e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31,
2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period From
to
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001-34809
Commission File Number
Global Indemnity Plc
(Exact name of registrant as
specified in its charter)
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Ireland
(State or other
jurisdiction
of incorporation or organization)
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98-0664891
(I.R.S. Employer
Identification No.)
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ARTHUR COX BUILDING
EARLSFORT TERRACE
DUBLIN 2
IRELAND
(Address of principal executive
office including zip code)
Registrants telephone number, including area code: 353
(0) 1 618 0517
Securities Registered Pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Common A Ordinary shares,
$0.0001 Par Value
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The Nasdaq Global Select Market
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Securities Registered Pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
YES o NO þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
YES o NO þ
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 þ NO o
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
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). YES
o NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
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 the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act). YES
o NO þ
The aggregate market value of the common equity held by
non-affiliates of the registrant, computed by reference to the
price of the registrants Class A Ordinary shares as
of the last business day of the registrants most recently
completed second fiscal quarter (based on the last reported sale
price on the Nasdaq Global Select Market as of such date), was
$247,112,574. Class A ordinary shares held by each
executive officer and director and by each person who is known
by the registrant to beneficially own 5% or more of the
registrants outstanding Class A ordinary shares have
been excluded in that such persons may be deemed affiliates. The
determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of February 28, 2011, the registrant had outstanding
18,295,188 Class A Ordinary shares and 12,061,370
Class B Ordinary shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement relating to
the 2011 Annual Meeting of Shareholders are incorporated by
reference into Part III of this report.
TABLE OF
CONTENTS
As used in this annual report, unless the context requires
otherwise:
1) Global Indemnity refers to Global Indemnity
plc, an exempted company incorporated with limited liability
under the laws of Ireland, and its U.S. and
Non-U.S. Subsidiaries;
2) we, us, our, and the
Company refer to Global Indemnity and its
subsidiaries or, prior to July 2, 2010, to United America
Indemnity;
3) ordinary shares refers to Global Indemnity
Class A and Class B ordinary shares, or, prior to
July 2, 2010, to United America Indemnity Class A and
Class B common shares;
4) United America Indemnity refers to United
America Indemnity, Ltd. (formerly Vigilant International, Ltd.,
a Cayman Islands exempted company that, on July 2, 2010,
became a direct, wholly-owned subsidiary of Global Indemnity
plc, and its subsidiaries;
5) our U.S. Subsidiaries refers to Global
Indemnity Group, Global Indemnity Group Services, LLC, AIS,
Penn-America
Group, Inc., and our Insurance Operations;
1
6) our United States Based Insurance Operations
and Insurance Operations refer to the insurance and
related operations conducted by the U.S. Insurance
Companies, American Insurance Adjustment Agency, Inc., Global
Indemnity Collectibles Insurance Services, LLC, United America
Insurance Services, LLC, and J.H. Ferguson &
Associates, LLC;
7) our U.S. Insurance Companies refers to
the insurance and related operations conducted by United
National Insurance Company, Diamond State Insurance Company,
United National Casualty Insurance Company, United National
Specialty Insurance Company,
Penn-America
Insurance Company, Penn-Star Insurance Company and Penn-Patriot
Insurance Company;
8) our
Non-U.S. Subsidiaries
refers to Global Indemnity Services Ltd., Global Indemnity
(Gibraltar) Ltd., Global Indemnity (Cayman) Ltd., Global
Indemnity (Luxembourg) Ltd., Wind River Reinsurance, the
Luxembourg Companies, and U.A.I. (Ireland) Ltd.;
9) Wind River Reinsurance refers to Wind River
Reinsurance Company, Ltd.;
10) the Luxembourg Companies refers to U.A.I.
(Luxembourg) I S.à r.l., U.A.I. (Luxembourg)
II S.à r.l., U.A.I. (Luxembourg) III S.à
r.l., U.A.I. (Luxembourg) IV S.à r.l., U.A.I. (Luxembourg)
Investment S.à r.l., and Wind River (Luxembourg) S.à
r.l.;
11) AIS refers to American Insurance Service,
Inc.;
12) our Predecessor Insurance Operations refers
to Wind River Investment Corporation, which was dissolved on
May 31, 2006, AIS, American Insurance Adjustment Agency,
Inc., Emerald Insurance Company, which was dissolved on
March 24, 2008, United National Insurance Company, Diamond
State Insurance Company, United National Casualty Insurance
Company, United National Specialty Insurance Company, and J.H.
Ferguson & Associates, LLC;
13) our International Reinsurance Operations
and Reinsurance Operations refer to the reinsurance
and related operations of Wind River Reinsurance;
14) Global Indemnity Group refers to Global
Indemnity Group, Inc., (fka United America Indemnity Group,
Inc.);
15) Penn-America
refers to our product classification that includes property and
general liability products for small commercial businesses
distributed through a select network of wholesale general agents
with specific binding authority;
16) United National refers to our product
classification that includes property, general liability, and
professional liability lines products distributed through
program administrators with specific binding authority;
17) Diamond State refers to our product
classification that includes property, casualty, and
professional liability lines products distributed through
wholesale brokers and program administrators with specific
binding authority;
18) the Statutory Trusts refers to United
National Group Capital Trust I, United National Group
Capital Statutory Trust II,
Penn-America
Statutory Trust I, whose registration was cancelled
effective January 15, 2008, and
Penn-America
Statutory Trust II, whose registration was cancelled
effective February 2, 2009;
19) Fox Paine & Company refers to Fox
Paine & Company, LLC and affiliated investment funds;
20) Funds refers to Fox Paine Capital
Fund II International, L.P. together with its affiliates.
21) Wind River refers to Wind River Holdings,
L.P. (formerly The AMC Group, L.P.)
22) Global Indemnity Cayman refers to Global
Indemnity (Cayman) Ltd.
23) GAAP refers to accounting principles
generally accepted in the United States of America; and
24) $ or dollars refers to
U.S. dollars.
2
PART I
Some of the information contained in this Item 1 or set
forth elsewhere in this report, including information with
respect to our plans and strategy, constitutes forward-looking
statements that involve risks and uncertainties. Please see
Cautionary Note Regarding Forward-Looking Statements
at the end of Item 7 of Part II and Risk
Factors in Item 1A of Part I 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.
Our
History
Global Indemnity is a holding company formed on March 9,
2010 under the laws of Ireland. On July 2, 2010, Global
Indemnity became our ultimate parent company pursuant to a
scheme of arrangement whereby all United America Indemnity, Ltd.
ordinary shares were cancelled and all holders of such shares
received ordinary shares of Global Indemnity plc on a
one-for-two
basis. United America Indemnity, Ltd. was a holding company
formed on August 26, 2003 under the laws of the Cayman
Islands to acquire our Predecessor Insurance Operations.
General
Global Indemnity, one of the leading specialty property and
casualty insurers in the industry, provides its insurance
products across a full distribution network binding
authority, program, brokerage, and reinsurance. We manage the
distribution of these products in two segments:
(a) Insurance Operations and (b) Reinsurance
Operations.
Business
Segments
Our
Insurance Operations
The United States Based Insurance Operations distribute property
and casualty insurance products and operate predominantly in the
excess and surplus lines marketplace. Our insurance products
target specific, defined groups of insureds with customized
coverages to meet their needs. To manage our operations, we
differentiate them by product classification. These product
classifications are:
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Penn-America
distributes property and general liability products for small
commercial businesses through a select network of wholesale
general agents with specific binding authority;
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United National distributes property, general liability, and
professional lines products through program administrators with
specific binding authority; and
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Diamond State distributes property, casualty, and professional
lines products through wholesale brokers that are underwritten
by our personnel and selected brokers with specific binding
authority.
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See Marketing and Distribution below for a
discussion on how our insurance products are underwritten.
These product classifications comprise our Insurance Operations
business segment and are not considered individual business
segments because each product has similar economic
characteristics, distribution, and coverages. Our Insurance
Operations provide property, casualty, and professional
liability products utilizing customized guidelines, rates, and
forms tailored to our risk and underwriting philosophy. Our
Insurance Operations are licensed to write on a surplus lines
(non-admitted) basis and an admitted basis in all 50
U.S. States, the District of Columbia, Puerto Rico, and the
U.S. Virgin Islands, which provides us with flexibility in
designing products, programs, and in determining rates to meet
emerging risks and discontinuities in the marketplace. In 2010,
gross premiums written were $245.5 million compared to
$268.0 million for 2009.
We distribute our insurance products through a group of
approximately 103 professional wholesale general agencies that
have specific quoting and binding authority, as well as a number
of wholesale insurance brokers who in turn sell our insurance
products to insureds through retail insurance brokers.
3
Our United States Based Insurance Operations are rated
A (Excellent) by A.M. Best, which assigns
credit ratings to insurance companies transacting business in
the United States. A (Excellent) is the third
highest rating of sixteen rating categories. These ratings are
based upon factors of concern to policyholders, such as capital
adequacy, loss reserve adequacy, and overall operating
performance, and are not directed to the protection of investors.
Our
Reinsurance Operations
Our Reinsurance Operations segment provides reinsurance
solutions through brokers, primary writers, including regional
insurance companies, and program managers and consists solely of
the operations of Wind River Reinsurance. Wind River Reinsurance
is a Bermuda-based treaty reinsurer of excess and surplus lines
carriers, specialty property and casualty insurance companies
and U.S. regional insurance writers. Wind River also
participates as a retrocessionaire on business assumed by other
reinsurers. Wind River Reinsurance began offering third party
reinsurance in the third quarter of 2006 and entered into its
initial third party reinsurance treaty effective January 1,
2007. Wind River Reinsurance also provides quota share and
stop-loss reinsurance to our Insurance Operations. In 2010,
gross premiums written from third parties were
$100.3 million compared to $73.0 million for 2009.
Wind River Reinsurance is listed with the International Insurers
Department (IID) of the National Association of
Insurance Commissioners (NAIC). Although Wind River
Reinsurance does not currently offer direct third party excess
and surplus lines insurance products, it is eligible to write on
a surplus lines basis in 31 U.S. states and the District of
Columbia.
Wind River Reinsurance conducts business in Bermuda. While we
believe many reinsurers in Bermuda continue to focus on
catastrophe oriented reinsurance solutions, Wind River
Reinsurance is part of a smaller group of companies seeking
niche and casualty oriented treaty opportunities. While Wind
River Reinsurance will consider unique catastrophe oriented
placements, this is a very selective process and is not its
primary focus. Given the pricing environment of the larger
casualty oriented organizations, Wind River Reinsurance
continues to cautiously deploy and manage its capital while
seeking to position itself as a niche reinsurance solution
provider. We believe the current market dictates that growth
will be very measured.
As part of the aforementioned reinsurance that Wind River
Reinsurance provides to our Insurance Operations, our Insurance
Operations cede 50% of their net unearned premiums, plus 50% of
the net retained insurance liability of all new and renewal
business to Wind River Reinsurance under a quota share
reinsurance agreement. Wind River Reinsurance also provides
stop-loss protection for our Insurance Operations in a 70%
through 90% loss ratio corridor.
Wind River Reinsurance is rated A (Excellent) by
A.M. Best.
Available
Information
We maintain a website at www.globalindemnity.ie. We will make
available, free of charge on our website, our most recent annual
report on
Form 10-K
and subsequently filed quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after we
file such material with, or furnish it to, the United
States Securities and Exchange Commission.
Recent
Trends in Our Industry
The property and casualty insurance industry has historically
been a cyclical industry. During periods of reduced underwriting
capacity, which is characterized by a shortage of capital and
reduced competition, underwriting results are generally more
favorable for insurers due to more favorable policy terms and
conditions and higher rate levels. During periods of excess
underwriting capacity, which is characterized by an abundance of
capital and increased competition, underwriting results are
generally less favorable for insurers due to an expansion of
policy terms and conditions and lower rate levels. Historically,
several factors have affected the level of underwriting
capacity, including industry losses, catastrophes, changes in
legal and regulatory guidelines, investment results, and the
ratings and financial strength of competitors. As underwriting
capacity increases, the standard insurance markets begin to
expand their risk selection criteria to include risks that have
typically been placed in the
4
non-standard excess and surplus lines market. This tends to
shrink the demand for insurance coverage from insurers that are
focused on writing in the excess and surplus line marketplace,
such as Global Indemnity.
Currently we believe we are in a period of excess underwriting
capacity, and we continued to see rate decreases throughout
2010. Insurers and reinsurers 2010 growth, if any,
became very selective as new business prices remained
competitive and renewals saw little overall price increases.
Non-catastrophe segments of the reinsurance market continued to
be strained further as many opposing market forces failed to
allow upward rate pressures to take root. Reinsurers and
carriers alike clearly observed that competition has contributed
to the adequacy in underlying prices, terms, and conditions to
be eroded over the past several years calling for a flight to
improved pricing, terms, and conditions adequacy.
For property and casualty reinsurance and insurance companies to
generate an acceptable return on capital in the current interest
rate environment, companies are focusing on generating
acceptable underwriting returns. The industry is making
increased use of risk management tools to adequately compensate
for the risks being written. We believe the industry continues
to focus on investment yields and the credit-worthiness of
investment portfolios.
The Federal Funds rate remained at extremely low levels during
2010 causing investment yields on short-term and overnight
investments to be low. Given low interest rates for Federal
Funds and current yields on investment grade fixed income
securities, we seek to position our investment portfolio to
protect against a rising interest rate environment by including
fixed maturity investments with low durations and continuing
re-investment in our floating rate corporate loans portfolio.
Our fixed income portfolio continues to be biased toward high
quality assets with an average rating of AA. Our corporate loans
portfolio is primarily made up of corporate loans which are
typically below investment grade; however provide a higher
return and shorter duration.
In addition, continuing developments in the regulatory
environment could have some impact on our industry. On
July 21, 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Act) was enacted into
law in the United States. The Act includes a number of
provisions having a direct impact on the insurance industry,
most notably, the creation of a Federal Insurance Office to
monitor the insurance industry, streamlining of surplus lines
insurance, credit for reinsurance, and systemic risk regulation.
The Federal Insurance Office is empowered to gather data and
information regarding the insurance industry and insurers,
including conducting a study for submission to the
U.S. Congress on how to modernize and improve insurance
regulation in the United States. With respect to surplus lines
insurance, the Act gives exclusive authority to regulate surplus
lines transactions to the home state of the insured, and the
requirement that a surplus lines broker must first attempt to
place coverage in the admitted market is substantially softened
with respect to large commercial policyholders. Significantly,
the Act provides that a state may not prevent a surplus lines
broker from placing surplus lines insurance with a
non-U.S. insurer,
such as our Wind River subsidiary, that appears on the quarterly
listing of non-admitted insurers maintained by the International
Insurers Department of the National Association of Insurance
Commissioners. Regarding credit for reinsurance, the Act
generally provides that the state of domicile of the ceding
company (and no other state) may regulate financial statement
credit for the ceded risk. The Act also provides the
U.S. Federal Reserve with supervisory authority over
insurance companies that are deemed to be systemically
important. Regulations to implement the Act are currently
under development and we are continuing to monitor the impact
the Act may have on our operations.
Excess
and Surplus Lines Market
Our Insurance Operations operate in the excess and surplus lines
market. The excess and surplus lines market differs
significantly from the standard property and casualty insurance
market. In the standard property and casualty insurance market,
insurance rates and forms are highly regulated, products and
coverages are largely uniform and have relatively predictable
exposures. In the standard market, policies must be written by
insurance companies that are admitted to transact business in
the state in which the policy is issued. As a result, in the
standard property and casualty insurance market, insurance
companies tend to compete for customers primarily on the basis
of price, coverage, value-added service, and financial strength.
In contrast, the excess and surplus lines market provides
coverage for businesses that often do not fit the underwriting
criteria of an insurance company operating in the standard
markets due to their relatively greater unpredictable loss
patterns and unique niches of exposure requiring
5
rate and policy form flexibility. Without the excess and surplus
lines market, certain businesses would have to self insure their
exposures, or seek coverage outside the U.S. market.
Competition in the excess and surplus lines market tends to
focus less on price and more on availability, service, and other
considerations. While excess and surplus lines market exposures
may have higher perceived insurance risk than their standard
market counterparts, excess and surplus lines market
underwriters historically have been able to generate
underwriting profitability superior to standard market
underwriters.
The excess underwriting capacity felt in the standard property
and casualty insurance industry is impacting the excess and
surplus lines market as standard insurers continue to search for
acceptable risks in the excess marketplace. According to
A.M. Best, direct premiums written for the excess and
surplus lines market fell 4.1% in 2009, a larger decrease than
the 3.3% drop felt by the overall property and casualty
insurance industry. The excess and surplus market is also being
impacted by companies who choose to self-insure their risks
rather than purchase third-party insurance.
Within the excess and surplus lines market, we write business on
both a specialty admitted and surplus lines basis. Surplus lines
business accounts for approximately 70.6% of the business that
our Insurance Operations writes, while specialty admitted
business accounts for the remaining 29.4%.
When writing on a specialty admitted basis, our focus is on
writing insurance for insureds that engage in similar but often
highly specialized types of activities. The specialty admitted
market is subject to greater state regulation than the surplus
lines market, particularly with regard to rate and form filing
requirements and the ability to enter and exit lines of
business. Insureds purchasing coverage from specialty admitted
insurance companies do so because the insurance product is not
otherwise available from standard market insurers. Yet, for
regulatory or marketing reasons, these insureds require products
that are written by an admitted insurance company.
Products
and Product Development
Our Insurance Operations distribute property and casualty
insurance products and operate predominantly in the excess and
surplus lines marketplace. To manage our operations, we seek to
differentiate our products by product classification. See
Our Insurance Operations above for a description of
these product classifications. We believe we have significant
flexibility in designing products, programs, and in determining
rates to meet the needs of the marketplace.
Our Reinsurance Operations offer third party treaty reinsurance
for excess and surplus lines carriers, specialty property and
casualty insurance companies and U.S. regional insurance
writers. Our Reinsurance Operations also provide reinsurance to
our Insurance Operations in the form of quota share and
stop-loss arrangements.
The following table sets forth an analysis of Global
Indemnitys gross premiums written, which is the sum of
direct and assumed premiums written, by operating segment during
the periods indicated:
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For the Years Ended December 31,
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2010
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2009
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2008
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(Dollars in thousands)
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Insurance Operations
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$
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245,481
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71.0
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%
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$
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267,992
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78.6
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%
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$
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353,130
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93.2
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%
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Reinsurance Operations
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100,282
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29.0
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73,006
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21.4
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25,570
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6.8
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Total
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$
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345,763
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100.0
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%
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$
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340,998
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100.0
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%
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$
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378,700
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100.0
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%
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For a discussion of the variances between years, see
Results of Operations in Item 7 of Part II
of this report.
6
The following table sets forth an analysis of Global
Indemnitys net premiums written, which is gross premiums
written less ceded premiums written, by operating segment during
the periods indicated:
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For the Years Ended December 31,
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2010
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2009
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2008
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(Dollars in thousands)
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Insurance Operations
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$
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196,065
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66.1
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%
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$
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218,264
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75.0
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%
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$
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305,479
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98.8
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%
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Reinsurance Operations
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100,439
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33.9
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72,731
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25.0
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3,601
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1.2
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Total
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$
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296,504
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100.0
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%
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$
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290,995
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100.0
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%
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$
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309,080
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100.0
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%
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For a discussion of the variances between years, see
Results of Operations in Item 7 of Part II
of this report.
Geographic
Concentration
The following table sets forth the geographic distribution of
Global Indemnitys gross premiums written by its Insurance
and Reinsurance Operations for the periods indicated:
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For the Years Ended December 31,
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2010
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2009
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2008
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(Dollars in thousands)
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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California
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$
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31,215
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9.0
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%
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$
|
28,264
|
|
|
|
8.3
|
%
|
|
$
|
39,793
|
|
|
|
10.5
|
%
|
Florida
|
|
|
28,072
|
|
|
|
8.1
|
|
|
|
34,061
|
|
|
|
10.0
|
|
|
|
41,893
|
|
|
|
11.1
|
|
Texas
|
|
|
22,133
|
|
|
|
6.4
|
|
|
|
24,292
|
|
|
|
7.1
|
|
|
|
26,029
|
|
|
|
6.9
|
|
New York
|
|
|
16,009
|
|
|
|
4.6
|
|
|
|
17,224
|
|
|
|
5.1
|
|
|
|
26,045
|
|
|
|
6.9
|
|
Louisiana
|
|
|
10,981
|
|
|
|
3.2
|
|
|
|
12,339
|
|
|
|
3.6
|
|
|
|
13,214
|
|
|
|
3.5
|
|
Pennsylvania
|
|
|
9,903
|
|
|
|
2.9
|
|
|
|
9,506
|
|
|
|
2.8
|
|
|
|
12,446
|
|
|
|
3.3
|
|
Massachusetts
|
|
|
9,181
|
|
|
|
2.7
|
|
|
|
11,948
|
|
|
|
3.5
|
|
|
|
16,956
|
|
|
|
4.5
|
|
Illinois
|
|
|
8,687
|
|
|
|
2.5
|
|
|
|
8,630
|
|
|
|
2.5
|
|
|
|
11,766
|
|
|
|
3.1
|
|
New Jersey
|
|
|
8,582
|
|
|
|
2.5
|
|
|
|
8,918
|
|
|
|
2.6
|
|
|
|
13,617
|
|
|
|
3.5
|
|
Michigan
|
|
|
6,540
|
|
|
|
1.9
|
|
|
|
6,927
|
|
|
|
2.0
|
|
|
|
8,467
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
151,303
|
|
|
|
43.8
|
|
|
|
162,109
|
|
|
|
47.5
|
|
|
|
210,226
|
|
|
|
55.5
|
|
Reinsurance Operations
|
|
|
100,282
|
|
|
|
29.0
|
|
|
|
73,006
|
|
|
|
21.4
|
|
|
|
25,570
|
|
|
|
6.8
|
|
All others
|
|
|
94,178
|
|
|
|
27.2
|
|
|
|
105,883
|
|
|
|
31.1
|
|
|
|
142,904
|
|
|
|
37.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
345,763
|
|
|
|
100.0
|
%
|
|
$
|
340,998
|
|
|
|
100.0
|
%
|
|
$
|
378,700
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
and Distribution
We provide our insurance products across a full distribution
network binding authority, program, brokerage, and
reinsurance. For our binding authority and program product
classifications, we distribute our insurance products through a
group of approximately 103 wholesale general agents and program
administrators that have specific quoting and binding authority.
For our brokerage business, we distribute our insurance products
through wholesale insurance brokers who in turn sell our
insurance products to insureds through retail insurance brokers.
For our reinsurance business, we distribute our products through
reinsurance brokers.
Of our non-affiliated professional wholesale general agents and
program administrators, the top five accounted for 39.3% of our
Insurance Operations gross premiums written for the year
ended December 31, 2010. No one agency accounted for more
than 12.1% of our Insurance Operations gross premiums
written.
Our distribution strategy is to seek to maintain strong
relationships with a limited number of high-quality wholesale
professional general agents and wholesale insurance brokers. We
carefully select our distribution sources based on their
expertise, experience and reputation. We believe that our
distribution strategy enables us to effectively access numerous
markets at a relatively low cost structure through the
marketing, underwriting, and administrative support of our
professional general agencies and wholesale insurance brokers.
We believe these
7
wholesale general agents and wholesale insurance brokers have
local market knowledge and expertise that we believe enables us
to access business in these markets more effectively.
Underwriting
Our insurance products are underwritten in two ways:
(1) specific binding authority in which we grant
underwriting authority to our wholesale general agents and
program administrators, and (2) brokerage in which our
internal personnel underwrites business submitted by our
wholesale insurance brokers.
Specific Binding Authority Our
wholesale general agents and program administrators have
specific quoting and binding authority with respect to a single
insurance product and some have limited quoting and binding
authority with respect to multiple products.
We provide our wholesale general agents and program
administrators with a comprehensive, regularly updated
underwriting manual that specifically outlines risk eligibility
which is developed based on the type of insured, nature of
exposure and overall expected profitability. This manual also
outlines (a) premium pricing, (b) underwriting
guidelines, including but not limited to policy forms, terms and
conditions, and (c) policy issuance instructions.
Our wholesale general agents and program administrators are
appointed to underwrite submissions received from their retail
agents in accordance with our underwriting manual. Risks that
are not within the specific binding authority must be submitted
to our underwriting personnel directly for underwriting review
and approval or denial of the application of the insured. Our
wholesale general agents provide all policy issuance services in
accordance with our underwriting manuals.
We regularly monitor the underwriting quality of our wholesale
general agents and program administrators through a disciplined
system of controls, which includes the following:
|
|
|
|
|
automated system criteria edits and exception reports;
|
|
|
|
individual policy reviews to measure adherence to our
underwriting manual including: risk selection, underwriting
compliance, policy issuance and pricing;
|
|
|
|
periodic
on-site
comprehensive audits to evaluate processes, controls,
profitability and adherence to all aspects of our underwriting
manual including: risk selection, underwriting compliance,
policy issuance and pricing;
|
|
|
|
internal quarterly actuarial analysis of loss ratios produced by
business underwritten by our wholesale general agents and
program administrators; and
|
|
|
|
internal quarterly analysis of financial results, including
premium growth and overall profitability of business produced by
our wholesale general agents and program administrators.
|
We provide incentives to certain of our wholesale general agents
and program administrators to produce profitable business
through contingent profit commission structures that are tied
directly to the achievement of profitability targets.
Brokerage Our wholesale insurance
brokers do not have specific binding authority, therefore, these
risks are submitted to our underwriting personnel for review and
processing.
We provide our underwriters with a comprehensive, regularly
updated underwriting manual that specifically outlines risk
eligibility, which is developed based on the type of insured,
nature of exposure and overall expected profitability. This
manual also outlines (a) premium pricing,
(b) underwriting guidelines, including but not limited to
policy forms, terms and conditions, and (c) policy issuance
instructions.
8
Our underwriting personnel review submissions, issue all quotes
and perform all policy issuance functions. We regularly monitor
the underwriting quality of our underwriters through disciplined
system of controls, which includes the following:
|
|
|
|
|
individual policy reviews to measure our underwriters
adherence to our underwriting manual including: risk selection,
underwriting compliance, policy issuance and pricing;
|
|
|
|
periodic underwriting review to evaluate adherence to all
aspects of our underwriting manual including: risk selection,
underwriting compliance, policy issuance and pricing;
|
|
|
|
internal quarterly actuarial analysis of loss ratios produced by
business underwritten by our underwriters; and
|
|
|
|
internal quarterly analysis of financial results, including
premium growth and overall profitability of business produced by
our underwriters.
|
Contingent
Commissions
Certain professional general agencies of the Insurance
Operations are paid special incentives, referred to as
commissions, when loss results of business produced by these
agencies are more favorable than predetermined thresholds.
Similarly, in some circumstances, insurance companies that cede
business to our Reinsurance Operations are paid ceding or profit
commissions based on the profitability of the ceded portfolio.
These commissions are charged to other underwriting expenses
when incurred. The liability for the unpaid portion of these
commissions is stated separately on the face of the consolidated
balance sheet as contingent commissions.
Pricing
We use our pricing actuaries to establish pricing tailored to
each specific product we underwrite, taking into account
historical loss experience and individual risk and coverage
characteristics. We generally use the actuarial loss costs
promulgated by the Insurance Services Office as a benchmark in
the development of pricing for most of our products. We will
seek to only write business if we believe we can achieve an
adequate rate of return.
Since 2005 industry prices have been steadily declining.
Casualty rates have declined faster than property rates. We
believe our market is facing competition from standard line
companies who are writing risks that they had not insured
previously, Bermuda companies who are establishing relationships
with wholesale brokers, and excess and surplus competitors. We
believe competition is driving much of the price decline.
Although market prices have dropped, we have sought to maintain
our underwriting discipline, and have therefore exited many
programs. Renewal pricing on our book decreased approximately
3.8% in 2008, approximately 2.3% in 2009, and approximately 3.0%
in 2010, on average.
Reinsurance
of Underwriting Risk
Our philosophy is to purchase reinsurance from third parties to
limit our liability on individual risks and to protect against
property catastrophe and casualty clash losses. Reinsurance
assists us in controlling exposure to severe losses, and
protecting capital resources. We purchase reinsurance on both an
excess of loss and proportional basis. The type, cost and limits
of reinsurance we purchase can vary from year to year based upon
our desired retention levels and the availability of quality
reinsurance at an acceptable price. Although reinsurance does
not legally discharge an insurer from its primary liability for
the full amount of limits on the policies it has written, it
does make the assuming reinsurer liable to the insurer to the
extent of the insurance ceded. Our reinsurance contracts renew
throughout the year, and all of our reinsurance is purchased
following guidelines established by our management. We primarily
utilize treaty reinsurance products, including proportional
reinsurance, excess of loss reinsurance, casualty clash
reinsurance, and property catastrophe excess of loss
reinsurance. Additionally, we may purchase facultative
reinsurance protection on single risks when deemed necessary.
We purchase specific types and structures of reinsurance
depending upon the specific characteristics of the lines of
business and specialty products we underwrite. We will typically
seek to place proportional reinsurance for our umbrella and
excess products, some of our specific specialty products, or in
the development stages of a new
9
product. We believe that this approach allows us to control our
net exposure in these product areas more cost effectively.
We purchase reinsurance on an excess of loss basis to cover
individual risk severity. These structures are utilized to
protect our primary positions on property, casualty, and
professional liability products. The excess of loss structures
allow us to maximize our underwriting profits over time by
retaining a greater portion of the risk in these products, while
helping to protect against the possibility of unforeseen
volatility.
We analyze our reinsurance contracts to ensure that they meet
the risk transfer requirements of applicable accounting
guidance, which requires that the reinsurer must assume
significant insurance risk under the reinsured portions of the
underlying insurance contracts and that there must be a
reasonably possible chance that the reinsurer may realize a
significant loss from the transaction. See Note 8 of the
notes to consolidated financial statements in Item 8 of
Part II of this report for details concerning our current
reinsurance contracts.
