At December 31, 2020, office space leased in Bala Cynwyd, Pennsylvania, holds the Commercial Specialty segment’s principal executive offices and headquarters. Office space leased in Arizona is used by the Company’s Specialty Property segment. Office space leased in Nebraska is used by the Company’s Farm, Ranch & Stable segment. Office space leased in Cavan, Ireland is used to support the operating needs of the Insurance and Reinsurance Operations. The leases for the properties listed are held by various Company subsidiaries. The Company believes the properties listed are suitable and adequate to meet its needs. Additionally, a number of the Company’s personnel work remotely and almost all of the Company’s personnel have the ability to work remotely.
2019 loss and combined ratios reflect a $32.8 million reduction of net losses and loss adjustment expenses
On December 1, 2020, Michele A. Colucci informed the Company that she was resigning from the Board effective at the conclusion of the Board’s meeting held on December 5, 2020 and December 6, 2020.
In connection with the resignation of Ms. Valko and Ms. Colucci, the size of the Board has been reduced from eight to six directors.
On August 28, 2020, the Company completed its plan to redomesticate to the United States. Please see Note 2 of the notes to the consolidated financial statements in Item 8 of Part II of this report for additional information on the redomestication.
In August 2020, GBLI Holdings and Global Indemnity Limited redeemed the entire outstanding $100 million aggregate principal amount of 7.75% Subordinated Notes due 2045 (the “2045 Notes”).
During 2020, the Board of Directors approved a dividend payment of $0.25 per common share to all shareholders of record on the close of business on March 24, 2020 and June 23, 2020 and approved a distribution payment of $0.25 per common share to all shareholders of record on the close of business on September 25, 2020 and December 24, 2020. Dividends / distributions paid were $14.3 million during the year ended December 31, 2020. In addition, distributions of $0.1 million were paid to Global Indemnity Group, LLC’s preferred shareholders during the year ended December 31, 2020.
AM Best has seven Rating Categories in the AM Best Financial Strength Rating Scale. The categories ranging from best to worst are Superior, Excellent, Good, Fair, Marginal, Weak and Poor. Within each rating category, there are rating notches of plus or minus to show additional gradation of the ratings. On September 23, 2020, AM Best assigned the Company’s insurance subsidiaries a financial strength rating of "A" (Excellent).
The Company operates and manages its business through four business segments: Commercial Specialty, Specialty Property, Farm, Ranch & Stable, and Reinsurance Operations.
The Company’s Specialty Property segment, primarily via American Reliable, offers specialty personal lines property and casualty insurance products through a group of approximately 225 agents, primarily comprised of wholesale general agents, with specific binding authority.
The Company’s Farm, Ranch & Stable segment, primarily via American Reliable, provides specialized property and casualty coverage including Commercial Farm Auto and Excess/Umbrella Coverage for the agriculture industry as well as specialized insurance products for the equine mortality and equine major medical industry. These insurance products are sold through a group of approximately 220 agents, primarily comprised of wholesalers and retail agents, with a selected number having specific binding authority.
The Company’s Reinsurance Operations provides reinsurance solutions through brokers and on a direct basis. It uses its capital capacity to write niche and specialty-focused treaties and business which meet the Company’s risk tolerance and return thresholds. Prior to the redomestication, the Company’s Reinsurance Operations consisted solely of the operations of Global Indemnity Reinsurance. In connection with the redomestication, Global Indemnity Reinsurance merged into Penn-Patriot Insurance Company and all of its business was assumed by the Company’s existing insurance company subsidiaries.
In developing losses and loss adjustment expense ("loss" or "losses") reserve estimates for the Company’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, Collectibles, 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 Average Loss method multiplies a projected number of ultimate incurred 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.
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 11 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.
See Note 9 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, 2020 and 2019. For a listing of the ten reinsurers for which the Company has the largest reinsurance asset amounts as of December 31, 2020, 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 whether the decline in fair value below amortized cost basis has resulted from a credit loss or other factors, such as changes in interest rates. In assessing whether a credit loss exists, the Company compares the present value of the cash flows expected to be collected from the security to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis of the security, a credit loss exists and an allowance for expected credit losses is recorded. Subsequent changes in the allowances are recorded in the period of change as either credit loss expense or reversal of credit loss expense. Any impairments related to factors other than credit losses or the intent to sell are recorded through 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. See Note 4 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 as well as an analysis of the Company’s securities with gross unrealized losses as of December 31, 2020 and 2019.
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, 2020.
Impairment of intangible assets with indefinite useful lives is tested at least annually and more frequently as circumstances warrant in accordance with applicable accounting guidance. Accounting guidance allows for the testing of intangible assets for impairment using both qualitative and quantitative factors. Impairment of indefinite lived intangible assets is recognized only if the carrying amount of the intangible assets exceeds the fair value of said assets. The amount of the impairment loss would be equal to the excess carrying value of the assets over the fair value of said assets. Based on the qualitative assessment performed, there were no impairments of indefinite lived intangible assets as of December 31, 2020.
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 earned premiums.
Gross written premiums represent the amount received or to be received for insurance policies written without reduction for reinsurance costs or other deductions.
Net earned premiums within the Farm, Ranch & Stable segment increased by 3.0% for the year ended December 31, 2019 as compared to the same period in 2018 primarily due to a growth of the business as a result of adding new agents. Property net earned premiums were $50.9 million and $49.6 million for the years ended December 31, 2019 and 2018, respectively. Casualty net earned premiums were $20.4 million and $19.6 million for the years ended December 31, 2019 and 2018, respectively.
Net earned premiums within the Reinsurance Operations segment increased by 47.8% for the year ended December 31, 2019 as compared to the same period in 2018 primarily due to growth in gross written premiums within the property catastrophe line of business as well as the new casualty treaty entered into during 2019. Property net earned premiums were $56.8 million and $45.2 million for the years ended December 31, 2019 and 2018, respectively. Casualty net earned premiums were $19.2 million and $6.2 million for the years ended December 31, 2019 and 2018, respectively.
The current accident year property non-catastrophe loss ratio for 2020 increased by 3.7 points compared to 2019. The increase in the loss ratio primarily reflects a higher claims severity as the claims incurred frequency was up slightly at twelve months of development from last year. The current accident year property non-catastrophe loss ratio for 2019 improved by 1.7 points compared to 2018. The loss ratio improvement reflects a lower claims severity compared to last year as each accident quarter except for the third accident quarter had a lower claims severity compared to the same accident quarters last year. The twelve-month claims incurred frequency was unchanged from last year.
The calendar year loss ratio for the years ended December 31, 2020, 2019, and 2018 includes a decrease of $17.6 million, or 6.2% percentage points, a decrease of $18.4 million or 7.7% percentage points, and a decrease of $7.3 million or 3.3% percentage points, respectively, related to reserve development on prior accident years. Please see Note 11 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.
The expense ratio improved 4.0 points from 40.6% for 2019 to 36.6% for 2020 primarily due to higher earned premiums.
COVID-19 could result in declines in business, non-payment of premiums, and increases in claims that could adversely affect Commercial Specialty’s business, financial condition, and results of operation.
Includes business written by American Reliable that is ceded to insurance companies owned by Assurant under a 100% quota share reinsurance agreement of less than $0.1 million, ($0.3) million, and ($2.1) million during the years ended December 31, 2020, 2019, and 2018, respectively.
Other income was $1.7 million, $1.8 million and $1.8 million for the years ended December 31, 2020, 2019, and 2018, respectively. Other income is primarily comprised of fee income.
The current accident year property non-catastrophe loss ratio for 2020 improved by 10.1 points compared to 2019. The improvement in the loss ratio recognizes a lower claims frequency and severity compared to last year. The current accident year property non-catastrophe loss ratio for 2019 improved by 5.7 points compared to 2018. The decrease in the loss ratio reflects a lower claims frequency compared to last year.
The calendar year loss ratio for the years ended December 31, 2020, 2019, and 2018 includes a decrease of $6.6 million, or 5.0 percentage points, a decrease of $10.9 million, or 7.7 percentage points, and an decrease of $7.9 million, or 6.1 percentage points, respectively, related to reserve development on prior accident years. Please see Note 11 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.
The expense ratio increased 0.3 points from 41.9% for 2019 to 42.2% for 2020 primarily due to a reduction in net earned premiums as discussed above.
The components of income from the Company’s Farm, Ranch & Stable segment and corresponding underwriting ratios are as follows:
Includes excise tax related to cessions from the Company’s Farm, Ranch & Stable segment to its Reinsurance Operations of $0.1 million for the year ended December 31, 2018. Due to the termination of the quota share agreement in 2018, there was no excise tax related to cessions from the Company’s Farm, Ranch & Stable segment to its Reinsurance Operations for the years ended December 31, 2020 and 2019.
Other income was $0.1 million, $0.1 million and $0.2 million for the years ended December 31, 2020, 2019, and 2018, respectively. Other income is primarily comprised of fee income.
