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 the period.
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. Please see Note 11 of the notes to consolidated financial statements contained in Item 8 of Part II of this report for further discussion on this transaction.
In developing losses and loss adjustment expense ("loss" or "losses") reserve estimates for the U.S. Insurance Operations, the Company’s actuaries perform detailed reserve analyses each quarter. To perform the analysis, the data is organized at a "reserve category" level. A reserve category can be a line of business such as commercial automobile liability, or it can be a particular type of claim such as construction defect. The reserves within a reserve category level are characterized as long-tail or short-tail. For long-tail business, it will generally be several years between the time the business is written and the time when all claims are settled. The Company’s long-tail exposures include general liability, professional liability, products liability, commercial automobile liability, and excess and umbrella. Short-tail exposures include property, commercial automobile physical damage, and equine mortality. To manage its insurance operations, the Company differentiates by product classifications, which are Penn-America, United National, Diamond State, American Reliable, and Vacant Express. For further discussion about the Company’s product classifications, see “General - Business Segments - Insurance Operations” in Item 1 of Part I of this report. Each of the Company’s product classifications contain both long-tail and short-tail exposures. Every reserve category is analyzed by the Company’s actuaries each quarter. Management is responsible for the final determination of loss reserve selections.
The Company continually reviews these estimates and, based on new developments and information, includes adjustments of the estimated ultimate liability in the operating results for the periods in which the adjustments are made. The establishment of losses and loss adjustment expense reserves makes no provision for the possible broadening of coverage by legislative action or judicial interpretation, or the emergence of new types of losses not sufficiently represented in the Company’s historical experience or that cannot yet be quantified or estimated. The Company regularly analyzes its reserves and reviews reserving methodologies so that future adjustments to prior accident year reserves can be minimized. However, given the complexity of this process, reserves require continual updates and the ultimate liability may be higher or lower than previously indicated. Changes in estimates for losses and loss adjustment expense reserves are recorded in the period that the change in these estimates is made. See Note 10 to the consolidated financial statements in Item 8 of Part II of this report for details concerning the changes in the estimate for incurred losses and loss adjustment expenses related to prior accident years.
Previous reserve analyses have resulted in the Company’s identification of information and trends that have caused it to increase or decrease frequency and severity assumptions in prior periods and could lead to the identification of a need for additional material changes in losses and loss adjustment expense reserves, which could materially affect results of operations, equity, business and insurer financial strength and debt ratings. Factors affecting loss frequency include, among other things, the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include, among other things, changes in policy limits and deductibles, rate of inflation and
See Note 8 of the notes to consolidated financial statements in Item 8 of Part II of this report for further information surrounding the Company’s reinsurance receivable balances and collectability as of December 31, 2018 and 2017. For a listing of the ten reinsurers for which the Company has the largest reinsurance asset amounts as of December 31, 2018, see “Reinsurance of Underwriting Risk” in Item 1 of Part I of this report.
The carrying amount of the Company’s investments approximates their fair value. The Company regularly performs various analytical valuation procedures with respect to investments, including reviewing each fixed maturity security in an unrealized loss position to determine the amount of unrealized loss related to credit loss and the amount related to all other factors, such as changes in interest rates. The credit loss represents the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. The credit loss component of the other than temporary impairment is recorded through earnings, whereas the amount relating to factors other than credit losses are recorded in other comprehensive income, net of taxes. During its review, the Company considers credit rating, market price, and issuer specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which the Company determines that a credit loss is likely are subjected to further analysis to estimate the credit loss to be recognized in earnings, if any. See Note 3 of the notes to consolidated financial statements in Item 8 of Part II of this report for the specific methodologies and significant assumptions used by asset class. Upon identification of such securities and periodically thereafter, a detailed review is performed to determine whether the decline is considered other than temporary. This review
includes an analysis of several factors, including but not limited to, the credit ratings and cash flows of the securities, and the magnitude and length of time that the fair value of such securities is below cost.
For an analysis of the Company’s securities with gross unrealized losses as of December 31, 2018 and 2017, and for other than temporary impairment losses that the Company recorded for the years ended December 31, 2018, 2017, and 2016, please see Note 4 of the notes to the consolidated financial statements in Item 8 of Part II of this report.
The Company tests for impairment of goodwill at least annually and more frequently as circumstances warrant in accordance with applicable accounting guidance. Accounting guidance allows for the testing of goodwill for impairment using both qualitative and quantitative factors. Impairment of goodwill is recognized only if the carrying amount of the reporting unit, including goodwill, exceeds the fair value of the reporting unit. The amount of the impairment loss would be equal to the excess carrying value of the goodwill over the implied fair value of the reporting unit goodwill. Based on the qualitative assessment performed, there was no impairment of goodwill as of December 31, 2018.
The Company evaluates the performance of these three segments based on gross and net premiums written, revenues in the form of net premiums earned, and expenses in the form of (1) net losses and loss adjustment expenses, (2) acquisition costs, and (3) other underwriting expenses.
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 the year ended December 31, 2016 have been revised to reflect these changes.
The following table summarizes the Company’s results for the years ended December 31, 2018, 2017, and 2016:
On September 30, 2016, Diamond State Insurance Company sold all the outstanding shares of capital stock of one of its wholly owned subsidiaries, United National Specialty Insurance Company. Financial results for 2016 include United National Specialty Insurance. Company. This transaction did not have a significant impact on the Company’s ongoing business operations. Subsequent to the sale, any business previously written by United National Specialty Insurance Company is being written by other companies within the Company’s U.S. Insurance Operations.
Net premiums written equal gross premiums written less ceded premiums written.
Includes 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, ($1.3) million, and $35.3 million during the years ended December 31, 2018, 2017, and 2016, respectively.
The net premium retention for the year ended December 31, 2018 increased by 3.0 points for Commercial Lines and decreased by 5.0 points for Personal Lines as compared to 2017. The increase in retention for Commercial Lines was primarily due to an increase in gross premiums written as noted above. The decline in retention for Personal Lines was primarily due to the Property Catastrophe Quota Share Treaty that became effective on April 15, 2017.
The net premium retention for the year ended December 31, 2017 decreased by 2.4 points for Commercial Lines and decreased by 1.8 points for Personal Lines as compared to 2016 primarily due to the Property Catastrophe Quota Share Treaty that became effective on April 15, 2017.
