<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, 1997
[_] 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.)
R.R. No. 3, Airport Road, Berlin, Vermont 05602
Mailing address: P.O. Box 1330, Montpelier, Vermont 05601
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (802) 229-5042
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:
<TABLE>
<CAPTION>
Number outstanding
Class as of October 29, 1997
----- ----------------------
<S> <C>
$0.01 par value common 333,789
</TABLE>
<PAGE>
AMERINST INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
INVESTMENTS
Fixed-maturity securities, at market......................... $34,687,539 $35,688,432
Short-term investments at market............................. 978,629 1,687,461
Equity securities, at market................................. 6,227,677 2,260,878
----------- -----------
TOTAL INVESTMENTS......................................... 41,893,845 39,636,771
OTHER ASSETS
Cash......................................................... 474,687 347,404
Assumed reinsurance premiums receivable...................... 1,022,559 929,798
Reinsurance recoveries receivable............................ 1,725,763 2,019,975
Accrued investment income.................................... 547,588 515,870
Deferred policy acquisition costs............................ 742,830 611,048
Deferred federal income taxes................................ 1,091,066 1,306,399
Prepaid expenses and other assets............................ 53,616 90,008
Income tax recoverable....................................... 138,982
----------- -----------
TOTAL OTHER ASSETS........................................ 5,797,091 5,820,502
----------- -----------
TOTAL ASSETS.............................................. $47,690,936 $45,457,273
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Losses and loss adjustment expenses.......................... $21,961,232 $20,299,937
Unearned premiums............................................ 2,606,422 2,144,027
Reinsurance balances payable................................. 2,438,971 2,152,056
Income taxes payable......................................... 316,199
Accrued expenses and other liabilities....................... 441,023 453,529
----------- -----------
TOTAL LIABILITIES......................................... 27,447,648 25,365,748
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 2,000,000 shares authorized:
1997: 333,789 issued and outstanding
1996: 334,180 issued and outstanding.................... 3,338 3,342
Additional paid-in capital................................... 7,182,083 7,188,983
Retained earnings............................................ 11,931,356 12,474,579
Unrealized investment gains, net of taxes.................... 1,126,511 424,621
----------- -----------
TOTAL STOCKHOLDERS' EQUITY................................ 20,243,288 20,091,525
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $47,690,936 $45,457,273
=========== ===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
2
<PAGE>
AMERINST INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 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,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE
Premiums earned.............................. $ 3,407,213 $ 3,622,382 $ 999,649 $ 1,165,381
Net investment income........................ 1,793,221 1,849,630 597,353 597,394
Net realized capital gain (loss)............. 180,503 12,750 110,891 (26,515)
----------- ----------- ----------- -----------
TOTAL REVENUE........................ 5,380,937 5,484,762 1,707,893 1,736,260
LOSSES AND EXPENSES
Losses and loss adjustment expenses.......... 4,041,048 3,297,379 1,167,452 1,048,662
Commissions expense.......................... 971,172 997,544 284,903 332,275
Other operating and management expenses...... 548,267 629,465 167,657 172,155
----------- ----------- ----------- -----------
TOTAL LOSSES AND EXPENSES............ 5,560,487 4,924,388 1,620,012 1,553,092
----------- ----------- ----------- -----------
Income (loss) before income taxes.............. (179,550) 560,374 87,881 183,168
Provision for income tax expense (benefit).... (292,379) 127,217 (166,939) 30,068
----------- ----------- ----------- -----------
NET INCOME (LOSS).............................. 112,829 $ 433,157 $ 254,820 $ 153,100
=========== =========== =========== ===========
RETAINED EARNINGS, BEGINNING OF PERIOD......... 12,474,579 $11,274,797 $11,893,520 $11,112,569
Net income (loss).............................. 112,829 433,157 254,820 153,100
Dividend paid.................................. (651,000) (652,497) (216,984) (217,374)
Excess of purchase price on stock redemptions.. (5,052) (11,362) 0 (4,200)
----------- ----------- ----------- -----------
RETAINED EARNINGS, END OF PERIOD............... $11,931,356 $11,044,095 $11,931,356 $11,044,095
=========== =========== =========== ===========
Per common share data
Net income (loss) $ .34 $ 1.29 $ .76 $ .46
=========== =========== =========== ===========
Dividend paid $ 1.95 $ 1.95 $ .65 $ .65
=========== =========== =========== ===========
Weighted average number of shares
outstanding for the entire period 333,864 334,618 333,821 334,449
=========== =========== =========== ===========
</TABLE>
See the accompanying notes 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,
1997 1996
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Cash Provided by Operating Activities............. $ 3,239,679 $ 808,639
