UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2016
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
001-34809
Commission File Number
GLOBAL INDEMNITY PLC
(Exact name of registrant as specified in its charter)
Ireland | 98-0664891 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
25/28 NORTH WALL QUAY
DUBLIN 1
IRELAND
(Address of principal executive office, including zip code)
353 (0) 49 4891407
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.:
Large accelerated filer | ¨; | Accelerated filer | x; | |||
Non-accelerated filer | ¨; | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 29, 2016, the registrant had outstanding 13,420,978 A Ordinary Shares and 4,133,366 B Ordinary Shares.
Page | ||||||
PART I FINANCIAL INFORMATION | ||||||
Item 1. |
Financial Statements: | |||||
Consolidated Balance Sheets |
2 | |||||
3 | ||||||
4 | ||||||
5 | ||||||
6 | ||||||
Notes to Consolidated Financial Statements (Unaudited) | 7 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
36 | ||||
Item 3. |
68 | |||||
Item 4. |
68 | |||||
PART II OTHER INFORMATION | ||||||
Item 1. |
69 | |||||
Item 1A. |
69 | |||||
Item 2. |
69 | |||||
Item 3. |
69 | |||||
Item 4. |
69 | |||||
Item 5. |
69 | |||||
Item 6. |
69 | |||||
71 |
1
PART I FINANCIAL INFORMATION
GLOBAL INDEMNITY PLC
(In thousands, except share amounts)
(Unaudited) June 30, 2016 |
December 31, 2015 | |||||||
ASSETS | ||||||||
Fixed maturities: |
||||||||
Available for sale, at fair value (amortized cost: $1,292,785 and $1,308,333 ) |
$ | 1,306,955 | $ | 1,306,149 | ||||
Equity securities: |
||||||||
Available for sale, at fair value (cost: $101,867 and $100,157) |
119,008 | 110,315 | ||||||
Other invested assets |
35,798 | 32,592 | ||||||
|
|
|
|
|||||
Total investments |
1,461,761 | 1,449,056 | ||||||
Cash and cash equivalents |
70,647 | 67,037 | ||||||
Premiums receivable, net |
90,275 | 89,245 | ||||||
Reinsurance receivables, net |
115,365 | 115,594 | ||||||
Funds held by ceding insurers |
19,927 | 16,037 | ||||||
Federal income taxes receivable |
4,840 | 4,828 | ||||||
Deferred federal income taxes |
41,028 | 34,687 | ||||||
Deferred acquisition costs |
56,051 | 56,517 | ||||||
Intangible assets |
23,342 | 23,607 | ||||||
Goodwill |
6,521 | 6,521 | ||||||
Prepaid reinsurance premiums |
49,763 | 44,363 | ||||||
Receivable for securities sold |
561 | 172 | ||||||
Other assets |
66,013 | 49,630 | ||||||
|
|
|
|
|||||
Total assets |
$ | 2,006,094 | $ | 1,957,294 | ||||
|
|
|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Liabilities: |
||||||||
Unpaid losses and loss adjustment expenses |
$ | 683,850 | $ | 680,047 | ||||
Unearned premiums |
294,426 | 286,285 | ||||||
Ceded balances payable |
12,386 | 4,589 | ||||||
Contingent commissions |
9,498 | 11,069 | ||||||
Debt |
174,211 | 172,034 | ||||||
Other liabilities |
60,974 | 53,344 | ||||||
|
|
|
|
|||||
Total liabilities |
1,235,345 | $ | 1,207,368 | |||||
|
|
|
|
|||||
Commitments and contingencies (Note 9) |
| | ||||||
Shareholders equity: |
||||||||
Ordinary shares, $0.0001 par value, 900,000,000 ordinary shares authorized; A ordinary shares issued: 16,559,872 and 16,424,546, respectively; A ordinary shares outstanding:13,420,978 and 13,313,751, respectively; B ordinary shares issued and outstanding: 4,133,366 and 4,133,366, respectively |
3 | 3 | ||||||
Additional paid-in capital |
531,542 | 529,872 | ||||||
Accumulated other comprehensive income, net of taxes |
22,076 | 4,078 | ||||||
Retained earnings |
320,376 | 318,416 | ||||||
A ordinary shares in treasury, at cost: 3,138,894 and 3,110,795 shares, respectively |
(103,248 | ) | (102,443 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
770,749 | 749,926 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 2,006,094 | $ | 1,957,294 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
2
GLOBAL INDEMNITY PLC
Consolidated Statements of Operations
(In thousands, except shares and per share data)
(Unaudited) Quarters Ended June 30, |
(Unaudited) Six Months Ended June 30, |
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Revenues: |
||||||||||||||||
Gross premiums written |
$ | 154,319 | $ | 166,515 | $ | 295,685 | $ | 309,384 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums written |
$ | 125,310 | $ | 146,005 | $ | 242,182 | $ | 272,109 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums earned |
$ | 117,804 | $ | 128,877 | $ | 239,440 | $ | 256,214 | ||||||||
Net investment income |
6,562 | 9,141 | 16,308 | 17,382 | ||||||||||||
Net realized investment gains (losses): |
||||||||||||||||
Other than temporary impairment losses on investments |
(1,217 | ) | (1,898 | ) | (2,267 | ) | (2,238 | ) | ||||||||
Other net realized investment gains (losses) |
(2,275 | ) | 8,430 | (8,718 | ) | 5,800 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total net realized investment gains (losses) |
(3,492 | ) | 6,532 | (10,985 | ) | 3,562 | ||||||||||
Other income |
795 | 577 | 1,751 | 1,129 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
121,669 | 145,127 | 246,514 | 278,287 | ||||||||||||
Losses and Expenses: |
||||||||||||||||
Net losses and loss adjustment expenses |
78,111 | 79,560 | 142,895 | 149,179 | ||||||||||||
Acquisition costs and other underwriting expenses |
48,542 | 50,926 | 100,632 | 99,184 | ||||||||||||
Corporate and other operating expenses |
4,255 | 4,334 | 8,058 | 15,874 | ||||||||||||
Interest expense |
2,229 | 535 | 4,444 | 1,040 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
(11,468 | ) | 9,772 | (9,515 | ) | 13,010 | ||||||||||
Income tax benefit |
(6,303 | ) | (1,345 | ) | (11,475 | ) | (4,901 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | (5,165 | ) | $ | 11,117 | $ | 1,960 | $ | 17,911 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Per share data: |
||||||||||||||||
Net income (loss) (1) |
||||||||||||||||
Basic |
$ | (0.30 | ) | $ | 0.44 | $ | 0.11 | $ | 0.70 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
$ | (0.30 | ) | $ | 0.43 | $ | 0.11 | $ | 0.70 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average number of shares outstanding |
||||||||||||||||
Basic |
17,244,075 | 25,454,579 | 17,234,063 | 25,447,398 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
17,244,075 | 25,680,997 | 17,484,980 | 25,659,869 | ||||||||||||
|
|
|
|
|
|
|
|
(1) | For the quarter ended June 30, 2016, diluted loss per share is the same as basic loss per share since there was a net loss for the period. |
See accompanying notes to consolidated financial statements.
3
GLOBAL INDEMNITY PLC
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited) Quarters Ended June 30, |
(Unaudited) Six Months Ended June 30, |
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net income (loss) |
$ | (5,165 | ) | $ | 11,117 | $ | 1,960 | $ | 17,911 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Unrealized holding gains (losses) |
9,875 | (7,087 | ) | 20,005 | (730 | ) | ||||||||||
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss) |
| (1 | ) | (1 | ) | | ||||||||||
Reclassification adjustment for gains included in net income (loss) |
(723 | ) | (917 | ) | (1,693 | ) | (2,716 | ) | ||||||||
Unrealized foreign currency translation gains (losses) |
(312 | ) | 402 | (313 | ) | 164 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income (loss), net of tax |
8,840 | (7,603 | ) | 17,998 | (3,282 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive income (loss), net of tax |
$ | 3,675 | $ | 3,514 | $ | 19,958 | $ | 14,629 | ||||||||
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
GLOBAL INDEMNITY PLC
Consolidated Statements of Changes in Shareholders Equity
(In thousands, except share amounts)
(Unaudited) Six Months Ended June 30, 2016 |
Year Ended December 31, 2015 |
|||||||
Number of A ordinary shares issued: |
||||||||
Number at beginning of period |
16,424,546 | 16,331,577 | ||||||
Ordinary shares issued under share incentive plans |
115,712 | 121,812 | ||||||
Ordinary shares issued to directors |
19,614 | 36,321 | ||||||
B ordinary shares converted to A ordinary shares |
| 7,928,004 | ||||||
Ordinary shares redeemed |
| (8,260,870 | ) | |||||
Ordinary shares issued in connection with American Reliable acquisition |
| 267,702 | ||||||
|
|
|
|
|||||
Number at end of period |
16,559,872 | 16,424,546 | ||||||
|
|
|
|
|||||
Number of B ordinary shares issued: |
||||||||
Number at beginning and end of period |
4,133,366 | 12,061,370 | ||||||
B Ordinary shares converted to A ordinary shares |
| (7,928,004 | ) | |||||
|
|
|
|
|||||
Number at end of period |
4,133,366 | 4,133,366 | ||||||
|
|
|
|
|||||
Par value of A ordinary shares: |
||||||||
Balance at beginning and end of period |
$ | 2 | $ | 2 | ||||
|
|
|
|
|||||
Par value of B ordinary shares: |
||||||||
Balance at beginning and end of period |
$ | 1 | $ | 1 | ||||
|
|
|
|
|||||
Additional paid-in capital: |
||||||||
Balance at beginning of period |
$ | 529,872 | $ | 519,590 | ||||
Share compensation plans |
1,543 | 10,272 | ||||||
Tax benefit on share-based compensation expense |
127 | 10 | ||||||
|
|
|
|
|||||
Balance at end of period |
$ | 531,542 | $ | 529,872 | ||||
|
|
|
|
|||||
Accumulated other comprehensive income, net of deferred income tax: |
||||||||
Balance at beginning of period |
$ | 4,078 | $ | 23,384 | ||||
Other comprehensive income (loss): |
||||||||
Change in unrealized holding gains (losses) |
18,312 | (19,436 | ) | |||||
Change in other than temporary impairment losses recognized in other comprehensive income |
(1 | ) | (10 | ) | ||||
Unrealized foreign currency translation gains (losses) |
(313 | ) | 140 | |||||
|
|
|
|
|||||
Other comprehensive income (loss) |
17,998 | (19,306 | ) | |||||
|
|
|
|
|||||
Balance at end of period |
$ | 22,076 | $ | 4,078 | ||||
|
|
|
|
|||||
Retained earnings: |
||||||||
Balance at beginning of period |
$ | 318,416 | $ | 466,717 | ||||
Ordinary shares redeemed |
| (189,770 | ) | |||||
Net income |
1,960 | 41,469 | ||||||
|
|
|
|
|||||
Balance at end of period |
$ | 320,376 | $ | 318,416 | ||||
|
|
|
|
|||||
Number of treasury shares: |
||||||||
Number at beginning of period |
3,110,795 | 3,064,815 | ||||||
A ordinary shares purchased |
28,099 | 11,895 | ||||||
Elimination of shares indirectly owned by subsidiary |
| 34,085 | ||||||
|
|
|
|
|||||
Number at end of period |
3,138,894 | 3,110,795 | ||||||
|
|
|
|
|||||
Treasury shares, at cost: |
||||||||
Balance at beginning of period |
$ | (102,443 | ) | $ | (101,404 | ) | ||
A ordinary shares purchased, at cost |
(805 | ) | (333 | ) | ||||
Elimination of shares indirectly owned by subsidiary |
| (706 | ) | |||||
|
|
|
|
|||||
Balance at end of period |
$ | (103,248 | ) | $ | (102,443 | ) | ||
|
|
|
|
|||||
Total shareholders equity |
$ | 770,749 | $ | 749,926 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
5
GLOBAL INDEMNITY PLC
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited) Six Months Ended June 30, |
||||||||
2016 | 2015 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 1,960 | $ | 17,911 | ||||
Adjustments to reconcile net income to net cash provided by (used for) operating activities: |
||||||||
Amortization of the value of business acquired |
| 18,743 | ||||||
Amortization and depreciation |
3,229 | 2,334 | ||||||
Amortization of debt issuance costs |
61 | | ||||||
Restricted stock and stock option expense |
1,543 | 8,611 | ||||||
Deferred federal income taxes |
(11,680 | ) | (3,515 | ) | ||||
Amortization of bond premium and discount, net |
5,080 | 7,188 | ||||||
Net realized investment (gains) losses |
10,985 | (3,562 | ) | |||||
Equity in the earnings of equity method limited liability investments |
(2,747 | ) | (1,342 | ) | ||||
Changes in: |
||||||||
Premiums receivable, net |
(1,030 | ) | 1,191 | |||||
Reinsurance receivables, net |
229 | (4,387 | ) | |||||
Funds held by ceding insurers |
(3,890 | ) | (2,863 | ) | ||||
Unpaid losses and loss adjustment expenses |
3,803 | 5,457 | ||||||
Unearned premiums |
8,141 | 2,285 | ||||||
Ceded balances payable |
7,797 | 2,919 | ||||||
Other assets and liabilities, net |
(12,948 | ) | (13,312 | ) | ||||
Contingent commissions |
(1,571 | ) | (3,383 | ) | ||||
Federal income tax receivable/payable |
(12 | ) | (1,530 | ) | ||||
Deferred acquisition costs, net |
466 | (27,140 | ) | |||||
Prepaid reinsurance premiums |
(5,400 | ) | 13,612 | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
4,016 | 19,217 | ||||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Cash release from escrow for business acquisition |
| 113,696 | ||||||
Acquisition of business, net of cash acquired |
| (92,336 | ) | |||||
Proceeds from sale of fixed maturities |
200,045 | 211,542 | ||||||
Proceeds from sale of equity securities |
20,967 | 22,327 | ||||||
Proceeds from sale of preferred stock |
| 1,540 | ||||||
Proceeds from maturity of fixed maturities |
46,741 | 132,180 | ||||||
Proceeds from limited partnership distribution |
2,000 | 4,287 | ||||||
Amounts paid in connection with derivatives |
(12,324 | ) | (521 | ) | ||||
Purchases of fixed maturities |
(236,031 | ) | (393,932 | ) | ||||
Purchases of equity securities |
(20,783 | ) | (22,996 | ) | ||||
Purchases of other invested assets |
(2,459 | ) | | |||||
|
|
|
|
|||||
Net cash used for investing activities |
(1,844 | ) | (24,213 | ) | ||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Net borrowings under margin borrowing facilities |
2,130 | 12,734 | ||||||
Debt issuance cost |
(14 | ) | | |||||
Tax benefit on share-based compensation expense |
127 | 58 | ||||||
Purchase of A ordinary shares |
(805 | ) | (333 | ) | ||||
|
|
|
|
|||||
Net cash provided by (used for) financing activities |
1,438 | 12,459 | ||||||
|
|
|
|
|||||
Net change in cash and cash equivalents |
3,610 | 7,463 | ||||||
Cash and cash equivalents at beginning of period |
67,037 | 58,823 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of period |
$ | 70,647 | $ | 66,286 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
6
1. | Principles of Consolidation and Basis of Presentation |
Global Indemnity plc (Global Indemnity or the Company) was incorporated on March 9, 2010 and is domiciled in Ireland. Global Indemnity replaced the Companys predecessor, United America Indemnity, Ltd., as the ultimate parent company as a result of a re-domestication transaction in July, 2010. The Companys A ordinary shares are publicly traded on the NASDAQ Global Select Market under the trading symbol GBLI.
The Company manages its business through three reportable business segments: Commercial Lines, Personal Lines, and Reinsurance Operations. The Companys Commercial Lines, managed in Bala Cynwyd, PA, offers specialty property and casualty insurance products in the excess and surplus lines marketplace. The Company manages its Commercial Lines by differentiating them into three product classifications: Penn-America, which markets property and general liability products to small commercial businesses through a select network of wholesale general agents with specific binding authority; United National, which markets insurance products for targeted insured segments, including specialty products, such as property, general liability, and professional lines through program administrators with specific binding authority; and Diamond State, which markets property, casualty, and professional lines products, which are developed by the Companys underwriting department by individuals with expertise in those lines of business, through wholesale brokers and also markets through program administrators having specific binding authority. These product classifications comprise the Companys Commercial Lines business segment and are not considered individual business segments because each product has similar economic characteristics, distribution, and coverage. The Companys Personal Lines segment, via the American Reliable Insurance Company (American Reliable) product classification, offers specialty personal lines and agricultural coverage through general and specialty agents with specific binding authority on an admitted basis and is managed in Scottsdale, AZ. Collectively, the Companys U.S. insurance subsidiaries are licensed in all 50 states and the District of Columbia. The Companys Reinsurance Operations consist solely of the operations of its Bermuda-based wholly-owned subsidiary, Global Indemnity Reinsurance Company, Ltd. (Global Indemnity Reinsurance). Global Indemnity Reinsurance is a treaty reinsurer of specialty property and casualty insurance and reinsurance companies. The Companys Reinsurance Operations segment provides reinsurance solutions through brokers and primary writers including insurance and reinsurance companies. The Commercial Lines and Personal Lines segments comprise the Companys U.S. Insurance Operations (Insurance Operations). See Note 12 for additional information regarding segments.
