(3) Results for the year to date 2012 include the impact of an out-of-period adjustment which reduced net income by $1.6 million, or $0.06 per diluted share.
(1) 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 both the Company’s Insurance Operations and Reinsurance Operations.
2010 loss and combined ratios reflect a $54.1 million reduction of net losses and loss adjustment expenses
On June 26, 2014, the Company sold approximately $148.7 million of the Company’s equity portfolio.
American Reliable was established in 1952 and is headquartered in Scottsdale Arizona. It is rated “A” (Excellent) by A.M. Best. As of December 31, 2014, it employed approximately 200 full-time employees between its facilities in Scottsdale, Arizona, and Omaha, Nebraska. American Reliable writes property and casualty insurance across all fifty states primarily through a network of retail and general agents and select brokers. The two primary lines of business are Specialty Personal Lines and Agriculture.
The Company expects that the acquisition of American Reliable will have a material impact on the future financial condition and operating performance of Global Indemnity.
Key products of American Reliable’s Agriculture lines include farmers and ranchers, farmowners, commercial farm auto and liability. During 2014 these products generated $78.1 million of gross written premium, $72.9 million of net written premium and $71.3 million of net earned premium.
In total, American Reliable had $266.3 million of gross written premium, $249.8 million of net written premium and $249.3 million of net earned premium.
As part of the acquisition the Company acquired the American Reliable portfolio of cash and invested assets, which totaled $251.1 million as of December 31, 2014. The portfolio consists of $225.1 million in fixed income securities, $24.6 million of cash and cash equivalents, and $1.4 million in preferred stock.
The Company derives its revenues primarily from premiums paid on insurance policies that it writes and from income generated by its investment portfolio, net of fees paid for investment management services. The amount of insurance premiums that the Company receives is a function of the amount and type of policies it writes, as well as of prevailing market prices.
The Company’s expenses include losses and loss adjustment expenses, acquisition costs and other underwriting expenses, corporate and other operating expenses, interest, investment expenses, and income taxes. Losses and loss adjustment expenses are estimated by management and reflect the Company’s best estimate of ultimate losses and costs arising during the reporting period and revisions of prior period estimates. The Company records its best estimate of losses and loss adjustment expenses based on both internal and external’s actuarial analyses of the estimated losses the Company expects to incur on the insurance policies it writes. The ultimate losses and loss adjustment expenses will depend on the actual costs to resolve claims. Acquisition costs consist principally of commissions and premium taxes that are typically a percentage of the premiums on the insurance policies the Company writes, net of ceding commissions earned from reinsurers. Other underwriting expenses consist primarily of personnel expenses and general operating expenses. Corporate and other operating expenses are comprised primarily of outside legal fees, other professional and accounting fees, directors’ fees, management fees, and salaries and benefits for company personnel whose services relate to the support of corporate activities. Interest expense is primarily comprised of amounts due on outstanding debt.
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 2 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.
In developing loss and loss adjustment expense (“loss” or “losses”) reserve estimates for the Company’s Insurance Operations, its actuaries perform detailed reserve analyses each quarter. To perform the analysis, the data is organized at a “reserve category” level. A reserve category can be a line of business such as commercial automobile liability, or it can be a particular type of claim such as construction defect. The reserves within a reserve category level are characterized as short-tail and long-tail. For long-tail business, it will generally be several years between the time the business is written and the time when all claims are settled. The Company’s long-tail exposures include general liability, professional liability, products liability, commercial automobile liability, and excess and umbrella. Short-tail exposures include property, commercial automobile physical damage, and equine mortality. To manage its insurance operations, the Company differentiates by product classifications, which are Penn-America, United National, and Diamond State. For further discussion about the Company’s product classifications, see “General - Business Segments - Insurance Operations” in Item 1 of Part I of this report. Each of the Company’s product classifications contain both long-tail and short-tail exposures. Every reserve category is analyzed by the Company’s actuaries each quarter. The analyses generally include reviews of losses gross of reinsurance and net of reinsurance.
Loss reserve estimates for the Company’s Reinsurance Operations are developed by independent, external actuaries; however management is responsible for the final determination of loss reserve selections. The data for this analysis is organized by treaty and treaty year. As with the Company’s reserves for its Insurance Operations, reserves for its Reinsurance Operations are characterized as short-tail and long-tail. Long-tail exposures include workers compensation, professional liability, and excess and umbrella liability. Short-tail exposures are primarily catastrophe exposed property and marine accounts.
listed in the description of the Paid Development method. The estimate of losses yet to be paid is added to current paid losses to estimate the ultimate loss for each year. This method will react very slowly if actual ultimate loss ratios are different from expectations due to changes not accounted for by the expected loss ratio calculation.
decisions, the impact of underwriting changes and other factors. An average claim size is determined from past experience and applied to the number of unreported claims to estimate reserves for these claims.
Management’s best estimate at December 31, 2014 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 $675.5 million and $552.3 million, respectively, as of December 31, 2014. A breakout of the Company’s gross and net reserves, excluding the effects of the Company’s intercompany pooling arrangements and intercompany stop loss and quota share reinsurance agreements, as of December 31, 2014 is as follows:
If the actual levels of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s best estimate. For most of its reserving classes, the Company believes that frequency can be predicted with greater accuracy than severity. Therefore, the Company believes management’s best estimate is more sensitive to changes in severity than frequency. The following table, which the Company believes reflects a reasonable range of variability around its best estimate based on historical loss experience and
management’s judgment, reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity on the Company’s current accident year net loss estimate of $154.0 million for claims occurring during the year ended December 31, 2014:
The Company’s net reserves for losses and loss expenses of $552.3 million as of December 31, 2014 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.
See Note 7 of the notes to consolidated financial statements in Item 8 of Part II of this report for further information surrounding the Company’s reinsurance receivable balances and collectability as of December 31, 2014 and 2013. For a listing of the ten reinsurers for which the Company has the largest reinsurance asset amounts as of December 31, 2014, see “Reinsurance of Underwriting Risk” in Item 1 of Part I of this report.
