The following table sets forth selected consolidated historical financial data for the Company and should be read together with the consolidated financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report. Cash dividends / distributions totaling $1.00 per share were declared and paid on common stock in 2020, 2019 and 2018. No cash dividends were declared or paid on common stock during the years ended December 31, 2017 and 2016.
For the years ended December 31, 2020, 2018 and 2017, weighted average shares outstanding - basic was used to calculate diluted earnings per share due to a net loss for the period.
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 earned premiums. The expense ratio is the ratio of acquisition costs and other underwriting expenses to net earned premiums. 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 Specialty segment, Specialty Property segment, Farm, Ranch & Stable segment, and Reinsurance Operations.
2020 loss and combined ratios reflect a $31.5 million reduction of net losses and loss adjustment expenses
The global outbreak of COVID-19 presents significant risks to the Company which it continues to evaluate. The COVID-19 pandemic may affect the Company’s operations indefinitely. The Company may experience reductions in premium volume, delays in the collection of premiums, and increases in COVID-19 related claims. Volatility in the global financial markets may negatively impact the market value of the Company’s investment portfolio and may result in net realized investment losses as well as a decline in the liquidity of the investment portfolio. All of these factors may have far reaching impacts on the Company’s business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the health of the Company’s management and employees, distribution, marketing, customers and agents, and on the overall economy. The scope and nature of these impacts, most of which are beyond the Company’s control, continue to evolve and such effects could exist for an extended period of time even after the pandemic ends.
On January 19, 2021, the Company announced that Cynthia Y. Valko, chief executive officer and a member of the Board of Directors of Global Indemnity Group, LLC, informed the Board of Directors that she would retire effective as of January 31, 2021. In connection with her retirement, Ms. Valko resigned from her positions as chief executive officer of the Company and a member of the Board of Directors, in each case, effective as of January 15, 2021, although Ms. Valko will continue to serve the Company in an advisory capacity. The Board of Directors is conducting a search to identify the successor to Ms. Valko for the chief executive officer position of the Company. Effective as of January 19, 2021, the Company named Jonathan E. Oltman as president of the Company’s insurance operations. Until Ms. Valko’s successor as chief executive officer of the Company is duly appointed, Mr. Oltman will act as the Company’s principal executive officer. Mr. Oltman will report directly to the Board of Directors through its chairman on a day-to-day basis. Please see Note 25 of the notes to the consolidated financial statements in Item 8 of Part II of this report for additional information regarding the retirement of Ms. Valko and the appointment of Mr. Oltman.
As a result of the Company moving its Reinsurance Operations to the United States, Steve Green, President of the Company’s Reinsurance Operations, will depart the Company effective March 31, 2021.
The Company’s Commercial Specialty segment sells its property and casualty insurance products through a group of approximately 185 professional general agencies that have limited quoting and binding authority, as well as a number of wholesale insurance brokers who in turn sell the Company’s insurance products to insureds through retail insurance brokers. Commercial Specialty operates predominantly in the excess and surplus lines marketplace. The Company manages its Commercial Specialty segment via product classifications. These product classifications are: 1) Penn-America, which includes property and general liability products for small commercial businesses sold through a select network of wholesale general agents with specific binding authority; 2) United National, which includes property, general liability, and professional lines products sold through program administrators with specific binding authority; 3) Diamond State, which includes property, casualty, and professional lines products sold through wholesale brokers and program administrators with specific binding authority; and 4) Vacant Express, which primarily insures dwellings which are currently vacant, undergoing renovation, or are under construction and is sold through aggregators, brokers, and retail agents.
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 considering both internal and external 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 related to underwriting activities. Corporate and other operating expenses are comprised primarily of outside legal fees, other professional and accounting fees, directors’ fees, management fees & advisory 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.
Management’s best estimate at December 31, 2020 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 $662.8 million and $580.7 million, respectively, as of December 31, 2020. A breakout of the Company’s gross and net reserves as of December 31, 2020 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 reserve categories, the Company believes that frequency can be predicted with greater accuracy than severity. Therefore, the Company believes management’s best estimate is more likely influenced by 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 $367.7 million for claims occurring during the year ended December 31, 2020:
The Company’s net reserves for losses and loss adjustment expenses of $580.7 million as of December 31, 2020 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 regularly reviews the collectability of its reinsurance receivables, and includes adjustments resulting from this review in earnings in the period in which the adjustment arises. An allowance for uncollectible reinsurance receivables is recognized based upon the Company’s ongoing review of key aspects of amounts outstanding, including but not limited to, length of collection periods, disputes, applicable coverage defenses, insolvent reinsurers, financial strength of solvent reinsurers based on AM Best Ratings and other relevant factors. Changes in loss reserves can also affect the valuation of reinsurance receivables if the change is related to loss reserves that are ceded to reinsurers. Certain amounts may be uncollectible if the Company’s reinsurers dispute a loss or if the reinsurer is unable to pay. If its reinsurers do not pay, the Company remains legally obligated to pay the loss.
The Company categorizes its invested assets and derivative instruments 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 and margin borrowing facility approximate fair value. See Note 6 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.
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, 2020, there were no triggering events that occurred during the year that would result in an impairment of definite lived intangible assets.
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, 2020 and 2019. 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 relevant taxing authorities. Please see Note 10 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.
During the first quarter of 2019, the Company re-evaluated its Personal Lines segment and determined that Personal Lines should be bifurcated into two reportable segments: Specialty Property and Farm, Ranch & Stable. This is the result of changing how Specialty Property and Farm, Ranch & Stable are managed and reported. Specialty Property is managed out of the Company’s Scottsdale, Arizona office; whereas, Farm, Ranch & Stable is managed out of the Company’s Omaha, Nebraska office. In the past, Farm, Ranch & Stable reported to the Scottsdale, Arizona office and now it reports directly to the Company’s main headquarters in Bala Cynwyd, Pennsylvania. Results for Specialty Property and Farm, Ranch & Stable are separately measured, resources are separately allocated to each of these lines, and employees in each line are now being rewarded based on each line’s separate results. Accordingly, the Company now reports Specialty Property and Farm, Ranch & Stable as two separate reportable segments. In addition, the Company changed the name of its Commercial Lines segment to Commercial Specialty to better align with its key product offerings. The segment results for the years ended December 31, 2018 have been revised to reflect these changes.
The following table summarizes the Company’s results for the years ended December 31, 2020, 2019, and 2018:
Gross written premiums increased by 16.2% for year ended December 31, 2019 as compared to 2018. Gross written premiums include business written by American Reliable that is ceded to insurance entities owned by Assurant under a 100% quota share reinsurance agreement in the amount of ($0.3) million and ($2.1) million for the years ended December 31, 2019 and 2018, respectively. Excluding the business that is ceded 100% to insurance entities owned by Assurant, gross written premiums increased by 15.9% for the year ended December 31, 2019 as compared to 2018. The increase is mainly due to several new programs and increases in excess & surplus lines submissions within Commercial Specialty, rate increases within Specialty Property and Farm, Ranch & Stable, new agent appointments within Farm, Ranch & Stable, and growth in the Reinsurance Operation’s property catastrophe book primarily driven by rate increases as well as a new casualty treaty. This new casualty treaty contributed $26.9 million in gross written premiums during the year ended December 31, 2019. This growth in premiums was partially offset by a continued reduction of catastrophe exposed business within both Commercial Specialty and Specialty Property.
