<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15 (d)
of the Securities Exchange Act of 1934.
For the Quarterly period ended SEPTEMBER 30, 1996
OR
[ ] 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 0-17676
-------
AMERINST INSURANCE GROUP, INC.
------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 52-1534560
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1751 W. 47th Street, Chicago, Illinois 60609
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (312) 523-4416
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
Number of shares of common stock outstanding:
Number outstanding
Class as of October 11, 1996
----- ----------------------
$0.01 par value common 334,233
<PAGE>
AMERINST INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1996 1995
-------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
INVESTMENTS
Fixed-maturity securities, at market........................ $34,317,511 $35,114,791
Short-term investments at market............................ 2,922,684 2,734,633
Equity investments held for sale at market.................. 2,090,688
Mutual fund shares at market value.......................... 1,250,378
-----------
Total investments....................................... 39,330,883 39,099,802
OTHER ASSETS
Cash........................................................ 363,292 1,070,639
Assumed Reinsurance Premiums Receivable..................... 508,775 1,126,426
Reinsurance recoverable on outstanding losses............... 2,743,475 3,159,561
Income tax refunds receivable............................... 466,001 396,992
Accrued investment income................................... 541,212 440,567
Deferred federal income taxes............................... 1,460,323 732,964
Deferred acquisition costs.................................. 545,430 562,475
Other assets................................................ 91,725 80,250
----------- -----------
Total other assets...................................... 6,720,233 7,569,874
----------- -----------
Total assets............................................ $46,051,116 $46,669,676
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Reserves for unpaid losses and loss adjustment expenses..... $22,086,930 $21,789,036
Unearned premium reserves................................... 1,913,789 2,095,462
Reinsurance balances payable................................ 3,170,170 3,235,492
Accrued liabilities......................................... 453,634 489,893
----------- -----------
Total liabilities....................................... 27,624,523 27,609,883
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 2,000,000 shares authorized:
1996: 334,252 issued and outstanding
1995: 334,872 issued and outstanding.................... 3,343 3,349
Additional paid-in capital.................................. 7,197,085 7,206,283
Retained earnings........................................... 11,044,095 11,274,797
Unrealized investment gains, net of taxes................... 182,070 575,364
----------- -----------
Total stockholders' equity.............................. 18,426,593 19,059,793
----------- -----------
Total liabilities and stockholders' equity.............. $46,051,116 $46,669,676
=========== ===========
</TABLE>
See the accompanying note to the condensed consolidated financial statements.
2
<PAGE>
AMERINST INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue
Premiums earned............................... $ 3,622,382 $ 4,543,259 $ 1,165,381 $ 2,047,599
Net investment income......................... 1,849,630 1,958,927 597,394 623,692
Net realized capital gain (loss).............. 12,750 (301,419) (26,515) (45,462)
----------- ----------- ----------- -----------
Total revenue............................. 5,484,762 6,200,767 1,736,260 2,625,829
Losses and expenses
Losses and loss adjustment expenses........... 3,297,379 881,950 1,048,662 (1,551,220)
Commissions expense........................... 997,544 800,111 332,275 263,520
Other operating and management expenses....... 629,465 656,619 172,155 189,947
----------- ----------- ----------- -----------
Total losses and expenses................. 4,924,388 2,338,680 1,553,092 (1,097,753)
----------- ----------- ----------- -----------
Income before income taxes...................... 560,374 3,862,087 183,168 3,723,582
Provision for income taxes.................... 127,217 1,324,927 30,068 1,305,133
----------- ----------- ----------- -----------
Net income...................................... $ 433,157 $ 2,537,160 $ 153,100 $ 2,418,449
=========== =========== =========== ===========
Retained earnings, beginning of period.......... $11,274,797 $ 8,635,961 $11,112,569 $ 8,754,672
Net income...................................... 433,157 2,537,160 153,100 2,418,449
Dividend paid.................................. (652,497) (217,745) (217,374) (217,745)
Excess of purchase price on stock redemptions.. (11,362) (4,200)
----------- ----------- ----------- -----------
Retained earnings, end of period................ $11,044,095 $10,955,376 $11,044,095 $10,955,376
=========== =========== =========== ===========
Per common share data
Net income...................................... $ 1.29 $ 7.57 $ 0.46 $ 7.23
=========== =========== =========== ===========
Dividend paid
Weighted average number of shares
outstanding for the entire period............ 334,618 335,764 334,449 334,993
=========== =========== =========== ===========
</TABLE>
See the accompanying note to the condensed consolidated financial statements.
