes, but is not limited to: (i) initial and ongoing evaluation of the pricing methodologies and valuation models used by outside parties to calculate fair value; (ii) quantitative analysis; (iii) a review of multiple quotes obtained in the pricing process and the range of resulting fair values for each security, if available, and (iv) randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates provided by the independent pricing sources.
1012
There have been no material changes to our valuation techniques from what was used as of December 31, 2016.2017. Since the fair value of a security is an estimate of what a willing buyer would pay for such security if we sold it, we cannot 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 if we were 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 June 30, 2017March 31, 2018 and December 31, 2016:2017:
Carrying amount | Total fair value | Fair value measurement using: | Carrying amount | Total fair value | Fair value measurement using: | |||||||||||||||||||||||||||||||||||
Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||||||||||||||||||||||||
As of June 30, 2017 | ||||||||||||||||||||||||||||||||||||||||
As of March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
U.S. government agency securities | $ | 1,907,097 | $ | 1,907,097 | $ | — | $ | 1,907,097 | $ | — | $ | 4,828,154 | $ | 4,828,154 | $ | — | $ | 4,828,154 | $ | — | ||||||||||||||||||||
Obligations of U.S. state and political subdivisions | 3,309,031 | 3,309,031 | 3,309,031 | 3,971,602 | 3,971,602 | 3,971,602 | ||||||||||||||||||||||||||||||||||
Corporate debt securities | 6,213,204 | 6,213,204 | 6,213,204 | 6,033,559 | 6,033,559 | 6,033,559 | ||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total fixed maturity investments | 11,429,332 | 11,429,332 | 14,833,315 | 14,833,315 | ||||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Equity securities (excluding the hedge fund) | 16,387,970 | 16,387,970 | 16,387,970 | 15,725,500 | 15,725,500 | 15,725,500 | ||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total equity securities (excluding the hedge fund) | 16,387,970 | 16,387,970 | 15,725,500 | 15,725,500 | ||||||||||||||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Hedge fund measured at net asset value (a) | 56,028 | 56,028 | 12,052 | 12,052 | ||||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total investments | $ | 27,873,330 | $ | 27,873,330 | $ | 16,387,970 | $ | 11,429,332 | $ | — | $ | 30,570,867 | $ | 30,570,867 | $ | 15,725,500 | $ | 14,833,315 | $ | — | ||||||||||||||||||||
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|
|
|
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|
|
| |||||||||||||||||||||||||||||||
Carrying amount | Total fair value | Fair value measurement using: | Carrying amount | Total fair value | Fair value measurement using: | |||||||||||||||||||||||||||||||||||
Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||||||||||||||||||||||||
As of December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||
As of December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||
U.S. government agency securities | $ | 1,466,806 | $ | 1,466,806 | $ | — | $ | 1,466,806 | $ | — | $ | 4,380,500 | $ | 4,380,500 | $ | — | $ | 4,380,500 | $ | — | ||||||||||||||||||||
Obligations of U.S. state and political subdivisions | 4,134,744 | 4,134,744 | 4,134,744 | 3,993,133 | 3,993,133 | 3,993,133 | ||||||||||||||||||||||||||||||||||
Corporate debt securities | 5,760,871 | 5,760,871 | 5,760,871 | 6,136,994 | 6,136,994 | 6,136,994 | ||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total fixed maturity investments | 11,362,421 | 11,362,421 | 14,510,627 | 14,510,627 | ||||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Equity securities (excluding the hedge fund) | 15,025,077 | 15,025,077 | 15,025,077 | 15,493,204 | 15,493,204 | 15,493,204 | ||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total equity securities (excluding the hedge fund) | 15,025,077 | 15,025,077 | 15,493,204 | 15,493,204 | ||||||||||||||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Hedge fund measured at net asset value (a) | 140,467 | 140,467 | 11,493 | 11,493 | ||||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total investments | $ | 26,527,965 | $ | 26,527,965 | $ | 15,025,077 | $ | 11,362,421 | $ | — | $ | 30,015,324 | $ | 30,015,324 | $ | 15,493,204 | $ | 14,510,627 | $ | — | ||||||||||||||||||||
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|
(a) | In accordance with Subtopic820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented |
There were no transfers between Levels 1 and 2 during the sixthree months ended June 30, 2017March 31, 2018 and the year ended December 31, 2016.2017.