The net premium retention for the year ended December 31, 2020 increased by 2.2 points as compared to 2019. This increase in retention is driven by the restructuring of the Company’s catastrophe reinsurance treaties as well as a change in the mix of business.
The net premium retention for the year ended December 31, 2019 increased by 2.3 points as compared to 2018. This increase in retention is primarily driven by growth of casualty premiums and reinsurance premiums. It is also being driven by the downsizing of catastrophe exposed business within Specialty Property.
Net earned premiums within the Commercial Specialty segment increased by 20.2% for the year ended December 31, 2020 as compared to the same period in 2019. The increase in net earned premiums was primarily due to a growth in premiums written as a result of organic growth from existing agents, pricing increases, and several new programs. Property net earned premiums were $131.1 million and $110.7 million for the years ended December 31, 2020 and 2019, respectively. Casualty net earned premiums were $154.6 million and $127.0 million for the years ended December 31, 2020 and 2019, respectively.
Net earned premiums within the Commercial Specialty segment increased by 8.9% for the year ended December 31, 2019 as compared to the same period in 2018. The increase in net earned premiums was primarily due to a growth in premiums written as a result of several new programs. Property net earned premiums were $110.7 million and $115.2 million for the years ended December 31, 2019 and 2018, respectively. Casualty net earned premiums were $127.0 million and $103.1 million for the years ended December 31, 2019 and 2018, respectively.
Net earned premiums within the Farm, Ranch & Stable segment increased by 6.8% for the year ended December 31, 2020 as compared to the same period in 2019 primarily due to a growth in premiums written in prior periods as a result of rate increases and new agent appointments. Property net earned premiums were $55.8 million and $50.9 million for the years ended December 31, 2020 and 2019, respectively. Casualty net earned premiums were $20.4 million for each of the years ended December 31, 2020 and 2019.
Net earned premiums within the Reinsurance Operations segment decreased by 2.1% for the year ended December 31, 2020 as compared to the same period in 2019 due to the non-renewal of its property catastrophe treaties partially offset by the new casualty treaty entered into during 2019. Property net earned premiums were $28.3 million and $56.8 million for the years ended December 31, 2020 and 2019, respectively. Casualty net earned premiums were $46.1 million and $19.2 million for the years ended December 31, 2020 and 2019, respectively.
The components of income from the Company’s Commercial Specialty segment and corresponding underwriting ratios are as follows:
Includes excise tax related to cessions from the Company’s Commercial Specialty segment to its Reinsurance Operations of $0.4 million for the year ended December 31, 2018, respectively. Due to the termination of the quota share agreement in 2018, there was no excise tax related to cessions from the Company’s Commercial Specialty segment to its Reinsurance Operations for the years ended December 31, 2020 and 2019.
The current accident year property catastrophe loss ratio for 2020 increased by 11.8 points compared to 2019 due to a higher claims frequency and severity. The current accident year property catastrophe loss ratio for 2019 improved by 1.6 points compared to 2018 reflecting a lower claims severity compared to last year. The twelve-month claims incurred frequency was equivalent to last year.
The current accident year casualty loss ratio for 2020 improved by 0.3 points compared to 2019 reflecting a lower claims frequency at twelve months of development. The current accident year casualty loss ratio for 2019 improved by 1.8 points compared to 2018 reflecting lower claims frequency compared to last year. The claims frequency was lower for each accident quarter compared to the same accident quarters last year.
There is risk that legislation could be passed or there could be a court ruling which would require the Company to cover business interruption claims regardless of terms, exclusions including the virus exclusions contained within the Company’s Commercial Specialty policies, or other conditions included in these policies that would otherwise preclude coverage.
The components of income from the Company’s Specialty Property segment and corresponding underwriting ratios are as follows:
Includes excise tax related to cessions from the Company’s Specialty Property segment to its Reinsurance Operations of $0.3 million for the year ended December 31, 2018. Due to the termination of the quota share agreement in 2018, there was no excise tax related to cessions from the Company’s Specialty Property segment to its Reinsurance Operations for the years ended December 31, 2020 and 2019.
See “Result of Operations” above for a discussion on consolidated premiums for 2020.
The current accident year property catastrophe loss ratio for 2020 increased by 27.2 points compared to 2019 due to a higher claims frequency and severity at twelve months of development. The impact from Hurricanes Laura and Delta on the loss ratio was 18.8 points which were the two largest events impacting this segment. The current accident year property catastrophe loss ratio for 2019 improved by 37.1 points compared to 2018 reflecting a lower claims frequency and severity for each accident quarter.
The current accident year casualty loss ratio for 2020 improved by 10.5 points compared to 2019. The improvement reflects a lower claims frequency and severity compared to last year. The current accident year casualty loss ratio for 2019 improved by 9.5 points compared to 2018. The improvement reflects a lower claims frequency and severity compared to last year.
COVID-19 could result in declines in business and non-payment of premiums that could adversely affect Specialty Property’s business, financial condition, and results of operation.
The current accident year casualty loss ratio for 2020 increased by 1.0 point compared to 2019. The increase in the loss ratio reflects a higher claims severity compared to last year. The current accident year casualty loss ratio for 2019 improved by 2.8 points compared to 2018. The decrease in the loss ratio reflects a lower claims severity compared to last year
There is risk that legislation could be passed or there could be a court ruling which would require the Company to cover business interruption claims regardless of terms, exclusions including the virus exclusions contained within the Company’s Farm, Ranch & Stable policies, or other conditions included in these policies that would otherwise preclude coverage.
COVID-19 could result in declines in business, non-payment of premiums, and increases in claims that could adversely affect Farm, Ranch & Stable’s business, financial condition, and results of operation.
Reinsurance Operations recognized other income of $0.2 million in 2020, other loss of $0.1 million in 2019, and other loss of $0.2 million in 2018. Other income (loss) is comprised of foreign exchange gains and losses.
The current accident year loss ratio for 2020 improved by 1.6 points compared to 2019. The property and casualty treaties both performed better than 2019. The current accident year loss ratio for 2019 improved by 65.7 points compared to 2018 primarily due to less catastrophes.
The expense ratio increased 3.4 points from 31.1% for 2019 to 34.5% for 2020. The increase in the expense ratio is primarily due to an increase in commission expense resulting from a change in business mix.
The Company’s fixed income portfolio, excluding cash, continues to maintain high quality with an AA- average rating and a duration of 4.2 years.
Gross investment income for 2020 decreased by 30.4% and net investment income for 2020 decreased by 32.5% compared to 2019. The decrease was primarily due to decreased returns from alternative investments, a decrease in yield within the fixed maturities portfolio, and a decrease in dividend income related to equity securities. Gross investment income for 2019 decreased by 8.0% and net investment income for 2019 decreased by 9.3% compared to 2018. The decrease was primarily due to decreased returns from alternative investments offset by an increase in dividend income related to equity securities.
See Note 4 of the notes to the consolidated financial statements in Item 8 of Part II of this report for an analysis of total investment return on a pre-tax basis for the years ended December 31, 2020, 2019, and 2018.
The future liquidity of both Global Indemnity and GBLI Holdings, LLC is dependent on the ability of its subsidiaries to pay dividends. Global Indemnity and GBLI Holdings, LLC’s insurance companies are restricted by statute as to the amount of dividends that they may pay without the prior approval of regulatory authorities. The dividend limitations imposed by state laws are based on the statutory financial results of each insurance company within the Insurance Operations that are determined by using statutory accounting practices that differ in various respects from accounting principles used in financial statements prepared in conformity with GAAP. See “Regulation-Statutory Accounting Principles.” Key differences relate to, among other items, deferred acquisition costs, limitations on deferred income taxes, reserve calculation assumptions and surplus notes.