We continually evaluate our retention levels across the entire
line of business and specialty product portfolio seeking to
ensure that the ultimate reinsurance structures are aligned with
our corporate risk tolerance levels associated with such lines
of business products. Any decision to decrease our reliance upon
proportional reinsurance or to increase our excess of loss
retentions could increase our earnings volatility. In cases
where we decide to increase our excess of loss retentions, such
decisions will be a result of a change or progression in our
risk tolerance level and will be supported by an actuarial
analysis. We endeavor to purchase reinsurance from financially
strong reinsurers with which we have long-standing
relationships. In addition, in certain circumstances, we hold
collateral, including letters of credit, under reinsurance
agreements.
10
The following table sets forth the ten reinsurers for which we
have the largest reinsurance receivables, as of
December 31, 2010. Also shown are the amounts of premiums
ceded by us to these reinsurers during the year ended
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A.M.
|
|
Gross
|
|
|
Prepaid
|
|
|
Total
|
|
|
Percent
|
|
|
Ceded
|
|
|
Percent
|
|
|
|
Best
|
|
Reinsurance
|
|
|
Reinsurance
|
|
|
Reinsurance
|
|
|
of
|
|
|
Premiums
|
|
|
of
|
|
|
|
Rating
|
|
Receivables
|
|
|
Premium
|
|
|
Assets
|
|
|
Total
|
|
|
Written
|
|
|
Total
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Munich Re America Corp.
|
|
A+
|
|
$
|
202.2
|
|
|
$
|
6.6
|
|
|
$
|
208.8
|
|
|
|
45.5
|
%
|
|
$
|
20.3
|
|
|
|
41.3
|
%
|
Westport Insurance Corp.
|
|
A
|
|
|
97.1
|
|
|
|
|
|
|
|
97.1
|
|
|
|
21.2
|
|
|
|
|
|
|
|
|
|
General Reinsurance Corp.
|
|
A++
|
|
|
20.2
|
|
|
|
0.5
|
|
|
|
20.7
|
|
|
|
4.5
|
|
|
|
1.6
|
|
|
|
3.3
|
|
Hartford Fire Insurance Co.
|
|
A
|
|
|
17.5
|
|
|
|
|
|
|
|
17.5
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
GE Reinsurance Corporation (Swiss Re)
|
|
A
|
|
|
13.5
|
|
|
|
|
|
|
|
13.5
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
Transatlantic Reinsurance
|
|
A
|
|
|
11.8
|
|
|
|
3.1
|
|
|
|
14.9
|
|
|
|
3.2
|
|
|
|
10.3
|
|
|
|
20.9
|
|
Converium AG, Zurich (Scor)
|
|
A
|
|
|
8.1
|
|
|
|
|
|
|
|
8.1
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
Finial Reinsurance Company
|
|
A-
|
|
|
7.7
|
|
|
|
|
|
|
|
7.7
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
Swiss Reinsurance America Corp
|
|
A
|
|
|
7.3
|
|
|
|
0.2
|
|
|
|
7.5
|
|
|
|
1.6
|
|
|
|
1.2
|
|
|
|
2.4
|
|
Clearwater Insurance Company
|
|
A-
|
|
|
6.8
|
|
|
|
|
|
|
|
6.8
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
392.2
|
|
|
|
10.4
|
|
|
|
402.6
|
|
|
|
87.8
|
|
|
|
33.4
|
|
|
|
67.9
|
|
All other reinsurers
|
|
|
|
|
55.5
|
|
|
|
0.7
|
|
|
|
56.2
|
|
|
|
12.2
|
|
|
|
15.8
|
|
|
|
32.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance receivables before purchase accounting
adjustments
|
|
|
|
|
447.7
|
|
|
|
11.1
|
|
|
|
458.8
|
|
|
|
100.0
|
%
|
|
$
|
49.2
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase accounting adjustments, including uncollectible
reinsurance reserve
|
|
|
|
|
(24.7
|
)
|
|
|
|
|
|
|
(24.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables, net of purchase accounting adjustments and
uncollectible reinsurance reserve
|
|
|
|
|
423.0
|
|
|
|
11.1
|
|
|
|
434.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral held in trust from reinsurers
|
|
|
|
|
(289.3
|
)
|
|
|
(5.2
|
)
|
|
|
(294.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net receivables
|
|
|
|
$
|
133.7
|
|
|
$
|
5.9
|
|
|
$
|
139.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, we carried reinsurance receivables of
$423.0 million. This amount is net of a purchase accounting
adjustment and an allowance for uncollectible reinsurance
receivables. The purchase accounting adjustment resulted from
our acquisition of Wind River Investment Corporation on
September 5, 2003 and is related to discounting the
acquired loss reserves to their present value and applying a
risk margin to the discounted reserves. This adjustment was
$12.0 million at December 31, 2010. The allowance for
uncollectible reinsurance receivables was $12.7 million at
December 31, 2010.
Historically, there have been insolvencies following a period of
competitive pricing in the industry. While we have recorded
allowances for reinsurance receivables based on currently
available information, conditions may change or additional
information might be obtained that may require us to record
additional allowances. On a quarterly basis, we review our
financial exposure to the reinsurance market and assess the
adequacy of our collateral and allowance for uncollectible
reinsurance and continue to take actions to mitigate our
exposure to possible loss.
11
Claims
Management and Administration
Our approach to claims management is designed to investigate
reported incidents at the earliest juncture, to select, manage,
and supervise all legal and adjustment aspects of claims,
including settlement, for the mutual benefit of us, our
professional general agents, wholesale brokers, reinsurers and
insureds. Our professional general agents and wholesale brokers
have no authority to settle claims or otherwise exercise control
over the claims process, with the exception of one statutory
managing general agent. Our claims management staff supervises
or processes all claims. We have a formal claims review process,
and all claims greater than $100,000, gross of reinsurance, are
reviewed by our senior claims management and certain of our
senior executives.
To handle claims, we utilize our own in-house claims department
as well as third-party claims administrators (TPAs)
and assuming reinsurers, to whom we delegate limited claims
handling authority. Our experienced in-house staff of claims
management professionals are assigned to one of five dedicated
claim units: casualty claims, latent exposure claims, property
claims, TPA oversight, and a wholly owned subsidiary that
administers construction defect claims. The dedicated claims
units meet regularly to communicate current developments within
their assigned areas of specialty.
As of December 31, 2010, we had $358.3 million of
direct outstanding loss and loss adjustment expense case
reserves at our United States Based Insurance Operations. Claims
relating to approximately 80.0% of those reserves are handled by
our in-house claims management professionals, while claims
relating to approximately 4.0% of those reserves are handled by
our TPAs, which send us detailed financial and claims
information on a monthly basis. We also individually supervise
in-house any significant or complicated TPA handled claims, and
conduct two to five day
on-site
audits of our material TPAs at least twice a year. Approximately
16.0% of our reserves are handled by our assuming reinsurers. We
review and supervise the claims handled by our reinsurers
seeking to protect our reputation and minimize exposure.
Reserves
for Unpaid Losses and Loss Adjustment Expenses
Applicable insurance laws require us to maintain reserves to
cover our estimated ultimate losses under insurance policies
that we write and for loss adjustment expenses relating to the
investigation and settlement of policy claims.
We establish loss and loss adjustment expense reserves for
individual claims by evaluating reported claims on the basis of:
|
|
|
|
|
our knowledge of the circumstances surrounding the claim;
|
|
|
|
the severity of injury or damage;
|
|
|
|
jurisdiction of the occurrence;
|
|
|
|
the potential for ultimate exposure;
|
|
|
|
litigation related developments;
|
|
|
|
the type of loss; and
|
|
|
|
our experience with the insured and the line of business and
policy provisions relating to the particular type of claim.
|
We generally estimate such losses and claims costs through an
evaluation of individual reported claims. We also establish
reserves for incurred but not reported losses
(IBNR). IBNR reserves are based in part on
statistical information and in part on industry experience with
respect to the expected number and nature of claims arising from
occurrences that have not been reported. We also establish our
reserves based on our estimates of future trends in claims
severity and other subjective factors. Insurance companies are
not permitted to reserve for a catastrophe until it has
occurred. Reserves are recorded on an undiscounted basis other
than fair value adjustments recorded under purchase accounting.
The reserves are reviewed quarterly by the in-house actuarial
staff. In addition to our internal reserve analysis, independent
external actuaries performed a detailed review of our reserves
for the second
12
and fourth quarters of 2010. We do not rely upon the review by
the independent actuaries to develop our reserves; however, the
data is used to corroborate the analysis performed by the
in-house actuarial staff.
With respect to some classes of risks, the period of time
between the occurrence of an insured event and the final
resolution of a claim may be many years, and during this period
it often becomes necessary to adjust the claim estimates either
upward or downward. Certain classes of umbrella and excess
liability that we underwrite have historically had longer
intervals between the occurrence of an insured event, reporting
of the claim and final resolution. In such cases, we must
estimate reserves over long periods of time with the possibility
of several adjustments to reserves. Other classes of insurance
that we underwrite, such as most property insurance,
historically have shorter intervals between the occurrence of an
insured event, reporting of the claim and final resolution.
Reserves with respect to these classes are therefore inherently
less likely to be adjusted.
The loss and loss expense reserving process is intended to
reflect the impact of inflation and other factors affecting loss
payments by taking into account changes in historical payment
patterns and perceived trends. However, there is no precise
method for the subsequent evaluation of the adequacy of the
consideration given to inflation, or to any other specific
factor, or to the way one factor may affect another.
The loss and loss expense development table below shows changes
in our reserves in subsequent years from the prior loss and loss
expense estimates based on experience as of the end of each
succeeding year and in conformity with GAAP. The estimate is
increased or decreased as more information becomes known about
the frequency and severity of losses for individual years. A
redundancy means the original estimate was higher than the
current estimate; a deficiency means that the current estimate
is higher than the original estimate.
The first line of the loss and loss expense development table
shows, for the years indicated, our net reserve liability
including the reserve for incurred but not reported losses. The
first section of the table shows, by year, the cumulative
amounts of losses and loss adjustment expenses paid as of the
end of each succeeding year. The second section sets forth the
re-estimates in later years of incurred losses and loss
expenses, including payments, for the years indicated. The
cumulative redundancy (deficiency) represents, as of
the date indicated, the difference between the latest
re-estimated liability and the reserves as originally estimated.
In 2005, $235.2 million of loss reserves were acquired as a
result of the merger with
Penn-America
Group, Inc. that took place on January 24, 2005. As such,
there are no loss reserves in our loss development table related
to the
Penn-America
Insurance Companies for any years prior to 2005.
13
This loss development table shows development in Global
Indemnitys loss and loss expense reserves on a net basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet reserves:
|
|
$
|
131,128
|
|
|
$
|
156,784
|
|
|
$
|
260,820
|
|
|
$
|
314,027
|
|
|
$
|
344,614
|
|
|
$
|
639,291
|
|
|
$
|
735,342
|
|
|
$
|
800,885
|
|
|
$
|
835,839
|
|
|
$
|
725,296
|
|
|
$
|
645,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative paid as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
$
|
26,163
|
|
|
$
|
63,667
|
|
|
$
|
42,779
|
|
|
$
|
76,048
|
|
|
$
|
85,960
|
|
|
$
|
154,069
|
|
|
$
|
169,899
|
|
|
$
|
190,723
|
|
|
$
|
215,903
|
|
|
$
|
189,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two years later
|
|
|
72,579
|
|
|
|
82,970
|
|
|
|
96,623
|
|
|
|
136,133
|
|
|
|
139,822
|
|
|
|
268,827
|
|
|
|
300,041
|
|
|
|
360,336
|
|
|
|
366,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
75,661
|
|
|
|
118,401
|
|
|
|
141,545
|
|
|
|
171,659
|
|
|
|
180,801
|
|
|
|
355,987
|
|
|
|
413,055
|
|
|
|
470,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
98,654
|
|
|
|
150,062
|
|
|
|
164,181
|
|
|
|
197,596
|
|
|
|
209,938
|
|
|
|
414,068
|
|
|
|
478,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
121,407
|
|
|
|
164,023
|
|
|
|
182,043
|
|
|
|
214,376
|
|
|
|
237,636
|
|
|
|
440,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
129,371
|
|
|
|
177,682
|
|
|
|
193,536
|
|
|
|
235,022
|
|
|
|
251,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
139,090
|
|
|
|
186,173
|
|
|
|
211,036
|
|
|
|
244,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
143,435
|
|
|
|
201,899
|
|
|
|
218,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
156,432
|
|
|
|
208,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
162,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Re-estimated liability as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
131,128
|
|
|
$
|
156,784
|
|
|
$
|
260,820
|
|
|
$
|
314,023
|
|
|
$
|
344,614
|
|
|
$
|
639,291
|
|
|
$
|
735,342
|
|
|
$
|
800,885
|
|
|
$
|
835,839
|
|
|
$
|
725,297
|
|
|
$
|
645,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
124,896
|
|
|
|
228,207
|
|
|
|
261,465
|
|
|
|
313,213
|
|
|
|
343,332
|
|
|
|
632,327
|
|
|
|
716,361
|
|
|
|
832,733
|
|
|
|
827,439
|
|
|
|
671,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two years later
|
|
|
180,044
|
|
|
|
228,391
|
|
|
|
263,995
|
|
|
|
315,230
|
|
|
|
326,031
|
|
|
|
629,859
|
|
|
|
732,056
|
|
|
|
812,732
|
|
|
|
768,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
180,202
|
|
|
|
231,133
|
|
|
|
268,149
|
|
|
|
298,989
|
|
|
|
323,696
|
|
|
|
635,504
|
|
|
|
707,525
|
|
|
|
765,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
175,198
|
|
|
|
236,271
|
|
|
|
252,078
|
|
|
|
301,660
|
|
|
|
332,302
|
|
|
|
622,122
|
|
|
|
672,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
179,727
|
|
|
|
226,116
|
|
|
|
264,058
|
|
|
|
308,776
|
|
|
|
323,547
|
|
|
|
608,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
173,424
|
|
|
|
242,666
|
|
|
|
272,806
|
|
|
|
303,146
|
|
|
|
316,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
187,441
|
|
|
|
254,110
|
|
|
|
266,880
|
|
|
|
298,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
198,999
|
|
|
|
249,861
|
|
|
|
264,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
196,423
|
|
|
|
249,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
196,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative redundancy/(deficiency)
|
|
$
|
(65,559
|
)
|
|
$
|
(92,889
|
)
|
|
$
|
(3,235
|
)
|
|
$
|
15,461
|
|
|
$
|
28,419
|
|
|
$
|
31,241
|
|
|
$
|
62,630
|
|
|
$
|
35,450
|
|
|
$
|
67,217
|
|
|
$
|
53,897
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Liability end of year
|
|
|
800,630
|
|
|
|
907,357
|
|
|
|
2,004,422
|
|
|
|
2,059,760
|
|
|
|
1,876,510
|
|
|
|
1,914,224
|
|
|
|
1,702,010
|
|
|
|
1,503,238
|
|
|
|
1,506,429
|
|
|
|
1,257,741
|
|
|
|
1,052,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Reinsurance recoverable
|
|
|
669,502
|
|
|
|
750,573
|
|
|
|
1,743,602
|
|
|
|
1,745,733
|
|
|
|
1,531,896
|
|
|
|
1,274,933
|
|
|
|
966,668
|
|
|
|
702,353
|
|
|
|
670,591
|
|
|
|
532,445
|
|
|
|
407,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability-end of year
|
|
|
131,128
|
|
|
|
156,784
|
|
|
|
260,820
|
|
|
|
314,027
|
|
|
|
344,614
|
|
|
|
639,291
|
|
|
|
735,342
|
|
|
|
800,885
|
|
|
|
835,838
|
|
|
|
725,296
|
|
|
|
645,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross re-estimated liability
|
|
|
1,269,647
|
|
|
|
1,583,234
|
|
|
|
1,667,695
|
|
|
|
1,545,365
|
|
|
|
1,310,262
|
|
|
|
1,431,994
|
|
|
|
1,234,344
|
|
|
|
1,388,359
|
|
|
|
1,342,561
|
|
|
|
1,148,129
|
|
|
|
1,052,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Re-estimated recoverable at December 31, 2010
|
|
|
1,072,960
|
|
|
|
1,333,561
|
|
|
|
1,403,640
|
|
|
|
1,246,799
|
|
|
|
994,067
|
|
|
|
823,944
|
|
|
|
561,632
|
|
|
|
622,924
|
|
|
|
573,938
|
|
|
|
476,730
|
|
|
|
407,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-estimated liability at December 31, 2010
|
|
$
|
196,687
|
|
|
$
|
249,673
|
|
|
$
|
264,055
|
|
|
$
|
298,566
|
|
|
$
|
316,195
|
|
|
$
|
608,050
|
|
|
$
|
672,712
|
|
|
$
|
765,435
|
|
|
$
|
768,623
|
|
|
$
|
671,399
|
|
|
$
|
645,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cumulative redundancy/ (deficiency)
|
|
$
|
(469,017
|
)
|
|
$
|
(675,877
|
)
|
|
$
|
336,727
|
|
|
$
|
514,395
|
|
|
$
|
566,248
|
|
|
$
|
482,230
|
|
|
$
|
467,666
|
|
|
$
|
114,879
|
|
|
$
|
163,868
|
|
|
$
|
109,612
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2010 the Company reduced its prior accident year loss
reserves by $53.9 million and reduced its allowance for
uncollectible reinsurance by $0.2 million, which consisted
of a $43.7 million reduction in general liability lines, a
$5.4 million reduction in umbrella lines, a
$4.8 million reduction in professional liability lines, and
a $2.5 million reduction in property lines, partially
offset by a $2.0 million increase in auto liability lines
and a $0.7 million increase in workers compensation
lines:
|
|
|
|
|
General Liability: The
$43.7 million reduction primarily consisted of net
reductions of $45.5 million related to accident years 2002
through 2009 due to lower than anticipated frequency and
severity. Incurred losses for these years have developed at a
rate lower than the Companys historical averages. The
reduction was driven by the
Penn-America
Small Business segment where loss emergence was consistently
better than expected throughout the year. This reduction was
partially offset by net increases of $1.8 million related
to accident years 2001 and prior where the Company increased the
loss and loss adjustment expense estimates related to
construction defect claims.
|
|
|
|
Umbrella: The $5.4 million
reduction in the umbrella lines related to all accident years
2009 and prior due to less than anticipated severity. As these
accident years have matured, more weight has been given to
experience based methods which continue to develop favorably
compared to our initial indications.
|
|
|
|
Professional Liability: The
$4.8 million reduction primarily consisted of net
reductions of $9.6 million related to accident years 2001
through 2008 driven by lower than expected paid and incurred
activity related to our Public Officials, Social Services and
Real Estate products. This reduction was partially offset by
|
14
|
|
|
|
|
increases of $4.7 million related to accident year 2009
where the Company experienced higher than expected claim
frequency and severity driven by our Lawyers, Allied Health and
Real Estate products.
|
|
|
|
|
|
Property: The reduction in the property
lines primarily consisted of reductions of $2.7 million
related to accident years 2002 and 2004 through 2008 driven by
lower than anticipated severity in the
Penn-America
book of business and a reduction in reserve estimates related to
2008 catastrophes. This was partially offset by increases of
$0.2 million primarily related to accident year 2009 where
the Company experienced higher than expected claim frequency and
severity in our
Penn-America
book of business. We identified an unusually large loss in our
Equine Mortality program which was offset by favorable
experience in our Diamond State book of business and a reduction
in ULAE reserves.
|
|
|
|
Auto Liability: The increase in the
automobile liability lines was primarily due to increases of
$2.5 million related to accident year 2009 from a
non-standard auto treaty in our Reinsurance Operations.
|
|
|
|
Workers Compensation: The
increase in our workers compensation lines is related to
an accident year 2009 structured excess of loss treaty at our
Reinsurance Operations where we increased our loss estimates
based on industry workers compensation results.
|
The reduction in the allowance for uncollectible reinsurance is
due to a decrease in the amount of the Companys carried
reinsurance receivables.
See Note 10 of the notes to consolidated financial
statements in Item 8 of Part II of this report for a
reconciliation of Global Indemnitys liability for losses
and loss adjustment expenses, net of reinsurance ceded.
The adverse development noted in the table above from 2000
through 2002 is primarily related to increasing asbestos and
environmental (A&E) reserves related to a
single policy. The insurance industry continues to receive a
substantial number of asbestos-related bodily injury claims,
with an increasing focus being directed toward 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. In response to
these developments, management increased gross and net A&E
reserves during 2008 to reflect its best estimate of A&E
exposures.
Asbestos
and Environmental Exposure
Our environmental exposure arises from the sale of general
liability and commercial multi-peril insurance. Currently, our
policies continue to exclude classic environmental contamination
claims. In some states we are required, however, depending on
the circumstances, to provide coverage for certain bodily injury
claims, such as an individuals exposure to a release of
chemicals. We have also issued policies that were intended to
provide limited pollution and environmental coverage. These
policies were specific to certain types of products underwritten
by us. We have also received a number of asbestos-related
claims, the majority of which are declined based on
well-established exclusions. In establishing the liability for
unpaid losses and loss adjustment expenses related to A&E
exposures, management considers facts currently known and the
current state of the law and coverage litigations. Estimates of
these liabilities are reviewed and updated continually.
Significant uncertainty remains as to our ultimate liability for
asbestos-related claims due to such factors as the long latency
period between asbestos exposure and disease manifestation and
the resulting potential for involvement of multiple policy
periods for individual claims, the increase in the volume of
claims made by plaintiffs who claim exposure but who have no
symptoms of asbestos-related disease, and an increase in claims
subject to coverage under general liability policies that do not
contain aggregate limits of liability.
The liability for unpaid losses and loss adjustment expenses,
inclusive of A&E reserves, reflects our best estimates for
future amounts needed to pay losses and related adjustment
expenses as of each of the balance sheet dates reflected in the
financial statements herein in accordance with GAAP. As of
December 31, 2010, we had $20.4 million of net loss
reserves for asbestos-related claims and $9.9 million for
environmental claims. We attempt to estimate the full impact of
the A&E exposures by establishing specific case reserves on
all known losses. See
15
Note 10 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for
tables showing our gross and net reserves for A&E losses.
In addition to the factors referenced above, establishing
reserves for A&E and other mass tort claims involves more
judgment than other types of claims due to, among other things,
inconsistent court decisions, an increase in bankruptcy filings
as a result of asbestos-related liabilities, and judicial
interpretations that often expand theories of recovery and
broaden the scope of coverage. In 2009, one of our insurance
companies was dismissed from a lawsuit seeking coverage from it
and other unrelated insurance companies. The suit involved
issues related to approximately 3,900 existing asbestos-related
bodily injury claims and future claims related to a single
policy. The dismissal was the result of a settlement of a
disputed claim related to accident year 1984. The settlement is
conditioned upon certain legal events occurring which will
trigger financial obligations by the insurance company.
Management will continue to monitor the developments of the
litigation to determine if any additional financial exposure is
present.
See Note 10 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for the
survival ratios on a gross basis for our open A&E claims.
Investments
Our investment policy is determined by the Investment Committee
of our Board of Directors. We have engaged third-party
investment advisors to oversee our investments and to make
recommendations to the Investment Committee of our Board of
Directors. Our investment policy allows us to invest in taxable
and tax-exempt fixed income investments including corporate
bonds and loans as well as publicly traded and private equity
investments. With respect to fixed income investments, the
maximum exposure per issuer varies as a function of the credit
quality of the security. For our corporate loans portfolio, the
maximum exposure per issuer is limited to 5% of the market value
of the corporate loans portfolio. The allocation between taxable
and tax-exempt bonds is determined based on market conditions
and tax considerations, including the applicability of the
alternative minimum tax. The maximum allowable investment in
equity securities under our investment policy is 30% of our GAAP
equity, or $278.6 million at December 31, 2010. As of
December 31, 2010, we had $1,712.4 million of
investments and cash and cash equivalent assets, including
$152.9 million of equity and limited partnership
investments and $204.0 million in floating rate corporate
loans, less a $4.8 million payable for securities purchased.
Insurance company investments must comply with applicable
statutory regulations that prescribe the type, quality and
concentration of investments. These regulations permit
investments, within specified limits and subject to certain
qualifications, in federal, state, and municipal obligations,
corporate bonds, and preferred and common equity securities.
16
The following table summarizes by type the estimated fair value
of Global Indemnitys investments and cash and cash
equivalents as of December 31, 2010, 2009, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Estimated
|
|
|
Percent
|
|
|
Estimated
|
|
|
Percent of
|
|
|
Estimated
|
|
|
Percent of
|
|
(Dollars in thousands)
|
|
Fair Value
|
|
|
of Total
|
|
|
Fair Value
|
|
|
Total
|
|
|
Fair Value
|
|
|
Total
|
|
|
Cash and cash equivalents
|
|
$
|
119,888
|
|
|
|
7.0
|
%
|
|
$
|
186,087
|
|
|
|
10.8
|
%
|
|
$
|
292,604
|
|
|
|
18.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency obligations
|
|
|
202,690
|
|
|
|
11.8
|
|
|
|
236,088
|
|
|
|
13.6
|
|
|
|
152,777
|
|
|
|
9.6
|
|
Obligations of states and political subdivisions
|
|
|
245,012
|
|
|
|
14.3
|
|
|
|
225,598
|
|
|
|
13.0
|
|
|
|
243,030
|
|
|
|
15.2
|
|
Mortgage-backed securities(1)
|
|
|
249,080
|
|
|
|
14.4
|
|
|
|
364,000
|
|
|
|
21.0
|
|
|
|
384,069
|
|
|
|
24.0
|
|
Commercial mortgage-backed securities
|
|
|
38,733
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
144,457
|
|
|
|
9.0
|
|
Asset-backed securities
|
|
|
115,099
|
|
|
|
6.7
|
|
|
|
114,163
|
|
|
|
6.6
|
|
|
|
16,553
|
|
|
|
1.0
|
|
Corporate bonds and loans
|
|
|
532,784
|
|
|
|
31.0
|
|
|
|
460,730
|
|
|
|
26.6
|
|
|
|
213,655
|
|
|
|
13.4
|
|
Foreign corporate bonds
|
|
|
60,994
|
|
|
|
3.6
|
|
|
|
70,993
|
|
|
|
4.1
|
|
|
|
29,150
|
|
|
|
1.8
|
|
Other bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,283
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
1,444,392
|
|
|
|
84.1
|
|
|
|
1,471,572
|
|
|
|
84.9
|
|
|
|
1,204,974
|
|
|
|
75.3
|
|
Equity securities
|
|
|
147,526
|
|
|
|
8.6
|
|
|
|
65,656
|
|
|
|
3.8
|
|
|
|
55,278
|
|
|
|
3.5
|
|
Other investments
|
|
|
5,380
|
|
|
|
0.3
|
|
|
|
7,999
|
|
|
|
0.5
|
|
|
|
46,672
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments and cash and cash equivalents(2)
|
|
$
|
1,717,186
|
|
|
|
100.0
|
%
|
|
$
|
1,731,314
|
|
|
|
100.0
|
%
|
|
$
|
1,599,528
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes collateralized mortgage obligations of $13,445,
$21,959, and $34,395 for 2010, 2009, and 2008, respectively. |
|
(2) |
|
Does not include payable for securities purchased of $4,768,
$37,258 and $710 for 2010, 2009 and 2008, respectively. |
Although we generally intend to hold fixed maturities to
recovery
and/or
maturity, we regularly re-evaluate our position based upon
market conditions. As of December 31, 2010, our fixed
maturities, excluding our mortgage-backed and commercial
mortgage-backed securities, had a weighted average maturity of
4.73 years and a weighted average duration, excluding
mortgage-backed, commercial mortgage-backed and collateralized
mortgage obligations and including cash and short-term
investments, of 2.1 years. Our financial statements reflect
a net unrealized gain on fixed maturities available for sale as
of December 31, 2010 of $50.7 million on a pre-tax
basis.
The following table shows the average amount of fixed
maturities, income earned on fixed maturities, and the book
yield thereon, as well as unrealized gains for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Average fixed maturities at book value
|
|
$
|
1,408,353
|
|
|
$
|
1,307,718
|
|
|
$
|
1,275,700
|
|
Gross income on fixed maturities(1)
|
|
|
60,262
|
|
|
|
62,099
|
|
|
|
63,268
|
|
Book yield
|
|
|
4.28
|
%
|
|
|
4.75
|
%
|
|
|
4.96
|
%
|
Fixed maturities at book value
|
|
$
|
1,393,655
|
|
|
$
|
1,423,050
|
|
|
$
|
1,192,385
|
|
Unrealized gain
|
|
|
50,737
|
|
|
|
48,522
|
|
|
|
12,589
|
|
|
|
|
(1) |
|
Represents income earned by fixed maturities, gross of
investment expenses and excluding realized gains and losses. |
Default rates on collateralized commercial real estate
obligations and asset-backed securities may continue to rise. To
protect ourselves against this possibility, we have sought to
structure our portfolio to reduce the risk of
17
default. Of the $249.1 million of mortgage-backed
securities, $235.7 million is invested in U.S. agency
paper and $13.4 million is invested in collateralized
mortgage obligations, of which $12.0 million, or 89.2%, are
rated AAA. Of the $115.1 million in asset-backed
securities, 92.0% are rated AAA. The weighted average credit
enhancement for our asset-backed securities is 30.2. We also
face liquidity risk. Liquidity risk is when the fair value of an
investment is not able to be realized due to lack of interest by
outside parties in the marketplace. We attempt to diversify our
investment holdings to minimize this risk. Our investment
managers run periodic analysis of liquidity costs to the fixed
income portfolio. We also face credit risk. 85.5% of our fixed
income securities are investment grade securities. 44.3% of our
fixed maturities are rated AAA. See Quantitative and
Qualitative Disclosures About Market Risk in Item 7A
of Part II of this report for a more detailed discussion of
the credit market and our investment strategy.