Net premiums earned within the Commercial Lines segment increased by 22.1% for the year ended December 31, 2018 as compared to the same period in 2017. The increase in net premiums earned was primarily due to an increase in gross premiums written. Property net premiums earned were $115.2 million and $90.0 million for the years ended December 31, 2018 and 2017, respectively. Casualty net premiums earned were $103.1 million and $88.8 million for the years ended December 31, 2018 and 2017, respectively.
Net premiums earned within the Commercial Lines segment decreased by 5.6% for the year ended December 31, 2017 as compared to the same period in 2016. The decline in net premiums earned was primarily due to the Company discontinuing one of its programs within the Commercial Lines as well as the Company ceding additional premiums under the new Property Catastrophe Quota Share Treaty which was effective April 15, 2017. This decline was partially offset by an increase in gross premiums due to the introduction of a new program. Property net premiums earned were $90.0 million and $102.4 million for the years ended December 31, 2017 and 2016, respectively. Casualty net premiums earned were $88.8 million and $87.0 million for the years ended December 31, 2017 and 2016, respectively.
Net premiums earned within the Personal Lines segment decreased by 9.1% for the year ended December 31, 2017 as compared to the same period in 2016 primarily due to a decline in gross premiums written as well as the ceding of additional premiums under the property catastrophe treaties. Property net premiums earned were $183.5 million and $203.1 million for the years ended December 31, 2017 and 2016, respectively. Casualty net premiums earned were $32.5 million and $34.4 million for the years ended December 31, 2017 and 2016, respectively.
Net premiums earned within the Reinsurance Operations segment increased by 18.8% for the year ended December 31, 2018 as compared to the same period in 2017. This increase was primarily due to growth in gross premiums written within the property and professional lines of business as well as earnings from a treaty that was non-renewed. Property net premiums earned were $45.2 million and $38.4 million for the years ended December 31, 2018 and 2017, respectively. Casualty net premiums earned were $6.2 million and $4.8 million for the years ended December 31, 2018 and 2017, respectively.
Net premiums earned within the Reinsurance Operations segment increased by 4.1% for the year ended December 31, 2017 as compared to the same period in 2016. This increase was primarily due to a new mortgage treaty written in the fourth
Includes excise tax related to cessions from the Company’s Commercial Lines to its Reinsurance Operations of $0.4 million, $0.7 million, and $0.8 million for the years ended December 31, 2018, 2017, and 2016, respectively.
The table below reconciles the non-GAAP measures or ratios, which excludes the impact of prior accident year adjustments, to its most directly comparable GAAP measure or ratio. The Company believes the non-GAAP measures or ratios are useful to investors when evaluating the Company's underwriting performance as trends in the Company's Commercial Lines may be obscured by prior accident year adjustments. These non-GAAP measures or ratios should not be considered as a substitute for its most directly comparable GAAP measure or ratio and does not reflect the overall underwriting profitability of the Company.
Includes 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, ($1.3) million, and $35.3 million during the years ended December 31, 2018, 2017, and 2016, respectively.
The table below reconciles the non-GAAP measures or ratios, which excludes the impact of prior accident year adjustments, to its most directly comparable GAAP measure or ratio. The Company believes the non-GAAP measures or ratios are useful to investors when evaluating the Company's underwriting performance as trends in the Company's Personal Lines may be obscured by prior accident year adjustments. These non-GAAP measures or ratios should not be considered as a substitute for its most directly comparable GAAP measure or ratio and does not reflect the overall underwriting profitability of the Company.
The current accident year non-catastrophe loss ratio for 2018 increased by 0.3 points compared to 2017 mainly due to a slightly higher claims frequency compared to last year. The current accident year non-catastrophe loss ratio for 2017 increased by 8.7 point compared to 2016 mainly due to higher claims frequency and severity compared to last year.
The expense ratio increased 0.1 points from 43.1% for 2017 to 43.2% for 2018 mainly due to a reduction in net earned premiums as discussed above partially offset by a reduction in commission expense due to mix of business.
The expense ratio increased 1.4 points from 41.7% for 2016 to 43.1% for 2017 primarily due to a reduction in Personal Lines’ net premiums earned in 2017 as compared to 2016 as a result of underwriting actions taken to improve profitability.
Reinsurance Operations recognized other loss of $0.2 million in 2018, other income of $0.2 million in 2017, and a loss of $0.2 million in 2016. Other income (loss) is comprised of foreign exchange gains and losses.
The current accident year loss ratio for 2018 increased by 14.6 points compared to 2017. The increase is driven by higher losses in the property catastrophe contracts. The 2018 accident year loss ratio reflects the impact from multiple large catastrophes, including Typhoons Jebi & Trami, Hurricanes Florence & Michael, and the California wildfires. The current accident year loss ratio for 2017 increased by 45.9 points compared to 2016. The increase in the loss ratio was mainly
attributable to the higher impact from catastrophes, primarily hurricanes Harvey, Irma, and Maria as well as the 2017 California wildfires, 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 $8.9 million, or 17.3 percentage points, a decrease of $7.9 million or 18.4 percentage points, and a decrease of $13.5 million or 32.4 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.
Investment expenses for 2018 decreased by 3.1% compared to 2017. The decrease was primarily due to reduced fees related to the custody of the Company’s investment portfolio during 2018. Investment expenses for 2017 decreased by 43.4% compared to 2016. The decrease in investment expense in 2017 is mainly attributable to $1.5 million in upfront fees paid in 2016 to enter into a new investment in middle market corporate debt and equity investments in limited liability companies.
cause principal payments on certain investments to extend or shorten which can impact duration. At December 31, 2017, the Company’s embedded book yield on its fixed maturities, not including cash, was 2.7% compared with 2.1% at December 31, 2016. The embedded book yield on the $95.1 million of municipal bonds in the Company’s portfolio, which includes $93.5 million of taxable municipal bonds, was 3.0% at December 31, 2017, compared to an embedded book yield of 2.7% on the Company’s municipal bond portfolio of $156.4 million at December 31, 2016.
Interest expense was $19.7 million, $16.9 million, and $8.9 million during the years ended December 31, 2018, 2017, and 2016, respectively. The increase in 2018 as compared to 2017 as well as the increase in 2017 as compared to 2016 is primarily due to the Company’s $130 million debt offering in March, 2017.
