At December 31, 2018, office space leased in Bala Cynwyd, Pennsylvania, holds the Commercial Lines’ principal executive offices and headquarters. Additional office space leased in California, Georgia, Illinois, and Texas, serve as field offices for Commercial Lines. Some of the office space in California also serves as office space for Commercial Lines’ claims operations. Office space in Hamilton, Bermuda used by Reinsurance Operations is shared with one of Global Indemnity Reinsurance’s service providers per an agreement between the two. Office space leased in Arizona and Nebraska, is used by Personal Lines. Office space leased in Cavan, Ireland is used to support the operating needs of the Insurance and Reinsurance Operations. The leases for the properties listed are held by various Company subsidiaries. The Company believes the properties listed are suitable and adequate to meet its needs.
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 totaling $1.00 per share were declared and paid on common stock in 2018. No cash dividends were declared or paid on common stock during the years ended December 31, 2017, 2016, 2015, and 2014.
2018 loss and combined ratios reflect a $28.8 million reduction of net losses and loss adjustment expenses
During the quarter ended March 31, 2018, the Company received regulatory approval to terminate the quota share agreement between Global Indemnity Reinsurance and the Company’s U.S. insurance companies effective January 1, 2018.
During each quarter of 2018, the Board of Directors approved a dividend payment of $0.25 per ordinary share to all shareholders of record on the close of business on March 21, 2018, June 22, 2018, September 27, 2018, and December 24, 2018. Quarterly dividends of $3.5 million were paid on March 29, 2018, June 29, 2018, October 1, 2018 and December 31, 2018.
On January 8, 2019, A.M. Best affirmed the financial strength rating of “A” (Excellent) for Global Indemnity Reinsurance and its U.S. insurance subsidiaries.
The Company operates and manages its business through three business segments: Commercial Lines, Personal Lines, and Reinsurance Operations.
The Company’s Commercial Lines segment distribute property and casualty insurance products through a group of approximately 130 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 Lines operates predominantly in the excess and surplus lines marketplace. The Company manages its Commercial Lines segment via product classification. These product classifications are: 1) Penn-America, which includes property and general liability products for small commercial businesses distributed through a select network of wholesale general agents with specific binding authority; 2) United National, which includes property, general liability, and professional lines products distributed through program administrators with specific binding authority; 3) Diamond State, which includes property, casualty, and professional lines products distributed 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 distributed through aggregators, brokers, and retail agents.
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 prevailing market prices.
In addition to the Company’s internal reserve analysis, independent external actuaries perform a full, detailed review of the Insurance and Reinsurance Operations’ reserves annually. The Company reviews both the internal and external actuarial analyses in determining its reserve position.
The actuarial methods used to project ultimate losses for both long-tail and short-tail reserve categories include, but are not limited to, the following:
For other more complex reserve categories where the above methods may not produce reliable indications, the Company uses additional methods tailored to the characteristics of the specific situation. Such reserve categories include losses from construction defect and A&E claims.
For construction defect losses, the Company’s actuaries organize losses by the year in which they were reported to develop an IBNR provision for development on known cases. To estimate losses from claims that have occurred but have not yet been reported to the Company (pure IBNR), various extrapolation techniques are applied to the pattern of claims that have been reported to estimate the number of claims yet to be reported. This process requires analysis of several factors including the rate at which policyholders report claims to the Company, the impact of judicial 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.
The key assumptions fundamental to the reserving process are often different for various reserve categories and accident years. Some of these assumptions are explicit assumptions that are required of a particular method, but most of the assumptions are implicit and cannot be precisely quantified. An example of an explicit assumption is the pattern employed in the Paid Development method. However, the assumed pattern is itself based on several implicit assumptions such as the impact of inflation on medical costs and the rate at which claim professionals close claims. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Each reserve category has an implicit frequency and severity for each accident year as a result of the various assumptions made.
judicial interpretations. Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects the Company’s ability to accurately predict loss frequency (loss frequencies are more predictable for short-tail lines) as well as the amount of reserves needed for IBNR.
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 $363.4 million for claims occurring during the year ended December 31, 2018:
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, there were no impairments of indefinite lived intangible assets as of December 31, 2018.
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, 2018, there were no triggering events that occurred during the year that would result in an impairment of definite lived intangible assets.
The costs of acquiring new and renewal insurance and reinsurance contracts include commissions, premium taxes and certain other costs that are directly related to the successful acquisition of new and renewal insurance and reinsurance contracts. The excess of the Company’s costs of acquiring new and renewal insurance and reinsurance contracts over the related ceding commissions earned from reinsurers is capitalized as deferred acquisition costs and amortized over the period in which the related premiums are earned.
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, 2018 and 2017. 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 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 following table summarizes the change in premium volume by business segment:
Gross premiums written represent the amount received or to be received for insurance policies written without reduction for reinsurance costs or other deductions.
Gross premiums written increased by 6.1% for year ended December 31, 2018 as compared to 2017. Gross premiums written 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 ($2.1) million and ($1.3) million for the years ended December 31, 2018 and 2017, respectively. Excluding the business that is ceded 100% to insurance entities owned by Assurant, gross premiums written increased by 6.2% for the year ended December 31, 2018 as compared to 2017. The increase is mainly due to the premium growth within the Company’s Commercial Lines partially offset by a reduction in premiums written within the Company’s Reinsurance Operations. The growth experienced in Commercial Lines is primarily being driven by rate increases mainly due to catastrophes experienced in the prior year, new programs, and increased interactions with agents. The reduction in gross premiums written within the Company’s Reinsurance Operations is primarily due to the non-renewal of a treaty partially offset by growth in the property catastrophe treaties and professional liability portfolio. Gross premiums written within the Company’s Personal Lines, excluding the business that is ceded 100% to insurance entities owned by Assurant, increased 0.3%. This increase was the result of growth in agriculture writings offset by reduced writings within Specialty Property in an effort to reduce catastrophe exposure.
Gross premiums written decreased by 8.7% for year ended December 31, 2017 as compared to 2016. Gross premiums written 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 ($1.3) million and $35.3 million for the years ended December 31, 2017 and 2016, respectively. Excluding the business that is ceded 100% to insurance entities owned by Assurant, gross premiums written decreased by 2.4% for the year ended December 31, 2017 as compared to 2016. The decline is mainly due to the discontinuance of one unprofitable program within the Company’s Commercial Lines, underwriting actions taken within the
Company’s Personal Lines to improve profitability, and a reduction in premiums written within the Company’s Reinsurance Operations related to cancellation of a treaty. This decline was partially offset by an increase in gross premiums written within the Company’s Commercial Lines due to the introduction of a new program as well as increased production as a result of providing additional commission incentives for increased business.
The ratio of net premiums written to gross premiums written is referred to as the Company’s net premium retention. The Company’s net premium retention is summarized by segments as follows:
Excludes business written by American Reliable that is ceded to insurance companies owned by Assurant under a 100% quota share reinsurance agreement of ($2.1) million and ($1.3) million during the years ended December 31, 2018 and 2017, respectively.