In 2020, the U.S. insurance companies did not declare or pay a dividend. See Note 20 of the notes to consolidated financial statements in Item 8 of Part II of this report for the maximum amount of distributions that U.S. insurance companies could pay as dividends in 2021.
Sources of operating funds consist primarily of net written premiums and investment income. Funds are used primarily to pay claims and operating expenses and to purchase investments. As a result of the dividend / distribution policy, funds may also be used in the future to pay distributions to shareholders of the Company.
Net cash provided by operating activities in 2020, 2019, and 2018 was $32.7 million, $32.4 million and $42.1 million, respectively.
In 2020, the increase in operating cash flows of approximately $0.3 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 4.2 years.
As of December 31, 2020, the Company also had future funding commitments of $31.2 million related to investments. The timing of commitments related to investments is uncertain.
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. However, the Company’s future capital requirements depend on many factors, including the amount of premium it writes, the amount of loss reserves by lines of business, and catastrophe exposure. To the extent that the Company needs to raise additional funds, any equity or debt financing for this purpose, if available at all, may be on terms that are not favorable to the Company. If the Company cannot obtain adequate capital, its business, results of operations and financial condition could be adversely affected.
Global Indemnity has adopted a dividend / distribution program. Although subject to the absolute discretion of the Board of Directors and factors, conditions, and prospects as such may exist from time to time when the Board of Directors considers the advisability of declaring a quarterly distribution, Global Indemnity Group, LLC currently anticipates a distribution rate of $0.25 per share per quarter ($1.00 per share per year). As of December 31, 2020, there are currently 14,397,088 shares issued and outstanding.
In August 2020, GBLI Holdings and Global Indemnity Limited redeemed the entire outstanding $100 million aggregate principal amount of the 7.75% Subordinated Notes due 2045.
The Company repaid all of the outstanding debt on the margin borrowing facility in August, 2020.
The Company entered into derivative instruments related to interest rate swaps. Due to fluctuations in interest rates, the Company paid $20.5 million and $7.7 million in connection with these derivative instruments for the years ended December 31, 2020 and 2019, respectively.
The Company is providing the following information in compliance with Rule 13-01 of Regulation S-X, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities” with respect to the Company’s 7.875% Subordinated Notes due in 2047 (“2047 Notes”). See Note 12 of the notes to the consolidated financial statements in Item 8 of Part II of this report for additional information on the 2047 Notes, the supplemental indenture whereby Global Indemnity Group, LLC assumes the obligation under the 2047 Notes, and the co-obligor transaction whereby GBLI Holdings, LLC becomes a co-obligor on the 2047 Notes.
The following tables present summarized financial information for Global Indemnity Group, LLC (Parent co-obligor) and GBLI Holdings, LLC (Subsidiary co-obligor) on a combined basis after transactions and balances within the combined entities have been eliminated.
The Company has commitments in the form of operating leases, commitments to fund limited liability investments, subordinated notes, and unpaid losses and loss expense obligations. As of December 31, 2020, contractual obligations related to Global Indemnity’s commitments, including any principal and interest payments, were as follows:
Represents future funding commitment of the Company’s participation in three separate limited partnership investments. See Note 16 of the notes to the consolidated financial statements in Item 8 of Part II of this report for additional information on these commitments.
To the Shareholders and the Board of Directors of Global Indemnity Group, LLC
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, 2020, 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 12, 2021, expressed an unqualified opinion thereon.
Auditing management’s best estimate of the liability for unpaid losses and loss adjustment expenses was complex and involved the use of our actuarial specialists due to the significant estimation uncertainty associated with evaluating management’s methods and assumptions in determining the Company’s recorded loss and loss adjustment reserves.
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the process for estimating loss and loss adjustment expense reserves. This included, among others, the review and approval processes management has in place for the methods and assumptions used in estimating the loss and loss adjustment expense reserves.
To test the Company’s estimate of loss and loss adjustment expense reserves, our audit procedures included among others, the assistance of our actuarial specialists to evaluate the assumptions used in the actuarial methods, by comparing the significant assumptions, including severity, frequency, payment patterns and expected loss ratios to the Company’s historical experience. In addition, we evaluated the selection and the weighting of actuarial methods used by management with those methods used in prior periods and those used in the industry. We developed a range of reasonable reserve estimates which included performing independent projections for a sample of lines of business and compared the range of reserve estimates to the Company’s recorded reserves. We also performed a review of historical results of the development of the loss and loss adjustment expense reserves related to prior years.
The consolidated financial statements include the accounts of Global Indemnity and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
As a result, any references to class A common shares or class B common shares after the Effective Time refer to Global Indemnity Group, LLC class A common shares or class B common shares and any references to class A common shares or class B common shares prior to the Effective Time refers to Global Indemnity Limited A ordinary shares or B ordinary shares.
Following completion of the Scheme of Arrangement, Global Indemnity Group, LLC survived as the ultimate parent company of the Global Indemnity group of companies. Additionally, as part of the Redomestication transactions, Global Indemnity Reinsurance Company was merged with and into Penn-Patriot, with Penn-Patriot surviving, resulting in the assumption of Global Indemnity Reinsurance’s business by the Global Indemnity group of companies’ existing U.S. insurance company subsidiaries (the "GI Bermuda Transaction" and, together with the Redomestication and the other transactions described in Global Indemnity Limited's Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on July 23, 2020 (the "Redomestication Proxy Statement"), the "Transactions").
Prior to the Redomestication, the Global Indemnity Limited A ordinary shares were listed on the NASDAQ Global Select Market ("Nasdaq") under the symbol "GBLI" and registered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). At the Effective Time, Global Indemnity Group, LLC’s class A common shares were deemed to be registered under Section 12(b) of the Exchange Act pursuant to Rule 12g-3(a) under the Exchange Act. The issuance of the class A common shares by Global Indemnity Group, LLC in the Redomestication was exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), by virtue of Section 3(a)(10) of the Securities Act. The Company’s class A common shares began trading on Nasdaq under the symbol "GBLI," the same symbol under which the Global Indemnity Limited ordinary shares previously traded, at the commencement of trading on Nasdaq on August 28, 2020.
On August 27, 2020, Global Indemnity Group, LLC issued 4,000 series A cumulative fixed rate preferred interests. Following the Effective Time, all of the issued and outstanding series A fixed rate preferred interests were unaffected by the Scheme of Arrangement. See Note 14 for additional information regarding the issuance of these preferred interests. The issuance of series A preferred interests was made pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act. The series A preferred interests are not convertible into or exchangeable for any other securities or property of Global Indemnity Group, LLC.
The Company’s investments in fixed maturities, which are classified as available for sale, and equity securities are carried at their fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair values of the Company's fixed maturities and equity securities are determined on the basis of quoted market prices where available. If quoted market prices are not available, the Company uses third party pricing services to assist in determining fair value. In many instances, these services examine the pricing of similar instruments to estimate fair value. The Company purchases bonds with the expectation of holding them to their maturity; however, changes to the portfolio are sometimes required to assure it is appropriately matched to liabilities. In addition, changes in financial market conditions and tax considerations may cause the Company to sell an investment before it matures. The difference between amortized cost and fair value of the Company’s fixed maturity portfolio, 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 (loss) other than for the credit loss component of impairments and losses recognized as a result of the intent to sell. Equity securities are measured at fair value with the changes in fair value recognized in net income (loss).