The current accident year property catastrophe loss ratio for 2020 increased by 13.0 points compared to 2019 reflecting a reflecting a higher claims frequency and severity at twelve months of development. The impact from the Midwest derecho on the loss ratio was 7.3 points which was the largest event impacting this segment. The current accident year property catastrophe loss ratio for 2019 improved by 11.3 points compared to 2018 reflecting a lower claims frequency and severity compared to last year.
The calendar year loss ratio for the years ended December 31, 2020, 2019, and 2018 includes a decrease of $2.3 million, or 3.0 percentage points, a decrease of $5.5 million, or 7.8 percentage points, and an decrease of $4.7 million, or 6.9 percentage points, respectively, related to reserve development on prior accident years. Please see Note 11 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.
The expense ratio improved 2.3 points from 41.4% for 2019 to 39.1% for 2020 primarily due to higher earned premiums.
The calendar year loss ratio for the years ended December 31, 2020, 2019, and 2018 includes a decrease of $5.0 million, or 6.8 percentage points, an increase of $1.9 million or 2.6 percentage points, and a decrease of $8.9 million or 17.3 percentage points, respectively, related to reserve development on prior accident years. Please see Note 11 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.
COVID-19 could result in declines in business, non-payment of premiums, and increases in claims that could adversely affect the Reinsurance Operations’ business, financial condition, and results of operation.
At December 31, 2020, the Company held agency mortgage-backed securities with a market value of $250.6 million. Excluding the agency mortgage-backed securities, the average duration of the Company’s fixed maturities portfolio was 4.8 years as of December 31, 2020, compared with 4.4 years as of December 31, 2019. Including cash and short-term investments, the average duration of the Company’s fixed maturities portfolio, excluding agency mortgage-backed securities, was 4.4 years as of December 31, 2020, compared to 4.2 years as of December 31, 2019. Changes in interest rates can cause principal payments on certain investments to extend or shorten which can impact duration. At December 31, 2020, the Company’s embedded book yield on its fixed maturities, not including cash, was 2.3% compared with 3.0% at December 31, 2019. The embedded book yield on the $61.2 million of taxable municipal bonds in the Company’s portfolio was 3.0% at December 31, 2020, compared to an embedded book yield of 3.1% on the Company’s taxable municipal bonds of $63.4 million at December 31, 2019.
At December 31, 2019, the Company held agency mortgage-backed securities with a market value of $181.5 million. Excluding the agency mortgage-backed securities, the average duration of the Company’s fixed maturities portfolio was 4.4 years as of December 31, 2019, compared with 3.1 years as of December 31, 2018. Including cash and short-term investments, the average duration of the Company’s fixed maturities portfolio, excluding agency mortgage-backed securities, was 4.2 years as of December 31, 2019 compared with 2.9 years as of December 31, 2018. Changes in interest rates can cause principal payments on certain investments to extend or shorten which can impact duration. At December 31, 2019, the Company’s embedded book yield on its fixed maturities, not including cash, was 3.0% compared with 3.1% at December 31, 2018. The embedded book yield on the $63.8 million of municipal bonds in the Company’s portfolio, which includes $63.4 million of taxable municipal bonds, was 3.2% at December 31, 2019, compared to an embedded book yield of 3.2% on the Company’s municipal bond portfolio of $95.6 million at December 31, 2018.
The components of net realized investment gains (losses) for the years ended December 31, 2020, 2019, and 2018 were as follows:
Corporate and other operating expenses consist of outside legal fees, other professional fees, directors’ fees, management fees & advisory fees, salaries and benefits for holding company personnel, development costs for new products, and taxes incurred which are not directly related to operations. Corporate and other operating expenses were $42.0 million, $18.9 million, and $29.8 million during the years ended December 31, 2020, 2019, and 2018, respectively. The increase in 2020 as compared to 2019 is primarily due to incurring $10.0 million in advisory fees related to the redomestication as well as an increase in legal and professional fees due to the redomestication. See Note 15 of the notes to the consolidated financial statements in Item 8 of Part II of this report for additional information on the redomestication fee. The reduction in 2019 as compared to 2018 is primarily due to incurring an advisory fee related to the Reorganization transaction of $12.5 million during 2018.
Interest expense was $15.8 million, $20.0 million, and $19.7 million during the years ended December 31, 2020, 2019, and 2018, respectively. The reduction in 2020 as compared to 2019 is primarily due to a reduction in the Fed Funds effective interest rate in March, 2020 as well as the redemption of the 2045 Notes and repayment of the margin borrowing facility in August, 2020. The increase in 2019 as compared to 2018 is primarily due to increased borrowings on the Margin Borrowing Facility.
The income tax benefit was $8.1 million for the year ended December 31, 2020 compared with income tax expense of $11.7 million for the year ended December 31, 2019. The increase in income tax benefit was primarily due to higher pre-tax loss for the Company’s U.S. subsidiaries for 2020 as compared to 2019 and the change in tax status which is the income tax benefit recognized on net insurance liabilities that were redomiciled from Bermuda at 0% tax rate to the United States at a 21% tax rate. The income tax expense was $11.7 million for the year ended December 31, 2019 compared with income tax benefit of $19.2 million for the year ended December 31, 2018. The increase in the income tax expense is primarily due to an increase in pretax income in the U.S.
The factors described above resulted in a net loss of $21.0 million, net income of $70.0 million, and a net loss of $56.7 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Global Indemnity Group, LLC is a holding company. Its principal asset is its ownership of the shares of its direct and indirect subsidiaries, including those of its insurance companies: United National Insurance Company, Diamond State Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, Penn-Patriot Insurance Company, and American Reliable Insurance Company.
Global Indemnity Group, LLC’s short term and long term liquidity needs include but are not limited to the payment of corporate expenses, debt service payments, dividend payments to shareholders, and share repurchases. In order to meet their short term and long term needs, Global Indemnity Group, LLC’s principal sources of cash includes dividends from subsidiaries, other permitted disbursements from its direct and indirect subsidiaries, reimbursement for equity awards granted to employees and intercompany borrowings. The principal sources of funds at these direct and indirect subsidiaries include underwriting operations, investment income, proceeds from sales and redemptions of investments, capital contributions, intercompany borrowings, and dividends from subsidiaries. Funds are used principally by these operating subsidiaries to pay claims and operating expenses, to make debt payments, fund margin requirements on interest rate swap agreements, to purchase investments, and to make dividend / distribution payments. In addition, the Company periodically reviews opportunities related to business acquisitions and as a result, liquidity may be needed in the future.
GBLI Holdings, LLC is a holding company which is a wholly-owned subsidiary of Penn-Patriot Insurance Company. GBLI Holdings, LLC’s principal asset is its ownership of the shares of its direct and indirect subsidiaries which include United National Insurance Company, Diamond State Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, and American Reliable Insurance Company. GBLI Holdings, LLC is dependent on dividends from its subsidiaries to meet its debt obligations as well as corporate expense obligations.
Global Indemnity Reinsurance was prohibited, without the approval of the Bermuda Monetary Authority (“BMA”), from reducing by 15% or more its total statutory capital or 25% or more of its total statutory capital and surplus as set out in its previous year’s statutory financial statements, and any application for such approval must include such information as the BMA may require. In June, 2020, the Board of Directors of Global Indemnity Reinsurance declared and paid a dividend of $226 million to its parent company, Global Indemnity Limited. On August 26, 2020, Global Indemnity Reinsurance merged into Penn-Patriot Insurance Company.
Global Indemnity’s insurance companies are required by law to maintain a certain minimum level of policyholders' surplus on a statutory basis. Policyholders' surplus is calculated by subtracting total liabilities from total assets. The NAIC has risk-based capital standards that are designed to identify property and casualty insurers that may be inadequately capitalized based on the inherent risks of each insurer's assets and liabilities and mix of net written premiums. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action. Based on the standards currently adopted, the policyholders’ surplus of each of the insurance companies is in excess of the prescribed minimum company action level risk-based capital requirements.
Excludes a $3.5 million payment related to a purchase price adjustment for American Reliable in 2018. This payment is included in the net cash used in investing activities on the Company’s Consolidated Statement of Cash Flows in 2018. The recovery on loss indemnification, net of the purchase price adjustment, is $41.5 million in 2018. For additional information on the loss indemnification, please see Note 11 of the notes to the consolidated financial statements in Item 8 of Part II of this report.
The Company’s liquidity could be negatively impacted by the cancellation, delays, or non-payment of premiums related to the ongoing COVID-19 pandemic. There is risk that legislation could be passed or there could be a court ruling which would require the Company to cover business interruption claims regardless of terms, exclusions including the virus exclusions contained within the Company’s Commercial Specialty and Farm, Ranch & Stable policies, or other conditions included in policies that would otherwise preclude coverage which would negatively impact liquidity. In addition, the liquidity of the Company’s investment portfolio could be negatively impacted by disruption experienced in global financial markets. Management is taking actions it considers prudent to minimize the impact on the Company’s liquidity. However, given the ongoing uncertainty surrounding the duration, magnitude and geographic reach of COVID-19, the Company is regularly evaluating the impact of COVID-19 on its liquidity.
