UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the Quarterly Period ended September 30, 2019.

 

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

For the transition period from                  to                 .

Commission file number 000-28249

 

 

AMERINST INSURANCE GROUP, LTD.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

BERMUDA		98-0207447
(State or other jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
c/o 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)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☐		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 Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒.

Securities registered pursuant to Section 12(b) of the Act: None.

As of November 1, 2019, the Registrant had 995,253 common shares, $1.00 par value per share, outstanding.

 

 

 

Introductory Note

Caution Concerning Forward-Looking Statements

Certain statements contained in this Form 10-Q, or otherwise made by our officers, including statements related to our future performance, our outlook for our businesses and respective markets, projections, statements of our management’s plans or objectives, forecasts of market trends and other matters, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and contain information relating to us that is based on the beliefs of our management as well as assumptions made by, and information currently available to, our management. The words “expect,” “believe,” “may,” “could,” “should,” “would,” “estimate,” “anticipate,” “intend,” “plan,” “target,” “goal” and similar expressions as they relate to us or our management are intended to identify forward-looking statements. Such statements reflect our management’s current views with respect to future events and are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially from those reflected in any forward-looking statements. Our actual future results may differ materially from those set forth in our forward-looking statements. Factors that might cause such actual results to differ materially from those reflected in any forward-looking statements include, but are not limited to the factors discussed in detail in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q, as well as:

 

•

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

 

•

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

 

•

the legislative and administrative impact of the current United States administration on our business;

 

•

subjection of our non-U.S. companies to regulation and/or taxation in the United States;

 

•

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

 

•

our ability to meet the performance goals and metrics set forth in our business plan without a significant depletion of our cash resources while maintaining sufficient capital levels;

 

•

the effects of security breaches, cyber-attacks or computer viruses that may affect our computer systems or those of our customers, third-party managers and service providers;

 

•

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

 

•

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

 

•

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

 

•

increased or decreased rate pressure on premiums;

 

•

adequacy of our risk management and loss limitation methods;

 

•

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

 

•

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

 

•

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

 

•

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

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our management’s analysis only as of the date they are made. We undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

2

Part I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

AMERINST INSURANCE GROUP, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, expressed in U.S. dollars)

 

		As of September 30, 2019				As of December 31, 2018
ASSETS
Investments:
Fixed maturity investments, at fair value (amortized cost $14,801,687 and $14,806,427)		$	14,918,441			$	14,588,080
Equity securities, at fair value (cost $12,002,872, and $12,145,120)			15,914,233				13,445,226
TOTAL INVESTMENTS			30,832,674				28,033,306
Cash and cash equivalents			5,978,562				5,498,914
Restricted cash and cash equivalents			930,874				472,132
Assumed reinsurance premiums receivables			2,886,098				2,651,863
Accrued investment income			105,660				88,569
Property and equipment			983,448				776,382
Deferred income taxes			2,785,000				2,730,000
Deferred policy acquisition costs			2,111,128				1,869,368
Prepaid expenses and other assets			1,974,296				1,981,913
TOTAL ASSETS		$	48,587,740			$	44,102,447
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses		$	15,797,403			$	12,989,260
Unearned premiums			5,705,725				5,051,847
Assumed reinsurance payable			1,077,067				2,171,767
Accrued expenses and other liabilities			5,764,045				5,934,408
TOTAL LIABILITIES		$	28,344,240			$	26,147,282
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Common shares, $1 par value, 2019 and 2018: 2,000,000 shares authorized, 995,253 issued and outstanding		$	995,253			$	995,253
Additional paid-in-capital			6,444,036				6,393,730
Retained earnings			21,558,508				19,725,581
Accumulated other comprehensive income			116,754				(218,348	)
Shares held by Subsidiary (362,699 and 365,198 shares) at cost			(8,871,051	)			(8,941,051	)
TOTAL SHAREHOLDERS’ EQUITY			20,243,500				17,955,165
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	48,587,740			$	44,102,447

 

 