The carrying amount of the Company’s investments approximates their fair value. The Company regularly performs various analytical valuation procedures with respect to investments, including reviewing each fixed maturity security in an unrealized loss position to determine the amount of unrealized loss related to credit loss and the amount related to all other factors, such as changes in interest rates. The credit loss represents the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. The credit loss component of the other than temporary impairment is recorded through earnings, whereas the amount relating to factors other than credit losses are recorded in other comprehensive income, net of taxes. During its review, the Company considers credit rating, market price, and issuer specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which the Company determines that a credit loss is likely are subjected to further analysis to estimate the credit loss to be recognized in earnings, if any. See Note 2 of the notes to consolidated financial statements in Item 8 of Part II of this report for the specific methodologies and significant assumptions used by asset class. Upon identification of such securities and periodically thereafter, a detailed review is performed to determine whether the decline is considered other than temporary. This review includes an analysis of several factors, including but not limited to, the credit ratings and cash flows of the securities, and the magnitude and length of time that the fair value of such securities is below cost.
The Company categorizes its assets that are accounted for at fair value in the consolidated statements into a fair value hierarchy. The fair value hierarchy is directly related to the amount of subjectivity associated with the inputs utilized to determine the fair value of these assets. The reported value of financial instruments not carried at fair value, principally cash and cash equivalents, margin borrowing facility, and notes payable, approximate fair value. See Note 5 of the notes to the consolidated financial statements in Item 8 of Part II of this report for further information about the fair value hierarchy and the Company’s assets that are accounted for at fair value.
The Company tests for impairment of goodwill at least annually and more frequently as circumstances warrant in accordance with applicable accounting guidance. Accounting guidance allows for the testing of goodwill for impairment using both qualitative and quantitative factors. Impairment of goodwill is recognized only if the carrying amount of the business unit, including goodwill, exceeds the fair value of the reporting unit. The amount of the impairment loss would be equal to the excess carrying value of the goodwill over the implied fair value of the reporting unit goodwill. Based on the qualitative assessment performed in 2014, there was no impairment of goodwill as of December 31, 2014.
Impairment of intangible assets with indefinite useful lives is tested at least annually and more frequently as circumstances warrant in accordance with applicable accounting guidance. Accounting guidance allows for the testing of intangible assets for impairment using both qualitative and quantitative factors. Impairment of indefinite lived intangible assets is recognized only if the carrying amount of the intangible assets exceeds the fair value of said assets. The amount of the impairment loss would be equal to the excess carrying value of the assets over the fair value of said assets. Based on the qualitative assessment performed in 2014, there were no impairments of indefinite lived intangible assets as of December 31, 2014.
See Note 6 of the notes to the consolidated financial statements in Item 8 of Part II of this report for more details concerning the Company’s goodwill and intangible assets.
In accordance with accounting guidance for insurance enterprises, the method followed in computing such amounts limits them to their estimated realizable value that gives effect to the premium to be earned, related
At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. A valuation allowance would be based on all available information including the Company’s assessment of uncertain tax positions and projections of future taxable income from each tax-paying component in each jurisdiction, principally derived from business plans and available tax planning strategies. There are no valuation allowances as of December 31, 2014 and 2013. The deferred tax asset balance is analyzed regularly by management. This assessment requires significant judgment and considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of carryforward periods, and tax planning strategies and/or actions. Based on these analyses, the Company has determined that its deferred tax asset is recoverable. Projections of future taxable income incorporate several assumptions of future business and operations that are apt to differ from actual experience. If, in the future, the Company’s assumptions and estimates that resulted in the forecast of future taxable income for each tax-paying component prove to be incorrect, a valuation allowance may be required. This could have a material adverse effect on the Company’s financial condition, results of operations, and liquidity.
The Company applies a more likely than not recognition threshold for all tax uncertainties, only allowing the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities. Please see Note 8 of the notes to the consolidated financial statements in Item 8 of Part II of this report for a discussion of the Company’s tax uncertainties.
As of December 31, 2014, the Company managed its business through two business segments: Insurance Operations, which includes the operations of United National Insurance Company, Diamond State Insurance Company, United National Specialty Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, Penn-Patriot Insurance Company, American Insurance Adjustment Agency, Inc., Collectibles Insurance Services, LLC, Global Indemnity Insurance Agency, LLC, and J.H. Ferguson & Associates, LLC, and Reinsurance Operations, which includes the operations of Global Indemnity Reinsurance Company, Ltd.
(3) Includes excise tax of $1,114, $1,026, and $936 related to cessions from the Company’s Insurance Operations to its Reinsurance Operations for 2014, 2013, and 2012, respectively.
(4) The Company’s insurance combined 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.
(1) Includes excise tax of $1,114 and $1,026 related to cessions from the Company’s Insurance Operations to its Reinsurance Operations for 2014 and 2013, respectively.
(2) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments. The most directly comparable GAAP measure is the combined ratio.
The ratio of net premiums written to gross premiums written was 92.6% for 2014 and 92.0% for 2013.
Net premiums earned were $211.2 million for 2014, compared with $196.3 million for 2013, an increase of $14.9 million or 7.6%. The growth in net premiums earned was primarily due to increases in net premiums written within the previous year. Property net premiums earned for 2014 and 2013 were $126.6 million and $114.1 million, respectively. Casualty net premiums earned for 2014 and 2013 were $84.5 million and $82.2 million, respectively.
In 2014, the Company reduced its prior accident year loss reserves by $12.5 million, which primarily consisted of the following:
Commercial Auto: A $3.6 million increase primarily related to accident years 2011 through 2013. Larger vehicles were written prior to 2014 and industry loss development factors were used to project losses.
In 2013, the Company reduced its prior accident year loss reserves by $7.6 million, which primarily consisted of the following:
Acquisition costs and other underwriting expenses were $89.0 million for 2014, compared with $87.4 million for 2013, an increase of $1.6 million or 1.9%. The increase is primarily due to increased commissions as a result of growth in net premiums earned offset by the impact of the premium deficiency charge recognized in 2013.
The expense ratio for the Company’s Insurance Operations was 42.1% for 2014, compared with 44.5% for 2013. The expense ratio is a GAAP financial measure that is calculated by dividing the sum of acquisition costs and other underwriting expenses by net premiums earned. The decrease in the expense ratio is primarily due to the growth in earned premium volume as well as the impact of the premium deficiency charge recognized in 2013 as noted above.
The factors described above resulted in income from the Company’s Insurance Operations of $5.2 million for 2014, compared with a loss of $2.1 million for 2013, an improvement of $7.3 million.
(1) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments. The most directly comparable GAAP measure is the combined ratio.
(4) This is a non-GAAP measure that excludes the impact of premium deficiency charges. The most directly comparable GAAP measure is the acquisition cost and other underwriting expenses.
(5) The Company believes that this non-GAAP ratio or measure is useful to investors when evaluating the Company’s underwriting performance as trends in the Company’s reinsurance operations may be obscured by prior accident year adjustments. This non-GAAP ratio or measure should not be considered as a substitute for its most directly comparable GAAP measure and does not reflect the overall underwriting profitability of the Company.