For 2017, the Company’s U.S. insurance companies participated in quota share reinsurance agreements with Global Indemnity Reinsurance whereby 40% of the net retained business of the U.S. insurance companies was ceded to Global Indemnity Reinsurance. These agreements exclude named storms. As a result of the enactment of the TCJA, effective January 1, 2018, premiums being ceded under the quota share arrangement could potentially be subject to a 10% BEAT tax. As a result, Global Indemnity Reinsurance and the Company’s U.S. insurance companies terminated the quota share arrangement effective January 1, 2018.
Global Indemnity Reinsurance is an unauthorized reinsurer. As a result, any losses and unearned premiums that were ceded to Global Indemnity Reinsurance by the U.S. insurance companies prior to the termination of the quota share arrangement must be collateralized. To satisfy this requirement, Global Indemnity Reinsurance has set up custodial trust accounts on behalf of the U.S. insurance companies. These custodial trust accounts were terminated in 2020 due to the 2018 termination of the quota share arrangement.
Global Indemnity Reinsurance also has established trust accounts to collateralize exposure it has to certain third party ceding companies. As a result of the redomestication, Penn-Patriot Insurance Company now holds these trust accounts. The Company invests the funds in securities that have durations that closely match the expected duration of the liabilities assumed. The Company believes that Penn-Patriot Insurance Company will have sufficient liquidity to pay claims prospectively.
In connection with the Company’s redomestication to the United States, actions were taken to simplify the Company’s organizational structure. Various intercompany capital contributions and distributions took place between many of the Company’s subsidiaries. Several of the Company’s subsidiaries merged into new or existing companies. This included, but was not limited to, the merger of Global Indemnity Reinsurance into Penn-Patriot Insurance Company (“Penn-Patriot”) with Penn-Patriot surviving as well as the amalgamation of Global Indemnity Limited with a newly formed company, New Cayco. The surviving company, New Cayco, then merged into Global Indemnity Group, LLC, a newly formed parent company, with Global Indemnity Group, LLC surviving as the ultimate parent company of the Global Indemnity group of companies. In addition, $541.4 million of intercompany debt between Global Indemnity Limited and Global Indemnity Reinsurance was cancelled. Through a series of transactions, the Company also settled $402.3 million of notes between Global Indemnity Holdings (U.K.) Limited and Global Indemnity Financial (U.K.) Limited in 2020. The cancellation and settlement of these debt arrangements had no impact to the consolidated results of the Company.
On June 16, 2020, GBLI Holdings, LLC entered into a loan agreement with Global Indemnity Reinsurance. Under the terms of the loan agreement, GBLI Holdings, LLC agreed to lend $40.0 million to Global Indemnity Reinsurance by transferring cash and / or securities to Global Indemnity Reinsurance. This loan bore interest at a rate of 0.18% and was due on June 16, 2023. This loan was fully repaid at December 31, 2020.
On August 28, 2020, Global Indemnity Investments, Inc. entered into a promissory note with Global Indemnity Group, LLC for the principal amount of $11.3 million. This note was issued in conjunction with Global Indemnity Investment Inc.’s purchase of limited liability partnership interests from Global Indemnity Group, LLC. The note bears interest at a rate of 1.47% and is due on August 28, 2030. The outstanding balance on the note was $11.3 million at December 31, 2020.
In June, 2020, Global Indemnity Reinsurance declared and paid a dividend of $226.0 million to its parent, Global Indemnity Limited.
The following table presents the summarized balance sheet information as of December 31, 2020.
The following table presents the summarized statement of operations information for the year ended December 31, 2020.
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 forward-looking statements contained in this report are primarily based on the Company’s current expectations and projections about future events and trends that it believes may affect the Company’s business, financial condition, results of operations, prospects, business strategy and financial needs. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions and other factors described in the section captioned “Risk Factors” and elsewhere in this report. These risks are not exhaustive. Other sections of this report include additional factors that could adversely impact the Company’s business and financial performance. Moreover, the Company operates in a very competitive environment. New risks and uncertainties emerge from time to time and it is not possible for the Company to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this report. The Company cannot provide assurance that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
We have audited the accompanying consolidated balance sheets of Global Indemnity Group, LLC (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
At December 31, 2020, the Company’s liability for unpaid losses and loss adjustment expenses was $663 million, of which a significant portion represents incurred but not reported reserves. As described in Note 3 of the consolidated financial statements, the liability for unpaid losses and loss adjustment expenses represents the Company’s best estimate of future amounts needed to pay losses and related settlement expenses with respect to events insured by the Company. The difference between the estimated ultimate loss and loss adjustment expenses and the case incurred loss (paid loss plus case reserve) is considered to be incurred but not reported. There is significant uncertainty inherent in determining management’s best estimate of the ultimate loss and loss adjustment expenses, requiring the use of informed actuarially based estimates and management’s judgment. In particular, the Company’s long-tail reserve categories (such as general liability, construction defect and environmental exposures) are influenced by factors that are subject to significant variation over a long period of time or have high potential severities within the selection and weighting of actuarial methods and assumptions. Assumptions fundamental to the reserving process include claims frequency and severity as well as the review of historical payment and claim reporting patterns.
Global Indemnity Group, LLC (“Global Indemnity”), a Delaware limited liability company formed on June 23, 2020, replaced Global Indemnity Limited, incorporated in the Cayman Islands as an exempted company with limited liability, as the ultimate parent company of the Global Indemnity group of companies as a result of a redomestication transaction completed on August 28, 2020. This transaction resulted in the redomestication of the Company and its Bermuda subsidiary, Global Indemnity Reinsurance Company, Ltd. (“Global Indemnity Reinsurance”), to the United States. Global Indemnity Group, LLC’s class A common shares are publicly traded on the NASDAQ Global Select Market under the ticker symbol GBLI. Global Indemnity Group, LLC’s predecessors have been publicly traded since 2003. See Note 2 below for additional information regarding the redomestication.
During the first quarter of 2019, the Company re-evaluated its Personal Lines segment and determined that Personal Lines should be bifurcated into two reportable segments: Specialty Property and Farm, Ranch & Stable. This is the result of changing how Specialty Property and Farm, Ranch & Stable are managed and reported. Specialty Property is managed out of the Company’s Scottsdale, Arizona office; whereas, Farm, Ranch & Stable is managed out of the Company’s Omaha, Nebraska office. In the past, Farm, Ranch & Stable reported to the Scottsdale, Arizona office and now it reports directly to the Company’s main headquarters in Bala Cynwyd, Pennsylvania. Results for Specialty Property and Farm, Ranch & Stable are separately measured, resources are separately allocated to each of these lines, and employees in each line are now being rewarded based on each line’s separate results. Accordingly, the Company now reports Specialty Property and Farm, Ranch & Stable as two separate reportable segments. In addition, the Company has changed the name of its Commercial Lines segment to Commercial Specialty to better align with its key product offerings. The segment results for the year ended December 31, 2018 have been revised to reflect these changes. See Note 21 for additional information regarding segments.
The Company manages its business through four business segments: Commercial Specialty, Specialty Property, Farm, Ranch & Stable, and Reinsurance Operations. The Company’s Commercial Specialty segment offers specialty property and casualty insurance products in the excess and surplus lines marketplace. The Company manages Commercial Specialty by differentiating them into four product classifications: 1) Penn-America, which markets property and general liability products to small commercial businesses through a select network of wholesale general agents with specific binding authority; 2) United National, which markets insurance products for targeted insured segments, including specialty products, such as property, general liability, and professional lines through program administrators with specific binding authority; 3)Diamond State, which markets property, casualty, and professional lines products, which are developed by the Company’s underwriting department by individuals with expertise in those lines of business, through wholesale brokers and also markets through program administrators having specific binding authority; and 4) Vacant Express, which primarily insures dwellings which are currently vacant, undergoing renovation, or are under construction and is marketed through aggregators, brokers, and retail agents. These product classifications comprise the Company’s Commercial Specialty business segment and are not considered individual business segments because each product has similar economic characteristics, distribution, and coverage. The Company’s Specialty Property segment offers specialty personal lines property and casualty insurance products through general and specialty agents with specific binding authority. The Company’s Farm, Ranch & Stable segment provides specialized property and casualty coverage including Commercial Farm Auto and Excess/Umbrella Coverage for the agriculture industry as well as specialized insurance products for the equine mortality and equine major medical industry. These insurance products are sold through wholesalers and retail agents, with a selected number having specific binding authority. Collectively, the Company’s insurance subsidiaries are licensed in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The Commercial Specialty, Specialty Property, and Farm, Ranch & Stable segments comprise the Company’s Insurance Operations (“Insurance Operations”). The Company’s Reinsurance Operations segment provides reinsurance solutions through brokers and primary writers including insurance and reinsurance companies. Prior to the redomestication transactions, the Company’s Reinsurance Operations consisted solely of the operations of its Bermuda-based wholly-owned subsidiary, Global Indemnity Reinsurance. As part of the redomestication transactions, Global Indemnity Reinsurance was merged with and into Penn-Patriot Insurance Company ("Penn-Patriot"), with Penn-Patriot surviving, resulting in the assumption of Global Indemnity Reinsurance's business by the Global Indemnity group of companies’ existing U.S. insurance company subsidiaries.