The income tax benefit was $19.2 million for the year ended December 31, 2018 compared with income tax benefit of $0.5 million for the year ended December 31, 2017. The increase in the income tax benefit is primarily due to a $17.5 million tax expense recorded in 2017 as a result of the TCJA enacted in 2017 resulting in lowering the tax rate from 35% to 21% offset by an increase in losses incurred by the Company’s non-U.S. operations in 2018 compared to 2017. The income tax benefit was $0.5 million for the year ended December 31, 2017 compared with income tax benefit of $2.3 million for the year ended December 31, 2016. The decrease in the income tax benefit is primarily due to incurring a provisional tax expense of $17.5 million related to the reduction in the deferred tax asset as a result of the TCJA enacted on December 22, 2017 which lowered the U.S. tax rate from 35% to 21% offset by a $18.4 million tax benefit primarily due to an increase in losses incurred in the Company’s U.S. operations for 2017 compared to 2016.
See Note 9 of the notes to the consolidated financial statements in Item 8 of Part II of this report for a comparison of income tax between periods.
preceding 12 months exceeds the lesser of either (1) 10% of its surplus as of the 31st day of December of the last preceding year, or (2) its net income for the 12 month period ending on the 31st day of December of the last preceding year, not including pro rata distributions of any class of its securities, unless the commissioner approves the proposed payment or fails to disapprove such payment within 30 days after receiving notice of such payment.
See Note 18 of the notes to consolidated financial statements in Item 8 of Part II of this report for the dividends declared and paid by Global Indemnity’s U.S. insurance companies in 2018 and the maximum amount of distributions that U.S. insurance companies could pay as dividends in 2019.
Global Indemnity Reinsurance is 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. Based upon the total statutory capital plus the statutory surplus as set out in its 2018 statutory financial statements that will be filed in 2019, the Company believes Global Indemnity Reinsurance could pay a dividend of up to $223.9 million without requesting BMA approval. For 2019, the Company believes that Global Indemnity Reinsurance, including distributions it could receive from its subsidiaries, should have sufficient liquidity and solvency to pay dividends. 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’s reconciliation of net income (loss) to net cash provided by (used for) operations is generally influenced by the following:
Excludes a $3.5 million payment related to a purchase price adjustment for American Reliable. This payment is included in the net cash used in investing activities on the Company’s Consolidated Statement of Cash Flows. The recovery on loss indemnification, net of the purchase price
In 2017, the increase in operating cash flows of approximately $0.3 million from the prior year was primarily a net result of the following items:
See the consolidated statements of cash flows in the financial statements in Item 8 of Part II of this report for details concerning the Company’s investing and financing activities.
Global Indemnity has adopted a dividend 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 dividend, the Company currently anticipates an dividend rate of $0.25 per share per quarter ($1.00 per share per year). As of December 31, 2018, there are currently 14,228,678 shares issued and outstanding.
As of December 31, 2018, the Company also had future funding commitments of $34.7 million related to investments. The timing of commitments related to investments is uncertain.
On March 8, 2018, the Company settled its final reserve calculation which resulted in the recovery of $41.5 million in accordance with the Stock Purchase Agreement between Global Indemnity Group, Inc. and American Bankers Insurance Group, Inc. for the purchase of American Reliable.
As of December 31, 2017, U.A.I. (Luxembourg) Investment S.à.r.l. had a note receivable due from Global Indemnity Limited in the amount of $1.0 million. This loan was a demand loan which bore interest at 4.38%. In July, 2018, this note receivable of $1.0 million was assigned to GBLI (Barbados) Limited and the related accrued interest of $2.0 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 $1.0 million from Global Indemnity Limited and Global Indemnity Reinsurance had an accrued interest receivable due from Global Indemnity Limited of $2.0 million.
In November, 2018, Global Indemnity Group Limited, a wholly owned subsidiary of Global Indemnity Group, Inc., issued three Bonus Debentures to GBLI (Ireland) Limited in the amount of $150.0 million due 2028, $150.0 million due 2033, and $102.3 million due 2038. The Debentures bear interest at a rate of 3.22% per year and are guaranteed by Global Indemnity Group, Inc. Interest paid on these notes is not deductible by Global Indemnity Group, Inc. or Global Indemnity Group Limited. As of December 31, 2018, there was $402.3 million outstanding on these Bonus Debentures with accrued interest of $1.7 million.
In July, 2018, U.A.I. (Luxembourg) Investment S.à.r.l. declared and paid a dividend totaling $430.4 million. The ultimate recipient of this dividend was GBLI (Barbados) Limited. This dividend was satisfied by the assignment of intercompany note receivables totaling $412.5 million, $11.6 million in accrued interest receivables on the intercompany notes, and $6.3 million in fixed income securities. The $412.5 million in intercompany notes were then converted into interest free loans. GBLI (Barbados) Limited subsequently declared and paid a dividend to its parent, Global Indemnity Reinsurance, in the amount of $17.9 million which consisted of the accrued interest receivable and fixed income securities.
In November, 2018, U.A.I. (Luxembourg) Investment S.à.r.l. declared and paid a dividend totaling $128.6 million. The ultimate recipient of this dividend was Global Indemnity Reinsurance. This dividend was satisfied by the assignment of $21.9 million in accrued interest receivables on intercompany notes, $87.5 million in fixed income securities, $19.4 million in other invested assets, and $0.2 million of intercompany payables.
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, 2018, contractual obligations related to Global Indemnity’s commitments, including any principal and interest payments, were as follows:
Represents the Subordinated Notes due in 2045 in the aggregate principal amount of $100.0 million through an underwritten public offering. The notes bear interest at an annual rate equal to 7.75% 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 2045 Subordinated Notes.
Some of the statements under “Business,” “Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report may include forward-looking statements within the meaning of Section 21E of the Security Exchange Act of 1934, as amended, that reflect the Company’s current views with respect to future events and financial performance. Forward-looking statements are statements that are not historical facts. These statements can be identified by the use of forward-looking terminology such as "believe," "expect," "may," "will," "should," "project," "plan," "seek," "intend," or "anticipate" or the negative thereof or comparable terminology, and include discussions of strategy, financial projections and estimates and their underlying assumptions, statements regarding plans, objectives, expectations or consequences of identified transactions or natural disasters, and statements about the future performance, operations, products and services of the companies.
The Company’s business and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. See “Risk Factors” in Item 1A of Part I of this report for risks, uncertainties and other factors that could cause actual results and experience to differ from those projected.
This report and the documents that are referenced in this report and have filed as exhibits to this report should be read with the understanding that actual future results, levels of activity, performance and achievements may be materially different from what the Company expects. The Company qualifies all of its forward-looking statements by these cautionary statements.
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 (“American Reliable”), 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. See Note 19 for additional information regarding segments.