Net premiums earned within the Personal Lines segment decreased by 8.3% for the year ended December 31, 2018 as compared to the same period in 2017 primarily due to a decline in gross premiums written in previous periods as well as additional premiums being ceded due to the Property Catastrophe Quota Share Treaty that became effective on April 15, 2017. Property net premiums earned were $167.3 million and $183.5 million for the years ended December 31, 2018 and 2017, respectively. Casualty net premiums earned were $30.7 million and $32.5 million for the years ended December 31, 2018 and 2017, respectively.
quarter of 2016 which is expected to earn out over an eight year period. This new mortgage insurance treaty was not renewed. Property net premiums earned were $38.4 million and $37.6 million for the years ended December 31, 2017 and 2016, respectively. Casualty net premiums earned were $4.8 million and $4.0 million for the years ended December 31, 2017 and 2016, respectively.
Includes business ceded to the Company’s Reinsurance Operations under a quota share agreement. This quota share agreement was cancelled effective January 1, 2018.
Other income was $0.1 million and $6.9 million for the years ended December 31, 2017 and 2016, respectively. There was no other income during the year ended December 31, 2018. For the year ended December 31, 2017, other income is primarily comprised of fee income. For the year ended December 31, 2016, other income is comprised of the net gain on the asset sale of the Company’s wholly owned subsidiary, United National Specialty Insurance Company.
The current accident year catastrophe loss ratio for 2018 improved by 0.6 points compared to 2017. The loss ratio improvement reflects lower claims frequency compared to last year particularly in the third accident quarter. The current accident year catastrophe loss ratio for 2017 improved by 2.0 points compared to 2016 primarily due to lower claims severity in 2017.
The current accident year non-catastrophe property loss ratio for 2018 increased by 3.5 points compared to 2017. The increase in the loss ratio reflects a higher claims severity for each of the accident quarters of 2018 compared to the same accident quarters last year. The current accident year property non-catastrophe loss ratio for 2017 improved by 8.9 points compared to 2016 primarily due to Property Brokerage having several large losses in 2016.
The current accident year casualty loss ratio for 2018 improved by 5.5 points compared to 2017 driven primarily by a lower claims severity for each of the accident quarters of 2018 compared to the same accident quarters last year. The current accident year casualty loss ratio for 2017 improved by 0.8 points compared to 2016 mainly due to lower reported claims frequency as compared to the same period last year.
The calendar year loss ratio for the years ended December 31, 2018, 2017, and 2016 includes a decrease of $7.3 million, or 3.3% percentage points, a decrease of $39.4 million or 22.0% percentage points, and a decrease of $43.8 million or 23.1% percentage points, respectively, related to reserve development on prior accident years. Please see Note 10 of the notes to the consolidated financial statements in Item 8 of Part II of this report for further discussion on prior accident year development.
Includes excise tax related to cessions from the Company’s Personal Lines to its Reinsurance Operations of $0.5 million, $0.9 million, and $0.9 million for the years ended December 31, 2018, 2017, and 2016, respectively.
See “Result of Operations” above for a discussion on consolidated premiums for 2018.
Other income was $1.9 million, $6.3 million and $3.7 million for the years ended December 31, 2018, 2017, and 2016, respectively. In 2018, other income is primarily comprised of fee income. In 2017 and 2016, other income is comprised of fee income, commission income and accrued interest on the anticipated indemnification of unpaid losses and loss adjustment expense reserves. In accordance with a dispute resolution agreement between Global Indemnity Group, Inc. and American Bankers Group, Inc., any variance paid related to the loss indemnification was subjected to interest of 5% compounded semi-annually. The reduction in other income is primarily due to the Company settling its final reserve calculation with American Bankers Group, Inc. with an effective date of December 31, 2017 resulting in no interest on the loss indemnification being accrued in 2018.
The current accident year catastrophe loss ratio for 2018 increased by 13.1 points compared to 2017. The increase recognizes a higher claims frequency and severity compared to last year. The 2018 accident year loss ratio reflects the impact from multiple large catastrophes, including the Carr & Camp California wildfires and Hurricane Michael. There were also many smaller catastrophes impacting the 2018 accident year. The Company is taking action to reduce property exposure in California. The current accident year catastrophe loss ratio for 2017 improved by 1.0 point compared to 2016. 2016 included net losses from the Tennessee wildfires as well as some smaller catastrophes. 2017 included catastrophe losses from hurricanes Harvey, Irma, and Maria as well as losses from the California wildfires.
The current accident year casualty loss ratio for 2018 improved by 12.5 points compared to 2017 driven primarily by a lower claims frequency. The current accident year casualty loss ratio for 2017 improved by 1.1 points compared to 2016 mainly due to lower reported claims frequency as compared to the same period last year.
The expense ratio increased 0.9 points from 33.8% for 2017 to 34.7% for 2018. This was primarily due to the expense ratio for 2017 being lower than it otherwise would have been due to receiving a federal excise tax refund related to prior years during the year ended December 31, 2017.
The Company’s investment grade fixed income portfolio excluding cash continues to maintain high quality with an A+ average rating and a duration of 3.1 years.
At December 31, 2017, the Company held agency mortgage-backed securities with a market value of $81.2 million. Excluding the agency mortgage-backed securities, the average duration of the Company’s fixed maturities portfolio was 3.2 years as of December 31, 2017, compared with 1.9 years as of December 31, 2016. Including cash and short-term investments, the average duration of the Company’s fixed maturities portfolio, excluding agency mortgage-backed securities, was 3.0 years as of December 31, 2017 compared with 1.8 years as of December 31, 2016. Changes in interest rates can
The components of net realized investment gains (losses) for the years ended December 31, 2018, 2017, and 2016 were as follows:
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, 2018, 2017, and 2016.
See Note 11 of the notes to the consolidated financial statements in Item 8 of Part II of this report for details on the Company’s debt.
Global Indemnity’s short term and long term liquidity needs include but are not limited to the payment of corporate expenses, debt service payments, dividend payments to shareholders, and share repurchases. In order to meet their short term and long term needs, the Company’s principal sources of cash includes dividends from subsidiaries, 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. In addition, the Company periodically reviews opportunities related to business acquisitions and as a result, liquidity may be needed in the future.
Under Arizona law, American Reliable Insurance Company may not pay any dividend or make any distribution of cash or other property, the fair market value of which, together with that of any other dividends or distributions made within the
Global Indemnity’s U.S. insurance companies are required by law to maintain a certain minimum level of policyholders' surplus on a statutory basis. Policyholders' surplus is calculated by subtracting total liabilities from total assets. The NAIC has risk-based capital standards that are designed to identify property and casualty insurers that may be inadequately capitalized based on the inherent risks of each insurer's assets and liabilities and mix of net premiums written. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action. Based on the standards currently adopted, the policyholders’ surplus of each of the U.S. insurance companies is in excess of the prescribed minimum company action level risk-based capital requirements.