The interim consolidated financial statements are unaudited, but have been prepared in conformity with United States of America generally accepted accounting principles (GAAP), which differs in certain respects from those principles followed in reports to insurance regulatory authorities. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The unaudited consolidated financial statements include all adjustments that are, in the opinion of management, of a normal recurring nature and are necessary for a fair statement of results for the interim periods. Results of operations for the quarters and six months ended June 30, 2016 and 2015 are not necessarily indicative of the results of a full year. The accompanying notes to the unaudited consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements contained in the Companys 2015 Annual Report on Form 10-K.
The consolidated financial statements include the accounts of Global Indemnity and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
7
GLOBAL INDEMNITY PLC
2. | Investments |
The amortized cost and estimated fair value of investments were as follows as of June 30, 2016 and December 31, 2015:
(Dollars in thousands) | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
Other than temporary impairments recognized in AOCI (1) |
|||||||||||||||
As of June 30, 2016 |
||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||
U.S. treasury and agency obligations |
$ | 83,247 | $ | 1,999 | $ | | $ | 85,246 | $ | | ||||||||||
Obligations of states and political subdivisions |
175,427 | 3,877 | (31 | ) | 179,273 | | ||||||||||||||
Mortgage-backed securities |
154,119 | 3,369 | (84 | ) | 157,404 | | ||||||||||||||
Asset-backed securities |
269,093 | 1,286 | (582 | ) | 269,797 | (7 | ) | |||||||||||||
Commercial mortgage-backed securities |
134,472 | 229 | (1,202 | ) | 133,499 | | ||||||||||||||
Corporate bonds and debt |
358,411 | 4,660 | (355 | ) | 362,716 | | ||||||||||||||
Foreign corporate bonds |
118,016 | 1,046 | (42 | ) | 119,020 | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total fixed maturities |
1,292,785 | 16,466 | (2,296 | ) | 1,306,955 | (7 | ) | |||||||||||||
Common stock |
101,867 | 20,975 | (3,834 | ) | 119,008 | | ||||||||||||||
Other invested assets |
35,798 | | | 35,798 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 1,430,450 | $ | 37,441 | $ | (6,130 | ) | $ | 1,461,761 | $ | (7 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Represents the total amount of other than temporary impairment losses relating to factors other than credit losses recognized in accumulated other comprehensive income (AOCI). |
(Dollars in thousands) | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
Other than temporary impairments recognized in AOCI (1) |
|||||||||||||||
As of December 31, 2015 |
||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||
U.S. treasury and agency obligations |
$ | 106,303 | $ | 1,140 | $ | (321 | ) | $ | 107,122 | $ | | |||||||||
Obligations of states and political subdivisions |
203,121 | 2,576 | (457 | ) | 205,240 | | ||||||||||||||
Mortgage-backed securities |
157,753 | 2,113 | (743 | ) | 159,123 | | ||||||||||||||
Asset-backed securities |
261,008 | 435 | (1,421 | ) | 260,022 | (9 | ) | |||||||||||||
Commercial mortgage-backed securities |
142,742 | | (2,352 | ) | 140,390 | | ||||||||||||||
Corporate bonds |
334,720 | 685 | (3,294 | ) | 332,111 | | ||||||||||||||
Foreign corporate bonds |
102,686 | 194 | (739 | ) | 102,141 | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total fixed maturities |
1,308,333 | 7,143 | (9,327 | ) | 1,306,149 | (9 | ) | |||||||||||||
Common stock |
100,157 | 16,118 | (5,960 | ) | 110,315 | | ||||||||||||||
Other invested assets |
32,592 | | | 32,592 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 1,441,082 | $ | 23,261 | $ | (15,287 | ) | $ | 1,449,056 | $ | (9 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Represents the total amount of other than temporary impairment losses relating to factors other than credit losses recognized in accumulated other comprehensive income (AOCI). |
Excluding U.S. treasuries and agency bonds, the Company did not hold any debt or equity investments in a single issuer that was in excess of 5% of shareholders equity at June 30, 2016 or December 31, 2015.
8
GLOBAL INDEMNITY PLC
The amortized cost and estimated fair value of the Companys fixed maturities portfolio classified as available for sale at June 30, 2016, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Dollars in thousands) | Amortized Cost |
Estimated Fair Value |
||||||
Due in one year or less |
$ | 62,502 | $ | 62,746 | ||||
Due after one year through five years |
630,003 | 639,527 | ||||||
Due after five years through ten years |
39,088 | 40,487 | ||||||
Due after ten years through fifteen years |
| | ||||||
Due after fifteen years |
3,508 | 3,495 | ||||||
Mortgage-backed securities |
154,119 | 157,404 | ||||||
Asset-backed securities |
269,093 | 269,797 | ||||||
Commercial mortgage-backed securities |
134,472 | 133,499 | ||||||
|
|
|
|
|||||
Total |
$ | 1,292,785 | $ | 1,306,955 | ||||
|
|
|
|
The following table contains an analysis of the Companys securities with gross unrealized losses, categorized by the period that the securities were in a continuous loss position as of June 30, 2016:
Less than 12 months | 12 months or longer (1) | Total | ||||||||||||||||||||||
(Dollars in thousands) | Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
Obligations of states and political subdivisions |
$ | 4,143 | $ | (12 | ) | $ | 1,066 | $ | (19 | ) | $ | 5,209 | $ | (31 | ) | |||||||||
Mortgage-backed securities |
13,235 | (72 | ) | 322 | (12 | ) | 13,557 | (84 | ) | |||||||||||||||
Asset-backed securities |
73,205 | (404 | ) | 35,766 | (178 | ) | 108,971 | (582 | ) | |||||||||||||||
Commercial mortgage-backed securities |
59,186 | (601 | ) | 50,086 | (601 | ) | 109,272 | (1,202 | ) | |||||||||||||||
Corporate bonds and debt |
38,516 | (336 | ) | 5,181 | (19 | ) | 43,697 | (355 | ) | |||||||||||||||
Foreign corporate bonds |
11,889 | (42 | ) | | | 11,889 | (42 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturities |
200,174 | (1,467 | ) | 92,421 | (829 | ) | 292,595 | (2,296 | ) | |||||||||||||||
Common stock |
30,349 | (3,814 | ) | 127 | (20 | ) | 30,476 | (3,834 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 230,523 | $ | (5,281 | ) | $ | 92,548 | $ | (849 | ) | $ | 323,071 | $ | (6,130 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Fixed maturities in a gross unrealized loss position for twelve months or longer are primarily comprised of non-credit losses on investment grade securities where management does not intend to sell, and it is more likely than not that the Company will not be forced to sell the security before recovery. The Company has analyzed these securities and has determined that they are not other than temporarily impaired. |
The following table contains an analysis of the Companys securities with gross unrealized losses, categorized by the period that the securities were in a continuous loss position as of December 31, 2015:
Less than 12 months | 12 months or longer (1) | Total | ||||||||||||||||||||||
(Dollars in thousands) | Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. treasury and agency obligations |
$ | 79,496 | $ | (321 | ) | $ | | $ | | $ | 79,496 | $ | (321 | ) | ||||||||||
Obligations of states and political subdivisions |
49,708 | (373 | ) | 7,732 | (84 | ) | 57,440 | (457 | ) | |||||||||||||||
Mortgage-backed securities |
63,759 | (743 | ) | | | 63,759 | (743 | ) | ||||||||||||||||
Asset-backed securities |
203,381 | (1,404 | ) | 4,843 | (17 | ) | 208,224 | (1,421 | ) | |||||||||||||||
Commercial mortgage-backed securities |
118,813 | (2,005 | ) | 21,577 | (347 | ) | 140,390 | (2,352 | ) | |||||||||||||||
Corporate bonds |
211,364 | (3,269 | ) | 2,120 | (25 | ) | 213,484 | (3,294 | ) | |||||||||||||||
Foreign corporate bonds |
63,860 | (697 | ) | 5,129 | (42 | ) | 68,989 | (739 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturities |
790,381 | (8,812 | ) | 41,401 | (515 | ) | 831,782 | (9,327 | ) | |||||||||||||||
Common stock |
36,798 | (5,960 | ) | | | 36,798 | (5,960 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 827,179 | $ | (14,772 | ) | $ | 41,401 | $ | (515 | ) | $ | 868,580 | $ | (15,287 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Fixed maturities in a gross unrealized loss position for twelve months or longer are primarily comprised of non-credit losses on investment grade securities where management does not intend to sell, and it is more likely than not that the Company will not be forced to sell the security before recovery. The Company has analyzed these securities and has determined that they are not other than temporarily impaired. |
9
GLOBAL INDEMNITY PLC
The Company regularly performs various analytical valuation procedures with respect to its investments, including reviewing each fixed maturity security in an unrealized loss position to assess whether the security has a credit loss. Specifically, the Company considers credit rating, market price, and issuer specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which the Company determines that a credit loss is likely are subjected to further analysis through discounted cash flow testing to estimate the credit loss to be recognized in earnings, if any. The specific methodologies and significant assumptions used by asset class are discussed below. Upon identification of such securities and periodically thereafter, a detailed review is performed to determine whether the decline is considered other than temporary. This review includes an analysis of several factors, including but not limited to, the credit ratings and cash flows of the securities and the magnitude and length of time that the fair value of such securities is below cost.
For fixed maturities, the factors considered in reaching the conclusion that a decline below cost is other than temporary include, among others, whether:
(1) | the issuer is in financial distress; |
(2) | the investment is secured; |
(3) | a significant credit rating action occurred; |
(4) | scheduled interest payments were delayed or missed; |
(5) | changes in laws or regulations have affected an issuer or industry; |
(6) | the investment has an unrealized loss and was identified by the Companys investment manager as an investment to be sold before recovery or maturity; and |
(7) | the investment failed cash flow projection testing to determine if anticipated principal and interest payments will be realized. |
According to accounting guidance for debt securities in an unrealized loss position, the Company is required to assess whether it has the intent to sell the debt security or more likely than not will be required to sell the debt security before the anticipated recovery. If either of these conditions is met the Company must recognize an other than temporary impairment with the entire unrealized loss being recorded through earnings. For debt securities in an unrealized loss position not meeting these conditions, the Company assesses whether the impairment of a security is other than temporary. If the impairment is deemed to be other than temporary, the Company must separate the other than temporary impairment into two components: the amount representing the credit loss and the amount related to all other factors, such as changes in interest rates. The credit loss represents the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. The credit loss component of the other than temporary impairment is recorded through earnings, whereas the amount relating to factors other than credit losses is recorded in other comprehensive income, net of taxes.
For equity securities, management carefully reviews all securities with unrealized losses to determine if a security should be impaired and further focuses on securities that have either:
(1) | persisted with unrealized losses for more than twelve consecutive months or |
(2) | the value of the investment has been 20% or more below cost for six continuous months or more. |
The amount of any write-down, including those that are deemed to be other than temporary, is included in earnings as a realized loss in the period in which the impairment arose.
The following is a description, by asset type, of the methodology and significant inputs that the Company used to measure the amount of credit loss recognized in earnings, if any:
Obligations of states and political subdivisions As of June 30, 2016, gross unrealized losses related to obligations of states and political subdivisions were $0.031 million. Of this amount, $0.019 million have been in an unrealized loss position for twelve months or greater and are rated A. All factors that influence performance of the municipal bond market are considered in evaluating these securities. The aforementioned factors include investor expectations, supply and demand patterns, and current versus historical yield and spread relationships. The analysis relies on the output of fixed income credit analysts, as well as dedicated municipal bond analysts who perform extensive in-house fundamental analysis on each issuer, regardless of their rating by the major agencies.
10
GLOBAL INDEMNITY PLC
Mortgage-backed securities (MBS) As of June 30, 2016, gross unrealized losses related to mortgage-backed securities were $0.084 million. Of this amount, $0.012 million have been in an unrealized loss position for twelve months or greater and are rated investment grade or better. Mortgage-backed securities are modeled to project principal losses under downside, base, and upside scenarios for the economy and home prices. The primary assumption that drives the security and loan level modeling is the Home Price Index (HPI) projection. The model first projects HPI at the national level, then at the zip-code level based on the historical relationship between the individual zip code HPI and the national HPI. The model utilizes loan level data and borrower characteristics including FICO score, geographic location, original and current loan size, loan age, mortgage rate and type (fixed rate / interest-only / adjustable rate mortgage), issuer / originator, residential type (owner occupied / investor property), dwelling type (single family / multi-family), loan purpose, level of documentation, and delinquency status as inputs. The model also includes the explicit treatment of silent second liens, utilization of loan modification history, and the application of roll rate adjustments.
Asset-backed securities (ABS) - As of June 30, 2016, gross unrealized losses related to asset backed securities were $0.582 million. Of this amount, $0.178 million have been in an unrealized loss position for twelve months or greater and are rated AA or better. The weighted average credit enhancement for the Companys asset backed portfolio is 22.6. This represents the percentage of pool losses that can occur before an asset backed security will incur its first dollar of principal losses. Every ABS transaction is analyzed on a stand-alone basis. This analysis involves a thorough review of the collateral, prepayment, and structural risk in each transaction. Additionally, the analysis includes an in-depth credit analysis of the originator and servicer of the collateral. The analysis projects an expected loss for a deal given a set of assumptions specific to the asset type. These assumptions are used to calculate at what level of losses the deal will incur its first dollar of principal loss. The major assumptions used to calculate this ratio are loss severities, recovery lags, and no advances on principal and interest.
Commercial mortgage-backed securities (CMBS) - As of June 30, 2016, gross unrealized losses related to the CMBS portfolio were $1.202 million. Of this amount, $0.601 million have been in an unrealized loss position for twelve months or greater and are rated A+ or better. The weighted average credit enhancement for the Companys CMBS portfolio is 32.6. This represents the percentage of pool losses that can occur before a mortgage-backed security will incur its first dollar of principal loss. For the Companys CMBS portfolio, a loan level analysis is utilized where every underlying CMBS loan is re-underwritten based on a set of assumptions reflecting expectations for the future path of the economy. In the analysis, the focus is centered on stressing the significant variables that influence commercial loan defaults and collateral losses in CMBS deals. These variables include: (1) a projected drop in occupancies; (2) capitalization rates that vary by property type and are forecasted to return to more normalized levels as the capital markets repair and capital begins to flow again; and (3) property value stress testing using projected property performance and projected capitalization rates. Term risk is triggered if the projected debt service coverage rate falls below 1x. Balloon risk is triggered if a propertys projected performance does not satisfy new tighter mortgage standards.
Corporate bonds and debt - As of June 30, 2016, gross unrealized losses related to corporate bonds and debt were $0.355 million. Of this amount, $0.019 million related to corporate bonds have been in an unrealized loss position for twelve months or greater and are rated investment grade. The analysis for this sector includes maintaining detailed financial models that include a projection of each issuers 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 issuers current competitive position, its vulnerability to changes in the competitive and regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood of default as well as potential losses in the event of default.
Foreign bonds As of June 30, 2016, gross unrealized losses related to foreign bonds were $0.042 million. All unrealized losses have been in an unrealized loss position for less than 12 months. For this sector, detailed financial models are maintained that include a projection of each issuers 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 issuers 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.
Common stock As of June 30, 2016, gross unrealized losses related to common stock were $3.834 million. Of this amount, $0.020 million have been in an unrealized loss position for twelve months or greater. To determine if an other than temporary impairment of an equity security has occurred, the Company considers, among other things, the severity and duration of the decline in fair value of the equity security. The Company also examines other factors to determine if the equity security could recover its value in a reasonable period of time.
11
GLOBAL INDEMNITY PLC
The Company recorded the following other than temporary impairments (OTTI) on its investment portfolio for the quarters and six months ended June 30, 2016 and 2015:
Quarters Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Fixed maturities: |
||||||||||||||||
OTTI losses, gross |
$ | (36 | ) | $ | (13 | ) | $ | (93 | ) | $ | (23 | ) | ||||
Portion of loss recognized in other comprehensive income (pre-tax) |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net impairment losses on fixed maturities recognized in earnings |
(36 | ) | (13 | ) | (93 | ) | (23 | ) | ||||||||
Equity securities |
(1,181 | ) | (1,885 | ) | (2,174 | ) | (2,215 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | (1,217 | ) | $ | (1,898 | ) | $ | (2,267 | ) | $ | (2,238 | ) | ||||
|
|
|
|
|
|
|
|
The following table is an analysis of the credit losses recognized in earnings on fixed maturities held by the Company for the quarters and six months ended June 30, 2016 and 2015 for which a portion of the OTTI loss was recognized in other comprehensive income.