3
<PAGE>
AMERINST INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1996 1995
-------------- --------------
<S> <C> <C>
Net Cash Provided (Used) by Operating Activities.............. $ 808,639 $ (2,440,870)
------------ ------------
Investing Activities
Proceeds from sales of investments.......................... 15,974,386 17,980,745
Purchases of fixed-maturity and equity securities........... (16,629,258) (15,449,996)
Net purchases of short-term investments..................... (188,051)
------------
Net Cash (Used) Provided by Investing Activities.............. (842,923) 2,530,749
Financing Activities
Redemption of shares........................................ (20,566) (59,218)
Shareholder dividend........................................ (652,497) (217,745)
------------ ------------
Net Cash Used by Financing Activities......................... (673,063) (276,963)
------------ ------------
Increase (decrease) in cash................................... $ (707,347) $ (187,084)
============ ============
</TABLE>
See the accompanying note to the condensed consolidated financial statements.
4
<PAGE>
AMERINST INSURANCE GROUP, INC.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 1996
Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by the Registrant without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission and reflect all adjustments consisting
of normal recurring accruals, which are, in the opinion of management, necessary
for a fair presentation of the results of operations for the periods shown.
These statements are condensed and do not include all information required by
generally accepted accounting principles to be included in a full set of
financial statements. It is suggested that these condensed statements be read in
conjunction with the consolidated financial statements at and for the year ended
December 31, 1995 and notes thereto, included in the Registrant's annual report
as of that date. Certain prior period amounts have been reclassified to conform
with current period presentations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OPERATIONS
Three months ended September 30, 1996 compared to three months ended
September 30, 1995:
Net income for the third quarter of 1996 was $153,100, compared to $2,418,449
for the third quarter of 1995. This decrease is due primarily to a $2.7 million
favorable adjustment to loss reserves for 1994 and prior accident years which
was reflected in income in the third quarter of 1995. This adjustment to older
reserve layers was made in consultation with the Company's actuary based on an
evaluation of loss reserves as of June 30, 1995. Management and the Board of
Directors expect to receive the June 30, 1996 actuarial valuation during the
fourth quarter and will make a determination at that time whether an adjustment
to reserves for prior accident years is appropriate.
The decrease in earned premiums for the current quarter as compared to the third
quarter of 1995 is primarily the result of an $849,450 favorable (downward)
adjustment to ceded premiums reflected in the third quarter of 1995 resulting
from the actuarial revisions to ultimate losses discussed above. Without this
adjustment, net earned premium for the third quarter of 1995 would have been
$1,198,149, and the difference between the current quarter and the third quarter
of 1995 would have been a decrease of $32,768 or 2.7%.
5
<PAGE>
Commissions expense for the third quarter of 1996 is reflected at 28.5% of
earned premium based on the contractual rate in effect since July 1, 1995. The
effective commission rate for the prior year quarter of 12.8% was distorted
downward due to the ceded premium adjustment discussed above. Excluding the
premium adjustment, the effective commission rate for the third quarter of 1995
would have been 22.0%, which reflects the contractual rates in effect at that
time.
Operating and management expenses decreased $17,792 or 9.4% to $172,155 as
compared to $189,947 for the third quarter of 1995. This reflects efforts by
management and the Board to more closely control administrative costs.
Net investment income for the third quarter of 1996 of $597,394 is down $26,298
or 4.2% from the third quarter 1995 amount of $623,692. This reflects slightly
lower yields due to increased investment in tax exempt bonds as discussed below,
and the shift of approximately 5% of investments into common stocks during the
second quarter of 1996. A shift to equity investments tends to decrease current
income in favor of longer term appreciation.
The Company has been realizing capital gains and losses as it has been trading
its securities to more closely align the maturity dates of its investments with
the expected maturities of claims, and at the same time to take advantage of tax
loss carrybacks and to move into higher yielding securities as interest rates
change. The net realized capital loss in the third quarter reflects this
realignment activity.