Net cash provided by (used for) operating activities in 2018, 2017, and 2016 was $42.1 million, ($18.9) million and ($19.2) million, respectively.
adjustment, is $41.5 million. For additional information on the loss indemnification, please see Note 6 of the notes to the consolidated financial statements in Item 8 of Part II of this report.
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 2.87 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 18 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.
For 2016 and 2017, the Company’s U.S. insurance companies participated in quota share reinsurance agreements with Global Indemnity Reinsurance whereby 40% of the net retained business of the U.S. insurance companies was ceded to Global Indemnity Reinsurance. These agreements exclude named storms. As a result of the enactment of the TCJA, effective January 1, 2018, premiums being ceded under the quota share arrangement could potentially be subject to a 10% BEAT tax. As a result, Global Indemnity Reinsurance and the Company’s U.S. insurance companies terminated the quota share arrangement effective January 1, 2018.
Global Indemnity Reinsurance is an unauthorized reinsurer. As a result, any losses and unearned premiums that were ceded to Global Indemnity Reinsurance by the U.S. insurance companies prior to the termination of the quota share arrangement must be collateralized. To satisfy this requirement, Global Indemnity Reinsurance has set up custodial trust accounts on behalf of the U.S. insurance companies.
As a result of the changes in the worldwide tax environment, several of the intercompany financing structures were restructured in 2018.
As of December 31, 2018 and 2017, Global Indemnity Reinsurance held a note receivable due from Global Indemnity Limited in the amount of $33.0 million. This note is non-interest bearing.
As of December 31, 2017, U.A.I. (Luxembourg) Investment S.à.r.l. held two promissory notes in the amounts of $175 million and $110 million and three loans in the amount of $125.0 million, $100.0 million, and $120.0 million from Global Indemnity Group, Inc. The $175.0 million and $110.0 million notes bore interest at 6.64% and 6.20%, respectively, and were scheduled to mature in 2018 and 2020, respectively. The $125.0 million, $100.0 million, and $120.0 million loans bore interest at 5.78%, 8.06%, and 8.15%, respectively, and were scheduled to mature in 2024, 2045, and 2047, respectively. In July, 2018, Global Indemnity Group, Inc. redeemed the $175.0 million promissory note and $55.0 million of the $110.0 million promissory note. As payment to U.A.I. (Luxembourg) Investment S.à.r.l., Global Indemnity Group, Inc. assigned the $230.0 million promissory note from Global Indemnity Limited that was issued in connection with the co-obligor transaction discussed below. In November, 2018, U.A.I. (Luxembourg) Investment S.à.r.l. contributed the remaining $55.0 million on the $110.0 million promissory note and the three loans in the amount of $125.0 million, and $100.0 million, and $120.0 million to its wholly owned subsidiary, GBLI (Ireland) Limited and GBLI (Ireland) Limited contributed these notes to Global Indemnity Group Limited. The notes were subsequently converted to non-interest bearing notes. As of December 31, 2018, Global Indemnity Group, Inc. owed $402.3 million to Global Indemnity Group Limited.
As of December 31, 2017, Global Indemnity Limited owed $181.5 million to U.A.I. (Luxembourg) Investment S.à.r.l. under a demand line of credit which bore interest at 1.2%. In July, 2018, this note receivable of $181.5 million was assigned to GBLI (Barbados) Limited and the related accrued interest of $9.6 million was assigned to Global Indemnity Reinsurance in order to satisfy dividends declared. See below for additional information on the July, 2018 dividend. This note was then converted into an interest free loan. As of December 31, 2018, GBLI (Barbados) Limited was due $181.5 million from Global Indemnity Limited and Global Indemnity Reinsurance had an accrued interest receivable due from Global Indemnity Limited of $10.4 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%. Effective October 31, 2013, AIS assigned all of its rights, obligations, duties, and liabilities under the notes to Global Indemnity Group, Inc. As of December 31, 2018, there was $5.0 million outstanding on the note payable, with accrued interest of $0.2 million payable to AIS and $1.6 million payable to Global Indemnity Group, Inc.
On April 25, 2018 the Company and Global Indemnity Group, Inc., an indirect wholly owned subsidiary of the Company, entered into an agreement pursuant to which Global Indemnity Group, Inc. agreed to become a subordinated co-obligor with respect to the 7.75% subordinated notes due 2045 and the 7.875% subordinated notes due 2047. Global Indemnity Group, Inc. has agreed to pay all amounts due and payable in respect of the subordinated note obligations, including, without limitation, the payment of principal of and interest on each series of notes. In consideration for becoming a subordinated co-obligor on the subordinated notes, Global Indemnity Group, Inc. received a promissory note from the Company with a principal amount of $230 million at an interest rate of 7.825% per annum due on April 15, 2047. Global Indemnity Group, Inc. assigned the $230 million promissory note from the Company to U.A.I. (Luxembourg) Investment S.à.r.l. as payment on $230 million of the outstanding debt owed to U.A.I. (Luxembourg) Investment S.à.r.l. by Global Indemnity Group, Inc. as discussed above. In connection with the July, 2018 dividend payment discussed below, this loan was assigned from U.A.I. (Luxembourg) Investment S.à.r.l. to GBLI (Barbados) Limited and the loan was converted to non-interest bearing. As of December 31, 2018, Global Indemnity Limited had $230.0 million outstanding on the loan with GBLI (Barbados) Limited, with accrued interest of $4.9 million payable to Global Indemnity Reinsurance Company, Ltd.
As of December 31, 2018, the Company had available a margin borrowing facility. The borrowing rate for this facility was tied to the Fed Funds Effective rate and was approximately 2.7% and 1.6% at December 31, 2018 and 2017, respectively. This facility is due on demand. The borrowings are subject to maintenance margin, which is a minimum account balance that must be maintained. A decline in market conditions could require an additional deposit of collateral. As of December 31, 2018, approximately $83.2 million in securities were deposited as collateral to support borrowings. The amount borrowed against the margin account may fluctuate as routine investment transactions, such as dividends received, investment income received, maturities and pay-downs, impact cash balances. The margin facility contains customary events of default, including, without limitation, insolvency, failure to make required payments, failure to comply with any representations or warranties, failure to adequately assure future performance, and failure of a guarantor to perform under its guarantee. The amount outstanding on the Company’s margin borrowing facility was $65.8 million and $72.2 million as of December 31, 2018 and 2017, respectively.
The Company entered into two $100 million derivative instruments. Due to fluctuations in interest rates, the Company received $4.5 million and paid $1.5 million in connection with these derivative instruments for the years ended December 31, 2018 and 2017, respectively.