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

 

3

AMERINST INSURANCE GROUP, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF

OPERATIONS, COMPREHENSIVE INCOME

AND RETAINED EARNINGS

(Unaudited, expressed in U.S. dollars)

 

		Nine Months Ended September 30, 2019				Nine Months Ended September 30, 2018				Three Months Ended September 30, 2019				Three Months Ended September 30, 2018
REVENUE
Net premiums earned		$	8,141,526			$	7,224,922			$	2,815,917			$	2,554,044
Commission income			4,395,855				4,091,561				1,450,367				1,334,352
Net investment income			355,143				267,908				125,491				92,215
Net realized and unrealized gains on investments			2,595,789				895,340				72,492				567,054
TOTAL REVENUE			15,488,313				12,479,731				4,464,267				4,547,665
LOSSES AND EXPENSES
Losses and loss adjustment expenses			5,210,575				4,660,077				1,802,187				1,647,362
Policy acquisition costs			3,012,548				2,673,143				1,041,890				944,994
Operating and management expenses			5,138,604				4,874,487				1,636,073				1,515,854
TOTAL LOSSES AND EXPENSES			13,361,727				12,207,707				4,480,150				4,108,210
NET INCOME (LOSS) BEFORE TAX			2,126,586				272,024				(15,883	)			439,455
Income tax (benefit) expense			(32,032	)			—				6,654				—
NET INCOME (LOSS) AFTER TAX		$	2,158,618			$	272,024			$	(22,537	)		$	439,455
OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized holding gains (losses) arising during the period			335,102				(207,907	)			68,341				(18,529	)
Reclassification adjustment for gains included in net income			—				—				—				—
OTHER COMPREHENSIVE INCOME (LOSS)			335,102				(207,907	)			68,341				(18,529	)
COMPREHENSIVE INCOME		$	2,493,720			$	64,117			$	45,804			$	420,926
RETAINED EARNINGS, BEGINNING OF PERIOD		$	19,725,581			$	15,812,419			$	21,581,045			$	20,424,521
Net income (loss)			2,158,618				272,024				(22,537	)			439,455
Dividends			(325,691	)			(313,417	)			—				—
Cumulative effect of adoption of accounting guidance (ASU 2016-01)			—				5,092,950				—				—
RETAINED EARNINGS, END OF PERIOD		$	21,558,508			$	20,863,976			$	21,558,508			$	20,863,976
Per share amounts
Net Income (loss) per share
Basic		$	3.41			$	0.42			$	(0.04	)		$	0.68
Diluted		$	3.40			$	0.42			$	(0.04	)		$	0.68
Dividends		$	0.50			$	0.50			$	0.00			$	0.00
Weighted average number of shares outstanding for the entire period
Basic			631,721				645,485				632,554				646,647
Diluted			634,276				648,167				632,554				648,605

 

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

 

4

AMERINST INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited, expressed in U.S. dollars)

As of September 30, 2019

 

		Common Shares				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Losses)				Shares Held by Subsidiary				Total Shareholders’ Equity
BALANCE AT JANUARY 1, 2019		$	995,253			$	6,393,730			$	19,725,581			$	(218,348	)		$	(8,941,051	)		$	17,955,165
Net income			—				—				1,669,711				—				—				1,669,711
Other comprehensive income
Unrealized gains on securities, net of reclassification adjustment			—				—				—				140,409				—				140,409
BALANCE AT MARCH 31, 2019		$	995,253			$	6,393,730			$	21,395,292			$	(77,939	)		$	(8,941,051	)		$	19,765,285
Net income			—				—				511,444				—				—				511,444
Issuance of stock option awards			—				32,266				—				—				—				32,266
Other comprehensive income
Unrealized gain on securities, net of reclassification adjustment			—				—				—				126,352				—				126,352
Issuance of shares by subsidiary, net			—				—				—				—				70,000				70,000
Dividends ($0.50 per share)			—				—				(325,691	)			—				—				(325,691	)
BALANCE AT JUNE 30, 2019		$	995,253			$	6,425,996			$	21,581,045			$	48,413			$	(8,871,051	)		$	20,179,656
Net loss			—				—				(22,537	)			—				—				(22,537	)
Issuance of stock option awards			—				18,040				—				—				—				18,040
Other comprehensive income
Unrealized gain on securities, net of reclassification adjustment			—				—				—				68,341				—				68,341
BALANCE AT SEPTEMBER 30, 2019		$	995,253			$	6,444,036			$	21,558,508			$	116,754			$	(8,871,051	)		$	20,243,500