Quarters Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Balance at beginning of period |
$ | 31 | $ | 50 | $ | 31 | $ | 50 | ||||||||
Additions where no OTTI was previously recorded |
| | | | ||||||||||||
Additions where an OTTI was previously recorded |
| | | | ||||||||||||
Reductions for securities for which the company intends to sell or more likely than not will be required to sell before recovery |
| | | | ||||||||||||
Reductions reflecting increases in expected cash flows to be collected |
| | | | ||||||||||||
Reductions for securities sold during the period |
| (19 | ) | | (19 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 31 | $ | 31 | $ | 31 | $ | 31 | ||||||||
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income, Net of Tax
Accumulated other comprehensive income, net of tax, as of June 30, 2016 and December 31, 2015 was as follows:
(Dollars in thousands) | June 30, 2016 | December 31, 2015 | ||||||
Net unrealized gains (losses) from: |
||||||||
Fixed maturities |
$ | 14,170 | $ | (2,184 | ) | |||
Common stock |
17,141 | 10,158 | ||||||
Deferred taxes |
(9,235 | ) | (3,896 | ) | ||||
|
|
|
|
|||||
Accumulated other comprehensive income, net of tax |
$ | 22,076 | $ | 4,078 | ||||
|
|
|
|
12
GLOBAL INDEMNITY PLC
The following tables present the changes in accumulated other comprehensive income, net of tax, by component for the quarters and six months ended June 30, 2016 and 2015:
Quarter Ended June 30, 2016 (Dollars in thousands) |
Unrealized Gains and Losses on Available for Sale Securities, Net of Tax |
Foreign Currency Items, Net of Tax |
Accumulated Other Comprehensive Income, Net of Tax |
|||||||||
Beginning balance |
$ | 13,359 | $ | (123 | ) | $ | 13,236 | |||||
Other comprehensive income (loss) before reclassification |
9,873 | (310 | ) | 9,563 | ||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
(721 | ) | (2 | ) | (723 | ) | ||||||
|
|
|
|
|
|
|||||||
Other comprehensive income (loss) |
9,152 | (312 | ) | 8,840 | ||||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 22,511 | $ | (435 | ) | $ | 22,076 | |||||
|
|
|
|
|
|
|||||||
Quarter Ended June 30, 2015 (Dollars in thousands) |
Unrealized Gains and Losses on Available for Sale Securities, Net of Tax |
Foreign Currency Items, Net of Tax |
Accumulated Other Comprehensive Income, Net of Tax |
|||||||||
Beginning balance |
$ | 28,206 | $ | (501 | ) | $ | 27,705 | |||||
Other comprehensive income (loss) before reclassification |
(6,845 | ) | 159 | (6,686 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
(1,160 | ) | 243 | (917 | ) | |||||||
|
|
|
|
|
|
|||||||
Other comprehensive income (loss) |
(8,005 | ) | 402 | (7,603 | ) | |||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 20,201 | $ | (99 | ) | $ | 20,102 | |||||
|
|
|
|
|
|
|||||||
Six Months Ended June 30, 2016 (Dollars in thousands) |
Unrealized Gains and Losses on Available for Sale Securities, Net of Tax |
Foreign Currency Items, Net of Tax |
Accumulated Other Comprehensive Income, Net of Tax |
|||||||||
Beginning balance |
$ | 4,200 | $ | (122 | ) | $ | 4,078 | |||||
Other comprehensive income (loss) before reclassification |
20,002 | (311 | ) | 19,691 | ||||||||
Amounts reclassified from accumulated other comprehensive |
(1,691 | ) | (2 | ) | (1,693 | ) | ||||||
|
|
|
|
|
|
|||||||
Other comprehensive income (loss) |
18,311 | (313 | ) | 17,998 | ||||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 22,511 | $ | (435 | ) | $ | 22,076 | |||||
|
|
|
|
|
|
13
GLOBAL INDEMNITY PLC
Six Months Ended June 30, 2015 (Dollars in thousands) |
Unrealized Gains and Losses on Available for Sale Securities, Net of Tax |
Foreign Currency Items, Net of Tax |
Accumulated Other Comprehensive Income, Net of Tax |
|||||||||
Beginning balance |
$ | 23,647 | $ | (263 | ) | $ | 23,384 | |||||
Other comprehensive loss before reclassification |
(404 | ) | (162 | ) | (566 | ) | ||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
(3,042 | ) | 326 | (2,716 | ) | |||||||
|
|
|
|
|
|
|||||||
Other comprehensive income (loss) |
(3,446 | ) | 164 | (3,282 | ) | |||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 20,201 | $ | (99 | ) | $ | 20,102 | |||||
|
|
|
|
|
|
The reclassifications out of accumulated other comprehensive income for the quarters and six months ended June 30, 2016 and 2015 were as follows:
(Dollars in thousands) | Amounts Reclassified from Accumulated Other Comprehensive Income |
|||||||||
Quarters Ended June 30, | ||||||||||
Details about Accumulated Other Comprehensive Income Components |
Affected Line Item in the Consolidated Statements of Operations |
2016 | 2015 | |||||||
Unrealized gains and losses on available for sale securities |
Other net realized investment gains |
$ | (2,295 | ) | $ | (3,745 | ) | |||
Other than temporary impairment losses on investments |
1,217 | 1,897 | ||||||||
|
|
|
|
|||||||
Total before tax | (1,078 | ) | (1,848 | ) | ||||||
Income tax expense | 357 | 688 | ||||||||
|
|
|
|
|||||||
Unrealized gains on available for sale |
$ | (721 | ) | $ | (1,160 | ) | ||||
|
|
|
|
|||||||
Foreign currency items |
Other net realized investment (gains) losses |
$ | (4 | ) | $ | 373 | ||||
Income tax expense (benefit) | 2 | (130 | ) | |||||||
|
|
|
|
|||||||
Foreign currency items, net of tax | $ | (2 | ) | $ | 243 | |||||
|
|
|
|
|||||||
Total reclassifications |
Total reclassifications, net of tax |
$ | (723 | ) | $ | (917 | ) | |||
|
|
|
|
14
GLOBAL INDEMNITY PLC
(Dollars in thousands) | Amounts Reclassified from Accumulated Other Comprehensive Income |
|||||||||
Six Months Ended June 30, | ||||||||||
Details about Accumulated Other Comprehensive Income Components |
Affected Line Item in the Consolidated Statements of Operations |
2016 | 2015 | |||||||
Unrealized gains and losses on available for sale securities |
Other net realized investment gains |
$ | (4,830 | ) | $ | (7,126 | ) | |||
Other than temporary impairment losses on investments |
2,267 | 2,238 | ||||||||
|
|
|
|
|||||||
Total before tax | (2,563 | ) | (4,888 | ) | ||||||
Income tax expense | 872 | 1,846 | ||||||||
|
|
|
|
|||||||
Unrealized gains and losses on available for sale securities, net of tax |
$ | (1,691 | ) | $ | (3,042 | ) | ||||
|
|
|
|
|||||||
Foreign currency items |
Other net realized investment (gains) losses |
$ | (4 | ) | $ | 501 | ||||
Income tax expense (benefit) | 2 | (175 | ) | |||||||
|
|
|
|
|||||||
Foreign currency items, net of tax | $ | (2 | ) | $ | 326 | |||||
|
|
|
|
|||||||
Total reclassifications |
Total reclassifications, net of tax |
$ | (1,693 | ) | $ | (2,716 | ) | |||
|
|
|
|
Net Realized Investment Gains (Losses)
The components of net realized investment gains (losses) for the quarters and six months ended June 30, 2016 and 2015 were as follows:
Quarters Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Fixed maturities: |
||||||||||||||||
Gross realized gains |
$ | 637 | $ | 746 | $ | 818 | $ | 1,479 | ||||||||
Gross realized losses |
(71 | ) | (110 | ) | (144 | ) | (241 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net realized gains |
566 | 636 | 674 | 1,238 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Common stock: |
||||||||||||||||
Gross realized gains |
2,158 | 3,371 | 4,723 | 5,923 | ||||||||||||
Gross realized losses |
(1,642 | ) | (2,532 | ) | (2,830 | ) | (2,870 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net realized gains |
516 | 839 | 1,893 | 3,053 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Preferred stock: |
||||||||||||||||
Gross realized gains |
| | | 96 | ||||||||||||
Gross realized losses |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net realized gains |
| | | 96 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Derivatives: |
||||||||||||||||
Gross realized gains |
| 6,353 | | 1,873 | ||||||||||||
Gross realized losses |
(4,574 | ) | (1,296 | ) | (13,552 | ) | (2,698 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net realized gains (losses) |
(4,574 | ) | 5,057 | (13,552 | ) | (825 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total net realized investment gains (losses) |
$ | (3,492 | ) | $ | 6,532 | $ | (10,985 | ) | $ | 3,562 | ||||||
|
|
|
|
|
|
|
|
15
GLOBAL INDEMNITY PLC
The proceeds from sales of available-for-sale securities resulting in net realized investment gains for the six months ended June 30, 2016 and 2015 were as follows:
Six Months Ended June 30, | ||||||||
(Dollars in thousands) | 2016 | 2015 | ||||||
Fixed maturities |
$ | 200,045 | $ | 211,542 | ||||
Equity securities |
20,967 | 22,327 | ||||||
Preferred stock |
| 1,540 |
Net Investment Income
The sources of net investment income for the quarters and six months ended June 30, 2016 and 2015 were as follows:
Quarters Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Fixed maturities |
$ | 7,374 | $ | 8,022 | $ | 14,598 | $ | 16,036 | ||||||||
Equity securities |
760 | 924 | 1,949 | 1,716 | ||||||||||||
Cash and cash equivalents |
37 | 9 | 67 | 27 | ||||||||||||
Other invested assets |
863 | 1,089 | 2,897 | 1,342 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment income |
9,034 | 10,044 | 19,511 | 19,121 | ||||||||||||
Investment expense (1) |
(2,472 | ) | (903 | ) | (3,203 | ) | (1,739 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net investment income |
$ | 6,562 | $ | 9,141 | $ | 16,308 | $ | 17,382 | ||||||||
|
|
|
|
|
|
|
|
(1) | Investment expense for both the quarter and six months ended June 30, 2016 include $1.5 million in upfront fees necessary to enter into a new investment. See Note 9 for additional information on the Companys $40 million commitment related to this new investment. |
The Companys total investment return on a pre-tax basis for the quarters and six months ended June 30, 2016 and 2015 were as follows:
Quarters Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Net investment income |
$ | 6,562 | $ | 9,141 | $ | 16,308 | $ | 17,382 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net realized investment gains (losses) |
(3,492 | ) | 6,532 | (10,985 | ) | 3,562 | ||||||||||
Change in unrealized holding gains and losses |
11,529 | (9,752 | ) | 23,337 | (5,155 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net realized and unrealized investment returns |
8,037 | (3,220 | ) | 12,352 | (1,593 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment return |
$ | 14,599 | $ | 5,921 | $ | 28,660 | $ | 15,789 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment return % (1) |
1.0 | % | 0.3 | % | 1.9 | % | 0.9 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Average investment portfolio (2) |
$ | 1,519,556 | $ | 1,776,326 | $ | 1,524,617 | $ | 1,758,103 | ||||||||
|
|
|
|
|
|
|
|
(1) | Not annualized. |
(2) | Average of total cash and invested assets, net of receivable/payable for securities purchased and sold, as of the beginning and end of the period. |
16
GLOBAL INDEMNITY PLC
Insurance Enhanced Asset Backed and Credit Securities
As of June 30, 2016, the Company held insurance enhanced asset backed and credit securities with a market value of approximately $38.2 million. Approximately $13.8 million of these securities were tax free municipal bonds, which represented approximately 0.9% of the Companys total cash and invested assets, net of payable/receivable for securities purchased and sold. These securities had an average rating of A+. Approximately $5.2 million of these bonds are pre-refunded with U.S. treasury securities, of which $0.5 million are backed by financial guarantors, meaning that funds have been set aside in escrow to satisfy the future interest and principal obligations of the bond. Of the remaining $8.6 million of insurance enhanced municipal bonds, $0.5 million would have carried a lower credit rating had they not been insured. The following table provides a breakdown of the ratings for these municipal bonds with and without insurance.
(Dollars in thousands) |
Ratings with |
Ratings without |
||||||
Rating | Insurance | Insurance | ||||||
AA |
$ | 502 | $ | | ||||
BBB |
| 502 | ||||||
|
|
|
|
|||||
Total |
$ | 502 | $ | 502 | ||||
|
|
|
|
A summary of the Companys insurance enhanced municipal bonds that are backed by financial guarantors, including the pre-refunded bonds that are escrowed in U.S. government obligations, as of June 30, 2016, is as follows:
(Dollars in thousands)
Financial Guarantor |
Total | Pre-refunded Securities |
Government Guaranteed Securities |
Exposure Net of Pre-refunded & Government Guaranteed Securities |
||||||||||||
Ambac Financial Group |
$ | 1,529 | $ | 460 | $ | | $ | 1,069 | ||||||||
Assured Guaranty Corporation |
3,539 | | | 3,539 | ||||||||||||
Municipal Bond Insurance Association |
3,425 | | | 3,425 | ||||||||||||
Govt National Housing Association |
553 | | 553 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total backed by financial guarantors |
9,046 | 460 | 553 | 8,033 | ||||||||||||
Other credit enhanced municipal bonds |
4,740 | 4,740 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 13,786 | $ | 5,200 | $ | 553 | $ | 8,033 | ||||||||
|
|
|
|
|
|
|
|
In addition to the tax-free municipal bonds, the Company held $24.4 million of insurance enhanced bonds that are comprised of $23.2 million of taxable municipal bonds and $1.2 million of asset-backed securities, which represented approximately 1.6% of the Companys total invested assets, net of receivable/payable for securities purchased and sold. Of the Companys $24.4 million of insurance enhanced asset-backed and taxable municipal securities, $19.5 million are backed by financial guarantors including Municipal Bond Insurance Association ($3.9 million), Ambac Financial Group ($0.9 million), Assured Guaranty Corporation ($14.6 million), and Financial Guaranty Insurance Group ($0.1 million).
The Company had no direct investments in the entities that have provided financial guarantees or other credit support to any security held by the Company at June 30, 2016.
Bonds Held on Deposit
Certain cash balances, cash equivalents, equity securities, and bonds available for sale were deposited with various governmental authorities in accordance with statutory requirements, were held as collateral pursuant to borrowing arrangements, or were held in trust pursuant to intercompany reinsurance agreements. The fair values were as follows as of June 30, 2016 and December 31, 2015:
Estimated Fair Value | ||||||||
(Dollars in thousands) | June 30, 2016 | December 31, 2015 | ||||||
On deposit with governmental authorities |
$ | 36,349 | $ | 38,815 | ||||
Intercompany trusts held for the benefit of U.S. policyholders |
616,325 | 643,216 | ||||||
Held in trust pursuant to third party requirements |
60,209 | 66,544 | ||||||
Letter of credit held for third party requirements |
4,292 | 5,598 | ||||||
Securities held as collateral for borrowing arrangements (1) |
99,360 | 95,647 | ||||||
|
|
|
|
|||||
Total |
$ | 816,535 | $ | 849,820 | ||||
|
|
|
|
(1) | Amount required to collateralize margin borrowing facilities. |
17
GLOBAL INDEMNITY PLC
Variable Interest Entities
A Variable Interest Entity (VIE) refers to an investment in which an investor holds a controlling interest that is not based on the majority of voting rights. Under the VIE model, the party that has the power to exercise significant management influence and maintain a controlling financial interest in the entitys economics is said to be the primary beneficiary, and is required to consolidate the entity within their results. Other entities that participate in a VIE, for which their financial interests fluctuate with changes in the fair value of the investment entitys net assets but do not have significant management influence and the ability to direct the VIEs significant economic activities are said to have a variable interest in the VIE but do not consolidate the VIE in their financial results.
The Company has variable interests in several 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 fair value of one of the Companys variable interest VIEs was $33.3 million and $32.6 million as of June 30, 2016 and December 31, 2015, respectively. The Companys maximum exposure to loss from this variable interest VIE, which factors in future funding commitments, was $55.4 million at June 30, 2016 and $52.6 million at December 31, 2015. The fair value of the remaining two variable interest VIEs, which were acquired in 2016, were $2.5 million at June 30, 2016. The Company is not able to accurately estimate future funding requirements for the remaining two variable interest VIEs due to related debt components of the underlying investments that are not considered variable interest VIEs. If the entire future funding commitments of these two investments were considered variable interest VIEs, the Companys maximum exposure to loss from the remaining VIEs at June 30, 2016 would be $28.9 million. The Companys investment in variable interest VIEs is included in other invested assets on the consolidated balance sheet with changes in fair value recorded in the statement of operations.
3. | Derivative Instruments |
Interest rate swaps are used by the Company primarily to reduce risks from changes in interest rates. Under the terms of the interest rate swaps, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts as calculated by reference to an agreed notional amount.
The Company accounts for the interest rate swaps as non-hedge instruments and recognizes the fair value of the interest rate swaps in other assets or other liabilities on the consolidated balance sheets with the changes in fair value recognized as net realized investment gains (losses) in the consolidated statement of operations. The Company is ultimately responsible for the valuation of the interest rate swaps. To aid in determining the estimated fair value of the interest rate swaps, the Company relies on the forward interest rate curve and information obtained from a third party financial institution.