1113
Contractual Maturities
The cost or amortized cost and estimated fair value of fixed maturity investments as of June 30, 2017March 31, 2018 and December 31, 20162017 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 June 30, 2017 | ||||||||
Due in one year or less | $ | 2,472,420 | $ | 2,477,301 | ||||
Due after one year through five years | 8,469,077 | 8,502,768 | ||||||
Due after five years through ten years | 449,263 | 449,263 | ||||||
|
|
|
| |||||
Total | $ | 11,390,760 | $ | 11,429,332 | ||||
|
|
|
| |||||
Amortized Cost | Estimated Fair Value | |||||||
As of December 31, 2016 | ||||||||
Due in one year or less | $ | 1,455,729 | $ | 1,457,201 | ||||
Due after one year through five years | 8,081,777 | 8,089,289 | ||||||
Due after five years through ten years | 1,701,987 | 1,648,731 | ||||||
Due after ten years | 167,486 | 167,200 | ||||||
|
|
|
| |||||
Total | $ | 11,406,979 | $ | 11,362,421 | ||||
|
|
|
|
Information on sales and maturities of investments during the six months ended June 30, 2017 and 2016 are as follows:
June 30, 2017 | June 30, 2016 | |||||||
Total proceeds on sales of available-for-sale securities | $ | 3,028,927 | $ | 2,543,936 | ||||
Proceeds from redemptions of fixed maturity investments | 611,540 | — | ||||||
Total proceeds from maturities of fixed maturity investments | 950,000 | 705,000 | ||||||
Gross gains on sales | 879,193 | 882,442 | ||||||
Gross losses on sales | (2,349 | ) | (1,212 | ) | ||||
Impairment losses | (25,272 | ) | (121,116 | ) |
Amortized Cost | Estimated Fair Value | |||||||
As of March 31, 2018 | ||||||||
Due in one year or less | $ | 2,622,677 | $ | 2,621,071 | ||||
Due after one year through five years | 10,951,420 | 10,758,480 | ||||||
Due after five years through ten years | 955,311 | 927,659 | ||||||
Due after ten years | 531,889 | 526,105 | ||||||
|
|
|
| |||||
Total | $ | 15,061,297 | $ | 14,833,315 | ||||
|
|
|
| |||||
Amortized Cost | Estimated Fair Value | |||||||
As of December 31, 2017 | ||||||||
Due in one year or less | $ | 1,970,793 | $ | 1,971,237 | ||||
Due after one year through five years | 10,852,417 | 10,805,684 | ||||||
Due after five years through ten years | 1,215,724 | 1,200,086 | ||||||
Due after ten years | 535,483 | 533,620 | ||||||
|
|
|
| |||||
Total | $ | 14,574,417 | $ | 14,510,627 | ||||
|
|
|
|
Information on sales and maturities of investments during the three months ended June 30,March 31, 2018 and 2017 and 2016 are as follows:
June 30, 2017 | June 30, 2016 | |||||||
Total proceeds on sales of available-for-sale securities | $ | 1,794,306 | $ | 1,941,245 | ||||
Proceeds from redemptions of fixed maturity investments | 165,000 | — | ||||||
Total proceeds from maturities of fixed maturity investments | 275,000 | 325,000 | ||||||
Gross gains on sales | 398,588 | 532,057 | ||||||
Gross losses on sales | — | — | ||||||
Impairment losses | (25,272 | ) | (15,196 | ) |
March 31, 2018 | March 31, 2017 | |||||||
Total proceeds on sales ofavailable-for-sale securities | $ | 978,371 | $ | 1,234,621 | ||||
Proceeds from redemptions of fixed maturity investments | — | 446,540 | ||||||
Total proceeds from maturities of fixed maturity investments | — | 675,000 | ||||||
Gross gains on sales | 651,068 | 480,605 | ||||||
Gross losses on sales | (20 | ) | (2,349 | ) | ||||
Net unrealized losses on equity investments (1) | (812,108 | ) | — |
(1) | Effective January 1, 2018, the Company adopted ASUNo. 2016-01. The change in fair value of equity securities is now recognized in net realized and unrealized gains on investment. |
12Net Investment Income
Major categories of net investment income during the six months ended June 30, 2017 and 2016 are summarized as follows:
June 30, 2017 | June 30, 2016 | |||||||
Interest earned: | ||||||||
Fixed maturity investments | $ | 123,101 | $ | 92,029 | ||||
Short term investments and cash and cash equivalents | 11,349 | 1,904 | ||||||
Dividends earned | 173,861 | 118,782 | ||||||
Investment expenses | (72,151 | ) | (66,598 | ) | ||||
|
|
|
| |||||
Net investment income | $ | 236,160 | $ | 146,117 | ||||
|
|
|
|
Major categories of net investment income during the three months ended June 30,March 31, 2018 and 2017 and 2016 are summarized as follows:
June 30, 2017 | June 30, 2016 | March 31, 2018 | March 31, 2017 | |||||||||||||
Interest earned: | ||||||||||||||||
Fixed maturity investments | $ | 61,791 | $ | 46,409 | $ | 83,630 | $ | 61,310 | ||||||||
Short term investments and cash and cash equivalents | 9,440 | 1,026 | 2,341 | 1,909 | ||||||||||||
Dividends earned | 50,632 | 66,758 | 37,266 | 123,229 | ||||||||||||
Investment expenses | (36,370 | ) | (32,755 | ) | (34,768 | ) | (35,781 | ) | ||||||||
|
|
|
| |||||||||||||
Net investment income | $ | 85,493 | $ | 81,438 | $ | 88,469 | $ | 150,667 | ||||||||
|
|
|
|
14
3. LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table presents a reconciliation of the beginning and ending balances for the liability for unpaid losses and loss adjustment expenses for the sixthree months ended June 30, 2017March 31, 2018 and 2016:2017:
2017 | 2016 | March 31, 2018 | March 31, 2017 | |||||||||||||
Liability—beginning of period | $ | 8,941,991 | $ | 6,583,474 | $ | 11,228,507 | $ | 8,941,991 | ||||||||
Incurred related to: | ||||||||||||||||
Current year | 2,580,735 | 2,041,266 | 1,377,188 | 1,156,235 | ||||||||||||
Prior years | — | — | — | — | ||||||||||||
|
|
|
| |||||||||||||
Total incurred | 2,580,735 | 2,041,266 | 1,377,188 | 1,156,235 | ||||||||||||
|
|
|
| |||||||||||||
Paid related to: | ||||||||||||||||
Current year | (1,321 | ) | (3,237 | ) | — | — | ||||||||||
Prior years | (440,639 | ) | (348,172 | ) | (17,453 | ) | (10,047 | ) | ||||||||
|
|
|
| |||||||||||||
Total paid | (441,960 | ) | (351,409 | ) | (17,453 | ) | (10,047 | ) | ||||||||
|
|
|
| |||||||||||||
Liability—end of period | $ | 11,080,766 | $ | 8,273,331 | $ | 12,588,242 | $ | 10,088,179 | ||||||||
|
|
|
|
As incurred losses for the sixthree months ended June 30, 2017March 31, 2018 are derived by multiplying our estimated loss ratio of 64.5% and the net premiums earned, as stated in Results of Operations below, all incurred losses are assumed to be current year losses.
4. SEGMENT INFORMATION
AmerInst has two reportable 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.
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The tables below summarize the results of our reportable segments as of and for the six months ended June 30, 2017 and 2016.
As of and for the Six Months Ended June 30, 2017 | ||||||||||||
Reinsurance Segment | Insurance Segment | Total | ||||||||||
Revenues | $ | 5,087,326 | $ | 2,389,408 | $ | 7,476,734 | ||||||
Total losses and expenses | 4,706,949 | 2,122,273 | 6,829,222 | |||||||||
Segment income | 380,377 | 267,135 | 647,512 | |||||||||
Identifiable assets | — | 228,452 | 228,452 | |||||||||
As of and for the Six Months Ended June 30, 2016 | ||||||||||||
Reinsurance Segment | Insurance Segment | Total | ||||||||||
Revenues | $ | 4,021,477 | $ | 1,981,947 | $ | 6,003,424 | ||||||
Total losses and expenses | 3,763,236 | 1,959,368 | 5,722,604 | |||||||||
Segment income | 258,241 | 22,579 | 280,820 | |||||||||
Identifiable assets | — | 126,911 | 126,911 |
The tables below summarize the results of our reportable segments as of and for the three months ended June 30, 2017March 31, 2018 and 2016.2017.
As of and for the Three Months Ended March 31, 2018 | ||||||||||||||||||||||||
Reinsurance Segment | Insurance Segment | Total | ||||||||||||||||||||||
Revenues | $ | 2,061,623 | $ | 1,429,941 | $ | 3,491,564 | ||||||||||||||||||
Total losses and expenses | 2,510,921 | 1,295,810 | 3,806,731 | |||||||||||||||||||||
Segment (loss) income | (449,298 | ) | 134,131 | (315,167 | ) | |||||||||||||||||||
Identifiable assets | — | 414,522 | 414,522 | |||||||||||||||||||||
As of and for the Three Months Ended June 30, 2017 | As of and for the Three Months Ended March 31, 2017 | |||||||||||||||||||||||
Reinsurance Segment | Insurance Segment | Total | Reinsurance Segment | Insurance Segment | Total | |||||||||||||||||||
Revenues | $ | 2,666,576 | $ | 1,173,580 | $ | 3,840,156 | $ | 2,420,750 | $ | 1,215,828 | $ | 3,636,578 | ||||||||||||
Total losses and expenses | 2,602,896 | 1,020,849 | 3,623,745 | 2,104,053 | 1,101,424 | 3,205,477 | ||||||||||||||||||
Segment income | 63,680 | 152,731 | 216,411 | 316,697 | 114,404 | 431,101 | ||||||||||||||||||
Identifiable assets | — | 228,452 | 228,452 | — | 222,975 | 222,975 | ||||||||||||||||||
As of and for the Three Months Ended June 30, 2016 | ||||||||||||||||||||||||
Reinsurance Segment | Insurance Segment | Total | ||||||||||||||||||||||
Revenues | $ | 2,098,538 | $ | 947,861 | $ | 3,046,399 | ||||||||||||||||||
Total losses and expenses | 1,848,200 | 969,868 | 2,818,068 | |||||||||||||||||||||
Segment income (loss) | 250,338 | (22,007 | ) | 228,331 | ||||||||||||||||||||
Identifiable assets | — | 126,911 | 126,911 |
5. STOCK COMPENSATION
Protexure Insurance Agency Inc. (“Protexure”) (formerly AmerInst Professional Services, Limited (“APSL”)Limited), a subsidiary of AmerInst, has employment agreements with four key members of senior management, including one of our named executive officers, Kyle Nieman, the President of APSL, which grant them phantom shares of the Company. Under these agreements, these employees were initially granted an aggregate of 75,018 phantom shares of the Company on the date of their employment, subject to certain vesting requirements. The phantom shares are eligible for phantom dividends payable at the same rate
15
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 six months and three months ended June 30, 2017, 1,467March 31, 2018, no phantom shares were granted, arising from the dividends declared on the Company’s common shares.granted. 86,161 phantom shares were outstanding at June 30, 2017.March 31, 2018.