Gross premiums written was $61.3 million for 2014, compared $58.4 million for 2013, an increase of $2.9 million or 5.0%. This increase is mainly due to a change in the Company’s quota share participation on several property treaties as well as several new professional liability placements.
The current accident year loss ratio increased 10.4 points from 31.3% for 2013 to 41.7% for 2014 primarily due to an increase in losses for property lines. The property lines current accident year loss ratio increased to 39.7% for 2014 from 28.7% for 2013.
Net losses and loss adjustment expenses were $20.0 million for 2014, compared with $16.2 million for 2013, an increase of $3.8 million or 23.7%. Excluding the impact of prior year adjustments, the current accident year net losses and loss adjustment expenses increased from $16.4 million for 2013 to $23.9 million for 2014. This increase is primarily attributable to an increase in net premiums earned and an increase in property line losses as noted above.
The factors described above resulted in income from the Company’s Reinsurance Operations of $16.7 million in 2014, compared to $18.0 million in 2013, a decrease of $1.3 million.
Gross investment income, which excludes realized gains and losses, was $32.4 million for 2014, compared with $41.4 million for 2013, a decrease of $9.0 million or 21.7%. The decrease was primarily due to the redemption of the Company’s corporate loans portfolio during the first quarter of 2014 and lower reinvestment yields.
Year Ended December 31, 2013 Compared with the Year Ended December 31, 2012
(7) This is a non-GAAP measure that excludes the impact of prior accident year adjustments and premium deficiency charges. The most directly comparable GAAP measure is the net losses and loss adjustment expenses.
(13) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments. The most directly comparable GAAP measure is the property loss ratio.
Gross premiums written was $232.4 million for 2013, compared with $201.8 million for 2012, an increase of $30.6 million or 15.2%. The increase was primarily driven by growth in the Company’s small business binding authority of $19.7 million, as well as growth in the property brokerage, programs and other lines. Growth was driven by new business, pricing increases, and increased agent relationships as well as a new product offering in property brokerage.
The non-catastrophe loss ratio decreased 8.4 points from 50.0% in 2012 to 41.6% in 2013. Non-catastrophe losses were $47.5 million and $47.4 million for the years ended December 31, 2013 and 2012, respectively.
The current accident year casualty loss ratio increased 9.0 points from 72.5% in 2012 to 81.5% in 2013. Net losses for 2012 were lower than they otherwise would have been as a result of premium deficiency charges recorded in 2011. Excluding the impact of 2011 premium deficiency charges, the casualty loss ratio for 2012 was 76.5%.
In 2012, the Company reduced its prior accident year loss reserves by $4.2 million, which primarily consisted of the following:
Acquisition costs and other underwriting expenses were $87.4 million for 2013, compared with $79.9 million for 2012, an increase of $7.5 million or 9.3%. Acquisition costs and other underwriting expenses for 2013 were $1.2 million higher than they otherwise would have been as a result of the premium deficiency charges recorded in 2013 related to the commercial automobile product. Acquisition costs and other underwriting expenses for 2012 were lower than they otherwise would have been as a result of the premium deficiency charges recorded in 2011. Excluding the impact of the 2011 and 2013 premium deficiency charges, the acquisition costs and other underwriting expenses would have been $86.2 million and $80.4 million for 2013 and 2012, respectively. Excluding the premium deficiency charges, the increase is primarily due to the increase in earned premium volume.
The expense ratio for the Company’s Insurance Operations was 44.5% for 2013, compared with 44.6% for 2012. Excluding the impact of the 2011 and 2013 premium deficiency charges, the expense ratio would have been 43.9% and 44.9% for 2013 and 2012, respectively.
The combined ratio for the Company’s Insurance Operations was 104.0% for 2013, compared with 110.7% for 2012. Excluding the impact of prior accident year adjustments, the current accident year combined ratio decreased from 113.1% in 2012 to 107.9% in 2013. Excluding the impact of the 2011 and 2013 premium deficiency charges, the current accident year combined ratio would have been 107.3% and 115.3% for 2013 and 2012, respectively. See discussion of loss ratio included in “Net Losses and Loss Adjustment Expenses” above and discussion of expense ratio in preceding paragraph above for an explanation of this decrease.
The factors described above resulted in a loss from the Company’s Insurance Operations of $2.1 million for 2013, compared with a loss of $18.7 million for 2012, an improvement of $16.6 million.
(1) Results for the year to date 2012 include the impact of an out-of-period adjustment which reduced Reinsurance Operations segment income by $1.6 million.
(3) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments. The most directly comparable GAAP measure is the combined ratio.
(4) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments and premium deficiency charges. The most directly comparable GAAP measure is the combined ratio.
(5) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments. The most directly comparable GAAP measure is the loss ratio.
(11) The Company believes that this non-GAAP ratio or measure is useful to investors when evaluating the Company’s underwriting performance as trends in the Company’s reinsurance operations may be obscured by premium deficiency charges. This non-GAAP ratio or measure should not be considered as a substitute for its most directly comparable GAAP measure and does not reflect the overall underwriting profitability of the Company.
In 2012, the Company increased its prior accident year loss reserves by $8.7 million, which primarily consisted of the following:
Commercial Auto: A $1.3 million increase in auto liability lines primarily related to accident year 2009 resulting from further unexpected development on non-standard auto treaties which were not renewed.
Net losses and loss adjustment expenses were $16.2 million for 2013, compared with $35.1 million for 2012, a decrease of $19.0 million or 54.0%. Excluding the impact of prior year adjustments, the current accident year net losses and loss adjustment expenses decreased from $26.5 million for 2012 to $16.4 million for 2013. This decrease is primarily attributable to the exiting of unprofitable treaties in previous years offset by increased property writings in 2013.
The combined ratio for the Company’s Reinsurance Operations was 65.7% for 2013, compared with 84.7% for 2012. Excluding the impact of prior accident year adjustments, the combined ratio decreased from 75.2% in 2012 to 66.2% in 2013. Net losses and acquisition costs for 2012 were lower than they otherwise would have been as a result of premium deficiency charges recorded in 2011. Excluding the impact of 2011 premium deficiency charges, the current accident year combined ratio was 76.5% for 2012. See discussion of loss ratio included in “Net Losses and Loss Adjustment Expenses” above and discussion of expense ratio in preceding paragraph above for an explanation of this decrease.