----------- -----------
INVESTING ACTIVITIES
Proceeds from sales of investments.................. 8,142,786 15,974,386
Purchases of fixed-maturity securities.............. (9,887,047) (16,629,258)
Net sales of short-term investments................. (705,180) (188,051)
----------- -----------
Net Cash Provided by (used in) Investing Activities... (2,449,441) (842,923)
FINANCING ACTIVITIES
Redemption of shares................................ (11,955) (20,566)
Shareholder dividend................................ (651,000) (652,497)
----------- -----------
Net Cash Used by Financing Activities................. (662,955) (673,063)
----------- -----------
INCREASE (DECREASE) IN CASH........................... $ 127,283 $ (707,347)
=========== ===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
AMERINST INSURANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 1997
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, 1996 and notes thereto, included in the Registrant's annual
report as of that date.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OPERATIONS
Three months ended September 30, 1997 compared to three months ended September
30, 1996:
Net income increased by $101,720 from $153,100 in the third quarter of 1996 to
$254,820 in the third quarter of 1997. The increase is due to a decrease in the
pretax income of $95,287 as discussed below, offset by a decrease in the
provision for income tax expense of $197,007. The decrease in the provision for
income tax expense is primarily the result of a federal income tax refund of
$138,982 received in 1997 for the 1992 and 1993 tax years.
Pretax income decreased by $95,287 from $183,168 in the third quarter of 1996 to
$87,881 in the third quarter of 1997. The change in earnings is primarily
attributable to an increase in the loss reserving ratio for the 1996-97 treaty
year, which took effect in the fourth quarter of 1996, along with a decrease in
premium earned. Net investment income for the third quarter of 1997 was
$597,353, compared to $597,394 for the same quarter of 1996; however, the
investment yield for the third quarter of 1997 was approximately 5.7% compared
to 6.0% for the same period in 1996. The lower yield is attributable to an
increase in holdings of tax free municipal securities and an increase in equity
securities which generate less realized investment income. Sales of securities
during the three months ended September 30, 1997 resulted in net realized
capital gains of $110,891 as compared to net realized losses of $(26,515) in the
same period in 1996.
Earned premiums for the three month period ended September 30, 1997 amounted to
$999,649 representing a $165,732 decline, or approximately 14%, from the same
period of the prior year. All of the Company's premium revenue represents
accountants professional liability insurance premium from CNA. As a result of
the competitive market, CNA has been offering discounts based on favorable loss
experience in order to maintain and increase their market share. These discounts
are the primary reason for the decline in earned premiums.
5
<PAGE>
The loss ratio for the three month period ended September 30, 1997 was 117% as
compared to 90% for the same period of 1996. The loss ratio of 117% represents
management's current estimated effective loss ratio selected in consultation
with the Company's independent consulting actuary to apply to current premiums
assumed and earned. The Company's overall loss ratio for the year ended
December 31, 1996 was 50%. However, as reported as of December 1996, excluding
the effects of favorable development, the 1996-97 treaty year estimated loss
ratio was established at 120%. The net underwriting loss for the most recent
quarter of $(620,363) exceeded the third quarter 1996 underwriting loss of
$(387,711) primarily due to the increase in loss reserving ratio for the 1996-97
treaty year coupled with a decrease in premiums earned.
Nine months ended September 30, 1997 compared to nine months ended September 30,
1996:
Net income decreased by $320,328 from $433,157 for the nine months ended
September 30, 1996 to $112,829 for the nine months ended September 30, 1997.
The decrease is due to a decrease in pretax income of $739,924 as discussed
below, partially offset by the effect of a federal income tax refund of $138,982
received in 1997 for the 1992 and 1993 tax years.
Pretax income decreased by $739,924 from $560,374 for the nine months ended
September 30, 1996 to $(179,550) for the nine months ended September 30, 1997.
The change in earnings is primarily attributable to an increase in the loss
reserving ratio for the 1996-97 treaty year along with a decrease in premium
earned. Net investment income for the nine month period ended September 30,
1997 was $1,793,221, compared to $1,849,630 for the same period in 1996. The
investment yield for the nine month period ended September 30, 1997 was
approximately 5.7% compared to 6.0% for the same period in 1996. The lower net
investment income and lower yield are attributable to an increase in holdings of
tax free municipal securities and an increase in equity securities which
generate less realized investment income. Sales of securities during the nine
month period ended September 30, 1997 resulted in net realized capital gains of
$180,503 as compared to net realized gains of $12,750 in the same period in
1996.