The following table summarizes, by Standard &
Poors rating classifications, the estimated fair value of
Global Indemnitys investments in fixed maturities, as of
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Estimated
|
|
|
Percent
|
|
|
Estimated
|
|
|
Percent
|
|
(Dollars in thousands)
|
|
Fair Value
|
|
|
of Total
|
|
|
Fair Value
|
|
|
of Total
|
|
|
AAA
|
|
$
|
639,814
|
|
|
|
44.3
|
%
|
|
$
|
740,658
|
|
|
|
50.4
|
%
|
AA
|
|
|
251,850
|
|
|
|
17.5
|
|
|
|
231,403
|
|
|
|
15.7
|
|
A
|
|
|
288,663
|
|
|
|
20.0
|
|
|
|
299,703
|
|
|
|
20.4
|
|
BBB
|
|
|
53,468
|
|
|
|
3.7
|
|
|
|
60,439
|
|
|
|
4.1
|
|
BB
|
|
|
85,641
|
|
|
|
5.9
|
|
|
|
47,816
|
|
|
|
3.2
|
|
B
|
|
|
110,931
|
|
|
|
7.7
|
|
|
|
78,212
|
|
|
|
5.3
|
|
CCC
|
|
|
7,899
|
|
|
|
0.5
|
|
|
|
5,856
|
|
|
|
0.4
|
|
Not rated
|
|
|
6,126
|
|
|
|
0.4
|
|
|
|
7,485
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
1,444,392
|
|
|
|
100.0
|
%
|
|
$
|
1,471,572
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the expected maturity
distribution of Global Indemnitys fixed maturities
portfolio at their estimated market value as of
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Estimated
|
|
|
Percent of
|
|
|
Estimated
|
|
|
Percent of
|
|
(Dollars in thousands)
|
|
Market Value
|
|
|
Total
|
|
|
Market Value
|
|
|
Total
|
|
|
Due in one year or less
|
|
$
|
90,076
|
|
|
|
6.2
|
%
|
|
$
|
59,587
|
|
|
|
4.0
|
%
|
Due in one year through five years
|
|
|
665,633
|
|
|
|
46.2
|
|
|
|
718,081
|
|
|
|
48.8
|
|
Due in five years through ten years
|
|
|
212,990
|
|
|
|
14.7
|
|
|
|
149,785
|
|
|
|
10.2
|
|
Due in ten years through fifteen years
|
|
|
26,339
|
|
|
|
1.8
|
|
|
|
26,679
|
|
|
|
1.8
|
|
Due after fifteen years
|
|
|
46,442
|
|
|
|
3.2
|
|
|
|
39,277
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with fixed maturities
|
|
|
1,041,480
|
|
|
|
72.1
|
|
|
|
993,409
|
|
|
|
67.5
|
|
Mortgaged-backed securities
|
|
|
249,080
|
|
|
|
17.2
|
|
|
|
364,000
|
|
|
|
24.7
|
|
Commercial mortgage-backed securities
|
|
|
38,733
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
115,099
|
|
|
|
8.0
|
|
|
|
114,163
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
1,444,392
|
|
|
|
100.0
|
%
|
|
$
|
1,471,572
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected weighted average duration of our asset-backed,
mortgage-backed, and commercial mortgage-backed securities is
1.9 years.
The value of our portfolio of bonds is inversely correlated to
changes in market interest rates. In addition, some of our bonds
have call or prepayment options. This could subject us to
reinvestment risk should interest rates fall and issuers call
their securities and we are forced to invest the proceeds at
lower interest rates. We seek to mitigate our reinvestment risk
by investing in securities with varied maturity dates, so that
only a portion of the portfolio will mature, be called, or be
prepaid at any point in time.
18
Our investments in corporate loans were valued at
$204.0 million at December 31, 2010. Corporate loans,
a new investment vehicle in 2009, sometimes referred to as
leveraged loans, are primarily investments in senior secured
floating rate loans that banks have made to corporations. The
loans are generally priced at an interest rate spread over LIBOR
that resets every 60 to 90 days. As a result of the
floating rate feature, this asset class provides protection
against rising interest rates. However, this asset class is
subject to default risk since these investments are typically
below investment grade. To mitigate this risk, our investment
managers perform an in-depth structural analysis. As part of
this analysis, they focus on the strength of any security
granted to the lenders, the position of the loan in the
companys capital structure and the appropriate covenant
protection. In addition, as part of our risk control, our
investment managers seek to maintain appropriate portfolio
diversification by limiting issuer and industry exposure.
As of December 31, 2010, we had aggregate equity securities
of $147.5 million that consisted of $145.3 million in
common stocks and $2.2 million in preferred stocks.
Our investments in other invested assets are comprised primarily
of limited liability partnerships, and were valued at
$5.4 million at December 31, 2010. This entire amount
was comprised of securities for which there is no readily
available independent market price. The estimated fair value of
these limited partnerships is measured utilizing the
Companys net asset value as a practical expedient for each
limited partnership. Material assumptions and factors utilized
in pricing these securities include future cash flows, constant
default rates, recovery rates, and any market clearing activity
that may have occurred since the prior month-end pricing period.
We obtain the value of the partnerships at the end of each
reporting period; however, we are not provided with a detailed
listing of the investments held by these partnerships. We
receive annual audited financial statements from each of the
partnerships we own. Of our investments in other invested
assets, $1.1 million was related to a limited partnership
which holds convertible preferred securities of a privately held
company. These securities were subject to an appraisal action in
Delaware State Court. In February, 2011, the Companys
remaining interest of $1.1 million was liquidated.
Realized gains and (losses), including other than temporary
impairments, for the years ended December 31, 2010, 2009,
and 2008 were $26.4 million, $15.9 million, and
($50.3) million, respectively.
Competition
We compete with numerous domestic and international insurance
and reinsurance companies, mutual companies, specialty insurance
companies, underwriting agencies, diversified financial services
companies, Lloyds syndicates, risk retention groups,
insurance buying groups, risk securitization products and
alternative self-insurance mechanisms. In particular, we compete
against insurance subsidiaries of the groups in the specialty
insurance market noted below, insurance companies, and others,
including:
|
|
|
|
|
American International Group;
|
|
|
|
Argo Group International Holdings, Ltd.;
|
|
|
|
Berkshire Hathaway;
|
|
|
|
Everest Re Group, Ltd.;
|
|
|
|
Great American Insurance Group;
|
|
|
|
HCC Insurance Holdings, Inc.;
|
|
|
|
IFG Companies;
|
|
|
|
JRG Reinsurance Company, Ltd.;
|
|
|
|
Maiden Holdings, Ltd.;
|
|
|
|
Markel Corporation;
|
|
|
|
Alterra Capital Holdings, Ltd.;
|
|
|
|
Nationwide Insurance;
|
19
|
|
|
|
|
Navigators Insurance Group;
|
|
|
|
RLI Corporation;
|
|
|
|
Torus Insurance Holdings, Ltd.;
|
|
|
|
W.R. Berkley Corporation; and
|
|
|
|
Western World Insurance Group.
|
In addition to the companies mentioned above, we are facing
competition from standard line companies who are continuing to
write risks that traditionally had been written by excess and
surplus lines carriers, Bermuda companies who are establishing
relationships with wholesale brokers, and other excess and
surplus lines competitors.
Competition may also take the form of lower prices, broader
coverages, greater product flexibility, higher quality services,
reputation and financial strength or higher ratings by
independent rating agencies. In all of our markets, we compete
by developing insurance products to satisfy well-defined market
needs and by maintaining relationships with brokers and insureds
that rely on our expertise. For our program and specialty
wholesale products, offering and underwriting products that are
not readily available is our principal means of differentiating
ourselves from our competition. Each of our products has its own
distinct competitive environment. We seek to compete through
innovative products, appropriate pricing, niche underwriting
expertise, and quality service to policyholders, general
agencies and brokers.
A number of recent, proposed, or potential legislative or
marketplace developments could further increase competition in
our industry. These developments include an influx of new
capital that resulted from the formation of new insurers in the
marketplace and existing companies that have attempted to expand
their business as a result of better pricing or terms,
legislative mandates for insurers to provide certain types of
coverage in areas where existing insurers do business which
could eliminate the opportunities to write those coverages, and
proposed federal legislation which would establish national
standards for state insurance regulation.
These developments are making the property and casualty
insurance marketplace more competitive by increasing the supply
of insurance capacity.
Employees
We have approximately 300 employees, most of whom are
located at our Bala Cynwyd, Pennsylvania office. This includes
four individuals who operate out of our Bermuda office, six
individuals who operate out of our Ireland office and 65
individuals who operate out of our field offices that are
located in California, Georgia, Illinois, New York, North
Carolina, and Texas. In addition, we have contracts with
international insurance service providers based in Bermuda to
provide services to our Reinsurance Operations.
Our Bermuda employees are either permanent residents of Bermuda
who possess Bermuda status or are considered residents by the
applicable employment visas issued by the Bermuda immigration
authorities.
None of our employees are covered by collective bargaining
agreements, and our management believes that our relationship
with our employees is excellent.
Ratings
A.M. Best ratings for the industry range from
A++ (Superior) to F (In Liquidation)
with some companies not being rated. The United States Based
Insurance Companies and Wind River Reinsurance are currently
rated A (Excellent) by A.M. Best, the third
highest of sixteen rating categories.
Publications of A.M. Best indicate that A
(Excellent) ratings are assigned to those companies that, in
A.M. Bests opinion, have an excellent ability to meet
their ongoing obligations to policyholders. In evaluating a
companys financial and operating performance,
A.M. Best reviews its profitability, leverage and
liquidity, as well as its spread of risk, the quality and
appropriateness of its reinsurance, the quality and
diversification of its assets, the adequacy of its policy and
loss reserves, the adequacy of its surplus, its capital
structure and the experience and
20
objectives of its management. These ratings are based on factors
relevant to policyholders, general agencies, insurance brokers
and intermediaries and are not directed to the protection of
investors.
Regulation
General
The business of insurance is regulated in most countries,
although the degree and type of regulation varies significantly
from one jurisdiction to another. As a holding company, Global
Indemnity is not subject to any insurance regulation by any
authority in the Republic of Ireland. However, Global Indemnity
is subject to various Irish laws and regulations, including, but
not limited to, laws and regulations governing interested
directors, mergers and acquisitions, takeovers, shareholder
lawsuits, and indemnification of directors.
U.S.
Regulation
We have seven operating insurance subsidiaries domiciled in the
United States; United National Insurance Company,
Penn-America
Insurance Company, and Penn-Star Insurance Company, which are
domiciled in Pennsylvania; Diamond State Insurance Company and
United National Casualty Insurance Company, which are domiciled
in Indiana; United National Specialty Insurance Company, which
is domiciled in Wisconsin; and Penn-Patriot Insurance Company,
which is domiciled in Virginia. We refer to these companies
collectively as our U.S. Insurance Subsidiaries.
As the indirect parent of the U.S. Insurance Subsidiaries,
we are subject to the insurance holding company laws of Indiana,
Pennsylvania, Virginia, and Wisconsin. These laws generally
require each company of our U.S. Insurance Subsidiaries to
register with its respective domestic state insurance department
and to furnish annually financial and other information about
the operations of the companies within our insurance holding
company system. Generally, all material transactions among
affiliated companies in the holding company system to which any
of the U.S. Insurance Subsidiaries is a party must be fair,
and, if material or of a specified category, require prior
notice and approval or absence of disapproval by the insurance
department where the subsidiary is domiciled. Material
transactions include sales, loans, reinsurance agreements, and
service agreements with the non-insurance companies within our
family of companies, our Insurance Operations, or our
Reinsurance Operations.
Changes
of Control
Before a person can acquire control of a U.S. insurance
company, prior written approval must be obtained from the
insurance commissioner of the state where the domestic insurer
is domiciled. Prior to granting approval of an application to
acquire control of a domestic insurer, the state insurance
commissioner will consider factors such as the financial
strength of the applicant, the integrity and management of the
applicants Board of Directors and executive officers, the
acquirers plans for the management, Board of Directors and
executive officers of the company being acquired, the
acquirers plans for the future operations of the domestic
insurer and any anti-competitive results that may arise from the
consummation of the acquisition of control. Generally, state
statutes provide that control over a domestic insurer is
presumed to exist if any person, directly or indirectly, owns,
controls, holds with the power to vote, or holds proxies
representing 10% or more of the voting securities of the
domestic insurer. Because a person acquiring 10% or more of our
ordinary shares would indirectly control the same percentage of
the stock of the U.S. Insurance Subsidiaries, the insurance
change of control laws of Indiana, Pennsylvania, Virginia, and
Wisconsin would likely apply to such a transaction. While our
articles of association limit the voting power of any
U.S. shareholder to less than 9.5%, there can be no
assurance that the applicable state insurance regulator would
agree that any shareholder did not control the applicable
insurance company.
These laws may discourage potential acquisition proposals and
may delay, deter or prevent a change of control of Global
Indemnity, including through transactions, and in particular
unsolicited transactions, that some or all of the shareholders
of Global Indemnity might consider desirable.
Notice must also be provided to the IID after a person acquires
10% or more of the voting securities of Wind River Reinsurance.
Failure to do so may cause Wind River Reinsurance to be removed
from the IID listing. In the
21
event of a change in control
and/or
merger of Wind River Reinsurance, a complete application must be
filed with the IID, including all documents that are necessary
for the IID to determine if Wind River Reinsurance continues to
be in compliance for listing with the IID. The IID may determine
after a change in control
and/or
merger that Wind River Reinsurance is not in compliance and may
remove it from continued listing.
State
Insurance Regulation
State insurance authorities have broad regulatory powers with
respect to various aspects of the business of
U.S. insurance companies, including, but not limited to,
licensing companies to transact admitted business or determining
eligibility to write surplus lines business, accreditation of
reinsurers, admittance of assets to statutory surplus,
regulating unfair trade and claims practices, establishing
reserve requirements and solvency standards, regulating
investments and dividends, approving policy forms and related
materials in certain instances and approving premium rates in
certain instances. State insurance laws and regulations may
require the U.S. Insurance Subsidiaries to file financial
statements with insurance departments everywhere they will be
licensed or eligible or accredited to conduct insurance
business, and their operations are subject to review by those
departments at any time. The U.S. Insurance Subsidiaries
prepare statutory financial statements in accordance with
statutory accounting principles, or SAP, and
procedures prescribed or permitted by these departments. State
insurance departments also conduct periodic examinations of the
books and records, financial reporting, policy filings and
market conduct of insurance companies domiciled in their states,
generally once every three to five years, although market
conduct examinations may take place at any time. These
examinations are generally carried out in cooperation with the
insurance departments of other states under guidelines
promulgated by the NAIC. In addition, admitted insurers are
subject to targeted market conduct examinations involving
specific insurers by state insurance regulators in any state in
which the insurer is admitted. The insurance departments for the
states of Pennsylvania, Indiana, Wisconsin, and Virginia
completed their financial examinations of our
U.S. Insurance Subsidiaries for the period ended
December 31, 2007. Their final reports were issued in 2009,
and there were no materially adverse findings.
Insurance
Regulatory Information System Ratios
The NAIC Insurance Regulatory Information System, or
IRIS, was developed by a committee of the state
insurance regulators and is intended primarily to assist state
insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating
in their respective states. IRIS identifies twelve industry
ratios and specifies usual values for each ratio.
Departure from the usual values of the ratios can lead to
inquiries from individual state insurance commissioners as to
certain aspects of an insurers business. Insurers that
report four or more ratios that fall outside the range of usual
values are generally targeted for increased regulatory review.
The following summarizes the 2010 IRIS ratio results for our
insurance companies in our Insurance Operations:
|
|
|
|
|
Penn-Star Insurance Company and Penn-Patriot Insurance Company
had an unusual value for the change in net written premiums from
the result of an unearned premium transfer within the group
during 2009.
|
We do not believe that the above departures from the usual
values will subject us to further regulatory review.
Risk-Based
Capital Regulations
The state insurance departments of Indiana, Pennsylvania,
Virginia, and Wisconsin require that each domestic insurer
report its risk-based capital based on a formula calculated by
applying factors to various asset, premium and reserve items.
The formula takes into account the risk characteristics of the
insurer, including asset risk, insurance risk, interest rate
risk and business risk. The respective state insurance
regulators use the formula as an early warning regulatory tool
to identify possible inadequately capitalized insurers for
purposes of initiating regulatory action, and generally not as a
means to rank insurers. State insurance laws impose broad
confidentiality requirements on those engaged in the insurance
business (including insurers, general agencies, brokers and
others) and on state insurance departments as to the use and
publication of risk-based capital data. The respective state
insurance regulators have explicit regulatory authority to
require various actions by, or to take various actions against,
insurers whose total adjusted capital does not exceed certain
company action level risk-based capital levels.
22
Based on the standards currently adopted, we reported in our
2010 statutory filings that the capital and surplus of our
U.S. Insurance Companies are above the prescribed Company
Action
Level Risk-based
Capital requirements.
Statutory
Accounting Principles (SAP)
SAP is a basis of accounting developed to assist insurance
regulators in monitoring and regulating the solvency of
insurance companies. SAP is primarily concerned with measuring
an insurers surplus. Accordingly, statutory accounting
focuses on valuing assets and liabilities of insurers at
financial reporting dates in accordance with appropriate
insurance laws, regulatory provisions, and practices prescribed
or permitted by each insurers domiciliary state.
GAAP is concerned with a companys solvency, but it is also
concerned with other financial measurements, such as income and
cash flows. Accordingly, GAAP gives more consideration to
appropriate matching of revenue and expenses. As a direct
result, different line item groupings of assets and liabilities
and different amounts of assets and liabilities are reflected in
financial statements prepared in accordance with GAAP than
financial statements prepared in accordance with SAP.
Statutory accounting practices established by the NAIC and
adopted in part by the Indiana, Pennsylvania, Virginia, and
Wisconsin regulators determine, among other things, the amount
of statutory surplus and statutory net income of the
U.S. Insurance Companies and thus determine, in part, the
amount of funds these subsidiaries have available to pay
dividends.
State
Dividend Limitations
The U.S. Insurance Companies are restricted by statute as
to the amount of dividends that they may pay without the prior
approval of the applicable state regulatory authorities.
Dividends may be paid without advanced regulatory approval only
out of unassigned surplus. The dividend limitations imposed by
the applicable state laws are based on the statutory financial
results of each company within our Insurance Operations that are
determined using statutory accounting practices that differ in
various respects from accounting principles used in financial
statements prepared in conformity with GAAP. See
Regulation Statutory Accounting
Principles. Key differences relate to, among other items,
deferred acquisition costs, limitations on deferred income
taxes, reserve calculation assumptions and surplus notes.
See the Liquidity and Capital Resources section in
Item 7 of Part II of this report for a more complete
description of the state dividend limitations. See Note 18
of the notes to consolidated financial statements in Item 8
of Part II of this report for the dividends declared and
paid by the U.S. Insurance Companies in 2010 and the
maximum amount of distributions that they could pay as dividends
in 2011.
Guaranty
Associations and Similar Arrangements
Most of the jurisdictions in which our U.S. Insurance
Subsidiaries are admitted to transact business require property
and casualty insurers doing business within that jurisdiction to
participate in guaranty associations. These organizations are
organized to pay contractual benefits owed pursuant to insurance
policies issued by impaired, insolvent or failed insurers. These
associations levy assessments, up to prescribed limits, on all
member insurers in a particular state on the basis of the
proportionate share of the premiums written by member insurers
in the lines of business in which the impaired, insolvent, or
failed insurer is engaged. Some states permit member insurers to
recover assessments paid through full or partial premium tax
offsets or in limited circumstances by surcharging policyholders.
Operations
of Wind River Reinsurance
The insurance laws of each of the United States and of many
other countries regulate or prohibit the sale of insurance and
reinsurance within their jurisdictions by
non-U.S. insurers
and reinsurers that are not admitted to do business within such
jurisdictions. Wind River Reinsurance is not admitted to do
business in the United States. We do not intend for Wind River
Reinsurance to maintain offices or solicit, advertise, settle
claims or conduct other
23
insurance and reinsurance underwriting activities in any
jurisdiction in the United States where the conduct of such
activities would require that Wind River Reinsurance be admitted
or authorized.
As a reinsurer that is not licensed, accredited, or approved in
any state in the United States, Wind River Reinsurance is
required to post collateral security with respect to the
reinsurance liabilities it assumes from our Insurance Operations
as well as other U.S. ceding companies. The posting of
collateral security is generally required in order for
U.S. ceding companies to obtain credit on their
U.S. statutory financial statements with respect to
reinsurance liabilities ceded to unlicensed or unaccredited
reinsurers. Under applicable United States credit for
reinsurance statutory provisions, the security
arrangements generally may be in the form of letters of credit,
reinsurance trusts maintained by third-party trustees or
funds-withheld arrangements whereby the ceded premium is held by
the ceding company. If credit for reinsurance laws
or regulations are made more stringent in Indiana, Pennsylvania,
Virginia, Wisconsin or other applicable states or any of the
Insurance Operations re-domesticates to one of the few states
that do not allow credit for reinsurance ceded to non-licensed
reinsurers, we may be unable to realize some of the benefits we
expect from our business plan. Accordingly, our Reinsurance
Operations could be adversely affected.
Even though Wind River Reinsurance does not currently offer
third party excess and surplus lines insurance products, it
maintains a U.S. surplus lines trust fund with a
U.S. bank to secure its U.S. surplus lines
policyholders. The amount held in trust at December 31,
2010 was $5.9 million. Outstanding reserves at
December 31, 2010 were $0.1 million. The current
minimum amount that Wind River Reinsurance needs to maintain in
the trust fund is $5.4 million. In subsequent years, if
Wind River Reinsurance were to write third party excess and
surplus lines insurance, it would need to maintain in the trust
fund an amount equal to 30% of any amount up to the first
$200.0 million plus further graduated amounts of its
U.S. surplus lines loss reserves and unearned premium, as
at each year end, as certified by an actuary, but subject to a
current maximum of $100.0 million. The trust fund is
irrevocable and must remain in force for a period of five years
from the date of written notice to the trustee of the
termination of the trust unless the liabilities with respect to
all risks covered by the trust fund have been transferred to an
insurer licensed to do business in all states where insurance is
in force.
Apart from the financial and related filings required to
maintain Wind River Reinsurances place on the IIDs
Non-Admitted Insurers Quarterly Listing and its
jurisdiction-specific approvals and eligibilities, Wind River
Reinsurance generally is not subject to regulation by
U.S. jurisdictions. Specifically, rate and form regulations
otherwise applicable to authorized insurers generally do not
apply to Wind River Reinsurances surplus lines
transactions.
Bermuda
Insurance Regulation
The Bermuda Insurance Act 1978 and related regulations, as
amended (the Insurance Act), regulates the insurance
business of Wind River Reinsurance and provides that no person
may carry on any insurance business in or from within Bermuda
unless registered as an insurer by the Bermuda Monetary
Authority (the BMA) under the Insurance Act. Wind
River Reinsurance has been registered as a Class 3B insurer
by the BMA. A body corporate is registrable as a Class 3B
insurer if it intends to carry on insurance business in
circumstances where 50% or more of the net premiums written or
50% or more of the loss and loss expense provisions represent
unrelated business, or its total net premiums written from
unrelated business are $50.0 million or more. The continued
registration of an applicant as an insurer is subject to it
complying with the terms of its registration and such other
conditions as the BMA may impose from time to time.
The Insurance Act also imposes on Bermuda insurance companies
solvency and liquidity standards and auditing and reporting
requirements. Certain significant aspects of the Bermuda
insurance regulatory framework are set forth as follows.
Classification
of Insurers
Wind River Reinsurance, which is incorporated to carry on
general insurance and reinsurance business, is registered as a
Class 3B insurer in Bermuda.
24
Cancellation
of Insurers Registration
An insurers registration may be canceled by the Supervisor
of Insurance of the BMA on certain grounds specified in the
Insurance Act, including failure of the insurer to comply with
its obligations under the Insurance Act.
Principal
Representative
An insurer is required to maintain a principal office in Bermuda
and to appoint and maintain a principal representative in
Bermuda. Wind River Reinsurances principal office is its
executive offices in Hamilton, Bermuda, and Wind River
Reinsurances principal representative is its Chief
Executive Officer.
Independent
Approved Auditor
Every registered insurer, such as Wind River Reinsurance, must
appoint an independent auditor who will audit and report
annually on the statutory financial statements and the statutory
financial return of the insurer, both of which are required to
be filed annually with the BMA.
Loss
Reserve Specialist
As a registered Class 3B insurer, Wind River Reinsurance is
required to submit an opinion of its approved loss reserve
specialist in respect of its losses and loss expense provisions
with its statutory financial return.
Statutory
Financial Statements
Wind River Reinsurance must prepare annual statutory financial
statements. The Insurance Act prescribes rules for the
preparation and substance of these statutory financial
statements (which include, in statutory form, a balance sheet,
an income statement, a statement of capital and surplus and
notes thereto). Wind River Reinsurance is required to give
detailed information and analyses regarding premiums, claims,
reinsurance, and investments. The statutory financial statements
are not prepared in accordance with GAAP or SAP and are distinct
from the financial statements prepared for presentation to Wind
River Reinsurances shareholders and under the Bermuda
Companies Act 1981 (the Companies Act), which
financial statements will be prepared in accordance with GAAP.
Annual
Statutory Financial Return
Wind River Reinsurance is required to file with the BMA a
statutory financial return no later than four months after its
financial year end (unless specifically extended upon
application to the BMA). The statutory financial return for a
Class 3B insurer includes, among other matters, a report of
the approved independent auditor on the statutory financial
statements of the insurer, solvency certificates, the statutory
financial statements, a declaration of statutory ratios and the
opinion of the loss reserve specialist.
Minimum
Margin of Solvency and Restrictions on Dividends and
Distributions
The Insurance Act provides a minimum margin of solvency for
Class 3B general business insurers, such as Wind River
Reinsurance. A Class 3B insurer engaged in general business
is required to maintain the amount by which the value of its
assets exceed its liabilities at the greater of:
(1) $1.0 million; (2) where net premiums written
exceed $6.0 million: $1.2 million plus 15% of the
excess over $6.0 million; or (3) 15% of loss and loss
expenses provisions plus other insurance reserves, as such terms
are defined in the Insurance Act.
Additionally, under the Companies Act, Wind River Reinsurance
may only declare or pay a dividend if Wind River Reinsurance has
no reasonable grounds for believing that it is, or would after
the payment be, unable to pay its liabilities as they become
due, or if the realizable value of its assets would not be less
than the aggregate of its liabilities and its issued share
capital and share premium accounts.
25
Minimum
Liquidity Ratio
The Insurance Act provides a minimum liquidity ratio for general
business insurers, such as Wind River Reinsurance. An insurer
engaged in general business is required to maintain the value of
its relevant assets at not less than 75% of the amount of its
relevant liabilities; as such terms are defined in the Insurance
Act.
Restrictions
on Dividends and Distributions
Wind River Reinsurance is prohibited from declaring or paying
any dividends during any financial year if it is in breach of
its minimum solvency margin or minimum liquidity ratio or if the
declaration or payment of such dividends would cause it to fail
to meet such margin or ratio. In addition, if it has failed to
meet its minimum solvency margin or minimum liquidity ratio on
the last day of any financial year, Wind River Reinsurance will
be prohibited, without the approval of the BMA, from declaring
or paying any dividends during the next financial year.
Wind River Reinsurance is prohibited, without the approval of
the BMA, from reducing by 15% or more its total statutory
capital as set out in its previous years financial
statements, and any application for such approval must include
such information as the BMA may require. In addition, at any
time it fails to meet its minimum margin of solvency, Wind River
Reinsurance is required within 30 days after becoming aware
of such failure or having reason to believe that such failure
has occurred, to file with the BMA a written report containing
certain information.
Additionally, under the Companies Act, Wind River Reinsurance
may not declare or pay a dividend, or make a distribution from
contributed surplus, if there are reasonable grounds for
believing that it is, or would after the payment, be unable to
pay its liabilities as they become due, or if the realizable
value of its assets would be less than the aggregate of its
liabilities and its issued share capital and share premium
accounts.
Supervision,
Investigation and Intervention
The BMA has wide powers of investigation and document production
in relation to Bermuda insurers under the Insurance Act. For
example, the BMA may appoint an inspector with extensive powers
to investigate the affairs of Wind River Reinsurance if the BMA
believes that such an investigation is in the best interests of
its policyholders or persons who may become policyholders.
Disclosure
of Information
The BMA may assist other regulatory authorities, including
foreign insurance regulatory authorities, with their
investigations involving insurance and reinsurance companies in
Bermuda, but subject to restrictions. For example, the BMA must
be satisfied that the assistance being requested is in
connection with the discharge of regulatory responsibilities of
the foreign regulatory authority. Further, the BMA must consider
whether cooperation is in the public interest. The grounds for
disclosure are limited and the Insurance Act provides sanctions
for breach of the statutory duty of confidentiality.
Under the Companies Act, the Minister of Finance may assist a
foreign regulatory authority that has requested assistance in
connection with inquiries being carried out by it in the
performance of its regulatory functions. The Minster of
Finances powers include requiring a person to furnish
information to the Minister of Finance, to produce documents to
the Minister of Finance, to attend and answer questions and to
give assistance to the Minister of Finance in relation to
inquiries. The Minister of Finance must be satisfied that the
assistance requested by the foreign regulatory authority is for
the purpose of its regulatory functions and that the request is
in relation to information in Bermuda that a person has in his
possession or under his control. The Minister of Finance must
consider, among other things, whether it is in the public
interest to give the information sought.
Certain
Other Bermuda Law Considerations
Although Wind River Reinsurance is incorporated in Bermuda, it
is classified as a non-resident of Bermuda for exchange control
purposes by the BMA. Pursuant to the non-resident status, Wind
River Reinsurance may engage in transactions in currencies other
than Bermuda dollars, and there are no restrictions on its
ability to transfer funds (other than funds denominated in
Bermuda dollars) in and out of Bermuda or to pay dividends to
United States residents that are holders of its ordinary shares.