At 12:01 a.m., Eastern Time, on August 28, 2020 (the "Effective Time"), Global Indemnity Limited, incorporated in the Cayman Islands as an exempted company with limited liability, completed a scheme of arrangement and amalgamation under Sections 86 and 87 of the Cayman Islands Companies Law (2020 Revision) (the "Scheme of Arrangement") that effected certain transactions (the "Redomestication") that resulted in the shareholders of Global Indemnity Limited becoming the holders of all of the issued and outstanding common shares of Global Indemnity Group, LLC.
The Redomestication was approved by Global Indemnity Limited’s shareholders at a special meeting and an extraordinary general meeting held on August 25, 2020, convened by Order of the Grand Court of the Cayman Islands dated July 22, 2020. The terms and conditions of the issuance of the securities in connection with the Redomestication were sanctioned by the Grand Court of the Cayman Islands pursuant to an Order granted on August 26, 2020 after a hearing upon the fairness of such terms and conditions at which all holders of Global Indemnity Limited ordinary shares had a right to appear and of which adequate notice had been given.
For investments in limited partnerships and limited liability companies where the ownership interest is less than 3%, the Company carries these investments at fair value, and the change in the difference between cost and the fair value of these interests, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in shareholders' equity and, accordingly, has no effect on net income (loss). The Company uses the equity method to account for investments in limited partnerships and limited liability companies where its ownership interest exceeds 3%. The equity method of accounting for an investment in a limited partnership and limited liability company requires that its cost basis be updated to account for the income or loss earned on the investment. The income or loss associated with the limited partnerships and limited liability companies is reflected in the consolidated statements of operations, and the adjusted cost basis approximates fair value.
For fixed maturities, the factors considered in reaching the conclusion that a credit loss exists include, among others, whether:
the extent to which the fair value is less than the amortized cost basis;
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, any allowance for expected credit losses is written off and the amortized cost basis is written down to the fair value of the fixed maturity security with any incremental impairment reported in earnings. That new amortized cost basis shall not be adjusted for subsequent recoveries in fair value.
The Company elected the practical expedient to exclude accrued interest from both the fair value and the amortized cost basis of the available for sale debt securities for the purposes of identifying and measuring an impairment and to not measure an allowance for expected credit losses for accrued interest receivables. Accrued interest receivable is written off through net realized investment gains (losses) at the time the issuer of the bond defaults or is expected to default on payment. The Company made an accounting policy election to present the accrued interest receivable balance with other assets on the Company’s consolidated statements of financial position.
The Company has variable interests in four 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.
The Company regularly reviews the collectability of reinsurance receivables. An allowance for uncollectible reinsurance receivable is recognized based upon the Company’s ongoing review of key aspects of amounts outstanding, including but not limited to, length of collection periods, disputes, applicable coverage defenses, insolvent reinsurers, financial strength of solvent reinsurers based on AM Best Ratings and other relevant factors. Any changes in the allowance resulting from this review are included in net losses and loss adjustment expenses on the consolidated statements of operations during the period in which the determination is made. The allowance for expected credit losses was $9.0 million as of December 31, 2020 and 2019.
The amortization of deferred acquisition costs for the years ended December 31, 2020, 2019, and 2018 was $140.9 million, $132.3 million, and $118.0 million, 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, 2020 or 2019.
The Company uses derivative instruments to manage its exposure to cash flow variability from interest rate risk and limit exposure to severe equity market changes. The derivative instruments are carried on the balance sheet at fair value and included in other assets and other liabilities. Changes in the fair value of the derivative instruments and the periodic net interest settlements under the derivatives instruments are recognized as net realized investment gains (losses) on the consolidated statements of operations.
Upon the formal retirement of treasury stock, Global Indemnity Group, LLC offsets the par value of the treasury stock that is being retired against common shares and reflects any excess of cost over par value as a deduction from Additional Paid-in Capital.
When shares are redeemed, Global Indemnity Group, LLC offsets the par value of the redeemed shares against common shares and reflects any excess of cost over par value as a deduction from Retained Earnings.
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.
Other income is primarily comprised of fee income and foreign exchange gains and losses.
The Company implemented new accounting guidance on January 1, 2020 related to the measurement of expected credit losses on financial instruments. For financial assets held at amortized cost basis, the new guidance requires a forward-looking methodology for in-scope financial assets that reflects expected credit losses and requires consideration of a broader range of information for credit loss estimates, including historical experience, current economic conditions and supportable forecasts that affect the collectability of the financial assets. For available for sale debt securities, credit losses are still measured similar to the old guidance; however, the new guidance requires that credit losses be presented as an allowance rather than as a write-down of the amortized cost basis of the impaired security and allows for the reversal of credit losses in the current period net income (loss). Any impairments related to factors other than credit losses or the intent to sell continue to be recorded through other comprehensive income, net of taxes.
The amortized cost and estimated fair value of the Company’s fixed maturities securities were as follows as of December 31, 2020 and 2019:
As of December 31, 2020 and 2019, the Company held Fannie Mae mortgage pools that totaled as much as 3.9% and 4.2% of shareholders’ equity, respectively. Excluding the Fannie Mae pools, U.S. treasuries, agency bonds, index funds, and limited liability companies and limited partnerships, the Company did not hold any debt or equity investments in a single issuer in excess of 2% and 3% of shareholders' equity at December 31, 2020 and 2019, respectively.
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, 2019. The fair value amounts reported in the table are estimates that are prepared using the process described in Note 6.
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, 2020 concluded the unrealized losses discussed above are non-credit losses on 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 impairment evaluation process is discussed in the “Investment” section of Note 3 (“Summary of Significant Accounting Policies”).
U.S. treasury and agency obligations - As of December 31, 2020, gross unrealized losses related to U.S. treasury and agency obligations were $1.089 million. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, 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. Based on the analysis performed, the Company did not recognize a credit loss on U.S. treasury and agency obligations during the period.
Asset backed securities (“ABS”) - As of December 31, 2020, gross unrealized losses related to asset backed securities were $0.646 million. The weighted average credit enhancement for the Company’s asset backed portfolio is 33.6. This represents the percentage of pool losses that can occur before an asset backed security will incur its first dollar of principal losses. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, every ABS transaction is analyzed on a stand-alone basis. This analysis involves a thorough review of the collateral, prepayment, and structural risk in each transaction. Additionally, the analysis includes an in-depth credit analysis of the originator and servicer of the collateral. The analysis projects an expected loss for a deal given a set of assumptions specific to the asset type. These assumptions are used to calculate at what level of losses the deal will incur its first dollar of principal loss. The major assumptions used to calculate this ratio are loss severities, recovery lags, and no advances on principal and interest. Based on the analysis performed, the Company did not recognize a credit loss on asset backed securities during the period.
Corporate bonds - As of December 31, 2020, gross unrealized losses related to corporate bonds were $0.373 million. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, analysis for this asset class includes maintaining detailed financial models that include a projection of each issuer’s future financial performance, including prospective debt servicing capabilities, capital structure composition, and the value of the collateral. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, the issuer’s current competitive position, its vulnerability to changes in the competitive and regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood of default as well as potential losses in the event of default. Based on the analysis performed, the Company did not recognize a credit loss on corporate bonds during the period.
Foreign bonds - As of December 31, 2020, gross unrealized losses related to foreign bonds were $0.027 million. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, detailed financial models are maintained that include a projection of each issuer’s future financial performance, including prospective debt servicing capabilities, capital structure composition, and the value of the collateral. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, the issuer’s current competitive position, its vulnerability to changes in the competitive and regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood of default as well as potential losses in the event of default. Based on the analysis performed, the Company did not recognize a credit loss on foreign bonds during the period.
The Company recorded the following impairments on its investment portfolio for the years ended December 31, 2020, 2019 and 2018 and are related to securities in an unrealized loss position where the Company had an intent to sell the securities:
Accumulated other comprehensive income, net of tax, as of December 31, 2020 and 2019 was as follows:
The reclassifications out of accumulated other comprehensive income for the years ended December 31, 2020 and 2019 were as follows:
Includes periodic net interest settlements related to the derivatives of $4.5 million, $1.2 million, and $1.9 million for the years ended December 31, 2020, 2019, and 2018, respectively.
The following table shows the calculation of the portion of realized gains and losses related to equity securities held as of December 31, 2020, 2019, and 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, 2020, 2019, and 2018 were as follows:
As of December 31, 2020, the Company held insurance enhanced bonds with a market value of approximately $37.3 million, which represented 2.6% of the Company’s total cash and invested assets, net of payable/receivable for securities purchased and sold. The insurance enhanced bonds are comprised of $15.2 million of municipal bonds, $14.3 million of commercial mortgage-backed securities, and $7.8 million of collateralized mortgage obligations. The financial guarantors of the Company’s $37.3 million of insurance enhanced commercial-mortgage-backed, municipal securities, and collateralized mortgage obligations include Municipal Bond Insurance Association ($3.1 million), Assured Guaranty Corporation ($9.9 million), Federal Home Loan Mortgage Corporation ($22.1 million), and Ambac Financial Group ($2.2 million).