Earned premiums for the first nine months of 1997 of $3,407,213 represents a
decline of $215,169, or approximately 6%, from the same period of the prior
year. All of the Company's premium revenue represents accountants professional
liability insurance premium from CNA. As a result of the competitive market,
CNA has been offering discounts based on favorable loss experience in order to
maintain and increase their market share. These discounts are the primary
reason for the decline in earned premiums.
The loss ratio through the first nine months of 1997 was 119% as compared to 91%
for the same period of 1996. The loss ratio of 119% represents management's
current estimated effective loss ratio selected in consultation with the
Company's independent consulting actuary to apply to current premiums assumed
and earned. Losses incurred through September 30, 1997 do not reflect any
development of prior year reserves. Management expects to make a determination
in the fourth quarter whether an adjustment to reserves for prior years is
appropriate. The Company's overall loss ratio for the year ended December 31,
1996 was 50%. However, as reported as of December 1996, excluding the effects of
favorable development, the 1996-97 treaty year estimated loss ratio was
established at 120%. The reported loss ratio through the first nine months of
1997 is slightly less than 120% due to the effect of a lower selected loss ratio
for treaty year 1995, for which a small amount of premium is still being earned.
6
<PAGE>
These fluctuations in the loss ratio and the decrease in premiums earned result
in a net underwriting loss of $(2,153,274) for the nine month period ended
September 30, 1997 as compared to $(1,302,006) for the same period in 1996.
FINANCIAL CONDITION AND LIQUIDITY
As of September 30, 1997, total invested assets amounted to $41,893,845, an
increase of $2,257,074 or 5.7% from $39,636,771 at December 31, 1996. Cash
balances increased from $347,404 at December 31, 1996 to $474,687 at September
30, 1997, an increase of 37%. Short-term investments decreased from $1,687,461
at December 31, 1996 to $978,629 at September 30, 1997. The amount of short-term
investments will fluctuate based on the timing of bond maturities. As bonds
mature, the proceeds are temporarily placed in short-term investments until they
are reinvested. The ratio of cash and invested assets to total liabilities and
stockholders' equity at September 30, 1997 was .89 to 1, compared to a ratio of
.88 to 1 at September 30, 1996.
The Registrant paid its ninth consecutive quarterly dividend of $0.65 per share
during the third quarter of 1997.
Assumed reinsurance premiums receivable represents current assumed premiums
receivable less commissions payable to the fronting carriers. This balance
increased from $929,798 at December 31, 1996 to $1,022,559 at September 30,
1997. The increase is due to the timing of renewal premium written. Premium
renewals generally peak during the third quarter.
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, 1997.
7
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERINST INSURANCE GROUP, INC.
------------------------------
(Registrant)
November 11, 1997 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.)
8
<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)
4.1 Article Fourth of Certificate of Incorporation -- included in Exhibit
3(i) above
4.2 Statement of Stock Ownership Policy, as amended (7)
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)
and 1997 placement slip (filed herewith)
10.5 Management Agreement between Vermont Insurance Management, Inc. and
AIIC dated May 1, 1997 (8) and Addenda to Management Agreement dated
July 1, 1997 (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.
(6) Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference.
(7) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
(8) Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference.
9
<PAGE>
EXHIBIT 10.4
QUOTA SHARE REINSURANCE AGREEMENT
1997 PLACEMENT SLIP
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 policies
TERMINATION: having effective dates during the 12 month term beginning
July 1, 1997. 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, 1998, 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
Page 1 of 10
<PAGE>
QUOTA SHARE REINSURANCE AGREEMENT
1997 PLACEMENT SLIP
INSURING CLAUSE: Policy Limit; and, in addition as respects each loss, the
(continued) Reinsureragrees 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 The Company will be permitted to purchase facultative
REINSURANCE: 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.