Nine months ended September 30, 1996 compared to nine months ended September 30,
1995:
The Company is reporting net income of $433,157 for the current year to date,
which is $2.1 million lower than the $2,537,160 net income reported at September
30, 1995. This difference is due primarily to the third quarter 1995 loss
reserve and ceded premium adjustments discussed above.
Commission expense year to date reflects approximately 27.5% of earned premium
based on a contractual rate of 28.5% in effect since July 1, 1995, blended with
the old rate of 21.5% still being earned on prior policies. Commission expense
for the prior nine months, excluding the effect of the ceded premium adjustment
discussed above, would have been 21.7%, reflecting the contractual rates in
effect for that period.
Investment yield on fixed maturity securities is approximately 4.9% for the nine
months ended September 30, 1996, as compared to 6.5% for the year ended December
31, 1995. This decrease reflects the Company's continued shift to tax exempt
municipal bonds which offer lower yields. According to the Company's investment
advisor, the "taxable equivalent yield" on the Company's fixed maturity
investments has increased from 6.61% in 1995 to 6.80% for the nine months ended
September 30, 1996.
6
<PAGE>
Net realized capital gains amounted to $12,750 for the nine months ended
September 30, 1996, as compared to a net loss of $(301,419) for the comparable
period in 1995. The 1996 net gain is the combination of a first quarter gain of
$169,422, primarily realized as a result of the liquidation of the mutual fund
portfolio, with losses in the second and third quarters of $(130,157) and
$(26,515), respectively, reflecting the realignment trading activity in the
Company's securities portfolio as described above. In the 1996 period, the
Company retained an equity manager and invested $2,000,000 in equities which
previously had been invested in fixed-maturity securities and mutual funds. In
the prior year period, the Company made a tax payment of $3,500,000,
necessitating the sale of several fixed-maturity investments. Investments
selected were those generating a capital loss in order to obtain the benefit of
tax loss carrybacks.
FINANCIAL CONDITION AND LIQUIDITY
As of September 30, 1996, total invested assets amounted to $39,330,883, an
increase of $231,081 or 0.6% from $39,099,802 at December 31, 1995. Through
improved cash management practices, cash balances have been reduced and invested
in short term investments. The mutual fund investments of $1,250,378 were
liquidated and $2,000,000 was invested in a new equity portfolio during the
second quarter of 1996.
Assumed reinsurance premiums receivable decreased by $617,651 to $508,775 from
$1,126,426 as a result of an increase in losses currently payable in comparison
with premiums assumed.
Reinsurance recoverable decreased $416,686 or 13.2% from $3,159,561 to
$2,743,475 due to recoveries on paid losses in the reinsured layer.
Deferred federal income taxes have increased $727,359 from $732,964 to
$1,460,323 due to a decrease in unrealized gains on investments, the tax effect
of which increases the net deferred tax asset, and by increases in other
deductible temporary differences such as loss reserve discounting.
7
<PAGE>
AMERINST INSURANCE GROUP, INC.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
See Index to Exhibits immediately following the signature page.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
8
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERINST INSURANCE GROUP, INC.
------------------------------
(Registrant)
November 12, 1996 Bruce W. Breitweiser
____________________
Bruce W. Breitweiser
(Vice President and Chief Financial Officer,
duly authorized to sign this Report in such
capacity and on behalf of the Registrant.)
9
<PAGE>
AMERINST INSURANCE GROUP, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
3(i) Certificate of Incorporation of the Company (1)
3(ii) Bylaws of the Company (1)
4 Article Fourth of Certificate of Incorporation -- included in Exhibit
3(i) above
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) and 1996 placement slip
(filed herewith)
10.5 Revised Management Agreement between USA Risk Group (USARG) and AIIC
dated July 1, 1994 (5) and Addendum to Management Agreement dated
August 26, 1996 (filed herewith)
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)
27 Financial Data Schedule (filed herewith)
- --------------------------------
(1) Filed with the Company's Registration Statement on Form S-1, Registration
No. 33-17421 and incorporated herein by reference.
(2) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference.
(3) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
(4) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference.
(5) Filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995 and incorporated herein by reference.
10
<PAGE>
EXHIBIT 10.4
QUOTA SHARE REINSURANCE AGREEMENT
1996 PLACEMENT SLIP
<TABLE>
<CAPTION>
<S> <C>
COMPANY: CONTINENTAL CASUALTY COMPANY, Chicago, IL
BUSINESS COVERED: Business classified by the Company as Accountants'
Professional Liability for members of the American
Institute of Certified Public Accountants.
