The Company’s insurance operating ratios are GAAP financial measures that are generally viewed in the insurance industry as indicators of underwriting profitability. The loss ratio is the ratio of net losses and loss adjustment expenses to net premiums earned. The expense ratio is the ratio of acquisition costs and other underwriting expenses to net premiums earned. The combined ratio is the sum of the loss and expense ratios. The ratios presented here represent the consolidated results of the Company’s Commercial Lines, Personal Lines, and Reinsurance Operations.
2017 loss and combined ratios reflect a $53.9 million reduction of net losses and loss adjustment expenses
The Company’s consolidated financial statements are prepared in conformity with GAAP, which require it to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. See Note 3 of the notes to consolidated financial statements contained in Item 8 of Part II of this report. Actual results could differ from those estimates and assumptions.
Management’s best estimate at December 31, 2018 was recorded as the loss reserve. Management’s best estimate is as of a particular point in time and is based upon known facts, the Company’s actuarial analyses, current law, and the Company’s judgment. This resulted in carried gross and net reserves of $680.0 million and $570.7 million, respectively, as of December 31, 2018. A breakout of the Company’s gross and net reserves as of December 31, 2018 is as follows:
The Company’s net reserves for losses and loss adjustment expenses of $570.7 million as of December 31, 2018 relate to multiple accident years. Therefore, the impact of changes in frequency and severity for more than one accident year could be higher or lower than the amounts reflected above.
The Company manages its business through three business segments: Commercial Lines, Personal Lines, and Reinsurance Operations. The Commercial Lines and Personal Lines segments comprise the Company’s U.S. Insurance Operations, which currently includes the operations of United National Insurance Company, Diamond State Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, Penn-Patriot Insurance Company, American Reliable Insurance Company, American Insurance Adjustment Agency, Inc., Collectibles Insurance Services, LLC, Global Indemnity Insurance Agency, LLC, and J.H. Ferguson & Associates, LLC. Reinsurance Operations includes the operations of Global Indemnity Reinsurance Company, Ltd.
The loss ratio is a GAAP financial measure that is generally viewed in the insurance industry as an indicator of underwriting profitability and is calculated by dividing net losses and loss adjustment expenses by net premiums earned.
The current accident year losses and loss ratio is summarized as follows:
The calendar year loss ratio for the years ended December 31, 2018, 2017, and 2016 includes a decrease of $12.6 million, or 6.4 percentage points, a decrease of $6.6 million, or 3.1 percentage points, and an increase of less than $0.1 million, or less than 0.1 percentage points, respectively, related to reserve development on prior accident years. Please see Note 10 of the notes to the consolidated financial statements in Item 8 of Part II of this report for further discussion on prior accident year development.
Gross investment income for 2018 increased by 16.4% compared to 2017. The increase was primarily due to an increase in yield within the fixed maturities portfolio due to extending duration in 2017, and increased returns from alternative investments. Gross investment income for 2017 increased by 7.9% compared to 2016. The increase was primarily due to the increase in yield and a larger fixed maturities portfolio resulting from $130.0 million in borrowings offset by a reduction in the investment portfolio of $83.0 million for a share redemption in December, 2017.
At December 31, 2018, the Company held agency mortgage-backed securities with a market value of $21.0 million. Excluding the agency mortgage-backed securities, the average duration of the Company’s fixed maturities portfolio was 3.1 years as of December 31, 2018, compared with 3.2 years as of December 31, 2017. Including cash and short-term investments, the average duration of the Company’s fixed maturities portfolio, excluding agency mortgage-backed securities, was 2.9 years as of December 31, 2018, compared to 3.0 years as of December 31, 2017. Changes in interest rates can cause principal payments on certain investments to extend or shorten which can impact duration. At December 31, 2018, the Company’s embedded book yield on its fixed maturities, not including cash, was 3.1% compared with 2.7% at December 31, 2017. The embedded book yield on the $95.6 million of municipal bonds in the Company’s portfolio, which includes $94.9 million of taxable municipal bonds, was 3.2% at December 31, 2018, compared to an embedded book yield of 3.0% on the Company’s municipal bond portfolio of $95.1 million at December 31, 2017.
The factors described above resulted in a net loss of $56.7 million, net loss of $9.6 million, and net income of $49.9 million for the years ended December 31, 2018, 2017, and 2016, respectively.
As of December 31, 2018, Global Indemnity Limited owed $75.0 million to Global Indemnity Group Limited under a loan agreement which bears interest at the Applicable Federal Rate of 1.11%. Accrued interest was $2.2 million as of December 31, 2018.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 14, 2019, expressed an unqualified opinion thereon.
For investments in limited liability companies and limited partnerships where the ownership interest is less than 3%, the Company carries these investments at fair value, and the change in the difference between cost and the fair value of the partnership interests, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in shareholders' equity and, accordingly, has no effect on net income other than for impairments deemed to be other than temporary. The Company uses the equity method to account for investments in limited liability companies and limited partnerships where its ownership interest exceeds 3%. The equity method of accounting for an investment in a limited liability company or limited partnership requires that its cost basis be updated to account for the income or loss earned on the investment. The income or loss associated with the limited liability companies or limited partnerships is reflected in the consolidated statements of operations, and the adjusted cost basis approximates fair value.
not have access to daily valuations, therefore; the estimated fair value of the limited liability companies and limited partnerships are based on net asset value as a practical expedient for the limited liability companies and limited partnerships.
The Company regularly reviews the collectability of reinsurance receivables. An allowance for uncollectible reinsurance receivable is recognized based on the financial strength of the reinsurers and the length of time any balances are past due. Any changes in the allowance resulting from this review are included in net losses and loss adjustment expenses on the consolidated statements of operations during the period in which the determination is made. The allowance for uncollectible reinsurance was $8.0 million as of December 31, 2018 and 2017.
The Company has available a margin borrowing facility. The borrowing rate for this facility is tied to the Fed Funds Effective rate and was approximately 2.7% and 1.6% at December 31, 2018 and 2017, respectively. This facility is due on demand. The borrowings are subject to maintenance margin, which is a minimum account balance that must be maintained. A decline in market conditions could require an additional deposit of collateral. As of December 31, 2018, approximately $83.2 million in securities were deposited as collateral to support borrowings. The amount borrowed against the margin account may fluctuate as routine investment transactions, such as dividends received, investment income received, maturities and pay-downs, impact cash balances. The margin facility contains customary events of default, including, without limitation, insolvency, failure to make required payments, failure to comply with any representations or warranties, failure to adequately assure future performance, and failure of a guarantor to perform under its guarantee. The amount outstanding on the Company’s margin borrowing facility was $65.8 million and $72.2 million as of December 31, 2018 and 2017, respectively.
In addition to stock option grants, the Plan also provides for the granting of restricted shares to employees and non-employee Directors. The Company recognized compensation expense for restricted stock of $3.1 million, $4.1 million and $3.2 million for
Includes federal excise tax of $862 relating to cessions from Personal Lines to Reinsurance Operations.
Includes $35,334 of business written by American Reliable that is ceded to insurance companies owned by Assurant under a 100% quota share reinsurance agreement.