At December 31, 2014, the Company leased office space in Bala Cynwyd, Pennsylvania which holds the Insurance Operations’ principal executive offices and headquarters. In addition, the Company leased additional office space in California, Georgia, Illinois, Maryland, North Carolina and Texas, which serves as office space for field offices. Some of the office space in California also serves as office space for the Company’s claims operations. The Company also leased office space in Hamilton, Bermuda, which is used by the Reinsurance Operations. The Company leased office space in Cavan, Ireland, which is used to support the operating needs of the Insurance and Reinsurance Operations. As a result of the American Reliable acquisition on January 1, 2015, the Company assumed leases in Arizona, Nebraska, and Florida. The Company believes the properties listed are suitable and adequate to meet its needs.
(1) In 2011, “Diluted” shares were the same as “Basic” shares since there was a net loss for that year.
(2) Shares outstanding and per share amounts have been restated to reflect the 1-for-2 stock exchange effective July 2, 2010 when the Company completed its re-domestication to Ireland.
(2) A summary of prior accident year adjustments is summarized as follows:
Unless otherwise specifically noted, discussion and analysis of the financial condition and results of operations of American Reliable are not included in the following discussion. Any reference to 2014 annual financial information for American Reliable has not been audited.
During the first quarter of 2014, the Company exited its corporate loan portfolio and made a $50 million commitment to purchase an alternative investment vehicle which is comprised of European non-performing loans. As of December 31, 2014, the Company has funded $29.9 million of this commitment leaving $20.1 million as unfunded.
On June 13, 2014, A.M. Best affirmed the financial strength rating of “A” (Excellent) for Global Indemnity Reinsurance and its U.S. insurance subsidiaries. Global Indemnity Reinsurance and subsidiaries have a financial size category of “XI” with A.M. Best, which represents an adjusted policyholder’s surplus of $750 million to $1 billion.
On January 1, 2015, Global Indemnity Group, Inc. completed its acquisition of American Reliable pursuant to the American Reliable SPA upon payment of an aggregate purchase price of approximately $113.7 million in cash and the assumption of approximately $322.9 million in customary insurance related liabilities, obligations, and mandates. The ultimate purchase price is subject to accounting procedures that are expected to be completed by June 30, 2015. The most recent estimate of the purchase price, based on available financial information, is approximately $117.9 million. The purchase price is subject to adjustment based on GAAP book value of the business as of the date of the closing of the transaction and the future development of loss reserves as specified in the American Reliable SPA.
The cash portion of the acquisition price was financed primarily by a $102.0 million borrowing on December 26, 2014 pursuant to the Company’s margin borrowing facilities. The borrowing rate is tied to LIBOR and is currently approximately 1%. Approximately $130.5 million in collateral supported the borrowing. See Note 13 of the notes to the consolidated financial statements in Item 8 of Part II of this report for details on the terms of the margin borrowing facilities.
Key products of American Reliable’s Specialty Personal Lines include manufactured home, dwelling, homeowners and recreational vehicle insurance including a small commercial portfolio. During 2014 these products generated $188.2 million of gross written premium, $176.9 million of net written premium and $178.0 million of net earned premium.
Excluding cash and preferred stock, the fixed income portfolio has a weighted average duration of 2.6 years with an average credit rating of A and 94.7% of securities investment grade or higher.
The Company’s Insurance Operations distribute property and casualty insurance products through a group of approximately 110 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. The Company operates predominantly in the excess and surplus lines marketplace. To manage its operations, the Company differentiates them by 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; and 3) Diamond State, which includes property, casualty, and professional lines products distributed through wholesale brokers and program administrators with specific binding authority.
Currently, the Company’s Reinsurance Operations segment, which consists solely of the operations of Global Indemnity Reinsurance, provides reinsurance solutions through brokers and on a direct basis. In prior years, the Company provided reinsurance solutions through program managers and primary writers, including regional insurance companies. Global Indemnity Reinsurance is a Bermuda based treaty reinsurer for specialty property and casualty insurance and reinsurance companies. Global Indemnity Reinsurance conducts business in Bermuda and is focused on using its capital capacity to write catastrophe-oriented placements and other niche or specialty-focused treaties meeting the Company’s risk tolerance and return thresholds. Given the current pricing environment, Global Indemnity Reinsurance continues to cautiously deploy and manage its capital while seeking to position itself as a niche reinsurance solution provider.
For many reserve categories, paid loss data for recent periods may be too immature or erratic for accurate predictions. This situation often exists for long-tail exposures. In addition, changes in the factors described above may result in inconsistent payment patterns. Finally, estimating the paid loss pattern subsequent to the most mature point available in the data analyzed often involves considerable uncertainty for long-tail reserve categories.
The Average Loss method multiplies a projected number of ultimate claims by an estimated ultimate average loss for each accident year to produce ultimate loss estimates. Since projections of the ultimate number of claims are often less variable than projections of ultimate loss, this method can provide more reliable results for reserve categories where loss development patterns are inconsistent or too variable to be relied on exclusively. In addition, this method can more directly account for changes in coverage that impact the number and size of claims. However, this method can be difficult to apply to situations where very large claims or a substantial number of unusual claims result in volatile average claim sizes. Projecting the ultimate number of claims 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. Estimating the ultimate average loss requires analysis of the impact of large losses and claim cost trends based on changes in the cost of repairing or replacing property, changes in the cost of medical care, changes in the cost of wage replacement, judicial decisions, legislative changes and other factors.
For construction defect losses, the Company’s actuaries organize losses by the year in which they were reported. To estimate losses from claims that have not been reported, 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
In 2009, one of the Company’s insurance companies entered into a settlement agreement to resolve asbestos related coverage litigation related to approximately 3,900 existing asbestos-related bodily injury claims and future claims. The settlement was approved by the Court and a final order was issued in September 2014.