26
Under Bermuda law, exempted companies are companies formed for
the purpose of conducting business outside Bermuda from a
principal place of business in Bermuda. As an
exempted company, Wind River Reinsurance may not,
without the express authorization of the Bermuda legislature or
under a license or consent granted by the Minister of Finance,
participate in certain business transactions, including
transactions involving Bermuda landholding rights and the
carrying on of business of any kind for which it is not licensed
in Bermuda.
The European Unions (EU) executive body, the
European Commission, is implementing new capital adequacy and
risk management regulations for the European insurance industry
known as Solvency II, which aims to establish a revised set of
EU-wide capital requirements and risk management standards that
will replace the current Solvency I requirements. Once
finalized, Solvency II is expected to set out new,
strengthened requirements applicable to the entire EU relating
to capital adequacy and risk management for insurers. Other
jurisdictions such as Bermuda are likely to strengthen their
respective capital and risk management requirements to be in
line with Solvency II. Final Solvency II guidance has yet
to be published; consequently the Companys implementation
plans are based on its current understanding of Solvency II
equivalence for the BMAs regime, which may change.
Taxation
of Global Indemnity and Subsidiaries
Ireland
Global Indemnity plc is a public limited company incorporated
under the laws of Ireland. The company is a resident taxpayer
fully subject to Ireland corporate income tax of 12.5% on
trading income and 25.0% on non-trading income, including
interest and dividends from foreign companies. Currently, Global
Indemnity plc has only non-trading income, so it is subject to
corporate income tax of 25.0%.
United America Indemnity, Ltd., a direct wholly-owned
subsidiary, is a private limited liability company incorporated
under the laws of the Cayman Islands. The company is an Irish
tax resident fully subject to Ireland corporate income tax of
12.5% on trading income and 25.0% on non-trading income,
including interest and dividends from foreign companies.
Currently, United America Indemnity, Ltd. has only non-trading
income, so it is subject to corporate income tax of 25.0%.
Global Indemnity Services Ltd., a direct wholly-owned
subsidiary, is a private limited liability company incorporated
under the laws of Ireland. The company is a resident taxpayer
fully subject to Ireland corporate income tax of 12.5% on
trading income and 25.0% on non-trading income, including
interest and dividends from foreign companies. Currently, Global
Indemnity Services Ltd. has only trading income, so it is
subject to corporate income tax of 12.5%.
U.A.I. (Ireland) Limited, an indirect wholly-owned subsidiary,
is a private limited liability company incorporated under the
laws of Ireland. The company is a resident taxpayer fully
subject to Ireland corporate income tax of 12.5% on trading
income and 25.0% on non-trading income, including interest and
dividends from foreign companies. Currently, U.A.I. (Ireland)
Limited has only non-trading income, so it is subject to
corporate income tax of 25.0%.
Cayman
Islands
United America Indemnity, Ltd., a direct wholly-owned
subsidiary, and Global Indemnity (Cayman) Ltd., an indirect
wholly-owned subsidiary, are private limited liability companies
incorporated under the laws of the Cayman Islands. Under current
Cayman Islands law, we are not required to pay any taxes in the
Cayman Islands on our income or capital gains. United America
Indemnity, Ltd. obtained an undertaking on September 2,
2003 from the Governor in Council of the Cayman Islands
substantially that, for a period of 20 years from the date
of such undertaking, no law that is enacted in the Cayman
Islands imposing any tax to be levied on profit or income or
gains or appreciation shall apply to it and no such tax and no
tax in the nature of estate duty or inheritance tax will be
payable, either directly or by way of withholding, on its
shares. Given the limited duration of the undertaking, we cannot
be certain that it will not be subject to Cayman Islands tax
after the expiration of the
20-year
period.
27
Bermuda
Under current Bermuda law, we and our Bermuda subsidiaries are
not required to pay any taxes in Bermuda on our income or
capital gains. Currently, there is no Bermuda income,
corporation or profits tax, withholding tax, capital gains tax,
capital transfer tax, estate duty or inheritance tax payable by
Wind River Reinsurance or its shareholders, other than
shareholders ordinarily resident in Bermuda, if any. Currently,
there is no Bermuda withholding or other tax on principal,
interest, or dividends paid to holders of the ordinary shares of
Wind River Reinsurance, other than holders ordinarily resident
in Bermuda, if any. There can be no assurance that Wind River
Reinsurance or its shareholders will not be subject to any such
tax in the future.
We have received a written assurance from the Bermuda Minister
of Finance under the Exempted Undertakings Tax Protection Act of
1966 of Bermuda, that if any legislation is enacted in Bermuda
that would impose tax computed on profits or income, or computed
on any capital asset, gain or appreciation, or any tax in the
nature of estate duty or inheritance tax, then the imposition of
that tax would not be applicable to Wind River Reinsurance or to
any of its operations, shares, debentures or obligations through
March 28, 2016; provided that such assurance is subject to
the condition that it will not be construed to prevent the
application of such tax to people ordinarily resident in
Bermuda, or to prevent the application of any taxes payable by
Wind River Reinsurance in respect of real property or leasehold
interests in Bermuda held by them. Given the limited duration of
the assurance, we cannot be certain that we will not be subject
to any Bermuda tax after March 28, 2016.
Gibraltar
Global Indemnity (Gibraltar) Ltd., an indirect wholly-owned
subsidiary, is a private limited liability company incorporated
under the laws of Gibraltar. The Company received a tax ruling
from the Ministry of Finance Income Tax Office of Gibraltar that
dividends and distributions received by Global Indemnity
(Gibraltar) Ltd. from Global Indemnity (Cayman) Ltd. would not
be subject to tax in Gibraltar, provided that Global Indemnity
(Gibraltar) Ltd. continues to indirectly hold a relevant
participation in U.A.I. (Luxembourg) I S.à.r.l.
Luxembourg
The Luxembourg Companies and Global Indemnity (Luxembourg)
S.à.r.l. are indirect wholly-owned subsidiaries and private
limited liability companies incorporated under the laws of
Luxembourg. These are taxable companies, which may carry out any
activities that fall within the scope of their corporate object
clause. The companies are resident taxpayers fully subject to
Luxembourg corporate income tax at a rate of 28.59% and net
worth tax at a rate of 0.5%. The companies are entitled to
benefits of the tax treaties concluded between Luxembourg and
other countries and European Union Directives.
Profit distributions (not in respect to liquidations) by the
companies are generally subject to Luxembourg dividend
withholding tax at a rate of 15% in 2010, unless a domestic law
exemption or a lower tax treaty rate applies. Dividends paid by
any of the Luxembourg Companies to their Luxembourg resident
parent company are exempt from Luxembourg dividend withholding
tax, provided that at the time of the dividend distribution, the
resident parent company has held (or commits itself to continue
to hold) 10% or more of the nominal paid up capital of the
distributing entity or, in the event of a lower percentage
participation, a participation having an acquisition price of
Euro 1.2 million or more for a period of at least
12 months.
The Luxembourg Companies have obtained a confirmation from the
Luxembourg Administration des Contributions Directes
(Luxembourg Tax Administration) that the current
financing activities of the Luxembourg Companies under the
application of at arms length principles will not lead to
any material taxation in Luxembourg. The confirmation from the
Luxembourg Tax Administration covers the current financing
operations of the Luxembourg Companies through
September 15, 2018. Given the limited duration of the
confirmation and the possibility of a change in the relevant tax
laws or the administrative policy of the Luxembourg Tax
Administration, we cannot be certain that we will not be subject
to greater Luxembourg taxes in the future.
Dividends by Global Indemnity (Luxembourg) S.à.r.l. to
United America Indemnity, Ltd., an Irish tax resident, are
exempt from withholding tax in Luxembourg, provided that as of
the date on which the income is made available, United America
Indemnity, Ltd. has held or undertakes to hold, directly, for an
uninterrupted period of at
28
least 12 months, a relevant participation in the share
capital of Global Indemnity (Luxembourg) S.à.r.l.
United America Indemnity, Ltd. has held such participation
since April, 2010.
Global Indemnity (Luxembourg) S.à.r.l. benefits from the
Luxembourg participation exemption regime for its participation
in Global Indemnity (Gibraltar) Ltd. with respect to dividends
and capital gains derived there from, provided Global Indemnity
(Luxembourg) S.à.r.l. has held or commits to hold a
participation in the share capital of Global Indemnity
(Gibraltar) Ltd. for an uninterrupted period of at least
12 months. Global Indemnity (Luxembourg) S.à.r.l. has
held such participation since June, 2010.
United
States
The following discussion is a summary of all material
U.S. federal income tax considerations relating to our
operations. We manage our business in a manner that seeks to
mitigate the risk that either Global Indemnity or Wind River
Reinsurance will be treated as engaged in a U.S. trade or
business for U.S. federal income tax purposes. However,
whether business is being conducted in the United States is an
inherently factual determination. Because the United States
Internal Revenue Code (the Code), regulations and
court decisions fail to identify definitively activities that
constitute being engaged in a trade or business in the United
States, we cannot be certain that the IRS will not contend
successfully that Global Indemnity or Wind River Reinsurance is
or will be engaged in a trade or business in the United States.
A
non-U.S. corporation
deemed to be so engaged would be subject to U.S. income tax
at regular corporate rates, as well as the branch profits tax,
on its income that is treated as effectively connected with the
conduct of that trade or business unless the corporation is
entitled to relief under the permanent establishment provision
of an applicable tax treaty, as discussed below. Such income
tax, if imposed, would be based on effectively connected income
computed in a manner generally analogous to that applied to the
income of a U.S. corporation, except that a
non-U.S. corporation
is generally entitled to deductions and credits only if it
timely files a U.S. federal income tax return. Global
Indemnity and Wind River Reinsurance are filing protective
U.S. federal income tax returns on a timely basis in order
to preserve the right to claim income tax deductions and credits
if it is ever determined that it is subject to U.S. federal
income tax. All of our other
non-U.S. entities
are considered disregarded entities for federal income tax
purposes. The highest marginal federal income tax rates
currently are 35% for a corporations effectively connected
income and 30% for the branch profits tax.
Global Indemnity Group, Inc. is a Delaware corporation wholly
owned by U.A.I. (Luxembourg) Investment S.à r.l. Under
U.S. federal income tax law, dividends and interest paid by
a U.S. corporation to a
non-U.S. shareholder
are generally subject to a 30% withholding tax, unless reduced
by treaty. The income tax treaty between Luxembourg and the
United States (the Luxembourg Treaty) reduces the
rate of withholding tax on interest payments to 0% and on
dividends to 15%, or 5% (if the shareholder owns 10% or more of
the companys voting stock).
If Wind River Reinsurance is entitled to the benefits under the
income tax treaty between Bermuda and the United States (the
Bermuda Treaty), Wind River Reinsurance would not be
subject to U.S. income tax on any business profits of its
insurance enterprise found to be effectively connected with a
U.S. trade or business, unless that trade or business is
conducted through a permanent establishment in the United
States. No regulations interpreting the Bermuda Treaty have been
issued. Wind River Reinsurance currently conducts its activities
to reduce the risk that it will have a permanent establishment
in the United States, although we cannot be certain that we will
achieve this result.
An insurance enterprise resident in Bermuda generally will be
entitled to the benefits of the Bermuda Treaty if (1) more
than 50% of its shares are owned beneficially, directly or
indirectly, by individual residents of the United States or
Bermuda or U.S. citizens and (2) its income is not
used in substantial part, directly or indirectly, to make
disproportionate distributions to, or to meet certain
liabilities to, persons who are neither residents of either the
United States or Bermuda nor U.S. citizens. We cannot be
certain that Wind River Reinsurance will be eligible for Bermuda
Treaty benefits in the future because of factual and legal
uncertainties regarding the residency and citizenship of our
shareholders.
Foreign insurance companies carrying on an insurance business
within the United States have a certain minimum amount of
effectively connected net investment income, determined in
accordance with a formula that depends, in part, on the amount
of U.S. risk insured or reinsured by such companies. If
Wind River Reinsurance is
29
considered to be engaged in the conduct of an insurance business
in the United States and it is not entitled to the benefits of
the Bermuda Treaty in general (because it fails to satisfy one
of the limitations on treaty benefits discussed above), the Code
could subject a significant portion of Wind River
Reinsurances investment income to U.S. income tax. In
addition, while the Bermuda Treaty clearly applies to premium
income, it is uncertain whether the Bermuda Treaty applies to
other income such as investment income. If Wind River
Reinsurance is considered engaged in the conduct of an insurance
business in the United States and is entitled to the benefits of
the Bermuda Treaty in general, but the Bermuda Treaty is
interpreted to not apply to investment income, a significant
portion of Wind River Reinsurances investment income could
be subject to U.S. federal income tax.
Foreign corporations not engaged in a trade or business in the
United States are subject to 30% U.S. income tax imposed by
withholding on the gross amount of certain fixed or
determinable annual or periodic gains, profits and income
derived from sources within the United States (such as dividends
and certain interest on investments), subject to exemption under
the Code or reduction by applicable treaties. The Bermuda Treaty
does not reduce the rate of tax in such circumstances. The
United States also imposes an excise tax on insurance and
reinsurance premiums paid to foreign insurers or reinsurers with
respect to risks located in the United States. The rates of tax
applicable to premiums paid to Wind River Reinsurance on such
business are 4% for direct insurance premiums and 1% for
reinsurance premiums.
Our U.S. Subsidiaries are each subject to taxation in the
United States at regular corporate rates.
The risks and uncertainties described below are those we believe
to be material, but they are not the only ones we face. If any
of the following risks, or other risks and uncertainties that we
have not yet identified or that we currently consider not to be
material, actually occur, our business, prospects, financial
condition, results of operations and cash flows could be
materially and adversely affected.
Some of the statements regarding risk factors below and
elsewhere in this report may include forward-looking statements
that reflect our current views with respect to future events and
financial performance. Such statements include forward-looking
statements both with respect to us specifically and the
insurance and reinsurance sectors in general, both as to
underwriting and investment matters. Statements that include
words such as expect, intend,
plan, believe, project,
anticipate, seek, will and
similar statements of a future or forward-looking nature
identify forward-looking statements for purposes of the federal
securities laws or otherwise. All forward-looking statements
address matters that involve risks and uncertainties.
Accordingly, there are or will be important factors that could
cause actual results to differ materially from those indicated
in such statements. We assume no obligation to update our
forward-looking statements to reflect actual results or changes
in or additions to such forward-looking statements.
Risks
Related to our Business
We are
Dependent on Our Senior Executives and the Loss of Any of These
Executives or Our Inability to Attract and Retain Other Key
Personnel Could Adversely Affect Our Business.
Our success substantially depends upon our ability to attract
and retain qualified employees and upon the ability of our
senior management and other key employees to implement our
business strategy. We believe there are a limited number of
available, qualified executives in the business lines in which
we compete. The success of our initiatives and our future
performance depend, in significant part, upon the continued
service of our senior management team, including Larry A.
Frakes, our President and Chief Executive Officer, Thomas M.
McGeehan, our Chief Financial Officer, Matthew B. Scott,
President of
Penn-America
Group and United National Group, David J. Myers, President of
Diamond State Group, and Troy W. Santora, President of Wind
River Reinsurance Company, Ltd. Messrs. Frakes, McGeehan,
Scott, and Santora have employment agreements with us, although
these agreements cannot assure us of the continued service of
these individuals. Mr. Myers employment agreement
expired effective January 1, 2011. We do not currently
maintain key man life insurance policies with respect to any of
our employees.
30
The future loss of any of the services of other members of our
senior management team or the inability to attract and retain
other talented personnel could impede the further implementation
of our business strategy, which could have a material adverse
effect on our business.
If
Actual Claims Payments Exceed Our Reserves for Losses and Loss
Adjustment Expenses, Our Financial Condition and Results of
Operations Could Be Adversely Affected.
Our success depends upon our ability to accurately assess the
risks associated with the insurance and reinsurance policies
that we write. We establish reserves on an undiscounted basis to
cover our estimated liability for the payment of all losses and
loss adjustment expenses incurred with respect to premiums
earned on the insurance policies that we write. Reserves do not
represent an exact calculation of liability. Rather, reserves
are estimates of what we expect to be the ultimate cost of
resolution and administration of claims under the insurance
policies that we write. These estimates are based upon actuarial
and statistical projections, our assessment of currently
available data, as well as estimates and assumptions as to
future trends in claims severity and frequency, judicial
theories of liability and other factors. We continually refine
our reserve estimates in an ongoing process as experience
develops and claims are reported and settled. Our insurance
subsidiaries obtain an annual statement of opinion from an
independent actuarial firm on the reasonableness of these
reserves.
Establishing an appropriate level of reserves is an inherently
uncertain process. The following factors may have a substantial
impact on our future actual losses and loss adjustment
experience:
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claim and expense payments;
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severity of claims;
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legislative and judicial developments; and
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changes in economic conditions, including the effect of
inflation.
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For example, as industry practices and legal, judicial, social
and other conditions change, unexpected and unintended exposures
related to claims and coverage may emerge. Recent examples
include claims relating to mold, asbestos and construction
defects, as well as larger settlements and jury awards against
professionals and corporate directors and officers. In addition,
there is a growing trend of plaintiffs targeting property and
casualty insurers in purported class action litigations relating
to claims-handling, insurance sales practices and other
practices. These exposures may either extend coverage beyond our
underwriting intent or increase the frequency or severity of
claims. As a result, such developments could cause our level of
reserves to be inadequate.
Actual losses and loss adjustment expenses we incur under
insurance policies that we write may be different from the
amount of reserves we establish, and to the extent that actual
losses and loss adjustment expenses exceed our expectations and
the reserves reflected on our financial statements, we will be
required to immediately reflect those changes by increasing our
reserves. In addition, regulators could require that we increase
our reserves if they determine that our reserves were
understated in the past. When we increase reserves, our pre-tax
income for the period in which we do so will decrease by a
corresponding amount. In addition to having an effect on
reserves and pre-tax income, increasing or
strengthening reserves causes a reduction in our
insurance companies surplus and could cause the rating of
our insurance company subsidiaries to be downgraded or placed on
credit watch. Such a downgrade could, in turn, adversely affect
our ability to sell insurance policies.
A
Failure in Our Operational Systems or Infrastructure or Those of
Third Parties Could Disrupt Business, Damage Our Reputation, and
Cause Losses.
Our operations rely on the secure processing, storage, and
transmission of confidential and other information in our
computer systems and networks. Our business depends on effective
information systems and the integrity and timeliness of the data
we use to run our business. Our ability to adequately price
products and services, to establish reserves, to provide
effective and efficient service to our customers, and to timely
and accurately report our financial results also depends
significantly on the integrity of the data in our information
systems. Although we take protective measures and endeavor to
modify them as circumstances warrant, our computer systems,
software, and networks may be vulnerable to unauthorized access,
computer viruses or other malicious code, and other events that
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could have security consequences. If one or more of such events
occur, this potentially could jeopardize our or our
clients or counterparties confidential and other
information processed and stored in, and transmitted through,
our computer systems and networks, or otherwise cause
interruptions or malfunctions in our, our clients, our
counterparties, or third parties operations, which
could result in significant losses or reputational damage. We
may be required to expend significant additional resources to
modify our protective measures or to investigate and remediate
vulnerabilities or other exposures, and we may be subject to
litigation and financial losses that are either not insured
against or not fully covered by insurance maintained.
Despite the contingency plans and facilities we have in place,
our ability to conduct business may be adversely affected by a
disruption of the infrastructure that supports our business in
the communities in which we are located, or of outsourced
services or functions. This may include a disruption involving
electrical, communications, transportation, or other services
used by us. These disruptions may occur, for example, as a
result of events that affect only the buildings occupied by us
or as a result of events with a broader effect on the cities
where those buildings are located. If a disruption occurs in one
location and our employees in that location are unable to occupy
their offices and conduct business or communicate with or travel
to other locations, our ability to service and interact with
clients may suffer and we may not be able to successfully
implement contingency plans that depend on communication or
travel.
Employee
Error and Misconduct May Be Difficult to Detect and Prevent and
Could Adversely Affect Our Business, Results of Operations, and
Financial Condition.
Losses may result from, among other things, fraud, errors,
failure to document transactions properly, failure to obtain
proper internal authorization, or failure to comply with
regulatory requirements. It is not always possible to deter or
prevent employee misconduct and the precautions we take to
prevent and detect this activity may not be effective in all
cases. Resultant losses could adversely affect our business,
results of operations, and financial condition.
Catastrophic
Events Can Have a Significant Impact on Our Financial and
Operational Condition.
Results of operations of property and casualty insurers are
subject to man-made and natural catastrophes. We have
experienced, and expect to experience in the future, catastrophe
losses. It is possible that a catastrophic event or a series of
multiple catastrophic events could have a material adverse
effect on our operating results and financial condition. Our
operating results could be negatively impacted if we experience
losses from catastrophes that are in excess of the catastrophe
reinsurance coverage of our Insurance Operations. Our
Reinsurance Operations also have exposure to losses from
catastrophes as a result of the reinsurance treaties that it
writes. Our operating results could be negatively impacted if
losses and expenses related to the property catastrophe events
exceed premiums assumed. Catastrophes include windstorms,
hurricanes, typhoons, floods, earthquakes, tornadoes, hail,
severe winter weather, fires and may include terrorist events
such as the attacks on the World Trade Center and Pentagon on
September 11, 2001. We cannot predict how severe a
particular catastrophe may be until after it occurs. The extent
of losses from catastrophes is a function of the total amount
and type of losses incurred, the number of insureds affected,
the frequency of the events and the severity of the particular
catastrophe. Most catastrophes occur in small geographic areas.
However, some catastrophes may produce significant damage in
large, heavily populated areas. In 2010, our Reinsurance
Operations suffered net losses due to hail storms and flooding
in Australia, an earthquake in New Zealand and smaller events in
other locations.
A
Decline in Rating for Any of Our Insurance or Reinsurance
Subsidiaries Could Adversely Affect Our Position in the
Insurance Market, Make It More Difficult To Market Our Insurance
Products and Cause Our Premiums and Earnings To
Decrease.
Ratings have become an increasingly important factor in
establishing the competitive position for insurance companies.
A.M. Best ratings currently range from A++
(Superior) to F (In Liquidation), with a total of 16
separate ratings categories. A.M. Best currently assigns
the companies in our Insurance Operations and Reinsurance
Operations a financial strength rating of A
(Excellent), the third highest of their 16 rating categories.
The objective of A.M. Bests rating system is to
provide potential policyholders an opinion of an insurers
financial strength and its ability to meet ongoing obligations,
including paying claims. In evaluating a companys
financial
32
and operating performance, A.M. Best reviews its
profitability, leverage and liquidity, its spread of risk, the
quality and appropriateness of its reinsurance, the quality and
diversification of its assets, the adequacy of its policy and
loss reserves, the adequacy of its surplus, its capital
structure, and the experience and objectives of its management.
These ratings are based on factors relevant to policyholders,
general agencies, insurance brokers, reinsurers, and
intermediaries and are not directed to the protection of
investors. These ratings are not an evaluation of, nor are they
directed to, investors in our Class A ordinary shares and
are not a recommendation to buy, sell or hold our Class A
ordinary shares. Publications of A.M. Best indicate that
companies are assigned A (Excellent) ratings if, in
A.M. Bests opinion, they have an excellent ability to
meet their ongoing obligations to policyholders. These ratings
are subject to periodic review by, and may be revised downward
or revoked at the sole discretion of, A.M. Best.
If the rating of any of the companies in our Insurance
Operations or Reinsurance Operations is reduced from its current
level of A by A.M. Best, our competitive
position in the insurance industry could suffer, and it could be
more difficult for us to market our insurance products. A
downgrade could result in a significant reduction in the number
of insurance contracts we write and in a substantial loss of
business, as such business could move to other competitors with
higher ratings, thus causing premiums and earnings to decrease.
We
Cannot Guarantee that Our Reinsurers Will Pay in a Timely
Fashion, If At All, and as a Result, We Could Experience
Losses.
We cede a portion of gross premiums written to third party
reinsurers under reinsurance contracts. Although reinsurance
makes the reinsurer liable to us to the extent the risk is
transferred, it does not relieve us of our liability to our
policyholders. Upon payment of claims, we will bill our
reinsurers for their share of such claims. Our reinsurers may
not pay the reinsurance receivables that they owe to us or they
may not pay such receivables on a timely basis. If our
reinsurers fail to pay us or fail to pay us on a timely basis,
our financial results would be adversely affected. Lack of
reinsurer liquidity, perceived improper underwriting, or claim
handling by us, and other factors could cause a reinsurer not to
pay.
As of December 31, 2010, we had $423.0 million of
reinsurance receivables, and $289.3 million of collateral
was held in trust to support our reinsurance receivables. Our
reinsurance receivables, net of collateral held, were
$133.7 million. We also had $5.9 million of prepaid
reinsurance premiums, net of collateral held. As of
December 31, 2010, our largest reinsurer represented
approximately 45.2% of our reinsurance receivables, or
$202.2 million, and our second largest reinsurer
represented approximately 21.7% of our reinsurance receivables,
or $97.1 million. As of December 31, 2010, we had
collateral of $162.2 million and $91.1 million from
our largest reinsurer and second largest reinsurer,
respectively. See Business Reinsurance of
Underwriting Risk in Item 1 of Part I of this
report.
Our
Investment Performance May Suffer as a Result of Adverse Capital
Market Developments or Other Factors, Which Would In Turn
Adversely Affect Our Financial Condition and Results of
Operations.
We derive a significant portion of our income from our invested
assets. As a result, our operating results depend in part on the
performance of our investment portfolio. For 2010, our pre-tax
income derived from invested assets was $83.1 million, net
of investment expenses, including net realized gains of
$26.4 million. Of this amount, $0.5 million were other
than temporary impairments. Our operating results are subject to
a variety of investment risks, including risks relating to
general economic conditions, market volatility, interest rate
fluctuations, liquidity risk and credit and default risk. The
fair value of fixed income investments can fluctuate depending
on changes in interest rates and the credit quality of
underlying issuers. Generally, the fair market value of these
investments has an inverse relationship with changes in interest
rates, while net investment income earned by us from future
investments in fixed maturities will generally increase or
decrease with changes in interest rates. Additionally, with
respect to certain of our investments, we are subject to
pre-payment or reinvestment risk.
Credit tightening could negatively impact our future investment
returns and limit the ability to invest in certain classes of
investments. Credit tightening may cause opportunities that are
marginally attractive to not be financed, which could cause a
decrease in the number of bond issuances. If marginally
attractive opportunities are financed, they may be at higher
interest rates, which would cause credit risk of such
opportunities to increase. If new debt supply is curtailed, it
could cause interest rates on securities that are deemed to be
credit-worthy to decline. Funds
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generated by operations, sales, and maturities will need to be
invested. If we invest during a tight credit market, our
investment returns could be lower than the returns we are
currently realizing
and/or we
may have to invest in higher risk securities.
With respect to our longer-term liabilities, we strive to
structure our investments in a manner that recognizes our
liquidity needs for our future liabilities. In that regard, we
attempt to correlate the maturity and duration of our investment
portfolio to our liability for insurance reserves. However, if
our liquidity needs or general and specific liability profile
unexpectedly changes, we may not be successful in continuing to
structure our investment portfolio in that manner. During 2010
we decreased the average duration on our investment portfolio in
order to defensively position ourselves during the current low
interest rate environment. To the extent that we are
unsuccessful in correlating our investment portfolio with our
expected liabilities, we may be forced to liquidate our
investments at times and prices that are not optimal, which
could have a material adverse affect on the performance of our
investment portfolio. We refer to this risk as liquidity risk,
which is when the fair value of an investment is not able to be
realized due to low demand by outside parties in the marketplace.
We are also subject to credit risk due to non-payment of
principal or interest. Current market conditions increase the
risk that companies may default on their credit obligations.
Several classes of securities that we hold, including our
corporate loan securities, have default risk. As interest rates
rise for companies that are deemed to be less creditworthy,
there is a greater risk that they will be unable to pay
contractual interest or principal on their debt obligations.
Interest rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international
economic and political conditions and other factors beyond our
control. Although we attempt to take measures to manage the
risks of investing in a changing interest rate environment, we
may not be able to mitigate interest rate sensitivity
effectively. A significant increase in interest rates could have
a material adverse effect on the market value of our fixed
maturities securities. Our mitigation efforts include
maintaining a high-quality portfolio with a relatively short
duration that seeks to reduce the effect of interest rate
changes on market value.
We also have an equity portfolio that represented approximately
8.6% of our total investments and cash and cash equivalents
portfolio, net of payable for securities purchased of
$4.8 million, as of December 31, 2010. The performance
of our equity portfolio is dependent upon a number of factors,
including many of the same factors that affect the performance
of our fixed income investments, although those factors
sometimes have the opposite effect on the performance of the
equity portfolio. Individual equity securities have unsystematic
risk. We could experience market declines on these investments.
We also have systematic risk, which is the risk inherent in the
general market due to broad macroeconomic factors that affect
all companies in the market. If the market indexes were to
decline, we anticipate that the value of our portfolio would be
negatively affected.
We have $204.0 million of investments in corporate loans.
Corporate loans are primarily investments in senior secured
floating rate loans that banks have made to corporations. The
loans are generally priced at an interest rate spread over LIBOR
that resets every 60 to 90 days. As a result, this asset
class provides protection against rising interest rates.
However, this asset class is subject to default risk since these
investments are typically below investment grade.
We have $5.4 million of investments in limited
partnerships. Material assumptions and factors utilized in
pricing these securities include future cash flows, constant
default rates, recovery rates, and any market clearing activity
that may have occurred since the prior month-end pricing period.
Our limited partnership investments are not liquid. Our
investment contracts state that we need to provide advance
notice to the partnerships of up to three months if we wished to
liquidate part or all of the investment. The contracts have
provisions that allow the general partner to delay distribution
of funds if it would negatively impact the partnership. Our
returns could be negatively affected if the market value of the
partnership declines. We may miss the opportunity to reinvest
proceeds from a partnership at attractive rates. If the general
partner exercised a provision to not distribute funds, and we
needed liquidity, we might be forced to liquidate other
investments at a time when prices are not optimal.