On January 1, 2018, the Company adopted new accounting guidance which 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. Upon adoption, the Company recorded a cumulative effect adjustment, net of tax, of $10.0 million which reduced accumulated other comprehensive income and increased retained earnings. During the year ended December 31, 2018, net realized investment gains (losses) included a loss of $22.0 million related to the change in the fair value of equity investments in accordance with this new accounting guidance. In addition, under the new guidance, equity investments, are no longer classified into different categories as either trading or available for sale. Prior to the adoption of this new guidance, equity securities were previously classified as available for sale.
On January 1, 2018, the Company adopted new accounting guidance regarding the classification of certain cash receipts and cash payments within the statement of cash flows. Upon adoption, the Company made a policy election to use the cumulative earnings approach for presenting distributions received from equity method investees. Under this approach, distributions up to the amount of cumulative equity in earnings recognized will be treated as returns on investment and presented in operating activities and those in excess of that amount will be treated as returns of investment and presented in the investing section. Prior to adoption, all distributions received from equity method investees were presented in the investing section of the consolidated statements of cash flows. The provisions of this accounting guidance were adopted on a retrospective basis. As a result, the consolidated statement of cash flows for the years ended December 31, 2017 and 2016 that was included in the Form 10-K for the years ended December 31, 2017 and 2016 was restated. For the years ended December 31, 2017 and 2016, net cash flows from operating activities was increased by $4.7 million and $5.2 million, respectively, and net cash flows from investing activities was reduced by $4.7 million and $5.2 million, respectively.
the investment failed cash flow projection testing to determine if anticipated principal and interest payments will be realized.
According to accounting guidance for debt securities in an unrealized loss position, the Company is required to assess whether it has the intent to sell the debt security or more likely than not will be required to sell the debt security before the anticipated recovery. If either of these conditions is met, the Company must recognize an other than temporary impairment with the entire unrealized loss being recorded through earnings. For debt securities in an unrealized loss position not meeting these conditions, the Company assesses whether the impairment of a security is other than temporary. If the impairment is deemed to be other than temporary, the Company must separate the other than temporary impairment into two components: the amount representing the credit loss and the amount related to all other factors, such as changes in interest rates. The credit loss represents the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. The credit loss component of the other than temporary impairment is recorded through earnings, whereas the amount relating to factors other than credit losses is recorded in other comprehensive income, net of taxes.
For an analysis of other than temporary losses that were recorded for the years ended December 31, 2018, 2017, and 2016, please see Note 4 below.
The Company has variable interests in two VIEs 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.
At December 31, 2018 and 2017, the Company had approximately $77.4 million and $67.1 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 bad debts against amounts due is recorded to reduce the net receivable to the amount reasonably believed by management to be collectible. For all remaining balances, allowances are recognized for bad debts based on the length of time the receivables are past due. The allowance for bad debts was $2.3 million and $2.2 million as of December 31, 2018 and 2017, respectively.
A premium deficiency is recognized if the sum of expected loss and loss adjustment expenses and unamortized acquisition costs exceeds related unearned premium after consideration of investment income. This evaluation is done at a distribution and product line level in Insurance Operations and at a treaty level in Reinsurance Operations. Any future expected loss on the related unearned premium is recorded first by impairing the unamortized acquisition costs on the related unearned premium followed by an increase to loss and loss adjustment expense reserves on additional expected loss in excess of unamortized acquisition costs. No premium deficiency reserve existed as of December 31, 2018 or 2017.
The process of establishing the liability for unpaid losses and loss adjustment is complex, requiring the use of informed actuarially based estimates and management’s judgment. In some cases, significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of that loss to the Company. To establish this liability, the Company regularly reviews and updates the methods of making such estimates and establishing the resulting liabilities. Any resulting adjustments are recorded in consolidated statements of operations during the period in which the determination is made.
Basic earnings per share have been calculated by dividing net income available to common shareholders by the weighted-average ordinary 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 ordinary 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 17 for details.
The Company maintains investments and cash accounts in foreign currencies related to the operations of its business. At period-end, the Company re-measures non-U.S. currency financial assets to their current U.S. dollar equivalent. The resulting gain or loss for foreign denominated fixed maturity investments 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 loss of $2.9 million, a gain of $2.1 million, and a loss of $0.7 million for the years ended December 31, 2018, 2017, and 2016, respectively.
The amortized cost and estimated fair value of investments were as follows as of December 31, 2018 and 2017:
Represents the total amount of other than temporary impairment losses relating to factors other than credit losses recognized in accumulated other comprehensive income (“AOCI”).
Excluding U.S. treasuries and agency bonds, the Company did not hold any debt or equity investments in a single issuer that was in excess of 6% of shareholders' equity at December 31, 2018 and 5% of shareholders’ equity at December 31, 2017.
The following table contains an analysis of the Company’s fixed income securities with gross unrealized losses, categorized by the period that the securities were in a continuous loss position as of December 31, 2018. Due to new accounting guidance implemented in 2018 regarding the treatment of gains and losses on equity securities, common stock is no longer included in the table:
Fixed maturities in a gross unrealized loss position for twelve months or longer are primarily comprised of non-credit losses on investment grade securities where management does not intend to sell, and it is more likely than not that the Company will not be forced to sell the security before recovery. The Company has analyzed these securities and has determined that they are not other than temporarily impaired.
The following is a description, by asset type, of the methodology and significant inputs that the Company used to measure the amount of credit loss recognized in earnings, if any:
U.S. treasury and agency obligations - As of December 31, 2018, gross unrealized losses related to U.S. treasury and agency obligations were $1.163 million. All unrealized losses have been in an unrealized loss position for twelve months or greater and are rated AA+. Macroeconomic and market analysis is conducted in evaluating these securities. Consideration is given to the interest rate environment, duration and yield curve management of the portfolio, sector allocation and security selection.
Mortgage-backed securities (“MBS”) - As of December 31, 2018, gross unrealized losses related to mortgage-backed securities were $1.786 million. Of this amount, $1.378 million have been in an unrealized loss position for twelve months or greater. 99.1% of the unrealized losses for twelve months or greater are related to securities rated AA+ or better. 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.
Commercial mortgage-backed securities (“CMBS”) - As of December 31, 2018, gross unrealized losses related to the CMBS portfolio were $3.852 million. Of this amount, $2.974 million have been in an unrealized loss position for twelve months or greater and are rated A- or better. The weighted average credit enhancement for the Company’s CMBS portfolio is 47.9. This represents the percentage of pool losses that can occur before a mortgage-backed security will incur its first dollar of principal loss. For the Company’s CMBS portfolio, a loan level analysis is utilized where every underlying CMBS loan is re-underwritten based on a set of assumptions reflecting expectations for the future path of the economy. 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.
