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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual report pursuant to section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999.
[_] 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
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AMERINST INSURANCE GROUP, LTD.
(Exact Name of Registrant as Specified in its Charter)
BERMUDA 98-020-7447
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
c/o USA Offshore Management, Limited, No. 2 Reid Street, Hamilton, Bermuda HM11
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (441) 292-4364
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:COMMON SHARES, PAR
VALUE $1.00 PER SHARE
(Title of class)
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.
[x] YES [_] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
Aggregate market value of the common stock held by non-affiliates of the
Registrant as of March 15, 2000 was $18,605,950.*
Number of common shares, $1.00 par value per share, outstanding as of March 15,
2000 was 331,716.
*based on book value as of December 31, 1999.
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PART I
Item 1. Business
General
AmerInst Insurance Group, Ltd. ("AIG" or the "Company") was incorporated
under the laws of Bermuda on July 16, 1998. AIG's principal offices are located
at P.O. Box HM 1838, Hamilton, HM HX, Bermuda (No. 2 Reid Street, The Phoenix
Building, Hamilton, Bermuda). On December 2, 1999, the Company and its
predecessor entity, AmerInst Insurance Group, Inc., a Delaware corporation
("AIIG"), consummated an exchange transaction pursuant to an Exchange Agreement,
in which AIIG transferred all of its assets and liabilities to the Company in
exchange for newly issued common shares of the Company (the "Exchange"). AIIG
was then liquidated and AIIG shareholders received, on a share-for-share basis,
the newly issued common shares of AIG.
The primary purpose of AIIG and its subsidiary, AmerInst Insurance Company,
an Illinois corporation ("AIC"), was to establish, for the benefit of accounting
firms which are stockholders of AIG, an insurance company which over time can
exert a stabilizing influence, primarily through the reinsurance capacity of
AIC, on the design, pricing and availability of accountants' professional
liability insurance. AIC's sole current business activity is to act as a
reinsurer of professional liability insurance policies which are issued under
the AICPA Professional Liability Insurance Plan ("AICPA Plan" or "Plan"). The
AICPA Plan offers professional liability coverage to accounting firms in all 50
states. Currently, approximately 22,000 accounting firms are insured under the
Plan.
The primary purposes for the formation and operation of AIG and its wholly
owned subsidiaries, AmerInst Mezco, Ltd. ("Mezco"), AmerInst Insurance Company,
Ltd. ("AIC Ltd.") and AmerInst Investment Company, Ltd. ("Investco") was to
restructure AIIG's operations and change AIIG's domicile from Delaware to
Bermuda. The change of domicile and the related restructuring permitted AIIG to
reorganize its business activities to take maximum advantage of legal, financing
and tax environments. There were several factors that contributed to the
decision to carry out the restructuring and the change in domicile including,
without limitation, (i) expanding AIIG's ability to purchase shares of
shareholders who have died or retired from the practice of accounting, as AIIG
previously did generally at 75% of book value as of the end of the preceding
year, (ii) the substantial elimination of double income taxation and (iii)
Bermuda's standing as a major reinsurance and financial center.
In the future, AIC may want to expand its business, subject to obtaining
any required regulatory approvals, to include the reinsurance of other lines of
coverage. AIG's purpose is more fully described in Note 1 of the audited
financial statements included herein.
The reinsurance activity of AIC depends upon agreements entered into with
outside parties. From the inception of AIIG through mid-1993, Crum and Forster
Managers Corporation, through a group of affiliated insurance companies
(collectively, "CGI"), was the primary insurer for the AICPA Plan. In 1988,
AIIG's wholly-owned subsidiary, AIC provided reinsurance to CGI, assuming 10% of
the risks related to the first $1,000,000 of coverage for each policy issued
under the program. For the period 1989 through mid-1993, an unaffiliated
company, Virginia Surety Company, Inc., ("VSC") provided reinsurance to CGI and
retroceded a portion to AIC such that AIC assumed 10% to 12.5% of the risk
related to the first $1,000,000 of coverage limits for each policy issued under
the program. In August 1993, the AICPA Plan endorsed the CNA insurance group as
its insurance carrier, replacing CGI as the primary insurer. AIC then began a
reinsurance relationship with CNA, taking a 10% participation of the first
$1,000,000 of liability of each policy written under the plan. Effective in
December 1999, the Company also began taking a 10% share of the "value plan"
business from CNA. The "value plan" has separate $1,000,000 limits for expenses
and separate $2,000,000 policy aggregates for both losses and expenses.
The Company entered into excess of loss retrocession agreements to limit
its retained risk on any one claim underwritten by CGI to $50,000 in 1989 and
1990 and $62,500 in 1991 through mid-1993, subject to specified maximum
recoveries for each contract year. Retrocession premiums ceded by the Company
are adjustable within a specified range based on actual experience under each
contract. Retrocession transactions do not relieve AIC Ltd. from its obligation
to the ceding companies.
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Third-party Managers and Service Providers
USA Offshore Management provides the day-to-day services necessary in the
administration of AIG's, Mezco's, AIC Ltd.'s and Investco's business. Prior to
the Exchange, these services were provided by USA Risk Group, an affiliate of
USA Offshore Management, through Vermont Insurance Management, Inc.
The Country Club Bank of Kansas City, Missouri, has been engaged by AIG for
portfolio management of fixed-income securities and directs AIG's investments
pursuant to guidelines approved by AIG's board of directors. Harris Associates
L.P. has been engaged by AIC Ltd. to provide discretionary investment advice
with respect to AIC Ltd.'s equity investments.
Milliman & Robertson, Inc., (Liscord, Ward & Roy, Inc. for year-ends prior
to December 31, 1998) an independent casualty actuarial consulting firm, has
been retained by AIC Ltd. to render advice regarding actuarial matters.
The law firms of Altheimer & Gray and Conyers, Dill and Pearman have been
retained to render advice on legal matters.
Deloitte & Touche has been retained by AIG as its independent auditor to
audit its financial statements. This decision was based primarily on Deloitte &
Touche's expertise with respect to Bermuda domiciled entities. Prior to the
Exchange, Johnson Lambert & Co. served as independent auditor for AIIG.
Professional Liability Coverage
The professional liability policy issued by CGI or CNA and ultimately
reinsured by AIC (the "Policy") is a Professional Liability Company Indemnity
Policy form.
The coverage provided under the Policy is on a "claims made" basis, which
means the Policy covers only those losses resulting from claims asserted against
the insured during the policy period. The insuring clause of the Policy, which
indemnifies for losses caused by acts, errors or omissions in the insured's
performance of professional accounting services for others, is in three parts:
Clause A indemnifies the accounting firm insured and, unless excluded by
endorsements, any predecessor firms;
Clause B indemnifies any accountant or accounting firm while performing
professional accounting services under contract with the insured;
Clause C indemnifies any former or new partner, officer, director or
employee of the firm or predecessor firms.
Depending on the insured, defense costs for the policies issued by CNA (and
reinsured by AIC) are either within the policy limits or in addition to policy
limits. CNA charges additional premium to cover the cost of providing defense
costs in addition to the policy limits. Those insureds under the value plan have
separate limits for losses and defense costs. There are a few States in which
defense costs may not be included within the Policy limit. Settlements are made
only with the written consent of the insured. However, if the insured contests
the settlement recommended by the insurer, the Policy will only cover costs that
do not exceed the lesser of the amount for which the claim could have been
settled or the applicable limit of liability.
Competition
The AICPA Plan's current major competition comes from three large,
established insurance companies, including the Plan's former carrier, CGI. A
number of smaller companies compete in the field, but none have significant
nationwide market share. Many of these companies charge lower premiums than the
Plan, which may provide different terms of coverage. The Plan's principal
competitive strength is its
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commitment to the use of large, financially strong and experienced primary
insurers which enhance the Plan's capacity to continue to be a stable and
dependable source of coverage and to pay losses as they arise.
Licensing and Regulation
The rates and terms of reinsurance agreements generally are not subject to
regulation by any governmental authority. This is in contrast to direct
insurance policies, the rates and terms of which are regulated by, or subject to
notice to, State insurance departments. As a practical matter, however, the
rates charged by primary insurers place a limit upon the rates that can be
charged by reinsurers.
AIG and AIC Ltd. are subject to regulation under the insurance laws of
Bermuda, where they are domiciled.
Bermuda Regulation
AIC Ltd., as a licensed Bermuda insurance company, is subject to regulation
under The Insurance Act 1978, as amended, and related regulations (the "Bermuda
Act"), which provides that no person shall conduct insurance business (including
reinsurance) in or from Bermuda unless registered as an insurer under the
Bermuda Act by the Minister of Finance ("MOF"). In deciding whether to grant
registration, the MOF has discretion to act as he thinks fit in the public
interest. The MOF is required by the Bermuda Act to determine whether an
applicant for registration is a fit and proper body to be engaged in insurance
business and, in particular, whether it has, or has available to it, adequate
knowledge and expertise. In connection with registration, the MOF may impose
conditions relating to the writing of certain types of insurance business.
An Insurance Advisory Committee appointed by the MOF advises him on matters
connected with the discharge of his functions and sub-committees thereof
supervise and review the law and practice of insurance in Bermuda including
reviews of accounting and administrative procedures.
The Bermuda Act requires, among other things, Bermuda insurance companies to
meet and maintain certain standards of solvency, to file periodic reports in
accordance with the Bermuda Statutory Accounting Rules, to produce annual
audited financial statements and to maintain a minimum level of statutory
capital and surplus. In general, the regulation of insurers in Bermuda relies
heavily upon the auditors, directors and managers of the Bermuda insurer, each
of which must certify each year that the insurer meets the solvency and capital
requirements of the Bermuda Act. Furthermore, the MOF is granted powers to
supervise, investigate and intervene in the affairs of insurance companies.
Significant aspects of the Bermuda insurance regulatory framework are set forth
below.
Cancellation of an Insurer's Registration. An insurer's registration may be
canceled by the MOF on certain grounds specified in the Bermuda Act, including
the failure of the insurer to comply with the obligations of the Bermuda Act or
if, in the opinion of the MOF after consultation with the Insurance Advisory
Committee, the insurer has not been carrying on business in accordance with
sound insurance principles.
Independent Approved Auditor: Statutory Financial Statements: Statutory
Financial Return. Every registered insurer must appoint an independent auditor
approved by the MOF who will annually audit and report on the statutory
financial statements and the statutory financial return of the insurer, which
are required to be filed annually with the Registrar of Companies of Bermuda
(the "Registrar"), who is the chief administrative officer under the Bermuda
Act. The approved auditor may be the same person or firm that audits the
insurer's financial statements and reports for presentation to its shareholders.
An insurer must prepare annual statutory financial statements. The statutory
financial statements are not prepared in accordance with GAAP and are distinct
from
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the financial statements prepared for presentation to the insurer's shareholders
under the Companies Act 1981, as amended, of Bermuda (the "Companies Act"). The
insurer is required to submit the annual statutory financial statements as part
of the annual statutory financial return.
An insurer is required to file with the Registrar a statutory financial return
that includes, among other matters, a report of the approved independent auditor
on the statutory financial statements of the insurer, a declaration of the
statutory ratios and a related solvency certificate.
Minimum Solvency Margin. The Bermuda Act provides that the statutory assets of
an insurer must exceed its statutory liabilities by an amount greater than the
prescribed minimum solvency margin.
Pursuant to the Bermuda Act, AIC Ltd. is registered as a Class 3 insurer and,
as such: (i) is required to maintain a minimum of solvency margin equal to the
greatest of : (x) $1,000,000, (y) 20% of net premiums written in its current
financial year up to $6,000,000 plus 15% of net premiums written in its current
financial year over $6,000,000, or (z) 15% of loss reserves; (ii) is required to
file annually with the Registrar a statutory financial return together with a
copy of its respective statutory financial statements and an opinion of a loss
reserve specialist in respect of its loss and loss expense provisions within
four months following the end of the relevant financial year; (iii) is
prohibited from declaring or paying any dividends during any financial year if
it is in breach of its minimum solvency margin or minimum liquidity ratio or if
the declaration or payment of such dividends would cause it to fail to meet such
margin or ratio (if it fails to meet its minimum solvency margin or minimum
liquidity ratio on the last day of any financial year, the insurer will be
prohibited, without the approval of the MOF from declaring or paying and
dividends during the next financial year); (iv) will be prohibited, without the
approval of the MOF from reducing by 15% or more its total statutory capital, as
set out in its previous year's financial statements; and (v) if it appears to
the MOF that there is a risk of AIC Ltd. becoming insolvent or that it is in
breach of the Bermuda Act or any conditions imposed upon its registration, the
MOF may, in addition to the restrictions specified above, direct AIC Ltd. not to
declare or pay any dividends or any other distributions or may restrict it from
making such payments to such extent as the MOF may think fit.
Minimum Liquidity Ratio. The Bermuda Act provides a minimum liquidity ratio
for general business. An insurer engaged in general business is required to
maintain the value of its relevant assets as not less than 75% of the amount of
its relevant liabilities. Relevant assets include cash and time deposits, quoted
investments, unquoted bonds and debentures, first liens on real estate,
investment income due and accrued, account and premiums receivable and
reinsurance balances receivable. There are certain categories of assets which,
unless specifically permitted by the MOF, do not automatically qualify as
advances to affiliates and real estate and collateral loans. The relevant
liabilities are total general business insurance reserves and total other
liabilities less deferred income tax and sundry liabilities (by interpretation,
those not specifically defined). Based upon the foregoing, AIC Ltd.'s holding in
Investco requires the specific approval of the MOF.
Supervision, Investigation and Intervention. The MOF may appoint an inspector
with extensive powers to investigate the affairs of an insurer if the MOF
believes that an investigation is required in the interest of the insurer's
policyholders or persons who may become policyholders. In order to verify or
supplement information otherwise provided to him, the MOF may direct an insurer
to produce documents or information in relation to matters connected with the
insurer's business.
If it appears to the MOF that there is a risk of an insurer becoming insolvent
or, if the insurer is in breach of the Bermuda Act and the regulations or of any
condition imposed on its regulation as an insurer, the MOF may direct the
insurer in certain respects, including not to take on any new insurance
business; not to vary any insurance contract if the effect would be to increase
the insurer's liabilities; not to make certain investments; to realize certain
investments; to maintain in, or
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transfer to and to keep in the custody of, a specified bank, certain assets; not
to declare or pay any dividends or other distributions or to restrict the making
of such payments; and/or to limit its premium income.
As a Bermuda insurer, AIG is required to maintain a principal office in
Bermuda and to appoint and maintain a principal representative in Bermuda. For
the purpose of the Bermuda Act, the principal office of the Company will be
located at Phoenix Building, 2 Reid Street, Hamilton, Bermuda, HM 11. The
principal representative will be USA Offshore Management Ltd. Without a reason
acceptable to the MOF an insurer may not terminate the appointment of its
principal representative, and the principal representative may not cease to act
as such, unless 30 days' notice in writing to the MOF is given of the intention
to do so. It is the duty of the principal representative, within 30 days of his
reaching the view that there is a likelihood of the insurer for which he acts
becoming insolvent or its coming to his knowledge, or his having reason to
believe, that an "event" has occurred, to make a report in writing to the MOF
setting out all the particulars of the case that are available to him. Examples
of such an "event" include failure by the insurer to comply substantially with a
condition imposed upon the insurer by the MOF relating to a solvency margin or a
liquidity or other ratio.
The business of the Company and its subsidiaries is conducted from offices in
Hamilton, Bermuda. AIC Ltd. conducts the casualty insurance underwriting
business previously conducted by AIC. Investco and the Company conduct
investment business for their own accounts through independent commission
agents, brokers and custodians in the U.S. or other investment markets as needed
and appropriate. Neither Investco nor the Company operate as an investment
manager or as a broker dealer requiring registration under investment advisory
or securities broker regulations in the U.S., Bermuda or otherwise. The
directors and officers of AIC Ltd. negotiate reinsurance treaties for acceptance
in Bermuda. Among other matters, the following business functions are conducted
from the Bermuda offices at which the officers of AIC Ltd. and Investco are
located: (i) communications with shareholders of the Company, including the
providing of financial reports; (ii) communications with the general public of a
nature other than advertising; (iii) solicitation of the sale by the Company,
AIC Ltd. or Investco of shares in any of such entities; (iv) accepting
subscriptions of new shareholders of the Company; (v) maintenance of principal
corporate records and original books of account; (vi) audit of original books of
account; (vii) disbursement of funds in payment of dividends, claims, legal
fees, accounting fees, and officers' and directors' fees and salaries; (viii)
arrangement for and conduct of meetings of the shareholders and directors of the
Company, AIC Ltd. and Investco; and (ix) execution of redemptions of shares of
stock of the Company, AIC Ltd. and Investco. The Company does not maintain an
office or place of business in the United States.
AIC Ltd.'s ability to pay dividends to AIG is subject to the provisions of
the Bermuda insurance laws.
Under Companies' Bermuda law, AIG Ltd. is prohibited from declaring or
paying a dividend at December 31, 1999 if such payment would reduce the
realizable value of its assets to an amount less than the aggregate value of its
liabilities ($28,693,342), issued share capital ($331,751) and share premium
(additional paid-in capital in the amount of $11,322,139) accounts. As at
December 31, 1999, $6,955,909 was available to stockholders.
AIG Ltd.'s ability to pay common shareholders' dividends and its operating
expenses is dependent on cash dividends from AIC Ltd. including its subsidiary,
Investco (collectively the "reinsurance subsidiaries"). The payment of such
dividends by the reinsurance subsidiaries to AIG Ltd is limited under Bermuda
law by the Bermuda Insurance Act 1978 and related regulations as amended which
require that AIC Ltd. maintain minimum levels of solvency and liquidity. For
the years ended December 31, 1999 these requirements have been met. The minimum
required statutory capital and surplus was $ 2,436,281 and actual statutory
capital and surplus was $ 17,449,018 at December 31, 1999. The minimum required
level of liquid assets was $ 20,545,481 and actual liquid assets were
$44,812,394 at December 31, 1999.
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Customers
AIC Ltd.'s only source of income, other than its investment portfolio, is its
reinsurance treaties. Without such reinsurance treaties, current levels of
investment income would provide enough revenue to continue operations while the
Company evaluated other reinsurance and insurance opportunities.
