<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-1
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d)
of the Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
par value
(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 nonaffiliates of the
Registrant as of March 18, 1998 was $21,118,364.*
Number of shares of the $.01 par value common stock outstanding as of March 18,
1998 was 333,358.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III hereof.
*based on book value as of December 31, 1997.
<PAGE>
Item 8. Financial Statements and Supplementary Data
This Item is amended to reflect errors in the number of shares outstanding at
December 31, 1997 reflected in the Balance Sheets and the amount of income taxes
paid in 1996 reflected in the Consolidated Statements of Cash Flows.
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 Accountant...................................... 2
Consolidated Balance Sheets........................................... 3
Consolidated Statements of Income..................................... 4
Consolidated Statement of Changes in Stockholders' Equity............. 5
Consolidated Statements of Cash Flows................................. 6
Notes to the Consolidated Financial Statements........................ 7
Financial Statement Schedules:
- ------------------------------
Reports of Independent Accountants on Financial Statement Schedules... 19
Schedule II, Parent Company Condensed Financial Statements............ 20
</TABLE>
Schedules I, III, IV, 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.
-1-
<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. as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the three years ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for the three years ended December 31, 1997 in conformity with generally
accepted accounting principles.
JOHNSON LAMBERT & CO.
Burlington, Vermont
February 13, 1998
-2-
<PAGE>
AMERINST INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity investments, at market value
(amortized cost $33,420,863 and $35,312,165) $34,065,619 $35,688,432
Short-term investments, at market value (approximates cost) 1,687,461
Equity securities, at market value (cost $6,721,873 and $1,991,963) 7,617,960 2,260,878
----------- -----------
TOTAL INVESTMENTS 41,683,579 39,636,771
Cash and cash equivalents 1,081,736 347,404
Assumed reinsurance premiums receivable 1,146,379 929,798
Reinsurance recoveries receivable 1,039,762 2,019,975
Accrued investment income 499,970 515,870
Deferred policy acquisition costs 800,598 611,048
Deferred income tax asset 992,599 1,306,399
Prepaid expenses and other assets 186,506 90,008
----------- -----------
TOTAL ASSETS $47,431,129 $45,457,273
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses $20,802,873 $20,299,937
Unearned premiums 2,809,115 2,144,027
Reinsurance balances payable 1,984,442 2,152,056
Income taxes payable 260,897 316,199
Accrued expenses and other liabilities 455,438 453,529
----------- -----------
TOTAL LIABILITIES 26,312,765 25,365,748
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 2,000,000 shares authorized;
1997--333,358 shares issued and outstanding
1996--334,180 shares issued and outstanding 3,334 3,342
Additional paid-in capital 7,172,508 7,188,983
Retained earnings 12,925,566 12,474,579
Unrealized gains on investments, net of tax 1,016,956 424,621
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 21,118,364 20,091,525
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $47,431,129 $45,457,273
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
-3-
<PAGE>
AMERINST INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Premiums earned $5,852,286 $5,386,388 $5,494,413
Net investment income and net realized gains and losses 2,572,539 2,394,377 2,195,451
---------- ---------- ----------
TOTAL REVENUES 8,424,825 7,780,765 7,689,864
---------- ---------- ----------
LOSSES AND EXPENSES
Losses and loss adjustment expenses 4,748,833 2,717,884 1,489,667
Policy acquisition costs 1,462,733 1,302,327 1,084,577
Operating and management expenses 619,684 727,780 786,037
---------- ---------- ----------
TOTAL LOSSES AND EXPENSES 6,831,250 4,747,991 3,360,281
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,593,575 3,032,774 4,329,583
Provision for income taxes 262,404 945,996 1,232,598
---------- ---------- ----------
NET INCOME $1,331,171 $2,086,778 $3,096,985
========== ========== ==========
NET INCOME PER SHARE $ 3.99 $ 6.24 $ 9.24
========== ========== ==========
Average common shares outstanding for the year 333,870 334,558 335,294
========== ========== ==========
</TABLE>
See notes to the consolidated financial statements.
-4-
<PAGE>
AMERINST INSURANCE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gains
Additional (Losses) on Total
Common Paid-in Retained Investments, Treasury Stockholders'
Stock Capital Earnings Net of Tax Stock Equity
------- ---------- ------------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $3,366 $7,248,608 $ 8,635,961 $(1,390,852) $ - $14,497,083
Net income 3,096,985 3,096,985
Change in net unrealized gains and losses 1,966,216 1,966,216
Purchases of 1,693 shares of treasury stock (65,079) (65,079)
Retirement of 1,693 shares of treasury stock (17) (42,325) (22,737) 65,079
Cash dividends paid ($1.30 per share) (435,412) (435,412)
------ --------- ----------- ----------- ------- ----------
Balance at December 31, 1995 3,349 7,206,283 11,274,797 575,364 - 19,059,793
Net income 2,086,778 2,086,778
Change in net unrealized gains and losses (150,743) (150,743)
Purchases of 692 shares of treasury stock (34,642) (34,642)
Retirement of 692 shares of treasury stock (7) (17,300) (17,335) 34,642
Cash dividends paid ($2.60 per share) (869,661) (869,661)
------ ---------- ----------- ----------- -------- -----------
Balance at December 31, 1996 3,342 7,188,983 12,474,579 424,621 - 20,091,525
Net income 1,331,171 1,331,171
Change in net unrealized gains and losses 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 $12,925,566 $ 1,016,956 $ - $21,118,364
====== ========== =========== =========== ======== ===========
</TABLE>
See notes to the consolidated financial statements.
-5-
<PAGE>
AMERINST INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,331,171 $ 2,086,778 $ 3,096,985
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Amortization of net premiums and discounts
on investments 21,185 18,906 43,796
Net realized (gains) losses on sales of investments (305,253) (1,765) 312,647
Deferred income taxes 7,995 (495,727) 817,999
Changes in assets and liabilities:
Assumed reinsurance premiums receivable (216,581) 196,628 (754,590)
Reinsurance recoveries receivable 980,213 1,139,586 911,439
Accrued investment income 15,900 75,303 (217,556)
Deferred policy acquisition costs (189,550) (48,573) (120,887)
Income taxes receivable/payable (55,302) 713,191 (3,765,309)
Prepaid expenses and other assets (96,498) (9,758) (15,862)
Unpaid losses and loss adjustment expenses 502,936 (1,489,099) (3,546,094)
Unearned premiums 665,088 48,565 41,562
Reinsurance balances payable (167,614) (1,083,436) (687,903)
Accrued expenses and other liabilities 1,909 (36,364) 413,372
------------ ------------ ------------
Net cash provided by (used in) operating activities 2,495,599 1,114,235 (3,470,401)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments (13,572,437) (22,603,360) (16,227,959)
Proceeds from sales and maturities of investments 11,010,362 20,761,301 22,430,109
Net (purchases) sales of short-term investments 1,697,475 (1,325,897) 244,016
------------ ------------ ------------
Net cash provided by (used in) investing activities (864,600) (3,167,956) 6,446,166
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (867,735) (869,661) (435,412)
Purchases of treasury stock (28,932) (34,642) (65,079)
------------ ------------ ------------
Net cash used in financing activities (896,667) (904,303) (500,491)
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 734,332 (2,958,024) 2,475,274
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 347,404 3,305,428 830,154
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,081,736 $ 347,404 $ 3,305,428
============ ============ ============
SUPPLEMENTAL DATA
Income taxes paid $ 425,000 $ 728,505 $ 600,000
============ ============ ============
</TABLE>
See notes to the consolidated financial statements.
-6-
<PAGE>
AMERINST INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization: AmerInst Insurance Group, Inc. (AIIG) was incorporated under the
laws of the State of Delaware on September 9, 1987. On February 29, 1988, AIIG
sold 343,357 shares of its common stock at a price of $25 per share in a public
offering to accounting firms that were members of the American Institute of
Certified Public Accountants (AICPA) or a state CPA society. Proceeds of the
public offering (net of selling agent's commission and expenses, management fees
and other offering costs totaling $1,151,850) amounted to $7,432,075, which
consisted of $3,434 of paid-in share capital and $7,428,641 of additional paid-
in capital.
Basis of Presentation: The accompanying consolidated financial statements have
been prepared in conformity with generally accepted accounting principles (GAAP)
and include the accounts of AIIG and its wholly owned subsidiary, AmerInst
Insurance Company (AIIC). All material intercompany accounts and transactions
have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP 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.
Recognition of Premium Revenue: Premiums assumed are earned ratably over the
terms of the underlying policies to which they relate. Premiums assumed
relating to the unexpired portion of underlying policies in force at the balance
sheet date are recorded as unearned premiums. Premiums ceded pursuant to excess
of loss retrocession agreements are expensed over the calendar year term of the
treaty and are netted against earned premiums. Charges or credits resulting
from adjustments to provisional retrocession premiums ceded pursuant to the
excess of loss retrocession agreements are reflected as adjustments to ceded
premiums based upon estimated ultimate premiums. Management believes that
recorded retrocession premiums ceded represent its best estimates of such
amounts; however, as changes in the estimated ultimate losses and loss
adjustment expenses applicable to the first excess of loss retrocession
agreements 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.
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 calculated based upon projections of AIIC's historical loss
experience supplemented with industry data. In
-7-
<PAGE>
AMERINST INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(Continued)
establishing its liability for unpaid losses and loss adjustment expenses, AIIC
utilizes the findings of an independent consulting actuary. 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 losses. 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 dates. Accordingly, the ultimate liability
could vary significantly from the amounts shown in the financial statements. As
adjustments to these estimates become necessary, such adjustments are reflected
in current operations.
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
changes in underwriting standards, policy provisions, and general economic
trends. These 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 amounts; 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.
Investments: All investments are considered to be available for sale and are
reported at their estimated market values at December 31, 1997 and 1996. Net
changes in these estimated market values are reported as unrealized gains or
losses directly in stockholders' equity, net of tax effects. Net realized gains
and losses are determined using the specific identification method and are
reflected in the income statement in the period of sale. Short-term investments
include fixed maturity securities with a maturity date within one year of
acquisition. As more fully described in Note B, certain investments held are
used to collateralize obligations to previous and current ceding companies.
Cash and Cash Equivalents: Cash equivalents consist of money market mutual
funds.
-8-
<PAGE>
AMERINST INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE B--INSURANCE ACTIVITY
AIIG, through its wholly-owned subsidiary AIIC, has been engaged since April
1988 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 of AIIC through
mid-1993, Crum and Forster Managers Corporation through a group of affiliated
insurance companies (collectively CFMC), was the primary insurer for the AICPA
Plan. In 1988, AIIC provided reinsurance to CFMC, 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 CFMC and retroceded a portion
to AIIC such that AIIC 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 (CNA) as its
insurance carrier, replacing CFMC as the primary insurer. AIIC 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. CFMC, VSC, and
CNA are collectively referred to as the "ceding companies".
Pursuant to the reinsurance agreements described above, AIIC is required to
provide the ceding companies with collateral for AIIC's liabilities to them. At
December 31, 1997 and 1996, investments with a carrying value of $499,707 and
$1,498,311, respectively, are held in a trust account pursuant to the 1988
reinsurance agreement with CFMC. At December 31, 1997 and 1996, the carrying
value of investments held in a trust account pursuant to reinsurance agreements
with VSC in effect from 1989 to mid-1993 is $7,144,800 and $12,291,395,
respectively. At December 31, 1997 and 1996, AIIC has provided CNA with a letter
of credit issued by Harris Trust and Savings Bank in the amount of $4,500,000.
At December 31, 1997 and 1996, investments with a carrying value of $7,225,790
and $7,170,612, respectively, are held in a trust account at Harris Trust and
Savings Bank as security for the letter of credit.
AIIC entered into excess of loss retrocession agreements to limit its retained
risk on any one claim underwritten by CFMC 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 AIIC are adjustable within a
specified range based on actual experience under each contract. Retrocession
transactions do not relieve AIIC from its obligation to the ceding companies.
Revisions to the estimates of ultimate premiums ceded pursuant to the
retrocession agreements resulted in credits to retroceded premiums recorded of
$720,298, $693,976 and $611,916 during 1997, 1996 and 1995, respectively.
-9-
<PAGE>
AMERINST INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE B--INSURANCE ACTIVITY--(Continued)
A reconciliation of assumed to net premiums, on both a written and an earned
basis is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
Written Earned Written Earned Written Earned
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assumed $5,797,076 $5,131,988 $4,740,977 $4,692,412 $4,924,059 $4,882,497
Retroceded 720,298 720,298 693,976 693,976 611,916 611,916
---------- ---------- ---------- ---------- ---------- ----------
Net $6,517,374 $5,852,286 $5,434,953 $5,386,388 $5,535,975 $5,494,413
========== ========== ========== ========== ========== ==========
</TABLE>
The components of the liability for unpaid losses and loss adjustment expenses
and related reinsurance recoveries receivable are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------------------
Gross Reinsurance Net Gross Reinsurance Net
Liability Receivable Liability Liability Receivable Liability
--------- ------------ --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Case basis estimates $ 5,765 $ (372) $ 5,393 $ 6,673 $(1,162) $ 5,511
Supplemental amounts 15,038 (668) 14,370 13,627 (858) 12,769
------- ------- ------- ------- ------- -------
Totals $20,803 $(1,040) $19,763 $20,300 $(2,020) $18,280
======= ======= ======= ======= ======= =======
</TABLE>
-10-
<PAGE>
AMERINST INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE B--INSURANCE ACTIVITY--(Continued)
The changes in the liability for unpaid losses and loss adjustment expenses, net
of related reinsurance recoveries receivable, are as follows:
<TABLE>
<CAPTION>
(000's omitted)
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance as of January 1, net of
reinsurance recoveries receivable $18,280 $18,629 $21,264
Incurred related to:
Current year 6,160 5,635 4,797
Prior years (1,411) (2,917) (3,307)
------- ------- -------
Total incurred 4,749 2,718 1,490
------- ------- -------
Paid related to:
Current year (230) (183) (38)
Prior years (3,036) (2,884) (4,087)
------- ------- -------
Total paid (3,266) (3,067) (4,125)
------- ------- -------
Balance as of December 31, net of
reinsurance recoveries receivable $19,763 $18,280 $18,629
======= ======= =======
</TABLE>
-11-
<PAGE>
AMERINST INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE C--INVESTMENTS
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest earned:
Fixed maturity investments $2,158,681 $2,283,637 $2,290,071
Funds held by ceding companies 113,704
Short term investments and cash and cash equivalents 148,884 157,679 150,104
Dividends earned 57,724 23,571 23,336
Net realized gains (losses) on sales of investments:
Fixed maturity investments 3,025 (160,919) (367,505)
Equity securities 302,693 163,265 54,858
Short-term investments (466) (581)
Investment expenses (98,002) (72,275) (69,117)
---------- ---------- ----------
Net investment income $2,572,539 $2,394,377 $2,195,451
========== ========== ==========
Net change in unrealized gains (losses):
Fixed maturity investments $ 270,305 $ (373,231) $1,229,681
Funds held by ceding companies 1,555,517
Equity securities 627,172 144,833 193,917
---------- ---------- ----------
Net change in unrealized gains (losses) $ 897,477 $ (228,398) $2,979,115
========== ========== ==========
</TABLE>
-12-
<PAGE>
AMERINST INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE C--INVESTMENTS--(Continued)
The cost or amortized cost and estimated market values of investments are as
follows:
<TABLE>
<CAPTION>
As of December 31, 1997
--------------------------------------------------
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. treasury securities and obligations of
U.S. government agencies $ 4,447,299 $ 105,201 $ - $ 4,552,500
Obligations of states and political subdivisions 13,831,512 292,052 (5,510) 14,118,054
Mortgage-backed securities 15,142,052 253,013 15,395,065
----------- ---------- --------- -----------
Total fixed maturity investments 33,420,863 650,266 (5,510) 34,065,619
Equity securities 6,721,873 1,177,052 (280,965) 7,617,960
----------- ---------- --------- -----------
Total investments $40,142,736 $1,827,318 $(286,475) $41,683,579
=========== ========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1996
--------------------------------------------------
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. treasury securities and obligations of
U.S. government agencies $ 5,684,753 $ 87,747 $ - $ 5,772,500
Obligations of states and political subdivisions 9,332,002 110,379 (19,952) 9,422,429
Mortgage-backed securities 20,295,410 214,677 (16,584) 20,493,503
----------- ---------- --------- -----------
Total fixed maturity investments 35,312,165 412,803 (36,536) 35,688,432
Short term investments 1,689,278 (1,817) 1,687,461
Equity securities 1,991,963 345,397 (76,482) 2,260,878
----------- ---------- --------- -----------
Total investments $38,993,406 $ 758,200 $(114,835) $39,636,771
=========== ========== ========= ===========
</TABLE>
-13-
<PAGE>
AMERINST INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE C--INVESTMENTS--(Continued)
The amortized cost and estimated market value of fixed maturity investments at
December 31, 1997, 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>
Estimated
Amortized Market
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 751,875 $ 760,000
Due after one year through five years 6,654,159 6,769,270
Due after five years through ten years 9,463,351 9,702,132
Due after ten years 1,409,426 1,439,152
----------- -----------
Subtotal 18,278,811 18,670,554
Mortgage-backed securities 15,142,052 15,395,065
----------- -----------
Total $33,420,863 $34,065,619
=========== ===========
</TABLE>
Included in fixed maturity investments at December 31, 1997 and 1996 are
securities held in a trust fund deposit at a bank in accordance with the
Illinois Insurance Code with a carrying value of approximately $1,750,000.
Information on sales and maturities of investments in fixed maturity investments
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Total proceeds (excluding short-term investments) $9,890,774 $19,057,331 $18,680,109
Gross gains 18,504 33,438 31,761
Gross losses (15,479) (194,357) (399,266)
</TABLE>
NOTE D--OPERATING AND MANAGEMENT EXPENSES
AIIG and AIIC have no employees. Their operating activities, as well as certain
management functions, are performed by contracted professional service
providers. USA Risk Group (USARG) provides certain management, administrative
and operational services under the direction of the Company's board of directors
pursuant to an agreement. The agreement may be terminated by either party on
July 1 of each year within a period not exceeding ninety days and no less than
60 days prior written notice.
-14-
<PAGE>
AMERINST INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE D--OPERATING AND MANAGEMENT EXPENSES--(Continued)
Operating and management expenses include compensation paid to members of the
board of directors and various committees of the board totaling $140,025 in
1997, $140,300 in 1996 and $129,183 in 1995.
NOTE E--FEDERAL INCOME TAXES
AIIG and AIIC file a consolidated federal income tax return. Deferred federal
income taxes arise from temporary differences between the valuation of assets
and liabilities as determined for financial reporting purposes and income 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. Although realization is not
assured, management believes it is more likely than not that the net deferred
tax asset recorded at each balance sheet date is fully realizable. The amount
of the deferred tax asset considered realizable could be reduced in the near
term if estimates of future taxable income are reduced. Significant permanent
differences between book and taxable income include tax exempt municipal bond
income, and the deduction for dividends received.
The components of the provision for income tax are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ---------- ----------
<S> <C> <C> <C>
Federal income tax
Current tax $253,747 $1,434,172 $ 347,423
Deferred tax (benefit) 8,657 (495,780) 841,771
-------- ---------- ----------
Total federal income tax 262,404 938,392 1,189,194
State income tax 7,604 43,404
-------- ---------- ----------
Provision for income tax $262,404 $ 945,996 $1,232,598
======== ========== ==========
</TABLE>
-15-
<PAGE>
AMERINST INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE E--FEDERAL INCOME TAXES--(Continued)
A reconciliation of income tax at the federal statutory rate to the Company's
provision for income tax is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Income tax at federal statutory rate $ 541,816 $1,031,143 $1,472,058
Effect of tax exempt investment income (164,154) (71,449) (143,386)
State income taxes 7,604 43,404
Other (115,258) (21,302) (139,478)
--------- ---------- ----------
Totals $ 262,404 $ 945,996 $1,232,598
========= ========== ==========
</TABLE>
The composition of the net deferred tax asset at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
Deferred Tax Deferred Tax
Assets Liabilities Net
------------ ------------ ----------
<S> <C> <C> <C>
Loss reserve discount $1,491,367 $ - $1,491,367
Unearned premiums 191,020 191,020
Deferred policy acquisition costs (272,203) (272,203)
Unrealized gain on investments (523,885) (523,885)
Capital loss carry forward 106,300 106,300
---------- --------- ----------
Total $1,788,687 $(796,088) $ 992,599
========== ========= ==========
</TABLE>
-16-
<PAGE>
AMERINST INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE E--FEDERAL INCOME TAXES--(Continued)
The composition of the net deferred tax asset at December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
Deferred Tax Deferred Tax
Assets Liabilities Net
------------ ------------ ----------
<S> <C> <C> <C>
Loss reserve discount $1,480,805 $ - $1,480,805
Unearned premiums 145,794 145,794
Deferred policy acquisition costs (207,756) (207,756)
Unrealized gain on investments (218,744) (218,744)
Capital loss carryforward 106,300 106,300
---------- --------- ----------
Total $1,732,899 $(426,500) $1,306,399
========== ========= ==========
</TABLE>
NOTE F--INSURANCE REGULATORY MATTERS
AIIC, domiciled in the State of Illinois, prepares statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Insurance Department of the State of Illinois. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners (NAIC), as well as state laws,
regulations and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. The NAIC
currently is in the process of establishing a codified set of statutory
accounting practices (the codification), the result of which is expected to
change "prescribed" statutory accounting practices. The codification is
expected to be effective in 1999. The impact of the codification on AIIC cannot
be determined at this time. Significant differences between statutory
accounting practices and generally accepted accounting principles as apply to
AIIC are as follows:
. For statutory purposes, policy acquisition costs are charged to
operations in the year the costs are incurred rather than being
deferred and amortized as premiums are earned.
. Under statutory accounting practices, there is no provision made for
deferred income taxes.
. Certain assets including prepaid expenses are not admitted for
statutory purposes.
. Investments in fixed maturity securities are valued at amortized cost
under statutory accounting practices, rather than at market value.
-17-
<PAGE>
AMERINST INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE F--INSURANCE REGULATORY MATTERS--(Continued)
Statutory surplus (stockholder's equity determined on a statutory basis) as
reflected in AIIC's Annual Statement filed with the Insurance Department of the
State of Illinois was $17,400,602 and $16,478,241 at December 31, 1997 and 1996,
respectively. Statutory net income was $1,248,255, $1,711,224 and $3,969,695 in
1997, 1996 and 1995, respectively.
The State of Illinois imposes a restriction on the amount of dividends that can
be paid without prior regulatory approval. The maximum amount of dividends that
may be paid without such approval is limited to the greater of 10% of statutory
surplus or 100% of statutory basis net income for the preceding fiscal year.
The amount of dividends that could be paid by AIIC in 1998 without prior
regulatory approval is $1,740,060. Accordingly, $18,200,893 of AIIC's
separately determined GAAP basis stockholder's equity of $19,940,953 is
unavailable for distribution to AIIG in 1998 without prior regulatory approval.
NOTE G--PROPOSED REDOMESTICATION AND RESTRUCTURING
AIIG's Board of Directors has voted to submit a proposed "Exchange Agreement"
and related matters to a vote of shareholders. Pursuant to this proposal, AIIG
would transfer all of its assets and liabilities to a newly formed Bermuda
company in exchange for newly issued shares of the Bermuda company. AIIG would
then be liquidated and AIIG shareholders would receive on a share-for-share
basis the newly issued shares of the Bermuda company.
The transaction contemplates the restructuring of AIIG's business, including the
redomestication of AIIC's insurance operations to a Bermuda domiciled company.
The transactions contemplated in the Exchange Agreement, the redomestication and
the restructuring will be consummated only if certain conditions are satisfied,
including the approval of specified matters by the holders of at least a
majority of the outstanding AIIG common stock, certain regulatory approvals and
the agreement of certain other third parties.
-18-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
ON FINANCIAL STATEMENT SCHEDULES
--------------------------------
The Board of Directors
AmerInst Insurance Group, Inc.
Our report on the 1997 consolidated financial statements of AmerInst Insurance
Group, Inc. is included on page 11 of this Form 10-K. In connection with our
audit of such financial statements, we also audited the related financial
statement schedules listed in the index on page 9 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
JOHNSON LAMBERT & CO.
Burlington, Vermont
February 13, 1998
-19-
<PAGE>
AMERINST INSURANCE GROUP, INC. (PARENT)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--SCHEDULE II
Condensed Balance Sheets as of December 31, 1996 and 1997
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Investment in subsidiary $18,940,597 $18,379,184
Fixed maturity investments 1,081,859 1,082,928
Cash 3,162 6,339
Accrued investment income 20,514 20,514
Prepaid expenses and other assets 67,507 56,341
Income tax recoverable 79,893 218,275
----------- -----------
TOTAL ASSETS $20,193,532 $19,763,581
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Due to subsidiary $ 47,895 $ 61,325
Deferred federal income tax 8,552 7,399
Accrued expenses and other liabilities 19,077 13,590
----------- -----------
TOTAL LIABILITIES 75,524 82,314
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 3,334 3,342
Additional paid-in capital 7,172,508 7,188,983
Retained earnings 12,925,566 12,474,579
Net unrealized gain in held for sale securities 16,600 14,363
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 20,118,008 19,681,267
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,193,532 $19,763,581
=========== ===========
</TABLE>
-20-
<PAGE>
AMERINST INSURANCE GROUP, INC. (PARENT)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--SCHEDULE II
Condensed Statements of Income for the Years Ended December 31, 1995 through
1997
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
---------- ------------ ----------
<S> <C> <C> <C>
REVENUE
Net investment income $ 56,039 $ 56,816 $ 63,887
---------- ---------- ----------
EXPENSES
Operating and management expenses 242,064 323,970 327,481
---------- ---------- ----------
Income (Loss) Before Income Taxes and
Undistributed Earnings of Subsidiary (186,025) (267,154) (263,594)
Income Tax (Benefit) (88,048) (98,355) (111,765)
---------- ---------- ----------
Income (Loss) before undistributed income
of subsidiary (97,977) (168,799) (151,829)
Undistributed Net Income of Subsidiary 1,429,148 2,255,577 3,248,814
---------- ---------- ----------
NET INCOME $1,331,171 $2,086,778 $3,096,985
========== ========== ==========
</TABLE>
-21-
<PAGE>
AMERINST INSURANCE GROUP, INC. (PARENT)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--SCHEDULE II
Condensed Statements of Cash Flows for the Years Ended December 31, 1995 through
1997
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Cash Provided by Operations $ 893,490 $ 829,642 $ 474,335
--------- --------- ---------
INVESTING ACTIVITIES
Purchases of fixed-maturity investments - (190,000) (105,000)
Sale and maturities of fixed maturity investments 250,000
Net (purchases) sales of short-term investments 46,637 46,637
--------- --------- ---------
Net Cash Provided by (Used in) Investing Activities - 60,000 (58,363)
--------- --------- ---------
FINANCING ACTIVITIES
Dividends paid (867,735) (869,661) (435,412)
Purchases of treasury stock (28,932) (34,642) (65,079)
--------- --------- ---------
Net Cash Used in Financing Activities (896,667) (904,303) (500,491)
--------- --------- ---------
DECREASE IN CASH (3,177) (14,661) (84,519)
CASH AT BEGINNING OF YEAR 6,339 21,000 105,519
--------- --------- ---------
CASH AT END OF YEAR $ 3,162 $ 6,339 $ 21,000
========= ========= =========
</TABLE>
-22-
<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: June 4, 1998 AMERINST INSURANCE GROUP, INC.
By: /s/ Norman C. Batchelder
-------------------------------------
Norman C. Batchelder, President
-23-