The following table is an analysis of the credit losses recognized in earnings on fixed maturities held by the Company as of December 31, 2018, 2017, and 2016 for which a portion of the OTTI loss was recognized in other comprehensive income.
New accounting guidance regarding equity securities was implemented on January 1, 2018 which requires companies to disclose realized gains and losses for equity securities still held at period end and gains and losses from securities sold during the period. See Note 22 for additional information regarding new accounting pronouncements. The following table shows the calculation of the portion of realized gains and losses related to common stock held as of December 31, 2018:
The proceeds from sales and redemptions of available for sale and equity securities resulting in net realized investment gains (losses) for the years ended December 31, 2018, 2017, and 2016 were as follows:
As of December 31, 2018, the Company owned fixed maturity securities with a market value of $0.4 million that were non-income producing for the preceding twelve months. As of December 31, 2017, the Company did not own fixed maturity securities that were non-income producing for the preceding twelve months.
As of December 31, 2018, the Company held insurance enhanced collateralized mortgage obligations, commercial mortgage-backed, and credit securities with a market value of approximately $33.6 million. Approximately $0.7 million of these securities were tax-free municipal bonds, which represented less than 0.1% of the Company’s total cash and invested assets, net of payable/ receivable for securities purchased and sold. These securities had an average rating of “AA.” None of these bonds are pre-refunded with U.S. treasury securities, nor would they have carried a lower credit rating had they not been insured.
In addition to the tax-free municipal bonds, the Company held $32.9 million of insurance enhanced bonds, which represented approximately 2.2% of the Company’s total invested assets, net of receivable/payable for securities purchased and sold. The insurance enhanced bonds are comprised of $19.7 million of taxable municipal bonds, $13.0 million of commercial mortgage-backed securities, and $0.2 million of collateralized mortgage obligations. The financial guarantors of the Company’s $32.9 million of insurance enhanced commercial-mortgage-backed, taxable municipal securities, and collateralized mortgage obligations include Municipal Bond Insurance Association ($5.1 million), Assured Guaranty Corporation ($14.6 million), Federal Home Loan Mortgage Corporation ($13.0 million), and Federal Deposit Insurance Corporation ($0.2 million).
The fair value of one of the Company’s VIE’s, which invests in distressed securities and assets, was $17.9 million and $26.3 million as of December 31, 2018 and 2017, respectively. The Company’s maximum exposure to loss from this VIE, which factors in future funding commitments, was $32.1 million and $40.5 million at December 31, 2018 and 2017, respectively. The fair value of a second VIE that also invests in distressed securities and assets was $32.9 million and $17.8 million as of December 31, 2018 and 2017, respectively. The Company’s maximum exposure to loss from this VIE, which factors in future funding commitments, was $53.4 million and $51.3 million at December 31, 2018 and 2017, respectively. During the fourth quarter of 2018, the Company sold its interest in a VIE that provides financing for middle market companies and received sale proceeds of $29.6 million. The Company’s investment in VIEs is included in other invested assets on the consolidated balance sheet with changes in fair value recorded in the consolidated statements of operations.
The Company accounts for the interest rate swaps as non-hedge instruments and recognizes the fair value of the interest rate swaps in other assets or other liabilities on the consolidated balance sheets with the changes in fair value recognized as net realized investment gains or losses in the consolidated statements of operations. The Company is ultimately responsible for the valuation of the interest rate swaps. To aid in determining the estimated fair value of the interest rate swaps, the Company relies on the forward interest rate curve and information obtained from a third party financial institution.
The following table summarizes information on the location and the gross amount of the derivatives’ fair value on the consolidated balance sheets as of December 31, 2018 and 2017:
The following table summarizes the net gains (losses) included in the consolidated statements of operations for changes in the fair value of the derivatives and the periodic net interest settlements under the derivatives for the years ended December 31, 2018, 2017, and 2016:
As of December 31, 2018 and 2017, the Company is due $2.6 million and $3.1 million, respectively, for funds it needed to post to execute the swap transaction and $3.7 million and $9.5 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.
Level 2 - inputs utilize other than quoted prices included in Level 1 that are observable for similar assets, either directly or indirectly.
Level 3 - inputs are unobservable for the asset, and include situations where there is little, if any, market activity for the asset.
The following table presents information about the Company’s invested assets and derivative instruments measured at fair value on a recurring basis as of December 31, 2018 and 2017, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
Excluded from the table above are limited partnerships of $50.8 million at December 31, 2018 whose fair value is based on net asset value as a practical expedient.
Excluded from the table above are limited partnerships of $77.8 million at December 31, 2017 whose fair value is based on net asset value as a practical expedient.
As of December 31, 2018 and 2017, the carrying value and fair value of the 7.875% Subordinated Notes due 2047 are net of unamortized debt issuance cost of $4.0 million and $4.1 million, respectively.
Other invested assets consist of limited liability partnerships whose fair value is based on net asset value per share practical expedient.
The following table provides the fair value and future funding commitments related to these investments at December 31, 2018 and 2017.
This limited partnership invests in stressed and distressed securities and structured products. 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 to be redeemed no later than 2027.
Data from commercial vendors is aggregated with market information, then converted into a prepayment/spread/LIBOR curve model used for commercial mortgage obligations (“CMO”). CMOs are categorized with mortgage-backed securities in the tables listed above. For asset-backed securities, data derived from market information along with trustee and servicer reports is converted into spreads to interpolated benchmark curve. For both asset classes, evaluations utilize standard inputs plus new issue data, monthly payment information, and collateral performance. The evaluated pricing models incorporate discount rates, loan level information, prepayment speeds, treasury benchmarks, and LIBOR and swap curves.
Understanding and periodically evaluating the various pricing methods and procedures used by the Company’s pricing vendors to ensure that investments are properly classified within the fair value hierarchy.
On a quarterly basis, the Company corroborates investment security prices received from its pricing vendors by obtaining pricing from a second pricing vendor for a sample of securities.
During 2018 and 2017, the Company has not adjusted quotes or prices obtained from the pricing vendors.
As a result of acquisitions in 2015 and 2010, the Company has goodwill, within the Personal Lines segment, of $6.5 million as of December 31, 2018 and 2017. 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 2018 and 2017 did not result in impairment of the goodwill acquired.