Employees
AIG, AIC Ltd., Mezco and Investco have no employees. See Note 9 to the
Consolidated Financial Statements.
Loss Reserves
For information concerning AIC Ltd.'s loss reserves, changes in aggregate
reserves for the last three years, and loss reserve development as of the end of
each of the last ten years, see Management's Discussion and Analysis of
Financial Condition and Results of Operation, Note 3 to the Consolidated
Financial Statements, and Note 7 to the Consolidated Financial Statements.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for the common shares of AIG.
AIG's Bye-Laws provide that all transfers of common shares of AIG must be
approved by AIG's Board of Directors or a committee thereof. AIG's Board of
Directors has appointed a Shareholder Relations Committee for purposes of
reviewing and approving applications for transfer. All transferees must meet the
qualifications for Share Ownership contained in AIG's Share Ownership Policy.
As of March 15, 2000, AIG had 2,566 holders of record of its common shares. On
August 28, 1995, the Board of Directors of AIIG adopted a dividend policy for
AIIG to pay a quarterly dividend of $0.65 per share subject to legally available
funds and specific Board approval for each quarter. During 1999, 1998 and 1997,
AIIG paid cash dividends of $863,289, $865,587 and $867,735, respectively,
representing four quarterly payments of $0.65 per share in each year. During
1995, AIIG paid two quarterly dividends of $0.65 totaling $435,412. The
declaration of dividends by AIG's Board of Directors is dependent upon AIG's and
AIC Ltd.'s capacity to insure or reinsure business, profitability, financial
condition, and other factors which the Board of Directors may deem appropriate.
For a description of the restrictions which Bermuda law imposes on AIC Ltd.'s
ability to pay dividends, see Licensing and Regulation above.
Item 6. Selected Financial Data
The following summary sets forth selected financial data with respect to AIG for
the five fiscal years ended December 31, 1999. The balance sheet and income
statement data have been derived from AIG's consolidated financial statements
which have been audited, for fiscal years through 1998 by Johnson Lambert & Co.,
AIIG's independent auditors and, for fiscal year 1999 by Deloitte & Touche,
AIG's independent auditors. The data set forth below should be read in
conjunction with the audited financial statements and notes thereto included
elsewhere herein.
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SELECTED FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
Income Statement Data
1999 1998 1997 1996 1995
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Premiums Earned $ 6,388,323 $5,901,939 $6,172,610 $5,956,946 $5,748,143
Net Investment Income 2,696,132 2,443,995 2,572,539 2,394,377 2,195,451
----------- ---------- ---------- ---------- ----------
Total Revenue $ 9,084,455 $8,345,934 $8,745,149 $8,351,323 $7,943,594
=========== ========== ========== ========== ==========
Net Income (Loss) $(1,438,024) $1,061,530 $1,482,332 $2,356,024 $3,216,720
=========== ========== ========== ========== ==========
Basic Earnings (Loss)
Per Share $ (4.33) $ 3.19 $ 4.44 $ 7.04 $ 9.59
=========== ========== ========== ========== ==========
Cash dividends declared
per common share $ 2.60 $ 2.60 $ 2.60 $ 2.60 $ 1.30
=========== ========== ========== ========== ==========
</TABLE>
Balance Sheet Data
<TABLE>
<CAPTION>
Balance Sheet Data
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Investments $39,281,257 $42,548,658 $41,683,579 $39,636,771 $39,099,802
Other Assets 8,021,904 7,232,788 6,565,948 6,667,197 7,964,483
----------- ----------- ----------- ----------- -----------
Total Assets $47,303,161 $49,781,446 $48,249,527 $46,303,968 $47,064,285
=========== =========== =========== =========== ===========
Losses and Loss
Adjustment Expenses $25,037,029 $21,718,087 $20,802,873 $20,299,937 $21,789,036
Unearned Premiums 3,057,408 3,415,651 2,809,115 2,464,351 2,370,336
Other Liabilities 598,905 2,705,699 2,979,033 3,059,174 3,725,385
----------- ----------- ----------- ----------- -----------
Total Liabilities 28,693,342 27,839,437 26,591,021 25,823,462 27,884,757
Stockholders' Equity 18,609,819 21,942,009 21,658,506 20,480,506 19,179,528
----------- ----------- ----------- ----------- -----------
Total Liabilities and
Stockholders' Equity $47,303,161 $49,781,446 $48,249,527 $46,303,968 $47,064,285
=========== =========== =========== =========== ===========
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion presents the financial condition and results of
operation for AIG combined with the financial condition and results of operation
for its predecessor entity, AIIG, for the periods and as of the dates indicated.
The transfer of operations of AIIG to AIG has been accounted for at historic
cost in a manner similar to that in pooling-of-interests accounting.
Results of Operation
A net loss of $1,438,024 was reported in 1999, compared to net income of
$1,061,530 in 1998. Net income for 1998 decreased by 28.4% from $1,482,332
reported in 1997. The net loss is primarily due to a strengthening of loss
reserves in the current year, as well as the write off of the deferred tax asset
which will not be utilized as a result of the redomestication to Bermuda.
Premiums earned increased by 8.2% in 1999 to $6,388,323 from $5,901,939 in
1998. Premiums earned for 1998 decreased by 4.4% from $6,172,610 reported in
1997. In 1999, 1998, and 1997 premiums earned includes $182,959, $131,250 and
$720,298, respectively resulting from reductions in the ultimate estimated
premium ceded pursuant to retrocession agreements in effect during 1989 through
mid-1993. Ultimate premiums are dependent on loss experience under the
agreements and are reevaluated as ultimate losses are reevaluated. Excluding the
effect of the reduction of estimated ultimate premiums ceded, premiums earned
during 1999 increased by 5.8% as compared to 1998. 1998 premiums earned
increased by 3.6% as compared to 1997.
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The increase in earned premiums during 1999 is attributable to continued
growth of the AICPA Plan. This growth is primarily the result of an increase in
the number of insureds under the AICPA Plan and from certain rate increases
associated with a "step plan" which was initiated during 1995 and the maturing
of claims-made coverage. Under the step plan, insureds are offered discounted
premium rates for favorable loss experience. However, as these insureds
experience losses their premiums are "stepped up" accordingly. Because of the
use of claims-made policies, as the number of years of coverage provided
increases, CNA's (and AIG's) exposure increases. This additional exposure
results in an increase in premiums charged.
Net investment income, including realized capital gains and losses,
includes amounts earned on the Company's investment portfolio and cash on
deposit. Net investment income increased $252,137 or 10.3% in 1999 to $2,696,132
from $2,443,995 in 1998. Net investment income in 1998 decreased by $128,544 or
4.9% from the $2,572,539 reported in 1997. Net investment income in 1999
includes net realized capital gains of $532,854 as compared to net realized
capital gains in 1998 of $277,627. Net realized capital gains in 1997 were
$305,718. Capital losses are used to offset capital gains of prior and future
years and recover related income taxes.
Average invested assets including cash equivalents increased by $409,359 or
1.0% to $44,408,812 in 1999 compared to $43,999,453 in 1998. 1998 average
invested assets increased by 4.9% from $41,374,745 in 1997. Investment yield
including realized capital gains and losses in 1999 was 6.1% as compared to 5.6%
in 1998 and 6.2% in 1997. Excluding realized gains and losses, the yield was
5.2% in 1999, 5.1% in 1998 and 5.5% in 1997. The decrease in investment yield
from 1997 to 1998, excluding realized gains and losses, is primarily
attributable to an increase in holdings of tax free municipal securities and an
increase in equity securities which generate less realized investment income.
In 1999, due to the redomestication of the Company, most of the tax free
municipal securities were sold.
Unrealized gain on investments is $154,059 at December 31, 1999 as compared
to $1,156,993, net of tax at December 31, 1998. AIG considers all of its
investment portfolio to be available for sale and accordingly all investments
are reported at market value, with changes in net unrealized gains and losses
reflected as an adjustment to accumulated other comprehensive income.
The composition of the investment portfolio at December 31, 1999 and 1998
is as follows:
1999 1998
----- -----
U.S. Treasury notes 2% 4%
Mortgage backed securities and obligations of
U.S. Government agencies 59 41
Corporate debt securities 3 -
Obligations of state and political subdivisions 15 36
Equity securities 21 19
---- ----
100% 100%
==== ====
AIG continues to invest in high grade debt and equity securities.
Losses and loss adjustment expenses incurred increased by 40.5% to
$6,744,893 in 1999 from $4,797,657 in 1998. Losses and loss adjustment expense
for 1998 increased by 1.0% from $4,748,833 in 1997. These amounts include
favorable development of prior years' estimates of losses and loss adjustment
expense of approximately $2,533,000 in 1999, $4,883,000 in 1998 and $1,411,000
in 1997. As adjustments to prior estimates of losses and loss adjustment
expenses become known, such adjustments are included in current operations.
AIG's loss ratio, calculated as the ratio of losses and loss adjustment expense
to premiums earned, is 105.6% in 1999, 81.3% in 1998 and 76.9% in 1997. The
ratio calculated using only losses and loss adjustment expenses incurred for the
current year (excluding the effects of favorable development and excluding
reductions to retrocession premiums) is 149.5% in 1999, 167.8% in 1998, 112.9%
in 1997.
8
<PAGE>
Favorable development on prior year losses is attributable to various
economic trends and factors. In a strong economic environment, fewer
professional liability claims are likely to occur since fewer companies are
experiencing the kind of financial stress or failure that can often lead to such
claims. However, AIG has noted that under the CNA program, loss frequency has
increased in recent years while loss severity has remained constant. This
increase in loss frequency can be attributed to CNA's implementation of a step
plan (also see above discussion of premiums) in 1995 that was designed to
attract a large number of new insureds, predominantly smaller firms, to the
program. CNA expected loss severity to decrease and offset the effects of
increases in loss frequency, but to date this decrease has not occurred.
Accordingly, losses have trended upward in the most recent years. Additionally,
in recent years, many of the CNA insureds have opted to purchase defense
coverage outside of policy limits which results in larger reserve requirements.
Policy acquisition costs of $1,770,098 were expensed in 1999 as compared to
$1,641,092 in 1998, an increase of 7.8%. Policy acquisition costs expensed in
1998 reflect an increase of 5.6% from $1,554,025 in 1997. Such costs as a
percentage of premiums earned (excluding the effects of reductions to
retrocession premiums) are 28.1% in 1999, 28.0% in 1998 and 28.5% in 1997, and
result primarily from ceding commissions paid to ceding companies determined
contractually pursuant to reinsurance agreements.
Operating and management expenses increased by 70.6% in 1999 to $1,097,171
from $642,925 in 1998. 1998 operating and management expenses increased by 3.7%
from $619,694 in 1997. The increase in 1999 is due to the write-off of all
expenses relating to the redomestication.
AIG implemented Statement of Position 98-5 (SOP 98-5), "Reporting on the
Costs of Start-Up Activities", in the first quarter of 1999. With the adoption
of SOP 98-5, AIG expensed certain start-up costs associated with the
redomestication as incurred (see discussion detailing the redomestication
below). Previously, AIG had capitalized these costs to be expensed over a period
of 60 months. The adoption of SOP 98-5 has been applied retroactively to the
costs of start-up activities that were previously capitalized in order to
determine their cumulative effect. The effect of the change for the twelve
months ended December 31, 1999 was to decrease income before cumulative effect
of a change in accounting principle by $154,466 ($234,000 gross of tax) or
$(1.17) per share. The adjustment necessary for retroactive application of SOP
98-5, amount of $154,466 (net of tax), is included in net income for the twelve
months ended December 31, 1999.
The effective tax rate was 16.0% in 1998 and 18.7% in 1997. These rates
differ from the statutory federal rate primarily due to the effects of tax-
exempt municipal bond income. Effective December 2, 1999, the date of
redomestication to Bermuda, the Company ceased to pay corporate income taxes,
which meant the Company's deferred tax asset could not be utilized. As the
Company reported a tax loss for the period ended December 2, 1999, a tax benefit
was received. The current year tax charge of $676,317 comprises a deferred tax
write off of $1,248,693 and a current year tax benefit of $572,376.
Liquidity and Capital Resources
The Company's cash needs consist of settlement of losses and expenses under
its reinsurance treaties and funding day-to-day operations. Management expects
to be able to meet these cash needs from cash flows arising from its investment
portfolio. Because substantially all of the Company's assets are marketable
securities, the Company has sufficient flexibility to provide for unbudgeted
cash needs which may arise without resorting to borrowing.
As of December 31, 1999, total invested assets amounted to $39,281,257, a
decrease of $3,267,401 or 7.6% from $42,548,658 at December 31, 1998. Cash
balances increased from $1,450,795 at December 31, 1998 to $5,127,555 at
December 31, 1999. The amount of cash and cash equivalents varies depending on
the maturities of fixed term investments and on the level of funds invested in
money market mutual funds. The ratio of cash and invested assets to total
liabilities and stockholders' equity at December 31, 1999 was .94 to 1, compared
to a ratio of .91 to 1 at December 31, 1998.
9
<PAGE>
AIG's gross premiums assumed in 1999 amounted to $5,847,122, a decrease of
$530,103 from 1998. Gross premium assumed in 1998 increased by $580,149, or 10%
from 1997. Assumed reinsurance premiums receivable represents current assumed
premiums receivable less commissions payable to the fronting carriers. This
balance was $1,192,727 at December 31, 1998. As of December 31, 1999, this
balance is presented on a net basis with reinsurance balances payable and
therefore no comparable balance exists as of that date. This balance also
fluctuates due to the timing of renewal premium written. The increase in
premiums has also resulted in a direct increase in policy acquisition costs,
unearned premiums, fixed commissions paid to CNA as part of its quota share
agreement, and loss reserves.
Reinsurance recoveries represent AIG's estimate of losses to be reimbursed
by its reinsurer from future loss payments. AIG (through AIC) entered into
excess of loss retrocession agreements to limit its retained risk on any one
claim underwritten by Coregis Group, Inc. (formerly Crum and Forster Managers
Corporation), to $50,000 in 1989 and 1990 and $62,500 in 1991 through mid-1993,
subject to specified maximum recoveries for each contract year. Retrocession
premiums ceded by AIG are adjustable within a specified range based on actual
experience under each contract. Amounts recoverable from the reinsurers pursuant
to retrocession agreements have been estimated using actuarial assumptions
consistent with those used in establishing the liability for unpaid losses and
loss adjustment expenses. The actuary suggested a decrease in its analysis as of
December 31, 1999 which is reflected in the decrease to reinsurance recoveries
receivable from $875,685 at December 31, 1998 to $674,223 at December 31, 1999,
a $201,462, or 23.0%.
Reinsurance balances payable represent AIG's estimate of the premiums due
to the Company's reinsurer under the retrocession agreements described above,
and amounts currently due for losses and loss adjustment expenses payable.
Ultimate loss reserves were adjusted downward by the actuary in 1999, which
resulted in a decrease in the portion of reinsurance balances payable due for
retrospective premiums. The estimate of reinsurance balances due for
retrospective premiums decreased by $182,959, $131,250 and $720,298 during 1999,
1998 and 1997, respectively. Including loss and loss adjustment expenses
currently due, reinsurance balances payable decreased from $977,976 at December
31, 1998 to $96,108 at December 31, 1999, a decrease of $881,868, or 90.2%.
Prepaid expenses and other assets amounted to $80,587 at December 31, 1999, a
decrease of 75.3% from 1998.
Deferred policy acquisition costs, representing the deferral of ceding
commission expense related to premiums not yet earned, decreased from December
31, 1998 along with the increase in unearned premiums. The current ceding
commission rate, which became effective August 1, 1995, is 28.5%.
The Company paid its eighteenth consecutive quarterly dividend of $0.65 per
share during the fourth quarter of 1999.
During 1999, 1998 and 1997, the Board of Directors declared quarterly
dividends of $0.65 per share totaling $863,289, $865,587 and $867,735,
respectively. Continuation of quarterly dividend payments is subject to the
Board of Directors' continuing evaluation of the Company's level of surplus vis
a vis its capacity to accept more business. It is an objective of the Company
to build surplus in anticipation of the next "hard market", that is to say, the
next period in which accountants' professional liability insurance becomes
difficult or impossible to obtain at reasonable prices, and to retain
flexibility for any future business expansion.
Property/Casualty Losses and Loss Adjustment Expenses
The consolidated financial statements include the established liability for
unpaid losses and loss adjustment expenses ("LAE") of the Company's
property/casualty ("P/C") insurance operations. The liabilities for losses and
loss adjustment expenses are determined utilizing both case-basis evaluations
and actuarial projections, which together represent an estimate of the ultimate
net cost of all unpaid losses and LAE incurred through December 31 of each year.
These estimates are subject to the effect of trends in future claim severity and
frequency. The estimates are continually reviewed
10
<PAGE>
and, as experience develops and new information becomes known, the liability is
adjusted as appropriate. Such adjustments are reflected in current financial
reports.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and LAE. Future average severity is projected
based on historical trends adjusted for anticipated changes in underwriting
standards, policy provisions and general economic trends. These anticipated
trends are monitored based on actual development and are modified if necessary.
As is customary in the business, an actuarial review and projection is
performed for AIC by its independent actuary as of September 30 and December 31
of each year. Those projections are not adjusted for the first three quarters,
but are adjusted at year-end.
In preparing ultimate loss and allocated loss adjustment expenses, the
Company's actuary examined a variety of methods. The method most commonly
relied up on was the Generalized Cape Cod Method, which was applied to the
incurred, adjusted incurred and paid losses. The case reserving practices for
the CNA business differ significantly from those of the Coregis business,
therefore, the actuary performed a claims-adjusted incurred loss development
method on the CNA data, which adjusted the reserves upward to reflect what would
have been outstanding reserves at the level of the Coregis reserves. The actuary
selected the Generalized Cape Cod Method applied to claims-adjusted incurred
losses to determine ultimate loss estimates for CNA. The actuary also applied
the standard paid and incurred loss development methods to the CNA data,
however, these were not selected because of the belief that the adjusted
incurred method is more representative of the Company's claims history.
The result of this process is that twice a year, the actuary has made
recommendations to AIC's Board of Directors, which for each period adopted the
recommendation. Based on the foregoing practice, the estimated loss ratio has
been changed by AIG's Board of Directors approximately once each year.