Represents future funding commitment of the Company’s participation in two separate limited partnership investments. See Note 14 of the notes to the consolidated financial statements in Item 8 of Part II of this report for additional information on these commitments.
Represents the Subordinated Notes due in 2047 in the aggregate principal amount of $130.0 million through an underwritten public offering. The notes bear interest at an annual rate equal to 7.875% payable quarterly. See Note 11 of the notes to the consolidated financial statements in Item 8 of Part II of this report for additional information on the 2047 Subordinated Notes.
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.
To the Shareholders and the Board of Directors of Global Indemnity Limited
For the years ended December 31, 2018 and 2017, “diluted” loss per share is the same as “basic” loss per share since there was a net loss for each of these periods.
Global Indemnity Limited (“Global Indemnity” or “the Company”) was incorporated on February 9, 2016 and is domiciled in the Cayman Islands. On November 7, 2016, Global Indemnity replaced Global Indemnity plc as the ultimate parent company as a result of a redomestication transaction. The Company’s A ordinary shares are publicly traded on the NASDAQ Global Select Market under the ticker symbol GBLI. See Note 2 below for details regarding the redomestication. In connection with the redomestication, Global Indemnity plc was converted to a private unlimited company and was placed into liquidation. The liquidation was finalized in 2017.
The Company manages its business through three business segments: Commercial Lines, Personal Lines, and Reinsurance Operations. The Company’s Commercial Lines offers specialty property and casualty insurance products in the excess and surplus lines marketplace. The Company manages its Commercial Lines by differentiating them into four product classifications: Penn-America, which markets property and general liability products to small commercial businesses through a select network of wholesale general agents with specific binding authority; United National, which markets insurance products for targeted insured segments, including specialty products, such as property, general liability, and professional lines through program administrators with specific binding authority; Diamond State, which markets property, casualty, and professional lines products, which are developed by the Company’s underwriting department by individuals with expertise in those lines of business, through wholesale brokers and also markets through program administrators having specific binding authority; and Vacant Express, which primarily insures dwellings which are currently vacant, undergoing renovation, or are under construction and is distributed through aggregators, brokers, and retail agents. These product classifications comprise the Company’s Commercial Lines business segment and are not considered individual business segments because each product has similar economic characteristics, distribution, and coverage. The Company’s Personal Lines segment offers specialty personal lines and agricultural coverage through general and specialty agents with specific binding authority on an admitted basis. Collectively, the Company’s U.S. insurance subsidiaries are licensed in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The Company’s Reinsurance Operations consist solely of the operations of its Bermuda-based wholly-owned subsidiary, Global Indemnity Reinsurance. Global Indemnity Reinsurance is a treaty reinsurer of specialty property and casualty insurance and reinsurance companies. The Company’s Reinsurance Operations segment provides reinsurance solutions through brokers and primary writers including insurance and reinsurance companies.
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 other than for the credit loss component of impairments deemed to be other than temporary. Equity securities are measured at fair value with the changes in fair value recognized in net income.
The Company’s investments in other invested assets were valued at $50.8 million and $77.8 million as of December 31, 2018 and 2017, respectively. These amounts relate to investments in limited liability companies and limited partnerships. The Company does
The Company regularly performs various analytical valuation procedures with respect to its investments, including reviewing each fixed maturity security in an unrealized loss position to assess whether the security has a credit loss. Specifically, 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 through discounted cash flow testing to estimate the credit loss to be recognized in earnings, if any. The specific methodologies and significant assumptions used by asset class are discussed below. 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.
Prior to the implementation of new accounting guidance on January 1, 2018, management carefully reviewed all equities securities with unrealized losses to determine if a security should be impaired and further focuses on securities that had either:
the value of the investment had been 20% or more below cost for six continuous months or more.
A Variable Interest Entity (“VIE”) refers to an investment in which an investor holds a controlling interest that is not based on the majority of voting rights. Under the VIE model, the party that has the power to exercise significant management influence and maintain a controlling financial interest in the entity’s economics is said to be the primary beneficiary, and is required to consolidate the entity within their results. Other entities that participate in a VIE, for which their financial interests fluctuate with changes in the fair value of the investment entity’s net assets but do not have significant management influence and the ability to direct the VIE’s significant economic activities are said to have a variable interest in the VIE but do not consolidate the VIE in their financial results.
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, 2018.
See Note 7 for additional information on goodwill and intangible assets.
The amortization of deferred acquisition costs for the years ended December 31, 2018, 2017, and 2016 was $118.0 million, $109.0 million, and $114.3 million, respectively.
The Company uses derivative instruments to manage its exposure to cash flow variability from interest rate risk. The derivative instruments are carried on the balance sheet at fair value and included in other assets and other liabilities. Changes in the fair value of the derivative instruments and the periodic net interest settlements under the derivatives instruments are recognized as net realized investment gains (losses) on the consolidated statements of operations.
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 facility are shown net in the consolidated statements of cash flows.
The carrying amounts reported in the balance sheet represent the outstanding balances, net of deferred issuance cost. See Note 11 for details.
Mandatory reinstatement premiums assessed on reinsurance policies are earned in the period of the loss event that gave rise to the reinstatement premiums.
In addition, in 2018, other income is primarily comprised of fee income and foreign exchange gains and losses. In 2017, other income is comprised of fee income on policies issued, commission income, accrued interest on the anticipated indemnification of unpaid loss and loss adjustment expense reserve, and foreign exchange gains and losses.
The amortized cost and estimated fair value of the Company’s fixed maturities portfolio classified as available for sale at December 31, 2018, 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.
Subject to the risks and uncertainties in evaluating the potential impairment of a security’s value, the impairment evaluation conducted by the Company as of December 31, 2018 concluded the unrealized losses discussed above are not other than temporary impairments. The impairment evaluation process is discussed in the “Investment” section of Note 3 (“Summary of Significant Accounting Policies”).
Obligations of states and political subdivisions - As of December 31, 2018, gross unrealized losses related to obligations of states and political subdivisions were $0.338 million. Of this amount, $0.281 million have been in an unrealized loss position for twelve months or greater and are rated investment grade 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, 2018, gross unrealized losses related to asset backed securities were $2.012 million. Of this amount, $0.670 million have been in an unrealized loss position for twelve months or greater. 93.7% of the unrealized losses for twelve months or greater are related to securities rated investment grade or better. The weighted average credit enhancement for the Company’s asset backed portfolio is 23.0. 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 analysis projects an expected loss for a deal
given a set of assumptions specific to the asset type. These assumptions are used to calculate at what level of losses the deal will incur its first dollar of principal loss. The major assumptions used to calculate this ratio are loss severities, recovery lags, and no advances on principal and interest.
Corporate bonds - As of December 31, 2018, gross unrealized losses related to corporate bonds were $12.080 million. Of this amount, $3.289 million have been in an unrealized loss position for twelve months or greater. 88.7% of the unrealized losses for twelve months or greater are related to securities rated investment grade or better. The analysis for this asset class 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.