The Company has variable interests in four VIE’s for which it is not the primary beneficiary. These investments are accounted for under the equity method of accounting as their ownership interest exceeds 3% of their respective investments.
The following table summarizes information on the location and the gross amount of the derivatives on the consolidated balance sheets as of December 31, 2020 and 2019:
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, 2020, 2019, and 2018:
Other invested assets consist of limited liability companies and limited partnerships whose carrying value approximates fair value.
The following table provides the fair value and future funding commitments related to these investments at December 31, 2020 and 2019.
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.
This limited partnership invests in REIT qualifying assets such as mortgage loans, investor property loans, and commercial mortgage loans. 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.
This limited liability company invests in a broad portfolio of non-investment grade loans, secured and unsecured corporate debt, credit default swaps, reverse repurchase agreements and synthetic indices. The Company does have the ability to sell its interest by providing notice to the fund.
The Company uses the equity method to account for investments in limited liability companies and limited partnerships where its ownership interest exceeds 3%. The equity method of accounting for an investment in a limited liability companies and limited partnership requires that its cost basis be updated to account for the income or loss earned on the investment. The investment income
Corporate and agency bonds are evaluated by utilizing a spread to a benchmark curve. Bonds with similar characteristics are grouped into specific sectors. Inputs for both asset classes consist of trade prices, broker quotes, the new issue market, and prices on comparable securities.
Data from commercial vendors is aggregated with market information, then converted into an option adjusted spread (“OAS”) matrix and prepayment model used for collateralized mortgage obligations (“CMO”). CMOs are categorized with mortgage-backed securities in the tables listed above. For asset-backed securities, spread data is derived from trade prices, dealer quotations, and research reports. For both asset classes, evaluations utilize standard inputs plus new issue data, and collateral performance. The evaluated pricing models incorporate cash flows, broker quotes, market trades, historical prepayment speeds, and dealer projected speeds.
For obligations of state and political subdivisions, an attribute-based modeling system is used. The pricing model incorporates trades, market clearing yields, market color, and fundamental credit research.
During 2020 and 2019, the Company has not adjusted quotes or prices obtained from the pricing vendors.
As of December 31, 2020 and 2019, definite lived intangible assets, net of accumulated amortization, were $2.0 million and $2.5 million, respectively, and were comprised of customer relationships, agent relationships, and tradenames. There was no impairment of these assets in 2020 or 2019.
Allowance for Expected Credit Losses - Premiums Receivable and Reinsurance Receivables
The Company had the following reinsurance balances as of December 31, 2020 and 2019:
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 $0.4 million at December 31, 2019. There was no adjustment at December 31, 2020.
As of December 31, 2020, the statutory income tax rates of the countries where the Company conducts or conducted business are 21% in the United States, 0% in Bermuda, 0% in the Cayman Islands, 19% in the United Kingdom 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 expected annual taxable income of the Company in each country to estimate the annual income tax expense.
The Company’s income (loss) before income taxes from its non-U.S. subsidiaries and U.S. subsidiaries for the years ended December 31, 2020, 2019, and 2018 were as follows:
The effective income tax benefit rate for 2020 was 27.8%, compared with an effective income tax expense rate of 14.4% and an effective income tax benefit rate of 25.3% for 2019 and 2018, respectively. The increase in the effective income tax benefit for 2020 is primarily due to a pre-tax loss of the Company’s U.S. subsidiaries in 2020 as compared to pre-tax income in 2019. In addition, the income tax benefit for 2020 was also impacted by a change in tax status which is the income tax benefit recognized on net insurance liabilities that were redomiciled from Bermuda at a 0% tax rate to the United States at a 21% tax rate. The increase in the effective income tax expense rate in 2019 compared to 2018 is due to higher pretax income in the U.S. in 2019.
The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets at December 31, 2020 and 2019 are presented below:
The deferred tax assets and deferred tax liabilities listed in the table above relate to temporary differences between the Company’s accounting and tax carrying values and carryforwards for its companies in the United States. Management believes it is more likely than not that the remaining deferred tax assets will be completely utilized in future years. As a result, the Company has not recorded a valuation allowance at December 31, 2020 and 2019.
The Company has a net operating loss (“NOL”) carryforward of $26.2 million as of December 31, 2020, which begins to expire in 2036 based on when the original NOL was generated. The Company’s NOL carryforward as of December 31, 2019 was $21.9 million.
The Company had an alternative minimum tax (“AMT”) credit carryforward of $11.0 million as of December 31, 2019. Under the provisions of the CARES Act, the Company filed a request for a full refund in 2020. The Company received $11.0 million of the AMT credit carryforward during the year ended December 31, 2020.
The Company and some of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various U.S. states and certain foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations by tax authorities for tax years before 2017.
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, 2020, 2019 and 2018. As of December 31, 2020, the Company did not record any liabilities for tax-related interest and penalties on its consolidated balance sheets.
General Liability: A $20.4 million reduction in aggregate with $6.6 million of favorable development in the construction defect reserve category and $13.8 million of favorable development in the other general liability reserve categories. The reduction in the construction defect reserve category primarily recognizes lower than expected claims frequency and severity in the 2005 through 2009, 2012, 2015 and 2017 accident years, slightly offset by an increase in the 2016 accident year. For the other general liability reserve categories, lower than anticipated claims severity was the main driver of the favorable development primarily in the 2005 through 2015 accident years, partially offset by increases in the 2016 through 2019 accident years.
Professional Liability: A $1.8 million decrease mainly in the 2007 through 2010 and 2019 accident years recognizes lower than expected claims severity, partially offset by an increase in the 2006 accident year.
Property: A $5.8 million increase primarily recognizes higher than expected claims severity mainly in the 2013 and 2015 through 2018 accident years, partially offset by a decrease in the 2014 accident year. The bulk of the increase was in the 2018 accident year which reflects a higher estimated ultimate for Hurricane Michael. The increase in ultimate resulted from receiving additional information during the year for a Property Brokerage claim.
The $6.6 million reduction of prior accident year loss reserves related to Specialty Property primarily consisted of the following:
Property: A $4.5 million decrease reflects a decrease in the 2017 accident year catastrophe reserve categories for subrogation recoveries from the California wildfires and mainly recognizes lower than anticipated claims severity in the 2015 through 2018 accident years, partially offset by an increase in the 2019 accident year due to higher than expected claims severity.
General Liability: A $2.1 million decrease primarily recognizes lower than expected claims severity mainly in the 2015 through 2019 accident years.
Liability: A $0.3 million decrease primarily recognizes lower than expected claims severity mainly in the 2009 and 2015 through 2019 accident years, mostly offset by increases in the 2007 and 2013 accident years due to higher than anticipated claims severity.
Property: A $0.9 million decrease in aggregate mainly due to lower than anticipated claims severity in the 2012 through 2016 accident years, partially offset by increases in the 2010, 2017 and 2018 accident years which were impacted by higher than expected claims severity.
Reinsurance: A $1.0 million increase was recognized based on a review of expected ceded recoverables by reinsurer. The increase was primarily in the general liability reserve categories and older accident years.
Liability: A $1.6 million decrease primarily in the 2015 through 2017 accident years recognizes lower than anticipated claims severity, partially offset by increases in the 2013, 2014, and 2018 accident years which reflects higher than expected claims severity.
Professional Liability: A $3.1 million decrease was recognized in the 2008, 2010 and 2013 through 2015 accident years, partially offset by an increase in the 2007 accident year based on a review of the experience reported from the cedants.
Property: A $5.7 million reduction in the property reserve categories. The decrease reflects lower than anticipated claims severity primarily in the 2014 through 2017 accident years.
The Company has exposure to asbestos and environmental (“A&E”) claims. The asbestos exposure primarily arises from the sale of product liability insurance, and the environmental exposure arises from the sale of general liability and commercial multi-peril insurance. In establishing the liability for unpaid losses and loss adjustment expenses related to A&E exposures, management considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities have been established to cover additional exposures on both known and unasserted claims. Estimates of the liabilities are reviewed and updated regularly. Case law continues to evolve for such claims, and uncertainty exists about the outcome of coverage litigation and whether past claim experience will be representative of future claim experience. Included in net unpaid losses and loss adjustment expenses as of December 31, 2020, 2019, and 2018 were IBNR reserves of $27.3 million, $27.1 million, and $27.4 million, respectively, and case reserves of approximately $1.4 million, $2.0 million, and $2.1 million, respectively, for known A&E-related claims.
Specialty Property’s internal actuarial reserve reviews were completed for loss and allocated loss adjustment expenses (ALAE) separately for property excluding catastrophe experience, property catastrophes, and casualty reserve categories. The internal actuarial reserve reviews were completed with data through December, 2020. Actuarial methodologies, such as the Loss Development and Bornhuetter-Ferguson methods, were employed to develop estimates of ultimate Loss & ALAE. Management’s ultimate selections considered the internal actuarial review and a third party actuarial review completed during the 4th quarter of 2020. Case incurred is subtracted from the management selected ultimates to obtain the booked IBNR reserves. These methodologies are consistent with last year.