The following table shows the development of the estimated liability for
the previous eleven years of the Company's P/C operations:
11
<PAGE>
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT
(Thousands of Dollars)
Amounts prior to 1993 restated to conform with SFAS 113
<TABLE>
<CAPTION>
Year Ended December 31,
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
------ ------ ------- ------- ------- ------- ------- ------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Liability for Loss
and LAE Reserves.......... $1,895 $8,085 $15,182 $20,260 $25,287 $27,047 $25,335 $21,789 $20,300 $20,803 $21,718 $25,037
Reinsurance Recoverable for
Unpaid Loss and LAE
Reserves.................. - - 502 761 969 4,764 4,071 3,160 2,020 1,040 876 674
------ ------ ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net Liability for Unpaid
Losses and LAE reserves... $1,895 $8,085 $14,680 $19,499 $24,318 $22,283 $21,264 $18,629 $18,280 19,763 20,842 24,363
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
--------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Losses Reestimated as of:
One Year Later........ 1,897 8,705 14,779 19,963 23,004 18,099 17,957 15,709 16,869 14,883 18,309 -
Two Years Later....... 1,897 8,145 12,667 15,264 20,133 15,064 15,042 14,299 10,161 12,919
Three Years Later..... 1,780 6,796 9,862 13,101 17,782 12,196 13,635 8,417 9,458
Four Years Later...... 1,405 5,199 8,696 11,725 15,520 10,811 9,322 7,849
Five Years Later...... 1,065 4,782 7,753 10,158 14,825 8,479 9,074
Six Years Later....... 995 4,536 6,879 10,081 12,817 8,328
Seven Years Later..... 936 4,031 6,761 8,523 12,651
Eight Years Later..... 819 4,016 5,661 8,470
Nine Years Later...... 819 3,576 5,636
Ten Years Later....... 819 3,560
Eleven Years Later.... 834
Cumulative Redundancy
(Deficiency).............. 1,059 4,525 9,044 11,029 11,667 13,955 12,190 10,780 8,822 6,844 2,533 -
Cumulative Amount Paid
Through:
One Year Later........ 73 415 2,548 4,158 6,100 1,555 4,007 2,885 3,036 3,567 3,030 -
Two Years Later....... 208 1,710 3,653 5,464 7,860 5,128 6,469 4,791 5,580 5,531
Three Years Later..... 595 2,349 4,147 6,255 10,370 6,765 7,721 6,087 6,471
Four Years Later...... 617 2,716 4,380 7,744 11,436 7,666 8,551 6,655
Five Years Later...... 676 2,927 5,422 8,303 11,878 8,199 8,920
Six Years Later....... 659 3,317 5,540 8,501 12,263 8,398
Seven Years Later..... 668 3,380 5,764 8,611 12,412
Eight Years Later..... 670 3,467 5,799 8,693
Nine Years Later...... 674 3,485 5,821
Ten Years Later....... 675 3,495
Eleven Years Later.... 684
</TABLE>
The above table of losses reestimated has been prepared on a net basis
(i.e., loss and loss adjustment expenses and reinsurance recoveries receivable
have not been grossed-up, as required under FAS 113). The schedule has been
prepared on a net basis due to the relative immateriality of reinsurance
balances when considered in relation to total loss and loss adjustment expense
reserves, and due to the cost/benefit of not providing such information.
The above table presents the development of balance sheet liabilities for
1988 through 1999 as of year-end 1999. The top line of the table shows the
original recorded unpaid liability for losses and LAE recorded at the balance
sheet date for each of the indicated years.
This liability represents the estimated amount of losses and LAE for claims
arising in all prior years, both paid and unpaid at the balance sheet date,
including losses that had been incurred, but not yet reported, to the Company.
The upper portion of the table shows the experience as of the end of each
succeeding year. The estimate is increased or decreased as more information
becomes known about the frequency and severity of claims.
The "cumulative redundancy (deficiency)" represents the aggregate change in
the estimates over all prior years. For example, the 1994 liability has
developed a $12,190,000 redundancy which has been reflected in income in
subsequent years as the reserves were reestimated.
12
<PAGE>
The lower section of the table shows the cumulative amount paid with
respect to the previously recorded liability as of the end of each succeeding
year. For example, the 1994 year end liability was originally $21,264,000. As
of December 31, 1999, the Company had paid $8,920,000 of the currently estimated
$9,074,000 of losses and LAE that had been incurred for 1994 and prior years
through the end of 1999; thus an estimated $154,000 in losses incurred through
1994 remain unpaid as of the current financial statement date.
In evaluating this information, it should be understood that each amount
includes the effects of all changes in amounts for prior periods. This table
does not present accident or policy year development data, which readers may be
more accustomed to analyzing. Conditions and trends that have affected
development of liability in the past may not necessarily occur in the future.
Accordingly, it may not be appropriate to extrapolate future redundancies or
deficiencies based on this table.
Year 2000 Report
AIG was aware of the issues associated with the programming code in
existing computer systems as the year 2000 approached. The "Year 2000" problem
was due to computer programs being written using two digits rather than four to
define the applicable year. Programs with time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. Systems that do
not properly recognize such information could generate erroneous data or fail.
The Company's operations are conducted through its management company, USA
Offshore Management, Ltd. ("USAOM"). Prior to the redomestication of the
Company, Vermont Insurance Management, Inc. ("VIM") provided these services.
The majority of insurance transactions affecting the Company are originated
by CNA, the company's primary insurance carrier, operating systems, with
quarterly reporting to the Company. USAOM, VIM and CNA had performed extensive
review of their hardware and software systems during 1999 and believed they were
fully Year 2000 compliant.
Since the passing of Year 2000, the Company has not been made aware by
USAOM, VIM or CNA of any non-compliance and believes that there has been no
negative effect on its results due to the Year 2000 problem.
Redomestication and Restructuring
On December 2, 1999, the Company and its predecessor entity, AIIG,
consummated an exchange transaction pursuant to an Exchange Agreement, in which
AIIG transferred all of its assets and liabilities to the Company in exchange
for newly issued common shares of the Company. See Note 2 to the Consolidated
Financial Statements for a further description of the transaction.
13
<PAGE>
Item 8. Financial Statements and Supplementary Data
The financial statements required by this Item are listed below:
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Financial Statements
- ---------------------------------------------------------------------
Page
-----
<S> <C>
Report of Independent Accountants.................................... 16
Consolidated Balance Sheets.......................................... 17
Consolidated Statements of Income and Other Comprehensive Income..... 18
Consolidated Statement of Changes in Stockholders' Equity............ 19-20
Consolidated Statements of Cash Flows................................ 21
Notes to the Consolidated Financial Statements....................... 22
Financial Statement Schedules:
- ---------------------------------------------------------------------
Reports of Independent Accountants on Financial Statement Schedules.. 36
Schedule IV, Reinsurance............................................. 40
</TABLE>
Schedules I, II, III, V, and VI are omitted as they are inapplicable,
immaterial, or because the required information may be found in the audited
consolidated financial statements and notes thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There have been no disagreements with accountants on accounting and financial
disclosure. In connection with the redomestication of the Company to Bermuda,
which became effective on December 2, 1999, the Company has retained Deloitte &
Touche Ltd. as its independent auditors rather then Johnson Lambert & Co. based
on Deloitte & Touche's expertise with respect to Bermuda domiciled entities.
Neither of Johnson Lambert & Co.'s reports on the financial statements of AIIG
for the past two years contains an adverse opinion or a disclaimer of opinion,
or was qualified or modified as to uncertainty, audit scope, or accounting
principles. The retention of Deloitte & Touche by the Company has been approved
by the Company's Board of Directors. There have been no disagreements with
Johnson Lambert & Co. with respect to any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 of Form 10-K with respect to
identification of directors is incorporated by reference from the information
contained in the section captioned "Election of Directors" in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
or after June 1, 2000 the ("Proxy Statement"), a copy of which will be filed
with the Securities and Exchange Commission before the meeting date.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K is incorporated by reference
14
<PAGE>
from the information contained in the section captioned "Executive Compensation"
in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 of Form 10-K is incorporated by reference
from the information contained in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 of Form 10-K is incorporated by reference
from the information contained in the section captioned "Certain Relationships
and Related Transactions" in the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) See Index to Financial Statements on page 14.
(a)(2) See Index to Financial Statement Schedules on page 14.
(a)(3) See Index to Exhibits set forth on page 41.
(b) On December 3, 1999, the Company filed a report on Form 8-K regarding
the consummation of an Exchange Agreement with AmerInst Insurance Group,
Inc., a Delaware corporation ("AIIG"), pursuant to which AIIG exchanged all
of its assets and liabilities for common shares of the Company (the
"Exchange"). Immediately following the consummation of the Exchange, AIIG
was dissolved, and common shares of the Company were issued to the holders
of common stock of AIIG in a pro rata liquidating distribution. The
Exchange was part of a series of transactions involving the Company and
AIIG which are more fully described in the Prospectus/Proxy Statement
distributed to AIIG's stockholders on or about July 2, 1999, which was part
of Amendment No. 3 to the Company's Registration Statement on Form S-4,
Registration No. 333-64929.
(c) See Index to Exhibits set forth on page 41.
(d) See Index to Financial Statement Schedules on page 14.
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
AmerInst Insurance Group, Ltd.
We have audited the accompanying consolidated balance sheet of AmerInst
Insurance Group, Ltd. and subsidiaries (the "Company") as at December 31, 1999,
and the related consolidated statements of operations and other comprehensive
(loss) income, changes in stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements give
retroactive effect to the transfer of the operations of AmerInst Insurance
Group, Inc. to the Company, which has been accounted for in a manner similar to
that in pooling-of-interests accounting as described in Note 2 to the
consolidated financial statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of AmerInst Insurance Group, Ltd. and
subsidiaries as at December 31, 1999 and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE
March 8, 2000
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors
AmerInst Insurance Group, Inc.
We have audited the accompanying consolidated balance sheets of AmerInst
Insurance Group, Inc. (the Company) as of December 31, 1998, and the related
consolidated statements of income and other comprehensive income, changes in
stockholders' equity, and cash flows for each of the years in the two year
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and the disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AmerInst Insurance Group, Inc.
as of December 31, 1998, and the results of its operations and its cash flows
for each of the years in the two year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
JOHNSON LAMBERT & CO.
Burlington, Vermont
February 22, 1999,
<PAGE>
AMERINST INSURANCE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
ASSETS
Investments (Notes 5 and 6):
Fixed maturity investments, at market value
(amortized cost $31,545,924 and $33,680,548) $30,896,604 $34,577,261
Equity securities, at market value (cost $7,581,274
and $7,115,089) 8,384,653 7,971,397
----------- -----------
TOTAL INVESTMENTS 39,281,257 42,548,658
Cash and cash equivalents (Note 4) 5,127,555 1,450,795
Assumed reinsurance premiums receivable - 1,192,727
Reinsurance balances recoverable (Note 7) 674,223 875,685
Fund deposit with a reinsurer 108,000 -
Accrued investment income 487,842 596,862
Deferred policy acquisition costs 871,362 973,461
Deferred income tax asset (Note 10) - 652,666
Federal income taxes receivable 672,335 -
Prepaid expenses and other assets 80,587 326,172
----------- -----------
TOTAL ASSETS $47,303,161 $48,617,026
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses (Note 7) $25,037,029 $21,718,087
Unearned premiums 3,057,408 3,415,651
Reinsurance balances payable 96,108 977,976
Federal income taxes payable - 118,004
Accrued expenses and other liabilities 502,797 445,299
----------- -----------
TOTAL LIABILITIES 28,693,342 26,675,017
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, 1999 $1 par value, 500,000 shares authorized,
1998 $.01 par value, 2,000,000 shares authorized;
1999 - 331,751 shares issued and outstanding
1998 - 332,331 shares issued and outstanding 331,751 3,323
Additional paid-in-capital 6,801,870 7,144,818
Retained earnings 11,322,139 13,636,875
Accumulated other comprehensive income, net of tax 154,059 1,156,993
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 18,609,819 21,942,009
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $47,303,161 $48,617,026
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements
17
<PAGE>
AMERINST INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENT OF OPERATIONS AND
OTHER COMPREHENSIVE (LOSS) INCOME
years ended December 31, 1999, 1998 and 1997
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
REVENUES
Premiums earned (Note 8) $ 6,388,323 $5,901,939 $6,172,610
Net investment income and net realized gain
and losses (Note 6) 2,696,132 2,443,995 2,572,539
----------- ---------- -----------
TOTAL REVENUES 9,084,455 8,345,934 8,745,149
----------- ---------- -----------
LOSSES AND EXPENSES
Losses and loss adjustment expenses 6,744,893 4,797,657 4,748,833
Policy acquisition costs 1,770,098 1,641,092 1,554,025
Operating and management expenses (Note 9) 1,097,171 642,925 619,684
----------- ---------- -----------
TOTAL LOSSES AND EXPENSES 9,612,162 7,081,674 6,922,542
----------- ---------- -----------
(LOSS) INCOME BEFORE INCOME TAXES (527,707) 1,264,260 1,822,607
Provision for income taxes (Note 10) (676,317) (202,730) (340,275)
Cumulative effect of deferred charges (Note 9) (234,000) - -
----------- ---------- -----------
NET (LOSS) INCOME (1,438,024) 1,061,530 1,482,332
----------- ---------- -----------
OTHER COMPREHENSIVE (LOSS) INCOME,
NET OF TAX
Net unrealized holding (loss) gains arising
during the period (1,066,108) 323,271 793,801
Less: reclassification adjustment for gains and
losses included in net loss (532,854) (183,234) (201,466)
----------- ---------- -----------
OTHER COMPREHENSIVE (LOSS)
INCOME, NET OF TAX (1,598,962) 140,037 592,335
----------- ---------- -----------
COMPREHENSIVE (LOSS) INCOME $(3,036,986) $1,201,567 $2,074,667
=========== ========== ===========
BASIC (LOSS) EARNINGS PER SHARE $(4.33) $3.19 $4.44
=========== ========== ===========
Average common shares outstanding for the year 332,051 332,997 333,870
=========== ========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements
18
<PAGE>
AMERINST INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
years ended December 31, 1999, 1998 and 1997
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive Total
Common Paid-in Retained Income, Treasury Stockholders'
Stock Capital Earnings Net of Tax Stock Equity
-------- ------------ ------------ ------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 $3,342 $7,188,983 $12,863,560 $ 424,621 $ - $20,480,506
Net income - - 1,482,332 - - 1,482,332
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities, net
of reclassification adjustment - - - 592,335 - 592,335
Purchases of 822 shares of treasury stock (28,932) (28,932)
Retirement of 822 shares of treasury stock (8) (16,475) (12,449) - 28,932 -
Cash dividends paid ($2.60) per share) - - (867,735) - - (867,735)
------- ----------- ----------- ------------- -------- -------------
BALANCE AT DECEMBER 31, 1997 3,334 7,172,508 13,465,708 1,016,956 - 21,658,506
Net income - - 1,061,530 - - 1,061,530
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities,
net of reclassification adjustment - - - 140,037 - 140,037
Purchases of 1,108 shares of treasury stock - - - - (52,477) (52,477)
Retirement of 1,108 shares of treasury stock (11) (27,690) (24,776) - 52,477 -
Cash dividends paid ($2.60 per shares) - - (865,587) - - (865,587)
------- ----------- ----------- ------------- -------- -------------
BALANCE AT DECEMBER 31, 1998 3,323 7,144,818 13,636,875 1,156,993 - 21,942,009
</TABLE>
See accompanying notes to the consolidated financial statements
19
<PAGE>
AMERINST INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
years ended December 31, 1999, 1998 and 1997
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive Total
Common Paid-in Retained Income, Treasury Stockholders'
Stock Capital Earnings Net of Tax Stock Equity
--------- ----------- ------------ -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $ 3,323 $7,144,818 $13,636,875 $ 1,156,993 $ - $21,942,009
Net loss - - (1,438,024) - - (1,438,024)
Other comprehensive income:
Unrealized losses on securities,
net of reclassification adjustment - - - (1,598,962) - (1,598,962)
Release of deferred tax effect
on opening other comprehensive income (Note 10) - - - 596,028 - 596,028
Purchases of 580 shares of treasury stock - - - (27,943) (27,943)
Retirement of 580 shares of treasury stock (6) (14,514) (13,423) - 27,943 -
Increase in par value per share from $0.01
per share to $1.00 per share 328,434 (328,434) - - - -
Cash dividends paid ($2.60 per shares) - - (863,289) - - (863,289)
--------- ----------- ------------ -------------- --------- --------------
BALANCE AT DECEMBER 31, 1999 $331,751 $6,801,870 $11,322,139 $ 154,059 $ - $18,609,819
========= =========== ============ ============== ========= ==============
</TABLE>
See accompanying notes to the consolidated financial statements
20
<PAGE>
AMERINST INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
years ended December 31, 1999, 1998 and 1997
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (1,438,024) $ 1,061,530 $ 1,482,332
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of net premiums on investments 48,332 35,048 21,185
Net realized gains on sale of investments (532,854) (277,627) (305,253)
Deferred income taxes (net of deferred tax on
unrealized gain on investments) 652,666 267,793 (1,262)
Changes in assets and liabilities:
Assumed reinsurance premiums receivable 1,192,727 772,050 (216,581)
Reinsurance balances recoverable 201,462 164,077 980,213
Fund deposit with a reinsurer (108,000) - -
Accrued investment income 109,020 (96,892) 15,900
Deferred policy acquisition costs 102,099 (172,863) (98,258)
Income taxes recoverable (672,335) - -
Prepaid expenses and other assets 245,585 (139,666) (96,498)
Unpaid losses and loss adjustment expenses 3,318,942 915,214 502,936
Unearned premiums (358,243) 606,536 344,764
Income taxes payable (118,004) (421,149) 31,826
Reinsurance balances payable (881,868) (1,006,466) (167,614)
Accrued expenses and other liabilities 57,498 (10,139) 1,909
----------- ----------- ------------
Net cash provided by operating activities 1,819,003 1,697,446 2,495,599
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments (17,096,519) (12,265,241) (13,572,437)
Proceeds from sales and maturities of investments 19,845,508 11,854,918 11,010,362
Net sales of short-term investments - - 1,697,475
----------- ----------- ------------
Net cash provided by (used in) investing activities 2,748,989 (410,323) (864,600)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (863,289) (865,587) (867,735)
Purchases of treasury stock (27,943) (52,477) (28,932)
----------- ----------- ------------
Net cash used in financial activities (891,232) (918,064) (896,667)
----------- ----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,676,760 369,059 734,332
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 1,450,795 1,081,736 347,404
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,127,555 $ 1,450,795 $ 1,081,736
------------ ------------ ------------
SUPPLEMENTAL DATA - Income taxes paid $ 749,328 $ 454,893 $ 425,000
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements
21
<PAGE>
AMERINST INSURANCE GROUP, LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(expressed in U.S. dollars)
1. DESCRIPTION OF BUSINESS
AmerInst Insurance Group Ltd,. (AIG Ltd.) was incorporated under the laws
of Bermuda on July 16, 1998. The Company, through its wholly-owned
subsidiary AIIC Ltd. and its predecessor, has been engaged in the
reinsurance of claims-made insurance policies of participants in an AICPA -
endorsed insurance program that provides accountants' professional
liability insurance coverage (AICPA Plan). From the inception through mid-
1993, Coregis Group, Inc. (formerly Crum and Forster Managers Corporation)
through a group of affiliated insurance companies (collectively CGI), was
the primary insurer for the AICPA Plan. In 1988, the Company provided
reinsurance to CGI, assuming 10% of the risks related to the first
$1,000,000 of coverage for each policy issued under the program. For the
period 1989 through mid-1993, an unaffiliated company, Virginia Surety
Company, Inc. (VSC) provided reinsurance to CGI and retroceded a portion to
the Company such that the Company assumed 10% to 12.5% of risk related to
the first $1,000,000 of coverage for each policy issued under the program.