The Company’s investments in other invested assets were valued at $97.0 million and $47.3 million as of December 31, 2020 and 2019, respectively. These amounts relate to investments in limited partnerships and limited liability companies whose carrying value approximates fair value.
The Company implemented new accounting guidance on January 1, 2020 related to the measurement of expected credit losses on financial instruments. For available for sale debt securities, credit losses are still measured similar to the old guidance; however, the new guidance requires that credit losses be presented as an allowance rather than as a write-down of the amortized cost basis of the impaired security and allows for the reversal of credit losses in the current period net income (loss). Any impairments related to factors other than credit losses and the intent to sell continue to be recorded through other comprehensive income, net of taxes.
The Company regularly performs various analytical valuation procedures with respect to its investments, including reviewing each available for sale debt security in an unrealized loss position to assess whether the decline in fair value below amortized cost basis has resulted from a credit loss or other factors. In assessing whether a credit loss exists, the Company compares the present value of the cash flows expected to be collected from the security to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis of the security, a credit loss exists and an allowance for expected credit losses is recorded. Subsequent changes in the allowances are recorded in the period of change as either credit loss expense or reversal of credit loss expense. Any impairments related to factors other than credit losses and the intent to sell are recorded through other comprehensive income, net of taxes.
the investment failed cash flow projection testing to determine if anticipated principal and interest payments will be realized; and
At December 31, 2020 and 2019, the Company had approximately $58.0 million and $35.8 million, respectively, of cash and cash equivalents that was invested in a diversified portfolio of high quality short-term debt securities.
The Company evaluates the collectability of premium receivable based on a combination of factors. In instances in which the Company is aware of a specific circumstance where a party may be unable to meet its financial obligations to the Company, a specific allowance for expected credit losses against amounts due is recorded to reduce the net receivable to the amount reasonably believed by management to be collectible. For all remaining balances, the allowance is based upon the Company’s ongoing review of key aspects of amounts outstanding, including but not limited to, length of collection periods, direct placement with collection agencies, solvency of insured or agent, terminated agents, and other relevant factors. The allowance for expected credit losses was $2.9 million and $2.8 million as of December 31, 2020 and 2019, respectively.
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, there were no impairments of indefinite lived intangible assets as of December 31, 2020.
Basic earnings per share have been calculated by dividing net income (loss) available to common shareholders by the weighted-average common shares outstanding. In periods of net income, diluted earnings per share have been calculated by dividing net income available to common shareholders by the sum of the weighted-average common shares outstanding and the weighted-average common share equivalents outstanding, which include options and other equity awards. In periods of net loss, diluted earnings per share is the same as basic earnings per share. See Note 19 for details.
At times, 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 fixed maturity investments, if any, is reflected in accumulated other comprehensive income in shareholders’ equity; whereas, the gain or loss on foreign denominated cash accounts and equity securities 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 and losses, primarily comprised of re-measurement of known losses on claims to be paid in foreign currencies, were a gain of $0.1 million, a gain of $0.3 million, and a loss of $2.9 million for the years ended December 31, 2020, 2019, and 2018, respectively.
The Company determines if an arrangement is a lease at inception. Leases with a term of 12 months or less are not recorded on the consolidated balance sheets. Lease right-of-use assets (“ROU”) are included in other assets on the consolidated balance sheets and lease liabilities are included in other liabilities on the consolidated balance sheets.
The Company elected the practical expedient to exclude accrued interest from both the fair value and the amortized cost basis of the available for sale debt securities for the purposes of identifying and measuring an impairment and to not measure an allowance for expected credit losses for accrued interest receivables. Accrued interest receivable is written off through net realized investment gains (losses) at the time the issuer of the bond defaults or is expected to default on payment. The Company made an accounting policy election to present the accrued interest receivable balance with other assets on the Company’s consolidated statements of financial position. Accrued interest receivable was $5.7 million and $7.0 million as of December 31, 2020 and 2019, respectively.
As of December 31, 2020 and 2019, the Company’s investments in equity securities consist of the following:
The amortized cost and estimated fair value of the Company’s fixed maturities portfolio classified as available for sale at December 31, 2020, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The following table contains an analysis of the Company’s fixed income securities with gross unrealized losses that are not deemed to have credit losses, categorized by the period that the securities were in a continuous loss position as of December 31, 2020. The fair value amounts reported in the table are estimates that are prepared using the process described in Note 6.
Mortgage-backed securities (“MBS”) - As of December 31, 2020, gross unrealized losses related to mortgage-backed securities were $0.551 million. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, mortgage-backed securities are modeled to project principal losses under downside, base, and upside scenarios for the economy and home prices. The primary assumption that drives the security and loan level modeling is the Home Price Index (“HPI”) projection. These forecasts incorporate not just national macro-economic trends, but also regional impacts to arrive at the most granular and accurate projections. These assumptions are incorporated into the model as a basis to generate delinquency probabilities, default curves, loss severity curves, and voluntary prepayment curves at the loan level within each deal. The model utilizes HPI-adjusted current LTV, payment history, loan terms, loan modification history, and borrower characteristics as inputs to generate expected cash flows and principal loss for each bond under various scenarios. Based on the analysis performed, the Company did not recognize a credit loss on mortgage-backed securities during the period.
Commercial mortgage-backed securities (“CMBS”) - As of December 31, 2020, gross unrealized losses related to the CMBS portfolio were $0.644 million. The weighted average credit enhancement for the Company’s CMBS portfolio is 39.5. This represents the percentage of pool losses that can occur before a mortgage-backed security will incur its first dollar of principal loss. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, 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. Each loan is analyzed over time using a series of tests to determine if a credit event will occur during the life of the loan. Inherent in this process are several economic scenarios and their corresponding rent/vacancy and capital market states. The five primary credit events that frame the analysis include loan modifications, term default, balloon default, extension, and ability to pay off at balloon. The resulting output is the expected loss adjusted cash flows for each bond under the base case and distressed scenarios. Based on the analysis performed, the Company did not recognize a credit loss on commercial mortgage-backed securities during the period.
The Company has evaluated its investment portfolio and has determined that an allowance for credit losses on its investments is not required.
The following table is an analysis of the credit losses recognized in earnings on fixed maturities held by the Company as of December 31, 2019 and 2018 for which a portion of the OTTI loss was recognized in other comprehensive income.
The sources of net investment income for the years ended December 31, 2020, 2019, and 2018 were as follows:
As of December 31, 2020 and 2019, the Company did not own any fixed maturity securities that were non-income producing for the preceding twelve months.
The Company’s total investment return on a pre-tax basis for the years ended December 31, 2020, 2019, and 2018 were as follows:
The Company had no direct investments in the entities that have provided financial guarantees or other credit support to any security held by the Company at December 31, 2020.
Certain cash balances, cash equivalents, equity securities, and bonds available for sale were deposited with various governmental authorities in accordance with statutory requirements, were held as collateral, or were held in trust pursuant to intercompany reinsurance agreements. The fair values were as follows as of December 31, 2020 and 2019:
The derivatives are held by GBLI Holdings, LLC and are guaranteed by Global Indemnity Group, LLC
As of December 31, 2020 and 2019, the Company is due $2.8 million and $3.0 million, respectively, for funds it needed to post to execute the swap transaction and $17.5 million and $12.5 million, respectively, for margin calls made in connection with the interest rate swaps. These amounts are included in other assets on the consolidated balance sheets.