The factors described above resulted in income from the Company’s Reinsurance Operations of $18.0 million in 2013, compared to $8.4 million in 2012, an increase of $9.6 million.
Net realized investment gains were $27.4 million for 2013, compared with $6.8 million for 2012. The net realized investment gains for 2013 consist primarily of net gains of $1.4 million related to the Company’s fixed maturities, $25.8 million related to its equity securities, and $1.4 million related to its interest rate swaps, offset by other than temporary impairment losses of $1.2 million. The net realized investment gains for 2012 consist primarily of net gains of $3.0 million related to the Company’s fixed maturities and $9.2 million related to its equity securities, offset by other than temporary impairment losses of $5.4 million.
Corporate and other operating expenses consist of outside legal fees, other professional fees, directors’ fees, management fees, salaries and benefits for holding company personnel, development costs for new products, and taxes incurred which are not directly related to operations. Corporate and other operating expenses were $11.6 million for 2013, compared with $9.7 million for 2012, an increase of $1.9 million or 19.8%. The increase is primarily due to an increase in travel cost, legal expenses, and consulting fees offset by a reduction in audit fees.
The factors described above resulted in net income of $61.7 million in 2013, compared with net income of $34.8 million in 2012, an increase of $26.9 million.
The principal source of cash that Global Indemnity needs to meet its short term and long term liquidity needs, including the payment of corporate expenses and share repurchases, includes dividends, other permitted disbursements from its direct and indirect subsidiaries, reimbursement for equity awards granted to employees and intercompany borrowings. The principal sources of funds at these direct and indirect subsidiaries include underwriting operations, investment income, and proceeds from sales and redemptions of investments. Funds are used principally by these operating subsidiaries to pay claims and operating expenses, to make debt payments, fund margin requirements on interest rate swap agreements, to purchase investments, and to make dividend payments. The future liquidity of Global Indemnity is dependent on the ability of its subsidiaries to pay dividends. Global Indemnity has no planned capital expenditures that could have a material impact on its short-term or long-term liquidity needs.
In December, 2013, each of the U.S. insurance companies declared an extraordinary dividend that aggregated to $200 million. In January, 2014, each of the dividends for the U.S. insurance companies was approved by the
Net cash used for operating activities in 2014, 2013, and 2012 was $12.0 million, $4.9 million and $35.0 million, respectively.
In 2013, the increase in operating cash flows of approximately $30.1 million from the prior year was primarily a net result of the following items:
Prospectively, as fixed income investments mature and new cash is obtained, the cash available to invest will be invested in accordance with the Company’s investment policy. The Company’s investment policy allows the Company to invest in taxable and tax-exempt fixed income investments as well as publicly traded and private equity investments. With respect to bonds, the Company’s credit exposure limit for each issuer varies with the issuer’s credit quality. The allocation between taxable and tax-exempt bonds is determined based on market conditions and tax considerations. The fixed income portfolio currently has a duration of 1.95 years which allows the Company to defensively position itself during the current low interest rate environment.
The Company has access to various capital sources including dividends from insurance subsidiaries, invested assets in its non-U.S. subsidiaries, and access to the debt and equity capital markets. The Company believes it has sufficient liquidity to meet its capital needs. See Note 20 of the notes to the consolidated financial statements in Item 8 of Part II of this report for a discussion of the Company’s dividend capacity.
On January 18, 2006, U.A.I. (Luxembourg) Investment S.à.r.l. loaned $6.0 million to United America Indemnity, Ltd. The loan was used to pay operating expenses that arise in the normal course of business. The loan is a demand loan and bears interest at 4.38%. In May, 2012, United America Indemnity, Ltd. repaid $5.0 million of principal under this loan. At December 31, 2014, there was $1.0 million outstanding on this loan with accrued interest of $1.8 million. United America Indemnity, Ltd. is dependent on its subsidiaries to pay its dividends and operating expenses.
On November 12, 2007, Global Indemnity Reinsurance issued a $50.0 million demand line of credit to United America Indemnity, Ltd. which bore interest at 5.25%. The proceeds of the line were used to fund purchases of the Company’s A ordinary shares as part of two $50.0 million share buyback programs that were initiated in November 2007 and February 2008, respectively. On February 13, 2008, the demand line of credit was amended. The interest rate was decreased to 3.75% per annum, and the loan amount was increased to $100.0 million. In June 2008, Global Indemnity Reinsurance declared and paid a dividend of $50.0 million to United America Indemnity, Ltd. United America Indemnity, Ltd. used proceeds from the dividend to repay a portion of the line of credit. In February, 2010 the line of credit was converted to a non-interest bearing note payable for the full amount of principal and accrued interest to date. In May, 2014, United America Indemnity, Ltd. repaid $20 million of the outstanding balance due under this note. As of December 31, 2014, there was $33.0 million outstanding on the note payable.
U.A.I. (Luxembourg) Investment S.à.r.l. holds two promissory notes in the amounts of $175.0 million and $110.0 million and a loan in the amount of $125.0 million from Global Indemnity Group, Inc. The $175.0 million and $110.0 million notes bear interest at a rate of 6.64% and 6.20%, respectively, and mature in 2018 and 2020, respectively. The $125.0 million loan bears interest at 5.78% and matures in 2024. Interest on these agreements is paid annually. Other than its investment portfolio, Global Indemnity Group, Inc. has no income producing operations. The ability of Global Indemnity Group, Inc. to generate cash to repay the notes and loan is dependent on dividends that it receives from its subsidiaries or using other assets it holds.
In November, 2011, U.A.I. (Luxembourg) Investment S.à.r.l. issued a $100.0 million demand line of credit to Global Indemnity (Cayman) Ltd. which bears interest at 1.2%. The proceeds of the line were loaned from Global Indemnity (Cayman) Ltd. to Global Indemnity plc, bearing interest at 1.2%, to fund purchases of the Company’s A ordinary shares as part of the $100.0 million share repurchase program announced in September, 2011. In August, 2012, the demand line of credit was increased to $125.0 million to fund additional purchases under the Company’s $25.0 million share repurchase authorization. As of December 31, 2014, Global Indemnity plc owed Global Indemnity (Cayman) Ltd. $108.0 million under this arrangement, with accrued interest of $3.5 million, and Global Indemnity (Cayman) Ltd. had $102.5 million outstanding on the line of credit, with accrued interest of $3.4 million.