The following table summarizes information on the location and the gross amount of the derivatives fair value on the consolidated balance sheets as of June 30, 2016 and December 31, 2015:
(Dollars in thousands)
|
June 30, 2016 | December 31, 2015 | ||||||||||||||||
Derivatives Not Designated as Hedging Instruments under ASC 815 |
Balance Sheet Location |
Notional Amount |
Fair Value | Notional Amount |
Fair Value | |||||||||||||
Interest rate swap agreements |
Other liabilities | $ | 200,000 | $ | (26,343 | ) | $ | 200,000 | $ | (15,256 | ) |
The following table summarizes the net losses included in the consolidated statement of operations for changes in the fair value of the derivatives and the periodic net interest settlements under the derivatives for the quarters and six months ended June 30, 2016 and 2015:
Quarters Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
(Dollars in thousands) | Statement of Operations Line |
2016 | 2015 | 2016 | 2015 | |||||||||||||
Interest rate swap agreements |
Net realized investment gains (losses) |
$(4,574) | $5,057 | $(13,552) | $(825) |
As of June 30, 2016 and December 31, 2015, the Company is due $4.7 million and $4.5 million, respectively, for funds it needed to post to execute the swap transaction and $26.9 million and $17.3 million, respectively, for margin calls made in connection with the interest rate swaps. These amounts are included in other assets on the consolidated balance sheets.
18
GLOBAL INDEMNITY PLC
4. Fair Value Measurements
The accounting standards related to fair value measurements define fair value, establish a framework for measuring fair value, outline a fair value hierarchy based on inputs used to measure fair value, and enhance disclosure requirements for fair value measurements. These standards do not change existing guidance as to whether or not an instrument is carried at fair value. The Company has determined that its fair value measurements are in accordance with the requirements of these accounting standards.
The Companys invested assets and derivative instruments are carried at their fair value and are categorized based upon a fair value hierarchy:
| Level 1inputs utilize quoted prices (unadjusted) in active markets for identical assets that the Company has the ability to access at the measurement date. |
| Level 2inputs utilize other than quoted prices included in Level 1 that are observable for similar assets, either directly or indirectly. |
| Level 3inputs are unobservable for the asset, and include situations where there is little, if any, market activity for the asset. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.
The following table presents information about the Companys invested assets and derivative instruments measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
As of June 30, 2016 | Fair Value Measurements | |||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: |
||||||||||||||||
Fixed maturities: |
||||||||||||||||
U.S. treasury and agency obligations |
$ | 81,888 | $ | 3,358 | $ | | $ | 85,246 | ||||||||
Obligations of states and political subdivisions |
| 179,273 | | 179,273 | ||||||||||||
Mortgage-backed securities |
| 157,404 | | 157,404 | ||||||||||||
Commercial mortgage-backed securities |
| 133,499 | | 133,499 | ||||||||||||
Asset-backed securities |
| 269,797 | | 269,797 | ||||||||||||
Corporate bonds and debt |
| 351,496 | 11,220 | 362,716 | ||||||||||||
Foreign corporate bonds |
| 119,020 | | 119,020 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturities |
81,888 | 1,213,847 | 11,220 | 1,306,955 | ||||||||||||
Common stock |
119,008 | | | 119,008 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets measured at fair value (1) |
$ | 200,896 | $ | 1,213,847 | $ | 11,220 | $ | 1,425,963 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Derivative instruments |
$ | | $ | 26,343 | $ | | $ | 26,343 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities measured at fair value |
$ | | $ | 26,343 | $ | | $ | 26,343 | ||||||||
|
|
|
|
|
|
|
|
(1) | Excluded from the table above are limited liability companies and limited partnerships of $35.8 million at June 30, 2016 whose fair value is based on net asset value as a practical expedient. |
19
GLOBAL INDEMNITY PLC
As of December 31, 2015 | Fair Value Measurements | |||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: |
||||||||||||||||
Fixed maturities: |
||||||||||||||||
U.S. treasury and agency obligations |
$ | 101,264 | $ | 5,858 | $ | | $ | 107,122 | ||||||||
Obligations of states and political subdivisions |
| 205,240 | | 205,240 | ||||||||||||
Mortgage-backed securities |
| 159,123 | | 159,123 | ||||||||||||
Commercial mortgage-backed securities |
| 140,390 | | 140,390 | ||||||||||||
Asset-backed securities |
| 260,022 | | 260,022 | ||||||||||||
Corporate bonds |
| 332,111 | | 332,111 | ||||||||||||
Foreign corporate bonds |
| 102,141 | | 102,141 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturities |
101,264 | 1,204,885 | | 1,306,149 | ||||||||||||
Common stock |
110,315 | | | 110,315 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets measured at fair value (1) |
$ | 211,579 | $ | 1,204,885 | $ | | $ | 1,416,464 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Derivative instruments |
$ | | $ | 15,256 | $ | | $ | 15,256 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities measured at fair value |
$ | | $ | 15,256 | $ | | $ | 15,256 | ||||||||
|
|
|
|
|
|
|
|
(1) | Excluded from the table above are limited partnerships of $32.6 million at December 31, 2015 whose fair value is based on net asset value as a practical expedient. |
The securities classified as Level 1 in the above table consist of U.S. Treasuries and equity securities actively traded on an exchange.
The securities classified as Level 2 in the above table consist primarily of fixed maturity securities and derivative instruments. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, security prices are derived through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. If there are no recent reported trades, matrix or model processes are used to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Included in the pricing of asset-backed securities, collateralized mortgage obligations, and mortgage-backed securities are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral. The estimated fair value of the interest rate swaps is obtained from a third party financial institution who utilizes observable inputs such as the forward interest rate curve.
For the Companys material debt arrangements, the current fair value of the Companys debt at June 30, 2016 and December 31, 2015 was as follows:
June 30, 2016 | December 31, 2015 | |||||||||||||||
(Dollars in thousands) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Margin Borrowing Facilities |
$ | 77,776 | $ | 77,776 | $ | 75,646 | $ | 75,646 | ||||||||
7.75% Subordinated Notes due 2045 (1) |
96,435 | 96,795 | 96,388 | 91,748 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 174,211 | $ | 174,571 | $ | 172,034 | $ | 167,394 | ||||||||
|
|
|
|
|
|
|
|
(1) | As of June 30, 2016 and December 31, 2015, the carrying value and fair value of the 7.75% Subordinated Notes due 2045 are net of unamortized debt issuance cost of $3.6 million. |
The fair value of the margin borrowing facilities approximates its carrying value due to the facilities being due on demand. The 7.75% subordinated notes due 2045 are publicly traded instruments and are classified as Level 1 in the fair value hierarchy.
There were no transfers between Level 1 and Level 2 during the quarters ended June 30, 2016 or 2015.
20
GLOBAL INDEMNITY PLC
The following table presents changes in Level 3 investments measured at fair value on a recurring basis for the quarters and six months ended June 30, 2016 and 2015:
Quarters Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Beginning balance |
$ | | $ | | $ | | $ | | ||||||||
Total gains (losses) (realized / unrealized): |
||||||||||||||||
Included in accumulated other comprehensive income (loss) |
| | | | ||||||||||||
Purchases |
11,220 | | 11,220 | | ||||||||||||
Distributions |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 11,220 | $ | | $ | 11,220 | $ | | ||||||||
|
|
|
|
|
|
|
|
The investments classified as Level 3 in the above table consist of privately placed securities with unobservable inputs. The Company does not have access to daily valuations; therefore, market trades, performance of the underlying assets, and key risks are considered in order to estimate fair values of these middle market corporate debt instruments.
Fair Value of Alternative Investments
Other invested assets consist of limited liability companies and limited partnerships whose fair value is based on the net asset value per share practical expedient. The following table provides the fair value and future funding commitments related to these investments at June 30, 2016 and December 31, 2015.
June 30, 2016 | December 31, 2015 | |||||||||||||||
(Dollars in thousands) | Fair Value | Future Funding Commitment |
Fair Value | Future Funding Commitment |
||||||||||||
Real Estate Fund, LP (1) |
$ | | $ | | $ | | $ | | ||||||||
European Non-Performing Loan Fund, LP (2) |
33,339 | 22,014 | 32,592 | 20,014 | ||||||||||||
Private Middle Market Loans, LLC (3) |
2,459 | 26,321 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 35,798 | $ | 48,335 | $ | 32,592 | $ | 20,014 | ||||||||
|
|
|
|
|
|
|
|
(1) | This limited partnership invests in real estate assets through a combination of direct or indirect investments in partnerships, limited liability companies, mortgage loans, and lines of credit. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company continues to hold an investment in this limited partnership and has written the fair value down to zero. |
(2) | This limited partnership invests in distressed securities and assets through senior and subordinated, secured and unsecured debt and equity, in both public and private large-cap and middle-market companies. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets. Based on the terms of the partnership agreement, the Company anticipates its interest in this partnership to be redeemed in 2020. |
(3) | This interest consists of two separate equity investments in limited liability companies whereby the Company is also a lender via separate loan agreements. Typical financing is used for growth, acquisitions, or buyouts. The Company classifies their portion of the middle market corporate debt as fixed maturities. The Company has committed $40 million to this investment strategy, including both the equity and financing provisions. While the Company is not able to estimate the proportion of future funding commitments between equity and financing, the total remaining commitment is $26.3 million. Based on the terms of the investment management agreement, the Company anticipates its interest to be redeemed no later than 2024. |
Limited Liability Companies and Limited Partnerships with ownership interest exceeding 3%
The Company uses the equity method to account for investments in limited liability companies and limited partnerships where its ownership interest exceeds 3%. The equity method of accounting for an investment in a limited liability company and limited partnership requires that its cost basis be updated to account for the income or loss earned on the investment. The income or loss associated with the limited liability company or limited partnership is reflected in the statement of operations, and the adjusted cost basis approximates fair value. The income or loss associated with these limited liability companies or limited partnerships, which was included in investment income, was $0.9 million and $1.1 million during the quarters ended June 30, 2016 and 2015, respectively, and $2.9 million and $1.3 million during the six months ended June 30, 2016 and 2015, respectively.
21
GLOBAL INDEMNITY PLC
Pricing
The Companys pricing vendors provide prices for all investment categories except for investments in limited liability companies and limited partnerships whose fair value is based on net asset values as a practical expedient. Two vendors provide prices for equity and fixed maturity securities.
The following is a description of the valuation methodologies used by the Companys pricing vendors for investment securities carried at fair value:
| Common stock prices are received from all primary and secondary exchanges. |
| Corporate and agency bonds are evaluated by utilizing a multi-dimensional relational model. For bonds with early redemption options, an option adjusted spread model is utilized. Both asset classes use standard inputs and incorporate security set up, defined sector breakdown, benchmark yields, apply base spreads, yield to maturity, and adjust for corporate actions. |
| Data from commercial vendors is aggregated with market information, then converted into a prepayment/spread/LIBOR curve model used for commercial mortgage obligations (CMO). CMOs are categorized with mortgage-backed securities in the tables listed above. For asset-backed securities, data derived from market information along with trustee and servicer reports is converted into spreads to interpolated swap yield curve. For both asset classes, evaluations utilize standard inputs plus new issue data, monthly payment information, and collateral performance. The evaluated pricing models incorporate discount rates, loan level information, prepayment speeds, treasury benchmarks, and LIBOR and swap curves. |
| For obligations of state and political subdivisions, a multi-dimensional relational model is used to evaluate securities. The pricing models incorporate security set-up, benchmark yields, apply base spreads, yield to worst or market convention, ratings updates, prepayment schedules and adjustments for material events notices. |
| U.S. treasuries are evaluated by obtaining feeds from a number of live data sources including active market makers and inter-dealer brokers. |
| For mortgage-backed securities, a matrix model correlation to TBA (a forward MBS trade) or benchmarking is utilized to value a security. |
The Company performs certain procedures to validate whether the pricing information received from the pricing vendors is reasonable, to ensure that the fair value determination is consistent with accounting guidance, and to ensure that its assets are properly classified in the fair value hierarchy. The Companys procedures include, but are not limited to:
| Reviewing periodic reports provided by the Investment Manager that provide information regarding rating changes and securities placed on watch. This procedure allows the Company to understand why a particular securitys market value may have changed or may potentially change. |
| Understanding and periodically evaluating the various pricing methods and procedures used by the Companys pricing vendors to ensure that investments are properly classified within the fair value hierarchy. |
| On a quarterly basis, the Company corroborates investment security prices received from its pricing vendors by obtaining pricing from a second pricing vendor for a sample of securities. |
During the quarters and six months ended June 30, 2016 and 2015, the Company has not adjusted quotes or prices obtained from the pricing vendors.
5. Income Taxes
The statutory income tax rates of the countries where the Company does business are 35% in the United States, 0% in Bermuda, 0% in the Cayman Islands, 0% in Gibraltar, 29.22% in the Duchy of Luxembourg, 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
22
GLOBAL INDEMNITY PLC
country is applied against the expected annual taxable income of the Company in each country to estimate the annual income tax expense. Generally, during interim periods, the Company will divide total estimated annual income tax expense by total estimated annual pre-tax income to determine the expected annual income tax rate used to compute the income tax provision. The expected annual income tax rate is then applied against interim pre-tax income, excluding net realized gains and losses and distributions from limited liability companies and limited partnerships, and that amount is then added to the actual income taxes on net realized gains and losses, discrete items and distributions from limited liability companies and limited partnerships. However, when there is significant volatility in the expected effective tax rate, the Company records its actual income tax provision in lieu of the estimated effective income tax rate.
The Companys income before income taxes from its non-U.S. subsidiaries and U.S. subsidiaries, including the results of the quota share and stop-loss agreements between Global Indemnity Reinsurance and the Insurance Operations, for the quarters and six months ended June 30, 2016 and 2015 were as follows:
Quarter Ended June 30, 2016: (Dollars in thousands) |
Non-U.S. Subsidiaries |
U.S. Subsidiaries |
Eliminations | Total | ||||||||||||
Revenues: |
||||||||||||||||
Gross premiums written |
$ | 57,574 | $ | 141,911 | $ | (45,166 | ) | $ | 154,319 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums written |
$ | 57,560 | $ | 67,750 | $ | | $ | 125,310 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums earned |
$ | 52,454 | $ | 65,350 | $ | | $ | 117,804 | ||||||||
Net investment income |
12,132 | 2,925 | (8,495 | ) | 6,562 | |||||||||||
Net realized investment gains (losses) |
57 | (3,549 | ) | | (3,492 | ) | ||||||||||
Other income (loss) |
(66 | ) | 861 | | 795 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
64,577 | 65,587 | (8,495 | ) | 121,669 | |||||||||||
Losses and Expenses: |
||||||||||||||||
Net losses and loss adjustment expenses |
30,550 | 47,561 | | 78,111 | ||||||||||||
Acquisition costs and other underwriting expenses |
23,587 | 24,955 | | 48,542 | ||||||||||||
Corporate and other operating expenses |
2,488 | 1,767 | | 4,255 | ||||||||||||
Interest expense |
2,076 | 8,648 | (8,495 | ) | 2,229 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
$ | 5,876 | $ | (17,344 | ) | $ | | $ | (11,468 | ) | ||||||
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2015: (Dollars in thousands) |
Non-U.S. Subsidiaries |
U.S. Subsidiaries |
Eliminations | Total | ||||||||||||
Revenues: |
||||||||||||||||
Gross premiums written |
$ | 83,601 | $ | 148,038 | $ | (65,124 | ) | $ | 166,515 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums written |
$ | 83,601 | $ | 62,404 | $ | | $ | 146,005 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums earned |
$ | 72,471 | $ | 56,406 | $ | | $ | 128,877 | ||||||||
Net investment income |
11,320 | 4,325 | (6,504 | ) | 9,141 | |||||||||||
Net realized investment gains (losses) |
(118 | ) | 6,650 | | 6,532 | |||||||||||
Other income |
13 | 564 | | 577 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
83,686 | 67,945 | (6,504 | ) | 145,127 | |||||||||||
Losses and Expenses: |
||||||||||||||||
Net losses and loss adjustment expenses |
39,621 | 39,939 | | 79,560 | ||||||||||||
Acquisition costs and other underwriting expenses |
31,570 | 19,356 | | 50,926 | ||||||||||||
Corporate and other operating expenses |
(334 | ) | 4,668 | | 4,334 | |||||||||||
Interest expense |
430 | 6,609 | (6,504 | ) | 535 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
$ | 12,399 | $ | (2,627 | ) | $ | | $ | 9,772 | |||||||
|
|
|
|
|
|
|
|
23
GLOBAL INDEMNITY PLC
Six Months Ended June 30, 2016: (Dollars in thousands) |
Non-U.S. Subsidiaries |
U.S. Subsidiaries |
Eliminations | Total | ||||||||||||
Revenues: |
||||||||||||||||
Gross premiums written |
$ | 89,397 | $ | 270,542 | $ | (64,254 | ) | $ | 295,685 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums written |
$ | 89,383 | $ | 152,799 | $ | 0 | $ | 242,182 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums earned |
$ | 108,439 | $ | 131,001 | $ | 0 | $ | 239,440 | ||||||||
Net investment income |
25,235 | 8,060 | (16,987 | ) | 16,308 | |||||||||||
Net realized investment gains (losses) |
70 | (11,055 | ) | 0 | (10,985 | ) | ||||||||||
Other income (loss) |
28 | 1,723 | 0 | 1,751 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
133,772 | 129,729 | (16,987 | ) | 246,514 | |||||||||||
Losses and Expenses: |
||||||||||||||||
Net losses and loss adjustment expenses |
56,222 | 86,673 | 0 | 142,895 | ||||||||||||
Acquisition costs and other underwriting expenses |
47,107 | 53,525 | 0 | 100,632 | ||||||||||||
Corporate and other operating expenses |
4,276 | 3,782 | 0 | 8,058 | ||||||||||||
Interest expense |
4,152 | 17,279 | (16,987 | ) | 4,444 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
$ | 22,015 | $ | (31,530 | ) | $ | 0 | $ | (9,515 | ) | ||||||
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2015: (Dollars in thousands) |
Non-U.S. Subsidiaries |
U.S. Subsidiaries |
Eliminations | Total | ||||||||||||
Revenues: |
||||||||||||||||
Gross premiums written |
$ | 222,397 | $ | 271,042 | $ | (184,055 | ) | $ | 309,384 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums written |
$ | 222,358 | $ | 49,751 | $ | | $ | 272,109 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums earned |
$ | 144,135 | $ | 112,079 | $ | | $ | 256,214 | ||||||||
Net investment income |
21,502 | 8,811 | (12,931 | ) | 17,382 | |||||||||||
Net realized investment gains (losses) |
(387 | ) | 3,949 | | 3,562 | |||||||||||
Other income (loss) |
(66 | ) | 1,195 | | 1,129 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
165,184 | 126,034 | (12,931 | ) | 278,287 | |||||||||||
Losses and Expenses: |
||||||||||||||||
Net losses and loss adjustment expenses |
75,805 | 73,374 | | 149,179 | ||||||||||||
Acquisition costs and other underwriting expenses |
61,864 | 37,320 | | 99,184 | ||||||||||||
Corporate and other operating expenses |
1,747 | 14,127 | | 15,874 | ||||||||||||
Interest expense |
824 | 13,147 | (12,931 | ) | 1,040 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
$ | 24,944 | $ | (11,934 | ) | $ | | $ | 13,010 | |||||||
|
|
|
|
|
|
|
|
The following table summarizes the components of income tax expense (benefit):
Quarters Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Current income tax expense (benefit): |
||||||||||||||||
Foreign |
$ | 92 | $ | 70 | $ | 205 | $ | 161 | ||||||||
U.S. Federal |
| (2,657 | ) | | (1,547 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current income tax expense (benefit) |
92 | (2,587 | ) | 205 | (1,386 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Deferred income tax expense (benefit): |
||||||||||||||||
U.S. Federal |
(6,395 | ) | 1,242 | (11,680 | ) | (3,515 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total deferred income tax expense (benefit) |
(6,395 | ) | 1,242 | (11,680 | ) | (3,515 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total income tax benefit |
$ | (6,303 | ) | $ | (1,345 | ) | $ | (11,475 | ) | $ | (4,901 | ) | ||||
|
|
|
|
|
|
|
|
The weighted average expected tax provision has been calculated using income (loss) before income taxes in each jurisdiction multiplied by that jurisdictions applicable statutory tax rate.