Amortization related to the Company’s definite lived intangible assets was $0.5 million for each of the years ended December 31, 2018, 2017 and 2016.
As of December 31, 2018 and 2017, definite lived intangible assets, net of accumulated amortization, were $3.0 million and $3.5 million, respectively, and were comprised of customer relationships, agent relationships, and tradenames. 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 definite lived intangible assets. There was no impairment of these assets in 2018 or 2017.
The Company had the following reinsurance balances as of December 31, 2018 and 2017:
The reinsurance receivables above are net of a purchase accounting adjustment related to discounting acquired loss reserves to their present value and applying a risk margin to the discounted reserves. This adjustment was $0.8 million and $1.2 million at December 31, 2018 and 2017, respectively.
As of December 31, 2018, 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.
As of December 31, 2018, the statutory income tax rates of the countries where the Company conducts business are 21% in the United States, 0% in Bermuda, 0% in the Cayman Islands, 26.01% for companies with a registered office in Luxembourg City, 0.25% to 2.5% in Barbados, and 25% on non-trading income, 33% on capital gains and 12.5% on trading income in the Republic of Ireland. The statutory income tax rate of each country is applied against the annual taxable income of each country to calculate the annual income tax expense.
The effective income tax benefit rate for 2018 was 25.3%, compared with an effective income tax benefit rate of 5.0% and 4.7% for 2017 and 2016, respectively. The increase in the effective income tax benefit rate in 2018 compared to 2017 is due to a $17.5 million tax expense recorded in 2017 as a result of the TCJA enacted in 2017 resulting in lowering the tax rate from 35% to 21% offset by an increase in losses incurred by the Company’s non-U.S. operations in 2018 compared to 2017. The increase in the effective income tax benefit rate in 2017 compared to 2016 is due to incurring a provisional tax expense of $17.5 million related to the reduction in the deferred tax asset as a result of the TCJA enacted on December 22, 2017 which lowered the U.S. tax rate from 35% to 21% offset by $18.4 million tax benefit due to an increase in losses incurred in the Company’s U.S. operations for 2017 compared to 2016.
The Company has a Section 163(j) (“163(j)”) carryforward of $11.1 million and $7.9 million as of December 31, 2018 and 2017, respectively, which can be carried forward indefinitely. The 163(j) carryforward is for disqualified interest paid or accrued to a related entity that is not subject to U.S. tax.
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 Lines, $12.6 million decrease related to Personal Lines, and a $8.9 million decrease related to Reinsurance Operations.
The $7.3 million reduction of prior accident year loss reserves related to Commercial Lines primarily consisted of the following:
and 2012 through 2014 accident years which was partially offset by increases in the 2011 and 2015 through 2017 accident years.
General Liability: A $5.6 million decrease primarily due to lower than expected claims severity in the 2011 through 2014, 2016, and 2017 accident years partially offset by an increase in the 2007 and 2015 accident years.
The $39.4 million reduction of prior accident year loss reserves related to Commercial Lines primarily consisted of the following:
Property: A $6.3 million reduction in aggregate with $4.0 million of favorable development in the property excluding catastrophe reserve categories and $2.3 million of favorable development in the property catastrophe reserve categories. The favorable development in the reserve categories excluding catastrophe experience reflects lower than expected claims severity in the 2011 through 2015 accident years. For the property catastrophe reserve categories, lower than anticipated claims severity was the driver of the favorable development in the 2011 through 2016 accident years.
Property: A $6.1 million reduction in the property reserve categories. The decrease reflects lower than expected case incurred emergence primarily in the 2016 accident year and favorable development from the Butte wildfire subrogation recovery in the 2015 accident year.
The $43.8 million reduction of prior accident year loss reserves related to Commercial Lines primarily consisted of the following:
General Liability: A $43.8 million reduction in aggregate, within the casualty lines, with $9.4 million of favorable development in the construction defect reserve category and $34.4 million of favorable development in the other general liability reserve categories. For the construction defect reserve category, lower than expected frequency and severity led to favorable development in accident years 2005 through 2015. Lower than expected claims severity was the driver of the favorable development in the other general liability reserve categories, primarily in the 2004 through 2014 accident years.
Marine: A $1.4 million decrease in accident years 2010 through 2012 was driven by less than expected case incurred emergence in these years which is primarily within the casualty lines.
As of December 31, 2018, 2017, and 2016, the survival ratio on a gross basis for the Company’s open A&E claims was 24.2 years, 20.7 years, and 13.8 years, respectively. As of December 31, 2018, 2017, and 2016, the survival ratio on a net basis for the Company’s open A&E claims was 35.7 years, 35.6 years, and 19.3 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, 2018, 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 Lines 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, 2018. 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 were based on the internal actuarial review and a third party actuarial review completed during the 4th quarter of 2018. Case incurred is subtracted from the management selected ultimates to obtain the booked IBNR reserves. These methodologies are consistent with last year.
Personal Lines 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, 2018. Actuarial methodologies, such as the Loss Development and Bornhuetter-Ferguson methods, were employed to develop estimates of ultimate Loss & ALAE. Management’s ultimate selections were based on the internal actuarial review and a third party actuarial review completed during the 4th quarter of 2018. Case incurred is subtracted from the management selected ultimates to obtain the booked IBNR reserves. These methodologies are consistent with last year.
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 and marine 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 a third party actuarial review completed during the 4th quarter of 2018. Case incurred is subtracted from the management selected ultimates to obtain the booked IBNR reserves. These methodologies are consistent with last year.
On March 8, 2018, the Company settled its final reserve calculation which resulted in $41.5 million being due to Global Indemnity Group, Inc. in accordance with the Stock Purchase Agreement between Global Indemnity Group, Inc. and American Bankers Insurance Group, Inc. for the purchase of American Reliable. The settlement is comprised of (i) receipt of $38.8 million for loss and loss adjustment expenses paid on or after January 1, 2015 or payable as of December 31, 2017 with respect to losses incurred prior to January 1, 2015, (ii) receipt of $6.2 million for accrued interest and (iii) payment of $3.5 million for the difference between the agreed upon purchase price and actual settlement on January 1, 2015. These amounts, which were included in other assets on the consolidated balance sheets as of December 31, 2017, were received on March 9, 2018.
The Company’s outstanding debt consisted of the following at December 31, 2018 and 2017:
The Company incurred $3.7 million in deferred issuance costs associated with the 2045 Notes, which is being amortized over the term of the 2045 Notes. Interest expense, including amortization of deferred issuance costs, recognized on the 2045 Notes was $7.9 million for each of the years ended December 31, 2018, 2017, and 2016.