In August 1993, the AICPA Plan endorsed the CNA Insurance Company (CNA) as
its insurance carrier, replacing CGI as the primary insurer. The Company
began a reinsurance relationship with CNA, taking a 10% participation of
the first $1,000,000 of liability of each policy written under the plan.
CGI, VSC and CNA are collectively referred to as the "ceding companies".
The Company entered into excess of loss retrocession agreements to limit
its retained risk on any one claim underwritten by CGI to $50,000 in 1989
and 1990 and $62,500 in 1991 through mid-1993, subject to specified maximum
recoveries for each contract year. Retrocession premiums ceded by the
Company are adjustable within a specified range based on actual experience
under each contract. Retrocession transactions do not relieve AIC Ltd. from
its obligation to the ceding companies.
2. REDOMESTICATION AND RESTRUCTURING
At December 2, 1999 AmerInst Insurance Group Inc. (AIIG) a Delaware company
and AmerInst Insurance Group Ltd. (AIG Ltd.) entered into an Exchange
agreement, pursuant to which AIIG transferred all of its assets and
liabilities to AIG, Ltd. in exchange for newly issued shares of AIG, Ltd.
AIIG was then liquidated and AIIG shareholders received on a share-for-
share basis the newly issued shares of AIG, Ltd.
The restructuring of AIIG's business, including the redomestication of the
insurance operations of AIIC to AIG, Ltd. was consummated in the following
steps:
22
<PAGE>
AMERINST INSURANCE GROUP, LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(expressed in U.S. dollars)
2. REDOMESTICATION AND RESTRUCTURING (cont'd)
AmerInst Insurance Company Inc. ("AIC"), an Illinois company and a wholly-
owned subsidiary of AIIG, distributed to AIIG a cash dividend, of
approximately $20,000, to be used solely to fund the capitalization
required for the formation of the new entities described below; and the
expenses of the Restructuring.
AIC formed a new wholly-owned subsidiary, AmerInst Mezco, Ltd., under the
laws of Bermuda ("Mezco"). Mezco was funded by AIC with investment
securities in an amount sufficient for the capitalization of a Bermuda
insurance company.
AIC distributed all of the shares of Mezco to AIIG as a dividend.
Mezco formed a new wholly-owned subsidiary, AmerInst Insurance Company,
Ltd., under the laws of Bermuda ("AIC Ltd.").
AIC retroceded to AIC Ltd. all of its insurance treaty liabilities under
past treaties, and paid to AIC Ltd. in connection therewith a premium
determined on the basis of actuarial projections, appropriately discounted
based on the expected payout patterns, intended to reflect an arms' length
fair market value for such retrocession. The payment of the premium was
partially in the form of a transfer of investment securities at market
value.
AIC Ltd. formed a new wholly-owned subsidiary, AmerInst Investment Company,
Ltd. under the laws of Bermuda ("Investco") and contributed assets to
capitalize Investco, and provided a subsequent transfer of Securities.
AIC was liquidated, with its remaining assets and liabilities distributed
to AIIG.
Pursuant to the Exchange, AIIG exchanged all of its assets (including the
shares of Mezco) and liabilities with the AIG Ltd. solely for AIG Ltd.
Common Shares, and the currently outstanding AIG Ltd. Common Shares were
cancelled.
AIIG was dissolved, with holders of shares of AIIG Common stock receiving
the AIG Ltd. Common Shares previously issued to AIIG by AIG Ltd. on a
share-for-share basis.
A replacement treaty for the CNA Treaty was entered into between AIC
Limited and CNA.
Following the restructuring, Mezco, AIC Limited and Investco, became
wholly-owned direct and indirect subsidiaries of the AIG Ltd. and neither
AIIG nor AIC continued to exist as separate entities.
The transfers of the operations of AIIG to AIG Ltd. has been accounted for
at historic cost in a manner similar to that in pooling-of-interests
accounting.
23
<PAGE>
AMERINST INSURANCE GROUP, LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(expressed in U.S. dollars)
3. ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America and included the accounts of AIG Ltd. and its wholly
owned subsidiaries, AmerInst Mezco Ltd. (Mezco), AmerInst Insurance Company
(AIC Ltd) and AmerInst Investments Group, Ltd. ("Investco"). Intercompany
accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Premiums
Premiums assumed are earned ratably over the terms of the underlying
policies to which they relate. Premiums assumed relating to the unexpired
portion of policies in force at the balance sheet date are recorded as
unearned premiums. Pursuant to prior retrocession agreements, charges or
credits resulting from adjustments to related provisional retrocession
premiums are reflected as adjustments to ceded premiums. Management
believes that recorded retrocession premiums ceded represent its best
estimate of such amounts; however, as changes in the estimated ultimate
losses and loss adjustment expenses applicable to the retrocession layers
are determined, the estimated ultimate ceded premiums will also change. As
adjustments to these estimates become necessary, such adjustments are
reflected in current operations.
Deferred policy acquisition costs
Ceding commissions related to assumed reinsurance agreements are deferred
and amortized over the terms of the underlying policies to which they
relate.
24
<PAGE>
AMERINST INSURANCE GROUP, LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(expressed in U.S. dollars)
3. ACCOUNTING POLICIES (cont'd)
Unpaid losses and loss adjustment expenses
The liability for unpaid losses and loss adjustment expenses includes case
basis estimates of reported losses plus supplemental amounts for projected
losses incurred but not reported (IBNR), calculated based upon loss
projections utilizing certain actuarial assumptions and AIC Ltd.'s
historical loss experience supplemented with industry data. Management
believes that its aggregate liability for unpaid losses and loss adjustment
expenses at year end represents its best estimate, based upon the available
data, of the amount necessary to cover the ultimate cost of loss, based
upon an actuarial analysis prepared by a consulting actuary. However,
because of the volatility inherent in professional liability coverage,
actual loss experience may not conform to the assumptions used in
determining the estimated amounts for such liability at the balance sheet
date. Accordingly, the ultimate liability could be significantly in excess
of or less than the amount indicated in the financial statements. As
adjustments to these estimate become necessary, such adjustments are
reflected in current operations. AIC Ltd. does not discount its loss
reserves for purposes of these financial statements.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for unpaid losses and loss adjustment expenses.
Future average severities are projected based on historical trends adjusted
for anticipated trends, are monitored based on actual development and are
modified if necessary.
Reinsurance recoveries receivable
Reinsurance recoveries receivable is comprised of estimated amounts of
losses and loss adjustment expenses paid and unpaid which are expected to
be recoverable from reinsurers. Amounts recoverable from the reinsurers
pursuant to retrocession agreements have been estimated using actuarial
assumptions consistent with those used in establishing the liability for
unpaid losses and loss adjustment expenses. Management believes that
reinsurance recoveries receivable as recorded represents its best estimate
of such mounts; however, as changes in the estimated ultimate liability for
unpaid losses and loss adjustment expenses are determined, the estimated
ultimate amount recoverable from the reinsurers will also change.
Accordingly, the ultimate recoverable could be significantly in excess of
or less than the amount indicated in the financial statements. Further,
management has determined that no provision for uncollectible reinsurance
recoveries is necessary. As adjustments to these estimates become
necessary, such adjustments are reflected in current operations.
25
<PAGE>
AMERINST INSURANCE GROUP, LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(expressed in U.S. dollars)
3. ACCOUNTING POLICIES (cont'd)
Investments
Investments held by AIG Ltd. consist of U.S. Treasury notes, obligations of
states and political subdivisions and debt securities, mortgage-backed
securities, and equity securities. AIG Ltd. classifies these investments as
available-for-sale. Accordingly, AIG Ltd. reports these securities at their
estimated fair values with unrealized holding gains and losses being
reported as other comprehensive income, net of tax. Fair value of
investments is based on market quotation. Realized gains and losses on
sales of investments are accounted for using the specific identification
method and are reflected in the income statement in the period of sale.
Investments in U.S. Treasury notes with a carrying value of $Nil and
$1,525,000 at December 31, 1999 and 1998 are held in trust for the State of
Illinois in accordance with the Illinois Insurance Code. Also, as more
fully described in Note 5, certain other investments held are used to
collateralize obligations to previous and current ceding companies.
Cash and cash equivalents
For purposes of the statement of cash flows, AIG Ltd. considers all highly
liquid debt instruments purchased with an original maturity of three months
or less to be cash equivalents.
Net income per common share
Basic earnings per shares is determined as net income available to common
shareholders divided by the weighthted average number of common shares
outstanding for the period. There are no dilutive securities.
4. CASH AND CASH EQUIVALENTS
The analysis of cash and cash equivalents at December 31, 1999 and 1998 is as
follows:
1999 1998
Harris Trust and Savings Bank $1,221,875 $ 976,976
Bank of Butterfield - 13,299
Money Market Funds:
Harris Insight Funds - Class A 544,166 395,207
Lehman Brothers Prime Money Market Fund 467,394 65,313
Other cash equivalents (investments with maturities
of less than three months) 2,894,120 -
------------ ----------
Total cash and cash equivalents $5,127,555 $1,450,795
------------ ----------
26
<PAGE>
AMERINST INSURANCE GROUP, LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(expressed in U.S. dollars)
CASH AND CASH EQUIVALENTS (cont'd)
The Federal Deposit Insurance Corporation (FDIC) insures amounts on deposit
with Harris Trust Savings Bank up to $100,000. The FDIC does not insure
amounts on deposit with the Bank of Butterfield, a Bermuda institution, or
investments in money market funds.
5. PLEDGED ASSETS
Pursuant to the reinsurance agreements described in Note 1, AIC Ltd. is
required to provide the ceding companies with collateral for AIC Ltd.'s
liabilities to them. At December 31, 1999 $108,000 was held in deposit
pursuant to the 1988 reinsurance agreement with CGI. At December 31, 1998,
investments with a carrying value of $505,000, were held in a trust account
pursuant to the 1988 reinsurance agreement with CGI. Also at December 31,
1999 and 1998, the carrying value of investments held in a trust account
pursuant to reinsurance agreements with VSC in effect from 1989 to mid-1993
was $3,439,396 and $7,148,516, respectively. At December 31, 1999 and 1998,
AIIC had provided CNA with a letter of credit issued by Harris Trust and
Savings bank in the amount of $15,000,000 and $4,500,000 respectively. At
December 31, 1999 and 1998, investments with a carrying value of
$16,719,748 and $7,493,550, respectively, were held in a trust account at
Harris Trust and Savings bank as security for the letter of credit.
6. INVESTMENTS
The cost or amortized cost, gross unrealized holding gains and losses, and
estimated fair value for investments in fixed maturity investments by major
security type, and equity securities at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
December 31, 1999
Fixed maturity investments:
U.S. Treasury notes $ 1,516,703 $ 1,889 $ (15,780) $ 1,502,812
Obligations of states and
political subdivisions 6,222,822 506 (261,535) 5,961,793
Corporate debt securities 978,817 - (7,037) 971,780
Mortgage-backed securities and
obligations of U.S. government
corporations and agencies 22,827,582 54,238 (421,601) 22,460,219
----------- ---------- ---------- -----------
Total fixed maturity investments 31,545,924 56,633 (705,953) 30,896,604
Equity securities 7,581,274 1,569,908 (766,529) 8,384,653
----------- ---------- ---------- -----------
Total investments $39,127,198 $1,626,541 $(1,472,482) $39,281,257
=========== =========== ============ ===========
</TABLE>
27
<PAGE>
AMERINST INSURANCE GROUP, LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(expressed in U.S. dollars)
6. INVESTMENTS (cont'd)
<TABLE>
<CAPTION>
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1998
Fixed maturity investments:
U.S. Treasury notes $ 1,488,553 $ 36,447 $ - $ 1,525,000
Obligations of states and
political subdivisions 14,898,513 508,761 (688) 15,406,586
Mortgage-backed securities and
obligations of U.S. government
corporations and agencies 17,293,482 352,193 - 17,645,675
----------- ---------- ----------- -----------
Total fixed maturity investments 33,680,548 897,401 (688) 34,577,261
Equity securities 7,115,089 1,310,453 (454,145) 7,971,397
----------- ---------- ----------- -----------
Total investments $40,795,637 $2,207,854 $(454,833) $42,548,658
=========== ========== =========== ===========
</TABLE>
The cost or amortized cost and estimated market value of fixed maturity
investments at December 31, 1999, 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.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
------------- ------------
<S> <C> <C>
Due in one year or less $ 498,111 $ 500,000
Due after one year through five years 4,155,137 4,030,303
Due after five years through ten years 3,940,104 3,786,193
Due after ten years 124,990 119,889
------------- ------------
Subtotal 8,718,342 8,436,385
Mortgage-backed securities and obligations of
U.S. government corporations and agencies 22,827,582 22,460,219
------------- ------------
Total $31,545,924 $30,896,604
------------- ------------
</TABLE>
28
<PAGE>
AMERINST INSURANCE GROUP, LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(expressed in U.S. dollars)
6. INVESTMENTS (cont'd)
Information on sales and maturities of investments in fixed maturity
securities are as follows:
1999 1998 1997
------------ ----------- -----------
Total proceeds $19,845,508 $11,854,918 $11,010,362
Gross gains 877,804 120,808 18,504
Gross losses 344,950 - 15,479
Major categories of net interest and dividend income, net realized gains
(losses) on sales of investments and net change in unrealized gains
(losses) are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ----------- -----------
<S> <C> <C> <C>
Interest earned:
Fixed maturity investments $ 2,110,788 $1,999,638 $2,135,448
Short term investments and cash and cash
Equivalents 65,030 83,362 148,884
Other interest income - 121,853 23,233
Dividends earned 108,178 98,971 57,724
Net realized gains (losses) on sales of investments:
Fixed maturity investments 41,995 120,808 3,025
Equity securities 490,859 156,819 302,693
Short-term investments - - (466)
Investment expenses (120,718) (137,456) (98,002)
------------- ----------- -----------
Net investment income $ 2,696,132 $2,443,995 $2,572,539
============= =========== ===========
Net change in unrealized gains (losses):
Fixed maturity investments $(1,546,033) $ 251,957 $ 270,305
Equity securities (52,929) (39,780) 627,172
------------- ----------- -----------
Net change in unrealized gains (losses) $(1,598,962) $ 212,177 $ 897,477
============= =========== ===========
</TABLE>
29
<PAGE>
AMERINST INSURANCE GROUP, LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(expressed in U.S. dollars)
7. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Details of the liability for unpaid loses and loss adjustment expenses and
related reinsurance recoveries receivable at December 31, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
1999 1998
Gross Reinsurance Net Gross Reinsurance Net
Liability Receivable Liability Liability Receivable Liabilities
----------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Case base
estimates $ 4,320,754 $(151,000) $ 4,169,754 $ 5,093,630 $(169,000) $ 4,924,630
IBNR 20,716,275 (523,223) 20,193,052 16,624,457 (706,685) 15,917,772
----------- ------------ ----------- ----------- ------------ -----------
Totals $25,037,029 $(674,223) $24,362,806 $21,718,087 $(875,685) $20,842,402
=========== ============ =========== =========== ============ ===========
</TABLE>
Unpaid losses and loss adjustment expense activity is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Liability as of January 1, (net of reinsurance
balances recoverable) $20,842,402 $19,763,000 $18,280,000
------------- ------------ ------------
Incurred related to:
Current year 9,277,893 9,680,657 6,159,833
Prior years (2,533,000) (4,883,000) (1,411,000)
------------- ------------ ------------
Total incurred 6,744,893 4,797,657 4,748,833
------------- ------------ ------------
Paid related to:
Current year (147,476) (151,255) (229,833)
Prior years (3,077,013) (3,567,000) (3,036,000)
------------- ------------ ------------
Total paid (3,224,489) (3,718,255) (3,265,833)
------------- ------------ ------------
Liability as of December 31, (net of reinsurance
balances recoverable) $24,362,806 $20,842,402 $19,763,000
============= ============ ============
</TABLE>
As a result of changes in estimates of insured events in prior years, the
liability for losses and loss adjustment expenses relating to those years
was increased as of December 31, 1999 due to higher than anticipated losses
and reduced as of December 31, 1998 and 1997 because of lower than
anticipated losses on policies in those years.
30
<PAGE>
AMERINST INSURANCE GROUP, LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(expressed in U.S. dollars)
8. NET PREMIUMS EARNED
A reconciliation of assumed to net premiums, on both a written and an
earned basis is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
Written Earned Written Earned Written Earned
---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assumed $5,847,122 $6,205,364 $6,377,225 $5,770,689 $5,797,076 $5,452,312
Retroceded 182,959 182,959 131,250 131,250 720,298 720,298
---------- ----------- ---------- ---------- ---------- ----------
Net premiums $6,030,081 $6,388,323 $6,508,475 $5,901,939 $6,517,374 $6,172,610
========== =========== ========== ========== ========== ==========
</TABLE>
Revisions to the estimates of ultimate premiums pursuant to the
retrocession agreements resulted in additional retroceded premiums recorded
of $182,959, $131,250 and $720,298 during 1999, 1998 and 1997,
respectively.