As of December 31, 2020 and 2019, the Company posted initial margin of $0.5 million and $3.0 million, respectively, in securities for trading futures contracts and has a mark-to-market receivable of less than $0.1 million and $0.3 million, respectively, in connection with the futures contracts. Variation margin is included in other assets on the consolidated balance sheets.
The Company’s invested assets and derivative instruments are carried at their fair value and are categorized based upon a fair value hierarchy:
The securities classified as Level 1 in the above table consist of U.S. Treasuries and equity securities actively traded on an exchange.
For the Company’s material debt arrangements, the current fair value of the Company’s debt at December 31, 2020 and 2019 was as follows:
As of December 31, 2019, the carrying value and fair value of the 7.75% Subordinated Notes due 2045 are net of unamortized debt issuance cost of $3.1 million. In August 2020, the Company redeemed all of its outstanding 7.75% subordinated notes due 2045 and unamortized debt issuance cost of $3.1 million was written off and included in the consolidated statements of operations as loss on the extinguishment of debt.
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 ability to sell or transfer its limited partnership interest without consent from the general partner. 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’s pricing vendors provide prices for all investment categories except for investments in limited liability companies and limited partnerships. Two primary vendors are utilized to provide prices for equity and fixed maturity securities.
The following is a description of the valuation methodologies used by the Company’s pricing vendors for investment securities carried at fair value:
As a result of acquisitions in 2015 and 2010, the Company has goodwill, within the Specialty Property and Farm, Ranch & Stable segments, of $6.5 million as of December 31, 2020 and 2019. The goodwill represents the excess purchase price over the Company’s best estimate of the fair value of the assets acquired. Impairment testing performed in 2020 and 2019 did not result in impairment of the goodwill acquired.
The following table presents details of the Company’s intangible assets as of December 31, 2020:
The Company implemented new accounting guidance on January 1, 2020 related to the measurement of expected credit losses on financial instruments. Please see Note 23 for further discussion on this new accounting guidance.
For reinsurance receivables, the allowance is based upon the Company’s ongoing review of key aspects of amounts outstanding, including but not limited to, length of collection periods, disputes, applicable coverage defenses, insolvent reinsurers, financial strength of solvent reinsurers based on AM Best Ratings and other relevant factors.
The following table is an analysis of the allowance for expected credit losses related to the Company's premiums receivable and reinsurance receivables for the year ended December 31, 2020:
As of December 31, 2020, the Company had one aggregate unsecured reinsurance receivables that exceeded 3% of shareholders’ equity from the following reinsurer. Unsecured reinsurance receivables include amounts receivable for paid and unpaid losses and loss adjustment expenses, less amounts secured by collateral.
Includes ceded written premiums of less than $0.1 million, ($0.3) million, and ($2.1) million and ceded earned premiums of $1.6 million, $2.3 million and $7.3 million to American Bankers Insurance Company for the years ended December 31, 2020, 2019, and 2018, respectively.
The Company has a Section 163(j) (“163(j)”) carryforward of $5.6 million and $9.0 million as of December 31, 2020 and 2019, respectively, which can be carried forward indefinitely. The 163(j) carryforward relates to the limitation on the deduction for business interest expense paid or accrued.
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 relevant taxing authorities. All tax benefits recognized by the Company in 2020, 2019, and 2018 have a greater than 50% likelihood of being sustained upon examination by relevant taxing authorities.
During 2020, the Company reduced its prior accident year loss reserves by $31.5 million, which consisted of a $17.6 million decrease related to Commercial Specialty, a $6.6 million decrease related to Specialty Property, a $2.3 million decrease related to Farm, Ranch & Stable, and a $5.0 million decrease related to Reinsurance Operations.
The $17.6 million reduction of prior accident year loss reserves related to Commercial Specialty primarily consisted of the following:
Commercial Auto Liability: A $1.0 million reduction primarily in the 2010 and 2012 through 2016 accident years recognizes lower than anticipated claims severity.
Workers Compensation: A $0.2 million decrease primarily in loss adjustment expense reserves in the 2012 accident year and accident years prior to 2005.
The $2.3 million reduction of prior accident year loss reserves related to Farm, Ranch & Stable primarily consisted of the following:
The $5.0 million decrease in prior accident year loss reserves related to Reinsurance Operations were primarily based on a review of the experience reported from cedants. There was a $2.9 million decrease in the property lines in the 2009 through 2018 accident years, partially offset by an increase in the 2019 accident year. In addition, there was a reduction of $1.7 million in the professional lines in the 2014 and 2015 accident years and a reduction of $0.4 million in the liability & workers compensation lines in the 2009 through 2012 accident years.
During 2019, the Company reduced its prior accident year loss reserves by $32.8 million, which consisted of a $18.4 million decrease related to Commercial Specialty, $10.8 million decrease related to Specialty Property, $5.5 million decrease related to Farm, Ranch & Stable, and a $1.9 million increase related to Reinsurance Operations.
General Liability: A $14.5 million reduction in aggregate with $3.5 million of favorable development in the construction defect reserve category and $11.0 million of favorable development in the other general liability reserve categories. The favorable development in the construction defect reserve category recognizes better than expected claims frequency and severity in the 2004 through 2009, 2011 through 2015, 2017 and 2018 accident years, partially offset by increases in the 2010 and 2016 accident years which reflects higher than anticipated claims severity. The decreases in the other general liability reserve categories primarily recognizes lower than anticipated claims severity in the 1999 through 2014, 2016 and 2017 accident years, partially offset by an increase in the 2015 accident year which was impacted by higher than expected claims severity.
Commercial Auto Liability: A $2.0 million decrease primarily driven by better than expected claims severity in the 2000 through 2002, 2010 through 2013, 2015 and 2016 accident years.
Property: A $10.2 million decrease in aggregate primarily recognizes a reduction in the catastrophe reserve category for subrogation recoveries from the California Camp wildfire loss in the 2018 accident year. There also was favorable development in accident years 2015 through 2017 reflecting better than expected claims severity.
General Liability: A $0.6 million decrease primarily recognizes lower than expected claims severity in the 2014 through 2016 and 2018 accident years, partially offset by increases in the 2010 and 2017 accident years, recognizing higher than expected claims severity.
The $5.5 million reduction of prior accident year loss reserves related to Farm, Ranch & Stable primarily consisted of the following:
Property: A $5.0 million increase primarily in the 2016 through 2018 accident years partially offset by favorable development in the 2011 through 2015 accident years based on a review of the experience reported from the cedants. The 2018 accident year was adversely impacted by $9.0 million of development from Typhoon Jebi.
During 2018, the Company reduced its prior accident year loss reserves by $28.8 million, which consisted of a $7.3 million decrease related to Commercial Specialty, $7.9 million decrease related to Specialty Property, $4.7 million decrease related to Farm, Ranch & Stable, and a $8.9 million decrease related to Reinsurance Operations.
General Liability: A $2.2 million decrease primarily in the 2011 through 2014 and 2016 through 2017 accident years, which recognizes lower than expected claims severity, partially offset by an increase in the 2015 accident year which reflects higher than expected claims severity.
The $4.7 reduction of prior accident year loss reserves related to Farm, Ranch & Stable primarily consisted of the following:
Property: A $1.3 million reduction primarily in the 2014 through 2017 accident years mainly reflects lower than expected claims severity.
Liability: A $3.4 million decrease reflects lower than expected claims severity primarily in the 2012, 2014, 2016 and 2017 accident years, partially offset by increases in the 2007 and 2013 accident years recognizing higher than anticipated claims severity.