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For three of these employees, including Mr. Nieman, the phantom shares initially granted, as well as any additional shares granted from dividends declared, vested on January 1, 2015. For the fourth employee, the phantom shares initially granted, as well as any additional shares granted from dividends declared, will vestvested on January 1, 2018. The liability payable to each of these employees under the phantom share agreements 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, 2018 for the fourth employee.disability.
The liability relating to these phantom shares is recalculated quarterly based on the net book value of our common shares at the end of each quarter. As a result of the overall decrease in the net book value of our common shares since the grant dates, we have not recorded any liability relating to these phantom shares at June 30, 2017.March 31, 2018.
During the quarter ended March 31, 2017, 35,000 stock options were granted to the Company’s directors at a strike price of $27.99.$27.99, which represented the fair market value based on the net book value of the Company’s common stock as of December 31, 2016. These options vest in five equal annual installments, which began on March 3, 2018. As of March 31, 2018, there were 7,000 option grants fully vested and exercisable. To date, the Company has recognized $36,230 of compensation expense for these stock options.
During the quarter ended March 31, 2018, 7,000 stock options were granted to five Protexure employees at a strike price of $30.58, which represented the fair market value based on the net book value of the Company’s common stock as of December 31, 2017. These options vest in five equal annual installments beginning on March 3, 2018.January 1, 2019.
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 Form10-Q.
Certain statements contained in this Form10-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 20162017 Annual Report on Form10-K, as updated in our subsequent quarterly reports filed on Form10-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” of our 20162017 Annual Report on Form10-K or discussed in this Quarterly Report on Form10-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”“Protexure” means AmerInst Professional Services, Limited,Protexure Insurance Agency, Inc., a Delaware corporation and wholly owned subsidiary of AmerInst Mezco, Ltd. 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 Citadel Management Bermuda Limited, 25 Church Street, Continental Building, P.O. Box HM 1601, Hamilton, Bermuda, HM GX.
16
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 reportable 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 reportable segment and the insurance activity reportable segment were $5,087,326$2,061,623 and $2,389,408,$1,429,941, respectively, for the sixthree months ended June 30, 2017March 31, 2018 compared to $4,021,477$2,420,750 and $1,981,947,$1,215,828, respectively, for the sixthree months ended June 30, 2016.March 31, 2017. The revenues for both reportable segments were derived from business operations in the United States other than interest income on bank accounts maintained in Bermuda.
1517
Entry into Agency Agreement
On September 25, 2009, APSLProtexure 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 APSLProtexure 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 automaticone-year renewals thereafter. The Agency Agreement automatically renewed on September 25, 2016.2017.
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 APSLProtexure 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 term of the Reinsurance Agreement is continuous and may be terminated by either party upon at least 120 days’ prior written notice to the other party.
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.
Third-party Managers and Service Providers
Citadel Management Bermuda Limited (formerly Cedar Management Limited) provides theday-to-day services necessary for the administration of our business. Our agreement with Citadel Management Bermuda Limited renewed for one year beginning January 1, 20172018 and ending December 31, 2017.2018. Mr. Thomas R. McMahon, our Treasurer and Chief Financial Officer, is a shareholder, officer, director and employee of Citadel Management Bermuda Limited. Mr. Stuart Grayston, our President, was formerly a director and officer of Cedar Management Limited.