9. OPERATING AND MANAGEMENT EXPENSES
AIG Ltd., AIC Ltd., Mezco and Investco have no employees. Their operating
activities, as well as certain management functions, are performed by
contracted professional service providers. USA Offshore Management, Ltd.
provides AIG Ltd. and AIC Ltd. certain management, administrative and
operations services under the direction of the AIG Ltd.'s Board of
Directors pursuant to an agreement. The agreement may be terminated by
either party on December 31 of each year within a period not exceeding
ninety days and no less than 60 days prior written notice.
Operating and management expenses include compensation paid to members of
the board of directors and various committees of the board totaling
$132,067 in 1999, $114,200 in 1998 and $140,025 in 1997.
AIG implemented Statement of Position 98-5 (SOP 98-5) "Reporting on the
Cost of Start-Up Activities", in the first quarter of 1999. Previously, AIG
had capitalized these costs to be expensed over a period of 60 months. The
adoption of SOP 98-5 has been applied retroactively to the cost of start-up
activities that were previously capitalized in order to determine their
cumulative effect. Cumulative adjustment necessary for application of SOP
98-5, amount $234,000 ($0.70) is included in net income for the twelve
months ended December 31, 1999. Earnings per share before cumulative effect
of deferred charges was $(3.62).
31
<PAGE>
AMERINST INSURANCE GROUP, LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(expressed in U.S. dollars)
10. INCOME TAXES
As at December 2, 1999 AIIG and AIIC transferred all assets and liabilities
to AIG Ltd. and AIC Ltd . respectively (see Note 2). Following the
exchange, AIIG and AIC were liquidated.
Prior to the liquidation, United States deferred federal income taxes arose
from temporary differences between the valuation of assets and liabilities
as determined for financial reporting and tax purposes. Such temporary
differences relate principally to unrealized gains and losses on
investments, discounting of loss reserves, recognition of unearned premiums
and deferred policy acquisition costs. At the date of the liquidation,
remaining deferred United States federal income taxes assets of $596,028
were then written off to income. Significant permanent differences between
book and taxable income include nontaxable municipal bond income, the
dividends received deduction, and recovery of capital losses in excess of
gains relating to a prior year.
The components of the provision for income tax are as follows:
1999 1998 1997
------------ --------- ---------
Federal income tax
Current tax (benefit) $ 572,376 $(46,149) $340,875
Deferred tax (benefit) (1,248,693) 267,793 (600)
------------ --------- ---------
Total federal income tax 676,317 221,644 340,275
State income tax (benefit) - (18,914) -
------------ --------- ---------
Provision for income tax $ 676,317 $202,730 $340,275
============ ========== =========
A reconciliation of income tax at the federal statutory rate to the
Company's provision for income tax is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Income tax at federal statutory rate $(258,980) $ 429,848 $ 619,687
Effect of tax exempt investment income (123,005) (232,523) (164,154)
State income taxes - (18,914) -
Gain on portfolio transfer 817,418 - -
Net operating loss carryforward 259,401 - -
Other (18,517) 24,319 (115,258)
----------- ---------- ----------
Totals $ 676,317 $ 202,730 $ 340,275
=========== ========== ==========
</TABLE>
32
<PAGE>
AMERINST INSURANCE GROUP, LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(expressed in U.S. dollars)
10. INCOME TAXES (cont'd)
The composition of the net deferred tax asset was as follows at December
31, 1998:
1999 1998
Loss reserve discount $ - $1,334,649
Unearned premiums - 232,264
Deferred policy acquisition costs - (330,977)
Unrealized gain on investments - (596,027)
Capital loss carryforward - 12,757
----- ----------
$ - 652,666
===== ==========
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income". This statement requires
disclosure of the amount of income tax expenses or benefits allocated to
each component of "other comprehensive income". The following table
summarizes the changes in "accumulated other comprehensive income" and the
related tax benefit of the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
December 31, 1999 Before Tax Net
tax effect of tax
--- ------ ------
<S> <C> <C> <C>
Net unrealized holding (loss) gains
arising during the period $(1,066,108) $ - $(1,066,108)
Less: reclassification adjustment for gains and
loss included in net (loss) gains (634,614) (101,760) (532,854)
------------ ------------ --------------
$(1,269,702) $(101,760) $(1,598,962)
============ ============ ==============
December 31, 1998
Net unrealized holding (loss) gains
arising during the period $ 385,833 $ 62,562 $ 323,271
Less: reclassification adjustment for gains and
loss included in net (loss) gains (218,226) (34,992) (183,234)
------------ ------------ --------------
$ 167,607 $ 27,570 $ 140,037
============ ============ ==============
</TABLE>
33
<PAGE>
AMERINST INSURANCE GROUP, LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(expressed in U.S. dollars)
10. INCOME TAXES (cont'd)
Under current Bermuda law, the Company is not required to pay taxes in
Bermuda on either income or capital gains. The Company has received an
undertaking from the Bermuda government that, in the event of income or
capital gains taxes being imposed, the Company will be exempted from such
taxes until the year 2016.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS 133 is effective beginning in the
first quarter of fiscal 2001 and is not expected to have a material impact
on the Company's financial position or results of operations.
12. DIVIDEND RESTRICTIONS AND STATUTORY REQUIREMENTS
Under Companies' Bermuda law, AIG Ltd. is prohibited from declaring or
paying a dividend at December 31, 1999 if such payment would reduce the
realizable value of its assets to an amount less than the aggregate value
of its liabilities ($28,693,342), issued share capital ($331,771) and share
premium (additional paid-in capital in the amount of $11,322,139) accounts.
As at December 31, 1999, $6,955,909 was available to stockholders.
AIG Ltd.'s ability to pay common shareholders' dividends and its operating
expenses is dependent on cash dividends from AIC Ltd. including its
subsidiary, Investco (collectively the "reinsurance subsidiaries"). The
payment of such dividends by the reinsurance subsidiaries to AIG Ltd is
limited under Bermuda law by the Bermuda Insurance Act 1978 and related
regulations as amended which require that AIC Ltd. maintain minimum levels
of solvency and liquidity. For the years ended December 31, 1999 these
requirements have been met. The minimum required statutory capital and
surplus was $2,436,281 and actual statutory capital and surplus was
$17,449,018 at December 31, 1999. The minimum required level of liquid
assets was $20,545,481 and actual liquid assets were $44,812,394 at
December 31, 1999.
34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
ON FINANCIAL STATEMENT SCHEDULES
--------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of AmerInst Insurance Group, Ltd
We have audited the consolidated financial statements of AmerInst Insurance
Group, Ltd. and subsidiaries as of December 31, 1999 and for the year then ended
and have issued our report thereon dated March 8, 2000; such financial
statements and report are included on page 17 of this Form 10-K. Our audits also
included the financial statement schedules of AmerInst Insurance Group, Ltd.
listed in the Index on page 15. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit. In our opinion, such financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche
DELOITTE & TOUCHE
Hamilton, Bermuda
March 8, 2000
35
<PAGE>
AMERINST INSURANCE GROUP, INC. (PARENT)
REINSURANCE--SCHEDULE IV
<TABLE>
<CAPTION>
Year Ended Column A Column B Column C Column D Column E Column F
- ---------- -------- -------- -------- -------- -------- -------
% Assumed
Gross Ceded to Assumed Net To Net
Line of Premium Other Premiums Premiums Premiums
Business Written Companies Written Written Written
-------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
12/31/99 Professional
Liability - 182,959 5,847,122 6,030,081 96.9%
12/31/98 Professional
Liability - 131,250 6,377,225 6,508,475 97.9%
12/31/97 Professional
Liability - 720,298 5,797,076 6,517,374 88.9%
12/31/96 Professional
Liability - 693,976 4,740,977 5,434,953 87.2%
</TABLE>
Note: For description on the insurance program and further detail on ceded
premium adjustments and assumed premiums written and earned--see Note 8 of the
audited financial statements.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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: March 30, 2000 AMERINST INSURANCE GROUP, LTD.
__________________
By: /s/ Bruce Fenton
--------------------------------
Bruce Fenton, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and as of the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Bruce Fenton President and Director March 30, 2000
- ---------------------- (Principal Executive Officer)
Bruce Fenton
/s/ Janice Witkowski Vice-President, Treasurer March 30, 2000
- ---------------------- and Director
Janice Witkowski (Principal Financial and
Accounting Officer)
/s/ Ronald S. Katch Director and Chairman March 30, 2000
- ---------------------- of the Board
Ronald S. Katch
/s/ Bruce W. Breitweiser Director and Vice-Chairman March 30, 2000
- ------------------------- of the Board
Bruce W. Breitweiser
/s/ Jerome A. Harris Secretary and Director March 30, 2000
- ------------------------
Jerome A. Harris
/s/ David N. Thompson Asst. Secretary and Director March 30, 2000
________________________
David N. Thompson
/s/ Irvin F. Diamond Director March 30, 2000
________________________
Irvin F. Diamond
/s/ Jeffry I. Gillman Director March 30, 2000
________________________
Jeffry I. Gillman
/s/ Jerrell A. Atkinson Director March 30, 2000
________________________
Jerrell A. Atkinson
37
<PAGE>
INDEX TO EXHIBITS
YEAR ENDED DECEMBER 31, 1999
Exhibit
Number Description
- ------ -----------
3(i) Memorandum of Association of the Company (1)
3(ii) Bye-laws of the Company (1)
4.1 Section 47 of the Company's Bye-laws -- included in Exhibit
3(ii) above
4.2 Statement of Share Ownership Policy, as Amended (9)
10.1 Reinsurance Treaty between AIIC and Virginia Surety Company, Inc. (2)
10.2 Agreement between Country Club Bank and AIIC (2)
10.3 Agreement between Country Club Bank and AIIG (2)
10.4 Reinsurance Treaty between AIIC and CNA Insurance Companies (3), 1994
placement slip (4) 1995 placement slip (5) 1996 placement slip (6)
1997 placement slip (8) 1998 placement slip (10) and Endorsement No. 1
to the Treaty effective July 1, 1999 (filed herewith)
10.5 Revised Management Agreement between Vermont Insurance Management,
Inc. and AIIC dated May 1, 1997 (7) Addenda to Management Agreement
dated July 1, 1997 (8) and Addenda to Management Agreement dated July
1, 1998 (10)
10.6 Escrow Agreement among AIIC, United States Fire Insurance Company
and Harris Trust and Savings Bank dated March 7, 1995 (5)
10.7 Security Trust Agreement among AIIC, Harris Trust and Savings Bank
and Virginia Surety Company, Inc. dated March 9, 1995 (5)
10.8 Investment Advisory Agreement For Discretionary Accounts between
Amerinst Insurance Company and Harris Associates L.P. dated as of
January 22, 1996, as amended by the Amendment to Investment Advisory
Agreement for Discretionary Accounts dated as of April 2, 1996 (10)
10.9 Exchange Agreement between the Company and AIG Ltd., dated as of
January 20, 1999 (1)
10.10 Reinsurance Treaty between AIC Ltd. and CNA Insurance Companies,
effective December 1, 1999 (filed herewith)
10.11 Value Plan Reinsurance Treaty between AIC Ltd. and CNA Insurance
Companies, effective December 1, 1999 (filed herewith)
16 Letter regarding change in Certifying Accountant (1)
21 Subsidiaries of the Registrant (1)
23 Consent of Independent Accountants (filed herewith)
27 Financial Data Schedules (filed herewith)
- ----------------------------
(1) Filed with the Company's Registration Statement on Form S-4, Registration
No. 333-64929 and incorporated herein by reference.
(2) Filed with AIIG's Annual Report on Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference.
(3) Filed with AIIG's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
(4) Filed with AIIG's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference.
(5) Filed with AIIG's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 and incorporated herein by reference.
(6) Filed with AIIG's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference.
(7) Filed with AIIG's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference.
38
<PAGE>
AMERINST INSURANCE GROUP, INC.
INDEX TO EXHIBITS--Continued
(8) Filed with AIIG's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 and incorporated herein by reference.
(9) Filed with AIIG's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
(10) Filed with AIIG's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 and incorporated herein by reference.
39
<PAGE>
Exhibit 10.4
ENDORSEMENT NO. 1
to the
ACCOUNTANTS PROFESSIONAL LIABILITY
QUOTA SHARE TREATY
(hereinafter referred to as the "Agreement")
Effective: July 1, 1999
issued to
Continental Casualty Company
Chicago, Illinois
(hereinafter referred to as the "Company")
by
AmerInst Insurance Company
Chicago, Illinois
(hereinafter referred to as the "Reinsurer")
It is hereby mutually agreed and understood that effective 12:01 a.m., Local
Standard Time, December 1, 1999 at the location of the original insured, Article
3 - Term and Cancellation is deleted in its entirety and shall read as follows:
ARTICLE 3 - TERM AND CANCELLATION
This Agreement will apply to losses for claims first made and/or losses
discovered after 12:01A.M. Local Standard Time, July 1, 1999, at the location
of the original insured, as respects new and renewal policies becoming
effective on and after said date and this Agreement will terminate at 12:01
A.M. on December 1, 1999, Local Standard Time, at the location of the
original insured.
Policies in force as of 12:01 A.M. December 1, 1999, shall run-off to natural
expiry until policy expiration, termination or next anniversary date,
whichever comes first, including where applicable any discovery period
coverage as per the original policies. A claim first made under any
discovery period coverage shall be deemed to have been made on the day the
original policy expired or was cancelled and the premium, for such discovery
period coverage, shall be considered fully earned on the last day the
original policy was in force.
The Company may exercise the option to cut-off the Reinsurer's liability as
of 12:01 A.M. Local Standard Time, December 1, 1999, but no later than the
first anniversary of termination, by giving the Reinsurer thirty (30) days
prior written notice of its intent to do so. The Reinsurer will return to
the Company the unearned reinsurance premium
Page 1 of 2
<PAGE>
applicable to the unexpired liability as calculated on a monthly pro rata
basis less the rate of commission allowed in accordance with the Article 13 -
Ceding Commission.
If the Company requests the return of the unearned reinsurance premium
reserve the Reinsurer will continue to be liable for its pro rata share of
the aggregate losses after such cut off date, being pro rata as to the time
such original policies are in force under this Agreement.
All other terms and conditions of this Agreement remain unchanged.
IN WITNESS WHEREOF, the parties acknowledge that no intermediary is involved in
or brought about this transaction, and the parties hereto, by their authorized
representatives, have executed this Endorsement:
on this 17th day of March 2000
CONTINENTAL CASUALTY COMPANY
By: /s/ Raymond Cylochi
-----------------------------
Attested by: /s/ Robin F. Giberth
--------------------
on this 21st day of March 2000
AMERINST INSURANCE COMPANY
By: /s/ Bruce Fenton
-----------------------------
Attested by: /s/ Jillian Cunnon
--------------------
Page 2 of 2
<PAGE>
Exhibit 10.10
ACCOUNTANTS PROFESSIONAL LIABILITY
QUOTA SHARE TREATY
(hereinafter referred to as the "Agreement")
Effective: December 1, 1999
issued to
Continental Casualty Company
Chicago, Illinois
(hereinafter referred to as the "Company")
by
AmerInst Insurance Company Limited
Hamilton, Bermuda
(hereinafter referred to as the "Reinsurer")
ARTICLE 1 - DEFINITION OF COMPANY
- ---------------------------------
As respects the use of "Company" within this Agreement, it is understood and
agreed that Company shall mean the insurance companies owned directly or
indirectly by CNA Financial Corporation which are affiliated with, controlled by
or under common management of CNA, with the exception of the life insurance
companies, CNA Re Management Company Limited, RVI Guarantee Company Limited, and
CNA Surety Corporation and their respective subsidiaries.
It is further agreed that notice will be given to the Reinsurer within 45
(forty-five) days of the acquisition of a company having in-force business that
the Company wishes to have covered by this Agreement. In the event that either
party hereto maintains that the inclusion hereunder of some portion of the in-
force business of any such new acquisition calls for alteration in the existing
terms of this Agreement, and the parties are unable to negotiate terms that are
mutually acceptable, then that portion of the newly acquired in-force business
not considered mutually acceptable shall be covered for an additional period of
forty-five (45) days from the date the dissenting party gives to the other
written notice that said portion of the newly acquired in-force business is
unacceptable.
ARTICLE 2 - BUSINESS COVERED
- ----------------------------
The Company agrees to cede and the Reinsurer agrees to accept a 10% quota share
of the Company's net retained liability on policies classified by the Company as
Accountants Professional Liability for members of the American Institute of
Certified Public Accountants,
<PAGE>
written or renewed with an effective date on or after the inception of this
Agreement, subject to the following terms, conditions and exclusions. Value Plan
policies are excluded hereunder.
ARTICLE 3 - TERM AND CANCELLATION
- ---------------------------------
This Agreement will apply to losses for claims first made and/or losses
discovered after 12:01A.M. Local Standard Time, December 1, 1999, at the
location of the original insured, as respects new and renewal policies becoming
effective on and after said date and this Agreement will terminate at 12:01 A.M.
on January 1, 2002, Local Standard Time, at the location of the original
insured.
Policies in force as of 12:01 A.M. January 1, 2002, shall run-off to natural
expiry until policy expiration, termination or next anniversary date, whichever
comes first, including where applicable any discovery period coverage as per the
original policies. A claim first made under any discovery period coverage shall
be deemed to have been made on the day the original policy expired or was
cancelled and the premium, for such discovery period coverage, shall be
considered fully earned on the last day the original policy was in force.
The Company may exercise the option to cut-off the Reinsurer's liability as of
12:01 A.M. Local Standard Time, January 1 2002, or the termination date chosen
by the Reinsurer, but no later than the first anniversary of termination, by
giving the Reinsurer thirty (30) days prior written notice of its intent to do
so. The Reinsurer will return to the Company the unearned reinsurance premium
applicable to the unexpired liability as calculated on a monthly pro rata basis
less the rate of commission allowed in accordance with the Article 13 - Ceding
Commission.