Prior to 2001, the Company underwrote multi-peril business insuring general contractors, developers, and sub-contractors primarily involved in residential construction that has resulted in significant exposure to construction defect (“CD”) claims. The Company’s reserves for CD claims are established based upon management’s best estimate in consideration of known facts, existing case law and generally accepted actuarial methodologies. However, due to the inherent uncertainty concerning this type of business, the ultimate exposure for these claims may vary significantly from the amounts currently recorded. As of December 31, 2020 and 2019, gross reserves for CD claims were $31.4 million and $36.9 million, respectively, and net reserves for CD claims were $29.8 million and $35.4 million, respectively.
As of December 31, 2020, 2019, and 2018, the survival ratio on a gross basis for the Company’s open A&E claims was 35.5 years, 32.1 years, and 24.2 years, respectively. As of December 31, 2020, 2019, and 2018, the survival ratio on a net basis for the Company’s open A&E claims was 59.5 years, 47.8 years, and 35.7 years, respectively. The survival ratio, which is the ratio of gross or net reserves to the 3-year average of annual paid claims, is a financial measure that indicates how long the current amount of gross or net reserves are expected to last based on the current rate of paid claims.
The following is information, presented by lines of business with similar characteristics including similar payout patterns, about incurred and paid claims development as of December 31, 2020, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities included within the net incurred claims amounts. The years included represent the number of years for which claims incurred typically remain outstanding but need not exceed 10 years including the most recent report period presented.
Commercial Specialty’s internal actuarial reserve reviews were completed for loss and allocated loss adjustment expenses (“ALAE”) separately for property excluding catastrophe experience, property catastrophes, and casualty reserve categories. The internal actuarial reserve reviews were completed with data through December, 2020. Actuarial methodologies, such as the Loss Development and Bornhuetter-Ferguson methods, were employed to develop estimates of ultimate Loss & ALAE for most reserve categories. Additional actuarial methodologies were employed to develop estimates of ultimate Loss & ALAE for mass tort and constructions defect reserve categories due to the unique characteristics of the exposures involved. Management’s ultimate selections considered the internal actuarial review and a third party actuarial review completed during the 4th quarter of 2020. Case incurred is subtracted from the management selected ultimates to obtain the booked IBNR reserves. These methodologies are consistent with last year.
The following is required supplementary information about average historical claims duration as of December 31, 2020:
The following is required supplementary information about average historical claims duration as of December 31, 2020.
Farm, Ranch & Stable’s cumulative claim frequency has been calculated at the claim level and includes claims closed without payment.
Reinsurance Operations’ internal reserve reviews were completed for loss and allocated loss adjustment expenses (ALAE) combined for run off treaties and the current book of business. The current book of business is constituted of professional liability portfolios and retrocessions from Bermuda based companies for property catastrophe, marine and casualty business. The reserve reviews were completed based on the latest data reported from the cedants which is typically on a quarter lag. Paid loss, ALAE and Case reserves, shown in the reinsurance category tables below, which are originally based in a foreign currency, are remeasured in U.S. dollars based on the Foreign Exchange (FX) rate at the end of the period. Management’s ultimate selections were based on a review of ultimates reported from the cedants, including loss emergence during the reporting period, and consideration of the internal actuarial review and a third party actuarial review completed during the 4th quarter of 2020. Case incurred is subtracted from the management selected ultimates to obtain the booked IBNR reserves. These methodologies are consistent with last year.
May not be indicative of future average annual percentage payout of incurred claims due to a change in mix of business
The Company’s outstanding debt consisted of the following at December 31, 2020 and 2019:
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 0.8% and 1.9% at December 31, 2020 and 2019, 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. The Company did not have any securities that were deposited as collateral at December 31, 2020. As of December 31, 2019, approximately $88.2 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 $73.6 million as of December 31, 2019. The Company did not have any amounts outstanding on the margin borrowing facility as of December 31, 2020.
The Company recorded interest expense related to the Margin Borrowing Facility of approximately $0.5 million, $1.8 million, and $1.4 million for the years ended December 31, 2020, 2019, and 2018, respectively.
In August 2020, GBLI Holdings and Global Indemnity Limited redeemed the entire outstanding $100.0 million aggregate principal amount of 7.75% Subordinated Notes due 2045 (“2045 Notes”). In connection with the redemption, the Company wrote off deferred issuance costs of $3.1 million which was recognized as a loss on extinguishment of debt in its consolidated statements of operations for the year ended December 31, 2020.
The 2047 Notes are subordinated unsecured obligations and rank (i) senior to the Company’s existing and future capital stock, (ii) senior in right of payment to future junior subordinated debt, (iii) equally in right of payment with any existing unsecured, subordinated debt that the Company has issued or may issue in the future that ranks equally with the 2047 Notes, and (iv) subordinate in right of payment to any of the Company’s future senior debt. In addition, the 2047 Notes are structurally subordinated to all existing and future indebtedness, liabilities and other obligations of the Company’s subsidiaries including the Company’s margin borrowing facility.
The following table represents the amounts recorded for the subordinated notes as of December 31, 2020 and 2019:
Pursuant to the Fourth Supplemental Indenture, New CayCo expressly assumed the obligations of Global Indemnity Limited under the Indenture, including the obligations of Global Indemnity Limited under the outstanding 2047 Notes issued pursuant to such Indenture.
On August 28, 2020, in connection with the merger of New Cayco with and into Global Indemnity Group, LLC, each of New CayCo, the Co-Obligor, Global Indemnity Group, LLC and the Trustees entered into a Fifth Supplemental Indenture, dated as of August 28, 2020 (the "Fifth Supplemental Indenture"), to the Indenture.
Pursuant to the Fifth Supplemental Indenture, Global Indemnity Group, LLC expressly assumed the obligations of New CayCo under the Indenture, including the obligations of New CayCo under the outstanding 2047 Notes issued pursuant to such Indenture.
In April, 2018, GBLI Holdings, LLC, an indirect wholly-owned subsidiary of the Company, became a subordinated co-obligor with respect to the 2045 Notes, which were fully redeemed in August 2020, and the 2047 Notes with the same obligations and duties as the Company under the Indenture (including the due and punctual performance and observance of all of the covenants and conditions to be performed by the Company, including, without limitation, the obligation to pay the principal of, and interest on, the 2047 Notes when due whether at maturity, by acceleration, redemption or otherwise), and with the same rights, benefits and privileges of the Company thereunder. Notwithstanding the foregoing, GBLI Holdings, LLC's obligations (including the obligation to pay the principal of and interest in respect of the 2047 Notes) are subject to subordination to all monetary obligations or liabilities of GBLI Holdings, LLC owing to any regulated reinsurance or insurance company that is a direct or indirect subsidiary of the Company, in addition to indebtedness of GBLI Holdings, LLC for borrowed money. If the Company pays any amount with respect to the subordinated note obligations, the Company is entitled to be reimbursed by GBLI Holdings, LLC within 10 business days after a demand is made to GBLI Holding, LLC by the Company. In consideration for becoming a subordinated co-obligor on the subordinated notes, GBLI Holdings, LLC received a promissory note from Global Indemnity Limited with a principal amount of $230 million due April 15, 2047 that has since been assigned to an affiliate. This promissory note was settled in August 2020.
The Company determines if an arrangement is a lease at inception. Leases with a term of 12 months or less are not recorded on the consolidated balance sheets. For leases with a term of greater than 12 months, lease right-of-use assets (“ROU”) are included in other assets on the consolidated balance sheets and lease liabilities are included in other liabilities on the consolidated balance sheets.