Farm, Ranch & Stable’s internal actuarial reserve reviews were completed for loss and allocated loss adjustment expenses (ALAE) separately for property excluding catastrophe experience, property catastrophes, and casualty reserve categories. The internal actuarial reserve reviews were completed with data through December, 2020. Actuarial methodologies, such as the Loss Development and Bornhuetter-Ferguson methods, were employed to develop estimates of ultimate Loss & ALAE. Management’s ultimate selections considered the internal actuarial review and a third party actuarial review completed during the 4th quarter of 2020. Case incurred is subtracted from the management selected ultimates to obtain the booked IBNR reserves. These methodologies are consistent with last year.
The payout patterns are calculated using simple averages consistent with last year’s calculation methodology. However, these payout patterns based on simple averages look unusual given the change in estimate of ultimate losses for accident years 2013 through 2015 during the year and due to very minimal yet volatile payment activity for those accident years. Using a weighted average approach would produce smoother payout patterns as less weight is given to the accident years with minimal paid losses. The resulting volume weighted ten year annual payout pattern, for ages one through ten would be 11.7%, 19.5%, 14.4%, 16.9%, 4.8%, 1.7%, 0.2%, 0.5%, 0.4%, and 0.5%, respectively.
Interest expense, including amortization of deferred issuance costs through the date of redemption, recognized on the 2045 Notes was $4.9 million, $7.9 million, and $7.9 million for the years ended December 31, 2020, 2019, and 2018, respectively.
On March 23, 2017, Global Indemnity Limited issued Subordinated Notes due in 2047 in the aggregate principal amount of $120.0 million through an underwritten public offering (the “2047 Notes”). Pursuant to the underwriting agreement, Global Indemnity Limited granted the underwriters a 30 day option to purchase up to an additional $18 million aggregate principal amount of the 2047 Notes solely to cover over-allotments, if any. On March 30, 2017, the underwriters exercised their over-allotment option in the amount of $10 million principal amount of the 2047 Notes. As a result, the aggregate principal amount of the 2047 Notes increased to $130.0 million. The sale of the 2047 Notes pursuant to the over-allotment option closed on March 30, 2017.
The 2047 Notes do not require the maintenance of any financial ratios or specified levels of net worth or liquidity, and do not contain provisions that would afford holders of the 2047 Notes protection in the event of a sudden and dramatic decline in the Company’s credit quality resulting from any highly leveraged transaction, reorganization, restructuring, merger or similar transaction involving the Company that may adversely affect holders. The 2047 Notes do not restrict the Company in any way, now or in the future, from incurring additional indebtedness, including senior indebtedness that would rank senior in right of payment to the 2047 Notes. There is no right of acceleration of maturity of the 2047 Notes in the case of default in the payment of principal, premium, if any, or interest on the 2047 Notes or in the performance of any other obligation of the Company under the notes or if the Company defaults on any other debt securities. Holders may accelerate payment of indebtedness on the 2047 Notes only upon the Company’s bankruptcy, insolvency or reorganization.
The Company incurred $4.2 million in deferred issuance costs associated with the 2047 Notes, which is being amortized over the term of the 2047 Notes. Interest expense, including amortization of deferred issuance costs, recognized on the 2047 Notes was $10.4 million for each of the years ended December 31, 2020, 2019, and 2018.
On August 28, 2020, in connection with the merger of Global Indemnity Limited with and into New Cayco, each of Global Indemnity Limited, as successor to Global Indemnity plc, an Irish public limited company, GBLI Holdings, LLC, a Delaware limited liability company, as co-obligor (the "Co-Obligor"), New CayCo, Wells Fargo Bank, National Association, as trustee (the "Original Trustee"), and U.S. Bank National Association, as series trustee of the 7.875% Subordinated Notes due 2047 (the "Series Trustee" and, together with the Original Trustee, the "Trustees") entered into a Fourth Supplemental Indenture, dated as of August 28, 2020 (the "Fourth Supplemental Indenture"), to the base indenture, dated as of August 12, 2015 (as supplemented, the "Indenture").
There was no sublease income for the years ended December 31, 2020, 2019, and 2018.
The treasury shares of Global Indemnity Limited were not subject to the scheme of arrangement. The carrying value of the Global Indemnity Limited treasury shares, $4.1 million, were offset against the Additional Paid-in Capital account of Global Indemnity Limited, according to the Company’s policy regarding the treatment of treasury shares. Please see Note 2 of the notes to the consolidated financial statements in Item 8 Part II of the Company’s 2019 Annual Report on Form 10-K for more information on the Company’s policy regarding the treatment of treasury shares.
On August 27, 2020, Global Indemnity Group, LLC issued and sold to Wyncote LLC (“Wyncote”), an affiliate of Fox Paine & Company, LLC, 4,000 Series A Preferred Interests at a price of $1,000 per Series A Preferred Interest, for the aggregate purchase price of $4,000,000. The issuance of Series A Preferred Interests to Wyncote was made pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act. The Series A Preferred Interests are not convertible into or exchangeable for any other securities or property of Global Indemnity Group, LLC. The preferred shares are redeemable at the discretion of Global Indemnity Group, LLC after five years or at the discretion of the holders upon the occurrence of a change in control of Global Indemnity Group, LLC. While the preferred shares are non-voting, the preferred shareholders are entitled to appoint two additional members to Global Indemnity Group, LLC’s Board of Directors whenever the “Unpaid Targeted Priority Return” (as defined in the applicable Share Designation) with respect to the preferred shares exceed zero immediately following six or more “Distribution Dates” (as defined in the applicable Share Designation), whether or not such Distribution Dates occur consecutively and Global Indemnity Group, LLC’s Board of Directors is obligated to take, and cause Global Indemnity Group, LLC’s officers to take, any necessary actions to effectuate such appointments, including expanding the size of the Board of Directors, in connection with any exercise of the foregoing provisions.
The ability of Global Indemnity Group, LLC to pay distributions is subject to applicable federal and state laws and Global Indemnity Group, LLC’s LLCA. Distributions of cash or other assets of Global Indemnity Group, LLC may be paid to Global Indemnity Group, LLC’s shareholders out of Global Indemnity Group, LLC’s assets legally available therefor only when, and if determined by the Board. Each Series A Preferred Shareholder is entitled to a “Priority Return” (as defined in the applicable Share Designation). On each Distribution Date, Global Indemnity Group, LLC shall make a distribution to each holder of the Series A Preferred Shares out of, and subject to a determination by the Board that the Company has on the applicable Distribution Date, funds legally available therefor, payable in cash only, in an amount equal to the estimated amount necessary to reduce the Unpaid Priority Return of each Series A Preferred Share immediately after such Distribution Date to zero. All such distributions shall be made pro rata in relation to each such Series A Preferred Share’s Unpaid Priority Return.
During the fourth quarter of 2017, Global Indemnity announced the adoption of a dividend / distribution program. Although subject to the absolute discretion of the Board of Directors and factors, conditions, and prospects as such may exist from time to time when the Board of Directors considers the advisability of declaring a quarterly dividend / distribution, Global Indemnity Group, LLC currently anticipates a distribution rate of $0.25 per share per quarter ($1.00 per share per year).
Represents dividends / distributions declared on unvested shares, net of forfeitures
Dividend payments of $0.25 per common share per quarter were declared during the year ended December 31, 2019 as follows:
In addition, distributions of $0.1 million were paid to Global Indemnity Group, LLC’s preferred shareholders during the year ended December 31, 2020.
As of December 31, 2020 and 2019, accrued dividends on unvested common shares, which were included in other liabilities on the consolidated balance sheets, were $0.7 million and $0.3 million, respectively. Accrued preferred distributions were less than $0.1 million as of December 31, 2020 and were also included in other liabilities on the consolidated balance sheets. There was no accrued preferred distributions at December 31, 2019.
Global Indemnity Group, LLC allows employees to surrender A common 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 2020, 2019, and 2018, Global Indemnity purchased an aggregate of 5,120, 27,028 and 45,233, respectively, of surrendered A common shares from its employees for $0.2 million, $0.9 million and $1.8 million, respectively. All shares purchased from employees by Global Indemnity Group, LLC are held as treasury stock and recorded at cost until formally retired by Global Indemnity Group, LLC.
There were no class B common shares that were surrendered, repurchased, or redeemed in 2019.
As of December 31, 2020, Global Indemnity Group, LLC’s class A common shares were held by approximately 180 shareholders of record. There were four holders of record of Global Indemnity Group, LLC’s class B common shares, all of whom are affiliated investment funds of Fox Paine & Company, LLC, as of December 31, 2020. Global Indemnity Group, LLC’s preferred shares were held by 1 holder of record, an affiliate of Fox Paine & Company, LLC, as of December 31, 2020.
Group, LLC’s Directors due to their controlling share ownership. Global Indemnity Group, LLC’s Chairman is the chief executive and founder of Fox Paine & Company, LLC.