If the Company requests the return of the unearned reinsurance premium reserve
the Reinsurer will continue to be liable for its pro rata share of the aggregate
losses after such cut off date, being pro rata as to the time such original
policies are in force under this Agreement.
ARTICLE 4 - QUOTA SHARE PARTICIPATION
- -------------------------------------
The Company shall cede and the Reinsurer shall accept 10% of the Company's net
retained liability from each policy covered hereunder for each loss or annual
aggregate where applicable. However, the Reinsurers' share of the Company's net
liability shall not be more than 10% of $1,000,000 each covered policy for each
claim or annual aggregate where applicable.
In the event that a loss covered hereunder involves more than one of the
Company's policies, this Agreement shall provide coverage for each and every
policy in such loss.
In addition, as respects each loss, the Reinsurer agrees to pay a 10% quota
share of up to $1,000,000 of any Excess of Original Policy Limit (as provided
for in Article 10); and, in addition as respects each loss, the Reinsurer agrees
to pay a 10% quota share of up to $1,000,000 of any Extra Contractual Obligation
(as provided for in Article 11).
<PAGE>
ARTICLE 5 - TERRITORY
- ---------------------
The territorial limits of this Treaty shall be identical with those of the
Company's policies.
ARTICLE 6 - ORIGINAL CONDITIONS
- -------------------------------
All amounts ceded hereunder shall be subject to the same gross rating and to the
same clauses, conditions and modifications of the Company's policies, subject to
the limits, terms, exclusions and conditions of this Agreement.
Except as specifically and expressly provided for in Article 22 Insolvency, the
provisions of this Agreement are intended solely for the benefit of the parties
to and executing this Agreement, and nothing in this Agreement shall in any
manner create or be construed to create, any obligations to or establish any
rights against any party to this Agreement in favor of any third parties or
other persons not parties to and executing this Agreement.
ARTICLE 7 - EXCLUSIONS
- ----------------------
This Agreement shall not apply to and specifically excludes:
A. all assumed reinsurance; except as respects inter-company reinsurance.
B. policies written on other than a claims made form;
C. loss or liability accruing to the Company directly or indirectly from any
insurance written by or through any pool or association including pools or
associations in which membership by the Company is required by any statutes
or regulations;
D. loss or liability excluded under the Nuclear Incident Exclusion Clauses -
Liability - Reinsurance (U.S.A. and Canada) attached to this Agreement;
E. all liability of the Company arising by contract, operation of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty
fund, insolvency fund, plan, pool, association, fund or other arrangement,
however denominated, established or governed, which provides for any
assessment of or payment or assumption by the Company of part or all of any
claim, debt, charge, fee or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority to be
insolvent, or which is otherwise deemed unable to meet any claim, debt,
charge, fee or other obligation in whole or in part.
F. Value Plan policies.
<PAGE>
ARTICLE 8 - DEFINITIONS
- -----------------------
Unless more specifically defined in the Company's policies, in which case this
Agreement will follow the definition therein, the term "loss" as used in this
Agreement shall mean one or more accidents, casualties or losses arising out of
or following one event.
The term "net retained liability" means the remaining portion of the Company's
gross liability on each policy reinsured under this Agreement after deduction of
all Facultative Reinsurance which inures to the Company's sole benefit.
The term "policies" as used herein means the Company's binders, policies and
contracts providing insurance on the business covered under this Agreement. A
policy written on an installment premium shall be considered renewed as of the
end of each annual period commencing with the inception date of the policy.
ARTICLE 9 - LOSSES, EXPENSES, SUBROGATION AND SALVAGE
- -----------------------------------------------------
Losses shall be reported by the Company in summary form as hereinafter provided.
The Company will have the right to settle all claims under its policies. All
loss settlements made by the Company, whether under strict policy conditions or
by way of compromise, shall be binding upon the Reinsurer. The Reinsurer agrees
to pay or allow, as the case may be, as stated in Article 4, its proportionate
share of the amount of any settlement, award, or judgment paid by the Company or
for which the Company has become liable to pay (including interest accrued prior
to final judgment if included as part of loss on reinsured policies) after
deduction of all recoveries, salvages, subrogations and reinsurance, whether
recovered or not.
In addition, the Reinsurer shall also be liable for its' proportionate share of
loss expenses as respects losses covered under this Agreement, unless the policy
reinsured hereunder includes such loss expenses within the limit of liability.
In that instance, loss expense will be considered as part of the loss. Loss
expense as used in this Agreement will mean all expenses incurred by the Company
in the investigation, appraisal, adjustment, litigation and/or defense of claims
under policies reinsured hereunder, including court costs, interest accrued
prior to final judgment if included as expense on reinsured policies, and
interest accrued after final judgment, but excluding internal office expenses,
salaries, per diem, and other remuneration of regular Company employees.
However, in the event a verdict or judgment is reduced by an appeal or a
settlement, subsequent to the entry of the judgment, resulting in an ultimate
saving on such verdict or judgment, or a judgment is reversed outright, the
expense incurred in securing such final reduction or reversal will be prorated
between the Reinsurer and the Company in the proportion that each benefits from
such reduction or reversal, and the expenses incurred up to the time of the
original verdict or judgment will be (a) pro rated in proportion to each party's
interest in such verdict or judgment, or (b) when the terms and conditions of
the Company's original policies reinsured hereunder include expense as part of
the policy limit, be added to the Company's loss.
<PAGE>
Regardless of whether or not the policy reinsured hereunder includes loss
expenses within the limit of liability, in addition, the Reinsurer shall bear
its proportionate share of all legal expenses and other costs incurred in
connection with coverage questions and legal actions connected thereto arising
under policies covered by this Agreement. The Reinsurer's proportionate share
of these costs and expenses will be the same as the Reinsurer's proportionate
share of "loss" as defined herein.
ARTICLE 10 - EXCESS OF ORIGINAL POLICY LIMITS
- ---------------------------------------------
This Agreement shall protect the Company as provided in Article 4 - Quota Share
Participation in connection with loss in excess of the limit of the original
policy, such loss in excess of the limit having been incurred because of failure
by it to settle within the policy limit or by reason of alleged or actual
negligence, fraud or bad faith in rejecting an offer of settlement or in the
preparation of the defense or in the trial of any action against its insured or
reinsured or in the preparation or prosecution of an appeal consequent upon such
action.
However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
For the purpose of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original policy.
ARTICLE 11 - EXTRA CONTRACTUAL OBLIGATIONS
- ------------------------------------------
This Agreement shall protect the Company as provided in Article 4 - Quota Share
Participation where the loss includes any extra contractual obligations.
The term "Extra Contractual Obligations" is defined as those liabilities not
covered under any other provision of this Agreement and which arise from the
handling of any claim on business covered hereunder, such liabilities arising
because of, but not limited to, the following: failure by the Company to settle
within the policy limit, or by reason of alleged or actual negligence, fraud or
bad faith in rejecting an offer of settlement or in preparation of the defense
or in trial of any action against its insured or reinsured or in the preparation
or prosecution of an appeal consequent upon such action.
The date on which any Extra Contractual Obligation loss is incurred by the
Company shall be deemed, in all circumstances, to be the date of the original
occurrence, or the date the original claim is first made, whichever is
applicable.
However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any loss covered hereunder.
<PAGE>
ARTICLE 12 - PREMIUM
- --------------------
The Company shall pay to the Reinsurer 10% of the Company's Original Gross
Premium for up to $1,000,000 of policy limits ceded for each new or renewal
policy written during the period this Agreement is in effect, in respect to its
net retained liability on the business covered hereunder.
The term "Original Gross Premium" means the total of the gross premiums written,
plus deposits and additions, less cancellations and returns, by the Company on
business covered hereunder during the period for which calculations are being
made, less deductions for reinsurance premiums which inure to the benefit of the
Reinsurer. The Company will be permitted to purchase facultative reinsurance on
any risk it desires and to deduct the premium thereof.
ARTICLE 13 - CEDING COMMISSION
- ------------------------------
The Reinsurer agrees to allow the Company a commission allowance of 28.5% on the
Original Gross Premium ceded under this Agreement. On all return premiums the
Company shall return to the Reinsurer the commission allowance of 28.5%.
The commission allowance which the Reinsurer makes to the Company on the
business transacted under this Agreement includes provision for all taxes,
assessments and any other expenses whatsoever, except loss adjustment expenses.
ARTICLE 14 - REPORTS AND REMITTANCES
- ------------------------------------
A. Within 15 days after the end of each calendar quarter, the Company shall
report to the Reinsurer:
1. Ceded net written premium for the quarter, less return premium adjusted
for ceding commission received during the quarter;
2. Ceding commission thereon;
3. Ceded losses and loss adjustment expenses paid during this quarter.
The positive balance of (1) less (2) less (3) shall be remitted by the
Company 30 days after the end of the following calendar quarter. Any balance
shown to be due the Company shall be remitted by the Reinsurer within 30 days
after the end of the following calendar quarter after receipt and
verification of the Company's report.
B. Within 30 days after each calendar quarter, the Company shall report to the
Reinsurer the ceded unearned premiums and ceded outstanding loss reserves as
of the end of the calendar quarter.
<PAGE>
C. Annually the Company shall furnish the Reinsurer with such information as the
Reinsurer may require to complete its Annual Convention Statement.
ARTICLE 15 - OFFSET
- -------------------
The Company or the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Agreement. The
party asserting the right of offset may exercise such right any time whether the
balances due are on account of premiums or losses or otherwise.
ARTICLE 16 - CURRENCY
- ---------------------
Whenever the word "Dollars" or the "$" sign appears in this Agreement, they
shall be construed to mean United States Dollars and all transactions under this
Agreement shall be in United States Dollars.
ARTICLE 17 - ACCESS TO RECORDS
- ------------------------------
The Reinsurer, or their duly accredited representative, will have access to the
books and records of the Company on matters reasonably relating to this
reinsurance at all reasonable times for the purpose of obtaining information
concerning this Agreement or the subject matter hereof. Except as provided in
the following sentence, access to premium records is restricted to within four
years of the expiration of this Agreement. The Reinsurer will be permitted
access to premium records subsequent to the aforementioned period only on the
condition that either a) there are no balances payable hereunder by the
Reinsurer that are overdue as provided in the Interest Penalty Article of this
Agreement or b) the Reinsurer has funded all balances due hereunder in an
interest bearing trust fund or with a Letter of Credit as hereinafter provided.
Should the Reinsurer choose option b) of the foregoing paragraph, the Reinsurer
agrees to provide the Company a Trust Agreement established at Morgan Guaranty
Trust Company of New York, New York, or at a mutually agreed successor Trustee,
or a clean, irrevocable, and evergreen Letter of Credit, issued by Morgan
Guaranty Trust Company of New York, New York, or by a mutually agreed bank, of
which the Company will be the beneficiary, which will secure in full all
balances due from the Reinsurer to the Company with respect to this Agreement.
Such Trust Agreement and/or Letter of Credit will be established under laws of
the state of New York and will meet all requirements of the state regulatory
authorities applicable to the Company. The Reinsurer is responsible for all
costs associated with providing such Trust Agreement and/or Letters of Credit as
required under this Article.
ARTICLE 18 - ERRORS AND OMISSIONS
- ---------------------------------
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability or duty which would attach to it hereunder if
such delay, omission, or error had not been made, provided such omission or
error is rectified as soon as possible after discovery.
<PAGE>
ARTICLE 19 - TAXES
- ------------------
In consideration of the terms under which this Contract is issued, the Company
will not claim a deduction in respect of the premium hereon when making tax
returns, other than income or profits tax returns, to any state or territory of
the United States of America or the District of Columbia.
ARTICLE 20 - FEDERAL EXCISE TAX
- -------------------------------
Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at
Lloyds, London and other Reinsurers exempt from Federal Excise Tax, who are
domiciled outside the United States of America.
The Reinsurer agrees to allow for the purpose of paying the Federal Excise Tax
the applicable percentage of the premium payable hereon (as imposed under
Section 4371 of the Internal Revenue Code) to the extent such premium is subject
to the Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurer will
deduct the same applicable percentage from the return premium payable hereon and
the Company, or its agent, is responsible for recovering the tax from the U.S.
government.
ARTICLE 21 - INTEREST PENALTY
- -----------------------------
The interest amounts provided for in this Article will apply to the Reinsurer or
to the Company in the following circumstances:
A. Loss payment owed by the Reinsurer to the Company shall have a due date to
the Company of 90 calendar days following the date of the billing and/or
proof of loss.
B. Payment of any premium shall be due to the Reinsurer within 90 calendar days
of the date specified in this Agreement. Any premium adjustments will be due
by the debtor party within 150 calendar days of the expiration of this
Agreement.
C. Payment on return of premiums, commissions, profit sharing or any amounts not
provided in paragraph A. or B. above, shall have the due date as specified in
this Agreement. If no due date is specified, the due date shall be 90 days
following the date of billing.
D. Failure by the Reinsurer or the Company to comply with their respective
payment obligations within the time periods as herein provided will result in
a compound interest penalty payable at a rate equal to the 90 day Treasury
Bill rate as published in the Money Rate Section or any successor section of
The Wall Street Journal on the first business day following the date a
-----------------------
remittance becomes due, plus 1% per annum, to be compounded and adjusted
quarterly. Any interest that occurs pursuant to this Article shall be
calculated by the party to which it is
<PAGE>
owed. The accumulation of the number of days that any payment is past due
will stop on the date that the Intermediary, where applicable, receives
payment.
E. The validity of any claim or payment may be contested under the provisions of
this Agreement. To the extent the debtor party prevails in whole or part in
an arbitration or any other proceeding, there shall be no interest penalty
due. Otherwise, any interest will be calculated and due as outlined above.
F. If a Reinsurer advances payment of any claim it is contesting, and prevails
in the contest, the Company shall return such payment plus pay interest on
same, calculated as per the provisions of this Article.
G. Any interest which occurs pursuant to this Article may be waived by the party
to which it is owed. Further, any interest which is calculated pursuant to
this Article that is $100 or less shall be waived. Waiver of such interest
shall not affect the waiving party's rights to similar interest for any other
failure by the other party to make payment when due under this Article.
H. Nothing in this Article shall diminish any legal remedies that either party
may have against the other.
ARTICLE 22 - AMENDMENTS
- -----------------------
This Agreement may be altered or amended in any of its terms and conditions by
mutual consent of the Company and the Reinsurer by an Endorsement hereto. Such
Endorsement will then constitute a part of this Agreement.
ARTICLE 23 - INSOLVENCY
- -----------------------
In the event of the insolvency of the Company, this reinsurance shall be payable
directly to the Company, or to its liquidator, receiver, conservator or
statutory successor on the basis of the liability of the Company without
diminution because of the insolvency of the Company or because the liquidator,
receiver, conservator or statutory successor of the Company has failed to pay
all or a portion of any claim. It is agreed however, that the liquidator,
receiver, conservator or statutory successor of the Company shall give written
notice to the Reinsurers of the pendency of a claim which would involve a
possible liability on the part of the Reinsurer within a reasonable time after
such claim is filed in the conservation or liquidation proceeding or in the
receivership, and that during the pendency of such claim, the Reinsurer may
investigate such claim and interpose, at their own expense, in the proceeding
where such claim is to be adjudicated any defense or defenses that they may deem
available to the Company or its liquidator, receiver, conservator or statutory
successor. The expenses this incurred by the Reinsurer shall be chargeable,
subject to the approval of the court, against the Company as part of the expense
of conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the Company as a result of the defense undertaken by the
Reinsurer.
<PAGE>
As to all reinsurance made, ceded, renewed or otherwise becoming effective under
this Agreement, the reinsurance shall be payable as set forth above by the
Reinsurer to the Company or to its liquidator, receiver, conservator or
statutory successor, except as provided by Sections 4118(a)(1)(A) and 1114(c) of
the New York Insurance Law or except (1) where the Agreement specifically
provides another payee in the event of the insolvency of the Company, or (2)
where the Reinsurer, with the consent of the direct insured or insureds, has
assumed such policy obligations of the Company as direct obligations of the
Reinsurer to the payees under such policies and in substitution for the
obligations of the Company to such payees. Then, and in that event only, the
Company, with the prior approval of the certificate of assumption on New York
risks by the Superintendent of Insurance of the State of New York, is entirely
released from its obligation and the Reinsurer pays any loss directly to payees
under such policy.
ARTICLE 24 - LETTERS OF CREDIT
- ------------------------------
As regards policies or bonds issued by the Company within the scope of this
Agreement, the Company agrees that when it shall file with the insurance
regulatory authority or set up on its books reserves for losses, unearned
premium reserves and loss development allowance (to be calculated using the
formula below) covered hereunder which it shall be required by law to set up, it
will forward to the Reinsurer a statement showing the proportion of such
reserves which is applicable to the Reinsurer. The Reinsurer hereby agrees that
it will apply for and secure delivery to the Company of a clean, irrevocable and
unconditional Letter of Credit, issued by a bank, and containing provisions
acceptable to the insurance regulatory authorities having jurisdiction over the
Company's reserves in an amount equal to the Reinsurer's proportion of reserves
in respect of losses, unearned premium reserves and loss development allowances
and allocated loss adjustment expense relating thereto, and losses and allocated
loss adjustment expense paid by the Company but not recovered from the Reinsurer
as shown in the statement prepared by the Company (hereinafter referred to as
"Reinsurer's Obligations").
The Letter of Credit shall be issued for a period of not less than one year, and
shall be automatically extended for one year from its date of expiration or any
future expiration date unless thirty (30) days prior to any expiration date the
issuing bank shall notify the Company by certified or registered mail that the
issuing bank elects not to consider the Letter of Credit extended for any
additional period.
The Reinsurer and the Company agree that the Letters of Credit provided by the
Reinsurer pursuant to the provisions of this Agreement may be drawn upon at any
time, notwithstanding any other provision of this Agreement, and be utilized by
the Company or any successor, by operation of law, of the Company including,
without limitation, any liquidator, rehabilitator, receiver or conservator of
the Company for the following purposes, unless otherwise provided for in a
separate Trust Agreement:
A. to reimburse the Company for the Reinsurer's Obligations, the payment of
which is due under the terms of this Agreement and which has not been
otherwise paid;
<PAGE>
B. to make refund of any sum which is in excess of the actual amount required to
pay the Reinsurer's Obligations under this Agreement;
C. to fund an account with the Company for the Reinsurer's Obligations. Such
cash deposit shall be held in an interest bearing account separate from the
Company's other assets, and interest thereon not in excess of the prime rate
shall accrue to the benefit of the Reinsurer.