Reserve analyses performed by the Company’s internal and external actuaries result in actuarial point estimates. The results of the detailed reserve reviews were summarized and discussed with the Company’s senior management to determine the best estimate of reserves. This group considered many factors in making this decision. The factors included, but were not limited to, the historical pattern and volatility of the actuarial indications, the sensitivity of the actuarial indications to changes in paid and incurred loss patterns, the consistency of claims handling processes, the consistency of case reserving practices, changes in the Company’s pricing and underwriting, and overall pricing and underwriting trends in the insurance market.
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 loss 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 pricing and reserving methodologies so that future adjustments to prior 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 loss and loss adjustment expense reserves are recorded in the period that the change in these estimates is made. See Note 9 to the consolidated financial statements in Item 8 of Part II of this report for details concerning the changes in the estimate for incurred loss and loss adjustment expenses related to prior accident years.
The Company regularly reviews the collectability of its reinsurance receivables, and includes adjustments resulting from this review in earnings in the period in which the adjustment arises. A.M. Best ratings, financial history, available collateral, and payment history with the reinsurers are several of the factors that the Company considers when judging collectability. Changes in loss reserves can also affect the valuation of reinsurance receivables if the change is related to loss reserves that are ceded to reinsurers. Certain amounts may be uncollectible if the Company’s reinsurers dispute a loss or if the reinsurer is unable to pay. If its reinsurers do not pay, the Company is still legally obligated to pay the loss.
For an analysis of the Company’s securities with gross unrealized losses as of December 31, 2014 and 2013, and for other than temporary impairment losses that the Company recorded for the years ended December 31, 2014, 2013, and 2012, please see Note 3 of the notes to the consolidated financial statements in Item 8 of Part II of this report.
The costs of acquiring new and renewal insurance and reinsurance contracts include commissions, premium taxes and certain other costs that vary with and 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.
investment income, losses and loss adjustment expenses, and certain other costs expected to be incurred as the premium is earned. A premium deficiency is recognized if the sum of expected loss and loss adjustment expenses and unamortized acquisition costs exceeds related unearned premium. This evaluation is done at a product line level in Insurance Operations and at a treaty level in Reinsurance Operations. Any future expected loss on the related unearned premium is recorded first by impairing the unamortized acquisition costs on the related unearned premium followed by an increase to loss and loss adjustment expense reserves on additional expected loss in excess of unamortized acquisition costs. The Company calculates deferred acquisition costs for Insurance Operations separately by product lines and for its Reinsurance Operations separately for each treaty.
See “Business Segments” in Item 1 of Part I of this report for a description of the Company’s segments.
(5) Results for the year to date 2012 include the impact of an out-of-period adjustment which reduced Reinsurance Operations segment income by $1.6 million.
(6) On December 31, 2013, Diamond State Insurance Company sold all the outstanding shares of capital stock of one of its wholly owned subsidiaries, United National Casualty Insurance Company. Financial results for 2013 and 2012 include United National Casualty Insurance Company. This was an asset sale which did not have a significant impact on the Company’s ongoing business operations.
Year Ended December 31, 2014 Compared with the Year Ended December 31, 2013
(3) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments and premium deficiency charges. The most directly comparable GAAP measure is the combined ratio.
(4) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments. The most directly comparable GAAP measure is the property loss ratio.
(9) The Company believes that this non-GAAP ratio or measure is useful to investors when evaluating the Company’s underwriting performance as trends in the Company’s U.S. insurance operations may be obscured by prior accident year adjustments. This non-GAAP ratio or measure should not be considered as a substitute for its most directly comparable GAAP measure and does not reflect the overall underwriting profitability of the Company.
(10) The Company believes that this non-GAAP ratio or measure is useful to investors when evaluating the Company’s underwriting performance as trends in the Company’s U.S. insurance operations may be obscured by prior accident year adjustments and premium deficiency charges. This non-GAAP ratio or measure should not be considered as a substitute for its most directly comparable GAAP measure and does not reflect the overall underwriting profitability of the Company.
Management’s discussion and analysis of financial condition and results of operation references various non-GAAP measures related to combined ratio, loss ratio, expense ratio, net losses and loss adjustment expenses, and acquisition cost and other underwriting expenses throughout the discussion and should be read in conjunction with GAAP measures and the reconciliations of non-GAAP measures listed above.
Gross premiums written, which represents the amount received or to be received for insurance policies written without reduction for reinsurance costs or other deductions, was $230.0 million for 2014, compared with $232.4 million for 2013, an decrease of $2.4 million or 1.0%. The decrease was due to a reduction in other which was primarily due to the culling of unprofitable business within the Company’s commercial automobile lines. Excluding commercial automobile, which is included in the other category in the table above, gross written premiums increased by $13.1 million or 6.1% due to growth in small business driven by both higher retention rates and rate increases.
Net premiums written, which equals gross premiums written less ceded premiums written, was $213.0 million for 2014, compared with $213.7 million for 2013, an decrease of $0.7 million or 0.3%. As noted above, the decrease was primarily due to a reduction in gross premium written for commercial automobile partially offset by an increase in gross written premiums due to growth in small business.
The loss ratio for the Company’s Insurance Operations was 55.7% for 2014 compared with 59.5% for 2013. The loss ratio is a GAAP financial measure that is generally viewed in the insurance industry as an indicator of underwriting profitability and is calculated by dividing net losses and loss adjustment expenses by net premiums earned.
The non-catastrophe loss ratio decreased 0.8 points from 41.6% in 2013 to 40.8% in 2014. Non-catastrophe losses were $51.7 million and $47.5 million for the years ended December 31, 2014 and 2013, respectively.
Asbestos and Environmental: A $7.1 million increase related to policies written prior to 1990 as a result of recent severity being higher than expected due to faster erosion of underlying policy limits.