24
GLOBAL INDEMNITY PLC
The following table summarizes the differences between the tax provision for financial statement purposes and the expected tax provision at the weighted average tax rate:
Quarters Ended June 30, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
(Dollars in thousands) | Amount | % of Pre- Tax Income |
Amount | % of Pre- Tax Income |
||||||||||||
Expected tax provision at weighted average rate |
$ | (5,977 | ) | (52.1 | %) | $ | (848 | ) | (8.7 | %) | ||||||
Adjustments: |
||||||||||||||||
Tax exempt interest |
(99 | ) | (0.9 | ) | (83 | ) | (0.8 | ) | ||||||||
Dividend exclusion |
(238 | ) | (2.1 | ) | (258 | ) | (2.6 | ) | ||||||||
Other |
11 | 0.1 | (156 | ) | (1.6 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Actual tax on continuing operations |
$ | (6,303 | ) | (55.0 | %) | $ | (1,345 | ) | (13.7 | %) | ||||||
|
|
|
|
|
|
|
|
The effective income tax benefit rate for the quarter ended June 30, 2016 was 55.0%, compared to an effective income tax benefit rate of 13.7%, for the quarter ended June 30, 2015. The increase is primarily due to losses incurred in the Companys U.S. operations. Taxes were computed using a discrete period computation because a reliable estimate of an effective tax rate could not be made.
Six Months Ended June 30, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
(Dollars in thousands) | Amount | % of Pre- Tax Income |
Amount | % of Pre- Tax Income |
||||||||||||
Expected tax provision at weighted average rate |
$ | (10,829 | ) | (113.9 | %) | $ | (4,015 | ) | (30.9 | %) | ||||||
Adjustments: |
||||||||||||||||
Tax exempt interest |
(203 | ) | (2.1 | ) | (219 | ) | (1.7 | ) | ||||||||
Dividend exclusion |
(477 | ) | (5.0 | ) | (413 | ) | (3.2 | ) | ||||||||
Other |
34 | 0.3 | (254 | ) | (2.0 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Actual tax on continuing operations |
$ | (11,475 | ) | (120.7 | %) | $ | (4,901 | ) | (37.8 | %) | ||||||
|
|
|
|
|
|
|
|
The effective income tax benefit rate for the six months ended June 30, 2016 was 120.7%, compared to an effective income tax benefit rate of 37.8% for the six months ended June 30, 2015. The increase is primarily due to losses incurred in the Companys U.S. operations. Taxes were computed using a discrete period computation because a reliable estimate of an effective tax rate could not be made.
The Company has an alternative minimum tax (AMT) credit carryforward of $10.9 million as of June 30, 2016 and December 31, 2015 which can be carried forward indefinitely. The Company has a net operating loss (NOL) carryforward of $10.6 million and $1.9 million as of June 30, 2016 and December 31, 2015, respectively, which will expire in 2036 and 2035, respectively. The Company has a Section 163(j) (163(j)) carryforward of $3.1 million as of June 30, 2016 and December 31, 2015 which can be carried forward indefinitely. The 163(j) carryforward is for disqualified interest paid or accrued to a related entity that is not subject to U.S. tax.
25
GLOBAL INDEMNITY PLC
6. Liability for Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:
Quarters Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Balance at beginning of period |
$ | 676,236 | $ | 770,119 | $ | 680,047 | $ | 675,472 | ||||||||
Less: Ceded reinsurance receivables |
106,957 | 140,508 | 108,130 | 123,201 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net balance at beginning of period |
569,279 | 629,611 | 571,917 | 552,271 | ||||||||||||
Purchased reserves, gross |
| (584 | ) | | 88,370 | |||||||||||
Less: Purchased reserves ceded |
| | | 11,681 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Purchased reserves, net |
| (584 | ) | | 76,689 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Incurred losses and loss adjustment expenses related to: |
||||||||||||||||
Current year |
87,032 | 84,724 | 158,412 | 157,838 | ||||||||||||
Prior years |
(8,921 | ) | (5,164 | ) | (15,517 | ) | (8,659 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total incurred losses and loss adjustment expenses |
78,111 | 79,560 | 142,895 | 149,179 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Paid losses and loss adjustment expenses related to: |
||||||||||||||||
Current year |
43,560 | 45,379 | 63,386 | 60,061 | ||||||||||||
Prior years |
31,559 | 32,406 | 79,155 | 87,276 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total paid losses and loss adjustment expenses |
75,119 | 77,785 | 142,541 | 147,337 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net balance at end of period |
572,271 | 630,802 | 572,271 | 630,802 | ||||||||||||
Plus: Ceded reinsurance receivables |
111,579 | 138,497 | 111,579 | 138,497 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 683,850 | $ | 769,299 | $ | 683,850 | $ | 769,299 | ||||||||
|
|
|
|
|
|
|
|
When analyzing loss reserves and prior year development, the Company considers many factors, including the frequency and severity of claims, loss trends, case reserve settlements that may have resulted in significant development, and any other additional or pertinent factors that may impact reserve estimates.
In the second quarter of 2016, the Company reduced its prior accident year loss reserves by $8.9 million, which consisted of a $6.7 million decrease related to Commercial Lines and a $2.2 million decrease related to Reinsurance Operations.
The $6.7 million reduction of prior accident year loss reserves related to Commercial Lines primarily consisted of the following:
| General Liability: A $7.9 million reduction in aggregate with $2.0 million of favorable development in the construction defect reserve category and $5.9 million of favorable development in the other general liability reserve categories. The favorable development in the construction defect reserve category reflects the lower than expected claims frequency and severity which led to a reduction in the 2011 through 2015 accident years. For the other general liability reserve categories, lower than anticipated claims severity was the driver of the favorable development mainly in accident years 2007 through 2012. |
| Property: A $0.3 million increase was due to higher than expected case incurred emergence on catastrophe claims in the 2012 and 2015 accident years. |
| Umbrella: A $0.7 million increase driven by higher than expected case incurred emergence in accident years 2004 and 2011. |
The $2.2 million reduction related to Reinsurance Operations was from the property lines. Ultimate losses were lowered $3.3 million combined for the 2013 and 2014 accident years and the 2015 accident year increased $1.1 million based on a review of the experience reported from cedants.
In the second quarter of 2015, the Company decreased its prior accident year loss reserves by $5.2 million, which consisted of a $3.6 million decrease related to Commercial Lines and a $1.6 million decrease related to Reinsurance Operations.
26
GLOBAL INDEMNITY PLC
The $3.6 million decrease related to Commercial Lines primarily consisted of the following:
| Professional: $2.9 million decrease primarily due to frequency emergence continuing to be better than anticipated in accident years 2006 through 2011. |
| General Liability: A $1.1 million decrease primarily related to accident years 2011 and 2012 due to less than anticipated frequency and severity. |
The $1.6 million decrease related to Reinsurance Operations was primarily due to less severity on property than expected in accident years 2011 through 2014 due to catastrophe losses developing better than anticipated.
In the first six months of 2016, the Company decreased its prior accident year loss reserves by $15.5 million, which consisted of a $12.3 million decrease related to Commercial Lines and a $3.2 million decrease related to Reinsurance Operations.
The $12.3 million decrease related to Commercial Lines primarily consisted of the following:
| General Liability: A $12.1 million reduction in aggregate with $1.6 million of favorable development in the construction defect reserve category and $10.5 million of favorable development in the other general liability reserve categories. The favorable development in the construction defect reserve category reflects the lower than expected claims frequency and severity which led to a reduction in the 2011 through 2015 accident years. For the other general liability reserve categories, lower than anticipated claims severity was the driver of the favorable development and mainly in accident years 2007 through 2012. |
| Property: A $1.2 million reduction in aggregate is driven by favorable development of $1.5 million in the 2008 through 2013 accident year and 2015 accident year due to lower than expected case incurred emergence on non-catastrophe claims which was partially offset by increases in catastrophe claims totaling $0.3 million in the 2012, 2014, and 2015 accident years. |
| Umbrella: A $0.7 million increase driven by higher than expected case incurred emergence in accident years 2004 and 2011. |
The $3.2 million reduction related to Reinsurance Operations was from the property lines. Ultimate losses were lowered $4.0 million in the 2013 and 2014 accident years and the 2015 accident year increased $0.8 million based on reviews of the experience reported from cedants.
In the first six months of 2015, the Company decreased its prior accident year loss reserves by $8.7 million, which consisted of a $5.6 million decrease related to Commercial Lines and a $3.1 million decrease related to Reinsurance Operations.
The $5.6 million decrease related to Commercial Lines primarily consisted of the following:
| Property: A $0.8 million decrease primarily related to accident years 2009 through 2013 due to less than anticipated frequency and severity. |
| Umbrella: $0.3 million decrease primarily due to emergence continuing to be better than anticipated in accident years 2003 through 2005. |
| Professional: $2.9 million decrease primarily due to frequency emergence continuing to be better than anticipated in accident years 2006 through 2011. |
| General Liability: A $1.8 million decrease primarily related to accident years 2011 and 2012 due to less than anticipated frequency and severity. |
The $3.1 million decrease related to Reinsurance Operations was primarily due to less severity on property than expected in accident years 2011 through 2014 due to catastrophe losses developing better than anticipated.
27
GLOBAL INDEMNITY PLC
7. Shareholders Equity
Repurchases of the Companys A ordinary shares
The following table provides information with respect to A ordinary shares that were surrendered, repurchased, or redeemed during the quarter ended June 30, 2016:
Period (1) |
Total Number of Shares Purchased or Redeemed |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plan or Program |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
May 1 31, 2016 |
596 | (2) | $ | 30.56 | | | ||||||||||
|
|
|
|
|
|
|||||||||||
Total |
596 | $ | 30.56 | | ||||||||||||
|
|
|
|
|
|
(1) | Based on settlement date. |
(2) | Surrendered by employees as payment of taxes withheld on the vesting of restricted stock. |
The following table provides information with respect to the A ordinary shares that were surrendered, repurchased, or redeemed during the quarter ended June 30, 2015:
Period (1) |
Total Number of Shares Purchased or Redeemed |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plan or Program |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
May 1 31, 2015 |
596 | (2) | $ | 27.01 | | | ||||||||||
|
|
|
|
|||||||||||||
Total |
596 | $ | 27.01 | | | |||||||||||
|
|
|
|
(1) | Based on settlement date. |
(2) | Surrendered by employees as payment of taxes withheld on the vesting of restricted stock. |
Please see Note 12 of the notes to the consolidated financial statements in Item 8 Part II of the Companys 2015 Annual Report on Form 10-K for more information on the Companys repurchase program.
8. Related Party Transactions
Fox Paine & Company
As of June 30, 2016, Fox Paine beneficially owned shares having approximately 84% of the Companys total outstanding voting power. Fox Paine has the right to appoint a number of the Companys Directors equal in aggregate to the pro rata percentage of the voting shares of the Company beneficially held by Fox Paine for so long as Fox Paine holds an aggregate of 25% or more of the voting power in the Company. Fox Paine controls the election of all of the Companys Directors due to its controlling share ownership. The Companys Chairman is a member of Fox Paine. The Company relies on Fox Paine to provide management services and other services related to the operations of the Company.
Global Indemnity Reinsurance was a limited partner in Fox Paine Capital Fund, II, which was managed by Fox Paine & Company. This investment was originally made by United National Insurance Company in June 2000 and pre-dates the September 5, 2003 acquisition by Fox Paine of Wind River Investment Corporation, which was the predecessor holding company for United National Insurance Company. In connection with the Companys share redemption in 2015, Global Indemnity Reinsurance elected to redeem its shares in Fox Paine Capital Fund II, and as a result, the Company no longer held an interest in Fox Paine Capital Fund II as of November 10, 2015. All of Global Indemnity Reinsurances allocable Global Indemnity plc shares that were held by Fox Paine Capital Fund, II were transferred into a new unrelated liquidating partnership.
There were no distributions received from Fox Paine Capital Fund II during the quarters ended June 30, 2016 or 2015. During the six months ended June 30, 2015, the Company received a distribution of $0.8 million from Fox Paine Capital Fund II. The Company did not receive any distribution from Fox Paine Capital Fund II during the six months ended June 30, 2016.
28
GLOBAL INDEMNITY PLC
The Company relies on Fox Paine to provide management services and other services related to the operations of the Company. The Company incurred management fees of $0.5 million in each of the quarters ended June 30, 2016 and 2015 and $1.0 million in each of the six months ended June 30, 2016 and 2015 as part of the annual management fee paid to Fox Paine. As of June 30, 2016 and December 31, 2015, unpaid management fees, which were included in other liabilities on the consolidated balance sheets, were $3.6 million and $2.6 million, respectively.
In connection with the acquisition of American Reliable, the Company agreed to pay to Fox Paine an investment banking fee of 3% of the amount paid plus the additional capital required to operate American Reliable on a standalone basis and a $1.5 million investment advisory fee, which in the aggregate, totaled $6.5 million. This amount is included in corporate and other operating expenses on the Companys Consolidated Statements of Operations during the six months ended June 30, 2015. As payment for these fees, 267,702 A ordinary shares of Global Indemnity were issued under the Global Indemnity plc Share Incentive Plan (the Plan) in May, 2015. These shares cannot be sold until the earlier of five years after January 1, 2015 or a change of control.
Cozen OConnor
The Company incurred $0.2 million and $0.3 million for legal services rendered by Cozen OConnor during the quarter and six months ended June 30, 2015, respectively. Stephen A. Cozen, the chairman of Cozen OConnor, was a member of the Companys Board of Directors until he resigned effective December 31, 2015.