In the event the amount drawn by the Company on any Letter of Credit is in
excess of the actual amount required for A) or C), the Company shall promptly
return to the Reinsurer the excess amount so drawn. All of the foregoing shall
be applied without diminution because of insolvency on the part of the Company
or the Reinsurer.
The issuing bank shall have no responsibility whatsoever in connection with the
propriety of withdrawals made by the Company or the disposition of funds
withdrawn, except to ensure that withdrawals are made only upon the order of
properly authorized representatives of the Company.
At annual intervals, or more frequently as agreed, but never more frequently
than quarterly, the Company shall prepare a specific statement of the
Reinsurer's Obligations, for the sole purpose of amending the Letter of Credit,
in the following manner:
A. if the statement shows that the Reinsurer's Obligations exceed the balance of
credit as of the statement date, the Reinsurer shall, within thirty (30) days
after receipt of notice of such excess, secure delivery to the Company of an
amendment to the Letter of Credit increasing the amount of credit by the
amount of such difference;
B. if however, the statement shows that the Reinsurer's Obligations are less
than the balance of credit as of the statement date, the Company shall within
thirty (30) days after receipt of written request from the Reinsurer, release
such excess credit by agreeing to secure an amendment to the Letter of Credit
reducing the amount of credit available by the amount of such excess credit.
ARTICLE 25 - SERVICE OF SUIT
- ----------------------------
This Article applies only to the Reinsurer signatory hereto who is domiciled
outside the United States of America or, should the Company be authorized to do
business in the State of New York, that Reinsurer who is unauthorized in New
York as respects suits instituted in New York. This Article is not intended to
conflict with nor override the parties obligation to arbitrate their disputes in
accordance with the Arbitration Article.
It is agreed that in the event of the failure of the Reinsurer hereon to pay any
amount claimed to be due hereunder, the Reinsurer hereon, at the request of the
Company, will submit to the jurisdiction of a Court of competent jurisdiction
within the United States. Nothing in this Article constitutes or should be
understood to constitute a waiver of the Reinsurer's rights to commence
<PAGE>
an action in any Court of competent jurisdiction in the United States, to remove
an action to a United States District Court, or to seek a transfer of a case to
another Court as permitted by the laws of the United States or of any State in
the United States.
It is further agreed that service of process in such suit may be made upon
Mendes & Mount, 750 Seventh Avenue, New York, New York 10019-6829, and that in
any suit instituted against one of them upon this Agreement, the Reinsurer will
abide by the final decision of such Court or of any Appellate Court in the event
of an appeal.
The above named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the Company
to give a written undertaking to the Company that they will enter a general
appearance upon the Reinsurer's behalf in the event such a suit is instituted.
Further, pursuant to any statute of any state, territory or district of the
United States which makes provision thereof, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the Statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on behalf
of the Company or any beneficiary hereunder arising out of this Agreement, and
hereby designate the above named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE 26 - ARBITRATION
- ------------------------
As a condition precedent to any right of action hereunder, any dispute arising
out of this Agreement, whether arising before or after termination, shall be
submitted to the decision of a board of arbitration composed of three
arbitrators meeting in Chicago, Illinois unless otherwise agreed.
The members of the board of arbitration shall be active or retired,
disinterested officials of insurance or reinsurance companies or Lloyd's of
London Underwriters, or underwriting members of any Exchange formed for the
purpose of writing insurance or reinsurance. Each party shall appoint its
arbitrator, and the two arbitrators shall choose a third arbitrator before
instituting the hearing. If the respondent fails to appoint its arbitrator
within four weeks after being requested to do so by the claimant, the claimant
shall also appoint the second arbitrator. If the two arbitrators fail to agree
upon the appointment of a third arbitrator within four weeks after their
nominations, each of them shall name three and the decision of the third umpire
shall be made by mutual agreement. If the two arbitrators are unable to agree
upon the third arbitrator within thirty (30) days of their appointment, the
third arbitrator shall be selected from a list of six individuals (three named
by each arbitrator) by a judge of the federal district court having jurisdiction
over the geographical area in which the arbitration is to take place, or if the
federal court declines to act, the state court having general jurisdiction in
such area.
<PAGE>
The claimant shall submit its initial brief within 20 days from the appointment
of the umpire. The respondent shall submit its brief within 20 days thereafter,
and the claimant may submit a reply brief within 10 days after filing of the
respondent's brief. The parties shall have discovery rights equivalent to those
available to litigants in Illinois. In setting a hearing date, the board shall
not commence the hearing within 21 days of the completion of discovery.
The board shall make its decision with due regard to the custom and usage of the
insurance and reinsurance business. The board shall issue its decision in
writing based upon a hearing in which evidence may be introduced without
following strict rules of law and evidence but in which cross-examination and
rebuttal shall be allowed. The board shall make its decision within 60 days
following the termination of the hearings unless the parties consent to an
extension. The majority decision of the board shall be final and binding upon
all parties to the proceeding. Judgment may be entered upon the award of the
board in any court having jurisdiction thereof.
Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the expense of the third arbitrator. The
remaining costs of the arbitration proceedings shall be allocated by the board.
The board is prohibited from awarding punitive, exemplary and/or treble damages
of whatever nature in connection with any arbitration proceeding concerning this
Agreement.
ARTICLE 27 - LAW TO GOVERN
- --------------------------
This Agreement, including all matters relating to formation, validity and
performances thereof, shall be interpreted in accordance with the law of the
State of Illinois, exclusive of its rules with respect to conflict of laws,
except as to rules with respect to credit for reinsurance where the laws of the
(a) the domicile of the individual ceding company shall apply, and (b) the laws
of the other states applying their laws with respect to credit for reinsurance
with a foreign reinsurer shall also apply.
<PAGE>
IN WITNESS WHEREOF, the parties acknowledge that no intermediary is involved in
or brought about this transaction, and the parties hereto, by their authorized
representatives, have executed this Agreement:
on this 17th day of March 2000
CONTINENTAL CASUALTY COMPANY
By: /s/ Raymond Cylochi
-------------------------------
Attested by: /s/ Robin F. Giberth
----------------------
and on this 21st day of March 2000
AMERINST INSURANCE COMPANY LIMITED
By: /s/ Bruce Fenton
-------------------------------
Attested by: /s/ Jillian Cunnon
----------------------
<PAGE>
Exhibit 10.11
VALUE PLAN POLICIES
ACCOUNTANTS PROFESSIONAL LIABILITY
QUOTA SHARE TREATY
(hereinafter referred to as the "Agreement")
Effective: December 1, 1999
issued to
Continental Casualty Company
Chicago, Illinois
(hereinafter referred to as the "Company")
by
AmerInst Insurance Company Limited
Hamilton, Bermuda
(hereinafter referred to as the "Reinsurer")
ARTICLE 1 - DEFINITION OF COMPANY
- ---------------------------------
As respects the use of "Company" within this Agreement, it is understood and
agreed that Company shall mean the insurance companies owned directly or
indirectly by CNA Financial Corporation which are affiliated with, controlled by
or under common management of CNA, with the exception of the life insurance
companies, CNA Re Management Company Limited, RVI Guarantee Company Limited, and
CNA Surety Corporation and their respective subsidiaries.
It is further agreed that notice will be given to the Reinsurer within 45
(forty-five) days of the acquisition of a company having in-force business that
the Company wishes to have covered by this Agreement. In the event that either
party hereto maintains that the inclusion hereunder of some portion of the in-
force business of any such new acquisition calls for alteration in the existing
terms of this Agreement, and the parties are unable to negotiate terms that are
mutually acceptable, then that portion of the newly acquired in-force business
not considered mutually acceptable shall be covered for an additional period of
forty-five (45) days from the date the dissenting party gives to the other
written notice that said portion of the newly acquired in-force business is
unacceptable.
ARTICLE 2 - BUSINESS COVERED
- ----------------------------
The Company agrees to cede and the Reinsurer agrees to accept a 10% quota share
of the Company's net retained liability on policies classified by the Company as
Value Plan
Value Plan Accountants Professional Liability
Amerinst - Bermuda at December 1, 1999
Page 1 of 15
<PAGE>
Accountants Professional Liability for members of the American Institute of
Certified Public Accountants, written or renewed with an effective date on or
after the inception of this Agreement, subject to the following terms,
conditions and exclusions.
ARTICLE 3 - TERM AND CANCELLATION
- ---------------------------------
This Agreement will apply to losses for claims first made and/or losses
discovered after 12:01 A.M. Local Standard Time, December 1, 1999, at the
location of the original insured, as respects new and renewal policies becoming
effective on and after said date and this Agreement will terminate at 12:01 A.M.
on January 1, 2002, Local Standard Time, at the location of the original
insured.
Policies in force as of 12:01 A.M. January 1, 2002, shall run-off to natural
expiry until policy expiration, termination or next anniversary date, whichever
comes first, including where applicable any discovery period coverage as per the
original policies. A claim first made under any discovery period coverage shall
be deemed to have been made on the day the original policy expired or was
cancelled and the premium, for such discovery period coverage, shall be
considered fully earned on the last day the original policy was in force.
The Company may exercise the option to cut-off the Reinsurer's liability as of
12:01 A.M. Local Standard Time, January 1 2002, or the termination date chosen
by the Reinsurer, but no later than the first anniversary of termination, by
giving the Reinsurer thirty (30) days prior written notice of its intent to do
so. The Reinsurer will return to the Company the unearned reinsurance premium
applicable to the unexpired liability as calculated on a monthly pro rata basis
less the rate of commission allowed in accordance with the Article 13 - Ceding
Commission.
If the Company requests the return of the unearned reinsurance premium reserve
the Reinsurer will continue to be liable for its pro rata share of the aggregate
losses after such cut off date, being pro rata as to the time such original
policies are in force under this Agreement.
ARTICLE 4 - QUOTA SHARE PARTICIPATION
- -------------------------------------
The Company shall cede and the Reinsurer shall accept 10% of the Company's net
retained liability from each policy covered hereunder for each loss or annual
aggregate where applicable. However, the Reinsurers' share of the Company's net
liability shall not be more than 10% of each covered policy for each claim or
annual aggregate where applicable.
In the event that a loss covered hereunder involves more than one of the
Company's policies, this Agreement shall provide coverage for each and every
policy in such loss.
Value Plan Accountants Professional Liability
Amerinst - Bermuda at December 1, 1999
Page 2 of 15
<PAGE>
In addition, as respects each loss, the Reinsurer agrees to pay a 10% quota
share of up to $1,000,000 of any Excess of Original Policy Limit (as provided
for in Article 10); and, in addition as respects each loss, the Reinsurer agrees
to pay a 10% quota share of up to $1,000,000 of any Extra Contractual Obligation
(as provided for in Article 11).
ARTICLE 5 - TERRITORY
- ---------------------
The territorial limits of this Treaty shall be identical with those of the
Company's policies.
ARTICLE 6 - ORIGINAL CONDITIONS
- -------------------------------
All amounts ceded hereunder shall be subject to the same gross rating and to the
same clauses, conditions and modifications of the Company's policies, subject to
the limits, terms, exclusions and conditions of this Agreement.
Except as specifically and expressly provided for in Article 22 Insolvency, the
provisions of this Agreement are intended solely for the benefit of the parties
to and executing this Agreement, and nothing in this Agreement shall in any
manner create or be construed to create, any obligations to or establish any
rights against any party to this Agreement in favor of any third parties or
other persons not parties to and executing this Agreement.
ARTICLE 7 - EXCLUSIONS
- ----------------------
This Agreement shall not apply to and specifically excludes:
A. all assumed reinsurance; except as respects inter-company reinsurance.
B. policies written on other than a claims made form;
C. loss or liability accruing to the Company directly or indirectly from any
insurance written by or through any pool or association including pools or
associations in which membership by the Company is required by any statutes
or regulations;
D. loss or liability excluded under the Nuclear Incident Exclusion Clauses -
Liability - Reinsurance (U.S.A. and Canada) attached to this Agreement;
E. all liability of the Company arising by contract, operation of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty
fund, insolvency fund, plan, pool, association, fund or other arrangement,
however denominated, established or governed, which provides for any
assessment of or payment or assumption by the Company of part or all of any
claim, debt, charge, fee or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority to be
insolvent, or which is
Value Plan Accountants Professional Liability
Amerinst - Bermuda at December 1, 1999
Page 3 of 15
<PAGE>
otherwise deemed unable to meet any claim, debt, charge, fee or other
obligation in whole or in part.
F. Any policy, other than Value Plan policies, classified by the Company as
Accountants Professional Liability for members of the American Institute of
Certified Public Accountants.
ARTICLE 8 - DEFINITIONS
- -----------------------
Unless more specifically defined in the Company's policies, in which case this
Agreement will follow the definition therein, the term "loss" as used in this
Agreement shall mean one or more accidents, casualties or losses arising out of
or following one event.
The term "net retained liability" means the remaining portion of the Company's
gross liability on each policy reinsured under this Agreement after deduction of
all Facultative Reinsurance which insures to the Company's sole benefit.
The term "policies" as used herein means the Company's binders, policies and
contracts providing insurance on the business covered under this Agreement. A
policy written on an installment premium shall be considered renewed as of the
end of each annual period commencing with the inception date of the policy.
ARTICLE 9 - LOSSES, EXPENSES, SUBROGATION AND SALVAGE
- -----------------------------------------------------
Losses shall be reported by the Company in summary form as hereinafter provided.
The Company will have the right to settle all claims under its policies. All
loss settlements made by the Company, whether under strict policy conditions or
by way of compromise, shall be binding upon the Reinsurer. The Reinsurer agrees
to pay or allow, as the case may be, as stated in Article 4, its proportionate
share of the amount of any settlement, award, or judgment paid by the Company or
for which the Company has become liable to pay (including interest accrued prior
to final judgment if included as part of loss on reinsured policies) after
deduction of all recoveries, salvages, subrogations and reinsurance, whether
recovered or not.
In addition, the Reinsurer shall also be liable for its' proportionate share of
loss expenses as respects losses covered under this Agreement, unless the policy
reinsured hereunder includes such loss expenses within the limit of liability.
In that instance, loss expense will be considered as part of the loss. Loss
expense as used in this Agreement will mean all expenses incurred by the Company
in the investigation, appraisal, adjustment, litigation and/or defense of claims
under policies reinsured hereunder, including court costs, interest accrued
prior to final judgment if included as expense on reinsured policies, and
interest accrued after final judgment, but excluding internal office expenses,
salaries, per diem, and other remuneration of regular Company employees.
However, in the event a verdict or
Value Plan Accountants Professional Liability
Amerinst - Bermuda at December 1, 1999
Page 4 of 15
<PAGE>
judgment is reduced by an appeal or a settlement, subsequent to the entry of the
judgment, resulting in an ultimate saving on such verdict or judgment, or a
judgment is reversed outright, the expense incurred in securing such final
reduction or reversal will be prorated between the Reinsurer and the Company in
the proportion that each benefits from such reduction or reversal, and the
expenses incurred up to the time of the original verdict or judgment will be (a)
pro rated in proportion to each party's interest in such verdict or judgment, or
(b) when the terms and conditions of the Company's original policies reinsured
hereunder include expense as part of the policy limit, be added to the Company's
loss.
Regardless of whether or not the policy reinsured hereunder includes loss
expenses within the limit of liability, in addition, the Reinsurer shall bear
its proportionate share of all legal expenses and other costs incurred in
connection with coverage questions and legal actions connected thereto arising
under policies covered by this Agreement. The Reinsurer's proportionate share of
these costs and expenses will be the same as the Reinsurer's proportionate share
of "loss" as defined herein.
ARTICLE 10 - EXCESS OF ORIGINAL POLICY LIMITS
- ---------------------------------------------
This Agreement shall protect the Company as provided in Article 4 - Quota Share
Participation in connection with loss in excess of the limit of the original
policy, such loss in excess of the limit having been incurred because of failure
by it to settle within the policy limit or by reason of alleged or actual
negligence, fraud or bad faith in rejecting an offer of settlement or in the
preparation of the defense or in the trial of any action against its insured or
reinsured or in the preparation or prosecution of an appeal consequent upon such
action. However, this Article shall not apply where the loss has been incurred
due to fraud by a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
For the purpose of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original policy.
ARTICLE 11 - EXTRA CONTRACTUAL OBLIGATIONS
- ------------------------------------------
This Agreement shall protect the Company as provided in Article 4 - Quota Share
Participation where the loss includes any extra contractual obligations.
The term "Extra Contractual Obligations" is defined as those liabilities not
covered under any other provision of this Agreement and which arise from the
handling of any claim on business covered hereunder, such liabilities arising
because of, but not limited to, the following: failure by the Company to settle
within the policy limit, or by reason of alleged or actual negligence, fraud or
bad faith in rejecting an offer of settlement or in preparation of
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<PAGE>
the defense or in trial of any action against its insured or reinsured or in the
preparation or prosecution of an appeal consequent upon such action.
The date on which any Extra Contractual Obligation loss is incurred by the
Company shall be deemed, in all circumstances, to be the date of the original
occurrence, or the date the original claim is first made, whichever is
applicable.
However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any loss covered hereunder.
ARTICLE 12 - PREMIUM
- --------------------
The Company shall pay to the Reinsurer 10% of the Company's Original Gross
Premium for policy limits ceded for each new or renewal policy written during
the period this Agreement is in effect, in respect to its net retained liability
on the business covered hereunder.
The term "Original Gross Premium" means the total of the gross premiums written,
plus deposits and additions, less cancellations and returns, by the Company on
business covered hereunder during the period for which calculations are being
made, less deductions for reinsurance premiums which inure to the benefit of the
Reinsurer. The Company will be permitted to purchase facultative reinsurance on
any risk it desires and to deduct the premium thereof.
ARTICLE 13 - CEDING COMMISSION
- ------------------------------
The Reinsurer agrees to allow the Company a commission allowance of 28.5% on the
Original Gross Premium ceded under this Agreement. On all return premiums the
Company shall return to the Reinsurer the commission allowance of 28.5%.