As of December 31, 2010, we had approximately
$3.0 million worth of investment exposure to subprime
investments and Alt-A investments. Of that amount, approximately
$0.2 million of those investments have been
34
rated AAA by Standard & Poors, $0.2 million
were rated BBB- to AA, and $2.6 million were rated below
investment grade. Impairments on these investments were
$0.04 million during 2010.
Since
We Depend On Professional General Agencies, Brokers, Other
Insurance Companies and Other Reinsurance Companies For a
Significant Portion of Our Revenue, a Loss of Any One of Them
Could Adversely Affect Us.
We market and distribute our insurance products through a group
of approximately 103 professional general agencies that have
specific quoting and binding authority and that in turn sell our
insurance products to insureds through retail insurance brokers.
We also market and distribute our reinsurance products through
third-party brokers, insurance companies and reinsurance
companies. For the year ended December 31, 2010, our top
five non-affiliated agencies, all of which market more than one
specific product, represented 39.3% of our Insurance
Operations gross premiums written. No one agency accounted
for more that 12.1% of our Insurance Operations gross
premiums written. A loss of all or substantially all of the
business produced by any more of these general agencies,
brokers, insurance companies or reinsurance companies could have
an adverse effect on our results of operations.
If
Market Conditions Cause Reinsurance To Be More Costly or
Unavailable, We May Be Required to Bear Increased Risks or
Reduce The Level of Our Underwriting Commitments.
As part of our overall strategy of risk and capacity management,
we purchase reinsurance for a portion of the risk underwritten
by our insurance subsidiaries. Market conditions beyond our
control determine the availability and cost of the reinsurance
we purchase, which may affect the level of our business and
profitability. Our third party reinsurance facilities are
generally subject to annual renewal. We may be unable to
maintain our current reinsurance facilities or obtain other
reinsurance facilities in adequate amounts and at favorable
rates. If we are unable to renew our expiring facilities or
obtain new reinsurance facilities, either our net exposure to
risk would increase or, if we are unwilling to bear an increase
in net risk exposures, we would have to reduce the amount of
risk we underwrite.
Our
Results May Fluctuate as a Result of Many Factors, Including
Cyclical Changes in the Insurance Industry.
Historically, the results of companies in the property and
casualty insurance industry have been subject to significant
fluctuations and uncertainties. The industrys
profitability can be affected significantly by:
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competition;
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capital capacity;
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rising levels of actual costs that are not foreseen by companies
at the time they price their products;
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volatile and unpredictable developments, including man-made,
weather-related and other natural catastrophes or terrorist
attacks;
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changes in loss reserves resulting from the general claims and
legal environments as different types of claims arise and
judicial interpretations relating to the scope of insurers
liability develop; and
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fluctuations in interest rates, inflationary pressures and other
changes in the investment environment, which affect returns on
invested assets and may affect the ultimate payout of losses.
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The demand for property and casualty insurance and reinsurance
can also vary significantly, rising as the overall level of
economic activity increases and falling as that activity
decreases. The property and casualty insurance industry
historically is cyclical in nature. These fluctuations in demand
and competition could produce underwriting results that would
have a negative impact on our consolidated results of operations
and financial condition.
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We
Face Significant Competitive Pressures in Our Business that
Could Cause Demand for Our Products to Fall and Adversely Affect
Our Profitability.
We compete with a large number of other companies in our
selected lines of business. We compete, and will continue to
compete, with major U.S. and
Non-U.S. insurers
and other regional companies, as well as mutual companies,
specialty insurance companies, reinsurance companies,
underwriting agencies and diversified financial services
companies. Our competitors include, among others: American
International Group, Argo Group International Holdings, Ltd.,
Berkshire Hathaway, Everest Re Group, Ltd., Great American
Insurance Group, HCC Insurance Holdings, Inc., IFG Companies,
JRG Reinsurance Company, Ltd., Maiden Holdings, Ltd., Markel
Corporation, Alterra Capital Holdings, Ltd., Nationwide
Insurance, Navigators Insurance Group, RLI Corporation, Torus
Insurance Holdings, Ltd., W.R. Berkley Corporation, and Western
World Insurance Group. Some of our competitors have greater
financial and marketing resources than we do. Our profitability
could be adversely affected if we lose business to competitors
offering similar or better products at or below our prices.
Our
General Agencies Typically Pay the Insurance Premiums on
Business They Have Bound to Us On a Monthly Basis. This
Accumulation of Balances Due to Us Exposes Us to a Credit
Risk.
Insurance premiums generally flow from the insured to their
retail broker, then into a trust account controlled by our
professional general agencies. Our general agencies are
typically required to forward funds, net of commissions, to us
following the end of each month. Consequently, we assume a
degree of credit risk on the aggregate amount of these balances
that have been paid by the insured but have yet to reach us.
Brokers,
Insurance Companies and Reinsurance Companies Typically Pay
Premiums on Reinsurance Treaties Written With Us on a Quarterly
Basis. This Accumulation of Balances Due to Us Exposes Us to a
Credit Risk.
Assumed premiums on reinsurance treaties generally flow from the
ceding insurance and reinsurance companies to us on a quarterly
basis. Consequently, we assume a degree of credit risk on the
aggregate amount of these balances that have been collected by
the reinsured but have yet to reach us.
Because
We Provide Our General Agencies With Specific Quoting and
Binding Authority, If Any of Them Fail To Comply With Our
Pre-Established Guidelines, Our Results of Operations Could Be
Adversely Affected.
We market and distribute our insurance products through
professional general agencies that have limited quoting and
binding authority and that in turn sell our insurance products
to insureds through retail insurance brokers. These agencies can
bind certain risks without our initial approval. If any of these
wholesale professional general agencies fail to comply with our
underwriting guidelines and the terms of their appointment, we
could be bound on a particular risk or number of risks that were
not anticipated when we developed the insurance products or
estimated loss and loss adjustment expenses. Such actions could
adversely affect our results of operations.
Our
Holding Company Structure and Regulatory Constraints Limit Our
Ability to Receive Dividends From Our Subsidiaries in Order to
Meet Our Cash Requirements.
Global Indemnity is a holding company and, as such, has no
substantial operations of its own, and its assets primarily
consist of cash and its ownership of the shares of its direct
and indirect subsidiaries. Dividends and other permitted
distributions from insurance subsidiaries, which include payment
for equity awards granted by Global Indemnity to employees of
such subsidiaries, are expected to be Global Indemnitys
sole source of funds to meet ongoing cash requirements,
including debt service payments and other expenses.
Due to our corporate structure, most of the dividends that
Global Indemnity receives from its subsidiaries must pass
through Wind River Reinsurance. The inability of Wind River
Reinsurance to pay dividends in an amount sufficient to enable
Global Indemnity to meet its cash requirements at the holding
company level could have a material adverse effect on its
operations.
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Bermuda law does not permit payment of dividends or
distributions of contributed surplus by a company if there are
reasonable grounds for believing that the company, after the
payment is made, would be unable to pay its liabilities as they
become due, or the realizable value of the companys assets
would be less, as a result of the payment, than the aggregate of
its liabilities and its issued share capital and share premium
accounts. Furthermore, pursuant to the Bermuda Insurance Act
1978, an insurance company is prohibited from declaring or
paying a dividend during the financial year if it is in breach
of its minimum solvency margin or minimum liquidity ratio or if
the declaration or payment of such dividends would cause it to
fail to meet such margin or ratio. See
Regulation Bermuda Insurance Regulation
in Item 1 of Part I of this report.
In addition, the U.S. Insurance Subsidiaries, which are
indirect subsidiaries of Wind River Reinsurance, are subject to
significant regulatory restrictions limiting their ability to
declare and pay dividends, which must first pass through Wind
River Reinsurance before being paid to Global Indemnity. See
Regulation U.S. Regulation in
Item 1 of Part I of this report. Also, see
Note 18 of the notes to consolidated financial statements
in Item 8 of Part II of this report for the maximum
amount of dividends that could be paid by the
U.S. Insurance Subsidiaries in 2011.
Our
Businesses are Heavily Regulated and Changes in Regulation May
Limit The Way We Operate.
We are subject to extensive supervision and regulation in the
U.S. states in which our Insurance Operations operate. This
is particularly true in those states in which our insurance
subsidiaries are licensed, as opposed to those states where our
insurance subsidiaries write business on a surplus lines basis.
The supervision and regulation relate to numerous aspects of our
business and financial condition. The primary purpose of the
supervision and regulation is the protection of our insurance
policyholders and not our investors. The extent of regulation
varies, but generally is governed by state statutes. These
statutes delegate regulatory, supervisory, and administrative
authority to state insurance departments. This system of
regulation covers, among other things:
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standards of solvency, including risk-based capital measurements;
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restrictions on the nature, quality and concentration of
investments;
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restrictions on the types of terms that we can include or
exclude in the insurance policies we offer;
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restrictions on the way rates are developed and the premiums we
may charge;
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standards for the manner in which general agencies may be
appointed or terminated;
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credit for reinsurance;
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certain required methods of accounting;
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reserves for unearned premiums, losses and other
purposes; and
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potential assessments for the provision of funds necessary for
the settlement of covered claims under certain insurance
policies provided by impaired, insolvent or failed insurance
companies.
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The statutes or the state insurance department regulations may
affect the cost or demand for our products and may impede us
from obtaining rate increases or taking other actions we might
wish to take to increase our profitability. Further, we may be
unable to maintain all required licenses and approvals and our
business may not fully comply with the wide variety of
applicable laws and regulations or the relevant authoritys
interpretation of the laws and regulations. Also, regulatory
authorities have discretion to grant, renew or revoke licenses
and approvals subject to the applicable state statutes and
appeal process. If we do not have the requisite licenses and
approvals (including in some states the requisite secretary of
state registration) or do not comply with applicable regulatory
requirements, the insurance regulatory authorities could stop or
temporarily suspend us from carrying on some or all of our
activities or monetarily penalize us.
In recent years, the U.S. insurance regulatory framework
has come under increased federal scrutiny, and some state
legislators have considered or enacted laws that may alter or
increase state regulation of insurance and reinsurance companies
and holding companies. Moreover, the NAIC, which is an
association of the insurance commissioners of all 50 states
and the District of Columbia, and state insurance regulators
regularly re-examine
37
existing laws and regulations. Changes in these laws and
regulations or the interpretation of these laws and regulations
could have a material adverse effect on our business.
Although the U.S. federal government has not historically
regulated the insurance business, there have been proposals from
time to time, including after the financial crisis in 2008 and
2009, to impose federal regulation on the insurance industry. On
July 21, 2010, the President signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act. Among other
things, the Act establishes a Federal Insurance Office within
the U.S. Department of the Treasury. The Federal Insurance
Office initially has limited regulatory authority and is
empowered to gather data and information regarding the insurance
industry and insurers, including conducting a study for
submission to the U.S. Congress on how to modernize and
improve insurance regulation in the U.S. Further, the Act
gives the Federal Reserve supervisory authority over a number of
financial services companies, including insurance companies, if
they are designated by a two-thirds vote of a Financial
Stability Oversight Council as systemically
important. While we do not believe that we are
systemically important, as defined in the Act, it is
possible that the Financial Stability Oversight Council may
conclude that we are. If we were designated as
systemically important, the Federal Reserves
supervisory authority could include the ability to impose
heightened financial regulation and could impact requirements
regarding our capital, liquidity, leverage, business and
investment conduct. As a result of the foregoing, the Act, or
other additional federal regulation that is adopted in the
future, could impose significant burdens on us, including
impacting the ways in which we conduct our business, increasing
compliance costs and duplicating state regulation, and could
result in a competitive disadvantage, particularly relative to
smaller insurers who may not be subject to the same level of
regulation.
We May
Require Additional Capital in the Future That May Not Be
Available or Only Available On Unfavorable Terms.
Our future capital requirements depend on many factors,
including the incurring of significant net catastrophe losses,
our ability to write new business successfully and to establish
premium rates and reserves at levels sufficient to cover losses.
To the extent that we need to raise additional funds, any equity
or debt financing for this purpose, if available at all, may be
on terms that are not favorable to us. If we cannot obtain
adequate capital, our business, results of operations and
financial condition could be adversely affected.
Interests
of Holders of Class A Ordinary Shares May Conflict with the
Interests of Our Controlling Shareholder.
Fox Paine & Company beneficially owns shares having
approximately 89.6% of our total voting power. The percentage of
our total voting power that Fox Paine & Company may
exercise is greater than the percentage of our total shares that
Fox Paine & Company beneficially owns because Fox
Paine & Company beneficially owns a large number of
Class B ordinary shares, which have ten votes per share as
opposed to Class A ordinary shares, which have one vote per
share. The Class A ordinary shares and the Class B
ordinary shares generally vote together as a single class on
matters presented to our shareholders. Based on the ownership
structure of the affiliates of Fox Paine & Company
that own these shares, these affiliates are subject to the
voting restriction contained in our articles of association. As
a result, Fox Paine & Company has and will continue to
have control over the outcome of certain matters requiring
shareholder approval, including the power to, among other things:
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elect all of our directors;
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amend our articles of association (as long as their voting power
is greater than 75%);
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ratify the appointment of our auditors;
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increase our share capital;
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resolve to pay dividends or distributions; and
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approve the annual report and the annual financial statements.
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Subject to certain exceptions, the Fox Paine Entities may also
be able to prevent or cause a change of control. The Fox Paine
Entities control over us, and Fox Paine &
Companys ability in certain circumstances to prevent or
cause a change of control, may delay or prevent a change of
control, or cause a change of control to occur at a time
38
when it is not favored by other shareholders. As a result, the
trading price of our Class A ordinary shares could be
adversely affected.
In addition, we have agreed to pay Fox Paine &
Company, LLC an annual management fee of $1.5 million in
exchange for management services and a termination fee of
$10 million upon the termination of Fox Paine &
Company, LLCs management services in connection with the
consummation of a change of control transaction that
does not involve Fox Paine & Company, LLC and its
affiliates or the Funds. We have also agreed to pay Fox
Paine & Company, LLC a transaction advisory fee of one
percent of the transaction value upon the consummation of a
change of control transaction that does not involve
Fox Paine & Company, LLC and its affiliates or the
Funds in exchange for advisory services to be provided by Fox
Paine & Company, LLC in connection therewith. Fox
Paine & Company may in the future make significant
investments in other insurance or reinsurance companies. Some of
these companies may compete with us or with our subsidiaries.
Fox Paine & Company is not obligated to advise us of
any investment or business opportunities of which they are
aware, and they are not prohibited or restricted from competing
with us or with our subsidiaries.
Our
Controlling Shareholder Has the Contractual Right to Nominate a
Certain Number of the Members of Our Board of Directors and Also
Otherwise Controls the Election of Directors Due to Its
Ownership.
While Fox Paine & Company has the right under the
terms of the memorandum and articles of association to nominate
a certain number of Directors, dependant on Fox
Paine & Companys percentage ownership of voting
shares in the Company for so long as Fox Paine &
Company hold an aggregate 25% or more of the voting power in the
Company, it also controls the election of all directors to the
Board of Directors due to its controlling share ownership. Our
Board of Directors currently consists of eight directors, all of
which other than Mr. Frakes were identified and proposed
for consideration for the Board of Directors by Fox
Paine & Company.
Our Board of Directors, in turn, and subject to its fiduciary
duties under Irish law, appoints the members of our senior
management, who also have fiduciary duties to the Company. As a
result, Fox Paine & Company effectively has the
ability to control the appointment of the members of our senior
management and to prevent any changes in senior management that
other shareholders, or that other members of our Board of
Directors, may deem advisable.
Because
We Rely on Certain Services Provided By Fox Paine &
Company, the Loss of Such Services Could Adversely Affect Our
Business.
During 2008, 2009, and 2010, Fox Paine & Company
provided certain management services to us. To the extent that
Fox Paine & Company is unable or unwilling to provide
similar services in the future, and we are unable to perform
those services ourselves or we are unable to secure replacement
services, our business could be adversely affected.
Continued
Adverse Consequences of the Recent U.S. and Global Economic and
Financial Industry Downturns Could Harm Our Business, Our
Liquidity and Financial Condition, And Our Stock
Price.
In recent years, global market and economic conditions have been
severely disrupted. These conditions may potentially affect
(among other aspects of our business) the demand for and claims
made under our products, the ability of customers,
counterparties and others to establish or maintain their
relationships with us, our ability to access and efficiently use
internal and external capital resources, the availability of
reinsurance protection, the risks we assume under reinsurance
programs, and our investment performance. Continued volatility
in the U.S. and other securities markets may adversely
affect our stock price.
Our
Operating Results and Shareholders Equity May Be Adversely
Affected by Currency Fluctuations.
Our functional currency is the U.S. Dollar. Our Reinsurance
Operations conduct business with some customers in foreign
currencies, and some of our
Non-U.S. Subsidiaries
have foreign currency denominated cash accounts. Monetary assets
and liabilities that are denominated in foreign currencies are
revalued at the current exchange rates each period end with the
resulting gains or losses reflected in net income. Foreign
exchange risk is reviewed as part of our risk management
process. We may experience losses resulting from fluctuations in
the values of
non-U.S. currencies
relative to the strength of the U.S. Dollar, which could
adversely impact our results of operations and financial
condition.
39
We are
Incorporated in Ireland and Some of Our Assets are Located
Outside the United States. As a Result, It Might Not Be
Possible for Shareholders to Enforce Civil Liability Provisions
of the Federal or State Securities Laws of the United
States.
We are organized under the laws of Ireland, and some of our
assets are located outside the United States. A shareholder who
obtains a court judgment based on the civil liability provisions
of U.S. federal or state securities laws may be unable to
enforce the judgment against us in Ireland or in countries other
than the United States where we have assets. In addition, there
is some doubt as to whether the courts of Ireland and other
countries would recognize or enforce judgments of
U.S. courts obtained against us or our Directors or
officers based on the civil liabilities provisions of the
federal or state securities laws of the United States or would
hear actions against us or those persons based on those laws. We
have been advised that the United States and Ireland do not
currently have a treaty providing for the reciprocal recognition
and enforcement of judgments in civil and commercial matters.
The laws of Ireland do however, as a general rule, provide that
the judgments of the courts of the United States have the same
validity in Ireland as if rendered by Irish Courts. Certain
important requirements must be satisfied before the Irish Courts
will recognize the United States judgment. The originating court
must have been a court of competent jurisdiction and the
judgment may not be recognized if it was obtained by fraud or
its recognition would be contrary to Irish public policy. Any
judgment obtained in contravention of the rules of natural
justice or that is irreconcilable with an earlier foreign
judgment would not be enforced in Ireland. Similarly, judgments
might not be enforceable in countries other than the United
States where we have assets.
Irish
Law Differs From the Laws in Effect in the United States and
Might Afford Less Protection to Shareholders.
Our shareholders could have more difficulty protecting their
interests than would shareholders of a corporation incorporated
in a jurisdiction of the United States. As an Irish company, we
are governed by the Companies Acts 1963 to 2009 of Ireland
(the Companies Acts) and other Irish statutes. The
Companies Acts and other Irish statutes differ in some
significant, and possibly material, respects from laws
applicable to U.S. corporations and shareholders under
various state corporation laws, including the provisions
relating to interested directors, mergers and acquisitions,
takeovers, shareholder lawsuits and indemnification of Directors.
Under Irish law, the duties of Directors and officers of a
company are generally owed to the company only. Shareholders of
Irish companies do not generally have rights to take action
against Directors or officers of the company under Irish law,
and may only exercise such right of action on behalf of the
Company in limited circumstances. Directors of an Irish company
must, in exercising their powers and performing their duties,
act with due care and skill, honestly and in good faith with a
view to the best interests of the company. Directors have a duty
not to put themselves in a position in which their duties to the
company and their personal interests might conflict and also are
under a duty to disclose any personal interest in any contract
or arrangement with the company or any of its subsidiaries. If a
Director or officer of an Irish company is found to have
breached his duties to that company, he could be held personally
liable to the company in respect of that breach of duty.
A
Future Transfer of Your Ordinary Shares, Other Than One Effected
By Means of the Transfer of Book Entry Interests in DTC, May Be
Subject to Irish Stamp Duty.
A transfer of our Class A ordinary shares by a seller who
holds Class A ordinary shares beneficially through DTC to a
buyer who holds the acquired Class A ordinary shares
beneficially through DTC will not be subject to Irish stamp
duty. A transfer of our ordinary shares by a seller who holds
shares directly to any buyer, or by a seller who holds the
shares beneficially through DTC to a buyer who holds the
acquired shares directly, may be subject to Irish stamp duty.
Stamp duty is a liability of the buyer or transferee and is
currently levied at the rate of 1% of the price paid or the
market value of the shares acquired, if higher. The potential
for stamp duty could adversely affect the price of our ordinary
shares.
40
Risks
Related to Taxation
Legislative
and Regulatory Action by the U.S. Congress Could Materially and
Adversely Affect Us.
Our tax position could be adversely impacted by changes in tax
laws, tax treaties or tax regulations or the interpretation or
enforcement thereof. Legislative action may be taken by the
U.S. Congress which, if ultimately enacted, could override
tax treaties upon which we rely or could broaden the
circumstances under which we would be considered a
U.S. resident, each of which could materially and adversely
affect our effective tax rate and cash tax position.
We May
Become Subject to Taxes in the Cayman Islands or Bermuda in the
Future, Which May Have a Material Adverse Effect on Our Results
of Operations.
United America Indemnity, Ltd. has been incorporated under the
laws of the Cayman Islands as an exempted company and, as such,
obtained an undertaking on September 2, 2003 from the
Governor in Council of the Cayman Islands substantially that,
for a period of 20 years from the date of such undertaking,
no law that is enacted in the Cayman Islands imposing any tax to
be levied on profit or income or gains or appreciation shall
apply to us and no such tax and no tax in the nature of estate
duty or inheritance tax will be payable, either directly or by
way of withholding, on our ordinary shares. This undertaking
would not, however, prevent the imposition of taxes on any
person ordinarily resident in the Cayman Islands or any company
in respect of its ownership of real property or leasehold
interests in the Cayman Islands. Given the limited duration of
the undertaking, we cannot be certain that we will not be
subject to Cayman Islands tax after the expiration of the
20-year
period.
Wind River Reinsurance was formed in 2006 through the
amalgamation of our
Non-U.S. Operations.
We received an assurance from the Bermuda Minister of Finance,
under the Bermuda Exempted Undertakings Tax Protection Act of
1966, as amended, that if any legislation is enacted in Bermuda
that would impose tax computed on profits or income, or computed
on any capital asset, gain or appreciation, or any tax in the
nature of estate duty or inheritance tax, then the imposition of
any such tax will not be applicable to Wind River Reinsurance or
any of its operations, shares, debentures or other obligations
through March 28, 2016. Given the limited duration of the
assurance, we cannot be certain that we will not be subject to
any Bermuda tax after March 28, 2016.
Following the expiration of the period described above, we may
become subject to taxes in the Cayman Islands or Bermuda, which
may have a material adverse effect on our results of operations.
Global
Indemnity or Wind River Reinsurance May Be Subject to U.S. Tax
That May Have a Material Adverse Effect On Global
Indemnitys or Wind River Reinsurances Results of
Operations.
Global Indemnity is an Irish company and Wind River Reinsurance
is a Bermuda company. We seek to manage our business in a manner
designed to reduce the risk that Global Indemnity and Wind River
Reinsurance will be treated as being engaged in a
U.S. trade or business for U.S. federal income tax
purposes. However, because there is considerable uncertainty as
to the activities that constitute being engaged in a trade or
business within the United States, we cannot be certain
that the U.S. Internal Revenue Service will not contend
successfully that Global Indemnity or Wind River Reinsurance
will be engaged in a trade or business in the United States. If
Global Indemnity or Wind River Reinsurance were considered to be
engaged in a business in the United States, we could be subject
to U.S. corporate income and branch profits taxes on the
portion of our earnings effectively connected to such
U.S. business, in which case our results of operations
could be materially adversely affected.
The
Impact of the Cayman Islands Letter of Commitment or Other
Concessions to the Organization for Economic Cooperation and
Development to Eliminate Harmful Tax Practices Is Uncertain and
Could Adversely Affect the Tax Status of Our Subsidiaries in the
Cayman Islands or Bermuda.
The Organization for Economic Cooperation and Development, which
is commonly referred to as the OECD, has published reports and
launched a global dialogue among member and non-member countries
on measures to limit harmful tax competition. These measures are
largely directed at counteracting the effects of tax havens and
preferential tax regimes in countries around the world. In the
OECDs report dated January 27, 2011, the Cayman
Islands and Bermuda were not listed as uncooperative tax haven
jurisdictions because each had previously
41
committed itself to eliminate harmful tax practices and to
embrace international tax standards for transparency, exchange
of information and the elimination of any aspects of the regimes
for financial and other services that attract business with no
substantial domestic activity. We are not able to predict what
changes will arise from the commitment or whether such changes
will subject us to additional taxes.
There
Is A Risk That Interest Paid By Our U.S. Subsidiaries To a
Luxembourg Affiliate May Be Subject to 30% U.S. Withholding
Tax.
U.A.I. (Luxembourg) Investment, S.à r.l., an indirectly
owned Luxembourg subsidiary of Wind River Reinsurance, owns two
notes issued by Global Indemnity Group, Inc., a Delaware
corporation. Under U.S. federal income tax law, interest
paid by a U.S. corporation to a
non-U.S. shareholder
is generally subject to a 30% withholding tax, unless reduced by
treaty. The income tax treaty between the United States and
Luxembourg (the Luxembourg Treaty) generally
eliminates the withholding tax on interest paid to qualified
residents of Luxembourg. Were the IRS to contend successfully
that U.A.I. (Luxembourg) Investment, S.à r.l. is not
eligible for benefits under the Luxembourg Treaty, interest paid
to U.A.I. (Luxembourg) Investment, S.à r.l. by Global
Indemnity Group, Inc. would be subject to the 30% withholding
tax. Such tax may be applied retroactively to all previous years
for which the statute of limitations has not expired, with
interest and penalties. Such a result may have a material
adverse effect on our financial condition and results of
operation.
There
is a Risk That Interest Income Imputed to Our Irish Affiliates
May Be Subject to 25% Irish Income tax.
U.A.I. (Ireland) Limited is a private limited liability company
incorporated under the laws of Ireland. The company is a
resident taxpayer fully subject to Ireland corporate income tax
of 12.5% on trading income and 25.0% on non-trading income,
including interest and dividends from foreign companies. The
company intends to manage its operations in such a way that
there will not be any material taxable income generated in
Ireland under Irish law. However, there can be no assurance from
the Irish authorities that a law may not be enacted that would
impute income to U.A.I. (Ireland) Limited in the future or
retroactively arising out of our current operations.
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Item 1B.
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Unresolved
Staff Comments
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None.
We lease office space in Bala Cynwyd, Pennsylvania which holds
our principle executive offices and headquarters for our
Insurance Operations. In addition, we lease additional office
space in California, Georgia, Illinois, New York, North
Carolina, and Texas which serves as office space for our field
offices. Some of the office space in California also serves as
office space for our claims operations. We also lease office
space in Hamilton, Bermuda, which is used by our Reinsurance
Operations. We lease office space in Cavan, Ireland which is
used to support the operating needs of our Insurance and
Reinsurance Operations. We believe the properties listed are
suitable and adequate to meet our needs.
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Item 3.
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Legal
Proceedings
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The Company is, from time to time, involved in various legal
proceedings in the ordinary course of business. The Company
purchases insurance and reinsurance policies covering 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 the Companys business, results of
operations, cash flows, or financial condition.
There is a greater potential for disputes with reinsurers who
are in a runoff of their reinsurance operations. Some of the
Companys reinsurers reinsurance operations are in
runoff, and therefore, the Company closely
42
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.
On December 4, 2008, a federal jury in the
U.S. District Court for the Eastern District of
Pennsylvania (Philadelphia) returned a $24.0 million
verdict in favor of United National Insurance Company
(United National), an indirect wholly owned
subsidiary of the Company, against AON Corp., an insurance and
reinsurance broker. On July 24, 2009, a federal judge from
the U.S. District Court for the Eastern District of
Pennsylvania (Philadelphia) upheld that jury verdict. In doing
so, the U.S. District Judge increased the verdict to
$32.2 million by adding more than $8.2 million in
prejudgment interest. AON filed its Notice of Appeal and a Bond
in the amount of $33.0 million. Oral arguments were heard
by the Appellate Court on October 26, 2010. In January,
2011, we settled with AON for $16.3 million. We realized
approximately $7.5 million, net of income taxes and
attorneys fees.
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Item 4.
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(Removed
and Reserved)
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43
PART II
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Item 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market
for Our Class A Ordinary Shares
Our Class A ordinary shares, par value $0.0001 per share,
began trading on the Nasdaq Global Select Market, formerly the
Nasdaq National Market, under the symbol UNGL on
December 16, 2003. On March 14, 2005 we changed our
symbol to INDM. On July 6, 2010, we changed our
symbol to GBLI as part of a re-domestication
transaction whereby all shares of INDM were replaced
with shares of GBLI on a
one-for-two
basis. The following table sets forth, for the periods
indicated, the high and low sales prices of our Class A
ordinary shares, as reported by the Nasdaq Global Select Market.
Prices prior to July 6, 2010 have been adjusted to reflect
the impact of the
one-for-two
share exchange.
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High
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Low
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Fiscal Year Ended December 31, 2010:
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First Quarter
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$
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19.90
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$
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13.30
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Second Quarter
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20.36
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14.38
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Third Quarter
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17.21
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10.10
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Fourth Quarter
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21.25
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15.46
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Fiscal Year Ended December 31, 2009:
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First Quarter
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$
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26.96
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$
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7.40
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Second Quarter
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12.94
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7.46
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Third Quarter
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15.38
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8.74
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Fourth Quarter
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17.82
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13.24
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There is no established public trading market for our
Class B ordinary shares, par value $0.0001 per share.