General Liability: A $6.7 million reduction primarily due to better than expected emergence in nearly all accident years between 2003 through 2011 partially offset by an increase to accident years 1998 through 2002 and 2012 due to higher than anticipated loss emergence.
The combined ratio for the Company’s Insurance Operations was 97.8% for 2014, compared with 104.0% for 2013. The combined ratio is a GAAP financial measure and is the sum of the Company’s loss and expense ratios. Excluding the impact of prior accident year adjustments, the current accident year combined ratio decreased from 107.9% in 2013 to 103.7% in 2014. See discussion of loss ratio included in “Net Losses and Loss Adjustment Expenses” above and discussion of expense ratio in preceding paragraph above for an explanation of this decrease.
(2) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments. The most directly comparable GAAP measure is the loss ratio.
(3) This is a non-GAAP measure that excludes the impact of prior accident year adjustments. The most directly comparable GAAP measure is the net losses and loss adjustment expenses.
(6) The Company believes that this non-GAAP ratio or measure is useful to investors when evaluating the Company’s underwriting performance as trends in the Company’s reinsurance operations may be obscured by premium deficiency charges. This non-GAAP ratio or measure should not be considered as a substitute for its most directly comparable GAAP measure and does not reflect the overall underwriting profitability of the Company.
Net investment income, which is gross investment income less investment expenses, was $28.8 million for 2014, compared with $37.2 million for 2013, a decrease of $8.4 million or 22.5%.
See Note 3 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, 2014 and 2013.
Interest expense was $0.8 million and $6.2 million for 2014 and 2013, respectively. This reduction was primarily due to the repayment of the Company’s senior notes payable and junior subordinated debentures in 2013. See Note 10 of the notes to the consolidated financial statements in Item 8 of Part II of this report for details on the Company’s debt.
Income tax expense was $8.3 million and $1.0 million for 2014 and 2013, respectively. See Note 8 of the notes to the consolidated financial statements in Item 8 of Part II of this report for an analysis of income tax expense between periods.
(1) Includes excise tax of $1,026 and $936 related to cessions from the Company’s Insurance Operations to its Reinsurance Operations for 2013 and 2012, respectively.
(5) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments and premium deficiency charges. The most directly comparable GAAP measure is the casualty loss ratio.
(9) The Company believes that this non-GAAP ratio is useful to investors when evaluating the Company’s underwriting performance as trends in the Company’s U.S. insurance operations may be obscured by prior accident year adjustments. This non-GAAP ratio should not be considered as a substitute for its most directly comparable GAAP measure and does not reflect the overall underwriting profitability of the Company.
(14) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments. The most directly comparable GAAP measure is the casualty loss ratio.
(15) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments and premium deficiency charges. The most directly comparable GAAP measure is the casualty loss ratio.
Other income was $5.8 million and $0.6 million for the years ended December 31, 2013 and 2012, respectively. In 2013, other income is primarily comprised of the net gain on the asset sale of the Company’s wholly owned subsidiary, United National Casualty Insurance Company, of $5.2 million and fee income. In 2012, other income is primary comprised of fee income.
The loss ratio for the Company’s Insurance Operations was 59.5% for 2013 compared with 66.1% for 2012. The decrease in the loss ratio was driven by better performance in property lines for the current accident year offset by a higher current accident year loss ratio in casualty lines mainly due to poor performance of the commercial automobile line of business.
The current accident year loss ratio decreased 5.1 points to 63.4% in 2013 from 68.5% in 2012. Net losses for 2012 were lower than they otherwise would have been as a result of premium deficiency charges recorded in 2011. Excluding the impact of the 2011 premium deficiency charges, the current accident year loss ratio was 70.4% for 2012.
The catastrophe loss ratio decreased 6.3 points from 15.0% in 2012 to 8.7% in 2013. Catastrophe losses were $10.0 million and $14.2 million for the years ended December 31, 2013 and 2012, respectively.
The prior accident year loss ratio decreased by 1.5 points resulting from a decrease of net losses and loss adjustment expenses for prior accident years of $7.6 million in 2013 compared to a decrease of net losses and loss adjustment expenses for prior accident years of $4.2 million in 2012. When analyzing loss reserves and prior year development, the Company considers many factors, including the frequency and severity of claims, loss credit trends, case reserve settlements that may have resulted in significant development, and any other additional or pertinent factors that may impact reserve estimates.
General liability: A $6.3 million reduction primarily due to favorable emergence of $4.7 million on small business binding and $3.3 million on casualty brokerage exposures primarily in accident years 2002 through 2005. Partially offsetting these reductions were increases of $2.0 million on construction defect reserves in accident year 2007. The Company also decreased its reinsurance allowance by $0.7 million in this line due to changes in its reinsurance exposure on specifically identified claims and general decreases in ceded reserves.
Excluding prior accident year adjustments and premium deficiency charges which caused 2012 losses to be lower than what they otherwise would have been, the current accident year net losses and loss adjustment expenses were $124.5 million and $126.1 million for 2013 and 2012, respectively.
(2) Net premiums written and earned for the year to date 2012 includes $6.0 million related to reinsurance treaties written in 2009 and 2010 which were contractually due as a result of losses incurred on these treaties. The impact of these premiums is included in the “Prior accident year” ratios.
(8) This is a non-GAAP measure that excludes the impact of premium deficiency charges. The most directly comparable GAAP measure is the acquisition cost and other underwriting expenses.
(9) The Company believes that this non-GAAP ratio or measure is useful to investors when evaluating the Company’s underwriting performance as trends in the Company’s reinsurance operations may be obscured by prior accident year adjustments. This non-GAAP ratio or measure should not be considered as a substitute for its most directly comparable GAAP measure and does not reflect the overall underwriting profitability of the Company.