Crystal & Company
The Company incurred brokerage fees with Crystal & Company, an insurance broker, of $0.06 million during each of the quarters ended June 30, 2016 and 2015 and $0.1 million during each of the six months ended June 30, 2016 and 2015. In January of 2016, a subsidiary of the Company entered into an agency relationship with Crystal & Company in which Crystal & Company is to be paid a commission on net premiums written and collected consistent with those paid to other agencies in the Companys ordinary course of business. The Company did not pay any commissions to Crystal & Company under this arrangement during the quarter or six months ended June 30, 2016. James W. Crystal, the chairman and chief executive officer of Crystal & Company, was a member of the Companys Board of Directors until he resigned effective July 24, 2016.
Hiscox Insurance Company (Bermuda) Ltd.
Global Indemnity Reinsurance is a participant in two reinsurance agreements with Hiscox Insurance Company (Bermuda) Ltd. (Hiscox Bermuda) while Steve Green, the President of Global Indemnity Reinsurance, was a member of Hiscox Bermudas Board of Directors. Steve Green was a member of the Hiscox Bermudas Board of Directors until May, 2014. The Company estimated that the following earned premium and incurred losses related to these agreements have been assumed by Global Indemnity Reinsurance from Hiscox Bermuda:
Quarters Ended June 30, | ||||||||
(Dollars in thousands) | 2016 | 2015 | ||||||
Assumed earned premium |
$ | (6 | ) | $ | 886 | |||
Assumed losses and loss adjustment expenses |
(1 | ) | 239 | |||||
Six Months Ended June 30, | ||||||||
(Dollars in thousands) | 2016 | 2015 | ||||||
Assumed earned premium |
$ | 51 | $ | 2,248 | ||||
Assumed losses and loss adjustment expenses |
(209 | ) | 643 |
Net balances due to Global Indemnity Reinsurance under this agreement are as follows:
(Dollars in thousands) | June 30, 2016 |
December 31, 2015 |
||||||
Net payable balance |
$ | (259 | ) | $ | (110 | ) |
29
GLOBAL INDEMNITY PLC
9. Commitments and Contingencies
Legal Proceedings
The Company is, from time to time, involved in various legal proceedings in the ordinary course of business. The Company maintains insurance and reinsurance coverage for such risks in amounts that it considers adequate. However, there can be no assurance that the insurance and reinsurance coverage that the Company maintains is sufficient or will be available in adequate amounts or at a reasonable cost. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on its business, results of operations, cash flows, or financial condition.
There is a greater potential for disputes with reinsurers who are in runoff. Some of the Companys reinsurers have operations that are in runoff, and therefore, the Company closely monitors those relationships. The Company anticipates that, similar to the rest of the insurance and reinsurance industry, it will continue to be subject to litigation and arbitration proceedings in the ordinary course of business.
Commitments
During 2014, the Company entered into a $50 million commitment to purchase an alternative investment vehicle which is comprised of European non-performing loans. As of June 30, 2016, the Company has funded $28.0 million of this commitment leaving $22.0 million as unfunded.
In June, 2016, the Company entered into a $40 million commitment with an investment manager that provides financing for middle market companies. Typical financing arrangements are used for growth, acquisitions, or buyouts. This investment vehicle targets companies with $10 - $50 million in earnings before interest, taxes, depreciation, and amortization. As of June 30, 2016, the Company has funded $13.7 million of this commitment leaving $26.3 million as unfunded. Of the $13.7 million funded, $11.2 million and $2.5 million, respectively, was invested in middle market corporate debt and two separate equity investments in limited liability companies.
10. Share-Based Compensation Plans
Options
No stock options were awarded during the quarters ended June 30, 2016 and 2015. During the quarter ended June 30, 2016, 133,333 unvested stock options were forfeited. No unvested stock options were forfeited during the quarter ended June 30, 2015.
The Company did not award any stock options during the six months ended June 30, 2016. During the six months ended June 30, 2015, the Company awarded 200,000 stock options with a strike price of $28.37 per share which vest one third on each of December 31, 2015, 2016, and 2017 based on achievement of Board approved performance targets. During the six months ended June 30, 2016, 200,000 unvested stock options were forfeited. No unvested stock options were forfeited during the six months ended June 30, 2015.
Restricted Shares
No restricted shares were issued to employees during the quarters ended June 30, 2016 and 2015.
During the six months ended June 30, 2016, the Company granted 121,346 A ordinary shares, with a weighted average grant date value of $28.97 per share, to key employees under the Plan. Of the shares granted during the six months ended June 30, 2016, 11,199 were granted to the Companys Chief Executive Officer and vest 33 1/3 on each subsequent anniversary date of the grant for a period of three years subject to a true-up of bonus year underwriting results as of the third anniversary of the grant. 5,309 were granted to another key employee and vest 100% on February 7, 2019. 8,253 were issued to other key employees and vest 33% on the first and second anniversary of the grant and vest 34% on the third anniversary of the grant contingent on meeting certain performance objectives and subject to Board approval. The remaining 96,585 shares were granted to key employees and will vest as follows:
30
GLOBAL INDEMNITY PLC
| 16.5%, 16.5%, and 17.0% of the granted stock vest on the first, second, and third anniversary of the grant, respectively. |
| 50% of granted stock vests 100% on the third anniversary of the grant subject to a true-up of bonus year underwriting results and are subject to Board approval. |
During the six months ended June 30, 2015, the Company issued 138,507 A ordinary shares, with a weighted average grant date value of $28.37 per share, to key employees under the Plan.
Of the shares granted during the six months ended June 30, 2015, 10,574 were granted to the Companys Chief Executive Officer and vest 33 1/3 on each subsequent anniversary date of the grant for a period of three years subject to an accident year true-up of bonus year underwriting results as of the third anniversary of the grant and an additional 44,058 were granted to the Companys Chief Executive Officer and other key employees which vest 100% on January 1, 2018. The remaining 83,875 shares were granted to key employees and will vest as follows:
| 16.5%, 16.5%, and 17.0% of the granted stock vest on the first, second, and third anniversary of the grant, respectively. |
| 50% of granted stock vests 100% on the third anniversary of the grant subject to a true-up of bonus year underwriting results and are subject to Board approval. |
During the quarters ended June 30, 2016 and 2015, the Company issued 10,172 and 8,798 A ordinary shares, respectively, at a weighted average grant date value of $27.53 and $28.08 per share, respectively, to non-employee directors of the Company under the Plan. During the six months ended June 30, 2016 and 2015, the Company issued 19,614 and 18,045 A ordinary shares, respectively, at a weighted average grant date value of $29.26 and $27.91 per share, respectively, to non-employee directors of the Company under the Plan. All of the shares issued to non-employee directors of the Company in 2016 and 2015 were fully vested but subject to certain restrictions.
11. Earnings Per Share
Earnings per share have been computed using the weighted average number of ordinary shares and ordinary share equivalents outstanding during the period.
The following table sets forth the computation of basic and diluted earnings per share:
(Dollars in thousands, | Quarters Ended June 30, | Six Months Ended June 30, | ||||||||||||||
except share and per share data) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Net income (loss) |
$ | (5,165 | ) | $ | 11,117 | $ | 1,960 | $ | 17,911 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Basic earnings per share: |
||||||||||||||||
Weighted average shares outstanding basic |
17,244,075 | 25,454,579 | 17,234,063 | 25,447,398 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) per share |
$ | (0.30 | ) | $ | 0.44 | $ | 0.11 | $ | 0.70 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted earnings per share: |
||||||||||||||||
Weighted average shares outstanding diluted |
17,244,075 | 25,680,997 | 17,484,980 | 25,659,869 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) per share |
$ | (0.30 | ) | $ | 0.43 | $ | 0.11 | $ | 0.70 | |||||||
|
|
|
|
|
|
|
|
31
GLOBAL INDEMNITY PLC
A reconciliation of weighted average shares for basic earnings per share to weighted average shares for diluted earnings per share is as follows:
Quarters Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Weighted average shares for basic earnings per share |
17,244,075 | 25,454,579 | 17,234,063 | 25,447,398 | ||||||||||||
Non-vested restricted stock |
| 122,141 | 140,773 | 109,308 | ||||||||||||
Options |
| 104,277 | 110,144 | 103,163 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average shares for diluted earnings per share |
17,244,075 | 25,680,997 | 17,484,980 | 25,659,869 | ||||||||||||
|
|
|
|
|
|
|
|
If the Company had not incurred a loss in the quarter ended June 30, 2016, 17,511,617 weighted average shares would have been used to compute the diluted loss per share calculation. In addition to the basic shares, weighted average shares for the diluted calculation would have included 155,967 shares of non-vested restricted stock and 111,575 share equivalents for options.
The weighted average shares outstanding used to determine dilutive earnings per share for the quarters ended June 30, 2016 and 2015 do not include 300,000 and 512,500 shares, respectively, which were deemed to be anti-dilutive. The weighted average shares outstanding used to determine dilutive earnings per share for the six months ended June 30, 2016 and 2015 do not include 300,000 and 512,500 shares, respectively, which were deemed to be anti-dilutive.
The following table summarizes options which are deemed to be anti-dilutive at June 30, 2016:
Grant Date |
Expiration Date | Outstanding Options |
Strike Price | |||||||||
February 9, 2014 |
February 10, 2024 | 300,000 | $ | 32.38 | ||||||||
|
|
|||||||||||
300,000 | ||||||||||||
|
|
12. Segment Information
The Company manages its business through three reportable business segments: Commercial Lines, managed in Bala Cynwyd, PA, offers specialty property and casualty products designed for product lines such as Small Business Binding Authority, Property Brokerage, and Programs. Personal Lines, managed in Scottsdale, AZ, offers specialty personal lines and agricultural coverage. Reinsurance Operations, managed in Bermuda, provides reinsurance solutions through brokers and primary writers including insurance and reinsurance companies.
32
GLOBAL INDEMNITY PLC
The following are tabulations of business segment information for the quarters and six months ended June 30, 2016 and 2015.
Quarter Ended June 30, 2016: (Dollars in thousands) |
Commercial Lines(1) |
Personal Lines(1) |
Reinsurance Operations(2) |
Total | ||||||||||||
Revenues: |
||||||||||||||||
Gross premiums written |
$ | 58,030 | $ | 83,881 | $ | 12,408 | $ | 154,319 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums written |
$ | 52,452 | $ | 60,464 | $ | 12,394 | $ | 125,310 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums earned |
$ | 48,187 | $ | 60,729 | $ | 8,888 | $ | 117,804 | ||||||||
Other income (loss) |
160 | 701 | (66 | ) | 795 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
48,347 | 61,430 | 8,822 | 118,599 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Losses and Expenses: |
||||||||||||||||
Net losses and loss adjustment expenses |
29,712 | 44,687 | 3,712 | 78,111 | ||||||||||||
Acquisition costs and other underwriting expenses |
18,919 | (3) | 26,148 | (4) | 3,475 | 48,542 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from segments |
$ | (284 | ) | $ | (9,405 | ) | $ | 1,635 | $ | (8,054 | ) | |||||
|
|
|
|
|
|
|||||||||||
Unallocated Items: |
||||||||||||||||
Net investment income |
6,562 | |||||||||||||||
Net realized investment losses |
(3,492 | ) | ||||||||||||||
Corporate and other operating expenses |
(4,255 | ) | ||||||||||||||
Interest expense |
(2,229 | ) | ||||||||||||||
|
|
|||||||||||||||
Income before income taxes |
(11,468 | ) | ||||||||||||||
Income tax benefit |
6,303 | |||||||||||||||
|
|
|||||||||||||||
Net loss |
(5,165 | ) | ||||||||||||||
|
|
|||||||||||||||
Total assets |
$ | 771,330 | $ | 522,473 | $ | 712,291 | (5) | $ | 2,006,094 | |||||||
|
|
|
|
|
|
|
|
(1) | Includes business ceded to the Companys Reinsurance Operations. |
(2) | External business only, excluding business assumed from affiliates. |
(3) | Includes federal excise tax of $132 relating to cessions from Commercial Lines to Reinsurance Operations. |
(4) | Includes federal excise tax of $303 relating to cessions from Personal Lines to Reinsurance Operations. |
(5) | Comprised of Global Indemnity Reinsurances total assets less its investment in subsidiaries. |
Quarter Ended June 30, 2015: (Dollars in thousands) |
Commercial Lines(1) |
Personal Lines(1) |
Reinsurance Operations(2) |
Total | ||||||||||||
Revenues: |
||||||||||||||||
Gross premiums written |
$ | 59,033 | $ | 89,004 | $ | 18,478 | $ | 166,515 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums written |
$ | 54,700 | $ | 72,827 | $ | 18,478 | $ | 146,005 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums earned |
$ | 49,614 | $ | 65,918 | $ | 13,345 | $ | 128,877 | ||||||||
Other income |
153 | 411 | 13 | 577 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
49,767 | 66,329 | 13,358 | 129,454 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Losses and Expenses: |
||||||||||||||||
Net losses and loss adjustment expenses |
30,039 | 45,180 | 4,341 | 79,560 | ||||||||||||
Acquisition costs and other underwriting expenses |
20,008 | (3) | 26,065 | (4) | 4,853 | 50,926 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from segments |
$ | (280 | ) | $ | (4,916 | ) | $ | 4,164 | $ | (1,032 | ) | |||||
|
|
|
|
|
|
|||||||||||
Unallocated Items: |
||||||||||||||||
Net investment income |
9,141 | |||||||||||||||
Net realized investment gains |
6,532 | |||||||||||||||
Corporate and other operating expenses |
(4,334 | ) | ||||||||||||||
Interest expense |
(535 | ) | ||||||||||||||
|
|
|||||||||||||||
Income before income taxes |
9,772 | |||||||||||||||
Income tax benefit |
1,345 | |||||||||||||||
|
|
|||||||||||||||
Net income |
11,117 | |||||||||||||||
|
|
|||||||||||||||
Total assets |
$ | 944,744 | $ | 554,302 | $ | 761,412 | (5) | $ | 2,260,458 | |||||||
|
|
|
|
|
|
|
|
(1) | Includes business ceded to the Companys Reinsurance Operations. |
(2) | External business only, excluding business assumed from affiliates. |
(3) | Includes federal excise tax of $261 relating to cessions from Commercial Lines to Reinsurance Operations. |
(4) | Includes federal excise tax of $330 relating to cessions from Personal Lines to Reinsurance Operations. |
(5) | Comprised of Global Indemnity Reinsurances total assets less its investment in subsidiaries. |
33
GLOBAL INDEMNITY PLC
Six Months Ended June 30, 2016: (Dollars in thousands) |
Commercial Lines (1) |
Personal Lines (1) |
Reinsurance Operations (2) |
Total | ||||||||||||
Revenues: |
||||||||||||||||
Gross premiums written |
$ | 107,121 | $ | 163,421 | $ | 25,143 | $ | 295,685 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums written |
$ | 96,010 | $ | 121,043 | $ | 25,129 | $ | 242,182 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums earned |
$ | 95,520 | $ | 122,815 | $ | 21,105 | $ | 239,440 | ||||||||
Other income (loss) |
323 | 1,400 | 28 | 1,751 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
95,843 | 124,215 | 21,133 | 241,191 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Losses and Expenses: |
||||||||||||||||
Net losses and loss adjustment expenses |
54,718 | 79,860 | 8,317 | 142,895 | ||||||||||||
Acquisition costs and other underwriting expenses |
39,390 | (3) | 53,284 | (4) | 7,958 | 100,632 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from segments |
$ | 1,735 | $ | (8,929 | ) | $ | 4,858 | $ | (2,336 | ) | ||||||
|
|
|
|
|
|
|||||||||||
Unallocated Items: |
||||||||||||||||
Net investment income |
16,308 | |||||||||||||||
Net realized investment losses |
(10,985 | ) | ||||||||||||||
Corporate and other operating expenses |
(8,058 | ) | ||||||||||||||
Interest expense |
(4,444 | ) | ||||||||||||||
|
|
|||||||||||||||
Income before income taxes |
(9,515 | ) | ||||||||||||||
Income tax benefit |
11,475 | |||||||||||||||
|
|
|||||||||||||||
Net income |
1,960 | |||||||||||||||
|
|
|||||||||||||||
Total assets |
$ | 771,330 | $ | 522,473 | $ | 712,291 | (5) | $ | 2,006,094 | |||||||
|
|
|
|
|
|
|
|
(1) | Includes business ceded to the Companys Reinsurance Operations. |
(2) | External business only, excluding business assumed from affiliates. |
(3) | Includes federal excise tax of $259 relating to cessions from Commercial Lines to Reinsurance Operations. |
(4) | Includes federal excise tax of $614 relating to cessions from Personal Lines to Reinsurance Operations. |
(5) | Comprised of Global Indemnity Reinsurances total assets less its investment in subsidiaries. |
Six Months Ended June 30, 2015: (Dollars in thousands) |
Commercial Lines(1) |
Personal Lines (1) |
Reinsurance Operations (2) |
Total | ||||||||||||
Revenues: |
||||||||||||||||
Gross premiums written |
$ | 108,826 | $ | 162,215 | $ | 38,343 | $ | 309,384 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums written |
$ | 100,322 | $ | 133,483 | $ | 38,304 | $ | 272,109 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums earned |
$ | 100,328 | $ | 129,340 | $ | 26,546 | $ | 256,214 | ||||||||
Other income (loss) |
318 | 877 | (66 | ) | 1,129 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
100,646 | 130,217 | 26,480 | 257,343 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Losses and Expenses: |
||||||||||||||||
Net losses and loss adjustment expenses |
59,642 | 81,098 | 8,439 | 149,179 | ||||||||||||
Acquisition costs and other underwriting expenses |
40,631 | (3) | 48,811 | (4) | 9,742 | 99,184 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from segments |
$ | 373 | $ | 308 | $ | 8,299 | $ | 8,980 | ||||||||
|
|
|
|
|
|
|||||||||||
Unallocated Items: |
||||||||||||||||
Net investment income |
17,382 | |||||||||||||||
Net realized investment gains |
3,562 | |||||||||||||||
Corporate and other operating expenses |
(15,874 | ) | ||||||||||||||
Interest expense |
(1,040 | ) | ||||||||||||||
|
|
|||||||||||||||
Income before income taxes |
13,010 | |||||||||||||||
Income tax benefit |
4,901 | |||||||||||||||
|
|
|||||||||||||||
Net income |
17,911 | |||||||||||||||
|
|
|||||||||||||||
Total assets |
$ | 944,744 | $ | 554,302 | $ | 761,412 | (5) | $ | 2,260,458 | |||||||
|
|
|
|
|
|
|
|
(1) | Includes business ceded to the Companys Reinsurance Operations. |
(2) | External business only, excluding business assumed from affiliates. |
(3) | Includes federal excise tax of $529 relating to cessions from Commercial Lines to Reinsurance Operations. |
(4) | Includes federal excise tax of $647 relating to cessions from Personal Lines to Reinsurance Operations. |
(5) | Comprised of Global Indemnity Reinsurances total assets less its investment in subsidiaries. |
34
GLOBAL INDEMNITY PLC
13. New Accounting Pronouncements
The following are new accounting guidance issued in 2016 which have not yet been adopted.