 

 

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

5

AMERINST INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited, expressed in U.S. dollars)

As of September 30, 2018

 

		Common Shares				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Losses)				Shares Held by Subsidiary				Total Shareholders’ Equity
BALANCE AT JANUARY 1, 2018		$	995,253			$	6,323,450			$	15,812,419			$	5,029,160			$	(8,454,506	)		$	19,705,776
Net loss			—				—				(315,167	)			—				—				(315,167	)
Other comprehensive loss
Unrealized (losses) on securities, net of reclassification adjustment			—				—				—				(164,192	)			—				(164,192	)
Cumulative effect of adoption of accounting guidance (ASU 2016-01))			—				—				5,092,950				(5,092,950	)			—				—
BALANCE AT MARCH 31, 2018		$	995,253			$	6,323,450			$	20,590,202			$	(227,982	)		$	(8,454,506	)		$	19,226,417
Net income			—				—				147,736				—				—				147,736
Issuance of stock option awards			—				18,700				—				—				—				18,700
Other comprehensive loss
Unrealized (losses) on securities, net of reclassification adjustment			—				—				—				(25,186	)			—				(25,186	)
Purchase of shares by subsidiary, net			—				—				—				—				12,542				12,542
Dividends ($0.50 per share)			—				—				(313,417	)			—				—				(313,417	)
BALANCE AT JUNE 30, 2018		$	995,253			$	6,342,150			$	20,424,521			$	(253,168	)		$	(8,441,964	)		$	19,066,792
Net income			—				—				439,455				—				—				439,455
Other comprehensive loss
Unrealized (losses) on securities, net of reclassification adjustment			—				—				—				(18,530	)			—				(18,530	)
BALANCE AT SEPTEMBER 30, 2018		$	995,253			$	6,342,150			$	20,863,976			$	(271,697	)		$	(8,441,964	)		$	19,487,718

 

 

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

 

6

AMERINST INSURANCE GROUP, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, expressed in U.S. dollars)

 

		Nine Months Ended September 30, 2019				Nine Months Ended September 30, 2018
OPERATING ACTIVITIES
Net Cash provided by Operating Activities		$	1,603,447			$	861,395
INVESTING ACTIVITIES
Purchases of property and equipment			(434,250	)			(396,674	)
Purchases of available-for-sale securities			(5,492,708	)			(6,035,248	)
Proceeds from sales of available-for-sale securities			2,232,592				3,419,578
Proceeds from redemptions of hedge fund investments			—				3,085
Proceeds from redemptions of fixed maturity investments			265,000				—
Proceeds from maturities of fixed maturity investments			3,090,000				2,370,000
Net Cash used in Investing Activities			(339,366	)			(639,259	)
FINANCING ACTIVITIES
Dividends paid			(325,691	)			(313,417	)
Net Cash used in Financing Activities			(325,691	)			(313,417	)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH			938,390				(91,281	)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD		$	5,971,046			$	5,718,956
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD		$	6,909,436			$	5,627,675

 

 

 

 

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

 

7

AMERINST INSURANCE GROUP, LTD.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

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, 2018 and notes thereto, included in AmerInst’s Annual Report on Form 10-K for the year then ended.