(10) The Company believes that this non-GAAP ratio or measure is useful to investors when evaluating the Company’s underwriting performance as trends in the Company’s reinsurance operations may be obscured by prior accident year adjustments and premium deficiency charges. This non-GAAP ratio or measure should not be considered as a substitute for its most directly comparable GAAP measure and does not reflect the overall underwriting profitability of the Company.
Management’s discussion and analysis of financial condition and results of operation references various non-GAAP measures related to combined ratio, loss ratio, expense ratio, net losses and loss adjustment expenses, and acquisition cost and other underwriting expenses throughout the discussion and should be read in conjunction with the reconciliation of non-GAAP measures listed above.
Gross premiums written, which represents the amount received or to be received for reinsurance agreements written without reduction for reinsurance costs or other deductions, was $58.4 million for 2013, compared with $42.3 million for 2012, an increase of $16.1 million or 38.1%. The increase was primarily due to several new treaties written during 2013. Global Indemnity Reinsurance treaties written during 2012 and 2013 are predominantly related to property exposure comprised of property catastrophe business.
Net premiums written, which equals gross premiums written less ceded premiums written, was $58.3 million for 2013, compared with $41.7 million for 2012, an increase of $16.6 million or 39.7%. The increase was primarily due to the increase in gross premiums written.
Net premiums earned were $52.4 million for 2013, compared with $59.7 million for 2012, a decrease of $7.3 million or 12.2%. The decrease was primarily due to net earned premiums for 2012 including a premium increase of $6.0 million related to reinsurance treaties written in 2009 and 2010 which were contractually due as a result of losses incurred on these treaties. Property net premiums earned for 2013 and 2012 were $48.8 million and $34.2 million, respectively. Casualty net premiums earned for 2013 and 2012 were $3.6 million and $25.5 million, respectively.
The Company recognized a loss of less than $0.1 million for 2013 compared with a loss of $0.7 million for 2012. Other income or loss is comprised of foreign exchange gains and losses.
The loss ratio for the Company’s Reinsurance Operations was 30.8% for 2013 compared with 58.8% for 2012. The decrease is primarily due to having more casualty business in 2012 as compared to 2013. The Company’s casualty business has a higher loss ratio than its property business.
There was a decrease in net losses and loss adjustment expenses for prior accident years of $0.3 million in 2013 which decreased the loss ratio by 0.5 points, compared to an increase in net losses and loss adjustment expenses for prior accident years of $8.7 million in 2012 which increased the loss ratio by 9.5 points.
Workers’ Compensation: An $8.3 million increase in workers’ compensation lines primarily related to accident years 2009 and 2010 driven by increased frequency and severity. This increase in losses triggered $6.0 million in additional premium during 2012.
Acquisition costs and other underwriting expenses were $18.3 million for 2013, compared with $15.5 million for 2012, an increase of $2.8 million or 18.1%. In 2012, acquisition costs and other underwriting expenses were lower than they otherwise would have been as a result of premium deficiency charges recorded in 2011. Excluding the impact of the 2011 premium deficiency charges, acquisition costs and other underwriting expenses were $18.3 million and $18.5 million for 2013 and 2012, respectively. Profit commissions of $5.1 million, which were the result of good performance of the property catastrophe treaties, were included in acquisition costs during 2013.
The expense ratio for the Company’s Reinsurance Operations was 34.9% for 2013, compared with 25.9% for 2012. Excluding the impact of 2011 premium deficiency charges, the expense ratio would have been 34.9% and 31.0% for 2013 and 2012, respectively. The increase is related to an increase in commissions and contingent commissions due to business mix and good performance of the property catastrophe treaties in 2013.
Gross investment income, which excludes realized gains and losses, was $41.4 million for 2013, compared with $52.0 million for 2012, a decrease of $10.6 million or 20.4%. The decrease was partly due to gross investment income of $4.8 million generated from distributions from limited partnership investments during 2012. Gross investment income of $0.1 million was generated from distributions from limited partnership investments during 2013. Excluding distributions from limited partnership investments, gross investment income for 2013 decreased $6.0 million or 12.6% compared to 2012. This decrease was primarily due to lower reinvestment yields, a reduction in the Company’s fixed income portfolio related to funding the share repurchase program in 2012, and repayment of debt.
Investment expenses were $4.2 million for 2013, compared with $4.5 million for 2012, a decrease of $0.3 million or 6.2%. The decrease is primarily due to a reduction of investments in corporate loans and a reduction in trust fees which is partially offset by an increase in investment management fees related to the Company’s common stock portfolio.
As of December 31, 2013, the Company held agency mortgage-backed securities with a book value of $164.8 million. Excluding the agency mortgage-backed securities, the average duration of the Company’s fixed maturities portfolio was 1.9 years as of December 31, 2013, compared with 2.2 years as of December 31, 2012. Including cash and short-term investments, the average duration of the Company’s fixed maturities portfolio, excluding agency mortgage-backed securities, as of December 31, 2013 was 1.7 years compared with 2.0 years as of December 31, 2012. Changes in interest rates can cause principal payments on certain investments to extend or shorten which can impact duration. At December 31, 2013, the Company’s embedded book yield on its fixed maturities, not including cash, was 2.6% compared with 3.1% at December 31, 2012. As of December 31, 2013, the Company’s investment portfolio held $98.7 million in tax-free municipal bonds with an embedded book yield of 3.0% compared with an embedded book yield of 3.2% on $129.4 million in tax-free municipal bonds as of December 31, 2012.
See Note 3 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, 2013 and 2012.
Interest expense was $6.2 million and $5.4 million for 2013 and 2012, respectively. This increase was primarily due to a make-whole payment of $2.9 million related to the early prepayment of the guaranteed senior notes during the 2013 partially offset by lower interest expense on new margin borrowing facility and repayment of debt in 2013. See Note 10 of the notes to the consolidated financial statements in Item 8 of Part II of this report for details on the Company’s debt.