In November, 2012, American Insurance Service, Inc. (“AIS”) issued a $35.0 million loan to Global Indemnity Reinsurance, bearing interest at the six month London Interbank Offered Rate (“LIBOR”) plus 3.5%. The proceeds of the loan were used to fund trust accounts in the normal course of business. Effective October 31, 2013, American Insurance Service, Inc. (“AIS”) assigned all of its rights, obligations, duties, and liabilities under the note to Global Indemnity Group, Inc. As of December 31, 2014, there was $5.0 million outstanding on the note payable, with accrued interest of $0.2 million payable to AIS and $0.6 million payable to Global Indemnity Group, Inc.
The Company entered into two $100 million derivative instruments. Due to declines in interest rates, the Company has paid $20.6 million and $5.4 million in connection with these derivative instruments for the years ended December 31, 2014 and 2013, respectively.
The Company has commitments in the form of operating leases, commitments to fund limited partnerships, and unpaid losses and loss expense obligations. As of December 31, 2014, contractual obligations related to Global Indemnity’s commitments, including any principal and interest payments, were as follows:
(1) The above table does not reflect contractual obligations assumed in connection with the American Reliable Acquisition.
(3) These amounts represent the gross future amounts needed to pay losses and related loss adjustment expenses and do not reflect amounts that are expected to be recovered from the Company’s reinsurers. See discussion in “Liability for Unpaid Losses and Loss Adjustment Expenses” for more details.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Global Indemnity plc and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in internal control over financial reporting related to inadequate design of controls over management’s estimation process for unpaid losses and loss adjustment expenses existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2014 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management’s report referred to above. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As of December 31, 2014, the Company managed its business through two business segments: Insurance Operations, which includes the operations of United National Insurance Company, Diamond State Insurance Company, United National Specialty Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, Penn-Patriot Insurance Company, American Insurance Adjustment Agency, Inc., Collectibles Insurance Services, LLC, Global Indemnity Insurance Agency, LLC, and J.H. Ferguson & Associates, LLC, and Reinsurance Operations, which includes the operations of Global Indemnity Reinsurance.
section. These amounts were properly reclassified to the line item “Amortization and depreciation” in the Consolidated Statement of Cash Flows for the years ended December 31, 2013 and 2012 as included in this Form 10-K for the annual period ended December 31, 2014 (“the December 31, 2014 10K”). These reclassifications do not impact “Net cash flows used for operating activities” nor does it impact any other financial metric or disclosure within the December 31, 2014 10K. The Company does not believe that these adjustments are material to the current or to any prior years’ consolidated financial statements.
At December 31, 2014, the Company had $113.7 million of cash in escrow to fund the acquisition of American Reliable on January 1, 2015.
(5) changes in laws or regulations have affected an issuer or industry;
At December 31, 2014, the Company had approximately $39.1 million of cash and cash equivalents that was invested in a diversified portfolio of high quality short-term debt securities.
Impairment of intangible assets with an indefinite useful life is tested at least annually and more frequently as circumstances warrant in accordance with applicable accounting guidance. Accounting guidance allows for the testing of indefinite lived intangible assets for impairment using both qualitative and quantitative factors. Impairment of indefinite lived intangible assets is recognized only if the carrying amount of the intangible assets exceeds the fair value of said assets. The amount of the impairment loss would be equal to the excess carrying value of the assets over the fair value of said assets. Based on the qualitative assessment performed in 2014, there were no impairments of indefinite lived intangible assets as of December 31, 2014.
Intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives. The carrying amounts of definite lived intangible assets are regularly reviewed for indicators of impairment in accordance with applicable accounting guidance. Impairment is recognized only if the carrying amount of the intangible asset is in excess of its undiscounted projected cash flows. The impairment is measured as the difference between the carrying amount and the estimated fair value of the asset. As of December 31, 2014, there were no triggering events that occurred during the year that would result in an impairment of definite lived intangible assets.
expenses and unamortized acquisition costs exceeds related unearned premium after consideration of investment income. This evaluation is done at a product line level in Insurance Operations and at a treaty level in Reinsurance Operations. Any future expected loss on the related unearned premium is recorded first by impairing the unamortized acquisition costs on the related unearned premium followed by an increase to loss and loss adjustment expense reserves on additional expected loss in excess of unamortized acquisition costs.
The carrying amounts reported in the balance sheet represent the outstanding borrowings. The outstanding borrowings are due on demand; therefore, the cash receipts and cash payments related to the margin borrowing facilities are shown net in the consolidated statement of cash flows.
Basic earnings per share have been calculated by dividing net income available to common shareholders by the weighted-average ordinary shares outstanding. Diluted earnings per share has been calculated by dividing net income available to common shareholders by the sum of the weighted-average ordinary shares outstanding and the weighted-average common share equivalents outstanding, which include options and other equity awards. See Note 16 for details.
The Company maintains investments and cash accounts in foreign currencies related to the operations of its business. At period-end, the Company re-measures non-U.S. currency financial assets to their current U.S. dollar equivalent. The resulting gain or loss for foreign denominated investments is reflected in accumulated other comprehensive income in shareholders’ equity; whereas, the gain or loss on foreign denominated cash accounts is reflected in income during the period. Financial liabilities, if any, are generally adjusted within the reserving process. However, for known losses on claims to be paid in foreign currencies, the Company re-measures the liabilities to their current U.S. dollar equivalent each period end with the resulting gain or loss reflected in income during the period. Net transaction gains, primarily comprised of re-measurement of known losses on claims to be paid in foreign currencies, were $0.5 million and $0.3 million for the years ended December 31, 2014 and 2013, respectively. Net transaction losses, primarily comprised of re-measurement of known losses on claims to be paid in foreign currencies, were $0.7 million for the year ended December 31, 2012.
During the preparation of the Company’s consolidated financial statements for the year ended December 31, 2012, the Company identified an error in the consolidated financial statements as of and for the years ended December 31, 2011, 2010 and 2009 related to the recognition of incurred losses on two of the assumed reinsurance treaties at the Company’s Reinsurance Operations. These contracts relate to accident years 2009 and
2010 and have not been renewed. During the years ended December 31, 2009, 2010 and 2011, the Company’s internal calculations over-recorded the profitability of these two treaties, resulting in net income and equity being overstated by approximately $1.6 million over the three year period. There was no impact to the Company’s cash flows during these periods.
The Company corrected this error in its consolidated financial statements as of and for the year ended December 31, 2012 by increasing the “Unpaid losses and loss adjustment expenses” line item on the consolidated balance sheet and the “Net losses and loss adjustment expenses” line item on the consolidated statement of operations by $1.6 million, or $0.06 per diluted share, the cumulative effect of the error. The Company does not believe that these adjustments are material to any prior years’ consolidated financial statements. As a result, the Company has not restated or adjusted any prior period amounts for this error.