COMMENCEMENT AND Covering claims made and/or losses discovered on
TERMINATION: policies having effective dates during the 12 month
term beginning July 1, 1996. Run-off to policy
expiration, termination, or next anniversary date,
whichever comes first, plus unlimited discovery
period. 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 July 1, 1997, 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. If the Company requests the
return of the unearned premium reserve, the
Reinsurer will continue to be liable for its pro-
rata share of the aggregate losses after such
(termination) cut-off date, being pro rata as to
the time such original policies are in force under
this Agreement.
EXCLUSIONS: As attached.
TERRITORY: To follow the Company's original policies.
INSURING CLAUSE: 10% Quota Share of up to $1,000,000 each policy,
each claim and in the aggregate where applicable.
The Reinsurer's share of the Company's net retained
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 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
</TABLE>
Page 1 of 10
<PAGE>
QUOTA SHARE REINSURANCE AGREEMENT
1996 PLACEMENT SLIP
<TABLE>
<CAPTION>
<S> <C>
INSURING CLAUSE: Policy Limit; and, in addition as respects each
(continued) loss, the Reinsurer agrees to pay a 10% quota
share of up to $1,000,000 of any Extra Contractual
Obligation.
LOSS EXPENSE: As per the attached Losses, Loss Adjustment
Expenses Subrogation & Salvage Clause.
PREMIUM: 10% of the Original Gross Premium for up to
$1,000,000 for limits attaching.
CEDING COMMISSION: 28.5% of Original Gross Premium for limits
attaching.
OTHER REINSURANCE: The Company will be permitted to purchase
facultative reinsurance on any risk it desires and
to deduct the premium thereof.
FUNDING OF As per the attached Letters of Credit Clause
RESERVES:
REPORTS AND As per the attached Clause.
REMITTANCES:
OTHER PROVISIONS: Original Conditions: The Reinsurer will be subject
to the terms, conditions, interpretations,
waivers, modifications and alterations of the
Company's policies that are the subject of this
Agreement.
Inter-Company Pooling Clause
Definitions Clause
Losses, Loss Adjustment Expenses Subrogation &
Salvage (as per the attached Clause)
ECO/XPL
Insolvency Clause
Access to Records Clause (as per the attached
Clause)
Errors and Omissions Clause
Amendments Clause
Arbitration Clause
Service of Suit Clause
Taxes Clause
Interest Penalty Clause (as per the attached
Clause)
Currency Clause
Offset (this Agreement only)
WORDING: As expiring or as agreed.
</TABLE>
Page 2 of 10
<PAGE>
QUOTA SHARE REINSURANCE AGREEMENT
1996 PLACEMENT SLIP
We ask that you review the terms and conditions set forth hereon. Assuming that
you find everything in order, please indicate your acceptance and approval by
signing and returning one (1) copy of this Placement Slip.
Reinsurer:
-------------------------------------------------------------------
Signed Line: /s/ Norman C. Batchelder, President
-----------------------------------------------------------------
Accepted &
Approved By: Norman C. Batchelder, President -- AmerInst Insurance Company
-----------------------------------------------------------------
Page 3 of 10
<PAGE>
QUOTA SHARE REINSURANCE AGREEMENT
1996 PLACEMENT SLIP
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.
Page 4 of 10
<PAGE>
QUOTA SHARE REINSURANCE AGREEMENT
1996 PLACEMENT SLIP
LOSSES, LOSS ADJUSTMENT EXPENSES, SUBROGATION AND SALVAGES
----------------------------------------------------------
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.
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.
Page 5 of 10
<PAGE>
QUOTA SHARE REINSURANCE AGREEMENT
1996 PLACEMENT SLIP
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.
Page 6 of 10
<PAGE>
QUOTA SHARE REINSURANCE AGREEMENT
1996 PLACEMENT SLIP
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. If the debtor party prevails 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.
Page 7 of 10
<PAGE>
QUOTA SHARE REINSURANCE AGREEMENT
1996 PLACEMENT SLIP
REPORTS AND REMITTANCES
-----------------------
A. Within 30 days after the end of each calendar month, the Company shall report
to the Reinsurer:
1. Ceded net written premium for the month;
2. Ceding commission thereon;
3. Ceded losses and loss adjustment expenses paid during this month.
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.