As of March 3, 2011, there were approximately 1,800
beneficial holders of record of our Class A ordinary
shares. As of March 3, 2011, there were 11 holders of
record of our Class B ordinary shares, all of whom are
affiliates of Fox Paine & Company.
44
Performance
of Our Class A Ordinary Shares
The following graph represents a five-year comparison of the
cumulative total return to shareholders for the Companys
Class A ordinary shares and stock of companies included in
the NASDAQ Insurance Index and NASDAQ Composite Index, which we
believe are the most comparative indexes.
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12/31/05
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12/31/06
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12/31/07
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12/31/08
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12/31/09
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12/31/10
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Global Indemnity plc
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$
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100.0
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$
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138.0
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$
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108.5
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$
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69.8
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$
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43.1
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$
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55.7
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NASDAQ Insurance Index
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100.0
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112.1
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111.2
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98.3
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98.8
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113.2
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NASDAQ Composite Index
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100.0
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109.5
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120.3
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71.5
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102.9
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120.3
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Note:
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We completed our Rights Offering on May 5, 2009, which
increased our total outstanding Class A ordinary shares by
17.2 million shares. See Note 12 to the consolidated
financial statements in Item 8 of Part II of this
report for details concerning the Rights Offering.
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Note:
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We completed our re-domestication transaction on July 2,
2010, which resulted in shares of INDM being
exchanged for shares of GBLI on a
one-for-two
basis. Share prices prior to July 6, 2010 have been
adjusted to reflect the impact of the
one-for-two
share exchange. See Note 2 to the consolidated financial
statements in Item 8 of Part II of this report for
details concerning the re-domestication.
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45
Recent
Sales of Unregistered Securities
On May 5, 2009, we completed the Rights Offering in which a
total of 17,178,421 Class A ordinary shares and 11,435,244
Class B ordinary shares were issued. The issuance of the
Class A ordinary shares included 41,588 Class A
ordinary shares issued to an affiliate of Fox Paine &
Company in a private placement pursuant to Section 4(2) of
the Securities Act, as amended. The affiliate of Fox
Paine & Company purchased the 41,588 Class A
ordinary shares for $3.50 per share, which was the subscription
price at which all Class A common shareholders and
Class B common shareholders were entitled to purchase
additional shares. All other shares issued in the Rights
Offering were issued pursuant to a registration statement. The
net proceeds of $91.8 million were used to support our
strategic initiatives, enhance liquidity and financial
flexibility, and for other general corporate purposes. See
Note 12 to the consolidated financial statements in
Item 8 of Part II of this report for details
concerning the Rights Offering.
Purchases
of Our Class A Ordinary Shares
Our Share Incentive Plan allows employees to surrender shares of
our Class A ordinary shares as payment for the tax
liability incurred upon the vesting of restricted stock that was
issued under our Share Incentive Plan. During 2010, we purchased
an aggregate of 12,088 of surrendered Class A ordinary
shares from our employees for $0.2 million. All shares
purchased from employees are held as treasury stock and recorded
at cost. See Note 12 to the consolidated financial
statements in Item 8 of Part II of this report for
tabular disclosure of our share repurchases by month.
As part of the Rights Offering that was completed in May 2009,
we purchased 5,000 Class A ordinary shares for
$0.04 million that had been purchased by a former employee
with the non-transferable Class A Rights that were
distributed to that former employee for Class A ordinary
shares held of non-vested restricted stock. Since the restricted
stock was not vested, the former employee, upon leaving the
Company, had to forfeit those Class A ordinary shares that
had been purchased with the non-transferable Class A Rights
that were distributed on that restricted stock. See Note 12
to the consolidated financial statements in Item 8 of
Part II of this report for details concerning the Rights
Offering.
Dividend
Policy
We did not declare or pay cash dividends on any class of our
ordinary shares in 2010 or 2009. Payment of dividends is subject
to future determinations by the Board of Directors based on our
results, financial conditions, amounts required to grow our
business, and other factors deemed relevant by the Board.
We are a holding company and have no direct operations. Our
ability to pay dividends depends, in part, on the ability of
Wind River Reinsurance, the Luxembourg Companies, and the
U.S. Insurance Subsidiaries to pay dividends. Wind River
Reinsurance and the U.S. Insurance Subsidiaries are subject
to significant regulatory restrictions limiting their ability to
declare and pay dividends.
See Note 18 of the notes to consolidated financial
statements in Item 8 of Part II of this report for the
dividends declared and paid by the U.S. Insurance
Subsidiaries in 2010 and the maximum amount of distributions
that they could pay as dividends in 2011.
For 2011, we believe that Wind River Reinsurance should have
sufficient liquidity and solvency to pay dividends. In the
future, we anticipate paying dividends from Wind River
Reinsurance to fund obligations of Global Indemnity. Wind River
Reinsurance is prohibited, without the approval of the BMA, from
reducing by 15% or more its total statutory capital as set out
in its previous years statutory financial statements, and
any application for such approval must include such information
as the BMA may require. Based upon the total statutory capital
plus the statutory surplus as set out in its 2010 statutory
financial statements that will be filed in 2011, Wind River
Reinsurance could pay a dividend of up to $247.5 million
without requesting BMA approval. Wind River is dependent on
receiving distributions from its subsidiaries in order to pay
the full dividend.
Under the Companies Act, Wind River Reinsurance may only declare
or pay a dividend if Wind River Reinsurance has no reasonable
grounds for believing that it is, or would after the payment be,
unable to pay its
46
liabilities as they become due, or if the realizable value of
its assets would not be less than the aggregate of its
liabilities and its issued share capital and share premium
accounts.
In 2010, profit distributions (not in respect to liquidations)
by the Luxembourg Companies were generally subject to Luxembourg
dividend withholding tax at a rate of 15%, unless a domestic law
exemption or a lower tax treaty rate applies. There is no
Luxembourg dividend withholding tax in 2010. Dividends paid by
any of the Luxembourg Companies to their Luxembourg resident
parent company are exempt from Luxembourg dividend withholding
tax, provided that at the time of the dividend distribution, the
resident parent company has held (or commits itself to continue
to hold) 10% or more of the nominal paid up capital of the
distributing entity or, in the event of a lower percentage
participation, a participation having an acquisition price of
Euro 1.2 million or more for a period of at least
twelve months.
For a discussion of factors affecting our ability to pay
dividends, see Business Regulation in
Item 1 of Part I, Managements Discussion
and Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Sources and Uses of Funds in
Item 7 of Part II, and Note 18 of the notes to
the consolidated financial statements in Item 8 of
Part II of this report.
|
|
Item 6.
|
Selected
Financial Data
|
The following table sets forth selected consolidated historical
financial data for Global Indemnity and should be read together
with the consolidated financial statements and accompanying
notes and Managements Discussion and Analysis of
Financial Condition and Results of Operations included
elsewhere in this report. No cash dividends were declared on
common stock in any year presented in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(Dollars in thousands, except shares and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
345,763
|
|
|
$
|
340,999
|
|
|
$
|
378,700
|
|
|
$
|
563,112
|
|
|
$
|
652,965
|
|
Net premiums written
|
|
|
296,504
|
|
|
|
290,995
|
|
|
|
309,080
|
|
|
|
490,535
|
|
|
|
560,535
|
|
Net premiums earned
|
|
|
286,774
|
|
|
|
301,674
|
|
|
|
382,508
|
|
|
|
536,323
|
|
|
|
546,469
|
|
Net realized investment gains (losses)
|
|
|
26,437
|
|
|
|
15,862
|
|
|
|
(50,259
|
)
|
|
|
968
|
|
|
|
(570
|
)
|
Total revenues
|
|
|
370,487
|
|
|
|
387,750
|
|
|
|
400,079
|
|
|
|
614,632
|
|
|
|
612,437
|
|
Impairments of goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
(96,449
|
)
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations(1)
|
|
|
84,903
|
|
|
|
75,437
|
|
|
|
(141,560
|
)
|
|
|
98,917
|
|
|
|
89,338
|
|
Net income (loss)
|
|
|
84,903
|
|
|
|
75,437
|
|
|
|
(141,560
|
)
|
|
|
98,917
|
|
|
|
99,418
|
|
Per share data:(2)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations(1)
|
|
$
|
84,903
|
|
|
$
|
75,437
|
|
|
$
|
(141,560
|
)
|
|
$
|
98,917
|
|
|
$
|
89,338
|
|
Basic
|
|
|
2.81
|
|
|
|
2.92
|
|
|
|
(7.74
|
)
|
|
|
4.80
|
|
|
|
4.36
|
|
Diluted
|
|
|
2.80
|
|
|
|
2.91
|
|
|
|
(7.74
|
)
|
|
|
4.76
|
|
|
|
4.32
|
|
Net income (loss) available to common shareholders
|
|
$
|
84,903
|
|
|
$
|
75,437
|
|
|
$
|
(141,560
|
)
|
|
$
|
98,917
|
|
|
$
|
99,418
|
|
Basic
|
|
|
2.81
|
|
|
|
2.92
|
|
|
|
(7.74
|
)
|
|
|
4.80
|
|
|
|
4.85
|
|
Diluted
|
|
|
2.80
|
|
|
|
2.91
|
|
|
|
(7.74
|
)
|
|
|
4.76
|
|
|
|
4.81
|
|
Weighted-average number of shares outstanding(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,237,787
|
|
|
|
25,856,049
|
|
|
|
18,278,094
|
|
|
|
20,629,013
|
|
|
|
20,478,554
|
|
Diluted
|
|
|
30,274,259
|
|
|
|
25,881,610
|
|
|
|
18,278,094
|
|
|
|
20,785,119
|
|
|
|
20,668,308
|
|
|
|
|
(1) |
|
The results of our discontinued operations for 2010, 2009, 2008,
and 2007 relating to our Agency Operations that were sold in
2006 are included in income from continuing operations due to
immateriality. The results of discontinued operations continue
to be stated separately for 2006. |
|
(2) |
|
In 2008, Diluted loss per share is the same as
Basic loss per share since there was a net loss for
that year. |
|
(3) |
|
In May 2009, we issued 17.2 million Class A ordinary
shares and 11.4 million Class B ordinary shares in
conjunction with the Rights Offering. In computing the basic and
diluted weighted share counts, the number of shares outstanding
prior to May 5, 2009 (the date that the ordinary shares
were issued in conjunction with the Rights Offering) was
adjusted by a factor of 1.114 to reflect the impact of a bonus
element associated with the Rights Offering in accordance with
appropriate accounting guidance. As a result, share counts for
the prior periods have been restated. |
47
|
|
|
(4) |
|
Shares outstanding and per share amounts have been restated to
reflect the
1-for-2
stock exchange effective July 2, 2010 when the Company
completed its re-domestication to Ireland. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Insurance Operating Ratios based on our
GAAP Results:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio(2)(3)
|
|
|
45.4
|
|
|
|
56.2
|
|
|
|
79.8
|
|
|
|
55.8
|
|
|
|
55.7
|
|
Expense ratio
|
|
|
41.2
|
|
|
|
39.8
|
|
|
|
37.3
|
|
|
|
32.5
|
|
|
|
31.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio(2)(3)
|
|
|
86.6
|
|
|
|
96.0
|
|
|
|
117.1
|
|
|
|
88.3
|
|
|
|
87.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net/gross premiums written
|
|
|
85.8
|
|
|
|
85.3
|
|
|
|
81.6
|
|
|
|
87.1
|
|
|
|
85.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position as of Last Day of Period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments and cash and cash equivalents
|
|
$
|
1,717,186
|
|
|
$
|
1,731,314
|
|
|
$
|
1,599,528
|
|
|
$
|
1,765,103
|
|
|
$
|
1,656,664
|
|
Reinsurance receivables, net of allowance
|
|
|
422,844
|
|
|
|
543,351
|
|
|
|
679,277
|
|
|
|
719,706
|
|
|
|
982,502
|
|
Total assets
|
|
|
2,294,683
|
|
|
|
2,445,780
|
|
|
|
2,477,059
|
|
|
|
2,775,172
|
|
|
|
2,984,616
|
|
Senior notes payable
|
|
|
90,000
|
|
|
|
90,000
|
|
|
|
90,000
|
|
|
|
90,000
|
|
|
|
90,000
|
|
Junior subordinated debentures
|
|
|
30,929
|
|
|
|
30,929
|
|
|
|
30,929
|
|
|
|
46,393
|
|
|
|
61,857
|
|
Unpaid losses and loss adjustment expenses
|
|
|
1,052,743
|
|
|
|
1,257,741
|
|
|
|
1,506,429
|
|
|
|
1,503,237
|
|
|
|
1,702,010
|
|
Total shareholders equity
|
|
|
928,669
|
|
|
|
831,976
|
|
|
|
631,993
|
|
|
|
836,276
|
|
|
|
763,270
|
|
|
|
|
(1) |
|
Our insurance operating ratios are non-GAAP financial measures
that are generally viewed in the insurance industry as
indicators of underwriting profitability. The loss ratio is the
ratio of net losses and loss adjustment expenses to net premiums
earned. The expense ratio is the ratio of acquisition costs and
other underwriting expenses to net premiums earned. The combined
ratio is the sum of the loss and expense ratios. The ratios
presented here represent the consolidated results of both our
Insurance Operations and Reinsurance Operations. |
|
(2) |
|
Our 2010 loss and combined ratios were impacted by a
$54.1 million reduction of net losses and loss adjustment
expenses for prior accident years. Our 2009 loss and combined
ratios were impacted by a $9.1 million reduction of net
losses and loss adjustment expenses for prior accident years.
Our 2008 loss and combined ratios were impacted by a
$34.9 million increase of net losses and loss adjustment
expenses for prior accident years. Our 2007 loss and combined
ratios were impacted by a $29.1 million reduction of net
losses and loss adjustment expenses for prior accident years.
Our 2006 loss and combined ratios were impacted by a
$15.6 million reduction of net losses and loss adjustment
expenses for prior accident years. See Results of
Operations in Item 7 of Part II of this report
for details of these items and their impact on the loss and
combined ratios. |
|
(3) |
|
Our loss and combined ratios for 2010, 2009, 2008, 2007, and
2006 include $2.8 million, $5.8 million,
$21.5 million, $1.7 million, and $4.6 million,
respectively, of catastrophic losses from our U.S. Insurance
Operations. See Results of Operations in Item 7
of Part II of this report for a discussion of the impact of
these losses on the loss and combined ratios. |
48
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis of our 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 our 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 7 and Risk Factors in
Item 1A above for more information. You should review
Risk Factors in Item 1A above 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.
Recent
Developments
Re-domestication
to Ireland
In February 2010, our Board of Directors approved a plan for us
to re-domesticate from the Cayman Islands to Ireland. At a
special shareholders meeting held on May 27, 2010, our
shareholders approved the re-domestication proposal pursuant to
which all United America Indemnity, Ltd. ordinary shares would
be cancelled and all holders of such shares would receive
ordinary shares of Global Indemnity plc, a newly formed Irish
company, on a
one-for-two
basis. The re-domestication transaction was completed on
July 2, 2010, following approval from the Grand Court of
the Cayman Islands, at which time Global Indemnity plc replaced
United America Indemnity, Ltd. as the ultimate parent company,
and United America Indemnity, Ltd. became a wholly-owned
subsidiary of Global Indemnity plc. Shares of United America
Indemnity, Ltd. previously traded on the NASDAQ Global Select
Market under the symbol INDM. Shares of the Irish
company, Global Indemnity plc, began trading on the NASDAQ
Global Select Market on July 6, 2010 under the symbol
GBLI.
Profit
Enhancement Initiative
On November 2, 2010, we committed to a Profit Enhancement
Initiative with respect to our U.S. Insurance Operations.
The plan was initiated on November 4, 2010, and is part of
our efforts to streamline our operations in response to the
continuing impact of the domestic recession as well as the
competitive landscape within the excess and surplus lines
market. As part of this initiative, the Company intended to
enhance profitability and earnings through reducing its
U.S. based census by approximately 25%, closing
underperforming U.S. facilities, and supplementing staffing
in Bermuda and in Ireland. All action items relating to this
initiative were implemented by December 31, 2010.
The total cost of implementing this initiative was recorded in
our consolidated statements of operations within our Insurance
Operations segment in the fourth quarter of 2010. Components of
the initiative included: (1) employee termination and
severance charges of $1.71 million; (2) expenses of
$1.53 million relating to discontinuing use of leased
office space, net of sublease income; (3) restructuring
expenses of $0.63 million for related asset and leasehold
improvement impairments; and (4) expenses of
$2.91 million relating to the curtailment of our
workers compensation product initiative, consisting of a
minimum ceded premium charge of $1.48 on our workers
compensation reinsurance treaty and $1.43 million in asset
impairments. We project that this restructuring plan will result
in annual savings beginning in 2011 of approximately
$9 million to $11 million on a pre-tax basis, although
there can be no assurance that all of these savings will be
realized. See Note 3 of the notes to the consolidated
financial statements in Item 8 of Part II of this
report for a discussion on the Profit Enhancement Initiative.
Appointment
of Matthew B. Scott
On July 1, 2010, we announced the appointment of Matthew B.
Scott as President of the United National Group, the specific
binding authority side of our Insurance Operations. This
appointment coincides with the resignation of J. Scott Reynolds,
who had served as President of the United National Group since
July 2008. Mr. Scott will continue as President of the
Penn-America
Group, our wholesale general agency business.
49
Appointment
of Mr. James W. Crystal
On July 6, 2010, we announced the appointment of
Mr. James W. Crystal to our Board of Directors, effective
as of that date.
Retirement
of Mr. Stephen A. Cozen
On September 22, 2010, we announced that Mr. Stephen
A. Cozen will be retiring from our Board of Directors, effective
as of December 31, 2010.
Appointment
of Ms. Mary R. Hennessy
On September 22, 2010, we announced that Ms. Mary R.
Hennessy, FCAS, has joined the Board, effective as of
September 20, 2010.
AON
Settlement
On December 4, 2008, a federal jury in the
U.S. District Court for the Eastern District of
Pennsylvania (Philadelphia) returned a $24.0 million
verdict in favor of United National Insurance Company
(United National), an indirect wholly owned
subsidiary of the Company, against AON Corp., an insurance and
reinsurance broker. On July 24, 2009, a federal judge from
the U.S. District Court for the Eastern District of
Pennsylvania (Philadelphia) upheld that jury verdict. In doing
so, the U.S. District Judge increased the verdict to
$32.2 million by adding more than $8.2 million in
prejudgment interest. AON filed its Notice of Appeal and a Bond
in the amount of $33.0 million. Oral arguments were heard
by the Appellate Court on October 26, 2010. In January,
2011, we settled with AON for $16.3 million. We realized
approximately $7.5 million, net of income taxes and
attorneys fees.
New
Zealand Earthquake
On February 22, 2011, an earthquake struck Christchurch,
New Zealand. Given the magnitude and recent occurrence of this
event, there is a lack of data available from industry
participants resulting in significant uncertainty with respect
to potential insured losses, and as a result, the Companys
potential losses from this event. While we are still evaluating
the potential loss, our current estimate is approximately
$5.1 million. Actual losses from this event may vary
materially from our current estimates due to the inherent
uncertainties resulting from several factors, including the
preliminary nature of the loss data available and potential
inaccuracies and inadequacies in the data provided.
Japan
Earthquake and Tsunami
On March 11, 2011, an earthquake and resultant tsunami
struck off the northeast coast of Japan. Given the magnitude and
recent occurrence of this event, there is a lack of data
available from industry participants resulting in significant
uncertainty with respect to potential insured losses, and as a
result, the Companys potential losses from this event. We
are evaluating our exposure to loss from this event and have not
determined an initial estimate.
Overview
Our Insurance Operations distribute property and casualty
insurance products through a group of approximately 103
professional general agencies that have limited quoting and
binding authority, as well as a number of wholesale insurance
brokers who in turn sell our insurance products to insureds
through retail insurance brokers. We operate predominantly in
the excess and surplus lines marketplace. To manage our
operations, we differentiate them by product classification.
These product classifications are:
1) Penn-America,
which includes property and general liability products for small
commercial businesses distributed through a select network of
wholesale general agents with specific binding authority;
2) United National, which includes property, general
liability, and professional lines products distributed through
program administrators with specific binding authority; and
3) Diamond State, which includes property, casualty, and
professional lines products distributed through wholesale
brokers and program administrators with specific binding
authority.
50
Our Reinsurance Operations are comprised of the operations of
Wind River Reinsurance, a Bermuda based treaty reinsurer of
excess and surplus lines and specialty property and casualty
insurance.
We derive our revenues primarily from premiums paid on insurance
policies that we write and from income generated by our
investment portfolio, net of fees paid for investment management
services. The amount of insurance premiums that we receive is a
function of the amount and type of policies we write, as well as
of prevailing market prices.
Our expenses include losses and loss adjustment expenses,
acquisition costs and other underwriting expenses, corporate and
other operating expenses, interest, other investment expenses,
and income taxes. Losses and loss adjustment expenses are
estimated by management and reflect our best estimate of
ultimate losses and costs arising during the reporting period
and revisions of prior period estimates. We record losses and
loss adjustment expenses based on an actuarial analysis of the
estimated losses we expect to incur on the insurance policies we
write. The ultimate losses and loss adjustment expenses will
depend on the actual costs to resolve claims. Acquisition costs
consist principally of commissions that are typically a
percentage of the premiums on the insurance policies we write,
net of ceding commissions earned from reinsurers and allocated
internal costs. Other underwriting expenses consist primarily of
personnel expenses and general operating expenses. Corporate and
other operating expenses are comprised primarily of outside
legal fees, other professional fees, including accounting fees,
directors fees, management fees, salaries and benefits for
company personnel whose services relate to the support of
corporate activities, and capital duty taxes incurred. Interest
expense consists primarily of interest on senior notes payable,
junior subordinated debentures, and funds held on behalf of
others.
Critical
Accounting Estimates and Policies
Our consolidated financial statements are prepared in conformity
with GAAP, which requires us 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. See
Note 4 of the notes to consolidated financial statements
contained in Item 8 of Part II of this report. Actual
results could differ from those estimates and assumptions. We
believe that of our significant accounting policies, the
following may involve a higher degree of judgment and estimation.
Liability
For Unpaid Losses And Loss Adjustment Expenses
Although variability is inherent in estimates, we believe that
the liability for unpaid losses and loss adjustment expenses
reflects our best estimate for future amounts needed to pay
losses and related loss adjustment expenses and the impact of
our reinsurance coverages with respect to insured events.
In developing loss and loss adjustment expense (loss
or losses) reserve estimates for our Insurance
Operations, our 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 short-tail through long-tail. Most of our business can be
characterized as medium to long-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. Our 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 our
insurance operations, we differentiate them by product
classifications, which are
Penn-America,
United National, and Diamond State. For further discussion about
our product classifications, see General Our
Insurance Operations in Item 1 of Part I of this
report. Each of our product classifications contain both
long-tail and short-tail exposures. Every reserve category is
analyzed by our actuaries each quarter. The analyses generally
include reviews of losses gross of reinsurance and net of
reinsurance.
In addition to our internal reserve analysis, independent
external actuaries performed a detailed review of our reserves
for the second and fourth quarters of 2010. We do not rely upon
the review by the independent actuaries to develop our reserves;
however, the data is used to corroborate the analysis performed
by the in-house actuarial staff.
51
Loss reserve estimates for our Reinsurance Operations are
developed by independent, external actuaries. The data for this
analysis is organized by treaty and treaty year. As with our
reserves for our Insurance Operations, reserves for our
Reinsurance Operations are characterized as short-tail through
long-tail. Most of our business can be characterized as medium
to long-tail. Long-tail exposures include workers compensation,
professional liability, and excess and umbrella liability.
Short-tail exposures are primarily catastrophe exposed property
accounts. Every treaty is reviewed each quarter, both gross and
net of reinsurance.
The methods used to project ultimate losses for both long-tail
and short-tail exposures 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 accurate predictions. This
situation often exists for long-tail exposures. In addition,
changes in the factors described above may result in
inconsistent payment patterns. Finally, estimating the paid loss
pattern subsequent to the most mature point available in the
data analyzed often involves considerable uncertainty for
long-tail reserve categories.
The 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
52
losses to estimate the ultimate loss for each 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, and 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 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 us, 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 exposures, 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, our 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 our 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, we 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 our history
includes a sufficient number of years to cover the entire period
over which paid and incurred losses are expected to change.
However, we may also use the Expected Loss Ratio,
Bornhuetter-Ferguson and Average Loss methods for short-tail
exposures.
Generally, reserves for long-tail lines use the Expected Loss
Ratio method for the most recent accident year, shift to the
Bornhuetter-Ferguson methods for the next two years, and then
shift 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 Expected Loss Ratio and
Bornhuetter-Ferguson methods are used for as many as six years
before shifting to the Incurred Development method. Reserves for
short-tail lines use the Bornhuetter-Ferguson methods for the
most recent accident year and shift to the Incurred
and/or Paid
Development method in subsequent years.
For other more complex reserve categories where the above
methods may not produce reliable indications, we use additional
methods tailored to the characteristics of the specific
situation. Such reserve categories include losses from
construction defects and A&E.
For construction defect losses, our actuaries organize losses by
the year in which they were reported. To estimate losses from
claims that have not been reported, various extrapolation
techniques are applied to the pattern of claims that have been
reported to estimate the number of claims yet to be reported.
This process requires analysis of several factors including the
rate at which policyholders report claims to us, 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, an
increase in 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
53
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. In response to these continuing
developments, management increased gross and net A&E
reserves during the second quarter of 2008 to reflect its best
estimate of A&E exposures. In 2009, one of our insurance
companies was dismissed from a lawsuit seeking coverage from it
and other unrelated insurance companies. The suit involved
issues related to approximately 3,900 existing asbestos related
bodily injury claims and future claims. The dismissal was the
result of a settlement of a disputed claim related to accident
year 1984. The settlement is conditioned upon certain legal
events occurring which will trigger financial obligations by the
insurance company. Management will continue to monitor the
developments of the litigation to determine if any additional
financial exposure is present.
Reserve analyses performed by our internal and external
actuaries result in actuarial point estimates. The results of
the detailed reserve reviews were summarized and discussed with
our 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 our pricing and underwriting, and overall pricing and
underwriting trends in the insurance market.
Managements best estimate at December 31, 2010 was
recorded as the loss reserve. Managements best estimate is
as of a particular point in time and is based upon known facts,
our actuarial analyses, current law, and our judgment. This
resulted in carried gross and net reserves of
$1,052.7 million and $645.5 million, respectively, as
of December 31, 2010. A breakout of our gross and net
reserves, excluding the effects of our intercompany pooling
arrangements and intercompany stop loss and quota share
reinsurance agreements, as of December 31, 2010 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Reserves
|
|
(Dollars in thousands)
|
|
Case
|
|
|
IBNR(1)
|
|
|
Total
|
|
|
Insurance Operations
|
|
$
|
348,354
|
|
|
$
|
630,274
|
|
|
$
|
978,628
|
|
Reinsurance Operations
|
|
|
20,277
|
|
|
|
53,840
|
|
|
|
74,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
368,631
|
|
|
$
|
684,114
|
|
|
$
|
1,052,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Reserves(2)
|
|
(Dollars in thousands)
|
|
Case
|
|
|
IBNR(1)
|
|
|
Total
|
|
|
Insurance Operations
|
|
$
|
214,427
|
|
|
$
|
357,926
|
|
|
$
|
572,353
|
|
Reinsurance Operations
|
|
|
20,156
|
|
|
|
53,039
|
|
|
|
73,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
234,583
|
|
|
$
|
410,965
|
|
|
$
|
645,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Losses incurred but not reported, including the expected future
emergence of case reserves. |
|
(2) |
|
Does not include reinsurance receivable on paid losses. |
We continually review these estimates and, based on new
developments and information, we include 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 our historical experience or
that cannot yet be quantified or estimated. We regularly analyze
our reserves and review pricing and reserving methodologies so
that future adjustments to prior year reserves can be minimized.
However, given the complexity of this process, reserves require
continual updates and the ultimate liability may be higher or
lower than previously indicated. Changes in estimates for loss
and loss adjustment expense reserves are recorded in the period
that the change in these estimates is made. See Note 10 to
the consolidated financial statements in Item 8 of
Part II of this report for details concerning the changes
in the estimate for incurred loss and loss adjustment expenses
related to prior accident years.
54
The detailed reserve analyses that our internal and external
actuaries complete use a variety of generally accepted actuarial
methods and techniques to produce a number of estimates of
ultimate loss. We determine our best estimate of ultimate loss
by reviewing the various estimates and assigning weight to each
estimate given the characteristics of the reserve category being
reviewed. 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 (pure IBNR).
In light of the many uncertainties associated with establishing
the estimates and making the assumptions necessary to establish
reserve levels, we review our reserve estimates on a regular
basis and make adjustments in the period that the need for such
adjustments is determined. The anticipated future loss emergence
continues to be reflective of historical patterns, and the
selected development patterns have not changed significantly
from those underlying our most recent analyses.
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 segment has an implicit
frequency and severity for each accident year as a result of the
various assumptions made.