Income tax expense was $1.0 million for 2013, compared with a benefit of $5.9 million for 2012. See Note 8 of the notes to the consolidated financial statements in Item 8 of Part II of this report for an analysis of income tax expense between periods.
Global Indemnity is a holding company. Its principal asset is its ownership of the shares of its direct and indirect subsidiaries, including those of its U.S. insurance companies: United National Insurance Company, Diamond State Insurance Company, United National Specialty Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, and Penn-Patriot Insurance Company; and its Reinsurance Operations: Global Indemnity Reinsurance.
Global Indemnity’s U.S. insurance companies are restricted by statute as to the amount of dividends that they may pay without the prior approval of regulatory authorities. The dividend limitations imposed by state laws are based on the statutory financial results of each insurance company within the Insurance Operations that are determined by using statutory accounting practices that differ in various respects from accounting principles used
in financial statements prepared in conformity with GAAP. See “Regulation-Statutory Accounting Principles.” Key differences relate to, among other items, deferred acquisition costs, limitations on deferred income taxes, reserve calculation assumptions and surplus notes.
Under Virginia law, Penn-Patriot 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 preceding 12 consecutive 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, not including net realized capital gains, 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. In determining whether the dividend must be approved, undistributed net income from the second and third preceding years, not including net realized capital gains, may be carried forward.
respective departments of insurance in Pennsylvania, Indiana, Wisconsin, and Virginia. On January 23, 2014, the U.S. insurance companies paid an aggregate dividend of $200 million to Global Indemnity Group, Inc. See Note 17 of the notes to consolidated financial statements in Item 8 of Part II of this report for the dividend limitations for 2015.
Global Indemnity Reinsurance is prohibited, without the approval of the BMA, from reducing by 15% or more its total statutory capital 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 2014 statutory financial statements that will be filed in 2015, the Company believes Global Indemnity Reinsurance could pay a dividend of up to $287.1 million without requesting BMA approval Global Indemnity Reinsurance did not declare or pay any dividends during 2014. For 2015, 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 2014, the decrease in operating cash flows of approximately $7.1 million from the prior year was primarily a net result of the following items:
See the consolidated statement 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.
On December 26, 2014, the Company borrowed $102.0 million pursuant to its margin borrowing facilities. These funds were used to finance the acquisition of American Reliable on January 1, 2015. The borrowing rate is tied to LIBOR and is currently approximately 1%. Approximately $130.5 million in collateral was deposited to support the borrowing. The borrowing is subject to a maintenance margin, which is a minimum account balance that must be maintained. A decline in market conditions could require an additional deposit of collateral. See Note 10 of the notes to the consolidated financial statements in Item 8 of Part II of this report for details on the terms of the margin borrowing facilities.
Global Indemnity’s U.S. insurance companies and Global Indemnity Reinsurance currently participates in a stop loss agreement that provides protection to the U.S. insurance companies in a loss corridor from 70% to 90% subject to certain restrictions.
The Company’s U.S. insurance companies participate in quota share reinsurance agreements with Global Indemnity Reinsurance whereby 50% of the net retained business of the U.S. insurance companies is ceded to
Global Indemnity Reinsurance. These agreements exclude named storms. Global Indemnity Reinsurance is an unauthorized reinsurer. As a result, any losses and unearned premiums that are ceded to Global Indemnity Reinsurance by the U.S. insurance companies must be collateralized. To satisfy this requirement, Global Indemnity Reinsurance has set up custodial trust accounts on behalf of the U.S. insurance companies.
In 2015, American Reliable will also participate in a quota share reinsurance agreement with Global Indemnity Reinsurance whereby 50% of the net retained business of American Reliable is ceded to Global Indemnity Reinsurance.
On May 12, 2014, Global Indemnity Group, Inc. entered into an agreement to loan $200 million to Global Indemnity (Cayman) Limited which bears interest at 0.28% and matures in 2017. In December, 2014, Global Indemnity (Cayman) Limited repaid $125.0 million of the outstanding principal. As of December 31, 2014, Global Indemnity (Cayman) Limited owed $75.0 million under this loan agreement with accrued interest of $0.4 million.
(2) The Company leases office space and equipment as part of its normal operations. The amounts shown above represent future commitments under such operating leases.
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. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the following: (1) the ineffectiveness of the Company’s business strategy due to changes in current or future market conditions; (2) the effects of competitors’ pricing policies, and of changes in laws and regulations on competition, including industry consolidation and development of competing financial products; (3) greater frequency or severity of claims and loss activity than the Company’s underwriting, reserving or investment practices have anticipated; (4) decreased level of demand for the Company’s insurance products or increased competition due to an increase in capacity of property and casualty insurers; (5) risks inherent in establishing loss and loss adjustment expense reserves; (6) uncertainties relating to the financial ratings of the Company’s insurance subsidiaries; (7) uncertainties arising from the cyclical nature of the Company’s business; (8) changes in the Company’s relationships with, and the capacity of, its general agents, brokers, insurance companies and reinsurance companies from which the Company derives its business; (9) the risk that the Company’s reinsurers may not be able to fulfill obligations; (10) investment performance and credit risk; (11) new tax legislation or interpretations that could lead to an increase in the Company’s tax burden; (12) uncertainties relating to governmental and regulatory policies, both domestically and internationally; (13) foreign currency fluctuations; (14) the impact of catastrophic events; (15) the Company’s subsidiaries’ ability to pay dividends; (16) deterioration of debt and equity markets; (17) interest rate changes; (18) uncertainties relating to ongoing or future litigation matters; and (19) uncertainties and risks related to the acquisition of American Reliable.