On December 31, 2013, Diamond State Insurance Company sold all the outstanding shares of capital stock of one of its wholly owned subsidiaries, United National Casualty Insurance Company to an unrelated party. Diamond State Insurance Company received a one-time payment of $26.6 million and recognized a pretax gain of $5.2 million which is reflected in other income (loss). Management deemed this transaction to be an asset sale with the assets primarily comprised of investments and insurance licenses. This transaction did not have a significant impact on the ongoing business operations of the Company.
The amortized cost and estimated fair value of investments were as follows as of December 31, 2014 and 2013:
Excluding U.S. treasuries and agency bonds, the Company did not hold any debt or equity investments in a single issuer that was in excess of 4% of shareholders’ equity at December 31, 2014 or 2013, respectively.
The following table contains an analysis of the Company’s securities with gross unrealized losses, categorized by the period that the securities were in a continuous loss position as of December 31, 2014:
Obligations of states and political subdivisions-As of December 31, 2014, gross unrealized losses related to obligations of states and political subdivisions were $0.697 million. Of this amount, $0.383 million have been in an unrealized loss position for twelve months or greater and are rated A- or better. All factors that influence performance of the municipal bond market are considered in evaluating these securities. The aforementioned factors include investor expectations, supply and demand patterns, and current versus historical yield and spread relationships. The analysis relies on the output of fixed income credit analysts, as well as dedicated municipal bond analysts who perform extensive in-house fundamental analysis on each issuer, regardless of their rating by the major agencies.
Asset backed securities (“ABS”)-As of December 31, 2014, gross unrealized losses related to asset backed securities were $0.303 million. Of this amount, $0.020 million have been in an unrealized loss position for twelve months or greater and are rated A or better. The weighted average credit enhancement for the Company’s asset backed portfolio is 20.5. This represents the percentage of pool losses that can occur before an asset backed security will incur its first dollar of principal losses. Every ABS transaction is analyzed on a stand-alone basis. This analysis involves a thorough review of the collateral, prepayment, and structural risk in each transaction. Additionally, the analysis includes an in-depth credit analysis of the originator and servicer of the collateral. The
Commercial mortgage-backed securities (“CMBS”)-As of December 31, 2014, gross unrealized losses related to the CMBS portfolio were $0.847 million. Of this amount, $0.322 million have been in an unrealized loss position for twelve months or greater and are rated AA or better. The weighted average credit enhancement for the Company’s CMBS portfolio is 33.5. This represents the percentage of pool losses that can occur before a mortgage-backed security will incur its first dollar of principal loss. For the Company’s CMBS portfolio, a loan level analysis is utilized where every underlying CMBS loan is re-underwritten based on a set of assumptions reflecting expectations for the future path of the economy. In the analysis, the focus is centered on stressing the significant variables that influence commercial loan defaults and collateral losses in CMBS deals. These variables include: (1) a projected drop in occupancies; (2) capitalization rates that vary by property type and are forecasted to return to more normalized levels as the capital markets repair and capital begins to flow again; and (3) property value stress testing using projected property performance and projected capitalization rates. Term risk is triggered if the projected debt service coverage rate falls below 1x. Balloon risk is triggered if a property’s projected performance does not satisfy new, tighter mortgage standards.
Corporate bonds-As of December 31, 2014, gross unrealized losses related to corporate bonds were $0.709 million. Of this amount, $0.053 million have been in an unrealized loss position for twelve months or greater and are rated A+ or better. The analysis for this sector includes maintaining detailed financial models that include a projection of each issuer’s future financial performance, including prospective debt servicing capabilities, capital structure composition, and the value of the collateral. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, the issuer’s current competitive position, its vulnerability to changes in the competitive and regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood of default as well as potential losses in the event of default.
The Company recorded the following other than temporary impairments (“OTTI”) on its investment portfolio for the years ended December 31, 2014, 2013, and 2012:
The following table is an analysis of the credit losses recognized in earnings on fixed maturities held by the Company as of December 31, 2014, 2013, and 2012 for which a portion of the OTTI loss was recognized in other comprehensive income (loss).
The reclassifications out of accumulated other comprehensive income for the years ended December 31, 2014 and 2013 were as follows:
The components of net realized investment gains for the years ended December 31, 2014, 2013, and 2012 were as follows:
The proceeds from sales of available for sale securities resulting in net realized investment gains for the years ended December 31, 2014, 2013, and 2012 were as follows:
Level 2-inputs utilize other than quoted prices included in Level 1 that are observable for similar assets, either directly or indirectly.
The following table presents information about the Company’s invested assets and derivative instruments measured at fair value on a recurring basis as of December 31, 2014 and 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
The securities classified as Level 2 in the above table consist primarily of fixed maturity securities and derivative instruments. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, security prices are derived through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. If there are no recent reported trades, matrix or model processes are used to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Included in the pricing of asset-backed securities, collateralized mortgage obligations, and mortgage-backed securities are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral. For corporate loans, price quotes from multiple dealers along with recent reported trades for identical or similar securities are used to develop prices. The estimated fair value of the interest rate swaps is obtained from a third party financial institution who utilizes observable inputs such as the forward interest rate curve.
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2014, 2013, and 2012.
The following tables present the changes in Level 3 investments measured at fair value on a recurring basis for 2014, 2013, and 2012:
(3) This limited partnership invests in distressed securities and assets through senior and subordinated, secured and unsecured debt and equity, in both public and private large-cap and middle-market companies. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner.
Amortization related to the Company’s definite lived intangible assets was $0.4 million in each of the years ended December 31, 2014, 2013 and 2012.
The Company had the following reinsurance balances as of December 31, 2014 and 2013:
The statutory income tax rates of the countries where the Company does business are 35.0% in the United States, 0.0% in Bermuda, 0.0% in the Cayman Islands, 0.0% in Gibraltar, 29.22% in the Duchy of Luxembourg, and 25.0% on non-trading income, 33.0% on capital gains and 12.5% on trading income in the Republic of Ireland. The statutory income tax rate of each country is applied against the annual taxable income of each country to calculate the annual income tax expense.
The effective income tax rate for 2014 was 11.7%, compared with an effective income tax rate of 1.6% for 2013 and an effective income tax benefit rate of 20.3% for 2012. The increase in the effective income tax rate in 2014 compared with 2013 is primarily due to an increase in capital gains in 2014 and a $6.3 million withholding tax paid in connection with the $125 million dividend from Global Indemnity Group Inc. to U.A.I. Luxembourg S.à.r.l. The increase in the effective income tax rate in 2013 compared with 2012 is primarily due to the gain on the disposition of a subsidiary and an increase in capital gains in taxable jurisdictions in 2013 compared with 2012.