Previous reserve analyses have resulted in our identification of
information and trends that have caused us to increase or
decrease our 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 our 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 us. The length of the loss reporting lag
affects our 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 our reserving
classes, we believe that frequency can be predicted with greater
accuracy than severity. Therefore, we believe managements
best estimate is more sensitive to changes in severity than
frequency. The following table, which we believe reflects a
reasonable range of variability around our best estimate based
on our historical loss experience and managements
judgment, reflects the impact of changes (which could be
favorable or unfavorable) in frequency and severity on our
current accident year net loss estimate of $184.5 million
for claims occurring during the year ended December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severity Change
|
|
(Dollars in thousands)
|
|
|
|
|
−10%
|
|
|
−5%
|
|
|
0%
|
|
|
5%
|
|
|
10%
|
|
|
Frequency Change
|
|
|
−5
|
%
|
|
$
|
(26,747
|
)
|
|
$
|
(17,985
|
)
|
|
$
|
(9,223
|
)
|
|
$
|
(461
|
)
|
|
$
|
8,301
|
|
|
|
|
−3
|
%
|
|
|
(23,426
|
)
|
|
|
(14,480
|
)
|
|
|
(5,534
|
)
|
|
|
3,413
|
|
|
|
12,359
|
|
|
|
|
−2
|
%
|
|
|
(21,766
|
)
|
|
|
(12,728
|
)
|
|
|
(3,689
|
)
|
|
|
5,349
|
|
|
|
14,388
|
|
|
|
|
−1
|
%
|
|
|
(20,106
|
)
|
|
|
(10,975
|
)
|
|
|
(1,845
|
)
|
|
|
7,286
|
|
|
|
16,417
|
|
|
|
|
0
|
%
|
|
|
(18,446
|
)
|
|
|
(9,223
|
)
|
|
|
|
|
|
|
9,223
|
|
|
|
18,446
|
|
|
|
|
1
|
%
|
|
|
(16,786
|
)
|
|
|
(7,471
|
)
|
|
|
1,845
|
|
|
|
11,160
|
|
|
|
20,475
|
|
|
|
|
2
|
%
|
|
|
(15,126
|
)
|
|
|
(5,718
|
)
|
|
|
3,689
|
|
|
|
13,097
|
|
|
|
22,504
|
|
|
|
|
3
|
%
|
|
|
(13,466
|
)
|
|
|
(3,966
|
)
|
|
|
5,534
|
|
|
|
15,033
|
|
|
|
24,533
|
|
|
|
|
5
|
%
|
|
|
(10,145
|
)
|
|
|
(461
|
)
|
|
|
9,223
|
|
|
|
18,907
|
|
|
|
28,591
|
|
55
Our net reserves for losses and loss expenses of
$645.5 million as of December 31, 2010 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
We regularly review the collectability of our reinsurance
receivables, and we include 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 we consider 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 our
reinsurers dispute a loss or if the reinsurer is unable to pay.
If our reinsurers do not pay, we are still legally obligated to
pay the loss. At December 31, 2010, our reinsurance
receivables were $423.0 million, net of an allowance for
uncollectible reinsurance receivables of $12.7 million. At
December 31, 2010, the Company held collateral securing its
reinsurance receivables of $289.3 million. Reinsurance
receivables, net of collateral held, were $133.7 million at
December 31, 2010. For a listing of the ten reinsurers for
which we have the largest reinsurance asset amounts as of
December 31, 2010, see Reinsurance of Underwriting
Risk in Item 1 of Part I of this report. See
Note 8 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for
more details concerning the collectability of our reinsurance
receivables.
Investments
The carrying amount of our investments approximates their
estimated fair value. We regularly perform 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 our review,
we consider 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 we determine 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 4 of the notes to consolidated financial
statements in Item 8 of Part II of this report for the
specific methodologies and significant assumptions used by asset
class. 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 our securities with gross unrealized losses
as of December 31, 2010 and 2009, and for other than
temporary impairment losses that we recorded for the years ended
December 31, 2010, 2009, and 2008, please see Note 5
of the notes to the consolidated financial statements in
Item 8 of Part II of this report.
Fair
Value Measurements
We categorize our assets 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. See Note 6 of the notes to
the consolidated financial statements in Item 8 of
Part II of this report for further information about the
fair value hierarchy and our assets that are accounted for at
fair value.
Goodwill
and Intangible Assets
During 2008, the gross written premium of
Penn-America
declined and the Companys and certain of its
competitors market values declined, indicating that
goodwill and other intangible assets might be impaired. After
56
testing, the Company concluded that impairment of goodwill and
partial impairment of the intangible assets related to the
merger with
Penn-America
Group, Inc. was necessary. As a result, the Company recorded an
impairment charge of $92.2 million, net of tax, in the
fourth quarter of 2008 related to the Companys 2005 merger
with
Penn-America
Group, Inc. The impairment charge of $92.2 million is
comprised of a goodwill impairment of $84.3 million, an
impairment of indefinite lived intangible assets of
$0.8 million pre-tax, $0.5 million after tax, and an
impairment of definite lived intangible assets of
$11.4 million pre-tax, $7.4 million after-tax.
See Note 7 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for
details concerning the goodwill and intangible asset testing
related to 2008.
During 2009 there were no changes to goodwill which was fully
impaired in 2008. There were no impairments to indefinite lived
or definite lived intangible assets. The balance of definite
lived intangible assets related to the merger with the
Penn-America
Group, Inc. of $0.04 million, net of accumulated
amortization, amortized fully in 2010.
In April 2010, the Company recorded goodwill of
$4.8 million and intangible assets of $10.2 million as
a result of an acquisition. The acquisition was recorded as a
business combination using the acquisition method of accounting
in accordance with applicable accounting guidance. The
intangible assets were comprised of trademarks, customer
relationships, and non-compete agreements. The trademarks were
determined to be indefinite lived and are not subject to
amortization. The customer relationships and non-compete
agreements were determined to be definite lived and will be
amortized over their estimated useful lives. The customer
relationships will be amortized over fifteen years, and the
non-compete agreements will be amortized over two years.
See Note 7 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for
details concerning the 2010 acquisition.
Taxation
We provide for income taxes in accordance with applicable
accounting guidance. Our deferred tax assets and liabilities
primarily result from temporary differences between the amounts
recorded in our consolidated financial statements and the tax
basis of our 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
our assessment of uncertain tax positions and projections of
future taxable income from each tax-paying component in each
jurisdiction, principally derived from business plans and
available tax planning strategies. There are no valuation
allowances as of December 31, 2010. The deferred tax asset
balance is analyzed regularly by management. Based on these
analyses, we have determined that our 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, our
assumptions and estimates that resulted in our 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 our financial condition,
results of operations, and liquidity.
In 2009, we recognized $8.6 million of investment income
related to the liquidation of investments in two limited
partnerships. Our 2009 tax provision includes federal income tax
expense of $3.0 million related to this investment income.
We apply 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. Please see
Note 9 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for a
discussion of our tax uncertainties.
57
Our
Business Segments
We manage our business through two business segments: Insurance
Operations, which includes the operations of the United National
Insurance Companies and the
Penn-America
Insurance Companies, and Reinsurance Operations, which are the
operations of Wind River Reinsurance.
We evaluate the performance of our Insurance Operations and
Reinsurance Operations segments based on gross and net premiums
written, revenues in the form of net premiums earned, and
expenses in the form of (1) net losses and loss adjustment
expenses, (2) acquisition costs, and (3) other
underwriting expenses.
See Business Segments in Item 1 of Part I
of this report for a description of our segments.
The following table sets forth an analysis of financial data for
our segments during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Insurance Operations premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
245,481
|
|
|
$
|
267,992
|
|
|
$
|
353,130
|
|
Ceded premiums written
|
|
|
49,416
|
|
|
|
49,728
|
|
|
|
47,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
196,065
|
|
|
$
|
218,264
|
|
|
$
|
305,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Operations premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
100,282
|
|
|
$
|
73,007
|
|
|
$
|
25,570
|
|
Ceded premiums written
|
|
|
(157
|
)
|
|
|
276
|
|
|
|
21,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
100,439
|
|
|
$
|
72,731
|
|
|
$
|
3,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
194,820
|
|
|
$
|
250,409
|
|
|
$
|
374,174
|
|
Reinsurance Operations
|
|
|
92,607
|
|
|
|
51,265
|
|
|
|
8,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
287,427
|
|
|
$
|
301,674
|
|
|
$
|
382,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
162,626
|
(3)
|
|
$
|
252,494
|
(3)
|
|
$
|
431,114
|
(3)
|
Reinsurance Operations
|
|
|
85,897
|
|
|
|
36,817
|
|
|
|
16,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net expenses
|
|
$
|
248,523
|
|
|
$
|
289,311
|
|
|
$
|
447,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
$
|
32,194
|
|
|
$
|
(2,085
|
)
|
|
$
|
(56,940
|
)
|
Reinsurance Operations
|
|
|
6,710
|
|
|
|
14,448
|
|
|
|
(8,493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from segments
|
|
$
|
38,904
|
|
|
$
|
12,363
|
|
|
$
|
(65,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance combined ratio analysis:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
36.6
|
|
|
|
58.4
|
|
|
|
78.5
|
|
Expense ratio
|
|
|
47.1
|
|
|
|
42.4
|
|
|
|
36.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
83.7
|
|
|
|
100.8
|
|
|
|
115.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
63.9
|
|
|
|
45.2
|
|
|
|
136.2
|
|
Expense ratio
|
|
|
28.8
|
|
|
|
26.6
|
|
|
|
65.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
92.7
|
|
|
|
71.8
|
|
|
|
201.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
45.4
|
|
|
|
56.2
|
|
|
|
79.8
|
|
Expense ratio
|
|
|
41.2
|
|
|
|
39.8
|
|
|
|
37.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
86.6
|
|
|
|
96.0
|
|
|
|
117.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes net investment income and net realized investment gains
(losses), which are not allocated to our segments. |
|
(2) |
|
Excludes corporate and other operating expenses and interest
expense, which are not allocated to our segments. |
58
|
|
|
(3) |
|
Includes excise tax of $1,021, $1,342, and $1,871 related to
cessions from our U.S. Insurance Companies to Wind River
Reinsurance for 2010, 2009, and 2008, respectively. |
|
(4) |
|
Our insurance combined ratios are non-GAAP financial measures
that are generally viewed in the insurance industry as
indicators of underwriting profitability. The loss ratio is the
ratio of net losses and loss adjustment expenses to net premiums
earned. The expense ratio is the ratio of acquisition costs and
other underwriting expenses to net premiums earned. The combined
ratio is the sum of the loss and expense ratios. |
Results
of Operations
All percentage changes included in the text below have been
calculated using the corresponding amounts from the applicable
tables.
Year
Ended December 31, 2010 Compared with the Year Ended
December 31, 2009
Insurance
Operations
The components of income (loss) from underwriting and
underwriting ratios of our Insurance Operations segment are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
Gross premiums written
|
|
$
|
245,481
|
|
|
$
|
267,992
|
|
|
$
|
(22,511
|
)
|
|
|
(8.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
196,065
|
|
|
$
|
218,264
|
|
|
$
|
(22,199
|
)
|
|
|
(10.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
194,167
|
|
|
$
|
250,409
|
|
|
$
|
(56,242
|
)
|
|
|
(22.5
|
)%
|
Other income
|
|
|
653
|
|
|
|
|
|
|
|
653
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
194,820
|
|
|
$
|
250,409
|
|
|
$
|
(55,589
|
)
|
|
|
(22.2
|
)%
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
71,175
|
|
|
|
146,197
|
|
|
|
(75,022
|
)
|
|
|
(51.3
|
)%
|
Acquisition costs and other underwriting expenses(1)
|
|
|
91,451
|
|
|
|
106,297
|
|
|
|
(14,846
|
)
|
|
|
(14.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from underwriting
|
|
$
|
32,194
|
|
|
$
|
(2,085
|
)
|
|
$
|
34,279
|
|
|
|
1,644.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
65.9
|
|
|
|
62.0
|
|
|
|
3.9
|
|
|
|
|
|
Prior accident year
|
|
|
(29.3
|
)
|
|
|
(3.6
|
)
|
|
|
(25.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year
|
|
|
36.6
|
|
|
|
58.4
|
|
|
|
(21.8
|
)
|
|
|
|
|
Expense ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
45.7
|
|
|
|
42.1
|
|
|
|
3.6
|
|
|
|
|
|
Prior accident year
|
|
|
1.4
|
|
|
|
0.3
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year
|
|
|
47.1
|
|
|
|
42.4
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
83.7
|
|
|
|
100.8
|
|
|
|
(17.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes excise tax of $1,021 and $1,342 related to cessions
from our U.S. Insurance Companies to Wind River Reinsurance for
2010 and 2009, respectively. |
Premiums
Gross premiums written, which represents the amount received or
to be received for insurance policies written without reduction
for reinsurance costs or other deductions, was
$245.5 million for 2010, compared with $268.0 million
for 2009, a decrease of $22.5 million or 8.4%. The decrease
was primarily due to declines in
59
the
Penn-America
book of business and price decreases in the aggregate of 3.0%,
offset partially by growth in our brokerage operations.
Net premiums written, which equals gross premiums written less
ceded premiums written, was $196.1 million for 2010,
compared with $218.3 million for 2009, a decrease of
$22.2 million or 10.2%. The decrease was primarily due to
the reduction of gross premiums written noted above, higher
reinsurance costs, and a minimum premium charge of
$1.5 million related to the curtailment of our
workers compensation initiative. In 2011, we increased
retention on our property per risk reinsurance agreement from
$1 million to $2 million as well as cancelled our
Penn-America
property quota share treaty. Please see Note 8 of the notes
to the consolidated financial statements in Item 8 of
Part II of this report for more information on our treaty
renewals.
The ratio of net premiums written to gross premiums written was
79.9% for 2010 and 81.4% for 2009, a decline of 1.5 points,
which was primarily due to increased reinsurance costs and the
minimum premium charge noted above. Without the impact of the
premium charge, the ratio of net premiums written to gross
premiums written was 80.5% in 2010.
Net premiums earned were $194.2 million for 2010, compared
with $250.4 million for 2009, a decrease of
$56.2 million or 22.5%. The decrease was primarily due to
the reductions in net premiums written in recent years.
Property net premiums earned for 2010 and 2009 were
$75.2 million and $103.5 million, respectively.
Casualty net premiums earned for 2010 and 2009 were
$119.0 million and $146.9 million, respectively.
Net
Losses and Loss Adjustment Expenses
The loss ratio for our Insurance Operations was 36.6% for 2010
compared with 58.4% for 2009. The loss ratio is a non-GAAP
financial measure that is generally viewed in the insurance
industry as an indicator of underwriting profitability and is
calculated by dividing net losses and loss adjustment expenses
by net premiums earned.
The loss ratio improved 25.7 points resulting from a decrease of
net losses and loss adjustment expenses for prior accident years
of $56.8 million in 2010 compared to a decrease of net
losses and loss adjustment expenses for prior accident years of
$9.1 million in 2009. When analyzing loss reserves and
prior year development, we consider many factors, including the
frequency and severity of claims, loss credit trends, case
reserve settlements that may have resulted in significant
development, and any other additional or pertinent factors that
may impact reserve estimates.
|
|
|
|
|
In 2010, we reduced our prior accident year loss reserves by
$56.6 million and reduced our allowance for uncollectible
reinsurance by $0.2 million. The reduction of our prior
accident year loss reserves primarily consisted of a
$43.7 million reduction in our general liability lines, a
$5.4 million reduction in our umbrella lines, a
$4.9 million reduction in our professional liability lines,
and a $2.0 million reduction in our property lines:
|
|
|
|
|
|
General Liability: The reduction in the
general liability lines primarily consisted of reductions of
$45.4 million related to accident years 2002 through 2009
due to lower than anticipated frequency and severity. Incurred
losses for these years have developed at a rate lower than the
Companys historical averages. This reduction was partially
offset by net increases of $1.8 million related to accident
years 2001 and prior where the Company increased the loss and
loss adjustment expense estimates related to construction defect
claims.
|
|
|
|
Umbrella: The $5.4 million
reduction in the umbrella lines related to all accident years
2009 and prior due to less than anticipated severity. As these
accident years have matured, more weight has been given to
experience based methods which continue to develop favorably
compared to our initial indications.
|
|
|
|
Professional Liability: The reduction
in the professional liability lines primarily consisted of
reductions of $9.9 million related to accident years 2001
through 2008 driven by lower than expected paid and incurred
activity during the quarter. This reduction was partially offset
by increases of $5.0 million related to accident year 2009
where the Company experienced higher than expected claim
frequency and severity.
|
60
|
|
|
|
|
Property: The reduction in the property
lines primarily consisted of reductions of $2.9 million
related to accident years 2002 and 2004 through 2008 driven by
lower than anticipated severity, partially offset by increases
of $0.9 million primarily related to accident year 2009
where the Company experienced higher than expected claim
frequency and severity.
|
The reduction in our allowance for uncollectible reinsurance is
primarily due to the decrease in the amount of our carried
reinsurance receivables.
|
|
|
|
|
In 2009, we reduced our prior accident year loss reserves by
$8.4 million and reduced our allowance for uncollectible
reinsurance by $0.7 million. The reduction of our prior
accident year loss reserves primarily consisted of a
$5.5 million reduction in our property lines, a
$2.9 million reduction in our general liability lines, and
a $4.7 million reduction in our umbrella lines, offset by a
$4.7 million increase in our professional liability lines:
|
|
|
|
|
|
Property: The reduction in the property
lines primarily consisted of reductions related to accident year
2006 through 2008 due to better than expected loss emergence in
Diamond State brokerage.
|
|
|
|
General Liability: The reduction in the
general liability lines primarily consisted of net reductions of
$13.5 million related to accident years 2006 and prior due
to loss emergence that had been consistently lower than expected
during those years, partially offset by increases of
$10.6 million related to accident years 2007 and 2008 that
were driven by a large claim and an increase in our construction
defect provisions for
Penn-America.
|
|
|
|
Umbrella: The reduction in the umbrella
lines primarily consisted of net reductions of $5.1 million
related to accident years 2007 and prior that were driven by
loss emergence throughout the year that was consistently better
than expected, partially offset by increases of
$0.4 million related to accident year 2008.
|
|
|
|
Professional Liability: The increase to
the professional liability lines primarily consisted of
increases of $10.1 million related to accident years 2007
and 2008 due to an increase in severity, partially offset by net
reductions of $5.4 million primarily related to accident
years 2006 and prior.
|
The reduction in our allowance for uncollectible reinsurance is
primarily due to the decrease in the amount of our carried
reinsurance receivables.
The current accident year loss ratio increased 3.9 points in
2010 due to increases in both the property and casualty loss
ratios:
|
|
|
|
|
The current accident year property loss ratio increased 5.9
points from 55.3% in 2009 to 61.2% in 2010, which consisted of a
6.1 point increase in the non-catastrophe loss ratio from 51.4%
in 2009 to 57.5% in 2010, offset by a 0.1 point decrease in the
catastrophe loss ratio from 3.9% in 2009 to 3.8% in 2010. There
was very little significant catastrophe activity during 2010 and
2009. Catastrophe losses were $2.8 million and
$4.0 million in 2010 and 2009, respectively. The property
loss ratio was impacted by rate decreases of approximately 3.4%
as well as higher reinsurance costs in 2010 when compared to
2009. Property net premiums earned for 2010 and 2009 were
$75.2 million and $103.5 million, respectively.
|
|
|
|
The current accident year casualty loss ratio increased 2.1
points from 66.8% in 2009 to 68.9% in 2010 primarily due to rate
decreases of approximately 2.7% and higher reinsurance costs in
2010. Casualty net premiums earned for 2010 and 2009 were
$119.0 million and $146.9 million, respectively.
|
Net losses and loss adjustment expenses were $71.2 million
for 2010, compared with $146.2 million for 2009, a decrease
of $75.0 million or 51.3%. Excluding the $56.8 million
reduction of net losses and loss adjustment expenses for prior
accident years in 2010 and the $9.1 million reduction of
net losses and loss adjustment expenses for prior accident years
in 2009, the current accident year net losses and loss
adjustment expenses were $128.0 million and
$155.3 million for 2010 and 2009, respectively. This
decrease is primarily attributable to a decrease in net premiums
earned.
61
Acquisition
Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were
$91.5 million for 2010, compared with $106.3 million
for 2009, a decrease of $14.8 million or 14.0%. The
decrease is due to a $12.6 million decrease in acquisition
costs and a $2.2 million decrease in other underwriting
expenses. We incurred $2.8 million in acquisition costs
related to prior accident years in 2010, compared with
$0.8 million related to prior accident years in 2009, an
increase of $2.0 million.
|
|
|
|
|
The decrease in acquisition costs is primarily due to a decrease
in commissions resulting from a decrease in net premiums earned.
The increase in acquisition costs related to prior accident
years is primarily due to an increase in contingent commissions
related to the prior accident year loss reserve releases noted
above.
|
|
|
|
The decrease in other underwriting expenses is primarily due to
decreases in compensation related expenses and decreases in
legal fees, partially offset by one-time charges of
$3.9 million related to the Profit Enhancement Initiative.
See Note 3 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for a
discussion on the Profit Enhancement Initiative.
|
Expense
and Combined Ratios
The expense ratio for our Insurance Operations was 47.1% for
2010, compared with 42.4% for 2009. The current accident year
expense ratio was 45.7% for 2010, compared with 42.1% for 2009.
The expense ratio is a non-GAAP financial measure that is
calculated by dividing the sum of acquisition costs and other
underwriting expenses by net premiums earned. The increase in
the expense ratio is primarily due to the decrease in net
premiums earned noted above, as well as one-time charges related
to the Profit Enhancement Initiative of 1.5% or
$3.9 million.
The combined ratio for our Insurance Operations was 83.7% for
2010, compared with 100.8% for 2009. The combined ratio is a
non-GAAP financial measure and is the sum of our loss and
expense ratios. Excluding the impact of prior accident year
adjustments, the combined ratio increased from 104.2% in 2009 to
111.6% in 2010. See discussion of loss ratio included in
Net Losses and Loss Adjustment Expenses above and
discussion of expense ratio in preceding paragraph above for an
explanation of this increase.
Income
(loss) from underwriting
The factors described above resulted in income from underwriting
for our Insurance Operations of $32.2 million for 2010,
compared with a loss from underwriting of $2.1 million for
2009, an increase of $34.3 million.
62
Reinsurance
Operations
The components of income from underwriting and underwriting
ratios of our Reinsurance Operations segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
Gross premiums written
|
|
$
|
100,282
|
|
|
$
|
73,007
|
|
|
$
|
27,275
|
|
|
|
37.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
100,439
|
|
|
$
|
72,731
|
|
|
$
|
27,708
|
|
|
|
38.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
92,607
|
|
|
$
|
51,265
|
|
|
$
|
41,342
|
|
|
|
80.6
|
%
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
59,184
|
|
|
|
23,185
|
|
|
|
35,999
|
|
|
|
155.3
|
%
|
Acquisition costs and other underwriting expenses
|
|
|
26,713
|
|
|
|
13,632
|
|
|
|
13,081
|
|
|
|
96.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from underwriting
|
|
$
|
6,710
|
|
|
$
|
14,448
|
|
|
$
|
(7,738
|
)
|
|
|
(53.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
61.0
|
|
|
|
45.2
|
|
|
|
15.8
|
|
|
|
|
|
Prior accident year
|
|
|
2.9
|
|
|
|
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year loss ratio
|
|
|
63.9
|
|
|
|
45.2
|
|
|
|
18.7
|
|
|
|
|
|
Expense ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
27.2
|
|
|
|
26.6
|
|
|
|
0.6
|
|
|
|
|
|
Prior accident year
|
|
|
1.6
|
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year
|
|
|
28.8
|
|
|
|
26.6
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
92.7
|
|
|
|
71.8
|
|
|
|
20.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
Gross premiums written, which represents the amount received or
to be received for reinsurance agreements written without
reduction for reinsurance costs or other deductions, was
$100.3 million for 2010, compared with $73.0 million
for 2009, an increase of $27.3 million or 37.4%. The
increase was primarily due to several new reinsurance treaties
that were written during 2010.
Net premiums written, which equals gross premiums written less
ceded premiums written, was $100.4 million for 2010,
compared with $72.7 million for 2009, an increase of
$27.7 million or 38.1%. The increase was primarily due to
the increase in gross premiums written as described above.
The ratio of net premiums written to gross premiums written was
100.2% for 2010 and 99.6% for 2009.
Net premiums earned were $92.6 million for 2010, compared
with $51.3 million for 2009, an increase of
$41.3 million or 80.6%. The increase was primarily due to
new reinsurance treaties that commenced during 2009 and 2010.
Property net premiums earned for 2010 and 2009 were
$35.3 million and $23.5 million, respectively.
Casualty net premiums earned for 2010 and 2009 were
$57.3 million and $27.8 million, respectively.
Net
Losses and Loss Adjustment Expenses
The loss ratio for our Reinsurance Operations was 63.9% for 2010
compared with 45.2% for 2009. The loss ratio is a non-GAAP
financial measure that is generally viewed in the insurance
industry as an indicator of underwriting profitability and is
calculated by dividing net losses and loss adjustment expenses
by net premiums earned.
The impact of changes to prior accident years is an increase of
2.9 points resulting from an increase of net losses and loss
adjustment expenses for prior accident years of
$2.7 million in 2010 and an increase of net losses and
63
loss adjustment expenses for prior accident years of
$0.03 million in 2009. When analyzing loss reserves and
prior year development, we consider many factors, including the
frequency and severity of claims, loss credit trends, case
reserve settlements that may have resulted in significant
development, and any other additional or pertinent factors that
may impact reserve estimates.
|
|
|
|
|
In 2010, we increased our prior accident year loss reserves by
$2.7 million. The increase in our prior accident year loss
reserves primarily consisted of a $2.6 million increase in
our automobile liability lines, a $0.5 million increase in
our workers compensation lines, offset partially by a
decrease of $0.5 million in our property lines:
|
|
|
|
|
|
Automobile Liability: The increase in
the automobile liability lines was primarily due to increases of
$2.5 million related to higher frequency within accident
year 2009 from a non-standard auto treaty.
|
|
|
|
Workers Compensation: The
increase in our workers compensation lines is related to
an accident year 2009 structured excess of loss treaty where we
increased our loss estimates based on industry workers
compensation results.
|
|
|
|
Property: The reduction in the property
lines primarily consisted of reductions of $0.7 million
related to accident year 2009, partially offset by increases of
$0.2 million related to accident year 2008. These changes
are due to continuing emergence of loss trends on our
catastrophe treaty.
|
|
|
|
|
|
In 2009, we increased our prior accident year loss reserves by
$0.03 million, which primarily consisted of increases in
our general liability lines. The increase to the general
liability lines was related to accident years 2007 and 2008.
|
In 2010, the current accident year loss ratio increased 15.8
points from 45.2% in 2009 to 61.0% in 2010. The casualty lines
loss ratio was 75.1% in 2010 compared to 77.1% in 2009. The
property lines loss ratio was 38.2% in 2010 compared to 7.5% in
2009. We experienced abnormally low levels of catastrophe losses
in 2009. In 2010, we experienced catastrophe losses from New
Zealand earthquakes, Perth hail storms, Australian floods and
other smaller events.
Net losses and loss adjustment expenses were $59.2 million
for 2010, compared with $23.2 million for 2009, an increase
of $36.0 million or 155.3%. Excluding the $2.7 million
increase of net losses and loss adjustment expenses for prior
accident years in 2010 and the $0.03 million increase of
net losses and loss adjustment expenses for prior accident years
in 2009, the current accident year net losses and loss
adjustment expenses were $56.5 million and
$23.2 million for 2010 and 2009, respectively. This
increase is primarily attributable to an increase in net
premiums earned and the factors that caused an increased current
accident year loss ratio, as described above.
Acquisition
Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were
$26.7 million for 2010, compared with $13.6 million
for 2009, an increase of $13.1 million or 96.0%. We
incurred $1.5 million in acquisition costs related to prior
accident years in 2010, while we did not make any adjustments to
prior accident year acquisition costs in 2009. The entire
increase in acquisition costs and other underwriting expenses is
due to increases in commissions resulting from the increase in
net premiums earned. The increase in acquisition costs related
to prior accident years is primarily due to timing of contingent
commission expenses incurred.
Expense
and Combined Ratios
The expense ratio for our Reinsurance Operations was 28.8% for
2010, compared with 26.6% for 2009. The current accident year
expense ratio was 27.2% for 2010, compared with 26.6% for 2009.
The expense ratio is a non-GAAP financial measure that is
calculated by dividing the sum of acquisition costs and other
underwriting expenses by net premiums earned. The increase in
the expense ratio is primarily due to changes in our mix of
business.
The combined ratio for our Reinsurance Operations was 92.7% for
2010, compared with 71.8% for 2009. The combined ratio is a
non-GAAP financial measure and is the sum of our loss and
expense ratios. Excluding the impact of prior accident year
adjustments, the combined ratio increased from 71.8% in 2009 to
88.2% in 2010. See
64
discussion of loss ratio included in Net Losses and Loss
Adjustment Expenses above and discussion of expense ratio
in preceding paragraph above for an explanation of this increase.
Income
from underwriting
The factors described above resulted in income from underwriting
for our Reinsurance Operations of $6.7 million in 2010,
compared to $14.4 million in 2009, a decrease of
$7.7 million.
Unallocated
Corporate Items
The following items are not allocated to our Insurance
Operations or Reinsurance Operations segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
56,623
|
|
|
$
|
70,214
|
|
|
$
|
(13,591
|
)
|
|
|
(19.4
|
)%
|
Net realized investment gains
|
|
|
26,437
|
|
|
|
15,862
|
|
|
|
10,575
|
|
|
|
66.7
|
%
|
Corporate and other operating expenses
|
|
|
(21,127
|
)
|
|
|
(16,752
|
)
|
|
|
4,375
|
|
|
|
26.1
|
%
|
Interest expense
|
|
|
(7,020
|
)
|
|
|
(7,216
|
)
|
|
|
(196
|
)
|
|
|
(2.7
|
)%
|
Income tax expense
|
|
|
(8,892
|
)
|
|
|
(4,310
|
)
|
|
|
4,582
|
|
|
|
106.3
|
%
|
Equity in net income (loss) of partnership, net of tax
|
|
|
(22
|
)
|
|
|
5,276
|
|
|
|
(5,298
|
)
|
|
|
(100.4
|
%)
|
Net
Investment Income
Net investment income, which is gross investment income less
investment expenses, was $56.6 million for 2010, compared
with $70.2 million for 2009, a decrease of
$13.6 million or 19.4%.
|
|
|
|
|
Gross investment income was $62.6 million for 2010,
compared with $74.9 million for 2009, a decrease of
$12.3 million or 16.4%. There was no investment income
generated by our limited partnership investments in 2010, but
$8.6 million generated from these investments in 2009.