Global Indemnity Reinsurance, Ltd., a wholly owned subsidiary of the Company, and/or any other regulated reinsurance or insurance company that is a direct or indirect subsidiary of the Company, in addition to indebtedness of GIGI for borrowed money. If the Company pays any amount with respect to the subordinated note obligations, the Company is entitled to be reimbursed by GIGI within 10 business days after a demand is made to GIGI by the Company. In consideration for becoming a subordinated co-obligor on the subordinated notes, GIGI received a promissory note from the Company with a principal amount of $230 million due April 15, 2047 that has since been assigned to an affiliate. This promissory note is eliminated in consolidation.
in return for such issuance of new Global Indemnity plc ordinary shares to Global Indemnity Limited, Global Indemnity Limited issued 13,463,864 A ordinary shares, par value $0.0001 per share, and 4,133,366 Global Indemnity Limited B ordinary shares, par value $0.0001 per share (together the “Global Indemnity Limited ordinary shares”), to the former stockholders of Global Indemnity plc. Each shareholder received one Global Indemnity Limited A ordinary share for each Global Indemnity plc A ordinary share owned by such shareholder prior to the Scheme of Arrangement and one Global Indemnity Limited B ordinary share for each Global Indemnity plc B ordinary share owned by such shareholder prior to the Scheme of Arrangement.
Prior to the Redomestication, the Global Indemnity plc A ordinary shares were listed on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “GBLI” and registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In connection with the Redomestication, Global Indemnity plc requested that Nasdaq file with the U.S. Securities and Exchange Commission (the “SEC”) an application to strike the Global Indemnity plc A ordinary shares from listing on Nasdaq and the Global Indemnity plc A ordinary shares from registration under the Exchange Act.
Since the Company is a holding company and has no direct operations, its ability to pay dividends depends, in part, on the ability of its subsidiaries to pay dividends. Global Indemnity Reinsurance and the U.S. insurance subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. See Note 18 for additional information regarding dividend limitations imposed on Global Indemnity Reinsurance and the U.S. insurance subsidiaries.
During the fourth quarter of 2017, Global Indemnity announced the adoption of a dividend 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 dividend, the Company currently anticipates a dividend rate of $0.25 per share per quarter ($1.00 per share per year).
Dividend payments of $0.25 per ordinary share per quarter were paid as follows:
The Company allows employees to surrender A ordinary shares as payment for the tax liability incurred upon the vesting of restricted stock that was issued under the Company’s share incentive plan in effect at the time of issuance. During 2018, 2017, and 2016, the Company purchased an aggregate of 45,233, 29,551 and 28,099, respectively, of surrendered A ordinary shares from its employees for $1.8 million, $1.2 million and $0.8 million, respectively. All shares purchased from employees by the Company are held as treasury stock and recorded at cost until formally retired by the company.
In 2015, the Company entered into a redemption agreement with certain affiliates of the Fox Paine Funds to redeem 8,260,870 of its ordinary shares. In conjunction with the 2015 redemption, the Company acquired rights, expiring year end 2019, to redeem an additional 3,397,031 ordinary shares for $78.1 million, which amount was subject to an annual 3% increase. On December 29, 2017, Global Indemnity acquired 3,397,031 of its A ordinary shares for approximately $83.0 million in the aggregate (approximately $24.44 per share) from former investors in the Fox Paine Funds. See Note 12 of the notes to the consolidated financial statements in Item 8 of Part II of the Company’s 2015 Annual Report on Form 10-K for more information on the 2015 redemption.
There were no B ordinary shares that were surrendered or repurchased in 2018.
As of December 31, 2018, U.N. Co-Investment Fund III (Cayman), L.P. and Fox Paine Capital Fund II International, L.P. (collectively, the “Fox Paine Funds”), which are investment funds managed by Fox Paine & Company, LLC, beneficially own approximately 81% of the Company’s total voting power. As of December 31, 2018, Fox Mercury Investments, L.P. and certain of its affiliates (collectively, the “FM Entities”) separately beneficially own approximately 2% of the Company’s total voting power. The Fox Paine Funds have the right to appoint a number of the Company’s Directors equal in aggregate to the pro rata percentage of the voting shares of the Company beneficially held by the Fox Paine Funds, FM Entities and Fox Paine & Company, LLC (collectively, “Fox Paine Entities”) so long as the Fox Paine Entities beneficially own shares representing an aggregate 25% or more of the voting power in the Company. The Fox Paine Funds control the election of all of the Company’s Directors due to its controlling share ownership. The Company’s Chairman is the chief executive and founder of Fox Paine & Company, LLC.
The Company paid an $11.0 million advisory fee to Fox Paine & Company, LLC in connection with the redemption of 3,397,031 shares on December 29, 2017 as well as other services performed. See Note 12 for additional information on the share redemption.
Fox Paine & Company, LLC performed advisory services for the Company in relation to a transaction whereby one of the Company’s indirect wholly owned subsidiaries became a co-obligor on the Company’s subordinated notes. The advisory services were performed during the first and second quarter of 2018. The total fee for these services was $12.5 million which was paid during June, 2018. See Note 11 for additional information on the co-obligor transaction.
Fox Paine & Company, LLC also performed advisory services for the Company in relation to an alternative investment vehicle. The total fee for these services was $2.0 million and was accrued as of December 31, 2018.
During the year ended December 31, 2016, the Company incurred $0.2 million in brokerage fees to Crystal & Company, an insurance broker. James W. Crystal, the chairman and chief executive officer of Crystal & Company, was a member of the Company’s Board of Directors until he resigned on July 24, 2016.
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, 2018, the Company has funded $29.5 million of this commitment leaving $20.5 million as unfunded.
Total rental expense under operating leases for the years ended December 31, 2018, 2017, and 2016 was $3.5 million, $3.5 million, and $3.7 million, respectively. Rent expense was net of sublease income of $0.02 million for the year ended December 31, 2016. There was no sublease income for the years ended December 31, 2018 and 2017.
Upon adoption of this new accounting guidance, the Company elected to retain its policy of accruing the compensation cost based on the number of awards that are expected to vest. The adoption of this accounting guidance did not result in any cumulative adjustment or restatement. The provisions of this new guidance were adopted on a prospective basis and did not have a material impact on the Company’s financial position, results of operations or cash flows.