On August 27, 2020, Global Indemnity Group, LLC issued and sold to Wyncote LLC, an affiliate of Fox Paine & Company, LLC, 4,000 Series A Cumulative Fixed Rate Preferred Interests at a price of $1,000 per Series A Preferred Interest, for the aggregate purchase price of $4,000,000. While these preferred interests are non-voting, the preferred shareholders are entitled to appoint two additional members to Global Indemnity Group, LLC’s Board of Directors whenever the “Unpaid Targeted Priority Return” with respect to the preferred interests exceed zero immediately following six or more “Distribution Dates”, whether or not such Distribution Dates occur consecutively. Global Indemnity Group, LLC’s Board of Directors is obligated to take, and cause Global Indemnity Group, LLC’s officers to take, any necessary actions to effectuate such appointments, including expanding the size of the Board of Directors, in connection with any exercise of the foregoing provisions. See Note 14 of the notes to consolidated financial statements in Item 8 of Part II of this report for additional information on the Series A Cumulative Fixed Rate Preferred Interests.
In addition, Fox Paine & Company, LLC may also propose and negotiate transaction fees with the Company subject to the provisions of the Company’s related party transaction and conflict matter policies, including approval of Global Indemnity Group, LLC’s Conflicts Committee of the Board of Directors or Global Indemnity Limited’s Audit Committee of the Board of Directors, for those services from time to time. Each of the Company’s transactions with Fox Paine & Company, LLC described below was reviewed and approved by either Global Indemnity Group, LLC’s Conflicts Committee or Audit Committee, which is composed of independent directors, and the Board of Directors (other than Saul A. Fox, Chairman of the Board of Directors of the Company and Chief Executive of Fox Paine & Company, LLC, who is not a member of the Conflicts Committee and was not a member of Global Indemnity Limited’s Audit Committee and recused himself from the Board of Directors’ deliberations).
On December 21, 2018, GBLI Holdings, LLC exited an investment in a private credit fund pursuant to a sale of GBLI Holdings, LLC’s investment to third parties at par plus accrued interest. Fox Paine & Company, LLC provided services to GBLI Holdings, LLC in connection with the sale, including conducting due diligence to evaluate the private fund, recommending that GBLI Holdings, LLC withdraw from the private fund, and conducting extended negotiations with the private fund to secure GBLI Holdings, LLC’s withdrawal from the private fund on favorable terms. Fox Paine & Company, LLC’s services for GBLI Holdings, LLC in connection with the sale were performed during the second, third, and fourth quarters of 2018. The total fee for these services was $2.0 million which was accrued in the 4th quarter of 2018, which is the period in which the transaction was completed, and was paid in May 2019.
Pursuant to the Management Agreement, Fox Paine & Company, LLC performed extensive financial advisory services for the Company in connection with the conceptualization, design, structuring and implementation of the redomestication plan. In accordance with the Management Agreement, Fox Paine & Company, LLC may propose and negotiate advisory fees for such services with the Company, subject to the provisions of the Company’s related party transaction policies. The Company agreed to pay an advisory fee to Fox Paine & Company, LLC for such services in an amount of $10.0 million during the year ended December 31, 2020. The $10.0 million fee was approved by the Conflicts Committee.
The Company is party to a Management Agreement, as amended, with Fox Paine & Company, LLC, whereby in connection with certain management services provided to it by Fox Paine & Company, LLC, the Company agreed to pay an annual management fee to Fox Paine & Company, LLC. See Note 15 above for additional information pertaining to this management agreement.
There is risk that legislation could be passed or there could be a court ruling which would require the Company to cover business interruption claims regardless of terms, exclusions including the virus exclusions contained within the Company’s Commercial Specialty and Farm, Ranch & Stable policies, or other conditions included in policies that would otherwise preclude coverage.
For the purpose of determining the fair value of stock option awards, the Company uses the Black-Scholes option-pricing model. The Company elected a policy to accrue for compensation cost based on the number of awards that are expected to vest. An estimation of forfeitures is required when recognizing compensation expense which is then adjusted over the requisite service period should actual forfeitures differ from such estimates. Changes in estimated forfeitures are recognized through a cumulative adjustment to compensation in the period of change.
Excess tax benefits and tax deficiencies associated with share-based payment awards are required to be recognized as an income tax benefit or expense in net income (loss) with the corresponding cash flows recognized as an operating activity in the Consolidated Statement of Cash Flow.
In 2014, 300,000 performance-based 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”). Return on equity targets for the 2018 and 2020 bonus years were not met. As a result, 100,000 performance-based options related to the 2018 bonus year and 100,000 performance-based options related to the 2020 bonus year were forfeited. 100,000 performance-based options remain outstanding. The remaining 100,000 performance-based options, which were related to return on equity targets for the 2019 bonus year, vested on December 31, 2019. These options are subject to remeasurement of 2019 bonus year results after the third full calendar year following the bonus year.
The Company recorded $1.6 million, $ 1.1 million, and $0.3 million of compensation expense for stock options under the Plan during the years ended December 31, 2020, 2019, and 2018, respectively.
The Company did not receive any proceeds from the exercise of options during 2020, 2019 or 2018 under the Plan.
The intrinsic value of the exercised options is the difference between the fair market value at time of exercise and the strike price of the option.
There were no options granted under the Plan in 2019. The weighted average fair value of options granted under the Plan was $1.92 in 2020 and $3.79 in 2018 using a Black-Scholes option-pricing model and the following weighted average assumptions.
the weighted average per share exercise price on these shares outstanding is variable. See note below under Chief Executive Officer for additional information.
In addition to stock option grants, the Plan also provides for the granting of restricted shares and restricted stock units to employees and non-employee Directors. The Company recognized compensation expense for restricted stock of $3.2 million, $2.8 million and $3.1 million for 2020, 2019, and 2018, respectively. The total unrecognized compensation expense for the non-vested restricted stock is $0.2 million at December 31, 2020, which will be recognized over a weighted average life of 1.0 years. The Company recognized compensation expense for restricted stock units of $3.2 million and $0.4 million for 2020 and 2019, respectively. There was no compensation expense for restricted stock units in 2018. The total unrecognized compensation expense for the non-vested restricted stock units is $4.7 million at December 31, 2020, which will be recognized over a weighted average life of 1.8 years.
The following table summarizes the non-vested restricted shares activity for the years ended December 31, 2020, 2019, and 2018:
The following table summarizes the non-vested restricted stock units activity for the years ended December 31, 2020, 2019, and 2018:
During 2019, the Company granted 43,680 restricted A common shares, with a weighted average grant date value of $34.23 per share, to key employees under the Plan. 9,063 of these shares vested immediately. 27,117 of these shares will vest as follows:
16.5% vested on January 1, 2020. 16.5% and 17.0% of the restricted stock will vest on January 1, 2021, and January 1, 2022, respectively.
Subject to Board approval, 50% of restricted stock will vest 100%, no later than March 15, 2022, following a remeasurement of 2018 results as of December 31, 2021.
10.0%, 20.0%, 30.0%, and 40.0% of the restricted stock units will vest on June 18, 2021, June 18, 2022, June 18, 2023 and June 18, 2024, respectively.
During 2020, the Company granted 161,238 restricted stock units, with a weighted average grant date value of $30.32 per share, to key employees under the Plan. 3,375 of these restricted stock units will vest evenly over the next three years on January 1, 2021, January 1, 2022 and January 1, 2023.
16.5%, 16.5%, and 17.0% of the restricted stock units will vest on January 1, 2021, January 1, 2022, and January 1, 2023, respectively.
During 2020, the Company granted 108,521 restricted A common shares at a weighted average grant date fair value of $24.86 per share, to non-employee directors of the Company under the plan.
During 2020, the Company granted 41,667 restricted stock units at a weighted average grant date fair value of $24.00 per share, to a non-employee director of the Company under the plan.
On December 10, 2020, the Company entered into a new Chief Executive Agreement (the “Chief Executive Agreement”) with Ms. Valko. The Chief Executive Agreement grants Ms. Valko 300,000 options (“Tranche 4 Options”) to buy Shares, which are in addition to the 900,000 stock options previously granted by the Company to Ms. Valko. 100,000 of the Tranche 4 Options shall have an exercise price equal to the greater of the book value per share of the Company’s Shares on December 31, 2020 and the closing per-share price of the Company’s shares on the last NASDAQ trading day prior to the effective date of the Chief Executive Agreement (“Tranche 4-I Options”). 100,000 of the Tranche 4 Options shall have an exercise price equal to the exercise price of the Tranche 4-I Options, plus $3.09 (“Tranche 4-II Options”). 100,000 of the Tranche 4 Options shall have an exercise price equal to the exercise price of the Tranche 4-II Options, plus $3.33 (“Tranche 4-III Options”). Tranche 4-I Options vest on the earlier of April 1, 2022 or the date a party that is not affiliated with Fox Paine & Company, LLC or Saul Fox acquires 50% or more of the Company’s voting shares (“Change in Control”). Tranche 4-II Options vest on the earlier of April 1, 2023 or a Change in Control. Tranche 4-III Options vest on the earlier of April 1, 2024 or a Change in Control. Vesting is contingent upon Ms. Valko being a Company employee in good standing as of the applicable vesting date. Tranche 4 Options may only be exercised if vested. Tranche 4 Options are subject to the terms of the Company’s stock option plans and ancillary agreements.