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 Tower Wealth Managers, Inc. 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
SixThree months ended June 30, 2017March 31, 2018 compared to sixthree months ended June 30, 2016March 31, 2017
We recorded a net incomeloss of $647,512 for$315,167 during the six months ended June 30, 2017first quarter of 2018 compared to net income of $280,820$431,101 for the same period in 2016.2017. The increasedecrease in net income was mainly attributable to an increase in operating and management expenses from $1,386,384 in the first quarter of 2017 to $1,639,666 in the first quarter of 2018 and to the $615,941 decrease in the fair value of equity investments in the first quarter of 2018, as discussed in further detail below. This was partially offset by the increase in commission income from $1,980,758 for$1,215,044 in the six months ended June 30, 2016first quarter of 2017 to $2,387,863 for$1,428,980 in the six months ended June 30, 2017first quarter of 2018 as a result of a higher volume of premiums written under the Agency Agreement. This was partially offset by the increase in operating and management expenses from $2,528,253 for the six months ended June 30, 2016 to $2,762,958 for the six months ended June 30, 2017, as discussed in further detail below.
Our net premiums earned for the six months ended June 30, 2017first quarter of 2018 were $4,001,139$2,135,175 compared to $3,116,435$1,792,611 for the six months ended June 30, 2016,first quarter of 2017, an increase of $884,704$342,564 or 28.4%19.1%. The net premiums earned forduring the six monthsquarters ended June 30,March 31, 2018 and 2017 and 2016 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 2017 compared to the same period in 2016 resulted from increased cessions from C&F in 2017, arisingarose from a higher level of underwriting activity under the Agency Agreement due to the continued marketing of the program by APSLProtexure, which resulted in greaterincreased penetration in targeted markets.
1618
DuringFor the six monthsquarters ended June 30,March 31, 2018 and 2017, and 2016, we recorded commission income under the Agency Agreement of $2,387,863$1,428,980 and $1,980,758,$1,215,044, respectively, an increase of $407,105$213,936 or 20.6%17.6%. This increase resulted from a higher volume of premiums written under the Agency Agreement in 2017 due to the continued marketing of the program by APSL which resulted in greater penetration in the targeted markets.2018.
We recorded net investment income of $236,160$88,469 for the six monthsquarter ended June 30, 2017March 31, 2018 compared to $146,117$150,667, for the six monthsquarter ended June 30, 2016.March 31, 2017. The increasedecrease in net investment income was due to the increasedecrease in dividend income, which was attributable to a certain higher yielding equity security held in our investment portfolio during the six monthsfirst quarter of 2017 compared to the same period in 2016.2018. 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%1.0% for the six monthsquarter ended June 30, 2017,March 31, 2018, compared to the 1.1%1.9% yield earned for the six monthsquarter ended June 30, 2016.March 31, 2017.
SalesWe recorded net realized and unrealized losses on investments of securities$161,060 during the six monthsquarter ended June 30, 2017 resulted inMarch 31, 2018 compared to net realized gains on investments net of impairment$478,256 during the quarter ended March 31, 2017, a decrease of $851,572 compared to $760,114 for the six months ended June 30, 2016, an increase of $91,458.$639,316 or 133.7%. The increase in realized gainsdecrease is primarily related to increased salesthe decrease in the fair value of our equity securities in an unrealized gain positioninvestments during the first six monthsquarter ended March 31, 2018, which is attributable to unfavorable market conditions. As a result of 2017 comparedour adoption ofASU-2016-01 on January 1, 2018, the changes in fair value of our equity investments subsequent to January 1, 2018 are recognized within net realized and unrealized gains (losses) on the same period in 2016.consolidated statement of operations.
For the six monthsquarter ended June 30, 2017,March 31, 2018, we recorded loss and loss adjustment expenses of $2,580,735$1,377,188 derived by multiplying our estimated loss ratio of 64.5% and the net premiums earned under the Reinsurance Agreement of $4,001,139.$2,135,175. For the six monthsquarter ended June 30, 2016,March 31, 2017, we recorded loss and loss adjustment expenses of $2,041,266$1,156,235 derived by multiplying our estimated loss ratio of 65.5%64.5% and the net premiums earned under the Reinsurance Agreement of $3,116,435.$1,792,611. The increase in loss and loss adjustment expense was primarily due to an increase in net premiums earned during the first sixthree months of 20172018 compared to the corresponding period in 2016, partially offset by a reduction of our estimated loss ratio. The decrease in the estimated loss ratio was primarily the result of better than expected loss emergence in policy year 2013.2017.
We recorded policy acquisition costs of $1,480,015 for$789,877 in the six months ended June 30, 2017first quarter of 2018 compared to $1,153,085$662,858 for the same period in 2016.2017. 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,first quarter of 2018 and 2017 and 2016 were 37% of the net premiums earned under the Reinsurance Agreement of $4,001,139$2,135,175 and $3,116,435,$1,792,611, respectively.
We expensedincurred operating and management expenses of $2,768,472 for$1,639,666 in the six months ended June 30, 2017first quarter 2018 compared to $2,528,253$1,386,384 for the same period in 2016,2017, an increase of $240,219$253,282 or 9.5%18.3%. The increase was primarily attributable to increased salaries and related costs associated with Protexure’s hiring of additional personnel during 2017 and 2018 and to increased net commissions paid to outside brokers in association with the Agency Agreement.Agreement as a result of higher volume of premiums obtained from outside brokers during 2018 compared to 2017.
The tables below summarize the results of the following AmerInst reportable 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 of and for the Six Months Ended June 30, 2017 | ||||||||||||
Reinsurance Segment | Insurance Segment | Total | ||||||||||
Revenues | $ | 5,087,326 | $ | 2,389,408 | $ | 7,476,734 | ||||||
Total losses and expenses | 4,706,949 | 2,122,273 | 6,829,222 | |||||||||
Segment income | 380,377 | 267,135 | 647,512 | |||||||||
Identifiable assets | — | 228,452 | 228,452 | |||||||||
As of and for the Six Months Ended June 30, 2016 | ||||||||||||
Reinsurance Segment | Insurance Segment | Total | ||||||||||
Revenues | $ | 4,021,477 | $ | 1,981,947 | $ | 6,003,424 | ||||||
Total losses and expenses | 3,763,236 | 1,959,368 | 5,722,604 | |||||||||
Segment income | 258,241 | 22,579 | 280,820 | |||||||||
Identifiable assets | — | 126,911 | 126,911 |
As of and for the Three Months Ended March 31, 2018 | ||||||||||||
Reinsurance Segment | Insurance Segment | Total | ||||||||||
Revenues | $ | 2,061,623 | $ | 1,429,941 | $ | 3,491,564 | ||||||
Total losses and expenses | 2,510,921 | 1,295,810 | 3,806,731 | |||||||||
Segment income | (449,298 | ) | 134,131 | (315,167 | ) | |||||||
Identifiable assets | — | 414,522 | 414,522 |
1719
Three months ended June 30, 2017 compared to three months ended June 30, 2016
We recorded net income of $216,411 during the second quarter of 2017 compared to net income of $228,331 for the same period in 2016. The decrease in net income was mainly attributable to the decrease in realized gains on investments net of impairment from $516,861 in the second quarter of 2016 to $373,316 in the second quarter of 2017 as a result of decreased sales of equity securities in an unrealized gain position during the second quarter of 2017 compared to the same period in 2016 and to the increase in operating and management expenses from $1,279,718 in the second quarter of 2016 to $1,376,574 in the second quarter of 2017. This was partially offset by the increase in commission income from $947,273 in the second quarter of 2016 to $1,172,819 in the second quarter of 2017 as a result of a higher volume of premiums written under the Agency Agreement
Our net premiums earned for the second quarter of 2017 were $2,208,528 compared to $1,500,827 for the second quarter of 2016, an increase of $707,701 or 47.2%. The net premiums earned during the quarters ended June 30, 2017 and 2016 were attributable to cessions from C&F under the Reinsurance Agreement. The increased cessions during the second quarter of 2017 compared to the second quarter of 2016 arose from a higher level of underwriting activity under the Agency Agreement due to the continued marketing of the program by APSL, which resulted in greater penetration in targeted markets.
For the quarters ended June 30, 2017 and 2016, we recorded commission income under the Agency Agreement of $1,172,819 and $947,273, respectively, an increase of $225,546 or 23.8%. This increase resulted from a higher volume of premiums written under the Agency Agreement in 2017.
We recorded net investment income of $85,493 for the quarter ended June 30, 2017 compared to $81,438 for the quarter ended June 30, 2016. The increase in net investment income was attributable to higher yielding fixed income securities held in the Company’s investment portfolio during the second quarter of 2017 compared to the same period in 2016. 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 1.1% for the quarter ended June 30, 2017, compared to the 1.2% yield earned for the quarter ended June 30, 2016.
Sales of securities for the quarter ended June 30, 2017 resulted in realized gains on investments net of impairment of $373,316 compared to $516,861 during the quarter ended June 30, 2016, a decrease of $143,545 or 27.8%. The decrease in realized gains primarily related to decreased sales of equity securities in an unrealized gain position compared to 2016.
For the quarter ended June 30, 2017, we recorded loss and loss adjustment expenses of $1,424,500 derived by multiplying our estimated loss ratio of 64.5% and the net premiums earned under the Reinsurance Agreement of $2,208,528. For the quarter ended June 30, 2016, we recorded loss and loss adjustment expenses of $983,043 derived by multiplying our estimated loss ratio of 65.5% and the net premiums earned under the Reinsurance Agreement of $1,500,827. The increase in loss and loss adjustment expense was primarily due to an increase in net premiums earned during the second quarter of 2017 compared to the corresponding period in 2016, partially offset by a reduction of our estimated loss ratio. The decrease in the estimated loss ratio was primarily the result of better than expected loss emergence in policy year 2013.
We recorded policy acquisition costs of $817,157 in the second quarter of 2017 compared to $555,307 for the same period in 2016. 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 2017 and 2016 were 37% of the net premiums earned under the Reinsurance Agreement of $2,208,528 and $1,500,827, respectively.