Award activity for stock options granted under the Plan and the weighted average exercise price per share are summarized as follows:
In 2014, 300,000 options were granted. On March 6, 2018, the existing vesting provisions of these options were eliminated and replaced with new vesting provisions related to return on equity targets for 2018, 2019, and 2020 (“Bonus Years”). 100,000 options were related to the 2018 Bonus Year. Return on equity targets for the 2018 bonus year were not met and therefore, these 100,000 options have been forfeited. 200,000 options remain outstanding but are not yet exercisable. 100,000 options are related to return on equity targets for the 2019 bonus year. These options are subject to remeasurement of 2019 bonus year results after the third full calendar year following the bonus year. 100,000 options are related to return on equity targets for the 2020 bonus year. These options are subject to remeasurement of 2020 bonus year results after the third full calendar year following the bonus year.
The Company recorded $0.3 million, ($0.4) million, and $0.3 million of compensation expense for stock options outstanding under the Plan during the years ended December 31, 2018, 2017, and 2016, respectively.
The Company did not receive any proceeds from the exercise of options during 2018, 2017 or 2016 under the Plan.
During 2016, the Company granted an aggregate of 121,346 A ordinary shares to key employees at a weighted average grant date fair value of $28.97 per share under the Plan. Of the shares granted in 2016, 11,199 were granted to the Company’s Chief Executive Officer and vest 33 1/3% on each subsequent anniversary date of the grant for a period of three years subject to a true-up of bonus year underwriting results as of the third anniversary of the grant. 5,309 shares were granted to another key employee and were due to vest 100% on February 7, 2019. These shares were forfeited during 2017 as the key employee was no longer employed by the company. 8,253 shares were granted to other key personal lines employees and vest 33% on the first and second anniversary of the grant and vest 34% on the third anniversary of the grant contingent on meeting certain performance objectives and subject to Board approval. The remaining 96,585 shares were granted to key employees and will vest as follows:
During 2018, the Company granted 31,646 A ordinary shares, at a weighted average grant date fair value of $36.74 per share, to non-employee directors of the Company under the Plan.
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 Tranche 3 Options vested on December 31, 2018. 100,000 Tranche 3 Options will each vest on December 31 of 2019 and 2020 if Ms. Valko remains employed and in good standing as of such date. 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, 2018, 2017, and 2016.
The weighted average shares outstanding used to determine dilutive earnings per share for the years ended December 31, 2018 and 2016 do not include 500,000 and 300,000 options, respectively, which were deemed to be anti-dilutive. The year ended December 31, 2017 did not have any options that were deemed to be anti-dilutive.
Under SAP, certain assets designated as "Non-admitted assets" (such as prepaid expenses) are charged against surplus.
that could be paid in 2019 by the United National insurance companies and the Penn-America insurance companies under applicable laws and regulations without regulatory approval is approximately $10.6 million and $6.5 million, respectively. The Penn-America insurance companies limitation includes $2.1 million that would be distributed to United National Insurance Company or its subsidiary Penn Independent Corporation based on the December 31, 2018 ownership percentages. American Reliable is unable to pay a distribution in 2019 without regulatory approval. During 2018, the United National Insurance Company declared and paid dividends of $20.0 million. Penn-America Insurance Company and American Reliable did not declare or pay any dividends in 2018.
less than or equal to 70% of its ACLRBC (the "Mandatory Control Level"), the regulatory authority must place the company under its control.
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. Based upon the total statutory capital plus the statutory
The following are tabulations of business segment information for the years ended December 31, 2018, 2017, and 2016. Corporate information is included to reconcile segment data to the consolidated financial statements.
(3) Includes federal excise tax of $386 relating to cessions from Commercial Lines to Reinsurance Operations.
Includes federal excise tax of $458 relating to cessions from Personal Lines to Reinsurance Operations.
Includes ($2,062) of business written by American Reliable that is ceded to insurance companies owned by Assurant under a 100% quota share reinsurance agreement.
Comprised of Global Indemnity Reinsurance’s total assets less its investment in subsidiaries
The Company paid the following net federal income taxes and interest for 2018, 2017, and 2016:
In August, 2016, the FASB issued new accounting guidance regarding the classification of certain cash receipts and cash payments within the statements of cash flows. The new guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This guidance is effective for public business entities for fiscal periods beginning after December 15, 2017, and interim periods within those fiscal years. Upon adoption on January 1, 2018, the Company made an accounting policy election to use the cumulative earnings approach for presenting distributions received from equity method investees. Under this approach, distributions up to the amount of cumulative equity in earnings recognized will be treated as returns on investment and presented in operating activities and those in excess of that amount will be treated as returns of investment and presented in the investing section. Prior to adoption, all distributions received from equity method investees were presented in the investing section of the consolidated statements of cash flows. The other cash flow issues addressed by the new guidance did not impact the Company. The provisions of this accounting guidance were adopted on a retrospective basis. 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.
During the year ended December 31, 2018, net realized investment gains (losses) included a loss of $22.0 million related to the change in the fair value of equity investments in accordance with this new accounting guidance.
In May, 2014, the FASB issued new accounting guidance regarding the recognition of revenue from customers arising from the transfer of goods and services. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the standard and all related amendments using the modified retrospective method. Long and short duration insurance contracts, which comprise the majority of the Company’s revenues, are excluded from this accounting guidance. As such, revenue within the scope of the new guidance primarily includes fee income. 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. There were no material changes in the timing or measurement of revenues based upon the guidance. As a result, there is no cumulative effect on retained earnings.
In June, 2018, the FASB issued new accounting guidance which expanded the scope of Accounting Standards Codification (“ASC”) Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. This guidance is effective for fiscal years beginning after December 15, 2018 including interim periods. The Company does not anticipate the new guidance having a material impact on its financial condition, results of operations, or cash flows.
In June, 2016, the FASB issued new accounting guidance addressing the measurement of credit losses on financial instruments. For assets held at amortized cost basis, the new guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of information for credit loss estimates. For available for sale debt securities, credit losses should be measured similar to current GAAP; however, the new guidance requires that credit losses be presented as an allowance rather than as a write-down and allows for the reversal of credit losses in the current period net income. This guidance is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application of this new guidance is permitted as of the fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. This guidance will be applied using a modified-retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is still evaluating the impact of this guidance on its financial condition, results of operations, and cash flows.
On February 11, 2019, the Company’s Board of Directors approved a dividend payment of $0.25 per ordinary share to be paid on March 29, 2019 to all shareholders of record as of the close of business on March 22, 2019.