The Company leases office space and equipment under various operating lease arrangements. The Company’s leases have remaining lease terms ranging from 3 months to 10 years. Some building leases have options to extend, terminate, or retract the leased area. The Company did not factor in term extension, terminations, or space retractions into the lease terms used to calculate the right-of-use assets and lease liabilities since it was uncertain as to whether these options would be executed.
The Company is also party to certain service contracts. These agreements will continue to be accounted for as service contracts and expensed in the period the services have been provided. As contracts are signed, renewed, or renegotiated, they will be evaluated using the criteria set forth in the new lease guidance to determine if these contracts contain a lease and will be accounted for properly depending upon the terms and language in the contract.
Prior to the adoption of the new accounting guidance, rental expense under operating leases was $3.5 million for the year ended December 31, 2018.
At December 31, 2020, future minimum lease payments under non-cancelable operating leases were as follows:
On August 28, 2020, Global Indemnity completed a scheme of arrangement and amalgamation that effected certain transactions (the "Redomestication") that resulted in the shareholders of Global Indemnity Limited becoming the holders of all of the issued and outstanding common shares of Global Indemnity Group, LLC. Please see Note 2 of the notes to the consolidated financial statements in Item 8 of Part II of this report for details on the redomestication.
Following the effective time of the Redomestication (the “Effective Time”), all of the issued and outstanding Series A Preferred Interests sold to Wyncote remain outstanding as "Series A Cumulative Fixed Rate Preferred Shares", unaffected by the Scheme of Arrangement and subject to the terms of the Second Amended and Restated Limited Liability Company Agreement of Global Indemnity Group, LLC (the “LLCA”) and that certain Share Designation, effective as of the Effective Time, that sets forth the designation, rights, preferences, powers, duties, restrictions, limitations and obligations of the Series A Cumulative Fixed Rate Preferred Shares from and after the Effective Time.
Since Global Indemnity Group, LLC is a holding company and has no direct operations, its ability to pay distributions depends, in part, on the ability of its subsidiaries to pay dividends. Penn-Patriot Insurance Company and its insurance subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. Global Indemnity Investments, Inc. is dependent on generating investment income in order to pay a dividend to Global Indemnity Group, LLC. See Note 20 for additional information regarding dividend limitations imposed on Penn-Patriot Insurance Company and its subsidiaries.
Dividend & distribution payments of $0.25 per common share per quarter were declared during the year ended December 31, 2020 as follows:
Dividend payments of $0.25 per common share per quarter were declared during the year ended December 31, 2018 as follows:
The following table provides information with respect to the class A common shares that were surrendered, repurchased, or redeemed in 2020:
There were no class B common shares that were surrendered, repurchased, or redeemed in 2020.
The following table provides information with respect to the class A common shares that were surrendered, repurchased, or redeemed in 2019:
Each class A common share has one vote and each B common share has ten votes.
Pursuant to Global Indemnity Group, LLC’s LLCA, Fox Paine Capital Fund II International, L.P. and certain of its affiliates (the “Fox Paine Funds”), together with Fox Mercury Investments, L.P. and certain of its affiliates (the “FM Entities”), and Fox Paine & Company LLC (collectively, the “Fox Paine Entities”) currently constitute a Class B Majority Shareholder (as defined in the LLCA) and, as such, have the right to appoint a number of Global Indemnity Group, LLC’s directors equal in aggregate to the pro rata percentage of the voting power in Global Indemnity Group, LLC beneficially held by the Fox Paine Entities, rounded up to the nearest whole number of directors. The Fox Paine Entities beneficially own shares representing approximately 83.9% of the voting power of Global Indemnity Group, LLC as of December 31, 2020. The Fox Paine Entities control the election of all of Global Indemnity
Pursuant to the Third Amended and Restated Management Agreement, (“Management Agreement”) dated August 28, 2020, between Global Indemnity Group, LLC and Fox Paine & Company, LLC, Global Indemnity Group, LLC agrees to pay, or to cause one of its affiliates to pay, an annual service fee (“Annual Service Fee”) as compensation for Fox Paine & Company, LLC’s ongoing provision of certain financial and strategic consulting, advisory and other services to Global Indemnity Group, LLC and its affiliates, and to reimburse all direct and indirect expenses paid or incurred in connection with such services upon request, excluding expenses for travel, lodging, meals, and other items relating to attendance at regularly scheduled meetings of the Board of Directors. For the twelve-month period beginning on September 5, 2019 and ending September 4, 2020, the Annual Service Fee was equal to $2.6 million, which amount will be adjusted on an ongoing basis in each subsequent twelve-month period to reflect the aggregate increase in the CPI-U. Should Global Indemnity Group, LLC and Fox Paine & Company, LLC agree that the Annual Service Fee will be deferred, the Annual Service Fee will become subject to an annual adjustment equal to the percentage rate of return the Company earns on its investment portfolio multiplied by the aggregate Annual Service Fees and adjustment amounts accumulated and unpaid through such date.
Management fee expense of $2.6 million, $2.1 million, and $2.1 million was incurred during the years ended December 31, 2020, 2019, and 2018, respectively. Prepaid management fees, which were included in other assets on the consolidated balance sheets, were $1.8 million and $1.4 million as of December 31, 2020 and 2019, respectively.
In 2014, the Company entered into a $50 million commitment to purchase an alternative investment vehicle which is comprised of European non-performing loans. As of December 31, 2020, the Company has funded $35.8 million of this commitment leaving $14.2 million as unfunded. Since the investment period has concluded, the Company expects minimal capital calls will be made prospectively.
In 2017, the Company entered into a $50 million commitment to purchase an alternative investment vehicle comprised of stressed and distressed securities and structured products. As of December 31, 2020, the Company has funded $33.0 million of this commitment leaving $17.0 million as unfunded. Since the investment period has concluded, the Company expects minimal capital calls will be made prospectively.
In 2019, the Company entered into a $10 million commitment to purchase an alternative investment vehicle which is comprised of mortgage loans and other real-estate related investments. As of December 31, 2020, the Company has fully funded this commitment.
In 2020, the Company entered into a $60 million commitment to purchase an alternative investment vehicle which is comprised of non-investment grade loans. As of December 31, 2020, the Company has fully funded this commitment.
The fair value method of accounting recognizes share-based compensation to employees and non-employee directors in the consolidated statements of operations using the grant-date fair value of the stock options and other equity-based compensation expensed over the requisite service and vesting period.
In connection with the Redomestication, the 2018 Share Incentive Plan was amended and restated to reflect Global Indemnity Group, LLC’s assumption of the sponsorship of the plan and other changes deemed necessary and appropriate to reflect the completion of the Redomestication.
The Company awarded 300,000 time-based options in each of the years ended December 31, 2020 and 2018 with an average strike price of $52.79 and $50.00, respectively. There were no stock options granted in 2019.
Option intrinsic values, which are the differences between the fair value of $28.59 at December 31, 2020 and the strike price of the option, are as follows:
Based on the terms of the restricted share and restricted stock unit grants, all forfeited shares revert back to the Company.
16.5% vested on both January 1, 2019 and January 1, 2020. 17.0% of the granted restricted stock will vest on January 1, 2021.
During 2018, the Company granted 31,646 restricted A common shares, at a weighted average grant date fair value of $36.74 per share, to non-employee directors of the Company under the Plan.