We incurred operating and management expenses of $1,382,088 in the second quarter 2017 compared to $1,279,718 for the same period in 2016, an increase of $102,370 or 8.0%. The increase was primarily attributable to increased sub commission costs in relation to sub produced business associated with the Agency Agreement.
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The tables below summarize the results of the following AmerInst reportable 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 of and for the Three Months Ended June 30, 2017 | As of and for the Three Months Ended March 31, 2017 | |||||||||||||||||||||||
Reinsurance Segment | Insurance Segment | Total | Reinsurance Segment | Insurance Segment | Total | |||||||||||||||||||
Revenues | $ | 2,666,576 | $ | 1,173,580 | $ | 3,840,156 | $ | 2,420,750 | $ | 1,215,828 | $ | 3,636,578 | ||||||||||||
Total losses and expenses | 2,602,896 | 1,020,849 | 3,623,745 | 2,104,053 | 1,101,424 | 3,205,477 | ||||||||||||||||||
Segment income | 63,680 | 152,731 | 216,411 | 316,697 | 114,404 | 431,101 | ||||||||||||||||||
Identifiable assets | — | 228,452 | 228,452 | — | 222,975 | 222,975 | ||||||||||||||||||
As of and for the Three Months Ended June 30, 2016 | ||||||||||||||||||||||||
Reinsurance Segment | Insurance Segment | Total | ||||||||||||||||||||||
Revenues | $ | 2,098,538 | $ | 947,861 | $ | 3,046,399 | ||||||||||||||||||
Total losses and expenses | 1,848,200 | 969,868 | 2,818,068 | |||||||||||||||||||||
Segment income (loss) | 250,338 | (22,007 | ) | 228,331 | ||||||||||||||||||||
Identifiable assets | — | 126,911 | 126,911 |
FINANCIAL CONDITION
As of June 30, 2017,March 31, 2018, our total investments were $27,873,330,$30,570,867, an increase of $1,345,365$555,543 or 5.1%1.9%, from $26,527,965$30,015,324 at December 31, 2016.2017. This increase was primarily due to the increase in the fair value of certain equity securities as a result of favorable market conditions and to the purchase of additional equity securities with both net premiums received under the Reinsurance Agreement and positive cash inflows derived from net investment income. The cash and cash equivalents balance increaseddecreased from $4,631,709$5,008,138 at December 31, 20162017 to $5,251,270$4,223,171 at June 30, 2017, an increaseMarch 31, 2018, a decrease of $619,561$784,967 or 13.4%15.7%. The amount of cash and cash equivalents varies depending on the maturities of fixed term investments and the level of funds invested in money market funds. The restricted cash and cash equivalents balance decreased from $23,392$710,818 at December 31, 20162017 to $17,729$221,784 at June 30, 2017,March 31, 2018, a decrease of $5,663$489,034 or 24.2%68.8%. The decrease is due to the timing of sales and maturities of investments held as restricted cash at June 30, 2017March 31, 2018 that have been reinvested. Other invested assets remained unchanged at $490,000 as of June 30, 2017 and December 31, 2016. The ratio of cash, total investments and other invested assets to total liabilities at June 30, 2017March 31, 2018 was 1.67:1.63:1, compared to a ratio of 1.76:1.62:1 at December 31, 2016.2017.
The assumed reinsurance balances receivable represents the current assumed premiums receivable less commissions payable tofrom the fronting carriers. As of June 30, 2017,March 31, 2018, the balance was $1,506,216$2,614,660 compared to $1,285,126$2,375,629 as of December 31, 2016.2017. The increase resulted from a higher level of premiums assumed under the Reinsurance Agreement during 2017.2018.
The assumed reinsurance payable represents current reinsurance losses payable and commissions payable to the fronting carriers. As of June 30, 2017,March 31, 2018, the balance was $1,537$967,444 compared to $1,254,687$1,883,879 as of December 31, 2016.2017. This balance fluctuates due to the timing of losses being reported to us.
Deferred policy acquisition costs, which represent the deferral of ceding commission expense related to premiums not yet earned, increased from $1,384,915$1,622,676 at December 31, 20162017 to $1,726,807$1,800,224 at June 30, 2017.March 31, 2018. The increase in deferred policy acquisition costs in 20172018 was due to the increase in both net premiums written and unearned premiums assumed under the Reinsurance Agreement compared to the prior year. The ceding commission rate under the Reinsurance Agreement is 37%.
Prepaid expenses and other assets were $1,709,710$1,794,439 at June 30, 2017March 31, 2018 compared to $1,398,739$1,682,301 as of December 31, 2016.2017. 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 APSLProtexure under the Agency Agreement. The increase in theThis balance was partially attributablefluctuates due to the annual director fee paymentstiming of the prepayments and to the Company’s directors made in June 2017 relating totiming of the period from June 1, 2017 to May 31, 2018.premium receipts by Protexure.