Page 2 of 10
<PAGE>
QUOTA SHARE REINSURANCE AGREEMENT
1997 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: AmerInst Insurance Company
---------------------------------------------------------------------
Signed Line: /s/ Norman C. Batchelder, President
-------------------------------------------------------------------
Accepted & Approved By: Norman C. Batchelder, President
--------------------------------------------------------
Page 3 of 10
<PAGE>
QUOTA SHARE REINSURANCE AGREEMENT
1997 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
1997 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
1997 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
1997 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
1997 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
1997 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
1997 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:
Calendar Quarter Factor
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%
Page 10 of 10
<PAGE>
Exhibit 10.5
ADDENDA TO AGREEMENT
BETWEEN
AMERINST INSURANCE COMPANY
AND
VERMONT INSURANCE MANAGEMENT, INC.
INSURANCE ADDENDUM
- ------------------
MANAGER will:
- -------------
(1) Maintain and update all reinsurance policies, endorsements, binders, cover
notes, and other evidence of insurance or reinsurance.
(2) Issue Certificates of Insurance and act as COMPANY's registered agent for
services of process.
(3) Cooperate with authorized COMPANY employees, consultants, actuaries,
auditors, claims personnel and attorneys on a day-to-day basis to ensure
the efficient operation of the COMPANY. The MANAGER also agrees to extend
full cooperation to all regulatory and COMPANY officials during any and all
audits or examinations.
RECORDKEEPING ADDENDUM
- ----------------------
MANAGER will:
- -------------
(1) Provide all routine accounting services to establish and maintain books of
account, including, but not limited to, accounting for reinsurance,
maintenance of underwriting statistics, invoicing, disbursements, cash and
investment records and a general ledger.
(2) Maintain true, accurate and complete records and accounts of all
transactions arising out of this AGREEMENT, including, but not limited to,
claims and losses, and financial matters. Said records and accounts shall
be maintained at all times in such a manner and form as may be agreed to by
the Board of Directors of the COMPANY and in accordance with generally
accepted accounting and insurance practices.
(3) Prepare a monthly financial statement of income and expenses, a balance
sheet, and other financial statements as may be required by Company's
Board, for distribution to such persons as are designated in writing by the
Board; such reports shall include:
<PAGE>
(a) premiums received;
(b) losses paid:
(c) loss adjustment expenses paid; and
(d) loss reserves information.
(4) Complete and file NAIC quarterly and annual Statements.
(5) Liaise with service providers preparing Premium Tax and COMPANY Tax and
other regulatory returns in accordance with state and federal laws, and
cause such returns to be filed with the appropriate authorities.
(6) Ensure compliance with the regulations pertaining to books and records and
Illinois home office.
(7) Prepare and maintain minutes of all board and shareholder meetings. Assist
in the preparation of the agenda and materials for the meetings. Have a
representative attend all board meetings and Committee meetings where
necessary.
(8) Advise the Board on matters of interest.
MANAGEMENT AGREEMENT ADDENDUM
- -----------------------------
COMPANY will:
(1) Compensate MANAGER at a rate of $86,820.00 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.
IN WITNESS WHEREOF, the parties have duly executed this Addendum this 1st day
of July, 1997.
<PAGE>
VERMONT INSURANCE
WITNESS: MANAGEMENT, INC.
/s/ Jennifer McNaughton__________ By: /s/ Andrew Sargeant
-------------------------------
Andrew Sargeant, President
AMERINST INSURANCE
WITNESS: COMPANY
/s/ Rebecca Aitchison____________ By: /s/ Norman Batchelder
-------------------------------
Norman C. Batchelder, President
WITNESS:
/s/ Patrick Theriault______________ By: /s/ Ronald Katch
-------------------------------
Ronald S. Katch, Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 34,687,539
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 6,227,677
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 41,893,845
<CASH> 474,687
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 742,830
<TOTAL-ASSETS> 47,690,936
<POLICY-LOSSES> 21,961,232
<UNEARNED-PREMIUMS> 2,606,422
<POLICY-OTHER> 0
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<COMMON> 3,338
0
0
<OTHER-SE> 20,239,950
<TOTAL-LIABILITY-AND-EQUITY> 47,690,936
3,407,213
<INVESTMENT-INCOME> 1,793,221
<INVESTMENT-GAINS> 180,503
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<BENEFITS> 4,041,048
<UNDERWRITING-AMORTIZATION> 971,172
<UNDERWRITING-OTHER> 548,267
<INCOME-PRETAX> (179,550)
<INCOME-TAX> (292,379)
<INCOME-CONTINUING> 112,829
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112,829
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
<RESERVE-OPEN> 18,279,962
<PROVISION-CURRENT> 4,041,048
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 74,324
<PAYMENTS-PRIOR> 2,011,217
<RESERVE-CLOSE> 20,235,469
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</TABLE>