New Accounting Pronouncements

New Accounting Standards Adopted in 2019

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, which is codified in Accounting Standards Codification (“ASC”) 842, amending the guidance on the classification, measurement and disclosure of leases for both lessors and lessees. The ASU requires lessees to recognize a right-of-use asset and an offsetting lease liability on the balance sheet and to disclose qualitative and quantitative information about leasing arrangements. Subsequently, in July 2018, the FASB issued ASU 2018-10, which clarifies how to apply certain aspects of ASC 842. The amendments in the ASU address a number of issues in the new leases guidance, including (1) the rate implicit in the lease, (2) impairment of the net investment in the lease, (3) lessee reassessment of lease classification, (4) lessor reassessment of lease term and purchase options, (5) variable payments that depend on an index or rate, and (6) certain transition adjustments.

In July 2018, the FASB also issued ASU 2018-11, which adds a transition option for all entities and a practical expedient only for lessors to ASU 2016-02. The transition option, which we elected on adoption of the guidance, allows entities to choose not to apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. Under the transition option, entities can instead opt to continue to apply the legacy guidance in ASC 840—Leases, including its disclosure requirements, in the comparative periods presented in the year they adopt the new leases standard. This means that entities that elect this option will only provide annual disclosures for the comparative periods because ASC 840 does not require interim disclosures. Entities that elect this transition option will still be required to adopt the new leases standard using the modified retrospective transition method required by the standard, but they will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The practical expedient provides lessors with an option to not separate the non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the revenue recognition standard in ASC 606 if the associated non-lease components are the predominant components.

The Company adopted the new leasing standard and the related amendments on January 1, 2019. The Company believes the most significant change relates to the recognition of new right of use assets and lease liabilities on the consolidated balance sheet for Protexure’s real estate operating lease. These assets and liabilities, which are included in the “Prepaid expenses and other assets “line and “Accrued expenses and other liabilities” line of the Condensed Consolidated Balance Sheets, respectively, represent less than 1% of the Company’s total assets and total liabilities. The adoption did not have a material impact on its consolidated financial statements.

Accounting Standards Not Yet Adopted

Financial Instruments Credit Losses-Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, 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 for available-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 tentative effective date for the ASU is January 1, 2023. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

 

8

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued ASU 2018-02 “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.

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.

Changes to the Disclosure Requirements for Fair Value Measurements

In August 2018, the FASB issued ASU 2018-13, which amended the fair value measurement guidance in ASC 820—Fair Value Measurement, by removing and modifying certain existing disclosure requirements, while also adding new disclosure requirements. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted, with the amendments being applied either prospectively or retrospectively, as specified in the ASU. In addition, an entity may elect to early adopt the removal or modification of disclosures immediately and delay the adoption of the new disclosure requirements until the effective date. We are currently assessing the impact of adopting this guidance. However, we do not expect the new or modified disclosures to have a material impact on our consolidated financial statements.

 

9

2. INVESTMENTS

The cost or amortized cost, gross unrealized holding gains and losses, and estimated fair value of the Company’s fixed maturity investments, by major security type, and equity securities as of September 30, 2019 and December 31, 2018 are as follows:

 

		Cost or Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
As of September 30, 2019
Fixed maturity investments:
U.S. government agency securities		$	4,524,710			$	48,329			$	(725	)		$	4,572,314
Obligations of U.S. states and political subdivisions			2,947,364				32,641				—				2,980,005
Corporate debt securities			7,329,613				41,628				(5,119	)			7,366,122
Total fixed maturity investments			14,801,687				122,598				(5,844	)			14,918,441
Equity securities			12,002,872				4,456,663				(545,302	)			15,914,233
Total equity securities			12,002,872				4,456,663				(545,302	)			15,914,233
Total investments		$	26,804,559			$	4,579,261			$	(551,146	)		$	30,832,674
		Cost or Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
As of December 31, 2018
Fixed maturity investments:
U.S. government agency securities		$	6,739,840			$	287			$	(66,395	)		$	6,673,732
Obligations of U.S. states and political subdivisions			1,908,719				7,735				(13,514	)			1,902,940
Corporate debt securities			6,157,868				—				(146,460	)			6,011,408
Total fixed maturity investments			14,806,427				8,022				(226,369	)			14,588,080
Equity securities			12,145,120				2,596,269				(1,296,163	)			13,445,226
Total equity securities			12,145,120				2,596,269				(1,296,163	)			13,445,226
Total investments		$	26,951,547			$	2,604,291			$	(1,522,532	)		$	28,033,306