Accrued expenses and other liabilities primarily represent premiums payable by APSLProtexure to C&F under the Agency Agreement and expenses accrued relating largely to professional fees. The balance increaseddecreased from $4,035,617$4,610,781 at December 31, 20162017 to $4,195,240$4,092,287 at June 30, 2017, an increaseMarch 31, 2018, a decrease of $159,623$518,494 or 4.0%11.2%. This balance fluctuates due to the timing of the premium payments to C&F and payments of professional fees.
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LIQUIDITY AND CAPITAL RESOURCES
Our cash needs consist of settlement of losses and expenses under our reinsurance treaties and fundingday-to-day operations. In continuing the 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 that may arise from time to time without resorting to borrowing, subject to Bermuda statutory limitations as discussed in our 20162017 Form10-K.
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Total cash, investments and other invested assets increaseddecreased from $31,673,066$35,734,280 at December 31, 20162017 to $33,632,329$35,015,822 at June 30, 2017, an increaseMarch 31, 2018, a decrease of $1,959,263$718,458 or 6.2%2.0%. The net increasedecrease resulted primarily from unfavorable market conditions, partially offset by positive cash inflows derived from net investment income and net premiums received under the Reinsurance Agreement in the amount of $1,197,558, partially offset by dividends of $303,919 paid during the first six month of 2017.$491,826.
The Bermuda Monetary Authority has authorized Investco to purchase our common shares, on a negotiated basis, from shareholders who have died or retired from the practice of public accounting. During the sixthree months ended June 30, 2017,March 31, 2018, no such transactions occurred. Through June 30, 2017,March 31, 2018, Investco had repurchased 191,896201,069 common shares from shareholders who had died or retired for a total purchase price of $5,435,936.$5,687,643. From time to time, Investco has also purchased shares in privately negotiated transactions. Through June 30, 2017,March 31, 2018, Investco had purchased an additional 75,069 common shares in such privately negotiated transactions for a total purchase price of $1,109,025. During the sixthree months ended June 30, 2017,March 31, 2018, no such transactions occurred.
Cash Dividends
We paid no dividends of $0.50 per share during the secondfirst quarter of 2017, which amounted to total ordinary cash dividends of $323,323. The dividends paid in 2017 have been reduced by $19,404, which represents a write-back of uncashed dividends issued prior to 2012 to shareholders that we have been unable to locate.2018. Since we began paying dividends in 1995, our original shareholders have received $21.87 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 8.7% from our inception, based on a per share purchase price of $8.33 paid by the original shareholders, and using an unaudited net book value of $29.16$29.84 per share as of June 30, 2017.March 31, 2018. 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
AmerInstThe Company is not a party to anyoff-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form10-K for the year ended December 31, 20162017 and is incorporated herein by reference.
We have identified accounting for the liability for losses and loss adjustment expenses as our most critical accounting policy and estimate in that it is important to the portrayal of our financial condition and results, and it requires our subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. This accounting policy, including the nature of the estimates and types of assumptions used, are described throughout this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form10-K for the year ended December 31, 2016.2017.
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 at1-800-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 iswww.sec.gov.
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Our internet site iswww.amerinst.bm. We make available free of charge through our internet site our annual report onForm 10-K, quarterly reports on Form10-Q, current reports on Form8-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 onwww.amerinst.bm our Memorandum of Association, ourBye-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 Citadel Management Bermuda Limited, 25 Church Street, Continental Building, P.O. Box HM 1601 Hamilton, Bermuda HM GX, Attention: Investor Relations(441) 295-6015. The information on our internet site is not incorporated by reference into this report.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Not applicable.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of June 30, 2017,March 31, 2018, the end of the period covered by this Form10-Q, our management, including our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined inRule 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 June 30, 2017,March 31, 2018, the end of the period covered by this Form10-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 Rule13a-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.
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 will 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.
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Item 1A. | Risk Factors |
In addition to the other information set forth in this Quarterly Report on Form10-Q, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 20162017 Annual Report on Form10-K, as updated in our subsequent quarterly reports. The risks described in our 20162017 Annual Report on Form10-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 or operating results.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
On July 1, 2017, the Company issued an aggregate of 2,548 shares of its common stock out of the treasury shares held by Investco to the Company’s directors as part of the directors’ fees payable in respect of the directors’ board service from the 2017 Annual General Meeting until the 2018 Annual General Meeting. These shares were issued in reliance upon one or more exemptions from the registration requirements under the Securities Act of 1933, as amended, including Rule 506 and Section 4(a)(2) thereunder.None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
None.
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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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AMERINST INSURANCE GROUP, LTD.
INDEX TO EXHIBITS
Filed with the Quarterly Report on Form10-Q for the Quarter Ended March 31, 2018
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: | 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 June 30, 2017
|
| |
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