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are set forth in “Risk Factors” in Item 1A and elsewhere in this Annual Report on Form 10-K. The Company’s forward-looking statements speak only as of the date of this report or as of the date they were made. The Company undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
Global Indemnity plc (“Global Indemnity” or “the Company”) was incorporated on March 9, 2010 and is domiciled in Ireland. Global Indemnity replaced the Company’s predecessor, United America Indemnity, Ltd., as the ultimate parent company as a result of a re-domestication transaction. United America Indemnity, Ltd. was incorporated on August 26, 2003, and is domiciled in the Cayman Islands. United America Indemnity, Ltd. is now a subsidiary of the Company. The Company’s A ordinary shares are publicly traded on the NASDAQ Global Select Market under the trading symbol “GBLI.”
The Consolidated Statement of Cash Flows for the years ended December 31, 2013 and 2012 that were included in the Form 10-K for the annual periods ended December 31, 2013 and 2012 classified $3.0 million and $0.4 million, respectively, as “Other assets and liabilities, net” within the “Cash flows from operating activities”
Certain other prior period amounts have been reclassified to conform to the current period presentation.
The Company’s investments in fixed maturities and equity securities are classified as available for sale and 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 available for sale portfolio, excluding limited partnership interests, 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 available for sale investments, 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.
The Company’s investments in other invested assets were valued at $33.7 million and $3.5 million as of December 31, 2014 and 2013, respectively. Both of these amounts relate to investments in limited partnerships. The Company does not have access to daily valuations, therefore; the estimated fair value of the limited partnerships are measured utilizing net asset value as a practical expedient for the limited partnerships.
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 is a candidate for 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
(1) persisted with unrealized losses for more than twelve consecutive months or
For an analysis of other than temporary losses that were recorded for the years ended December 31, 2014, 2013, and 2012, please see Note 3 below.
For the purpose of the statements of cash flows, the Company considers all liquid instruments with an original maturity of three months or less to be cash equivalents. The Company has a cash management program that provides for the investment of excess cash balances primarily in short-term money market instruments. Generally, bank balances exceed federally insured limits. The carrying amount of cash and cash equivalents approximates fair value.
The Company regularly reviews the collectability of reinsurance receivables. An allowance for uncollectible reinsurance receivable is recognized based on the financial strength of the reinsurers and the length of time any balances are past due. Any changes in the allowance resulting from this review are included in income during the period in which the determination is made. The allowance for uncollectible reinsurance was $9.4 million and $9.0 million as of December 31, 2014 and 2013, respectively.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. 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. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the remaining deferred income tax assets, and accordingly, the Company has not established any valuation allowances.
The amortization of deferred acquisition costs for the years ended December 31, 2014, 2013, and 2012 was $57.1 million, $53.8 million, and $48.9 million, respectively.
In accordance with accounting guidance for insurance enterprises, the method followed in computing deferred acquisition costs limits them to their estimated realizable value that gives effect to the premium to be earned, related investment income, losses and loss adjustment expenses, and certain other costs expected to be incurred as the premium is earned. A premium deficiency is recognized if the sum of expected loss and loss adjustment
For the years ended December 31, 2014, 2013, and 2012, the total premium deficiency charges were $0.4 million, $1.7 million, and $0.5 million, respectively, comprised solely of reductions to unamortized deferred acquisition costs within the commercial automobile lines in Insurance Operations. The 2013 premium deficiency charge of $1.7 million was recorded as of September 30, 2013. Based on the Company’s analysis, the Company expensed acquisition cost as incurred for the remainder of 2013 and 2014 for the commercial automobile lines in Insurance Operations. The 2012 premium deficiency charge was recorded as of December 31, 2012. As the charges were a reduction of unamortized deferred acquisition costs in each respective period, no premium deficiency reserve exists as of December 31, 2014 or 2013.
The process of establishing the liability for unpaid losses and loss adjustment expenses of a property and casualty insurance company 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 income during the period in which the determination is made.
Certain professional general agencies of the Insurance Operations are paid special incentives, referred to as contingent commissions, when results of business produced by these agencies are more favorable than predetermined thresholds. Similarly, in some circumstances, companies that cede business to the Reinsurance Operations are paid profit commissions based on the profitability of the ceded portfolio. These commissions are charged to other underwriting expenses when incurred. The liability for the unpaid portion of these commissions, which is stated separately on the face of the consolidated balance sheet as contingent commissions, was $13.0 million and $12.7 million as of December 31, 2014 and 2013, respectively.
The Company accounts for stock options and other equity based compensation using the modified prospective application of the fair value-based method permitted by the appropriate accounting guidance. See Note 14 for details.
The amortized cost and estimated fair value of the Company’s fixed maturities portfolio classified as available for sale at December 31, 2014, 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.
(2) 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.
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, 2014 concluded the unrealized losses discussed above are not other than temporary impairments. The impairment evaluation process is discussed in the “Investment” section of Note 2 (“Summary of Significant Accounting Policies”).
Mortgage-backed securities (“MBS”)-As of December 31, 2014, gross unrealized losses related to mortgage-backed securities were $0.764 million. Of this amount, $0.757 million have been in an unrealized loss position for twelve months or greater and are rated AA+. 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. The model first projects HPI at the national level, then at the zip-code level based on the historical relationship between the individual zip code HPI and the national HPI. The model utilizes loan level data and borrower characteristics including FICO score, geographic location, original and current loan size, loan age, mortgage rate and type (fixed rate / interest-only / adjustable rate mortgage), issuer / originator, residential type (owner occupied / investor property), dwelling type (single family / multi-family), loan purpose, level of documentation, and delinquency status as inputs. The model also includes the explicit treatment of silent second liens, utilization of loan modification history, and the application of roll rate adjustments.
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.