In June, 2016, the Financial Accounting Standards Board (FASB) issued new accounting guidance surrounding the measurement of credit losses on financial instruments. For assets held at amortized cost basis, the new guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of information for credit loss estimates. For available for sale debt securities, credit losses should be measured similar to current GAAP; however, the new guidance requires that credit losses be presented as an allowance rather than as a write-down. This guidance is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application of this new guidance is permitted as of the fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. The Company is still evaluating the impact of this guidance on its financial condition, results of operations, or cash flows.
In March, 2016, the FASB issued new accounting guidance surrounding stock compensation. The new guidance simplifies several aspects of the accounting for share-based payment, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for public entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. Although the Company is still evaluating the impact of this new guidance, the Company does not anticipate it will have a material impact on its financial condition, results of operations, or cash flows.
In February, 2016, the FASB issued new accounting guidance regarding leases. The new guidance increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Although the Company is still evaluating the impact of this new guidance, the Company does not anticipate it will have a material impact on its financial condition, results of operations, or cash flows.
In January, 2016, the FASB issued new accounting guidance surrounding the accounting for financial instruments. The new guidance addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. In particular, the guidance requires equity investments, except for those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with the changes in fair value recognized in net income. It also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. This guidance is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application of this new guidance is permitted as of the beginning of the fiscal year of adoption. The Company is still evaluating the impact of this guidance on its financial condition, results of operations, and cash flows.
In 2016, the FASB issued several new accounting pronouncements which provided clarification to existing guidance surrounding revenue from contracts with customers. Long and short duration insurance contracts, which comprise the majority of the Companys revenues, are excluded from this accounting guidance. This guidance is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Although the Company is still evaluating the impact of this new guidance, the Company does not anticipate it will have a material impact on its financial condition, results of operations, or cash flows.
35
GLOBAL INDEMNITY PLC
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Companys financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes of Global Indemnity included elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to the Companys plans and strategy, constitutes forward-looking statements that involve risks and uncertainties. Please see Cautionary Note Regarding Forward-Looking Statements at the end of this Item 2 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein. For more information regarding the Companys business and operations, please see the Companys Annual Report on Form 10-K for the year ended December 31, 2015.
Recent Developments
James W. Crystal and Larry N. Port resigned from the Companys Board of Directors effective July 24, 2016 and July 28, 2016, respectively.
On June 20, 2016, the Company announced that its Board of Directors has unanimously approved a plan to re-domicile from Ireland to the Cayman Islands. The Companys shareholders will be asked to vote in favor of completing the reorganization proposal at a special shareholders meeting on September 14, 2016. If the proposal is accepted, a Cayman Islands exempted company, Global Indemnity Limited, would replace Global Indemnity plc as the ultimate holding company of the Global Indemnity group of companies. The Company does not expect the re-domestication will have any material impact on its financial results, including the Companys global effective tax rate.
The Company believes that the Cayman Islands offers a business friendly regulatory environment and a predictable legal framework that simultaneously provides both corporate certainty and shareholder protections, presents a flexible and stable legal and corporate governance framework, which allows a companys Board of Directors latitude to exercise its judgment in what it deems to be in the best interests of the company and offers a beneficial tax regime.
If the move to the Cayman Islands is approved by the Companys shareholders, each Company A ordinary share will be cancelled and replaced with one A ordinary share of Global Indemnity Limited and each Company B ordinary share will be cancelled and replaced with one B ordinary share of Global Indemnity Limited. The Company intends that the Global Indemnity Limited A ordinary shares will trade on the NASDAQ Global Select Market (NASDAQ) under the ticker symbol GBLI, the same symbol under which the Companys A ordinary shares are currently listed. The Company intends that Global Indemnity Limited will be subject to U.S. Securities and Exchange Commission reporting requirements, the mandates of the U.S. Sarbanes-Oxley Act and the corporate governance rules of NASDAQ. The Company will report its consolidated financial results in U.S. dollars and under U.S. generally accepted accounting principles. In addition to shareholder approval, the move to the Cayman Islands is subject to an order from the High Court of Ireland sanctioning the transaction and the satisfaction of certain other conditions.
For additional information on the proposed re-domestication, see the Companys definitive proxy statement on Schedule 14A filed with the SEC on July 15, 2016.
In June, 2016, the Company entered into a $40 million commitment with an investment manager that provides financing for middle market companies. Typical financing arrangements are used for growth, acquisitions, or buyouts. This investment vehicle targets companies with $10 - $50 million in earnings before interest, taxes, depreciation, and amortization. As of June 30, 2016, the Company has funded $13.7 million of this commitment leaving $26.3 million as unfunded. Of the $13.7 million funded, $11.2 million and $2.5 million, respectively, was invested in middle market corporate debt and two separate equity investments in limited liability companies as of June 30, 2016. As a result of this new investment, the Company incurred an additional $1.5 million in upfront investment fees.
In May, 2016, the Company entered into an agreement to sell all of the outstanding shares of capital stock of one of its wholly owned subsidiaries, United National Specialty Insurance Company to an unrelated party for $7.4 million plus the value of capital and surplus which is anticipated to be $10 million at close. Subject to regulatory approvals and customary closing conditions, the transaction is expected to close by the end of the 3rd quarter of 2016. This transaction is not expected to have a significant impact on the ongoing business operations of the Company.
36
GLOBAL INDEMNITY PLC
Overview
The Companys Commercial Lines segment distribute property and casualty insurance products through a group of approximately 120 professional general agencies that have limited quoting and binding authority, as well as a number of wholesale insurance brokers who in turn sell the Companys insurance products to insureds through retail insurance brokers. Commercial Lines operates predominantly in the excess and surplus lines marketplace. The Company manages its Commercial Lines segment via product classifications. These product classifications are: 1) Penn-America, which includes property and general liability products for small commercial businesses distributed through a select network of wholesale general agents with specific binding authority; 2) United National, which includes property, general liability, and professional lines products distributed through program administrators with specific binding authority; and 3) Diamond State, which includes property, casualty, and professional lines products distributed through wholesale brokers and program administrators with specific binding authority.
The Companys Personal Lines segment, via American Reliable, offers specialty personal lines and agricultural coverage through a group of approximately 285 agents, primarily comprised of wholesale general agents, with specific binding authority in the admitted marketplace.
The Companys Reinsurance Operations consisting solely of the operations of Global Indemnity Reinsurance, provides reinsurance solutions through brokers and on a direct basis. In prior years, the Company provided reinsurance solutions through program managers and primary writers, including regional insurance companies. Global Indemnity Reinsurance is a Bermuda based treaty reinsurer for specialty property and casualty insurance and reinsurance companies. Global Indemnity Reinsurance conducts business in Bermuda and is focused on using its capital capacity to write catastrophe-oriented placements and other niche or specialty-focused treaties meeting the Companys risk tolerance and return thresholds.
The Company derives its revenues primarily from premiums paid on insurance policies that it writes and from income generated by its investment portfolio, net of fees paid for investment management services. The amount of insurance premiums that the Company receives is a function of the amount and type of policies it writes, as well as prevailing market prices.
The Companys expenses include losses and loss adjustment expenses, acquisition costs and other underwriting expenses, corporate and other operating expenses, interest, investment expenses, and income taxes. Losses and loss adjustment expenses are estimated by management and reflect the Companys best estimate of ultimate losses and costs arising during the reporting period and revisions of prior period estimates. The Company records its best estimate of losses and loss adjustment expenses considering both internal and external actuarial analyses of the estimated losses the Company expects to incur on the insurance policies it writes. The ultimate losses and loss adjustment expenses will depend on the actual costs to resolve claims. Acquisition costs consist principally of commissions and premium taxes that are typically a percentage of the premiums on the insurance policies the Company writes, net of ceding commissions earned from reinsurers. Other underwriting expenses consist primarily of personnel expenses and general operating expenses related to underwriting activities. Corporate and other operating expenses are comprised primarily of outside legal fees, other professional and accounting fees, directors fees, management fees and salaries and benefits for company personnel whose services relate to the support of corporate activities. Interest expense is primarily comprised of amounts due on outstanding debt.
Critical Accounting Estimates and Policies
The Companys consolidated financial statements are prepared in conformity with GAAP, which require it to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
The Company believes that of the Companys significant accounting policies, the following may involve a higher degree of judgment and estimation.
37
GLOBAL INDEMNITY PLC
Liability for Unpaid Losses and Loss Adjustment Expenses
Although variability is inherent in estimates, the Company believes that the liability for unpaid losses and loss adjustment expenses reflects Managements best estimate for future amounts needed to pay losses and related loss adjustment expenses and the impact of its reinsurance coverage with respect to insured events.
In developing loss and loss adjustment expense (loss or losses) reserve estimates for the US Insurance Operations, the Companys 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 Companys 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 and American Reliable. For further discussion about the Companys product classifications, see General Business Segments in Item 1 of Part I of the Companys 2015 Annual Report on Form 10-K. Each of the Companys product classifications contain both long-tail and short-tail exposures. Every reserve category is analyzed by the Companys actuaries each quarter. The analyses generally include reviews net of reinsurance and ceded only experience. Management is responsible for the final determination of loss reserve selections.
Loss reserve estimates for the Companys Reinsurance Operations are developed by independent, external actuaries at least annually; however, management is responsible for the final determination of loss reserve selections. The data for this analysis is organized by treaty and treaty year. As with the Companys reserves for its Insurance Operations, reserves for its Reinsurance Operations are characterized as long-tail or short-tail. Long-tail exposures include workers compensation, professional liability, and excess and umbrella liability. Short-tail exposures are primarily catastrophe exposed property and marine accounts.
In addition to the Companys internal reserve analysis, independent external actuaries perform a full, detailed review of the Insurance and Reinsurance Operations reserves annually. The Company reviews both the internal and external actuarial analyses in determining its reserve position.
The actuarial methods used to project ultimate losses for both long-tail and short-tail reserve categories include, but are not limited to, the following:
| Paid Development method; |
| Incurred Development method; |
| Expected Loss Ratio method; |
| Bornhuetter-Ferguson method using premiums and paid loss; |
| Bornhuetter-Ferguson method using premiums and incurred loss; and |
| Average Loss method. |
The Paid Development method estimates ultimate losses by reviewing paid loss patterns and applying them to accident years with further expected changes in paid loss. Selection of the paid loss pattern requires analysis of several factors including the impact of inflation on claims costs, the rate at which claims professionals make claim payments and close claims, the impact of judicial decisions, the impact of underwriting changes, the impact of large claim payments and other factors. Claim cost inflation itself requires evaluation of 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. Because this method assumes that losses are paid at a consistent rate, changes in any of these factors can impact the results. Since the method does not rely on case reserves, it is not directly influenced by changes in the adequacy of case reserves.
For many reserve categories, paid loss data for recent periods may be too immature or erratic for reliable loss projections. This situation often exists for long-tail exposures. In addition, changes in the factors described above may result in inconsistent payment patterns. Finally, estimating the paid loss pattern subsequent to the most mature point available in the data analyzed often involves considerable uncertainty for long-tail reserve categories.
38
GLOBAL INDEMNITY PLC
The Incurred Development method is similar to the Paid Development method, but it uses case incurred losses instead of paid losses. Since this method uses more data (case reserves in addition to paid losses) than the Paid Development method, the incurred development patterns may be less variable than paid development patterns. However, selection of the incurred loss pattern requires analysis of all of the factors listed in the description of the Paid Development method. In addition, the inclusion of case reserves can lead to distortions if changes in case reserving practices have taken place and the use of case incurred losses may not eliminate the issues associated with estimating the incurred loss pattern subsequent to the most mature point available.
The Expected Loss Ratio method multiplies premiums by an expected loss ratio to produce ultimate loss estimates for each accident year. This method may be useful if loss development patterns are inconsistent, losses emerge very slowly, or there is relatively little loss history from which to estimate future losses. The selection of the expected loss ratio requires analysis of loss ratios from earlier accident years or pricing studies and analysis of inflationary trends, frequency trends, rate changes, underwriting changes, and other applicable factors.
The Bornhuetter-Ferguson method using premiums and paid losses is a combination of the Paid Development method and the Expected Loss Ratio method. This method normally determines expected loss ratios similar to the method used for the Expected Loss Ratio method and requires analysis of the same factors described above. The method assumes that only future losses will develop at the expected loss ratio level. The percent of paid loss to ultimate loss implied from the Paid Development method is used to determine what percentage of ultimate loss is yet to be paid. The use of the pattern from the Paid Development method requires consideration of all factors listed in the description of the Paid Development method. The estimate of losses yet to be paid is added to current paid losses to estimate the ultimate loss for each accident year. This method will react very slowly if actual ultimate loss ratios are different from expectations due to changes not accounted for by the expected loss ratio calculation.
The Bornhuetter-Ferguson method using premiums and incurred losses is similar to the Bornhuetter-Ferguson method using premiums and paid losses except that it uses case incurred losses. The use of case incurred losses instead of paid losses can result in development patterns that are less variable than paid development patterns. However, the inclusion of case reserves can lead to distortions if changes in case reserving practices have taken place. The method requires analysis of all the factors that need to be reviewed for the Expected Loss Ratio and Incurred Development methods.
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.
For many reserve categories, especially those that can be considered long-tail, a particular accident year may not have a sufficient volume of paid losses to produce a statistically reliable estimate of ultimate losses. In such a case, the Companys actuaries typically assign more weight to the Incurred Development method than to the Paid Development method. As claims continue to settle and the volume of paid losses increases, the actuaries may assign additional weight to the Paid Development method. For most of the Companys reserve categories, even the incurred losses for accident years that are early in the claim settlement process will not be of sufficient volume to produce a reliable estimate of ultimate losses. In these cases, the Company will not assign any weight to the Paid and Incurred Development methods and will use the Bornhuetter-Ferguson and Expected Loss Ratio methods. For short-tail exposures, the Paid and Incurred Development methods can often be relied on sooner primarily because the Companys history includes a sufficient number of accident years to cover the entire period over which paid and incurred losses are expected to change. However, the Company may also use the Expected Loss Ratio, Bornhuetter-Ferguson and Average Loss methods for short-tail exposures.
39
GLOBAL INDEMNITY PLC
Generally, reserves for long-tail lines give more weight to the Expected Loss Ratio method in the more recent immature years. As the accident years mature, weight shifts to the Bornhuetter-Ferguson methods and eventually to the Incurred and/or Paid Development method. Claims related to umbrella business are usually reported later than claims for other long-tail lines. For umbrella business, the shift from the Expected Loss Ratio method to the Bornhuetter-Ferguson methods to the Loss Development method may be more protracted than for most long tailed lines. Reserves for short-tail lines tend to make the shift across methods more quickly than the long tail lines.
For other more complex reserve categories where the above methods may not produce reliable indications, the Company uses additional methods tailored to the characteristics of the specific situation. Such reserve categories include losses from construction defect and asbestos and environmental (A&E) claims.
For construction defect losses, the Companys actuaries organize losses by the year in which they were reported to develop an incurred but not reported (IBNR) provision for development on known cases. To estimate losses from claims that have occurred but have not yet been reported to the Company (Pure IBNR), various extrapolation techniques are applied to the pattern of claims that have been reported to estimate the number of claims yet to be reported. This process requires analysis of several factors including the rate at which policyholders report claims to the Company, the impact of judicial decisions, the impact of underwriting changes and other factors. An average claim size is determined from past experience and applied to the number of unreported claims to estimate reserves for these claims.