Foreign bonds - As of December 31, 2018, gross unrealized losses related to foreign bonds were $3.292 million. Of this amount, $1.497 million have been in an unrealized loss position for twelve months or greater. 69.5% of the unrealized losses for twelve months or greater are related to securities rated investment grade or better. For this asset class, detailed financial models are maintained 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, 2018, 2017, and 2016:
Accumulated other comprehensive income, net of tax, as of December 31, 2018 and 2017 was as follows:
The reclassifications out of accumulated other comprehensive income for the years ended December 31, 2018 and 2017 were as follows:
Includes periodic net interest settlements related to the derivatives of $1.9 million, $3.6 million, and $4.8 million for the years ended December 31, 2018, 2017, and 2016, respectively.
Investment expense for the year ended December 31, 2016 includes $1.5 million in upfront fees necessary to enter into a new investment. See Note 14 for additional information on the Company’s $40 million commitment related to this investment.
The Company’s total investment return on a pre-tax basis for the years ended December 31, 2018, 2017, and 2016 were as follows:
A summary of the Company’s insurance enhanced municipal bonds that are backed by financial guarantors, including the pre-refunded bonds that are escrowed in U.S. government obligations, as of December 31, 2018, is 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, 2018.
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 pursuant to borrowing arrangements, or were held in trust pursuant to intercompany reinsurance agreements. The fair values were as follows as of December 31, 2018 and 2017:
A Variable Interest Entity (VIE) refers to an investment in which an investor holds a controlling interest that is not based on the majority of voting rights. Under the VIE model, the party that has the power to exercise significant management influence and maintain a controlling financial interest in the entity’s economics is said to be the primary beneficiary, and is required to consolidate the entity within their results. Other entities that participate in a VIE, for which their financial interests fluctuate with changes in the
fair value of the investment entity’s net assets but do not have significant management influence and the ability to direct the VIE’s significant economic activities are said to have a variable interest in the VIE but do not consolidate the VIE in their financial results.
The Company has variable interests in two VIE’s for which it is not the primary beneficiary. These investments are accounted for under the equity method of accounting as their ownership interest exceeds 3% of their respective investments.
For the Company’s material debt arrangements, the current fair value of the Company’s debt at December 31, 2018 and 2017 was as follows:
The fair value of the margin borrowing facility approximates its carrying value due to the facility being due on demand. The subordinated notes due 2045 and 2047 are publicly traded instruments and are classified as Level 1 in the fair value hierarchy.
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2018, 2017, and 2016.
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. Based on the terms of the partnership agreement, the Company anticipates its interest in this partnership to be redeemed by 2020.
This limited partnership provides financing for middle market companies. During the fourth quarter of 2018 the Company received permission from the general partner to divest from the limited partnership and subsequently sold its interest.
The Company uses the equity method to account for investments in limited liability companies and limited partnerships where its ownership interest exceeds 3%. The equity method of accounting for an investment in a limited liability company and limited partnership requires that its cost basis be updated to account for the income or loss earned on the investment. The investment income associated with these limited liability companies or limited partnerships, which is reflected in the consolidated statements of operations, was $6.9 million, $4.7 million, and $5.2 million for the years ended December 31, 2018, 2017, and 2016, respectively.
For obligations of state and political subdivisions, an integrated evaluation system is used. The pricing models incorporate trades, spreads, benchmark curves, market data feeds, new issue data, and trustee reports.
As of December 31, 2018 and 2017, indefinite lived intangible assets, which are comprised of tradenames, trademarks, and state insurance licenses, were $19.0 million. The Company reviewed internal business unit results, the growth of competitors and the overall property and casualty insurance market for indicators of impairment of its indefinite lived intangible assets. Impairment testing performed in 2018 and 2017 indicated that there was no impairment of these assets.
The Company cedes risk to unrelated reinsurers on a pro rata (“quota share”) and excess of loss basis in the ordinary course of business to limit its net loss exposure on insurance contracts. Reinsurance ceded arrangements do not discharge the Company of primary liability. Moreover, reinsurers may fail to pay the Company due to a lack of reinsurer liquidity, perceived improper underwriting, and losses for risks that are excluded from reinsurance coverage and other similar factors, all of which could adversely affect the Company’s financial results.
Includes ceded written premiums of ($2.1) million, ($1.3) million, and $35.3 million and ceded earned premiums of $7.3 million, $13.5 million and $43.2 million to American Bankers Insurance Company for the years ended December 31, 2018, 2017, and 2016, respectively.
The Company’s income before income taxes from its non-U.S. subsidiaries and U.S. subsidiaries for the years ended December 31, 2018, 2017, and 2016 were as follows:
For the years ended December 31, 2017 and 2016, the Company’s income (loss) before income taxes from its non-U.S. subsidiaries and U.S. subsidiaries, as reported in the table above, includes the results of the quota share agreement between Global Indemnity Reinsurance and the Insurance Operations. This quota share agreement was cancelled on a runoff basis effective January 1, 2018.
The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets at December 31, 2018 and 2017 are presented below:
The deferred tax assets and deferred tax liabilities listed in the table above relate to temporary differences between the Company’s accounting and tax carrying values and carryforwards for its companies in the United States. Management believes it is more likely than not that the remaining deferred tax assets will be completely utilized in future years. As a result, the Company has not recorded a valuation allowance at December 31, 2018 and 2017.
The Company has a net operating loss (“NOL”) carryforward of $29.5 million as of December 31, 2018, which begins to expire in 2035 based on when the original NOL was generated. The Company’s NOL carryforward as of December 31, 2017 was $16.3 million.
The Company and some of its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations by tax authorities for tax years before 2015.
Should the Company’s subsidiaries that are subject to income taxes imposed by the U.S. authorities pay a dividend to their foreign affiliates, withholding taxes would apply. The Company has not recorded deferred taxes for potential withholding tax on undistributed earnings. The Company believes, although there can be no assurances, that it qualifies for treaty benefits under the Tax Convention with Luxembourg and would be subject to a 5% withholding tax if it were to pay a dividend. Determination of the unrecognized deferred tax liability related to these undistributed earnings is not practicable because of the complexities with its hypothetical calculation. The Company did not pay any dividends from a U.S. subsidiary to a foreign affiliate during 2018, 2017, or 2016.
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. All tax benefits recognized by the company in 2018, 2017, 2016 have a greater than 50% likelihood of being sustained upon examination by the taxing authorities.
The Company classifies all interest and penalties related to uncertain tax positions as income tax expense. The Company did not incur any interest and penalties related to uncertain tax positions during the years ended December 31, 2018, 2017 and 2016. As of December 31, 2018, the Company did not record any liabilities for tax-related interest and penalties on its consolidated balance sheets.