Page 8 of 10
<PAGE>
QUOTA SHARE REINSURANCE AGREEMENT
1996 PLACEMENT SLIP
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 Reinsurer hereby agrees to fund a Letter of Credit, as described below, for
a total amount of $4,125,000 by December 31, 1994, with additions to same as
described below.
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 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.
Page 9 of 10
<PAGE>
QUOTA SHARE REINSURANCE AGREEMENT
1996 PLACEMENT SLIP
LETTERS OF CREDIT (CONTINUED)
-----------------------------
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.
Loss development allowance to be calculated as follows:
Original Gross Premium less the Ceding Commission = Net Premium x 85% ultimate
loss ratio = ultimate loss x the factor indicated below at each stated calendar
quarter:
<TABLE>
<CAPTION>
CALENDAR QUARTER FACTOR
<S> <C>
at 4th calendar quarter 100%
at 8th calendar quarter 85%
at 12th calendar quarter 70%
at 16th calendar quarter 40%
at 20th calendar quarter 30%
at 24th calendar quarter 20%
at 28th calendar quarter 10%
at 32nd calendar quarter 5%
</TABLE>
Page 10 of 10
<PAGE>
EXHIBIT 10.5
MANAGEMENT AGREEMENT ADDENDUM
-----------------------------
Addendum to the Management Agreement effective July 1, 1994, between Risk
Retention Management, Inc. and AmerInst Insurance Company.
I. The Management Fee Addendum portion of the Addenda to Agreement is hereby
amended to read in its entirety as follows:
MANAGEMENT FEE ADDENDUM
- -----------------------
COMPANY will:
(1) Effective July 1, 1996, the COMPANY will compensate MANAGER at the rate of
$82,687.50 per annum.
(2) Cause the above agreement to be paid in quarterly installments in advance
at the beginning of each calendar quarter.
(3) Reimburse MANAGER for reasonable out-of-pocket expenses incurred during the
management of the COMPANY including: courier and express mail service;
long distance telephone calls; travel and meeting expenses incurred at the
request of the COMPANY; costs of COMPANY stationery; filing fees; and
similar expenses.
COMPANY agrees that special projects will be invoiced separately at agreed upon
fees or rates.
COMPANY also agrees that Michael T. Rogers' attendance at Board meetings is only
required twice a year. Michael T. Rogers' attendance at Board meetings more
than twice a year will incur a fee of $1,200 per attendance.
IN WITNESS WHEREOF, the parties have duly executed this Addendum this 26th day
of August, 1996.
USA RISK SERVICES, INC. (Formerly
WITNESS: RISK RETENTION MANAGEMENT, INC.)
/s/ Rebecca J. Aitchison By: /s/ Michael T. Rogers
- ----------------------------------- --------------------------------
Michael T. Rogers
Vice President
WITNESS: AMERINST INSURANCE COMPANY
/s/ Priscilla Batchelder By: /s/ Norman Batchelder
- ----------------------------------- --------------------------------
Norman Batchelder, President
/s/ Adrienne L. Runge By: /s/ Ronald S. Katch
- ----------------------------------- --------------------------------
Ronald S. Katch, Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 34,317,511
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,090,688
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 39,330,883
<CASH> 363,292
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 545,430
<TOTAL-ASSETS> 46,051,116
<POLICY-LOSSES> 22,086,930
<UNEARNED-PREMIUMS> 1,913,789
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 3,343
0
0
<OTHER-SE> 18,423,250
<TOTAL-LIABILITY-AND-EQUITY> 46,051,116
3,622,382
<INVESTMENT-INCOME> 1,849,630
<INVESTMENT-GAINS> 12,750
<OTHER-INCOME> 0
<BENEFITS> 3,297,379
<UNDERWRITING-AMORTIZATION> 997,544
<UNDERWRITING-OTHER> 629,465
<INCOME-PRETAX> 560,374
<INCOME-TAX> 127,217
<INCOME-CONTINUING> 433,157
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 433,157
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
<RESERVE-OPEN> 18,629,475
<PROVISION-CURRENT> 3,297,379
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 70,617
<PAYMENTS-PRIOR> 2,512,782
<RESERVE-CLOSE> 19,343,455
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