The commission allowance which the Reinsurer makes to the Company on the
business transacted under this Agreement includes provision for all taxes,
assessments and any other expenses whatsoever, except loss adjustment expenses.
ARTICLE 14 - REPORTS AND REMITTANCES
- ------------------------------------
A. Within 15 days after the end of each calendar quarter, the Company shall
report to the Reinsurer:
1. Ceded net written premium for the quarter, less return premium adjusted
for ceding commission received during the quarter;
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2. Ceding commission thereon;
3. Ceded losses and loss adjustment expenses paid during this quarter.
The positive balance of (1) less (2) less (3) shall be remitted by the
Company 30 days after the end of the following calendar quarter. Any balance
shown to be due the Company shall be remitted by the Reinsurer within 30 days
after the end of the following calendar quarter after receipt and
verification of the Company's report.
B. Within 30 days after each calendar quarter, the Company shall report to the
Reinsurer the ceded unearned premiums and ceded outstanding loss reserves as
of the end of the calendar quarter.
C. Annually the Company shall furnish the Reinsurer with such information as the
Reinsurer may require to complete its Annual Convention Statement.
ARTICLE 15 - OFFSET
- -------------------
The Company or the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Agreement. The
party asserting the right of offset may exercise such right any time whether the
balances due are on account of premiums or losses or otherwise.
ARTICLE 16 - CURRENCY
- ---------------------
Whenever the word "Dollars" or the "$" sign appears in this Agreement, they
shall be construed to mean United States Dollars and all transactions under this
Agreement shall be in United States Dollars.
ARTICLE 17 - ACCESS TO RECORDS
- ------------------------------
The Reinsurer, or their duly accredited representative, will have access to the
books and records of the Company on matters reasonably relating to this
reinsurance at all reasonable times for the purpose of obtaining information
concerning this Agreement or the subject matter hereof. Except as provided in
the following sentence, access to premium records is restricted to within four
years of the expiration of this Agreement. The Reinsurer will be permitted
access to premium records subsequent to the aforementioned period only on the
condition that either a) there are no balances payable hereunder by the
Reinsurer that are overdue as provided in the Interest Penalty Article of this
Agreement or b) the Reinsurer has funded all balances due hereunder in an
interest bearing trust fund or with a Letter of Credit as hereinafter provided.
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<PAGE>
Should the Reinsurer choose option b) of the foregoing paragraph, the Reinsurer
agrees to provide the Company a Trust Agreement established at Morgan Guaranty
Trust Company of New York, New York, or at a mutually agreed successor Trustee,
or a clean, irrevocable, and evergreen Letter of Credit, issued by Morgan
Guaranty Trust Company of New York, New York, or by a mutually agreed bank, of
which the Company will be the beneficiary, which will secure in full all
balances due from the Reinsurer to the Company with respect to this Agreement.
Such Trust Agreement and/or Letter of Credit will be established under laws of
the state of New York and will meet all requirements of the state regulatory
authorities applicable to the Company. The Reinsurer is responsible for all
costs associated with providing such Trust Agreement and/or Letters of Credit as
required under this Article.
ARTICLE 18 - ERRORS AND OMISSIONS
- ---------------------------------
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability or duty which would attach to it hereunder if
such delay, omission, or error had not been made, provided such omission or
error is rectified as soon as possible after discovery.
ARTICLE 19 - TAXES
- ------------------
In consideration of the terms under which this Contract is issued, the Company
will not claim a deduction in respect of the premium hereon when making tax
returns, other than income or profits tax returns, to any state or territory of
the United States of America or the District of Columbia.
ARTICLE 20 - FEDERAL EXCISE TAX
- -------------------------------
Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at
Lloyds, London and other Reinsurers exempt from Federal Excise Tax, who are
domiciled outside the United States of America.
The Reinsurer agrees to allow for the purpose of paying the Federal Excise Tax
the applicable percentage of the premium payable hereon (as imposed under
Section 4371 of the Internal Revenue Code) to the extent such premium is subject
to the Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurer will
deduct the same applicable percentage from the return premium payable hereon and
the Company, or its agent, is responsible for recovering the tax from the U.S.
government.
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<PAGE>
ARTICLE 21 - INTEREST PENALTY
- -----------------------------
The interest amounts provided for in this Article will apply to the Reinsurer or
to the Company in the following circumstances:
A. Loss payment owed by the Reinsurer to the Company shall have a due date to
the Company of 90 calendar days following the date of the billing and/or
proof of loss.
B. Payment of any premium shall be due to the Reinsurer within 90 calendar days
of the date specified in this Agreement. Any premium adjustments will be due
by the debtor party within 150 calendar days of the expiration of this
Agreement.
C. Payment on return of premiums, commissions, profit sharing or any amounts not
provided in paragraph A. or B. above, shall have the due date as specified in
this Agreement. If no due date is specified, the due date shall be 90 days
following the date of billing.
D. Failure by the Reinsurer or the Company to comply with their respective
payment obligations within the time periods as herein provided will result in
a compound interest penalty payable at a rate equal to the 90 day Treasury
Bill rate as published in the Money Rate Section or any successor section of
The Wall Street Journal on the first business day following the date a
-----------------------
remittance becomes due, plus 1% per annum, to be compounded and adjusted
quarterly. Any interest that occurs pursuant to this Article shall be
calculated by the party to which it is owed. The accumulation of the number
of days that any payment is past due will stop on the date that the
Intermediary, where applicable, receives payment.
E. The validity of any claim or payment may be contested under the provisions of
this Agreement. To the extent the debtor party prevails in whole or part in
an arbitration or any other proceeding, there shall be no interest penalty
due. Otherwise, any interest will be calculated and due as outlined above.
F. If a Reinsurer advances payment of any claim it is contesting, and prevails
in the contest, the Company shall return such payment plus pay interest on
same, calculated as per the provisions of this Article.
G. Any interest which occurs pursuant to this Article may be waived by the party
to which it is owed. Further, any interest which is calculated pursuant to
this Article that is $100 or less shall be waived. Waiver of such interest
shall not affect the waiving party's rights to similar interest for any other
failure by the other party to make payment when due under this Article.
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<PAGE>
H. Nothing in this Article shall diminish any legal remedies that either party
may have against the other.
ARTICLE 22 - AMENDMENTS
- -----------------------
This Agreement may be altered or amended in any of its terms and conditions by
mutual consent of the Company and the Reinsurer by an Endorsement hereto. Such
Endorsement will then constitute a part of this Agreement.
ARTICLE 23 - INSOLVENCY
- -----------------------
In the event of the insolvency of the Company, this reinsurance shall be payable
directly to the Company, or to its liquidator, receiver, conservator or
statutory successor on the basis of the liability of the Company without
diminution because of the insolvency of the Company or because the liquidator,
receiver, conservator or statutory successor of the Company has failed to pay
all or a portion of any claim. It is agreed however, that the liquidator,
receiver, conservator or statutory successor of the Company shall give written
notice to the Reinsurers of the pendency of a claim which would involve a
possible liability on the part of the Reinsurer within a reasonable time after
such claim is filed in the conservation or liquidation proceeding or in the
receivership, and that during the pendency of such claim, the Reinsurer may
investigate such claim and interpose, at their own expense, in the proceeding
where such claim is to be adjudicated any defense or defenses that they may deem
available to the Company or its liquidator, receiver, conservator or statutory
successor. The expenses this incurred by the Reinsurer shall be chargeable,
subject to the approval of the court, against the Company as part of the expense
of conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the Company as a result of the defense undertaken by the
Reinsurer.
As to all reinsurance made, ceded, renewed or otherwise becoming effective under
this Agreement, the reinsurance shall be payable as set forth above by the
Reinsurer to the Company or to its liquidator, receiver, conservator or
statutory successor, except as provided by Sections 4118(a)(1)(A) and 1114(c) of
the New York Insurance Law or except (1) where the Agreement specifically
provides another payee in the event of the insolvency of the Company, or (2)
where the Reinsurer, with the consent of the direct insured or insureds, has
assumed such policy obligations of the Company as direct obligations of the
Reinsurer to the payees under such policies and in substitution for the
obligations of the Company to such payees. Then, and in that event only, the
Company, with the prior approval of the certificate of assumption on New York
risks by the Superintendent of Insurance of the State of New York, is entirely
released from its obligation and the Reinsurer pays any loss directly to payees
under such policy.
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<PAGE>
ARTICLE 24 - LETTERS OF CREDIT
- ------------------------------
As regards policies or bonds issued by the Company within the scope of this
Agreement, the Company agrees that when it shall file with the insurance
regulatory authority or set up on its books reserves for losses, unearned
premium reserves and loss development allowance (to be calculated using the
formula below) covered hereunder which it shall be required by law to set up, it
will forward to the Reinsurer a statement showing the proportion of such
reserves which is applicable to the Reinsurer. The Reinsurer hereby agrees that
it will apply for and secure delivery to the Company of a clean, irrevocable and
unconditional Letter of Credit, issued by a bank, and containing provisions
acceptable to the insurance regulatory authorities having jurisdiction over the
Company's reserves in an amount equal to the Reinsurer's proportion of reserves
in respect of losses, unearned premium reserves and loss development allowances
and allocated loss adjustment expense relating thereto, and losses and allocated
loss adjustment expense paid by the Company but not recovered from the Reinsurer
as shown in the statement prepared by the Company (hereinafter referred to as
"Reinsurer's Obligations").
The Letter of Credit shall be issued for a period of not less than one year, and
shall be automatically extended for one year from its date of expiration or any
future expiration date unless thirty (30) days prior to any expiration date the
issuing bank shall notify the Company by certified or registered mail that the
issuing bank elects not to consider the Letter of Credit extended for any
additional period.
The Reinsurer and the Company agree that the Letters of Credit provided by the
Reinsurer pursuant to the provisions of this Agreement may be drawn upon at any
time, notwithstanding any other provision of this Agreement, and be utilized by
the Company or any successor, by operation of law, of the Company including,
without limitation, any liquidator, rehabilitator, receiver or conservator of
the Company for the following purposes, unless otherwise provided for in a
separate Trust Agreement:
A. to reimburse the Company for the Reinsurer's Obligations, the payment of
which is due under the terms of this Agreement and which has not been
otherwise paid;
B. to make refund of any sum which is in excess of the actual amount required to
pay the Reinsurer's Obligations under this Agreement;
C. to fund an account with the Company for the Reinsurer's Obligations. Such
cash deposit shall be held in an interest bearing account separate from the
Company's other assets, and interest thereon not in excess of the prime rate
shall accrue to the benefit of the Reinsurer.
In the event the amount drawn by the Company on any Letter of Credit is in
excess of the actual amount required for A) or C), the Company shall promptly
return to the Reinsurer the
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<PAGE>
excess amount so drawn. All of the foregoing shall be applied without diminution
because of insolvency on the part of the Company or the Reinsurer.
The issuing bank shall have no responsibility whatsoever in connection with the
propriety of withdrawals made by the Company or the disposition of funds
withdrawn, except to ensure that withdrawals are made only upon the order of
properly authorized representatives of the Company.
At annual intervals, or more frequently as agreed, but never more frequently
than quarterly, the Company shall prepare a specific statement of the
Reinsurer's Obligations, for the sole purpose of amending the Letter of Credit,
in the following manner:
A. if the statement shows that the Reinsurer's Obligations exceed the balance of
credit as of the statement date, the Reinsurer shall, within thirty (30) days
after receipt of notice of such excess, secure delivery to the Company of an
amendment to the Letter of Credit increasing the amount of credit by the
amount of such difference;
B. if however, the statement shows that the Reinsurer's Obligations are less
than the balance of credit as of the statement date, the Company shall within
thirty (30) days after receipt of written request from the Reinsurer, release
such excess credit by agreeing to secure an amendment to the Letter of Credit
reducing the amount of credit available by the amount of such excess credit.
ARTICLE 25 - SERVICE OF SUIT
- ----------------------------
This Article applies only to the Reinsurer signatory hereto who is domiciled
outside the United States of America or, should the Company be authorized to do
business in the State of New York, that Reinsurer who is unauthorized in New
York as respects suits instituted in New York. This Article is not intended to
conflict with nor override the parties obligation to arbitrate their disputes in
accordance with the Arbitration Article.
It is agreed that in the event of the failure of the Reinsurer hereon to pay any
amount claimed to be due hereunder, the Reinsurer hereon, at the request of the
Company, will submit to the jurisdiction of a Court of competent jurisdiction
within the United States. Nothing in this Article constitutes or should be
understood to constitute a waiver of the Reinsurer's rights to commence an
action in any Court of competent jurisdiction in the United States, to remove an
action to a United States District Court, or to seek a transfer of a case to
another Court as permitted by the laws of the United States or of any State in
the United States.
It is further agreed that service of process in such suit may be made upon
Mendes & Mount, 750 Seventh Avenue, New York, New York 10019-6829, and that in
any suit instituted
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<PAGE>
against one of them upon this Agreement, the Reinsurer will abide by the final
decision of such Court or of any Appellate Court in the event of an appeal.
The above named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the Company
to give a written undertaking to the Company that they will enter a general
appearance upon the Reinsurer's behalf in the event such a suit is instituted.
Further, pursuant to any statute of any state, territory or district of the
United States which makes provision thereof, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the Statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on behalf
of the Company or any beneficiary hereunder arising out of this Agreement, and
hereby designate the above named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE 26 - ARBITRATION
- ------------------------
As a condition precedent to any right of action hereunder, any dispute arising
out of this Agreement, whether arising before or after termination, shall be
submitted to the decision of a board of arbitration composed of three
arbitrators meeting in Chicago, Illinois unless otherwise agreed.
The members of the board of arbitration shall be active or retired,
disinterested officials of insurance or reinsurance companies or Lloyd's of
London Underwriters, or underwriting members of any Exchange formed for the
purpose of writing insurance or reinsurance. Each party shall appoint its
arbitrator, and the two arbitrators shall choose a third arbitrator before
instituting the hearing. If the respondent fails to appoint its arbitrator
within four weeks after being requested to do so by the claimant, the claimant
shall also appoint the second arbitrator. If the two arbitrators fail to agree
upon the appointment of a third arbitrator within four weeks after their
nominations, each of them shall name three and the decision of the third umpire
shall be made by mutual agreement. If the two arbitrators are unable to agree
upon the third arbitrator within thirty (30) days of their appointment, the
third arbitrator shall be selected from a list of six individuals (three named
by each arbitrator) by a judge of the federal district court having jurisdiction
over the geographical area in which the arbitration is to take place, or if the
federal court declines to act, the state court having general jurisdiction in
such area.
The claimant shall submit its initial brief within 20 days from the appointment
of the umpire. The respondent shall submit its brief within 20 days thereafter,
and the claimant may submit a reply brief within 10 days after filing of the
respondent's brief. The parties shall have
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<PAGE>
discovery rights equivalent to those available to litigants in Illinois. In
setting a hearing date, the board shall not commence the hearing within 21 days
of the completion of discovery.
The board shall make its decision with due regard to the custom and usage of the
insurance and reinsurance business. The board shall issue its decision in
writing based upon a hearing in which evidence may be introduced without
following strict rules of law and evidence but in which cross-examination and
rebuttal shall be allowed. The board shall make its decision within 60 days
following the termination of the hearings unless the parties consent to an
extension. The majority decision of the board shall be final and binding upon
all parties to the proceeding. Judgment may be entered upon the award of the
board in any court having jurisdiction thereof.
Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the expense of the third arbitrator. The
remaining costs of the arbitration proceedings shall be allocated by the board.
The board is prohibited from awarding punitive, exemplary and/or treble damages
of whatever nature in connection with any arbitration proceeding concerning this
Agreement.
ARTICLE 27 - LAW TO GOVERN
- --------------------------
This Agreement, including all matters relating to formation, validity and
performances thereof, shall be interpreted in accordance with the law of the
State of Illinois, exclusive of its rules with respect to conflict of laws,
except as to rules with respect to credit for reinsurance where the laws of the
(a) the domicile of the individual ceding company shall apply, and (b) the laws
of the other states applying their laws with respect to credit for reinsurance
with a foreign reinsurer shall also apply.
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<PAGE>
IN WITNESS WHEREOF, the parties acknowledge that no intermediary is involved in
or brought about this transaction, and the parties hereto, by their authorized
representatives, have executed this Agreement:
on this 17th day of March 2000
CONTINENTAL CASUALTY COMPANY
By: /s/ Raymond Cylochi
--------------------------------
Attested by: /s/ Robin F. Geberth
-----------------------
and on this 21st day of March, 2000
AMERINST INSURANCE COMPANY LIMITED
By: /s/ Bruce Fenton
--------------------------------
Attested by: /s/ Jillian Cannon
-----------------------
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<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of AmerInst Insurance Group, Ltd.
We consent to the inclusion in Form 10-K, Annual Report of AmerInst Insurance
Group, Ltd. ("AIG Ltd.") of our report dated February 22, 1999 on our audit of
the financial statements of AmerInst Insurance Group, Inc., AIG Ltd.'s
predecessor entity, as of December 31, 1998 and for the two years ended December
31, 1998.
JOHNSON LAMBERT & CO.
Burlington, Vermont
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 30,896,604
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 8,384,653
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 39,281,257
<CASH> 5,127,555
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 871,362
<TOTAL-ASSETS> 47,303,161
<POLICY-LOSSES> 25,037,009
<UNEARNED-PREMIUMS> 3,057,408
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 331,731
<OTHER-SE> 18,609,813
<TOTAL-LIABILITY-AND-EQUITY> 47,303,161
6,388,323
<INVESTMENT-INCOME> 2,163,278
<INVESTMENT-GAINS> 532,854
<OTHER-INCOME> 0
<BENEFITS> 6,744,893
<UNDERWRITING-AMORTIZATION> 1,770,098
<UNDERWRITING-OTHER> 1,097,171
<INCOME-PRETAX> (527,707)
<INCOME-TAX> (676,317)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 234,000
<NET-INCOME> (1,438,024)
<EPS-BASIC> (4.33)
<EPS-DILUTED> (4.33)
<RESERVE-OPEN> 20,842,402
<PROVISION-CURRENT> 9,277,893
<PROVISION-PRIOR> (2,533,000)
<PAYMENTS-CURRENT> (147,476)
<PAYMENTS-PRIOR> (3,077,013)
<RESERVE-CLOSE> 24,362,806
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