Commercial Auto Liability: A $3.2 million decrease in the aggregate primarily due to a reduction in the 2010, 2012 and 2013 accident years resulting from lower than anticipated claims severity partially offset by an increase in the 2015 and 2017 accident years.
Professional Liability: A $0.9 million decrease reflects lower than expected claims severity mainly in the 2008, 2011, and 2014 accident years.
The $12.6 million reduction of prior accident year loss reserves related to Personal Lines primarily consisted of the following:
Property: A $7.0 million reduction primarily due to lower than anticipated claims severity in the 2014 through 2017 accident years partially offset by an increase in the 2013 accident year.
The $8.9 million reduction of prior accident year loss reserves related to Reinsurance Operations was from the property lines for accident years 2007, 2009 through 2012, 2015, and 2016 partially offset by increases in the 2013, 2014, and 2017 accident years. The accident year changes were based on a review of the experience reported from cedants.
The $6.6 million reduction of prior accident year loss reserves related to Personal Lines primarily consisted of the following:
The $7.9 million reduction of prior accident year loss reserves related to Reinsurance Operations was primarily from the property lines for accident years 2008 through 2016. Ultimate losses were lowered in these accident years based on review of the experience reported from cedants.
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, 2018 and 2017, gross reserves for CD claims were $42.4 million and $43.8 million, respectively, and net reserves for CD claims were $39.3 million and $40.2 million, respectively.
The Company has exposure to asbestos and environmental (“A&E”) claims. The asbestos exposure primarily arises from the sale of product liability insurance, and the environmental exposure arises from the sale of general liability and commercial multi-peril insurance. In establishing the liability for unpaid losses and loss adjustment expenses related to A&E exposures, management considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities have been established to cover additional exposures on both known and unasserted claims. Estimates of the liabilities are reviewed and updated regularly. Case law continues to evolve for such claims, and uncertainty exists about the outcome of coverage litigation and whether past claim experience will be representative of future claim experience. Included in net unpaid losses and loss adjustment expenses as of December 31, 2018, 2017, and 2016 were IBNR reserves of $27.4 million, $26.9 million, and $26.7 million, respectively, and case reserves of approximately $2.1 million, $3.3 million, and $3.2 million, respectively, for known A&E-related claims.
The information about incurred and paid claims development for the years ended December 31, 2009 to 2018, is presented as required supplementary unaudited information.
The following is required supplementary information about average historical claims duration as of December 31, 2018:
The following is required supplementary information about average historical claims duration as of December 31, 2018.
The Company does not have direct access to claim frequency information underlying certain reinsurance contracts. As a result, the Company does not believe providing claim frequency information is practicable.
The reconciliation of the net incurred and paid claims development tables to the liability for unpaid losses and loss adjustment expenses in the consolidated balance sheets as of December 31, 2018 is as follows:
The Company recorded interest expense related to the Margin Borrowing Facility of approximately $1.4 million, $1.0 million, and $1.0 million for the years ended December 31, 2018, 2017, and 2016, respectively.
The 2045 Notes do not require the maintenance of any financial ratios or specified levels of net worth or liquidity, and do not contain provisions that would afford holders of the 2045 Notes protection in the event of a sudden and dramatic decline in the Company’s credit quality resulting from any highly leveraged transaction, reorganization, restructuring, merger or similar transaction involving the Company that may adversely affect holders. The 2045 Notes do not restrict the Company in any way, now or in the future, from incurring additional indebtedness, including senior indebtedness that would rank senior in right of payment to the 2045 Notes. There is no right of acceleration of maturity of the 2045 Notes in the case of default in the payment of principal, premium, if any, or interest on the 2045 Notes or in the performance of any other obligation of the Company under the 2045 Notes or if the Company defaults on any other debt securities. Holders may accelerate payment of indebtedness on the 2045 Notes only upon the Company’s bankruptcy, insolvency or reorganization.
On March 23, 2017, the Company issued Subordinated Notes due in 2047 in the aggregate principal amount of $120.0 million through an underwritten public offering (the “2047 Notes”). Pursuant to the underwriting agreement, the Company granted the underwriters a
30 day option to purchase up to an additional $18 million aggregate principal amount of the 2047 Notes solely to cover over-allotments, if any. On March 30, 2017, the underwriters exercised their over-allotment option in the amount of $10 million principal amount of the 2047 Notes. As a result, the aggregate principal amount of the 2047 Notes increased to $130.0 million. The sale of the 2047 Notes pursuant to the over-allotment option closed on March 30, 2017.
The Company incurred $4.2 million in deferred issuance costs associated with the 2047 Notes, which is being amortized over the term of the 2047 Notes. Interest expense, including amortization of deferred issuance costs, recognized on the 2047 Notes was $10.4 million and $8.0 million for the years ended December 31, 2018 and 2017, respectively.
The following table represents the amounts recorded for the subordinated notes as of December 31, 2018 and 2017:
On April 25, 2018, Global Indemnity Group, Inc. ("GIGI"), an indirect wholly owned subsidiary of the Company, became a subordinated co-obligor with respect to the 2045 Notes 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 Notes of either series 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, GIGI's obligations (including the obligation to pay the principal of and interest in respect of the Notes of any series) are subject to subordination to all monetary obligations or liabilities of GIGI owing to
13,463,864 shares of Global Indemnity plc A ordinary shares, par value $0.0001 per share, which represent all of the existing A ordinary shares excluding the treasury shares held by Global Indemnity plc and A shares held by Global Indemnity Limited, and 4,133,366 Global Indemnity plc B ordinary shares, par value $0.0001 per share, (together, the “Global Indemnity plc ordinary shares”) were cancelled. The treasury shares of Global Indemnity plc were not subject to the scheme. The carrying value of the Global Indemnity plc treasury shares, $103.2 million, were offset against the Additional Paid-in Capital account of Global Indemnity Limited, according to the Company’s policy regarding the treatment of treasury shares;
the reserves created on the cancellation of the Global Indemnity plc ordinary shares were used to issue 17,597,230 Global Indemnity plc ordinary shares to Global Indemnity Limited; and
The ability of Global Indemnity Limited to pay dividends is subject to Cayman Island regulations. Under Cayman Islands law, dividends and distributions may only be made from distributable reserves or from amounts standing to the credit of the Company’s share premium account, together with any reserve established by the revaluation of the Company’s asset, subject to the ability of the Company to meet its obligations in the ordinary course as they fall due. Distributable reserves represents the accumulated realized profits and losses of Global Indemnity Limited on a standalone basis, which is $215.1 million as of December 31, 2018. Share premium represents the excess of the consideration paid upon the initial issuance of any share over the par value. As of December 31, 2018, share premium was $438.2 million. Reserves established by the revaluation of the Company’s asset were ($21.2) million as of December 31, 2018. As of December 31, 2018, the maximum dividends and distributions allowable under Cayman Island law is $632.1 million.
As of December 31, 2018, accrued dividends on unvested shares, which were included in other liabilities on the consolidated balance sheets, were $0.2 million.