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

 

		12 months or greater								Less than 12 months								Total
		Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses
As of September 30, 2019
Fixed maturity investments:
U.S. government agency securities		$	—			$	—			$	249,275			$	(725	)		$	249,275			$	(725	)
Obligations of states and political subdivisions			—				—				—				—				—				—
Corporate debt securities			2,125,346				(5,119	)			—				—				2,125,346				(5,119	)
Total fixed maturity investments			2,125,346				(5,119	)			249,275				(725	)			2,374,621				(5,844	)
Equity securities			710,251				(357,984	)			3,013,455				(187,318	)			3,723,706				(545,302	)
Total equity securities			710,251				(357,984	)			3,013,455				(187,318	)			3,723,706				(545,302	)
Total investments		$	2,835,597			$	(363,103	)		$	3,262,730			$	(188,043	)		$	6,098,327			$	(551,146	)

 

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		12 months or greater								Less than 12 months								Total
		Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses
As of December 31, 2018
Fixed maturity investments:
U.S. government agency securities		$	3,389,369			$	(55,015	)		$	2,788,235			$	(11,380	)		$	6,177,604			$	(66,395	)
Obligations of states and political subdivisions			766,118				(13,166	)			139,651				(348	)			905,769				(13,514	)
Corporate debt securities			4,498,396				(125,689	)			1,513,012				(20,771	)			6,011,408				(146,460	)
Total fixed maturity investments			8,653,883				(193,870	)			4,440,898				(32,499	)			13,094,781				(226,369	)
Equity securities			97,708				(40,981	)			5,683,065				(1,255,182	)			5,780,773				(1,296,163	)
Total equity securities			97,708				(40,981	)			5,683,065				(1,255,182	)			5,780,773				(1,296,163	)
Total investments		$	8,751,591			$	(234,851	)		$	10,123,963			$	(1,287,681	)		$	18,875,554			$	(1,522,532	)

As of September 30, 2019 and December 31, 2018, there were six and 35 fixed income securities in an unrealized loss position with an estimated fair value of $2,374,621 and $13,094,781, respectively. As of September 30, 2019 and December 31, 2018, five and 21 of these fixed income securities had been in an unrealized loss position for 12 months or greater, respectively. As of September 30, 2019 and December 31, 2018, none of the fixed income securities were considered to be other-than-temporarily impaired. The Company has the intent to hold these fixed income securities, and it is not more likely than not that the Company will be required to sell these fixed income securities before their fair values recover above the adjusted cost. The unrealized losses from these fixed income securities were not a result of credit, collateral or structural issues.

Other-Than-Temporary Impairment Process

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

The Company had no planned sales of its fixed maturity investments classified as available-for-sale that were in an unrealized loss position at September 30, 2019. 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.

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

If we conclude a fixed 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 Company’s fixed maturity investments as of September 30, 2019 and December 31, 2018, relating to six and 35 fixed maturity securities, amounted to $5,844 and $226,369, 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 nine months ended and three months ended September 30, 2019, no other-than-temporary impairment charges were recorded.