Accumulated other comprehensive income, net of tax, as of December 31, 2014 and 2013 was as follows:
The following tables present the changes in accumulated other comprehensive income, net of tax, by component for the years ended December 31, 2014 and 2013:
The sources of net investment income for the years ended December 31, 2014, 2013, and 2012 were as follows:
The Company’s total investment return on a pre-tax basis for the years ended December 31, 2014, 2013, and 2012 were as follows:
As of December 31, 2014, the Company held insurance enhanced asset-backed and credit securities with a market value of approximately $35.8 million. Approximately $16.4 million of these securities were tax-free municipal bonds, which represented approximately 1.1% 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-.” Approximately $6.1 million of these bonds are pre-refunded with U.S. treasury securities, of which $0.1 million are backed by financial guarantors, meaning that funds have been set aside in escrow to satisfy the future interest and principal obligations of the bond. Of the remaining $10.3 million of insurance enhanced municipal bonds, $1.3 million would have carried a lower credit rating had they not been insured. The following table provides a breakdown of the ratings for these municipal bonds with and without insurance.
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, 2014, is as follows:
In addition to the tax-free municipal bonds, the Company held $19.4 million of asset-backed and taxable municipal bonds, which represented approximately 1.3% of the Company’s total invested assets, net of receivable/payable for securities purchased and sold. The financial guarantors of the Company’s $19.4 million of insurance enhanced asset-backed and taxable municipal securities include Municipal Bond Insurance Association ($11.2 million), Ambac ($1.0 million) and Assured Guaranty Corporation ($7.2 million).
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, 2014.
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, 2014 and 2013:
Interest rate swaps are used by the Company primarily to reduce risks from changes in interest rates. Under the terms of the interest rate swaps, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts as calculated by reference to an agreed notional amount.
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 in the consolidated statement of operations. The estimated fair value of the interest rate swaps, which is primarily derived from the forward interest rate curve, is based on the valuation received 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, 2014 and 2013:
The following table summarizes the net gains (losses) included in the consolidated statement 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, 2014, 2013, and 2012:
Included in “Other invested assets” in the fair value hierarchy at December 31, 2014 and 2013 are limited liability partnerships measured at fair value. The following table provides the fair value and future funding commitments related to these investments at December 31, 2014 and 2013.
The Company’s pricing vendors provide prices for all investment categories except for investments in limited partnerships which are measured utilizing net assets values as a practical expedient. One vendor provides prices for equity securities and all fixed maturity categories.
For MBSs, a matrix model correlation to TBA (a forward MBS trade) or benchmarking is utilized to value a security.
During 2014 or 2013, the Company has not adjusted quotes or prices obtained from the pricing vendors.
The following table presents details of the Company’s intangible assets as of December 31, 2014:
The Company expects that amortization expense for the next five years related to the 2010 acquisition will be as follows:
As of December 31, 2014 and 2013, indefinite lived intangible assets, which are comprised of trade names, trademarks, and state insurance licenses, were $14.0 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 2014 and 2013 indicated that there was no impairment of these assets.
As of December 31, 2014 and 2013, definite lived intangible assets were $3.6 million and $4.0 million, net of accumulated amortization, and were comprised of customer relationships and non-compete agreements. 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 2014 or 2013.
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 $4.0 million and $6.0 million at December 31, 2014 and 2013, respectively.
As of December 31, 2014, the Company had one aggregate unsecured reinsurance receivable 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.
The effect of reinsurance on premiums written and earned is as follows:
The Company’s income before income taxes from its non-U.S. subsidiaries and U.S. subsidiaries, including the results of the quota share and stop-loss agreements between Global Indemnity Reinsurance and the Insurance Operations, for the years ended December 31, 2014, 2013, and 2012 were as follows:
The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets at December 31, 2014 and 2013 are presented below:
The Company has an alternative minimum tax (“AMT”) credit carryforward of $10.5 million and $9.9 million as of December 31, 2014 and 2013, respectively, which can be carried forward indefinitely. The Company no longer has a net operating loss (“NOL”) carryforward as of December 31, 2014. The NOL carryforward was $1.2 million at December 31, 2013.
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 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. In December, 2014, Global Indemnity Group, Inc. paid a dividend of $125 million to U.A.I. (Luxembourg) S.à.r.l. and accrued for a 5% withholding tax amounting to $6.3 million.
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, 2014, 2013 and 2012. As of December 31, 2014, the Company did not record any liabilities for tax-related interest and penalties on its consolidated balance sheets.
During 2014, the Company reduced its prior accident year loss reserves by $16.4 million, which consisted of a $12.5 million decrease related to Insurance Operations and a $3.9 million decrease related to Reinsurance Operations.
The $12.5 million reduction of prior accident year loss reserves related to Insurance Operations primarily consisted of the following:
The $7.6 million reduction of prior accident year loss reserves related to Insurance Operations primarily consisted of the following:
Commercial Auto: A $0.9 million increase primarily related to accident year 2011.
The $8.7 million increase in prior accident year loss reserves related to Reinsurance Operations primarily consisted of the following:
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 ($69.8 million and $70.5 million as of December 31, 2014 and 2013, net of reinsurance, respectively) 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.
The Company has exposure to asbestos & 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, 2014, 2013, and 2012 were IBNR reserves of $26.4 million, $18.2 million, and $14.6 million, respectively, and case reserves of approximately $4.8 million, $4.8 million, and $5.5 million, respectively, for known A&E-related claims.
On September 30, 2013, the Company redeemed the entire outstanding principal amount on its UNG Trust I junior subordinated notes. The payment of $10.4 million consisted of principal of $10.3 million and interest of $0.1 million. This payment was funded by borrowing $10.0 million pursuant to the Company’s margin borrowing facilities.
On October 29, 2013, the Company redeemed the entire outstanding principal amount on its UNG Trust II junior subordinated notes. The payment of $20.8 million consisted of principal of $20.6 million and interest of $0.2 million. This payment was funded by borrowing $20.2 million pursuant to the Company’s margin borrowing facilities.