Management believes it is more likely than not that the deferred tax assets will be completely utilized in future years. As a result, the Company has not recorded a valuation allowance at December 31, 2014 and 2013.
The Company applies a more-likely-than-not recognition threshold for all tax uncertainties whereby it only recognizes those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities. The Company had no unrecognized tax benefits during 2014 or 2013.
Property: A $2.1 million increase due to higher than expected emergence on non-catastrophe claims primarily in accident years 2007, 2012, and 2013.
Professional: A $19.4 million reduction primarily due to expected loss emergence being much less than anticipated for accident years 2007 through 2011.
During 2013, the Company reduced its prior accident year loss reserves by $7.9 million, which consisted of a $7.6 million decrease related to Insurance Operations and a $0.3 million decrease related to Reinsurance Operations.
Professional: A $0.7 million increase primarily driven by $2.2 million increase in aggregate from unexpected loss emergence in accident years 2006 to 2008 and 2010 offset by $1.5 million of favorable emergence from accident years 1998 and 2011.
During 2012, the Company increased its prior accident year loss reserves by $4.4 million, which consisted of a $4.2 million decrease related to Insurance Operations and an $8.7 million increase related to Reinsurance Operations.
The $4.2 million reduction of prior accident year loss reserves related to Insurance Operations primarily consisted of the following:
Commercial Auto: A $1.2 million increase primarily driven by continued loss emergence on casualty brokerage exposures.
Marine: A $2.7 million increase in marine lines primarily related to accident year 2011 primarily due to higher than expected reported losses.
The Company has available two margin borrowing facilities. The borrowing rate for each facility is tied to LIBOR and is currently approximately 1%. These facilities are 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, 2014, approximately $222.8 million in collateral was deposited to support borrowings. The amount borrowed against the margin accounts may fluctuate as routine investment transactions, such as dividends received, investment income received, maturities and pay-downs, impact cash balances. The margin facilities contain 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 facilities was $174.7 million and $100.0 million as of December 31, 2014 and 2013, respectively.
On July 19, 2013, the Company paid the entire outstanding principal amount on its guaranteed senior notes. The payment of $58.6 million consisted of principal of $54.0 million and interest of $4.6 million, which included a make-whole provision of $2.9 million. This payment was funded by borrowing $60.0 million pursuant to the Company’s margin borrowing facilities.
The ability of Global Indemnity plc to pay dividends is subject to Irish regulations. Under Irish law, dividends and distributions may only be made from distributable reserves. As of December 31, 2014, the Company’s distributable reserves were $931.5 million.
Since the Company is a holding company and has no direct operations, its ability to pay dividends depends, in part, on the ability of its subsidiaries to pay dividends. Global Indemnity Reinsurance and the U.S. insurance subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. See Note 17 for additional information regarding dividend limitations imposed on Global Indemnity Reinsurance and the U.S. insurance subsidiaries.
The Company allows employees to surrender A ordinary shares as payment for the tax liability incurred upon the vesting of restricted stock that was issued under the Share Incentive Plan. During 2014, 2013, and 2012, the
Company purchased an aggregate of 5,444, 2,370 and 4,997, respectively, of surrendered A ordinary shares from its employees for $0.1 million, $0.1 million and $0.1 million, respectively. All shares purchased from employees by the Company are held as treasury stock and recorded at cost.
In 2011 and 2012, the Board of Directors authorized the Company to repurchase up to $125.0 million of its A ordinary shares through share repurchase programs. The Company repurchased and retired an aggregate 5,371,419 of its A ordinary shares in the open market and in privately negotiated transactions at an aggregate price of $112.2 million or an average of $20.89 per share. The Company does not have authorization from the Board of Directors to repurchase any additional A ordinary shares as of December 31, 2014. The excess cost of the repurchased shares over their par value was classified to additional paid-in capital.
The following table provides information with respect to the A ordinary shares that were surrendered or repurchased in 2013:
As of December 31, 2014, Fox Paine & Company LLC (“Fox Paine”) beneficially owned shares having approximately 92.9% of the Company’s total outstanding voting power. Fox Paine has the right to appoint a number of the Company’s Directors equal in aggregate to the pro rata percentage of the voting shares of the Company beneficially held by Fox Paine for so long as Fox Paine holds an aggregate of 25% or more of the voting power in the Company. Fox Paine controls the election of all of the Company’s Directors due to its controlling share ownership. The Company’s Chairman is a member of Fox Paine. The Company relies on Fox Paine to provide management services and other services related to the operations of the Company.
At December 31, 2014 and 2013, Global Indemnity Reinsurance was a limited partner in Fox Paine Capital Fund, II, which is managed by Fox Paine. This investment was originally made by United National Insurance Company in June 2000 and pre-dates the September 5, 2003 acquisition by Fox Paine of Wind River Investment Corporation, which was the predecessor holding company for United National Insurance Company. The Company’s investment in this limited partnership was valued at $3.4 million and $3.5 million at December 31, 2014 and 2013, respectively. At December 31, 2014, the Company had an unfunded capital commitment of $2.4 million to the partnership. There were no distributions received from the limited partnership during 2014 and 2013. The Company received a distribution from the limited partnership of $5.4 million, of which $4.3 million was recorded as investment income, during 2012.
The Company relies on Fox Paine to provide management services and other services related to the operations of the Company. Starting in 2014, this fee will be adjusted annually to reflect the percentage change in the CPI-U. In addition, the payment of the annual management fee will be deferred until a change of control or September, 2018, whichever occurs first, and is subject to an annual adjustment equal to the rate of return the Company earns on its investment portfolio. Management fee expense of $1.9 million, $1.9 million and $1.5 million was incurred during the years ended December 31, 2014, 2013, and 2012, respectively. As of December 31, 2014, unpaid management fees, which were included in other liabilities on the consolidated balance sheets, were $0.6 million. As of December 31, 2013, prepaid management fees, which were included in other assets on the consolidated balance sheets, were $1.3 million.