Surrendered by employees as payment of taxes withheld on the vesting of restricted stock.
The Company relies on Fox Paine & Company, LLC to provide management services and other services related to the operations of the Company. Starting in 2014, this fee is adjusted annually to reflect the percentage change in the CPI-U. In accordance with the management agreement, payment of the annual management fee was deferred until September, 2018. Deferred management fees totaling $8.2 million, which included an annual adjustment equal to the rate of return the Company earns on its investment portfolio, were paid in September, 2018. Management fee expense of $2.1 million, $2.2 million, and $2.1 million was incurred during the years ended December 31, 2018, 2017, and 2016, respectively. Prepaid management fees, which were included in other assets on the consolidated balance sheets, were $1.4 million as of December 31, 2018. Unpaid management fees, which were included in other liabilities on the consolidated balance sheets, were $6.8 million as of December 31, 2017.
In addition, Fox Paine & Company, LLC may propose and negotiate transaction fees with the Company subject to the provisions of the Company’s related party transaction policies including approval of the Company’s Audit Committee of the Board of Directors, for those services from time to time.
At December 31, 2018, future minimum cash payments under non-cancelable operating leases were as follows:
The Company is party to a Management Agreement, as amended, with Fox Paine & Company, LLC, whereby in connection with certain management services provided to it by Fox Paine & Company, LLC, the Company agreed to pay an annual management fee to Fox Paine & Company, LLC. See Note 13 above for additional information pertaining to this management agreement.
Effective January 1, 2017, the Company adopted new accounting guidance which changed several aspects of the accounting for share-based payment transactions. Under the new guidance, all excess tax benefits and tax deficiencies associated with share-based payment awards are required to be recognized as an income tax benefit or expense in net income with the corresponding cash flows recognized as an operating activity in the Consolidated Statement of Cash Flow as opposed to being reported separately as a financing activity.
Prior to January 1, 2017, the prescribed accounting guidance required tax benefits relating to excess stock-based compensation deductions to be presented in the consolidated statements 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 $0.1 million for the year ended December 31, 2016.
During the year ended December 31, 2018, the Company awarded 300,000 options with a strike price of $50.00. There were no stock options issued in 2017 or 2016.
Compensation expense related to options outstanding under the Plan is anticipated to be $1.3 million and $0.7 million during the years ended December 31, 2019 and 2020, respectively.
Option intrinsic values, which are the differences between the fair value of $36.23 at December 31, 2018 and the strike price of the option, are as follows:
There were no options granted under the Plan in 2017 or 2016. The weighted average fair value of options granted under the Plan was $3.79 in 2018 using a Black-Scholes option-pricing model and the following weighted average assumptions.
The following tables summarize the range of exercise prices of options outstanding at December 31, 2018, 2017, and 2016:
2018, 2017, and 2016, respectively. The total unrecognized compensation expense for the non-vested restricted stock is $1.3 million at December 31, 2018, which will be recognized over a weighted average life of 1.7 years.
The following table summarizes the restricted stock grants since the 2003 inception of the original share incentive plan.
The following table summarizes the non-vested restricted shares activity for the years ended December 31, 2018, 2017, and 2016:
Subject to Board approval, 50% of granted stock vests 100%, no later than March 15, 2019, following a re-measurement of 2015 results as of December 31, 2018.
During 2016, the Company granted 35,185 A ordinary shares, at a weighted average grant date fair value of $31.05 per share, to non-employee directors of the Company under the Plan.
16.5%, vested on January 1, 2018. 16.5%, and 17.0% of the granted stock will vest on January 1, 2019 and January 1, 2020, respectively.
Subject to Board approval, 50% of granted stock vests 100%, no later than March 15, 2020, following a re-measurement of 2016 results as of December 31, 2019.
During 2017, the Company granted 27,121 A ordinary shares, at a weighted average grant date fair value of $40.42 per share, to non-employee directors of the Company under the Plan.
During 2018, the Company granted 38,778 A ordinary shares, with a weighted average grant date value of $40.57 per share, to key employees under the Plan. 11,843 of these shares vested immediately. The remainder will vest as follows:
16.5%, 16.5%, and 17.0% of the granted stock vest on January 1, 2019, January 1, 2020, and January 1, 2021, respectively.
Subject to Board approval, 50% of granted stock vests 100%, no later than March 15, 2021, following a re-measurement of 2017 results as of December 31, 2020.
All of the shares granted to non-employee directors in 2018, 2017, and 2016 were fully vested but subject to certain restrictions.
On March 6, 2018, the Company entered into a Chief Executive Agreement (the “Employment Agreement”) with Ms. Valko. 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. Of the remaining 200,000 options, 100,000 are scheduled to vest on December 31, 2019 if the 2019 Return on Equity criteria is met and 100,000 are scheduled to vest on December 31, 2020 if the 2020 Return on Equity criteria is met. As a result of applying modification accounting, stock based compensation was decreased by less than $0.1 million during the year ended December 31, 2018.
For the years ended December 31, 2018 and 2017, “weighted average shares outstanding - basic” was used to calculate “diluted earnings per share” due to a net loss for the period.
If the Company had not incurred a loss in the years ended December 31, 2018 and 2017, 14,325,276 and 17,680,209 weighted average shares, respectively, would have been used to compute the diluted loss per share calculations. In addition to the basic shares, weighted average shares for the diluted calculations would have included 76,568 and 157,441 shares of non-vested restricted stock, respectively, and 159,825 and 214,105 share equivalents for options, respectively.
Under SAP, the costs and related receivables for guaranty funds and other assessments are recorded based on management's estimate of the ultimate liability and related receivable settlement, while under GAAP such costs are accrued when the liability is probable and reasonably estimable and the related receivable amount is based on future premium collections or policy surcharges from in-force policies.
Under SAP, unpaid losses and loss adjustment expenses and unearned premiums are reported net of the effects of reinsurance transactions, whereas under GAAP, unpaid losses and loss adjustment expenses and unearned premiums are reported gross of reinsurance.
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. Applying the current regulatory restrictions as of December 31, 2018, the maximum amount of distributions
The NAIC's RBC model provides a tool for insurance regulators to determine the levels of statutory capital and surplus an insurer must maintain in relation to its insurance and investment risks, as well as its reinsurance exposures, to assess the potential need for regulatory attention. The model provides four levels of regulatory attention, varying with the ratio of an insurance company's total adjusted capital to its authorized control level RBC ("ACLRBC"). If a company’s total adjusted capital is:
less than or equal to 200%, but greater than 150% of its ACLRBC (the "Company Action Level"), the company must submit a comprehensive plan to the regulatory authority proposing corrective actions aimed at improving its capital position;
Based on the standards currently adopted, the Company reported in its 2018 statutory filings that the capital and surplus of the U.S. insurance companies are above the prescribed Company Action Level RBC requirements.
surplus as set out in its 2018 statutory financial statements that will be filed in 2019, Global Indemnity Reinsurance could pay a dividend of up to $223.9 million without requesting BMA approval. Global Indemnity Reinsurance is dependent on receiving distributions from its subsidiaries in order to pay the full dividend in cash. In 2018, Global Indemnity Reinsurance declared and paid a dividend of $50.0 million to its parent, Global Indemnity. In addition, Global Indemnity Reinsurance paid a dividend of $20.0 million in 2018, which was previously declared in 2017, to Global Indemnity.
