AICI Capital Trust 9% Pfd (fka AICPQ)

[Enterprising Investor]

The Enterprise Economics

AIC generates investment income from approximately $50,000,000 of cash and bonds yielding an estimated $2.5 million annually. Historically this income has been used to pay for staff and the third party administration of its claims run off.

Granite Re believed that, as a result of very conservative claims reserving practices at AIC there were significant claims redundancies in that company. As those redundancies are realized AIC’s capital and surplus will be increased making it an attractive target for acquisition.

Gross claims reserved at AIC totaled $57,926,000. Of that amount the company reinsured approximately $40,304,000 reducing net reserves on the books of AIC to $17,623,000. In addition to the net claims reserves of $17,623,000 the company had reserves for claims administration of approximately $18,000,000, an amount that Granite Re believed was too great and resulted in an artificial reduction of AIC’s capital and surplus. Aggressive claims resolution would have reduced much of the Loss Administration reserves and free up approximately $18,000,000 of value.

The information above came from the Granite Re Plan. All information was based on AIC financials dated 9/30/08.

The AICIQ July 2010 Monthly Operating Report, the last one available, detailed Investments in AIC at $1.584 million. AICIQ also had a note receivable from AIC in the amount of $20 million, which was fully reserved. The combination of a positive book value for AIC leads me to believe that a high percentage of the AIC note will be repaid to AICIQ.

http://sec.gov/Archives/edgar/data/74783/000119312510184702/dex991.htm

The funds could be then used to repay the pre-petition debt including AICPQ. I believe all creditors will end up with less than full payment.

I envision AICPQ will resemble LSRAF over time (review my postings).

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