Of the remaining 7,500 shares, 20% vested on August 26, 2020 and 20% will vest on August 26, 2021, August 26, 2022, August 26, 2023 and August 26, 2024.
During 2019, the Company granted 66,619 restricted A common shares at a weighted average grant date fair value of $28.77 per share, to non-employee directors of the Company under the plan.
10.0%, 20.0%, 30.0% and 40.0% of the restricted stock units will vest on June 18, 2021, June 18, 2022, June 18, 2023 and June 18, 2024, respectively.
Subject to Board approval, 50% of restricted stock units will vest 100%, no later than March 15, 2023, following a re-measurement of 2019 results as of December 31, 2022.
The Company did not grant any restricted class A common shares during 2020.
All of the shares and restricted stock units granted to non-employee directors in 2020, 2019, and 2018 were fully vested but subject to certain restrictions.
On March 6, 2018, the Company entered into a Chief Executive Agreement (the “Employment Agreement”) with Cynthia Y. Valko, the Company’s Chief Executive Officer. In accordance with the Employment Agreement, the vesting schedule for the 300,000 stock options issued in 2014 (“Tranche 2 Options”) was modified. 100,000 of the Tranche 2 Options were related to the attainment of Return on Equity criteria for 2018 and were scheduled to vest on December 31, 2018. These options were forfeited on December 31, 2018 because the Return on Equity criteria was not met. 100,000 of the Tranche 2 Options were related to the attainment of Return on Equity criteria for 2020 and were scheduled to vest on December 31, 2020. These options were forfeited on December 31, 2020 because the Return on Equity criteria was not met. The remaining 100,000 options vested on December 31, 2019. These options are subject to remeasurement of 2019 bonus year results after the third full calendar year following the bonus year.
Under the terms of the Employment Agreement, Ms. Valko was also granted an additional 300,000 Time-Based Options (“Tranche 3 Options”) with an exercise price of $50 per share. 100,000 of the Tranche 3 Options each vested on December 31, 2018, December 31, 2019, and December 31, 2020. Tranche 3 Options expire on the earlier of December 31, 2027 or 90 calendar days after Ms. Valko is neither employed by Global Indemnity nor a member of the Board of Directors.
The Company maintains a 401(k) defined contribution plan that covers all eligible U.S. employees. Under this plan, the Company matches 100% of the first 6% contributed by an employee. Vesting on contributions made by the Company is immediate. Total expenses for the plan were $1.9 million for each of the years ended December 31, 2020, 2019, and 2018.
Earnings per share have been computed using the weighted average number of common shares and common share equivalents outstanding during the period.
The weighted average shares outstanding used to determine dilutive earnings per share for the year ended December 31, 2020 did not include 700,000 options and 66,957 restricted stock units which were deemed to be anti-dilutive. The weighted average shares outstanding used to determine dilutive earnings per share for the years ended December 31, 2019 and 2018 do not include 500,000 options which were deemed to be anti-dilutive.
The Company’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. Applying the current regulatory restrictions as of December 31, 2020, the maximum amount of distributions that could be paid in 2021 by Penn-Patriot Insurance Company, the United National insurance companies, the Penn-America insurance companies, and American Reliable under applicable laws and regulations without regulatory approval is approximately $34.3 million, $17.4 million, $8.1 million, and $10.0 million, respectively. The Penn-America insurance companies limitation includes $2.7 million that would be distributed to United National Insurance Company or its subsidiary, Penn Independent Corporation, based on the December 31, 2020 ownership percentages. The Company’s insurance subsidiaries did not declare or pay any dividends in 2020.
The following is selected information for the Company’s insurance companies, net of intercompany eliminations, where applicable, as determined in accordance with SAP:
Prior to Global Indemnity Reinsurance’s merger into Penn-Patriot on August 28, 2020, Global Indemnity Reinsurance was required to also prepare annual statutory financial statements. The Bermuda Insurance Act 1978 (the “Insurance Act”) prescribes rules for the preparation and substance of these statutory financial statements which include, in statutory form, a balance sheet, an income statement, a statement of capital and surplus and notes thereto. The statutory financial statements are not prepared in accordance with GAAP or SAP and are distinct from the financial statements prepared for presentation to Global Indemnity Reinsurance's shareholders and under the Bermuda Companies Act 1981 (the “Companies Act”), which financial statements will be prepared in accordance with GAAP.
Under the Companies Act, Global Indemnity Reinsurance may only declare or pay a dividend if it has no reasonable grounds for believing that it is, or would after the payment be, unable to pay its liabilities as they become due, or if the realizable value of its assets would not be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Global Indemnity Reinsurance is also prohibited, without the approval of the BMA, from reducing by 15% or more its total statutory capital or 25% or more of its total statutory capital and surplus as set out in its previous year’s statutory financial statements, and any application for such approval must include such information as the BMA may require. In June, 2020, Global Indemnity Reinsurance declared and paid a dividend of $226.0 million to its parent company, Global Indemnity Limited. On August 26, 2020, Global Indemnity Reinsurance merged into Penn-Patriot Insurance Company.
As a result of the merger, the Company no longer has any subsidiaries which are Bermuda licensed companies and is not required to prepare annual statutory financial statements in accordance with the Bermuda Insurance Act 1978 for 2020.
The Company manages its business through four business segments. Commercial Specialty offers specialty property and casualty products designed for product lines such as Small Business Binding Authority, Property Brokerage, and Programs. Specialty Property offers specialty personal lines property and casualty insurance products. Farm, Ranch & Stable offers specialized property and casualty coverage including Commercial Farm Auto and Excess/Umbrella Coverage for the agriculture industry as well as specialized insurance products for the equine mortality and equine major medical industry. Reinsurance Operations provides reinsurance solutions through brokers and primary writers including insurance and reinsurance companies.
The following are tabulations of business segment information for the years ended December 31, 2020, 2019, and 2018. Corporate information is included to reconcile segment data to the consolidated financial statements.
Includes less than $0.1 million of business written by American Reliable that was ceded to insurance companies owned by Assurant under a 100% quota share reinsurance agreement.
In March, 2020, the FASB issued new accounting guidance that affected a variety of topics in the Codification. The amendments in this update are meant to make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarification. This guidance is effective for all fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2020. The adoption of this new accounting guidance did not have a material impact on the Company’s financial condition, results of operations, or cash flows.
In December, 2019, the FASB issued updated guidance related to the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The updated guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The Company does not expect the adoption of this new accounting guidance to have a material impact on the Company’s financial condition, results of operations, or cash flows.
An unaudited summary of the Company’s 2020 and 2019 quarterly performance is as follows:
The Terms of Employment provides that the Company may terminate Mr. Oltman’s employment at any time for any reason. In the event of Mr. Oltman’s termination by the Company without “cause” (as defined in the Terms of Employment), Mr. Oltman will receive as severance an aggregate amount equal to the lesser of (i) one month of Base Salary for each 12 months of employment and (ii) the Base Salary otherwise payable between the termination date and December 31, 2023 (such Base Salary payments, the “Severance Amount”). Payment of the Severance Amount is contingent upon compliance with the terms in the Terms of Employment, including Mr. Oltman’s execution of and not revoking a general release of claims in favor of the Company.
The Terms of Employment includes perpetual confidentiality and mutual non-disparagement provisions, and two-year post-termination non-competition and employee and customer non-solicitation provisions.
In January, 2021, the Company entered into a $25 million commitment to purchase an alternative investment vehicle that invests in performing, stressed or distressed securities and loans across the global fixed income markets.