The Company incurred $0.2 million, $0.02 million, and $0.2 million for legal services rendered by Cozen O’Connor during the years ended December 31, 2014, 2013, and 2012, respectively. Stephen A. Cozen, the chairman of Cozen O’Connor, is a member of the Company’s Board of Directors.
that the following earned premium and incurred losses related to the agreement have been assumed by Global Indemnity Reinsurance from Hiscox Bermuda:
Net balances due to Global Indemnity Reinsurance under this agreement are as follows:
As mentioned in Note 12 above, the Company has a remaining commitment of $2.4 million to the Fox Paine Capital Fund, II.
The prescribed accounting guidance also requires tax benefits relating to excess stock-based compensation deductions to be prospectively presented in the statement of cash flows as financing cash inflows. The tax benefit resulting from stock-based compensation deductions in excess of amounts reported for financial reporting purposes was $0.04 million for the year ended December 31, 2014. There was no tax benefit resulting from stock-based compensation deductions in excess of amounts reported for financial reporting purposes during 2013 and 2012.
Amortization expense related to options outstanding is anticipated to be $0.3 million in 2015, 2016, and 2017.
NOTE: The intrinsic value of the exercised options is the difference between the fair market value at time of exercise and the strike price of the option.
The following tables summarize the range of exercise prices of options outstanding at December 31, 2014, 2013, and 2012:
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 $2.6 million, $2.1 million and $1.8 million for 2014, 2013, and 2012, respectively. The total unrecognized compensation expense for the non-vested restricted stock is $3.7 million at December 31, 2014, which will be recognized over a weighted average life of 1.7 years.
During 2013, the Company granted an aggregate of 81,587 A ordinary shares to key employees at a weighted average grant date fair value of $22.13 per share. Of the A ordinary shares granted in 2013, 11,296 were granted to the Company’s Chief Executive Officer and vest 33 1/3% on each subsequent anniversary date of the grant for a period of three years subject to an accident year true-up of bonus year underwriting results as of the third anniversary of the grant. The remaining 70,291 shares were granted to key employees and will vests as follows:
Included in the 50,421A ordinary shares are 18,838 A ordinary shares earned by the non-employee directors of the Company during 2013 which have a weighted average grant date fair value of $25.38 per share. As of December 31, 2013, these shares were not granted but were considered issued and outstanding for purposes of the financial statement and were subject to shareholder approval of the Plan at the Company’s June 11, 2014 annual shareholder meeting. The shareholders approved the plan at the June 11, 2014 annual shareholder meeting.
In 2014, Ms. Valko was awarded an additional 300,000 stock options. The stock options vest as follows: 20% on December 31, 2015, 30% on December 31, 2016, and the remaining 50% on December 31, 2017 and are based on achieving underwriting income, premium volume, and underwriting profitability targets, subject to an accident year true up on the 3rd anniversary of each such year. Vesting of the stock options is subject to continued employment. The exercise price applicable to the Stock Options is $25.00 subject to adjustment based on the Company’s average year-end tangible book value per share, the average interest rate of certain Treasury bonds and the time period elapsed between January 1, 2014 and the date the stock options are exercised. The stock options were granted under and are subject to the terms of the Plan, as amended, subject to shareholder approval of such plan to the extent required to affect such grant under the plan.
The Company’s U.S. insurance subsidiaries are required by law to maintain certain minimum surplus on a statutory basis, and are subject to regulations under which payment of a dividend from statutory surplus is restricted and may require prior approval of regulatory authorities. In December, 2013, each of the U.S. insurance subsidiaries declared an extraordinary dividend that aggregated to $200 million. In January, 2014, each of the dividends for the U.S. insurance companies was approved by their respective departments of insurance in Pennsylvania, Indiana, Wisconsin, and Virginia. On January 23, 2014, the U.S. insurance companies paid an aggregate of $200 million to Global Indemnity Group, Inc. Applying the current regulatory restrictions as of December 31, 2014, the maximum amount of distributions that could be paid after January 23, 2015 by the United National insurance companies and the Penn-America insurance companies as dividends under applicable laws and regulations without regulatory approval is approximately $35.1 million and $8.4 million, respectively. The Penn-America insurance companies limitation includes $2.8 million that would be distributed to United National Insurance Company or its subsidiary Penn Independent Corporation based on the December 31, 2014 ownership percentages.
Based on the standards currently adopted, the Company reported in its 2014 statutory filings that the capital and surplus of the U.S. insurance companies are above the prescribed Company Action Level RBC requirements.
(a) Includes extraordinary dividend declared in 2013 for an aggregate of $200 million.
On December 31, 2013, Diamond State Insurance Company sold all the outstanding shares of capital stock of one of its wholly owned subsidiaries, United National Casualty Insurance Company, to an unrelated party. The financial results of the Insurance Operations for 2013 and 2012 include the financial results for United National Casualty Insurance Company. Management deemed this transaction to be an asset sale with the assets primarily comprised of investments and insurance licenses. This transaction did not have a significant impact on the ongoing business operations.
The Insurance Operations segment and the Reinsurance Operations segment follow the same accounting policies used for the Company’s consolidated financial statements. For further disclosure regarding the Company’s accounting policies, please see Note 2.
An unaudited summary of the Company’s 2014 and 2013 quarterly performance is as follows:
On January 1, 2015, Global Indemnity Group, Inc., a subsidiary of the Company, acquired 100% of the voting equity interest of American Reliable from American Bankers Insurance Group, Inc. by paying $113.7 million in cash and assuming approximately $322.9 million in customary insurance related liabilities, obligations, and mandates. The ultimate purchase price is subject to accounting procedures that are expected to be completed by June 30, 2015. The most recent estimate of the purchase price, based on available financial information, is approximately $117.9 million. This purchase price is subject to adjustment based on GAAP book value of the business as of the date of the closing of the transaction and the future development of loss reserves as specified in the American Reliable SPA. American Reliable’s results of operations will be included in the Company’s results of operations subsequent to the date of acquisition.
The purchase of American Reliable expands Global Indemnity’s product offerings. American Reliable is a specialty company that distributes personal lines products written on an admitted basis that are unusual and harder to place. It complements Global Indemnity’s existing US Insurance Operations that primarily distribute commercial lines products on an excess and surplus lines basis.
In accordance with GAAP, the total purchase price has been provisionally allocated to the tangible and intangible net assets acquired based on management’s preliminary estimates of their fair value and may change as additional information becomes available over the next several months. Accordingly, approximately
In connection with the acquisition, the Company has agreed to pay to Fox Paine an investment banking fee of 3% of the amount paid plus the capital required to operate American Reliable on a standalone basis and a $1.5 million investment advisory fee. 267,702 A ordinary shares of Global Indemnity will be issued to pay these fees. These shares will be registered but cannot be sold until the earlier of five years or a change of control.