Establishing reserves for A&E and other mass tort claims involves considerably more judgment than other types of claims due to, among other things, inconsistent court decisions, bankruptcy filings as a result of asbestos-related liabilities, and judicial interpretations that often expand theories of recovery and broaden the scope of coverage. The insurance industry continues to receive a substantial number of asbestos-related bodily injury claims, with an increasing focus being directed toward other parties, including installers of products containing asbestos rather than against asbestos manufacturers. This shift has resulted in significant insurance coverage litigation implicating applicable coverage defenses or determinations, if any, including but not limited to, determinations as to whether or not an asbestos-related bodily injury claim is subject to aggregate limits of liability found in most comprehensive general liability policies. The Company continues to closely monitor its asbestos exposure and make adjustments where they are warranted.
Reserve analyses performed by the Companys internal and external actuaries result in actuarial point estimates. The results of the detailed reserve reviews were summarized and discussed with the Companys senior management to determine the best estimate of reserves. This group considered many factors in making this decision. The factors included, but were not limited to, the historical pattern and volatility of the actuarial indications, the sensitivity of the actuarial indications to changes in paid and incurred loss patterns, the consistency of claims handling processes, the consistency of case reserving practices, changes in the Companys pricing and underwriting, and overall pricing and underwriting trends in the insurance market.
Managements best estimate at June 30, 2016 was recorded as the loss reserve. Managements best estimate is as of a particular point in time and is based upon known facts, the Companys actuarial analyses, current law, and the Companys judgment. This resulted in carried gross and net reserves of $683.9 million and $572.3 million, respectively, as of June 30, 2016. A breakout of the Companys gross and net reserves, excluding the effects of the Companys intercompany pooling arrangements and intercompany stop loss and quota share reinsurance agreements, as of June 30, 2016 is as follows:
Gross Reserves | ||||||||||||
(Dollars in thousands) | Case | IBNR (1) | Total | |||||||||
Commercial Lines |
142,430 | 375,906 | 518,336 | |||||||||
Personal Lines |
40,015 | 60,666 | 100,681 | |||||||||
Reinsurance Operations |
16,555 | 48,278 | 64,833 | |||||||||
|
|
|
|
|
|
|||||||
Total |
199,000 | 484,850 | 683,850 | |||||||||
|
|
|
|
|
|
Net Reserves (2) | ||||||||||||
(Dollars in thousands) | Case | IBNR (1) | Total | |||||||||
Commercial Lines |
110,090 | 308,400 | 418,490 | |||||||||
Personal Lines |
36,106 | 53,135 | 89,241 | |||||||||
Reinsurance Operations |
16,555 | 47,985 | 64,540 | |||||||||
|
|
|
|
|
|
|||||||
Total |
162,751 | 409,520 | 572,271 | |||||||||
|
|
|
|
|
|
(1) | Losses incurred but not reported, including the expected future emergence of case reserves. |
(2) | Does not include reinsurance receivable on paid losses. |
40
GLOBAL INDEMNITY PLC
The Company continually reviews these estimates and, based on new developments and information, includes adjustments of the estimated ultimate liability in the operating results for the periods in which the adjustments are made. The establishment of loss and loss adjustment expense reserves makes no provision for the possible broadening of coverage by legislative action or judicial interpretation, or the emergence of new types of losses not sufficiently represented in the Companys 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 loss and loss adjustment expense reserves are recorded in the period that the change in these estimates is made. See Note 6 of the notes to the consolidated financial statements in Item 1 of Part I of this report for details concerning the changes in the estimate for incurred loss and loss adjustment expenses related to prior accident years.
The detailed reserve analyses that the Companys internal and external actuaries complete use a variety of generally accepted actuarial methods and techniques to produce a number of estimates of ultimate loss. The Company determines its best estimate of ultimate loss by reviewing the various estimates provided by its actuaries and other relevant information. The reserve estimate is the difference between the estimated ultimate loss and the losses paid to date. The difference between the estimated ultimate loss and the case incurred loss (paid loss plus case reserve) is considered to be IBNR. IBNR calculated as such includes a provision for development on known cases (supplemental development) as well as a provision for claims that have occurred but have not yet been reported to the Company (Pure IBNR).
In light of the many uncertainties associated with establishing the estimates and making the assumptions necessary to establish reserve levels, the Company reviews its reserve estimates on a regular basis and makes adjustments in the period that the need for such adjustments is determined.
The key assumptions fundamental to the reserving process are often different for various reserve categories and accident years. Some of these assumptions are explicit assumptions that are required of a particular method, but most of the assumptions are implicit and cannot be precisely quantified. An example of an explicit assumption is the pattern employed in the Paid Development method. However, the assumed pattern is itself based on several implicit assumptions such as the impact of inflation on medical costs and the rate at which claim professionals close claims. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Each reserve category has an implicit frequency and severity for each accident year as a result of the various assumptions made.
Previous reserve analyses have resulted in the Companys identification of information and trends that have caused it to increase or decrease frequency and severity assumptions in prior periods and could lead to the identification of a need for additional material changes in loss and loss adjustment expense reserves, which could materially affect results of operations, equity, business and insurer financial strength and debt ratings. Factors affecting loss frequency include, among other things, the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include, among other things, changes in policy limits and deductibles, rate of inflation and judicial interpretations. Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects the Companys ability to accurately predict loss frequency (loss frequencies are more predictable for short-tail lines) as well as the amount of reserves needed for IBNR.
If the actual levels of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than managements best estimate. For most of its reserve categories, the Company believes that frequency can be predicted with greater accuracy than severity. Therefore, the Company believes managements best estimate is more likely influenced by changes in severity than frequency. The following table, which the Company believes reflects a reasonable range of variability around its best estimate based on historical loss experience and managements judgment, reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity on the Companys current accident year net loss estimate of $158.4 million for claims occurring during the six months ended June 30, 2016:
41
GLOBAL INDEMNITY PLC
Severity Change | ||||||||||||||||||||||||
(Dollars in thousands) | -10% | -5% | 0% | 5% | 10% | |||||||||||||||||||
Frequency Change |
-5 | % | $ | (22,968 | ) | $ | (15,444 | ) | $ | (7,920 | ) | $ | (396 | ) | $ | 7,128 | ||||||||
-3 | % | (20,117 | ) | (12,434 | ) | (4,752 | ) | 2,930 | 10,613 | |||||||||||||||
-2 | % | (18,691 | ) | (10,930 | ) | (3,168 | ) | 4,594 | 12,355 | |||||||||||||||
-1 | % | (17,266 | ) | (9,425 | ) | (1,584 | ) | 6,257 | 14,098 | |||||||||||||||
0 | % | (15,840 | ) | (7,920 | ) | | 7,920 | 15,840 | ||||||||||||||||
1 | % | (14,414 | ) | (6,415 | ) | 1,584 | 9,583 | 17,582 | ||||||||||||||||
2 | % | (12,989 | ) | (4,910 | ) | 3,168 | 11,246 | 19,325 | ||||||||||||||||
3 | % | (11,563 | ) | (3,406 | ) | 4,752 | 12,910 | 21,067 | ||||||||||||||||
5 | % | (8,712 | ) | (396 | ) | 7,920 | 16,236 | 24,552 |
The Companys net reserves for losses and loss adjustment expenses of $572.3 million as of June 30, 2016 relate to multiple accident years. Therefore, the impact of changes in frequency and severity for more than one accident year could be higher or lower than the amounts reflected above.
Recoverability of Reinsurance Receivables
The Company regularly reviews the collectability of its reinsurance receivables and includes adjustments resulting from this review in earnings in the period in which the adjustment arises. A.M. Best ratings, financial history, available collateral and payment history with the reinsurers are several of the factors that the Company considers when judging collectability. Changes in loss reserves can also affect the valuation of reinsurance receivables if the change is related to loss reserves that are ceded to reinsurers. Certain amounts may be uncollectible if the Companys reinsurers dispute a loss or if the reinsurer is unable to pay. If its reinsurers do not pay, the Company remains legally obligated to pay the loss.
Investments
The carrying amount of the Companys investments approximates their fair value. The Company regularly performs various analytical valuation procedures with respect to investments, including reviewing each fixed maturity security in an unrealized loss position to determine the amount of unrealized loss related to credit loss and the amount related to all other factors, such as changes in interest rates. The credit loss represents the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. The credit loss component of the other than temporary impairment is recorded through earnings, whereas the amount relating to factors other than credit losses are recorded in other comprehensive income, net of taxes. During its review, the Company considers credit rating, market price, and issuer specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which the Company determines that a credit loss is likely are subjected to further analysis to estimate the credit loss to be recognized in earnings, if any. See Note 2 of the notes to consolidated financial statements in Item 1 of Part I of this report for the specific methodologies and significant assumptions used by asset class. Upon identification of such securities and periodically thereafter, a detailed review is performed to determine whether the decline is considered other than temporary. This review includes an analysis of several factors, including but not limited to, the credit ratings and cash flows of the securities and the magnitude and length of time that the fair value of such securities is below cost.
For an analysis of the Companys securities with gross unrealized losses as of June 30, 2016 and December 31, 2015, and for other than temporary impairment losses that the Company recorded for the quarters ended June 30, 2016 and 2015, please see Note 2 of the notes to the consolidated financial statements in Item 1 of Part I of this report.
Fair Value Measurements
The Company categorizes its invested assets and derivative instruments that are accounted for at fair value in the consolidated statements into a fair value hierarchy. The fair value hierarchy is directly related to the amount of subjectivity associated with the inputs utilized to determine the fair value of these assets.
The reported value of financial instruments not carried at fair value, principally cash and cash equivalents and margin borrowing facility, approximates fair value.
42
GLOBAL INDEMNITY PLC
See Note 4 of the notes to the consolidated financial statements in Item 1 of Part I of this report for further information about the fair value hierarchy and the Companys assets that are accounted for at fair value.
Goodwill and Intangible Assets
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.
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.
Intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives. The carrying amounts of definite lived intangible assets are regularly reviewed for indicators of impairment in accordance with applicable accounting guidance. Impairment is recognized only if the carrying amount of the intangible asset is in excess of its undiscounted projected cash flows. The impairment is measured as the difference between the carrying amount and the estimated fair value of the asset.
Deferred Acquisition Costs
The costs of acquiring new and renewal insurance and reinsurance contracts include commissions, premium taxes and certain other costs that are directly related to the successful acquisition of new and renewal insurance and reinsurance contracts. The excess of the Companys costs of acquiring new and renewal insurance and reinsurance contracts over the related ceding commissions earned from reinsurers is capitalized as deferred acquisition costs and amortized over the period in which the related premiums are earned.
In accordance with accounting guidance for insurance enterprises, the method followed in computing such amounts limits them to amounts recoverable from premium to be earned, related investment income, losses and loss adjustment expenses, and certain other costs expected to be incurred as the premium is earned. A premium deficiency is recognized if the sum of expected loss and loss adjustment expenses and unamortized acquisition costs exceeds related unearned premium. This evaluation is done at a product line level in Insurance Operations and at a treaty level in Reinsurance Operations. Any future expected loss on the related unearned premium is recorded first by impairing the unamortized acquisition costs on the related unearned premium followed by an increase to loss and loss adjustment expense reserves on additional expected loss in excess of unamortized acquisition costs. The Company calculates deferred acquisition costs for Insurance Operations separately by product lines and for its Reinsurance Operations separately for each treaty.
Taxation
The Company provides for income taxes in accordance with applicable accounting guidance. The Companys deferred tax assets and liabilities primarily result from temporary differences between the amounts recorded in the consolidated financial statements and the tax basis of the Companys assets and liabilities.
At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. A valuation allowance would be based on all available information including the Companys assessment of uncertain tax positions and projections of future taxable income from each tax-paying component in each jurisdiction, principally derived from business plans and available tax planning strategies. There are no valuation allowances as of June 30, 2016 or December 31, 2015. The deferred tax asset balance is analyzed regularly by management. This assessment requires significant judgment and considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of carryforward periods, and tax planning strategies and/or actions. Based on these analyses, the Company has
43
GLOBAL INDEMNITY PLC
determined that its deferred tax asset is recoverable. Projections of future taxable income incorporate several assumptions of future business and operations that are apt to differ from actual experience. If, in the future, the Companys assumptions and estimates that resulted in the forecast of future taxable income for each tax-paying component prove to be incorrect, a valuation allowance may be required. This could have a material adverse effect on the Companys financial condition, results of operations, and liquidity.
On an interim basis, the Company generally records its tax provision using the expected full year effective tax rate. Forecasts which compute taxable income and taxes expected to be incurred in the jurisdictions where the Company does business are prepared several times per year. The effective tax rate is computed by dividing forecasted income tax expense not including tax on net realized investment gains (losses) and discrete items by forecasted pre-tax income not including net realized investment gains (losses) and discrete items. Changes in pre-tax and taxable income in the jurisdictions where the Company does business can change the effective tax rate. To compute the Companys income tax expense on an interim basis, the Company generally applies its expected full year effective tax rate against its pre-tax income excluding net realized investment gains (losses) and discrete items and then adds actual tax on net realized investment gains (losses) and discrete items to that result. However, when there is significant volatility in the expected tax rate, the Company records its actual income tax provision in lieu of the estimated effective income tax rate.
The Company applies a more likely than not recognition threshold for all tax uncertainties, only allowing the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities.
In April, 2016, the US Department of the Treasury announced the issuance of temporary and proposed regulations that could eliminate certain types of interest deductions. These regulations include provisions that may be interpreted to impact other common tax structures including intercompany financing and obligations. The US Department of Treasury still needs to provide clarification on these regulations and proposals.
Business Segments
The Company manages its business through three reportable business segments: Personal Lines, Commercial Lines, and Reinsurance Operations.
The Company evaluates the performance of these three segments based on gross and net premiums written, revenues in the form of net premiums earned and expenses in the form of net losses and loss adjustment expenses, acquisition costs, and other underwriting expenses.
For a description of the Companys segments, see Note 12 of the notes to the consolidated financial statements in Item 1 of Part I.
44
GLOBAL INDEMNITY PLC
The following table sets forth an analysis of financial data for the Companys segments during the periods indicated:
(Dollars in thousands) | Quarters Ended June 30, | Six Months Ended June 30, |
||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Personal Lines premium written: |
||||||||||||||||
Gross premiums written |
$ | 83,881 | $ | 89,004 | $ | 163,421 | $ | 162,215 | ||||||||
Ceded premiums written |
23,417 | 16,177 | 42,378 | 28,732 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums written |
$ | 60,464 | $ | 72,827 | $ | 121,043 | $ | 133,483 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Commercial Lines premiums written: |
||||||||||||||||
Gross premiums written |
$ | 58,030 | $ | 59,033 | $ | 107,121 | $ | 108,826 | ||||||||
Ceded premiums written |
5,578 | 4,333 | 11,111 | 8,504 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums written |
$ | 52,452 | $ | 54,700 | $ | 96,010 | $ | 100,322 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Reinsurance Operations premiums written: |
||||||||||||||||
Gross premiums written |
$ | 12,408 | $ | 18,478 | $ | 25,143 | $ | 38,343 | ||||||||
Ceded premiums written |
14 | | 14 | 39 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums written |
$ | 12,394 | $ | 18,478 | $ | 25,129 | $ | 38,304 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Revenues: (1) |
||||||||||||||||
Personal Lines |
$ | 61,430 | $ | 66,329 | $ | 124,215 | $ | 130,217 | ||||||||
Commercial Lines |
48,347 | 49,767 | 95,843 | 100,646 | ||||||||||||
Reinsurance Operations |
8,822 | 13,358 | 21,133 | 26,480 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
$ | 118,599 | $ | 129,454 | $ | 241,191 | $ | 257,343 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Expenses: (2) |
||||||||||||||||
Personal Lines (3) |
$ | 70,835 | $ | 71,245 | $ | 133,144 | $ | 129,909 | ||||||||
Commercial Lines (4) |
48,631 | 50,047 | 94,108 | 100,273 | ||||||||||||
Reinsurance Operations |
7,187 | 9,194 | 16,275 | 18,181 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total expenses |
$ | 126,653 | $ | 130,486 | $ | 243,527 | $ | 248,363 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from segments: |
||||||||||||||||
Personal Lines |
$ | (9,405 | ) | $ | (4,916 | ) | $ | (8,929 | ) | $ | 308 | |||||
Commercial Lines |
(284 | ) | (280 | ) | 1,735 | 373 | ||||||||||
Reinsurance Operations |
1,635 | 4,164 | 4,858 | 8,299 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total income (loss) from segments |
$ | (8,054 | ) | $ | (1,032 | ) | $ | (2,336 | ) | $ | 8,980 | |||||
|
|
|
|
|
|
|
|
|||||||||
Insurance combined ratio analysis: (5) |
||||||||||||||||
Personal Lines |
||||||||||||||||
Loss ratio |
73.6 | 68.5 | 65.0 | 62.7 | ||||||||||||
Expense ratio |
43.1 | 39.5 | 43.4 | 37.7 | ||||||||||||
|
|
|