 

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Fair Value of Investments

Under existing U.S. GAAP, we are required to recognize certain assets at their fair value in our consolidated balance sheets. This includes our fixed maturity investments and equity securities. In accordance with the Fair Value Measurements and Disclosures Topic of FASB’s 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:

 

•

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

 

•

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

 

•

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

At each measurement date, we estimate the fair value of the security using various valuation techniques. We utilize, to the extent available, quoted market prices in active markets or observable market inputs in estimating the fair value of our investments. When quoted market prices or observable market inputs are not available, we utilize valuation techniques that rely on unobservable inputs to estimate the fair value of investments. The following describes the valuation techniques we used to determine the fair value of investments held as of September 30, 2019 and December 31, 2018 and what level within the fair value hierarchy each valuation technique resides:

 

•

U.S. government agency securities: Comprised primarily of bonds issued by the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, Federal Farm Credit Bank and the Federal National Mortgage Association. The fair values of U.S. government agency securities are priced using the spread above the risk-free U.S. Treasury yield curve. As the yields for the risk-free U.S. Treasury yield curve are observable market inputs, the fair values of U.S. government agency securities are classified as Level 2 in the fair value hierarchy. AmerInst considers a liquid market to exist for these types of securities held. Broker quotes are not used for fair value pricing.

 

•

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

 

•

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

 

•

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

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.

 

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There have been no material changes to our valuation techniques from what was used as of December 31, 2018. 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 September 30, 2019 and December 31, 2018:

 

		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)
As of September 30, 2019
U.S. government agency securities		$	4,572,314			$	4,572,314			$	—			$	4,572,314			$	—
Obligations of U.S. state and political subdivisions			2,980,005				2,980,005								2,980,005
Corporate debt securities			7,366,122				7,366,122								7,366,122
Total fixed maturity investments			14,918,441				14,918,441
Equity securities			15,914,233				15,914,233				15,914,233
Total equity securities			15,914,233				15,914,233
Total investments		$	30,832,674			$	30,832,674			$	15,914,233			$	14,918,441			$	—
		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)
As of December 31, 2018
U.S. government agency securities		$	6,673,732			$	6,673,732			$	—			$	6,673,732			$	—
Obligations of U.S. state and political subdivisions			1,902,940				1,902,940								1,902,940
Corporate debt securities			6,011,408				6,011,408								6,011,408
Total fixed maturity investments			14,588,080				14,588,080
Equity securities			13,445,226				13,445,226				13,445,226
Total equity securities			13,445,226				13,445,226
Total investments		$	28,033,306			$	28,033,306			$	13,445,226			$	14,588,080			$	—

There were no transfers between Levels 1 and 2 during the nine months ended September 30, 2019 and the year ended December 31, 2018.

 

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Contractual Maturities

The cost or amortized cost and estimated fair value of fixed maturity investments as of September 30, 2019 and December 31, 2018 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
September 30, 2019
Due in one year or less			$	2,795,026				$	2,798,831
Due after one year through five years				11,496,703					11,608,575
Due after five years through ten years				509,958					511,035
Total			$	14,801,687				$	14,918,441
		Amortized Cost					Estimated Fair Value
December 31, 2018
Due in one year or less			$	4,434,013				$	4,429,510
Due after one year through five years				9,851,410					9,644,270
Due after five years through ten years				521,004					514,300
Total			$	14,806,427				$	14,588,080

Information on sales and maturity of investments and net unrealized gains (losses) on equity investments during the nine months ended September 30, 2019 and 2018 are as follows:

 

		September 30, 2019					September 30, 2018
Total proceeds from sales of available-for-sale securities			$	2,232,592				$	3,419,578
Proceeds from redemptions of hedge fund investments				—					3,085
Proceeds from redemptions of fixed maturity investments				265,000					—
Total proceeds from maturities of fixed maturity investments				3,090,000					2,370,000
Gross gains on sales				570,563					1,448,841
Gross losses on sales				(586,028	)				(13,983	)
Net unrealized gains (losses) on equity investments				2,611,254					(539,518	)
Total			$	2,595,789				$	895,340

Information on sales and maturity of investments and net unrealized gains (losses) on equity investments during the three months ended September 30, 2019 and 2018 are as follows:

 

		September 30, 2019				September 30, 2018
Total proceeds from sales of available-for-sale securities		$	429,866			$	489,440
Proceeds from redemptions of fixed maturity investments			265,000				—
Total proceeds from maturities of fixed maturity investments			840,000				400,000
Gross gains on sales			47,828				135,997
Gross losses on sales			(492,424	)			(13,367	)
Net unrealized gains on equity investments			517,088				444,424
Total		$	72,492			$	567,054