Ms. Valko will also be granted fully vested and exercisable options to acquire 300,000 Shares (“Tranche 5 Options”) on September 20, 2021, regardless of whether Ms. Valko is employed by the Company on such date. Tranche 5 Options shall have an exercise price equal to the greater of $17.87 and the closing per-share price of the Shares on the date of grant. Tranche 5 Options are subject to the terms of the Company’s stock option plans and ancillary agreements.
If the Company had not incurred a loss in the years ended December 31, 2020 and 2018, 14,458,008 and 14,325,276 weighted average shares, respectively, would have been used to compute the diluted loss per share calculations. In addition to the basic shares, weighted average shares for the diluted calculations for the years ended December 31, 2020 and 2018 would have included 17,470 and 76,568 shares of non-vested restricted stock, respectively, 57,456 and 0 restricted stock units, respectively, and 91,816 and 159,825 share equivalents for options, respectively.
Based on the standards currently adopted, the Company reported in its 2020 statutory filings that the capital and surplus of the insurance companies are above the prescribed Company Action Level RBC requirements.
The principal differences between statutory financial statements prepared under the Insurance Act and GAAP are as follows:
During the 1st quarter of 2019, the Company re-evaluated its Personal Lines segment and determined that Personal Lines should be bifurcated into two reportable segments: Specialty Property and Farm, Ranch & Stable. In addition, the Company has changed the name of its Commercial Lines segment to Commercial Specialty to better align with its key product offerings. The segment results for the year ended December 31, 2018 have been revised to reflect these changes. Please see Note 1 for additional information related to these segment changes.
All four segments follow the same accounting policies used for the Company’s consolidated financial statements. For further disclosure regarding the Company’s accounting policies, please see Note 3.
Includes federal excise tax of $145 relating to cessions from Farm, Ranch & Stable to Reinsurance Operations.
Includes ($2,062) of business written by American Reliable that was ceded to insurance companies owned by Assurant under a 100% quota share reinsurance agreement.
The Company paid the following net federal income taxes and interest for 2020, 2019, and 2018:
In March 2020, the SEC amended Rule 3-10 of Regulation S-X regarding financial disclosure requirements for registered debt offerings involving subsidiaries as either issuers or guarantors and affiliates whose securities are pledged as collateral. This new guidance narrows the circumstances that require separate financial statements of subsidiary issuers and guarantors and streamlines the alternative disclosures required in lieu of those statements. This rule is effective January 4, 2021 with early adoption permitted. The Company adopted this new standard in the fourth quarter of 2020. Accordingly, summarized financial information has been presented only for the parent and subsidiary co-obligor of the Company’s registered debt securities for the most recent fiscal year. The location of the required disclosures has been moved outside the Notes to Consolidated Financial Statements and is provided in the “Liquidity and Capital Resources - Co-obligor Financial Information” section of “Management’s Discussion and Analysis of Results of Operations and Financial Condition’ in Item 7 of Part II of this report.
In August, 2018, the FASB issued new accounting guidance which removed, modified, and added certain disclosures related to Topic 820, Fair Value. The affected disclosures are related to transfers between fair value levels, level 3 assets, and investments in certain entities that calculate net asset value. This guidance is effective for all fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2020. The adoption of this new accounting guidance did not have a material impact on the Company’s financial condition, results of operations, or cash flows.
In January, 2017, the FASB issued updated guidance that simplifies how an entity is required to test goodwill for impairment by eliminating the requirement to calculate the implied fair value of goodwill (i.e. Step 2 of the current goodwill impairment test). Under the new amendments, an entity may still first assess qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized, if any. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. This guidance is effective for public business entities’ annual or interim goodwill impairment testing in fiscal years beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020. The adoption of this new accounting guidance did not have a material impact on the Company’s financial condition, results of operations, or cash flows.
In June, 2016, the FASB issued new accounting guidance addressing the measurement of expected credit losses on financial instruments. The new guidance requires financial assets measured at amortized cost, which includes but are not limited to premiums receivable and reinsurance receivables, to be presented at the net amount expected to be collected over the life of the asset using an allowance for expected credit losses. Changes in the allowance are charged to earnings. The measurement of expected credit losses should consider relevant information about past events, including historical experience, current information, as well as reasonable and supportable forecasts that affect the collectability of the financial assets. For available for sale debt securities, credit losses should be measured similar to the old guidance; however, the new guidance requires that credit losses be presented as an allowance rather than as a write-down of the amortized cost basis of the impaired securities and allows for the reversal of credit losses in the current period net income. In addition, the Company made certain accounting policy elections related to accrued interest receivables which are described in Note 3. The Company adopted this new accounting guidance on January 1, 2020 using a modified-retrospective approach. The adoption of this new accounting guidance and the impact on the Company’s financial condition, results of operations, and cash flows is described primarily within Note 3 and Note 6.
On January 19, 2021, the Company announced that Ms. Valko informed the Board that she would retire effective as of January 31, 2021. In connection with her retirement, Ms. Valko has resigned from her positions as chief executive officer of Global Indemnity Group, LLC and a member of the Board of Directors, in each case effective as of January 15, 2021, although Ms. Valko will continue to serve the Company in an advisory capacity. The size of the Board has been reduced from seven to six directors, effective upon Ms. Valko’s resignation from the Board.
In connection with Ms. Valko’s retirement, the Company has entered into a separation agreement (the “Separation Agreement”) with Ms. Valko. Among other provisions, the Separation Agreement provides for (a) a severance payment of $675,000 to be paid ratably through December 2021, (b) preservation of all vested stock options held by Ms. Valko as of the date of her retirement to remain exercisable until the earlier of (i) 24 months from the date of Ms. Valko’s retirement or (ii) the expiration date of the applicable option, (c) forfeiture or continued vesting, as applicable, of unvested stock options held by Ms. Valko in accordance with their terms, with any such options that vest remaining exercisable for a period 24 to 38 months from the date of Ms. Valko’s retirement depending upon the vesting date, (d) the grant of 300,000 fully vested options as provided in Ms. Valko’s current employment agreement and (e) eligibility for an annual bonus for 2020 and true-up of bonus awards, based on a true-up of underwriting results for the applicable year, in the fourth calendar year following the applicable bonus award for all bonus years that remain open as of the date of retirement, including pro rata payment of bonus awards for January 2021. The receipt of the severance payment and the extension of the term of the stock options are subject to Ms. Valko’s execution of a general release in favor of the Company. The Separation Agreement also includes perpetual confidentiality and mutual non-disparagement provisions, and non-competition and employee and customer non-solicitation provisions effective until January 31, 2023. The foregoing description of the Separation Agreement is qualified in its entirety by the full text of the Separation Agreement, which is filed as Exhibit 10.21 in Item 15 of Part IV of this report.
Effective as of January 19, 2021, the Company named Jonathan E. Oltman as president of the Company’s insurance operations. Mr. Oltman joined the Company in 2014, serving most recently as executive vice president - commercial lines since February 2019. Until Ms. Valko’s successor as chief executive officer of the Company is duly appointed, Mr. Oltman will act as Global Indemnity Group, LLC’s principal executive officer. Mr. Oltman will report directly to the Board through its chairman on a day-to-day basis.
In connection with Mr. Oltman’s appointment, the Company and Mr. Oltman executed an agreement (the “Terms of Employment”) on January 19, 2021 setting forth the principal terms of Mr. Oltman’s employment with the Company. The Company expects to enter into definitive documentation with Mr. Oltman incorporating the provisions set forth in the Terms of Employment.
The Terms of Employment provides for Mr. Oltman’s term of office as president of the Company’s insurance operations to run from January 19, 2021 through December 31, 2023. The Terms of Employment also provides for an annual base salary of $650,000 (“Base Salary”) and an annual bonus opportunity of $487,500 to $812,500 (the “Bonus Opportunity”), payable based on the achievement of certain underwriting results, as determined by the Board, for each year of Mr. Oltman’s term as president of the Company’s insurance operations, with 50% of the Bonus Opportunity payable in cash in the subsequent calendar year and 50% payable in Global Indemnity Group, LLC stock following a true-up of underwriting results for the applicable year in the fourth calendar year following the applicable bonus award.
The Terms of Employment provides for a grant of 140,000 stock options to acquire Global Indemnity Group, LLC shares. One-third of the options will vest on April 1 of each of 2022, 2023 and 2024, subject to the achievement of certain underwriting results for the applicable year as determined by the Board and Mr. Oltman being a Company employee in good standing as of the applicable vesting date. The stock options will be subject to the terms of Global Indemnity Group, LLC’s stock option plans and ancillary agreements.
The foregoing description of the Terms of Employment is qualified in its entirety by the full text of the Terms of Employment, which is filed as Exhibit 10.24 in Item 15 of Part IV of this report.
On February 14, 2021, Global Indemnity Group, LLC’s Board of Directors approved a distribution payment of $0.25 per common share to be paid on March 31, 2021 to all shareholders of record as of the close of business on March 22, 2021.