The following table provides information with respect to the A ordinary shares that were surrendered or repurchased in 2014:
During each of the years ended December 31, 2014, 2013 and 2012, the Company incurred $0.2 million in brokerage fees to Crystal & Company, an insurance broker. Prior to October 15, 2012, Crystal & Company was known as Frank Crystal & Company. James W. Crystal, the chairman and chief executive officer of Crystal & Company, is a member of the Company’s Board of Directors.
The Company entered into a $50 million commitment to purchase an alternative investment vehicle which is comprised of European non-performing loans. As of December 31, 2014, the Company has funded $29.9 million of this commitment leaving $20.1 million as unfunded.
Total rental expense under operating leases for the years ended December 31, 2014, 2013, and 2012 were $2.6 million, $2.4 million, and $2.2 million, respectively. At December 31, 2014, future minimum cash payments under non-cancelable operating leases were as follows:
During the year ended December 31, 2014, the Company granted 325,000 Time-Based Options under the Plan. Of these options, 25,000 were forfeited during 2014. The remaining 300,000 stock options were issued to the Company’s Chief Executive Officer. See below for vesting schedule related to this stock award.
The Company recorded $0.3 million, $1.2 million, and $1.2 million of compensation expense for stock options outstanding under the Plan in each of the years ended December 31, 2014, 2013, and 2012, respectively.
The Company did not receive any proceeds from the exercise of options during 2014 under the Plan. In 2013, the Company received $0.3 million from the issuance of 14,292 A ordinary shares at a weighted average grant date value of $20.00 per share exercised by a former employee of the Company under the previous share incentive plan. In 2012, the Company received $0.1 million from the issuance of 5,000 A ordinary shares at a weighted average grant date value of $20.00 per share exercised by a former employee of the Company under the previous share incentive plan.
The weighted average fair value of options granted under the Plan was $7.92 in 2014 using a Black-Scholes option-pricing model and the following weighted average assumptions. There were no options granted under the Plan in 2013 or 2012.
The following table summarizes the non-vested restricted shares activity for the years ended December 31, 2014, 2013, and 2012:
During 2012, the Company granted an aggregate of 29,675 A ordinary shares to key employees at a weighted average grant date fair value of $18.60 per share which vest 33 1/3% on each subsequent anniversary date of the grant for a period of three years. During 2012, the Company granted an aggregate of 50,885 A ordinary shares, at a weighted average grant date fair value of $20.29 per share to non-employee Directors under the previous share incentive plan. The fully vested director restricted shares were granted from shares previously forfeited.
16.5%, 16.5%, and 17.0% of the granted stock vest on the first, second, and third anniversary of the grant, respectively.
50.0% of granted stock vests 100% on the anniversary of the third year subject to accident year true-up of bonus year underwriting results and are subject to Board approval.
During 2014, the Company granted an aggregate of 95,694 A ordinary shares to key employees at a weighted average grant date fair value of $25.37 per share under the Plan. Of the shares granted in 2014, 5,671 were granted to a key employee and vest 33 1/3% on each subsequent anniversary date of the award for a period of three years and 11,857 were granted to the Company’s Chief Executive Officer and vest 33 1/3% on each subsequent anniversary date of the grant for a period of three years subject to an accident year true-up of bonus year underwriting results as of the third anniversary of the grant. The remaining 78,166 shares were granted to key employees and will vest as follows:
During 2014, the Company granted 36,608 A ordinary shares, at a weighted average grant date fair value of $26.46 per share, to non-employee directors of the Company under the Plan. An additional 18,838 A ordinary shares were issued to non-employee directors on June 12, 2014. These shares were earned by non-employee directors prior to January 1, 2014 and were conditioned on shareholders’ approval of the Plan at the Company’s June 11, 2014 annual shareholder meeting. The shareholders approved the plan at the June 11, 2014 annual shareholder meeting.
All of the shares granted to non-employee directors in 2014, 2013, and 2012 were fully vested but subject to certain restrictions.
Ms. Valko’s terms of employment included two equity components including the granting of 300,000 stock options with a strike price equal to the closing price of the Company’s shares on the trading day preceding the start date, or $17.87 per share, and an annual bonus opportunity of which 50% shall be paid in restricted shares based on the market value of the Company’s shares as of December 31 of the subject bonus year. The stock options vested 33 1/3% on December 31, 2012, 2013, and 2014 pending Board approval at the time of vesting. The restricted shares vest 33 1/3% on each anniversary of the subject bonus year. All equity components based on performance are subject to accident year true-up of bonus year underwriting results and are subject to Board approval.
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 $1.2 million, $1.2 million, and $1.1 million for the years ended December 31, 2014, 2013, and 2012, respectively.
The weighted average shares outstanding used to determine dilutive earnings per share for the years ended December 31, 2014, 2013 and 2012 do not include 312,500, 12,500 and 452,450 shares, respectively, which were deemed to be anti-dilutive.
The following are tabulations of business segment information for the years ended December 31, 2014, 2013, and 2012. Corporate information is included to reconcile segment data to the consolidated financial statements.
(3) Includes excise tax of $1,114 related to cessions from Insurance Operations to Reinsurance Operations.
(4) Comprised of Global Indemnity Reinsurance’s total assets less its investment in subsidiaries.
The Company paid the following net federal income taxes and cash interest for 2014, 2013, and 2012:
$87.7 million was allocated to tangible net assets, approximately $27.5 million was allocated to intangible assets, primarily the value of business acquired (“VOBA”), and $2.7 million was allocated to goodwill. Under the
purchase method of accounting, goodwill is not amortized but is tested for impairment at least annually. Pursuant to the Company’s 338(h)(10) election, goodwill is expected to be tax deductible and will be amortized over a period of 15 years.
Goodwill of $2.7 million consists largely of the synergies and economies of scales expected from combining the operations of Global Indemnity and American Reliable. The Company has not yet determined the amount of goodwill to be assigned to each reportable segment.