 

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Net Investment Income

Major categories of net investment income during the nine months ended September 30, 2019 and 2018 are summarized as follows:

 

		September 30, 2019					September 30, 2018
Interest earned:
Fixed maturity investments			$	263,575				$	249,287
Short-term investments and cash and cash equivalents				55,362					10,876
Dividends earned				138,543					116,432
Investment expenses				(102,337	)				(108,687	)
Net investment income			$	355,143				$	267,908

Major categories of net investment income during the three months ended September 30, 2019 and 2018 are summarized as follows:

 

		September 30, 2019					September 30, 2018
Interest earned:
Fixed maturity investments			$	91,690				$	83,688
Short-term investments and cash and cash equivalents				19,488					5,287
Dividends earned				44,571					40,362
Investment expenses				(30,258	)				(37,122	)
Net investment income			$	125,491				$	92,215

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 nine months ended September 30, 2019 and 2018:

 

		September 30, 2019					September 30, 2018
Liability—beginning of year			$	12,989,260				$	11,228,507
Incurred related to:
Current year				5,210,575					4,660,077
Prior years				—					—
Total incurred				5,210,575					4,660,077
Paid related to:
Current year				(94,416	)				(202,620	)
Prior years				(2,308,016	)				(3,083,995	)
Total paid				(2,402,432	)				(3,286,615	)
Liability—end of year			$	15,797,403				$	12,601,969

As incurred losses for the nine months ended September 30, 2019 are derived by multiplying our estimated loss ratio of 64.0% and the net premiums earned, as stated in Results of Operations below, all incurred losses are assumed to be current year losses.

 

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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.

The tables below summarize the results of our reportable segments as of and for the nine months ended September 30, 2019 and 2018.

 

		As of and for the Nine Months Ended September 30, 2019
		Reinsurance Segment				Insurance Segment				Total
Revenues		$	11,053,834			$	4,434,479			$	15,488,313
Total losses and expenses			9,241,760				4,087,935				13,329,695
Segment income			1,812,074				346,544				2,158,618
Identifiable assets			—				983,448				983,448
		As of and for the Nine Months Ended September 30, 2018
		Reinsurance Segment				Insurance Segment				Total
Revenues		$	8,385,269			$	4,094,462			$	12,479,731
Total losses and expenses			8,318,960				3,888,747				12,207,707
Segment income			66,309				205,715				272,024
Identifiable assets			—				636,500				636,500

The tables below summarize the results of our reportable segments as of and for the three months ended September 30, 2019 and 2018.

 

		As of and for the Three Months Ended September 30,  2019
		Reinsurance Segment				Insurance Segment				Total
Revenues		$	3,001,278			$	1,462,989			$	4,464,267
Total losses and expenses			3,120,582				1,366,222				4,486,804
Segment (loss) income			(119,304	)			96,767				(22,537	)
Identifiable assets			—				983,448				983,448
		As of and for the Three Months Ended September 30,  2018
		Reinsurance Segment				Insurance Segment				Total
Revenues		$	3,212,326			$	1,335,339			$	4,547,665
Total losses and expenses			2,842,754				1,265,456				4,108,210
Segment income			369,572				69,883				439,455
Identifiable assets			—				636,500				636,500

5. STOCK COMPENSATION

Phantom Shares:

Protexure Insurance Agency, Inc. (“Protexure”) (formerly AmerInst Professional Services, Limited), a subsidiary of AmerInst, has employment agreements with four key members of senior management, which grant them phantom shares of the Company. Under these agreements, these employees were initially granted 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 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 nine months ended September 30, 2019, 1,397 phantom shares were granted, arising from the dividends declared on the Company’s common shares. During the three months ended September 30, 2019, no phantom shares were granted. 89,033 phantom shares were outstanding at September 30, 2019.

 

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