Excluding distributions from our limited partnership
investments, gross investment income for 2010 decreased
$3.6 million or 5.5% compared to 2009. The remaining
decrease was primarily due to continuing declines in our yield
as interest rates declined throughout 2010. We reduced the
average duration of our investment portfolio in 2010 in order to
maintain a defensive posture in the current low interest rate
environment. We continue to increase our investments in equity
securities and corporate loans, which generally have a higher
yield than traditional fixed income securities to offset the
increased credit risk.
|
Cash and invested assets, net of payable for securities
purchased, increased to $1,712.4 million as of
December 31, 2010 from $1,694.1 million as of
December 31, 2009, an increase of $18.3 million or
1.1%. This increase was primarily due to timing of purchases and
sales of securities.
|
|
|
|
|
Investment expenses were $6.0 million for 2010, compared
with $4.7 million for 2009, an increase of
$1.3 million or 28.2%. The increase was primarily due to
additional fees related to our investments in corporate loans.
|
The average duration of our fixed maturities portfolio was
2.2 years as of December 31, 2010, compared with
2.8 years as of December 31, 2009. Including cash and
short-term investments, the average duration of our fixed
maturities portfolio as of December 31, 2010 and 2009 was
2.1 years. Changes in interest rates can cause principal
payments on certain investments to extend or shorten which can
impact duration. At December 31, 2010, our book yield on
our fixed maturities, not including cash, was 3.92% compared
with 4.34% at December 31, 2009. As of December 31,
2010, our investment portfolio held $180.9 million in
tax-exempt municipals with a book yield of 3.68% and
$64.1 million in taxable municipals with a book yield of
2.99%.
65
Net
Realized Investment Gains
Net realized investment gains were $26.4 million for 2010,
compared with $15.9 million for 2009. The net realized
investment gains for 2010 consist primarily of net gains of
$17.4 million relative to our fixed maturities and $9.5
relative to our equity securities, offset by other than
temporary impairment losses of $0.5 million. The net
realized investment gains for 2009 consist primarily of net
gains of $5.4 million relative to market value changes in
our convertible portfolio and net gains of $16.1 million
relative to our fixed maturities and equity portfolios, offset
by other than temporary impairment losses of $5.6 million.
See Note 5 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for an
analysis of total investment return on an after-tax basis for
the years ended December 31, 2010 and 2009.
Corporate
and Other Operating Expenses
Corporate and other operating expenses consist of outside legal
fees, other professional fees, development costs,
directors fees, management fees, salaries and benefits for
holding company personnel, and taxes incurred which are not
directly related to operations. Corporate and other operating
expenses were $21.1 million for 2010, compared with
$16.8 million for 2009, an increase of $4.4 million or
26.1%. This increase was primarily due to one-time charges
related to the Profit Enhancement Initiative and infrastructure
costs related to IT upgrades, offset by decreases in
professional service fees.
Interest
Expense
Interest expense was $7.0 million and $7.2 million for
2010 and 2009, respectively. The reduction was due to decreases
in LIBOR rates during 2010, which is the basis for interest paid
on the trust preferred debt. See Note 11 of the notes to
the consolidated financial statements in Item 8 of
Part II of this report for details on our debt.
Income
Tax Expense
Income tax expense was $8.9 million for 2010, compared with
$4.3 million for 2009. See Note 9 of the notes to the
consolidated financial statements in Item 8 of Part II
of this report for an analysis of income tax expense between
periods.
Equity
in Net Earnings (Loss) of Partnerships
Equity in net loss of partnerships, net of tax was
$0.02 million for 2010, compared with equity in net
earnings of partnerships, net of tax of $5.3 million for
2009, a decrease of $5.3 million. The income in 2009 was
due to the performances of limited partnership investments which
invest mainly in high yield bonds and corporate loans. All but
the remaining value of $1.1 million of the partnership
interests that generated income in 2009 was redeemed as of
December 31, 2009. The Companys remaining interest of
$1.1 million was liquidated in February 2011.
Net
Income
The factors described above resulted in net income of
$84.9 million in 2010, compared with $75.4 million in
2009, an increase of $9.5 million.
66
Year
Ended December 31, 2009 Compared with the Year Ended
December 31, 2008
Insurance
Operations
The components of loss from underwriting and underwriting ratios
of our Insurance Operations segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
Gross premiums written
|
|
$
|
267,992
|
|
|
$
|
353,130
|
|
|
$
|
(85,138
|
)
|
|
|
(24.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
218,264
|
|
|
$
|
305,479
|
|
|
$
|
(87,215
|
)
|
|
|
(28.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
250,409
|
|
|
$
|
374,174
|
|
|
$
|
(123,765
|
)
|
|
|
(33.1
|
)%
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
146,197
|
|
|
|
293,820
|
|
|
|
(147,623
|
)
|
|
|
(50.2
|
)%
|
Acquisition costs and other underwriting expenses(1)
|
|
|
106,297
|
|
|
|
137,294
|
|
|
|
(30,997
|
)
|
|
|
(22.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from underwriting
|
|
$
|
(2,085
|
)
|
|
$
|
(56,940
|
)
|
|
$
|
54,855
|
|
|
|
(96.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
62.0
|
|
|
|
69.7
|
|
|
|
(7.7
|
)
|
|
|
|
|
Prior accident year
|
|
|
(3.6
|
)
|
|
|
8.8
|
|
|
|
(12.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year
|
|
|
58.4
|
|
|
|
78.5
|
|
|
|
(20.1
|
)
|
|
|
|
|
Expense ratio
|
|
|
42.4
|
|
|
|
36.7
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
100.8
|
|
|
|
115.2
|
|
|
|
(14.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Includes excise tax of $1,342 and $1,871 related to cessions
from our U.S. Insurance Companies to Wind River Reinsurance for
2009 and 2008, respectively. |
Premiums
Gross premiums written, which represents the amount received or
to be received for insurance policies written without reduction
for reinsurance costs or other deductions, was
$268.0 million for 2009, compared with $353.1 million
for 2008, a decrease of $85.1 million or 24.1%. The
decrease was primarily due to a reduction of $35.1 million
due to terminated programs and agents and a reduction of
$50.0 million from price decreases and other market factors.
Net premiums written, which equals gross premiums written less
ceded premiums written, was $218.3 million for 2009,
compared with $305.5 million for 2008, a decrease of
$87.2 million or 28.6%. The decrease was primarily due to
the reduction of gross premiums written noted above.
The ratio of net premiums written to gross premiums written was
81.4% for 2009 and 86.5% for 2008, a decline of 5.1 points,
which was primarily due to $11.5 million of ceded premiums
written related to a new quota share treaty that we executed on
Penn-Americas
property lines of business effective January 1, 2009 and
changes in our mix of business.
Net premiums earned were $250.4 million for 2009, compared
with $374.2 million for 2008, a decrease of
$123.8 million or 33.1%. The decrease was primarily due to
the reductions of net premiums written in recent years.
Property net premiums earned for 2009 and 2008 were
$103.5 million and $137.9 million, respectively.
Casualty net premiums earned for 2009 and 2008 were
$146.9 million and $236.3 million, respectively.
67
Net
Losses and Loss Adjustment Expenses
The loss ratio for our Insurance Operations was 58.4% for 2009
compared with 78.5% for 2008. The loss ratio is a non-GAAP
financial measure that is generally viewed in the insurance
industry as an indicator of underwriting profitability and is
calculated by dividing net losses and loss adjustment expenses
by net premiums earned.
The impact of changes to prior accident years is 12.4 points
resulting from a decrease of net losses and loss adjustment
expenses for prior accident years of $9.1 million in 2009
compared to an increase of net losses and loss adjustment
expenses for prior accident years of $33.0 million in 2008.
When analyzing loss reserves and prior year development, we
consider many factors, including the frequency and severity of
claims, loss credit trends, case reserve settlements that may
have resulted in significant development, and any other
additional or pertinent factors that may impact reserve
estimates.
|
|
|
|
|
In 2009, we reduced our prior accident year loss reserves by
$8.4 million and reduced our allowance for uncollectible
reinsurance by $0.7 million. The reduction of our prior
accident year loss reserves primarily consisted of a
$5.5 million reduction in our property lines, a
$2.9 million reduction in our general liability lines, and
a $4.7 million reduction in our umbrella lines, offset by a
$4.7 million increase in our professional liability lines:
|
|
|
|
|
|
Property: The reduction in the property
lines primarily consisted of reductions related to accident
years 2006 through 2008 due to better than expected loss
emergence in Diamond State brokerage.
|
|
|
|
General Liability: The reduction in the
general liability lines primarily consisted of net reductions of
$13.5 million related to accident years 2006 and prior due
to loss emergence that had been consistently lower than expected
during those years, partially offset by increases of
$10.6 million related to accident years 2007 and 2008 that
were driven by a large claim and an increase in our construction
defect provisions for
Penn-America.
|
|
|
|
Umbrella: The reduction in the umbrella
lines primarily consisted of net reductions of $5.1 million
related to accident years 2007 and prior that were driven by
loss emergence throughout the year that was consistently better
than expected, partially offset by increases of
$0.4 million related to accident year 2008.
|
|
|
|
Professional Liability: The increase to
the professional liability lines primarily consisted of
increases of $10.1 million related to accident years 2007
and 2008 due to an increase in severity, partially offset by net
reductions of $5.4 million primarily related to accident
years 2006 and prior.
|
The reduction in our allowance for uncollectible reinsurance is
primarily due to the decrease in the amount of our carried
reinsurance receivables.
|
|
|
|
|
In 2008, we increased our prior accident year loss reserves by
$29.9 million and increased our allowance for uncollectible
reinsurance by $3.1 million. The loss reserves increase of
$29.9 million consisted of increases of $15.9 million
in our general liability lines and $15.7 million in our
professional liability lines, offset by reductions of
$1.2 million in our property lines and $0.5 million in
our umbrella lines.
|
|
|
|
|
|
General Liability: The increase to the
general liability lines consisted of increases of
$20.5 million related to accident years 2006, 2007 and 2001
and prior, offset by reductions of $4.6 million related to
accident years 2002 through 2005. The increases in 2006 and 2007
are primarily related to greater severity.
|
|
|
|
Professional Liability: The increase to
the professional liability lines consisted of increases of
$17.7 million related to accident years 2006 and 2007,
offset by reductions of $2.0 million related to accident
years 2005 and prior. The increases in 2006 and 2007 are
primarily related to greater severity.
|
|
|
|
Property: The reduction in property
lines consisted of reductions of $2.6 million related to
accident years 2008 and 2003 and prior, offset by increases of
$1.4 million primarily related to accident years 2004
through 2006.
|
|
|
|
Umbrella: The reduction in umbrella
lines was primarily related to accident years 2004 and prior.
|
68
The current accident year loss ratio decreased 7.7 points in
2009 primarily due to a decrease in both the property and
casualty loss ratios:
|
|
|
|
|
The current accident year property loss ratio decreased 13.9
points from 69.2% in 2008 to 55.3% in 2009, which consists of an
11.4 point decrease in the catastrophe loss ratio from 15.3% in
2008 to 3.9% in 2009 and a 2.5 point decrease in the
non-catastrophe loss ratio from 53.9% in 2008 to 51.4% in 2009.
Catastrophe losses were $4.0 million and $21.1 million
in 2009 and 2008, respectively. Catastrophe losses in 2008
included net loss and loss adjustment expenses related to
Hurricanes Ike and Gustav, which occurred in September 2008, and
storms in the Midwest that occurred in the first half of 2008.
Property net premiums earned for 2009 and 2008 were
$103.5 million and $137.9 million, respectively.
|
|
|
|
The current accident year casualty loss ratio decreased 3.2
points from 70.0% in 2008 to 66.8% in 2009 primarily due to
changes in our mix of business. Casualty net premiums earned for
2009 and 2008 were $146.9 million and $236.3 million,
respectively.
|
Net losses and loss adjustment expenses were $146.2 million
for 2009, compared with $293.8 million for 2008, a decrease
of $147.6 million or 50.2%. Excluding the $9.1 million
reduction of net losses and loss adjustment expenses for prior
accident years in 2009 and the $33.0 million increase of
net losses and loss adjustment expenses for prior accident years
in 2008, the current accident year net losses and loss
adjustment expenses were $155.3 million and
$260.8 million for 2009 and 2008, respectively. This
decrease is primarily attributable to a decrease in net premiums
earned and the decline in the items noted in the loss ratio as
described above.
Acquisition
Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were
$106.3 million for 2009, compared with $137.3 million
for 2008, a decrease of $31.0 million or 22.6%. The
decrease is due to a $32.5 million decrease in acquisition
costs, offset by a $1.5 million increase in other
underwriting expenses.
|
|
|
|
|
The decrease in acquisition costs is primarily due to a decrease
in commissions resulting from a decrease in net premiums earned.
|
|
|
|
The increase in other underwriting expenses is primarily due to
the incurrence of infrastructure costs related to new product
development, information technology upgrades, and additional
office locations.
|
Expense
and Combined Ratios
The expense ratio for our Insurance Operations was 42.4% for
2009, compared with 36.7% for 2008. The expense ratio is a
non-GAAP financial measure that is calculated by dividing the
sum of acquisition costs and other underwriting expenses by net
premiums earned. The increase in the expense ratio is primarily
due to the decrease in net premiums earned noted above.
The combined ratio for our Insurance Operations was 100.8% for
2009, compared with 115.2% for 2008. The combined ratio is a
non-GAAP financial measure and is the sum of our loss and
expense ratios. Excluding the impact of a $9.1 million
reduction of prior accident year loss reserves in 2009 and a
$33.0 million increase of prior accident year loss reserves
in 2008, the combined ratio decreased from 106.4% for 2008 to
104.4% for 2009. See discussion of loss ratio included in
Net Losses and Loss Adjustment Expenses above and
discussion of expense ratio in preceding paragraph above for an
explanation of this decrease.
Loss
from underwriting
The factors described above resulted in a loss from underwriting
for our Insurance Operations of $2.1 million for 2009,
compared with a loss from underwriting of $56.9 million for
2008, a decrease in the loss of $54.8 million.
69
Reinsurance
Operations
The components of income (loss) from underwriting and
underwriting ratios of our Reinsurance Operations segment are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
Gross premiums written
|
|
$
|
73,007
|
|
|
$
|
25,570
|
|
|
$
|
47,437
|
|
|
|
185.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
72,731
|
|
|
$
|
3,601
|
|
|
$
|
69,130
|
|
|
|
1,919.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
51,265
|
|
|
$
|
8,334
|
|
|
$
|
42,931
|
|
|
|
515.1
|
%
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
23,185
|
|
|
|
11,354
|
|
|
|
11,831
|
|
|
|
104.2
|
%
|
Acquisition costs and other underwriting expenses
|
|
|
13,632
|
|
|
|
5,473
|
|
|
|
8,159
|
|
|
|
149.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from underwriting
|
|
$
|
14,448
|
|
|
$
|
(8,493
|
)
|
|
$
|
22,941
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
45.2
|
|
|
|
112.8
|
|
|
|
(67.6
|
)
|
|
|
|
|
Prior accident year
|
|
|
|
|
|
|
23.4
|
|
|
|
(23.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year loss ratio
|
|
|
45.2
|
|
|
|
136.2
|
|
|
|
(91.0
|
)
|
|
|
|
|
Expense ratio
|
|
|
26.6
|
|
|
|
65.7
|
|
|
|
(39.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
71.8
|
|
|
|
201.9
|
|
|
|
(130.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M Not meaningful
Premiums
Gross premiums written, which represents the amount received or
to be received for reinsurance agreements written without
reduction for reinsurance costs or other deductions, was
$73.0 million for 2009, compared with $25.6 million
for 2008, an increase of $47.4 million or 185.5%. The
increase was primarily due to several new reinsurance treaties
that commenced during the first quarter of 2009. One of the
treaties we entered into during the first quarter was a
catastrophe book of business.
Net premiums written, which equals gross premiums written less
ceded premiums written, was $72.7 million for 2009,
compared with $3.6 million for 2008, an increase of
$69.1 million or 1,919.7%. The increase was primarily due
to several new reinsurance treaties that commenced during the
first quarter of 2009.
The ratio of net premiums written to gross premiums written was
99.6% for 2009 and 14.1% for 2008, an increase of 85.5 points,
which was primarily due to changes in our mix of business. In
2008, one of our largest treaties was 95% retro-ceded.
Net premiums earned were $51.3 million for 2009, compared
with $8.3 million for 2008, an increase of
$43.0 million or 515.1%. The increase was primarily due to
several new reinsurance treaties that commenced during the first
quarter of 2009 and a decrease in the amount of gross premiums
retro-ceded to our reinsurers in 2008. Property net premiums
earned for 2009 and 2008 were $23.5 million and
$0.6 million, respectively. Casualty net premiums earned
for 2009 and 2008 were $27.8 million and $7.7 million,
respectively.
Net
Losses and Loss Adjustment Expenses
The loss ratio for our Reinsurance Operations was 45.2% for 2009
compared with 136.2% for 2008. The loss ratio is a non-GAAP
financial measure that is generally viewed in the insurance
industry as an indicator of underwriting profitability and is
calculated by dividing net losses and loss adjustment expenses
by net premiums earned.
70
The impact of changes to prior accident years is a reduction of
23.4 points resulting from an increase of net losses and loss
adjustment expenses for prior accident years of
$0.03 million in 2009 and an increase of net losses and
loss adjustment expenses for prior accident years of
$1.9 million in 2008. When analyzing loss reserves and
prior year development, we consider many factors, including the
frequency and severity of claims, loss credit trends, case
reserve settlements that may have resulted in significant
development, and any other additional or pertinent factors that
may impact reserve estimates.
|
|
|
|
|
In 2009, we increased our prior accident year loss reserves by
$0.03 million, which primarily consisted of increases in
our general liability lines. The increase to the general
liability lines was related to accident years 2007 and 2008.
|
|
|
|
In 2008, we increased our prior accident year loss reserves by
$1.9 million, which primarily consisted of an increase of
$2.6 million in our professional liability lines, offset by
reductions of $0.6 million in our general liability lines
and $0.1 million in our property lines. The increase to the
professional liability lines was related to accident year 2008.
The reduction to the general liability lines was related to
accident years 2004 through 2006. The reduction in the property
lines was related to accident year 2007.
|
In 2009, the current accident year loss ratio decreased 67.6
points from 112.8% in 2008 to 45.2% in 2009. In 2008, our book
was primarily comprised of casualty business that included a
treaty that was not performing profitably and that has since
been terminated. In 2009, our book is primarily comprised of
approximately 50% casualty and 50% property business, based on
net earned premiums.
Net losses and loss adjustment expenses were $23.2 million
for 2009, compared with $11.3 million for 2008, an increase
of $11.9 million or 104.2%. Excluding the
$0.03 million increase of net losses and loss adjustment
expenses for prior accident years in 2009 and the
$1.9 million increase of net losses and loss adjustment
expenses for prior accident years in 2008, the current accident
year net losses and loss adjustment expenses were
$23.2 million and $9.4 million for 2009 and 2008,
respectively. This increase is primarily attributable to an
increase in net premiums earned, which increased from
$8.3 million in 2008 to $51.3 million in 2009, offset
partially by an improved loss ratio in 2009 compared with 2008
as described below.
Acquisition
Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were
$13.6 million for 2009, compared with $5.5 million for
2008, an increase of $8.1 million or 149.1%. The increase
is due to a $7.8 million increase in acquisition costs and
a $0.3 million increase in other underwriting expenses.
|
|
|
|
|
The increase in acquisition costs is primarily due to an
increase in commissions resulting from an increase in net
premiums earned.
|
|
|
|
The increase in other underwriting expenses is primarily due to
an increase in property and office costs, legal fees, and
professional services, partially offset by reductions in total
compensation expenses.
|
Expense
and Combined Ratios
The expense ratio for our Reinsurance Operations was 26.6% for
2009, compared with 65.7% for 2008. The expense ratio is a
non-GAAP financial measure that is calculated by dividing the
sum of acquisition costs and other underwriting expenses by net
premiums earned. The decrease in the expense ratio is primarily
due to the increase in net premiums earned noted above.
The combined ratio for our Reinsurance Operations was 71.8% for
2009, compared with 201.9% for 2008. The combined ratio is a
non-GAAP financial measure and is the sum of our loss and
expense ratios. Excluding the impact of a $0.03 million
increase of prior accident year loss reserves in 2009 and a
$1.9 million increase of prior accident year loss reserves
in 2008, the combined ratio decreased from 178.5% for 2008 to
71.8% for 2009. See discussion of loss ratio included in
Net Losses and Loss Adjustment Expenses above and
discussion of expense ratio in preceding paragraph above for an
explanation of this increase.
71
Income
(Loss) from underwriting
The factors described above resulted in income from underwriting
for our Reinsurance Operations of $14.4 million for 2009,
compared with a loss from underwriting of $8.5 million for
2008, an increase in income of $22.9 million.
Unallocated
Corporate Items
The following items are not allocated to our Insurance
Operations or Reinsurance Operations segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
Net investment income
|
|
$
|
70,214
|
|
|
$
|
67,830
|
|
|
$
|
2,384
|
|
|
|
3.5
|
%
|
Net realized investment gains (losses)
|
|
|
15,862
|
|
|
|
(50,259
|
)
|
|
|
66,121
|
|
|
|
N/M
|
|
Corporate and other operating expenses
|
|
|
(16,752
|
)
|
|
|
(13,918
|
)
|
|
|
(2,834
|
)
|
|
|
20.4
|
%
|
Interest expense
|
|
|
(7,216
|
)
|
|
|
(8,657
|
)
|
|
|
1,441
|
|
|
|
(16.6
|
)%
|
Impairments of goodwill and intangible assets
|
|
|
|
|
|
|
(96,449
|
)
|
|
|
96,449
|
|
|
|
100.0
|
%
|
Income tax benefit (expense)
|
|
|
(4,310
|
)
|
|
|
29,216
|
|
|
|
(33,526
|
)
|
|
|
N/M
|
|
Equity in net income (loss) of partnership, net of tax
|
|
|
5,276
|
|
|
|
(3,890
|
)
|
|
|
9,166
|
|
|
|
N/M
|
|
N/M Not meaningful
Net
Investment Income
Net investment income, which is gross investment income less
investment expenses, was $70.2 million for 2009, compared
with $67.8 million for 2008, an increase of
$2.4 million or 3.5%.
|
|
|
|
|
Gross investment income, excluding realized gains and losses,
was $74.9 million for 2009, compared with
$72.8 million for 2008, an increase of $2.1 million or
2.8%. The increase was primarily due to gross investment income
of $8.6 million generated by liquidating some of our
limited partnership investments, offset by reductions due to
decreases in interest rates. There was no investment income
generated by our limited partnership investments for 2008.
Excluding distributions from our limited partnership
investments, gross investment income for 2009 decreased 9.0%
compared to 2008. This decrease is due to reductions in interest
rates. Cash and invested assets, net of payable for securities
purchased of $37.3 million, increased to
$1,694.1 million as of December 31, 2009 from
$1,598.8 million as of December 31, 2008, an increase
of $95.3 million or 6.0%. This increase was primarily due
to proceeds from the Rights Offering. A portion of these
proceeds were invested in a limited partnership which resulted
in $1.7 million of equity in net income of partnerships in
the consolidated statement of operations. This ownership was
redeemed in December 2009. The remaining portion of the proceeds
were invested short-term investments until later in the year at
which time they were invested in assets which are expected to
produce higher yields in 2010.
|
|
|
|
Investment expenses were $4.7 million for 2009, compared
with $5.0 million for 2008, a decrease of $0.3 million
or 6.3%. The decrease was primarily due to the decrease in trust
fees and a change in fee structure resulting from a change in
investment managers.
|
The average duration of our fixed maturities portfolio was
2.8 years as of December 31, 2009, compared with
3.1 years as of December 31, 2008. Including cash and
short-term investments, the average duration of our investments
as of December 31, 2009 and 2008 was 2.5 years. At
December 31, 2009, our book yield on our fixed maturities,
not including cash, was 4.34% compared with 4.95% at
December 31, 2008. The book yield on the
$194.0 million of municipal bonds in our portfolio was
3.88% at December 31, 2009.
Net
Realized Investment Gains (Losses)
Net realized investment gains were $15.9 million for 2009,
compared with net realized investment losses of
$50.3 million for 2008. The net realized investment gains
for 2009 consist primarily of net gains of $5.4 million
relative to market value changes in our convertible portfolio
and net gains of $16.1 million relative to our fixed
72
maturities and equity portfolios, offset by other than temporary
impairment losses of $5.6 million. The net realized
investment losses for 2008 consist primarily of net losses of
$5.2 million relative to market value declines in our
convertible portfolios, other than temporary impairment losses
of $32.1 million, net losses of $5.9 million from the
sale of Fannie Mae and Freddie Mac preferred stock, and net
losses of $6.8 million from the sale of Lehman Brothers
corporate bonds.
See Note 5 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for an
analysis of total investment return on an after-tax basis for
the years ended December 31, 2009 and 2008.
Corporate
and Other Operating Expenses
Corporate and other operating expenses consist of outside legal
fees, other professional fees, directors fees, management
fees, salaries and benefits for holding company personnel, and
taxes incurred which are not directly related to operations.
Corporate and other operating expenses were $16.8 million
for 2009, compared with $13.9 million for 2008, an increase
of $2.8 million or 20.4%. This increase was primarily due
to professional fees related to the re-domestication and other
corporate initiatives.
Interest
Expense
Interest expense was $7.2 million and $8.7 million for
2009 and 2008, respectively. The reduction was due to retiring
$15.5 million of trust preferred debt in May 2008, as well
as a reduction in LIBOR rates during 2009, which is the basis
for interest paid on the trust preferred debt. See Note 11
of the notes to the consolidated financial statements in
Item 8 of Part II of this report for details on our
debt.
Impairments
of Goodwill and Intangible Assets
Impairments of goodwill and intangible assets were
$96.4 million for 2008. There were no impairments in 2009.
See Note 7 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for
details on our goodwill and intangible asset impairments.
Income
Tax Expense (Benefit)
Income tax expense was $4.3 million for 2009, compared with
income tax benefit of $29.3 million for 2008. See
Note 9 of the notes to the consolidated financial
statements in Item 8 of Part II of this report for an
analysis of income tax expense between periods.
Equity
in Net Earnings (Loss) of Partnerships
Equity in net earnings of partnerships, net of tax was
$5.3 million for 2009, compared with equity in net loss of
partnerships, net of tax of $3.9 million for 2008, an
increase in income of $9.2 million. The change from a loss
in 2008 to income in 2009 was due to the performances of limited
partnership investments which invest mainly in high yield bonds
and corporate loans.
Net
Income (Loss)
The factors described above resulted in net income of
$75.4 million for 2009, compared with net loss of
$141.6 million for 2008, an increase in income of
$217.0 million.
Liquidity
and Capital Resources
Sources
and Uses of Funds
Global Indemnity is a holding company. Its principal asset is
its ownership of the shares of its direct and indirect
subsidiaries, including United National Insurance Company,
Diamond State Insurance Company, United National Specialty
Insurance Company, United National Casualty Insurance Company,
Wind River Reinsurance,
Penn-America
Insurance Company, Penn-Star Insurance Company, and Penn-Patriot
Insurance Company.
73
The principal source of cash that Global Indemnity, Global
Indemnity Group, Inc. and AIS need to meet their short term and
long term liquidity needs, including the payment of corporate
expenses, includes dividends and other permitted disbursements
from their direct and indirect subsidiaries and reimbursement
for equity awards granted to employees. The principal sources of
funds at these direct and indirect subsidiaries include
underwriting operations, investment income, and proceeds from
sales and redemptions of investments. Funds are used principally
by these operating subsidiaries to pay claims and operating
expenses, to make debt payments, to purchase investments, and to
make dividend payments. The future liquidity of Global
Indemnity, Global Indemnity Group, Inc. and AIS is dependent on
the ability of their subsidiaries to pay dividends. Currently,
Global Indemnity, Global Indemnity Group, Inc. and AIS have no
planned capital expenditures that could have a material impact
on their short-term or long-term liquidity needs.
In May 2009, we received gross proceeds of $100.1 million
from the issuance of 17.2 million and 11.4 million of
our Class A and Class B ordinary shares, respectively,
in conjunction with the Rights Offering that was announced in
March 2009. The net proceeds of $91.8 million were used to
support strategic initiatives, enhance liquidity and financial
flexibility, and for other general corporate purposes. See
Note 12 to the consolidated financial statements in
Item 8 of Part II of this report for details
concerning the Rights Offering.
We owe $90.0 million to unrelated third parties in
guaranteed senior notes. On July 20, 2011 and on each
anniversary thereafter to and including July 20, 2014, we
are required to prepay $18.0 million of the principal
amount. On July 20, 2015, we are required to pay any
remaining outstanding principal amount on the notes. The notes
are guaranteed by Global Indemnity (Cayman) Ltd. In the event
that debt service obligations were not satisfied, Global
Indemnity Group would be precluded from paying dividends to
U.A.I. (Luxembourg) Investment S.à r.l., its parent company.
AIS owes $30.9 million to affiliated parties in junior
subordinated debentures, which are due in 2033. Interest is
payable quarterly. See Note 11 of the notes to consolidated
financial statements in Item 8 of Part II of this
report for the terms of these notes. In the event that debt
service obligations were not satisfied, AIS would be precluded
from paying dividends to Global Indemnity Group, its parent
company.
In July 2008, United America Indemnity, Ltd. completed its
purchase of $100.0 million of its Class A ordinary
shares as part of two $50.0 million share buyback programs
that were initiated in November 2007 and February 2008,
respectively. Wind River Reinsurance loaned United America
Indemnity, Ltd. funds to enable it to execute the buybacks. In
June 2008, Wind River Reinsurance declared and paid a dividend
of $50.0 million to United America Indemnity, Ltd. United
America Indemnity, Ltd. used proceeds from the dividend to repay
a portion of the loan.