The Company manages its business through three business segments. Commercial Lines offers specialty property and casualty products designed for product lines such as Small Business Binding Authority, Property Brokerage, and Programs. Personal Lines offers specialty personal lines and agricultural coverage. Reinsurance Operations provides reinsurance solutions through brokers and primary writers including insurance and reinsurance companies.
During the 1st quarter of 2017, the Company re-evaluated its Commercial Lines and Personal Lines segments and determined that certain portions of business will be managed, operated and reported by including them in the other segment. As a result, the composition of the Company’s reportable segments changed slightly. Premium that is written through a wholly owned agency that mainly sells to individuals, which was previously included as part of the Commercial Lines segment, is now included within the Personal Lines segment. In addition, one of the small commercial programs written by American Reliable Insurance Company, which was previously included within the Personal Lines segment, is now aggregated within the Commercial Lines segment. Accordingly, the segment results for 2016 have been revised to reflect these changes.
Includes federal excise tax of $714 relating to cessions from Commercial Lines to Reinsurance Operations.
Includes ($1,338) of business written by American Reliable that is ceded to insurance companies owned by Assurant under a 100% quota share reinsurance agreement.
Includes federal excise tax of $756 relating to cessions from Commercial Lines to Reinsurance Operations.
Includes federal excise tax of $948 relating to cessions from Personal Lines to Reinsurance Operations.
Condensed Consolidating Financial Information Provided in Connection with Outstanding Debt of Subsidiaries
The following tables present condensed consolidating balance sheets at December 31, 2018 and December 31, 2017, condensed consolidating statements of operations and condensed consolidating statements of comprehensive income for the year ended December 31, 2018 and 2017, and condensed consolidating statements of cash flows for the year ended December 31, 2018 and 2017. GIGI is a 100% owned subsidiary of the Company. See Note 11 for information on the Company’s debt obligations.
In July, 2018, the FASB issued new accounting guidance that affected a wide variety of topics in the Codification. The amendments in this update represent changes to clarify, correct errors in, or make minor improvements to the Codification. This amendment is meant to make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarification. Some of the amendments in this guidance are effective immediately with the remainder effective for annual periods beginning after December 31, 2018. The adoption of this new accounting guidance did not have a material impact to the Company’s financial condition, results of operation, or cash flows.
In February, 2018, the FASB issued new accounting guidance which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. The amendments in this Update also require certain disclosures related to stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company early adopted the provisions of this new guidance on a retrospective basis as of January 1, 2018 and made an election to reclassify, in its entirety, all stranded tax effects related to TCJA. As a result, the Company recorded a cumulative effect adjustment of $0.1 million which was reclassified from accumulated other comprehensive income to retained earnings. The adoption of this new accounting guidance did not have a material impact to the Company’s financial condition, results of operation, or cash flows.
In May, 2017, the FASB issued updated accounting guidance which clarified whether changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted this guidance during the first quarter of 2018. The provisions of this guidance were adopted on a prospective basis. As a result of adopting this guidance, stock based compensation decreased by less than $0.1 million during the year ended December 31, 2018. The adjustment was due to the Company entering into an Employment Agreement with its Chief Executive Officer which modified the vesting schedule on 300,000 options issued in 2014. The Company did not record a cumulative effect adjustment to shareholders’ equity as a result of adopting this guidance and the adoption of this new accounting guidance did not have a material impact to the Company’s financial condition, results of operation, or cash flows.
In October, 2016, the FASB issued new accounting guidance regarding intra-entity transfers of assets other than inventory. Prior to adoption, the tax effects of intra-entity asset transfers (intercompany sales) were deferred until the transferred asset was sold to a third party or otherwise recovered through use. This is an exception to the principle in ASC 740, Income Taxes, that generally requires comprehensive recognition of current and deferred income taxes. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. Upon adoption on January 1, 2018, the Company applied the provisions of this guidance on a modified retrospective basis resulting in a cumulative-effect adjustment which increased retained earnings by $0.2 million. The adoption of this new accounting guidance did not have a material impact to the Company’s financial condition, results of operation, or cash flows.
In January, 2016, the FASB issued new accounting guidance surrounding the accounting for financial instruments. The new guidance addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. In particular, the guidance requires equity investments, except for those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with the changes in fair value recognized in net income. It also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. This guidance is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Upon adoption on January 1, 2018, the Company recorded a cumulative effect adjustment, net of tax, of $10.0 million which reduced accumulated other comprehensive income and increased retained earnings.
In August, 2018, the FASB issued new accounting guidance which removed, modified, and added certain disclosures related to Topic 820, Fair Value. This guidance is effective for all fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. The Company does not expect the new guidance to have a material impact on its financial condition, results of operations, or cash flows.
In March, 2017, the FASB issued new accounting guidance which amends the amortization period for certain purchased callable debt securities held at a premium. Under current generally accepted accounting principles, entities generally amortize the premium as an adjustment of yield over the contractual life of the instruments. Under the new guidance, the amortization period would be shortened to the earliest call date. This guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company does not anticipate the new guidance having a material impact on its financial condition, results of operations, and cash flows.
In January, 2017, the FASB issued updated guidance that simplifies how an entity is required to test goodwill for impairment by eliminating the requirement to calculate the implied fair value of goodwill (i.e. Step 2 of the current goodwill impairment test). Under the new amendments, an entity may still first assess qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized, if any. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. This guidance is effective for public business entities’ annual or interim goodwill impairment testing in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Although the Company is still evaluating the impact of this new guidance, the Company does not anticipate it will have a material impact on its financial condition, results of operations, or cash flows.
applies the new leases standard at the adoption date and recognizes a cumulative effect adjustment to the opening balance sheet of retained earnings. The lease guidance is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company plans to adopt this new accounting guidance on January 1, 2019 using the optional transition method. The Company will elect the package of practical expedients permitted under the transition guidance within the new standard. In addition, the Company will elect the hindsight practical expedient to determine the lease term for existing leases. The Company does not anticipate the classification of leases to change, but does expect to recognize right-of-use assets and corresponding lease liabilities. These assets and liabilities are expected to represent less than 2% of the Company’s assets and liabilities. The Company expects the new guidance to have minimal impact on the Consolidated Statement of Operations and Consolidated Statement of Cash Flows.
An unaudited summary of the Company’s 2018 and 2017 quarterly performance is as follows: