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2013 AnnuAl RepoRt
GLOBAL INDEMNITY
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2013 AnnuAl RepoRt
DeAR Fellow ShAReholDeRS
Starting in 2011 and continuing through 2012,
The insurance marketplace is extremely
Global Indemnity determined to (1) focus its
competitive; the insurance industry is highly
operations on areas where the company,
regulated; organic growth in the industry is
including its treaty partners, maintains
inhibited by the tepid recovery from the
particularly strong underwriting expertise and
2007-2009 Great Recession; and interest
can provide the insurance marketplace with
rates—that directly impact earnings from fixed
differentiated products or service offerings and
income securities, which are a significant driver
(2) exit lines of business that did not satisfy
of an insurance company’s profitability—
this criteria. The “cost” of this business
still continue to be constrained by the
realignment was a substantial reduction in the
Federal Reserve.
company’s premium volumes and operating
cash flow over the course of 2011 and 2012.
Despite these external challenges, however,
we believe the future holds promise for property
Fortunately, in 2013, the company began to
and casualty insurance companies that are
realize returns from its “investment” in the
disciplined, innovative underwriters who
strategic realignment. Profitability was
anticipate and satisfy the needs of the
ABOUT GLOBAL INDEMNITY...
With U.S. headquarters in Philadelphia, PA, Global Indemnity plc (NASDAQ: GBLI) is a national and
international niche supplier of excess and surplus lines, specialty
significantly enhanced as reflected by the
independent producer community, and those
property and casualty insurance, and reinsurance. The company’s
company’s 96% combined ratio (an eight
that are dedicated to serving policyholders.
products and services are offered through several direct and
indirect wholly-owned subsidiary insurance and reinsurance
companies. With more than 250 employees, Global Indemnity
offers underwriting, claims, and actuarial support to its multi-
distribution field operations. First chartered in 2003, the name
of the company was changed in 2010 when it was re-domiciled
under the laws of Ireland.
percentage point improvement), a 40% jump
Accordingly, Global Indemnity, which aspires
in operating income, and a 117% increase in
to fulfill these worthy objectives, is decidedly
pre-tax income to $62.7 million. Moreover,
enthusiastic about its prospective opportunities.
the company grew net written premiums by
24%, advanced operating cash flow by $30
million, and ended the year with shareholders’
equity of $873 million and book value per
share of $34.65.
Saul A. Fox
Chairman
Global Indemnity plc
Cynthia Y. Valko
Chief Executive Officer
Global Indemnity plc
Just For PDF_Layout 1 4/20/14 10:50 AM Page 2
2013 AnnuAl RepoRt
DeAR Fellow ShAReholDeRS
Starting in 2011 and continuing through 2012,
The insurance marketplace is extremely
Global Indemnity determined to (1) focus its
competitive; the insurance industry is highly
operations on areas where the company,
regulated; organic growth in the industry is
including its treaty partners, maintains
inhibited by the tepid recovery from the
particularly strong underwriting expertise and
2007-2009 Great Recession; and interest
can provide the insurance marketplace with
rates—that directly impact earnings from fixed
differentiated products or service offerings and
income securities, which are a significant driver
(2) exit lines of business that did not satisfy
of an insurance company’s profitability—
this criteria. The “cost” of this business
still continue to be constrained by the
realignment was a substantial reduction in the
Federal Reserve.
company’s premium volumes and operating
cash flow over the course of 2011 and 2012.
Despite these external challenges, however,
we believe the future holds promise for property
Fortunately, in 2013, the company began to
and casualty insurance companies that are
realize returns from its “investment” in the
disciplined, innovative underwriters who
strategic realignment. Profitability was
anticipate and satisfy the needs of the
ABOUT GLOBAL INDEMNITY...
With U.S. headquarters in Philadelphia, PA, Global Indemnity plc (NASDAQ: GBLI) is a national and
international niche supplier of excess and surplus lines, specialty
significantly enhanced as reflected by the
independent producer community, and those
property and casualty insurance, and reinsurance. The company’s
company’s 96% combined ratio (an eight
that are dedicated to serving policyholders.
products and services are offered through several direct and
indirect wholly-owned subsidiary insurance and reinsurance
companies. With more than 250 employees, Global Indemnity
offers underwriting, claims, and actuarial support to its multi-
distribution field operations. First chartered in 2003, the name
of the company was changed in 2010 when it was re-domiciled
under the laws of Ireland.
percentage point improvement), a 40% jump
Accordingly, Global Indemnity, which aspires
in operating income, and a 117% increase in
to fulfill these worthy objectives, is decidedly
pre-tax income to $62.7 million. Moreover,
enthusiastic about its prospective opportunities.
the company grew net written premiums by
24%, advanced operating cash flow by $30
million, and ended the year with shareholders’
equity of $873 million and book value per
share of $34.65.
Saul A. Fox
Chairman
Global Indemnity plc
Cynthia Y. Valko
Chief Executive Officer
Global Indemnity plc
FNL 2013 GLB Indemnity Annual Report Txt_Layout 1 4/20/14 10:41 AM Page 2
Our Continuing
Commitment to
ProfitableGrowth
Growth for the sake of growth may yield immediate benefits for some
organizations. Global Indemnity plc, however, takes a different view—
a strategy of ProfitableGrowth that leverages the company’s singular
knowledge, skills, and experience to achieve not simply short-term
results, but a record of success that can be sustained into the future.
Global Indemnity’s performance over the past year is a confirmation
of this strategy.
Finding Profit in overlooked opportunities
As they grow ever larger, well-established insurers and reinsurers often lose
the ability to spot and seize unexpected opportunities. Global Indemnity
remains alert and responsive to markets and distribution channels
overlooked by other providers. The company works with its agents to
be innovative in serving their customers and imaginative in seeking new
opportunities that result in selecting quality risks. As a result, Global
Indemnity provides unique, custom-designed products and services
across six domestic lines of specialty business—small business; property
brokerage; commercial automobile; vacant dwelling; collectibles; and
equine programs.
Building Mutually Beneficial relationships
Global Indemnity’s foundation of profitable growth extends beyond the
company itself, encompassing an expanding multi-channel distribution
network of select agents and brokers. Because it has believed that its success
rests upon the success of its producers and partners, Global Indemnity has
developed programs, systems, and technologies designed to make interaction
between the company and the network as smooth and seamless as possible.
These operational efficiencies include everything from developing a faster,
higher-quality policy issuance platform that gives agents more time and
freedom to quote and bind business, to decentralizing underwriters into four
regional centers, bringing them closer to agents and brokers in local markets.
Focusing on Financial Stability
In today’s volatile economy, a company’s core strengths can be an invaluable
anchor and source of stability. Global Indemnity is strong in many areas:
A seasoned, experienced, and proven management team. Knowledgeable
underwriters. A portfolio positioned to both profit from prosperity and
adversity. A solid balance sheet. And an “A” (Excellent) XI A.M. Best rating
that speaks to its fundamental stability. As it continues to expand business
lines with proven profitability, respond to market opportunities, and nurture
producer relationships, Global Indemnity looks forward to extending its
record of ProfitableGrowth.
With confidence and momentum inspired
by last year’s performance, the company looks forward
to new challenges and opportunities.
2
3
FNL 2013 GLB Indemnity Annual Report Txt_Layout 1 4/20/14 10:41 AM Page 2
Our Continuing
Commitment to
ProfitableGrowth
Growth for the sake of growth may yield immediate benefits for some
organizations. Global Indemnity plc, however, takes a different view—
a strategy of ProfitableGrowth that leverages the company’s singular
knowledge, skills, and experience to achieve not simply short-term
results, but a record of success that can be sustained into the future.
Global Indemnity’s performance over the past year is a confirmation
of this strategy.
Finding Profit in overlooked opportunities
As they grow ever larger, well-established insurers and reinsurers often lose
the ability to spot and seize unexpected opportunities. Global Indemnity
remains alert and responsive to markets and distribution channels
overlooked by other providers. The company works with its agents to
be innovative in serving their customers and imaginative in seeking new
opportunities that result in selecting quality risks. As a result, Global
Indemnity provides unique, custom-designed products and services
across six domestic lines of specialty business—small business; property
brokerage; commercial automobile; vacant dwelling; collectibles; and
equine programs.
Building Mutually Beneficial relationships
Global Indemnity’s foundation of profitable growth extends beyond the
company itself, encompassing an expanding multi-channel distribution
network of select agents and brokers. Because it has believed that its success
rests upon the success of its producers and partners, Global Indemnity has
developed programs, systems, and technologies designed to make interaction
between the company and the network as smooth and seamless as possible.
These operational efficiencies include everything from developing a faster,
higher-quality policy issuance platform that gives agents more time and
freedom to quote and bind business, to decentralizing underwriters into four
regional centers, bringing them closer to agents and brokers in local markets.
Focusing on Financial Stability
In today’s volatile economy, a company’s core strengths can be an invaluable
anchor and source of stability. Global Indemnity is strong in many areas:
A seasoned, experienced, and proven management team. Knowledgeable
underwriters. A portfolio positioned to both profit from prosperity and
adversity. A solid balance sheet. And an “A” (Excellent) XI A.M. Best rating
that speaks to its fundamental stability. As it continues to expand business
lines with proven profitability, respond to market opportunities, and nurture
producer relationships, Global Indemnity looks forward to extending its
record of ProfitableGrowth.
With confidence and momentum inspired
by last year’s performance, the company looks forward
to new challenges and opportunities.
2
3
FNL 2013 GLB Indemnity Annual Report Txt_Layout 1 4/20/14 10:41 AM Page 4
Financial Highlights
(Dollars in thousands, except per share and ratio data)
Stock Price as of December 31, 2013
Exchange/Symbol: GBLI
Closing Price: $25.30
52-Week Range: $20.06 - $27.57
Market Capitalization: $637.6M
Price/Book Ratio: 0.73
2010 2011 2012 2013
Gross Written Premium
$345,763 $307,903 $244,053 $290,723
Income Statement
Net Earned Premiums
286,774 297,854 238,862 248,722
Net Investment Income
56,623 53,112 47,557 37,209
Net Realized Gains
26,437 21,473 6,755 27,412
Other Income/(Loss)
293 12,581 (158) 5,791
Total Revenues
Total Expenses
370,127 385,020 293,016 319,134
285,256 423,358 258,259 257,444
Net Income/(Loss)
84,871 (38,338) 34,757 61,690
Earnings/(Loss) Per Share (Diluted) $2.80 $(1.27) $1.30 $2.45
Net Operating Income/(Loss)
65,467 (53,149) 29,309 40,453
One Company.
Multiple Markets.
As our name signifies, Global Indemnity is a worldwide company with operating units in the United States and Bermuda.
The units under our banner provide both admitted and non-admitted specialty property and casualty insurance in the
United States, as well as reinsurance internationally. Global Indemnity offers diverse and expanding product lines
distributed through a wide network. This combination gives us outstanding options on how and where to deploy our
strong capital reserves to achieve ProfitableGrowth.
Our companies hold admitted business and surplus lines qualifications in all 50 states and the District of Columbia.
Global Indemnity continues to maintain “A” (Excellent) XI A.M. Best ratings, a source of pride and a tribute to the
professionalism and skill of our employees.
u.S. Brokerage oPeratIonS
Diamond State Group
A specially selected network of wholesale brokers distributes
property and commercial auto products throughout the U.S.
InternatIonal reInSurance
oPeratIonS
Wind River Reinsurance Company, Ltd.
With headquarters in Bermuda, Wind River is
a treaty and facultative reinsurer of excess and
surplus lines insurance and specialty property
and casualty insurance.
windriver.bm
Operating Income/(Loss) Per Share (Diluted) $2.16 $(1.76) $1.10 $1.61
diamondstategroup.com
Balance Sheet
Total Assets
Shareholders’ Equity
Book Value Per Share
GAAP Ratios
Combined Ratio
2,290,728 2,072,916 1,903,703 1,911,779
924,769 839,063 806,618 873,280
$30.46 $29.06 $32.15 $34.65
86.6 134.3 104.2 96.0
Market Capitalization (As of year end) 620,901 572,533 555,293 637,621
134.3
86.6
104.2
96.0
150.0
120.0
90.0
60.0
30.0
0.0
$40
$30
$20
$10
$0
$30.46
$29.06
$32.15
$34.65
2010
2011
2012
2013
2010
2011
2012
2013
Combined Ratio
Book Value Per Share
u.S. BInDIng oPeratIonS
Penn-America Group
Property and casualty products, specifically for small commercial
businesses, are distributed through an exclusive network of
wholesale general agents with specific binding authority.
penn-america.com
United National Group
Program administrators distribute property and general
liability products, focusing primarily on specific classes with
a concentration on the program market.
unitednat.com
u.S. agency oPeratIonS
J.H. Ferguson & Associates, LLC
This preeminent property and casualty insurance wholesaler
specializes in vacant properties, renovations, and builders risk
utilizing web-based technology—VacantExpress.com®.
jhferg.com
Collectibles Insurance Services, LLC
Insuring collectibles such as comic books, sports memorabilia,
and stamps is the focus of this specialty retail agency.
collectinsure.com
4
5
FNL 2013 GLB Indemnity Annual Report Txt_Layout 1 4/20/14 10:41 AM Page 4
Financial Highlights
(Dollars in thousands, except per share and ratio data)
Stock Price as of December 31, 2013
Exchange/Symbol: GBLI
Closing Price: $25.30
52-Week Range: $20.06 - $27.57
Market Capitalization: $637.6M
Price/Book Ratio: 0.73
2010 2011 2012 2013
Gross Written Premium
$345,763 $307,903 $244,053 $290,723
Income Statement
Net Earned Premiums
286,774 297,854 238,862 248,722
Net Investment Income
56,623 53,112 47,557 37,209
Net Realized Gains
26,437 21,473 6,755 27,412
Other Income/(Loss)
293 12,581 (158) 5,791
Total Revenues
Total Expenses
370,127 385,020 293,016 319,134
285,256 423,358 258,259 257,444
Net Income/(Loss)
84,871 (38,338) 34,757 61,690
Earnings/(Loss) Per Share (Diluted) $2.80 $(1.27) $1.30 $2.45
Net Operating Income/(Loss)
65,467 (53,149) 29,309 40,453
One Company.
Multiple Markets.
As our name signifies, Global Indemnity is a worldwide company with operating units in the United States and Bermuda.
The units under our banner provide both admitted and non-admitted specialty property and casualty insurance in the
United States, as well as reinsurance internationally. Global Indemnity offers diverse and expanding product lines
distributed through a wide network. This combination gives us outstanding options on how and where to deploy our
strong capital reserves to achieve ProfitableGrowth.
Our companies hold admitted business and surplus lines qualifications in all 50 states and the District of Columbia.
Global Indemnity continues to maintain “A” (Excellent) XI A.M. Best ratings, a source of pride and a tribute to the
professionalism and skill of our employees.
u.S. Brokerage oPeratIonS
Diamond State Group
A specially selected network of wholesale brokers distributes
property and commercial auto products throughout the U.S.
InternatIonal reInSurance
oPeratIonS
Wind River Reinsurance Company, Ltd.
With headquarters in Bermuda, Wind River is
a treaty and facultative reinsurer of excess and
surplus lines insurance and specialty property
and casualty insurance.
windriver.bm
Operating Income/(Loss) Per Share (Diluted) $2.16 $(1.76) $1.10 $1.61
diamondstategroup.com
Balance Sheet
Total Assets
Shareholders’ Equity
Book Value Per Share
GAAP Ratios
Combined Ratio
2,290,728 2,072,916 1,903,703 1,911,779
924,769 839,063 806,618 873,280
$30.46 $29.06 $32.15 $34.65
86.6 134.3 104.2 96.0
Market Capitalization (As of year end) 620,901 572,533 555,293 637,621
134.3
86.6
104.2
96.0
150.0
120.0
90.0
60.0
30.0
0.0
$40
$30
$20
$10
$0
$30.46
$29.06
$32.15
$34.65
2010
2011
2012
2013
2010
2011
2012
2013
Combined Ratio
Book Value Per Share
u.S. BInDIng oPeratIonS
Penn-America Group
Property and casualty products, specifically for small commercial
businesses, are distributed through an exclusive network of
wholesale general agents with specific binding authority.
penn-america.com
United National Group
Program administrators distribute property and general
liability products, focusing primarily on specific classes with
a concentration on the program market.
unitednat.com
u.S. agency oPeratIonS
J.H. Ferguson & Associates, LLC
This preeminent property and casualty insurance wholesaler
specializes in vacant properties, renovations, and builders risk
utilizing web-based technology—VacantExpress.com®.
jhferg.com
Collectibles Insurance Services, LLC
Insuring collectibles such as comic books, sports memorabilia,
and stamps is the focus of this specialty retail agency.
collectinsure.com
4
5
FNL 2013 GLB Indemnity Annual Report Txt_Layout 1 4/20/14 10:41 AM Page 6
Saul A. Fox
Chairman
Global Indemnity plc
Cynthia Y. Valko
Chief Executive Officer
Global Indemnity plc
Clockwise
from top left:
Stephen A. Cozen
James W. Crystal
John H. Howes
Chad A. Leat
Seth J. Gersch
6
Board Members
& Officers
BOARD MEMBERS
Saul A. Fox, Chairman (3)(4)(5)
Stephen A. Cozen (2)(3)(6)
Founder & Chairman
Cozen O' Connor
James W. Crystal (1)(3)(5)
Chairman & Chief Executive Officer
Frank Crystal & Company
Seth J. Gersch (1)(4)(5)
Advisory Panel
Fox Paine & Company, LLC
John H. Howes (1)(2)(6)
Director
Satec srl
Chad A. Leat (2)(3)(6)
Vice Chairman of Global Banking
Citigroup
Cynthia Y. Valko (4)
Chief Executive Officer
Global Indemnity plc
(1) Audit Committee
(2) Compensation & Benefits Committee
(3) Enterprise Risk Management Committee
(4) Executive Committee
(5) Investment Committee
(6) Nominating & Governance Committee
OFFICERS
Cynthia Y. Valko
Chief Executive Officer
Thomas M. McGeehan
Chief Financial Officer
Joseph R. Lebens
Chief Underwriting & Actuarial Officer
Matthew B. Scott
Chief Marketing Officer
Raghu Ramachandran
Chief Investment Officer
William J. Devlin
Chief Operations & Claims Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2013
OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from
to
001-34809
Commission File Number
GLOBAL INDEMNITY PLC
(Exact name of registrant as specified in its charter)
Ireland
(State or other jurisdiction
of incorporation or organization)
98-0664891
(I.R.S. Employer
Identification No.)
25/28 NORTH WALL QUAY
DUBLIN 1
IRELAND
(Address of principal executive office including zip code)
Registrant’s telephone number, including area code: 353 (0) 1 649 2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class
Common A Ordinary shares, $0.0001 Par Value
Name of Exchange on Which Registered
The Nasdaq Global Select Market
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 ‘ NO È
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 ‘ NO È
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 È NO ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). YES È NO ‘
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 registrant’s 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. ‘
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):
Large accelerated filer ‘
Non-accelerated filer ‘ (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 ‘ NO È
Accelerated filer
Smaller reporting company ‘
Í
The aggregate market value of the common equity held by non-affiliates of the registrant, computed by reference to the price of the registrant’s A
ordinary shares as of the last business day of the registrant’s most recently completed second fiscal quarter (based on the last reported sale price
on the Nasdaq Global Select Market as of such date), was $197,201,153. There are no B ordinary shares held by non-affiliates of the registrant.
As of March 13, 2014, the registrant had outstanding 13,225,614 A ordinary shares and 12,061,370 B ordinary shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement relating to the 2014 Annual Meeting of Shareholders are incorporated by reference into Part III of
this report.
TABLE OF CONTENTS
Item 1.
PART I
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A.
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B.
UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES . . . . . . . . . . . . . . . . . . .
Item 6.
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . .
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . .
Page
2
30
43
43
43
43
44
47
49
85
88
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
148
Item 9A.
CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
148
Item 9B.
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
149
PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE . . . . . . . . . .
150
Item 11.
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150
Item 12.
Item 13.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,
AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150
150
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150
PART IV
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
151
1
PART I
Item 1.
BUSINESS
Some of the information contained in this Item 1 or set forth elsewhere in this report, including information with
respect to the Company’s 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.
History
Global Indemnity plc (“Global Indemnity” or “the Company”) was incorporated on March 9, 2010 and is
domiciled in Ireland as a public limited company. Global Indemnity replaced the Company’s predecessor, United
America Indemnity, Ltd., as the ultimate parent company as a result of a re-domestication transaction. United
America Indemnity, Ltd., which was incorporated on August 26, 2003 and domiciled in the Cayman Islands, is a
subsidiary of the Company and an Irish tax resident. The Company’s A ordinary shares are publicly traded on the
NASDAQ Global Select Market under the trading symbol “GBLI.”
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.
The Company manages the distribution of these products in two segments: (a) Insurance Operations, which
includes the operations of United National Insurance Company, Diamond State Insurance Company, United
National Specialty Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company,
Penn-Patriot Insurance Company, American Insurance Adjustment Agency, Inc., Collectibles Insurance Services,
LLC, Global Indemnity Insurance Agency, LLC, and J.H. Ferguson & Associates, LLC, and (b) Reinsurance
Operations, which includes the operations of Wind River Reinsurance Company, Ltd.
(“Wind River
Reinsurance”).
On December 31, 2013, Diamond State Insurance Company sold all the outstanding shares of capital stock of one
of its wholly owned subsidiaries, United National Casualty Insurance Company, to an unrelated party. Diamond
State Insurance Company received a one-time payment of $26.6 million and recognized a pre-tax gain of $5.2
million. The financial results for 2013, 2012, and 2011 include the financial results for United National Casualty
Insurance Company. Management deemed this transaction to be an asset sale with the assets primarily comprised
of investments and insurance licenses. This transaction will not have a significant impact on the Company’s
ongoing business operations.
Business Segments
See Note 21 of the notes to consolidated financial statements in Item 8 of Part II of this report for gross and net
premiums written, income and total assets of each operating segment for the years ended December 31, 2013,
2012 and 2011. For a discussion of the variances between years, see “Results of Operations” in Item 7 of Part II
of this report.
Insurance Operations
The Company’s United States based Insurance Operations distribute property and casualty insurance products
and operate predominantly in the excess and surplus lines marketplace. 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 coverage are largely uniform and have relatively predictable exposures. In the standard market, policies must
2
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 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.
A portion of The Company’s Insurance Operations is written on a specialty admitted basis. When writing on a
specialty admitted basis, the Company’s 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.
Its insurance products target specific, defined groups of insureds with customized coverage to meet their needs.
To manage operations, the Insurance Operations segment differentiates its products by product classification.
These product classifications are as follows:
•
Penn-America distributes property and general liability products for small commercial businesses
through a select network of wholesale general agents with specific binding authority;
• United National distributes property, general liability, and professional lines products through program
administrators with specific binding authority; and
• Diamond State distributes property, casualty, and professional
lines products through wholesale
brokers that are underwritten by the Company’s personnel and selected brokers with specific binding
authority.
See “Underwriting” below for a discussion on how the Company’s insurance products are underwritten.
These product classifications comprise the Insurance Operations business segment and are not considered
individual business segments because each product has similar economic characteristics, distribution, and
coverage. The Insurance Operations provide property, casualty, and professional liability products utilizing
customized guidelines, rates, and forms tailored to the Company’s risk and underwriting philosophy. The
Insurance Operations are licensed to write on a surplus lines (non-admitted) basis and/or an admitted basis in all
50 U.S. States, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, which provides them with
flexibility in designing products and programs, and in determining rates to meet emerging risks and
discontinuities in the marketplace.
The Company distributes its insurance products through a group of approximately 110 professional wholesale
general agencies that have specific quoting and binding authority, as well as a number of wholesale insurance
brokers who in turn sell the Company’s insurance products to insureds through retail insurance brokers.
In 2013, gross premiums written for the U.S. Insurance Operations were $232.4 million compared to $201.8
million for 2012. For 2013, surplus lines business accounts for approximately 68.8% of the business written
while specialty admitted business accounts for the remaining 31.2%.
3
Reinsurance Operations
Wind River Reinsurance is a Bermuda based treaty reinsurer of specialty property and casualty insurance and
reinsurance companies. The Company’s Reinsurance Operations segment provides reinsurance solutions through
brokers and primary writers including insurance and reinsurance companies, and consists solely of the operations
of Wind River Reinsurance.
The reinsurance markets face many of the same issues confronted with the primary insurance markets discussed
above, including excess capital capacity, low investment returns and increased pressure on generating acceptable
return on investment.
Even though there were some catastrophes in recent years, pricing on catastrophe reinsurance has started to
decrease due to excess capacity available in the market. Wind River Reinsurance is focused on using its capital
capacity to write catastrophe-oriented placements and other niche or specialty-focused treaties meeting the
Company’s risk tolerance and return thresholds.
In 2013, gross premiums written from third parties were $58.4 million compared to $42.3 million for 2012.
Available Information
The Company maintains a website at www.globalindemnity.ie. The information on the Company’s website is not
incorporated herein by reference. The Company will make available, free of charge on its website, the 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 the Company files such material with,
or furnishes it to, the United States Securities and Exchange Commission.
Products and Product Development
The Company’s Insurance Operations distribute property and casualty insurance products and operate
predominantly in the excess and surplus lines marketplace. To manage its operations, the Company seeks to
differentiate its products by product classification. See “Insurance Operations” above for a description of these
product classifications. The Company believes it has significant flexibility in designing products, programs, and
in determining rates to meet the needs of the marketplace.
The Company’s Reinsurance Operations offer third party treaty reinsurance for specialty property and casualty
insurance companies and reinsurance companies. The Company’s Reinsurance Operations also provide
reinsurance to its Insurance Operations in the form of quota share and stop-loss arrangements.
4
Geographic Concentration
The following table sets forth the geographic distribution of gross premiums written for the periods indicated:
(Dollars in thousands)
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mississippi
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other states . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . . . .
For the Years Ended December 31,
2013
2012
2011
Amount
Percent
Amount
Percent
Amount
Percent
$ 32,170
29,565
26,358
16,600
11,234
8,392
8,208
6,904
6,715
6,603
152,749
79,624
58,350
11.0% $ 28,738
21,554
10.1
22,277
9.1
14,876
5.7
8,291
3.9
7,579
2.9
8,529
2.8
6,496
2.4
6,130
2.3
5,282
2.3
11.8% $ 26,815
22,680
8.8
30,708
9.1
14,711
6.1
7,751
3.4
12,658
3.1
7,359
3.5
7,408
2.7
7,440
2.5
5,292
2.2
52.5
27.4
20.1
129,752
72,038
42,263
53.2
29.5
17.3
142,822
86,326
78,755
8.7%
7.4
10.0
4.8
2.5
4.1
2.3
2.4
2.4
1.8
46.4
28.0
25.6
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$290,723
100.0% $244,053
100.0% $307,903
100.0%
Marketing and Distribution
The Company provides its insurance products across a full distribution network—binding authority, program,
brokerage, and reinsurance. For its binding authority and program product classifications,
the Company
distributes its insurance products through a group of approximately 110 wholesale general agents and program
administrators that have specific quoting and binding authority. For its brokerage business, the Company
distributes its insurance products through wholesale insurance brokers who in turn sell the Company’s insurance
products to insureds through retail insurance brokers. For its reinsurance business, the Company distributes its
products through reinsurance brokers.
Wind River Reinsurance assumed premiums on four treaties which accounted for 97% of the Reinsurance
Operations’ 2013 gross premiums written. There is no treaty that accounted for more than 10% of the Company’s
consolidated revenues for the year ended December 31, 2013.
Of the Company’s non-affiliated professional wholesale general agents and program administrators, the top five
accounted for 28.6% of the Insurance Operations’ gross premiums written for the year ended December 31, 2013.
One agency accounted for 10.7% of the Insurance Operations’ gross premiums written. However, the loss of this
agent would not have a material impact on the Company’s results of operations. There is no agency which
accounts for more than 10% of the Company’s consolidated revenues for the year ended December 31, 2013.
The Company’s distribution strategy is to seek to maintain strong relationships with a limited number of high-
quality wholesale professional general agents and wholesale insurance brokers. The Company carefully selects
distribution sources based on their expertise, experience and reputation. The Company believes that its distribution
strategy enables it to effectively access numerous markets at a relatively low cost structure through the marketing,
underwriting, and administrative support of the Company’s professional general agencies and wholesale insurance
brokers. The Company believes these wholesale general agents and wholesale insurance brokers have local market
knowledge and expertise that enables them to access business in these markets more effectively.
Underwriting
The Company’s insurance products are primarily underwritten via specific binding authority in which the
Company grants underwriting authority to its wholesale general agents and program administrators and via
5
brokerage in which the Company’s internal personnel underwrites business submitted by wholesale insurance
brokers. Some of the Company’s specialized property business is submitted by retail agents or directly from
insureds and is also underwritten by internal personnel.
Specific Binding Authority—The Company’s 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.
The Company provides its 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.
The Company’s wholesale general agents and program administrators are appointed to underwrite submissions
received from their retail agents in accordance with the Company’s underwriting manual. Risks that are not
within the specific binding authority must be submitted to the Company’s underwriting personnel directly for
underwriting review and approval or denial of the application of the insured. The Company’s wholesale general
agents provide all policy issuance services in accordance with the Company’s underwriting manuals.
The Company regularly monitors the underwriting quality of its 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 the Company’s 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 the Company’s underwriting manual including: risk selection, underwriting compliance,
policy issuance and pricing;
internal quarterly actuarial analysis of loss ratios produced by business underwritten by the Company’s
wholesale general agents and program administrators; and
internal quarterly analysis of financial results, including premium growth and overall profitability of
business produced by the Company’s wholesale general agents and program administrators.
The Company provides incentives to certain of its 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—The Company’s wholesale insurance brokers do not have specific binding authority, therefore, these
risks are submitted to the Company’s underwriting personnel for review and processing.
The Company provides its 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.
The Company’s underwriting personnel review submissions, issue all quotes and perform all policy issuance
functions. The Company regularly monitors the underwriting quality of its underwriters through a disciplined
system of controls, which includes the following:
•
individual policy reviews to measure the Company’s underwriters’ adherence to the underwriting
manual including: risk selection, underwriting compliance, policy issuance and pricing;
6
•
•
•
periodic underwriting review to evaluate adherence to all aspects of the Company’s underwriting
manual including: risk selection, underwriting compliance, policy issuance and pricing;
internal quarterly actuarial analysis of loss ratios produced by business underwritten by the Company’s
underwriters; and
internal quarterly analysis of financial results, including premium growth and overall profitability of
business produced by the Company’s underwriters.
Reinsurance—The Company’s Wind River Reinsurance subsidiary primarily offers retrocessional coverage to
Bermuda based reinsurance companies. The business assumed is primarily quota share treaties on property
catastrophe and marine business. Prior to entering into any agreement, the Company evaluates a number of
factors for each cedent including, but not limited to, reputation and financial condition, underwriting and claims
practices and historical claims experience. The Company also models proposed treaties for both the catastrophe
exposure and the marginal impact on the Company’s existing catastrophe portfolio.
Contingent Commissions
Certain professional general agencies of the Insurance Operations are paid special incentives, referred to as
contingent commissions, when results of business produced by these agencies are more favorable than
predetermined thresholds. Similarly, in some circumstances, companies that cede business to the Reinsurance
Operations are paid a profit commission 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
The Company uses its pricing actuaries to establish pricing tailored to each specific product it underwrites, taking
into account historical loss experience and individual risk and coverage characteristics. The Company generally
uses the actuarial loss costs promulgated by the Insurance Services Office as a benchmark in the development of
pricing for most of the Company’s products. The Company will seek to only write business if it believes it can
achieve an adequate rate of return.
Reinsurance of Underwriting Risk
The Company’s philosophy is to purchase reinsurance from third parties to limit its liability on individual risks
and to protect against property catastrophe and casualty clash losses. Reinsurance assists the Company in
controlling exposure to severe losses and protecting capital resources. The Company purchases reinsurance on
both an excess of loss and proportional basis. The type, cost and limits of reinsurance it purchases can vary from
year to year based upon the Company’s 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. The Company’s reinsurance contracts renew throughout the year and all of its
reinsurance is purchased following guidelines established by management. The Company primarily utilizes treaty
reinsurance products, including proportional reinsurance, excess of loss reinsurance, casualty clash reinsurance,
and property catastrophe excess of loss reinsurance. Additionally, the Company may purchase facultative
reinsurance protection on single risks when deemed necessary.
The Company purchases specific types and structures of reinsurance depending upon the characteristics of the
lines of business and specialty products underwritten. The Company will typically seek to place proportional
reinsurance for umbrella and excess products, certain specialty products, or in the development stages of a new
product. The Company believes that this approach allows it to control net exposure in these product areas most
cost effectively.
7
The Company purchases reinsurance on an excess of loss basis to cover individual risk severity. These structures
are utilized to protect the Company’s primary positions on property and casualty products. The excess of loss
structures allow the Company to maximize 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.
The Company analyzes its 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.
The Company continually evaluates its retention levels across its entire line of business and specialty product
portfolio seeking to ensure that the ultimate reinsurance structures are aligned with the Company’s corporate risk
tolerance levels associated with such products. Any decision to decrease the Company’s reliance upon
proportional reinsurance or to increase the Company’s excess of loss retentions could increase the Company’s
earnings volatility. In cases where the Company decides to increase its excess of loss retentions, such decisions
will be a result of a change or progression in the Company’s risk tolerance level. The Company endeavors to
purchase reinsurance from financially strong reinsurers with which it has long-standing relationships. In addition,
in certain circumstances, the Company holds collateral, including letters of credit, under reinsurance agreements.
The Company’s Insurance Operations’ primary reinsurance treaties are as follows:
Property Catastrophe Excess of Loss—The Company’s current property writings create exposure to catastrophic
events. To protect against these exposures, the Company purchases a property catastrophe treaty. Effective
June 1, 2013, the Company renewed its property catastrophe excess of loss treaty which provides occurrence
coverage for losses of $70.0 million in excess of $20.0 million. At this renewal, the Company retained 50% of
the $20 million in excess of $20 million layer, and 20% of the $50 million in excess of $40 million layer. This
treaty provides for one full reinstatement of coverage at 100% additional premium as to time and pro rata as to
amount of limit reinstated. This replaces the treaty that expired on May 31, 2013, which provided identical
coverage with the exception of one additional layer of 100% of $10.0 million in excess of $90.0 million.
Property Per Risk Excess of Loss—Effective January 1, 2013, the Company renewed its property per risk excess
of loss treaty which provides coverage of 50% of $13.0 million per risk in excess of $2.0 million per risk. This
replaces the treaty that expired December 31, 2012, which provided 100% of $13.0 million per risk in excess of
$2.0 million per risk. The treaty provides coverage in two layers: $3.0 million per risk in excess of $2.0 million
per risk, and $10.0 million per risk in excess of $5.0 million per risk. The first layer is subject to a $6.0 million
limit of liability for all risks involved in one loss occurrence, and the second layer is subject to a $10.0 million
limit for all risks involved in one loss occurrence.
Casualty and Professional Liability Excess of Loss—Effective May 1, 2013, the Company renewed its casualty
and professional liability excess of loss treaty. The casualty section provides coverage for $2.0 million per
occurrence in excess of $1.0 million per occurrence for general liability and auto liability. The professional
liability section provides coverage of $4.0 million per policy/occurrence in excess of $1.0 million per policy/
occurrence. For both sections, allocated loss adjustment expenses are included within limits. The casualty and
professional liability treaty that expired April 30, 2013 provided identical coverage.
Casualty Clash Excess of Loss—Effective May 1, 2013, the Company renewed its casualty clash excess of loss
treaty which provides coverage of $10.0 million per occurrence in excess of $3.0 million per occurrence, subject
to a $20.0 million limit for all loss occurrences. The casualty clash treaty that expired April 30, 2013 provided
identical coverage.
To the extent that there may be an increase or decrease in catastrophe or casualty clash exposure in the future, the
Company may increase or decrease its reinsurance protection for these exposures commensurately. There were
no other significant changes to any of the Company’s Insurance Operations’ reinsurance treaties during 2013.
8
The following table sets forth the ten reinsurers for which the Company has the largest reinsurance receivables as
of December 31, 2013. Also shown are the amounts of premiums ceded by the Company to these reinsurers
during the year ended December 31, 2013.
(Dollars in millions)
A.M.
Best
Rating
Gross
Reinsurance
Receivables
Percent
of
Total
Ceded
Premiums
Written
Percent
of
Total
A+
A+
A
A+
. . . . . . . . . . . . . . . . . . . . . . . . . . . . A++
Munich Re America Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Westport Insurance Corp.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transatlantic Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Swiss Reinsurance America Corp. . . . . . . . . . . . . . . . . . . . . . . .
General Reinsurance Corp.
Hartford Fire Insurance Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Clearwater Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . .
Scor Holding (Switzerland) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
XL Reinsurance America, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Partner Reinsurance Co. of US . . . . . . . . . . . . . . . . . . . . . . . . .
A
NR
A
A
A+
Subtotal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other reinsurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total reinsurance receivables before purchase accounting
adjustments and allowance for uncollectible
reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$112.7
30.5
10.6
10.0
9.7
6.7
3.7
2.1
1.4
1.4
188.8
24.1
52.9% $ 7.2
—
14.3
4.0
5.0
0.2
4.7
0.1
4.6
—
3.1
—
1.7
—
1.0
—
0.7
—
0.7
88.7
11.3
11.5
7.2
38.5%
—
21.4
1.1
0.5
—
—
—
—
—
61.5
38.5
212.9
100.0% $18.7
100.0%
Purchase accounting adjustments and allowance for
uncollectible reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15.0)
Total receivables, net of purchase accounting adjustments
and allowance for uncollectible reinsurance . . . . . . . . .
Collateral held in trust from reinsurers . . . . . . . . . . . . . . . . . . .
Net receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
197.9
(9.4)
$188.5
At December 31, 2013, the Company carried reinsurance receivables, net of collateral held in trust, of $188.5
million. This amount is net of a purchase accounting adjustment and an allowance for uncollectible reinsurance
receivables. The purchase accounting adjustment resulted from the Company’s 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 $6.0 million at
December 31, 2013. The allowance for uncollectible reinsurance receivables was $9.0 million at December 31,
2013.
Historically, there have been insolvencies following a period of competitive pricing in the industry. While the
Company has recorded allowances for reinsurance receivables based on currently available information,
conditions may change or additional information might be obtained that may require the Company to record
additional allowances. On a quarterly basis, the Company reviews its financial exposure to the reinsurance
market and assesses the adequacy of its collateral and allowance for uncollectible reinsurance. The Company
continues to take actions to mitigate its exposure to possible loss.
Claims Management and Administration
The Company’s 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 the Company, its professional general agents, wholesale brokers, reinsurers and insureds. The
Company’s professional general agents and wholesale brokers have no authority to settle claims or otherwise
9
exercise control over the claims process, with the exception of one statutory managing general agent. The
Company’s claims management staff supervises or processes all claims. The Company has a formal claims
review process, and all claims greater than $100,000, gross of reinsurance, are reviewed by senior claims
management and certain senior executives. Large loss trends and analysis are reviewed by a Large Loss
committee.
To handle claims, the Company utilizes its own in-house claims department as well as third-party claims
administrators (“TPAs”) and assuming reinsurers, to whom it delegates limited claims handling authority. The
Company’s experienced in-house staff of claims management professionals are assigned to one of five dedicated
claim units: casualty and automobile 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, 2013, the Company has $164.6 million of direct outstanding loss and loss adjustment
expense case reserves at its Insurance Operations. Claims relating to approximately 85% of those reserves are
handled by in-house claims management professionals, while claims relating to approximately 4% of those
reserves are handled by TPAs, which send the Company detailed financial and claims information on a monthly
basis. The Company also individually supervises in-house any significant or complicated TPA handled claims,
and conducts on-site audits of material TPAs at least twice a year. Approximately 11% of its reserves are handled
by the Company’s assuming reinsurers. The Company reviews and supervises the claims handled by its
reinsurers seeking to protect its reputation and minimize exposure.
Reserves for Unpaid Losses and Loss Adjustment Expenses
Applicable insurance laws require the Company to maintain reserves to cover its estimated ultimate losses under
insurance policies and reinsurance treaties that it writes and for loss adjustment expenses relating to the
investigation and settlement of claims.
The Company establishes loss and loss adjustment expense reserves for individual claims by evaluating reported
claims on the basis of:
•
•
•
•
•
•
•
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
the Company’s experience with the insured and the line of business and policy provisions relating to
the particular type of claim.
The Company generally estimates such losses and claims costs through an evaluation of individual reported
claims. The Company also establishes 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. The Company also establishes its
reserves based on 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 Company’s Insurance
Operations’ reserves are reviewed quarterly by the in-house actuarial staff. Loss reserve estimates for the
Company’s Reinsurance Operations are developed by independent, external actuaries; however management is
responsible for the final determination of loss reserve selections. The data for this analysis is organized by treaty
and treaty year. Reviews for both Insurance Operations and Reinsurance Operations are performed both gross
and net of reinsurance.
10
In addition to the Company’s internal reserve analysis, independent external actuaries perform a full, detailed
review of the Insurance Operations’ reserves annually. The Company does not rely upon the review by the
independent actuaries to develop its reserves; however, the data is used to corroborate the analysis performed by
the in-house actuarial staff. The Company’s independent external actuaries also perform a full, detailed review of
the Reinsurance Operations’ reserves annually. In 2013, the independent external actuaries also performed a
detailed review of the Reinsurance Operations’ loss reserves at June 30, 2013. The results of the detailed reserve
reviews by internal and external actuaries were summarized and discussed with the Company’s senior
management to determine the best estimate of reserves.
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 the Company
underwrites have historically had longer intervals between the occurrence of an insured event, reporting of the
claim and final resolution. In such cases, the Company must estimate reserves over long periods of time with the
possibility of several adjustments to reserves. Other classes of insurance that the Company underwrites, 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 that follows shows changes in the Company’s 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 United States of America generally accepted accounting principles
(“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, the Company’s net
reserve liability including the reserve for IBNR. 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 is no loss reserves in the loss development table related to the
Penn-America insurance companies for any years prior to 2005.
11
This loss development table shows development in Global Indemnity’s loss and loss expense reserves on a net basis:
(Dollars in thousands)
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Balance sheet reserves:
Cumulative paid as of:
$ 314,023 $ 344,614 $ 639,291 $ 735,342 $ 800,885 $ 835,839 $ 725,297 $ 638,906 $684,878 $629,558 $586,975
One year later . . . . . . . . . . . $
. . . . . . . . .
Two years later
Three years later
. . . . . . . .
Four years later . . . . . . . . .
Five years later . . . . . . . . . .
Six years later
. . . . . . . . . .
Seven years later . . . . . . . .
Eight years later . . . . . . . . .
Nine years later . . . . . . . . .
Ten years later . . . . . . . . . .
76,048 $
136,133
171,659
197,596
214,376
235,022
244,389
253,267
261,842
263,231
Re-estimated liability as of:
85,960 $ 154,069 $ 169,899 $ 190,723 $ 215,903 $ 189,358 $ 160,204 155,888 134,065
139,822
180,801
209,938
237,636
251,350
261,773
271,688
273,618
268,827
355,987
414,068
440,206
454,982
467,669
471,472
300,041
413,055
478,408
506,915
525,173
534,801
360,336
470,313
532,753
561,536
581,265
261,569 260,667
330,522
366,647
454,284
510,177
541,313
299,720
375,066
419,717
End of year . . . . . . . . . . . . . $ 314,023 $ 344,614 $ 639,291 $ 735,342 $ 800,885 $ 835,839 $ 725,297 $ 638,906 $684,878 $629,558 $586,975
One year later . . . . . . . . . . .
. . . . . . . . .
Two years later
Three years later
. . . . . . . .
Four years later . . . . . . . . .
Five years later . . . . . . . . . .
Six years later
. . . . . . . . . .
Seven years later . . . . . . . .
Eight years later . . . . . . . . .
Nine years later . . . . . . . . .
Ten years later . . . . . . . . . .
643,569 690,004 619,887
642,478 679,689
640,581
313,213
315,230
298,989
301,660
308,776
303,146
298,566
297,544
293,598
299,866
343,332
326,031
323,696
332,302
323,547
316,195
312,860
307,822
313,731
632,327
629,859
635,504
622,122
608,050
598,384
591,562
596,405
716,361
732,056
707,525
672,712
658,429
651,850
654,983
832,733
812,732
765,435
737,614
731,468
729,228
827,439
768,623
730,079
719,486
715,067
671,399
640,750
636,051
631,101
Cumulative redundancy/
(deficiency) . . . . . . . . . . . . . . $
9,671 $ —
Gross Liability—end of year . . . 2,059,760 1,876,510 1,914,224 1,702,010 1,503,238 1,506,430 1,257,741 1,059,756 971,377 879,113 779,466
Less: Reinsurance
71,657 $ 120,772 $
14,157 $
80,359 $
42,886 $
30,883 $
94,196 $
(1,675)$
5,189 $
recoverable . . . . . . . . . . . . . . . 1,745,737 1,531,896 1,274,933
966,668
702,353
670,591
532,444
420,850 286,499 249,555 192,491
Net liability-end of year . . . . . . .
314,023
344,614
639,291
735,342
800,885
835,839
725,297
638,906 684,878 629,558 586,975
Gross re-estimated liability . . . . 1,427,086 1,174,681 1,280,875 1,066,945 1,197,094 1,135,308
Less: Re-estimated recoverable
948,091
897,494 910,241 839,383 779,466
at December 31, 2013 . . . . . . 1,127,219
860,950
684,471
411,962
467,866
420,241
316,989
256,913 230,551 219,496 192,491
Net re-estimated liability at
December 31, 2013 . . . . . . . . $ 299,867 $ 313,731 $ 596,404 $ 654,983 $ 729,228 $ 715,067 $ 631,102 $ 640,581 $679,690 $619,887 $586,975
Gross cumulative redundancy/
(deficiency) . . . . . . . . . . . . . . $ 632,674 $ 701,829 $ 633,349 $ 635,065 $ 306,144 $ 371,122 $ 309,650 $ 162,262 $ 61,136 $ 39,730 $ —
See Note 12 of the notes to consolidated financial statements in Item 8 of Part II of this report for a reconciliation
of the Company’s liability for losses and loss adjustment expenses, net of reinsurance ceded, as well as further
discussion surrounding changes to reserves for prior accident years.
The insurance industry continues to receive a substantial number of asbestos-related bodily injury claims, with an
increasing focus being directed toward other parties, including installers of products containing asbestos rather than
against asbestos manufacturers. This shift has resulted in significant insurance coverage litigation implicating
applicable coverage defenses or determinations, if any, including but not limited to, determinations as to whether or
not an asbestos related bodily injury claim is subject to aggregate limits of liability found in most comprehensive
general liability policies. In response to these continuing developments, management regularly evaluates and adjusts
its reserves to its best point estimate for asbestos and environmental (“A&E”) exposures.
Asbestos and Environmental Exposure
The Company’s environmental exposure arises from the sale of general liability and commercial multi-peril
insurance. Currently, the Company’s policies continue to exclude classic environmental contamination claims. In
some states the Company is required, however, depending on the circumstances, to provide coverage for certain
bodily injury claims, such as an individual’s exposure to a release of chemicals. The Company has also issued
policies that were intended to provide limited pollution and environmental coverage. These policies were specific
to certain types of products underwritten by the Company. The Company has 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.
12
Significant uncertainty remains as to the Company’s 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 the Company’s
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, 2013, the
Company has $11.1 million of net loss reserves for asbestos-related claims and $12.0 million for environmental
claims. The Company attempts to estimate the full impact of the A&E exposures by establishing specific case
reserves on all known losses. See Note 12 of the notes to the consolidated financial statements in Item 8 of Part II
of this report for tables showing the Company’s 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
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.
In 2009, one of the Company’s 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 may trigger
financial obligations by the insurance company. One such event is the confirmation of a Plan involving an asbestos
trust established under the bankruptcy code and funded in part by settlement proceeds. On February 24, 2014, the
United States Bankruptcy Court for the Northern District of California (District Court) issued a Memorandum Re
Confirmation of a Revised Plan following a remand from the Ninth Circuit Court of Appeals. The confirmation of
the Revised Plan includes an injunction under 11 U.S.C. Section 524(g) (US bankruptcy code) related to the suit
above. The injunction, also called a “channeling injunction,” precludes, among other things, non-settling insurers
from asserting claims against one of the Company’s insurance companies and asbestos related claims by third
parties against one of the Company’s insurance companies that are related to the named insured. The most recent
ruling may be subject to an appeal by the non-settling insurer group. Management will continue to monitor the
developments of the litigation to determine if any additional financial exposure is present.
See Note 12 of the notes to the consolidated financial statements in Item 8 of Part II of this report for the survival
ratios on a gross and net basis for the Company’s open A&E claims.
Investments
The Company’s investment policy is determined by the Investment Committee of the Board of Directors. The
Company engages third-party investment advisors and has a Chief Investment Officer on staff to oversee its
investments and to make recommendations to the Investment Committee. The Company’s investment policy
allows it 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. 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 the Company’s
investment policy is 30% of the Company’s GAAP equity, or $262.0 million at December 31, 2013. As of
December 31, 2013, the Company had $1,568.1 million of investments and cash and cash equivalent assets,
including $257.6 million of equity and limited partnership investments and $53.9 million in floating rate
corporate loans, plus a $0.7 million receivable for securities sold.
13
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 loans, and preferred and
common equity securities.
The following table summarizes by type the estimated fair value of Global Indemnity’s investments and cash and
cash equivalents as of December 31, 2013, 2012, and 2011:
(Dollars in thousands)
December 31, 2013
December 31, 2012
December 31, 2011
Estimated
Fair Value
Percent
of Total
Estimated
Fair Value
Percent
of Total
Estimated
Fair Value
Percent
of Total
Cash and cash equivalents . . . . . . . . . . . . . . .
$ 105,492
6.7% $ 104,460
6.8% $ 175,860
10.7%
81,674
5.2
108,744
7.1
131,289
8.0
U.S. treasury and agency obligations . . . . . .
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities (1) . . . . . . . . . . .
Commercial mortgage-backed securities . . .
Asset-backed securities . . . . . . . . . . . . . . . . .
Corporate bonds and loans . . . . . . . . . . . . . .
Foreign corporate bonds . . . . . . . . . . . . . . . .
180,936
229,910
53,975
168,436
435,392
54,041
Total fixed maturities . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . .
1,204,364
254,070
3,489
Total investments and cash and cash
11.5
14.8
3.4
10.7
27.9
3.4
76.9
16.2
0.2
201,077
255,942
8,117
113,351
486,171
55,920
1,229,322
197,075
3,132
13.1
16.7
0.5
7.4
31.7
3.7
80.2
12.8
0.2
206,133
268,990
29,969
95,964
521,201
43,339
1,296,885
168,361
6,617
12.5
16.3
1.8
5.8
31.7
2.6
78.7
10.2
0.4
equivalents (2) . . . . . . . . . . . . . . . . . . . . . .
$1,567,415
100.0% $1,533,989
100.0% $1,647,723
100.0%
(1)
Includes collateralized mortgage obligations of $63,322, $59,026, and $20,921 for 2013, 2012, and 2011,
respectively.
(2) Does not include net receivable (payable) for securities sold (purchased) of $723, ($2,634) and $1,484 for
2013, 2012 and 2011, respectively.
Although the Company generally intends to hold fixed maturities to recovery and/or maturity, the Company
regularly re-evaluates its position based upon market conditions. As of December 31, 2013, the Company’s fixed
maturities, excluding the mortgage-backed, commercial mortgage-backed and collateralized mortgage
obligations, had a weighted average maturity of 3.6 years and a weighted average duration, excluding mortgage-
backed, commercial mortgage-backed and collateralized mortgage obligations and including cash and short-term
investments, of 1.6 years. The Company’s financial statements reflect a net unrealized gain on fixed maturities
available for sale as of December 31, 2013 of $16.7 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:
(Dollars in thousands)
Years Ended December 31,
2013
2012
2011
Average fixed maturities at book value . . . . . . .
Gross income on fixed maturities (1) . . . . . . . . .
Book yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed maturities at book value . . . . . . . . . . . . . .
Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,187,390
35,669
$1,222,814
41,969
$1,326,094
54,153
3.00%
3.43%
4.08%
$1,187,685
16,679
$1,187,094
42,228
$1,258,533
38,352
(1) Represents income earned by fixed maturities, gross of investment expenses and excluding realized gains
and losses.
14
The Company has sought to structure its portfolio to reduce the risk of default on collateralized commercial real
estate obligations and asset-backed securities. Of the $229.9 million of mortgage-backed securities, $166.6
million is invested in U.S. agency paper and $63.3 million is invested in collateralized mortgage obligations, of
which $58.3 million, or 92.1%, are rated AA+ or better. In addition, the Company holds $168.4 million in asset-
backed securities, of which 79.4% are rated AAA. The weighted average credit enhancement for the Company’s
asset-backed securities is 26.4. The Company also faces 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. The Company
attempts to diversify its investment holdings to minimize this risk. The Company’s investment managers run
periodic analysis of liquidity costs to the fixed income portfolio. The Company also faces credit risk. 94.8% of
the Company’s fixed income securities are investment grade securities. 57.4% of the Company’s fixed maturities
are rated AA. 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 the Company’s investment strategy.
The following table summarizes, by Standard & Poor’s rating classifications, the estimated fair value of Global
Indemnity’s investments in fixed maturities, as of December 31, 2013 and 2012:
(Dollars in thousands)
December 31, 2013
December 31, 2012
Estimated
Fair Value
Percent of
Total
Estimated
Fair Value
Percent of
Total
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Not rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 199,515
491,166
268,598
182,271
10,665
33,978
10,696
354
7,121
16.6% $ 129,852
535,454
40.8
273,168
22.3
155,024
15.1
37,194
0.9
81,138
2.8
11,749
0.9
65
0.0
5,678
0.6
10.6%
43.5
22.2
12.6
3.0
6.6
1.0
0.0
0.5
Total fixed maturities . . . . . . . . . . . . . . . . .
$1,204,364
100.0% $1,229,322
100.0%
The following table sets forth the expected maturity distribution of Global Indemnity’s fixed maturities portfolio
at their estimated market value as of December 31, 2013 and 2012:
(Dollars in thousands)
December 31, 2013
December 31, 2012
Estimated
Market Value
Percent of
Total
Estimated
Market Value
Percent of
Total
Due in one year or less . . . . . . . . . . . . . . . . . . .
Due in one year through five years . . . . . . . . . .
Due in five years through ten years . . . . . . . . . .
Due in ten years through fifteen years . . . . . . .
Due after fifteen years . . . . . . . . . . . . . . . . . . . .
Securities with fixed maturities . . . . . . . . . . . . .
Mortgaged-backed securities . . . . . . . . . . . . . .
Commercial mortgage-backed securities . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . .
$ 120,974
529,604
75,424
3,147
22,894
752,043
229,910
53,975
168,436
10.0% $
44.0
6.2
0.3
1.9
62.4
19.1
4.5
14.0
87,816
565,413
152,588
10,993
35,102
851,912
255,942
8,117
113,351
7.1%
46.0
12.4
0.9
2.9
69.3
20.8
0.7
9.2
Total fixed maturities . . . . . . . . . . . . . . . .
$1,204,364
100.0% $1,229,322
100.0%
The expected weighted average duration of the Company’s asset-backed, mortgage-backed and commercial
mortgage-backed securities is 2.5 years.
The value of the Company’s portfolio of bonds is inversely correlated to changes in market interest rates. In
addition, some of the Company’s bonds have call or prepayment options. This could subject the Company to
15
reinvestment risk should interest rates fall and issuers call their securities and the Company is forced to invest the
proceeds at lower interest rates. The Company seeks to mitigate its 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.
The Company’s investments in corporate loans were valued at $53.9 million at December 31, 2013. Corporate
loans, 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 periodically, typically at intervals between one month and one year. 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, the Company’s 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 company’s capital structure and the appropriate
covenant protection. In addition, as part of the Company’s risk control, its investment managers seek to maintain
appropriate portfolio diversification by limiting issuer and industry exposure. The Company exited this asset
class in the first quarter of 2014.
As of December 31, 2013, the Company has aggregate equity securities of $254.1 million that consisted entirely
of common stocks.
The Company’s investments in other invested assets is comprised of a limited liability partnership investment
where the partnership has acquired control of a business as a lead or organizing investor, which was valued at
$3.5 million at December 31, 2013, and another limited liability partnership investment that invests in real estate,
which was valued at zero at December 31, 2013. There is no readily available independent market price for these
limited liability partnership investments. The limited partnerships have invested primarily in publicly traded
companies, however not all of the investments are publicly traded, nor does the Company have access to daily
valuations, therefore the estimated fair value of these limited partnerships is measured utilizing the net asset
value as a practical expedient for each limited partnership. The Company receives annual audited financial
statements from each of the partnership investments it owns.
Realized gains, including other than temporary impairments, for the years ended December 31, 2013, 2012, and
2011 were $27.4 million, $6.8 million, and $21.5 million, respectively.
Competition
The Company competes with numerous domestic and international insurance and reinsurance companies, mutual
companies, specialty insurance companies, underwriting agencies, diversified financial services companies,
Lloyd’s syndicates, risk retention groups, insurance buying groups, risk securitization products and alternative
self-insurance mechanisms. In particular, the Company competes 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;
• Markel Corporation;
16
• Nationwide Insurance;
• Navigators Insurance Group;
• RLI Corporation;
•
Selective Insurance Group, Inc.;
• The Travelers Companies, Inc.;
• W.R. Berkley Corporation; and
• Western World Insurance Group.
In addition to the companies mentioned above, the Company is 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 coverage, greater product flexibility, higher quality
services, reputation and financial strength or higher ratings by independent rating agencies. In all of the
Company’s markets, it competes by developing insurance products to satisfy well-defined market needs and by
maintaining relationships with brokers and insureds that rely on the Company’s expertise. For its program and
specialty wholesale products, offerings and underwriting products that are not readily available is the Company’s
principal means of differentiating itself from its competition. Each of the Company’s products has its own
distinct competitive environment. The Company seeks to compete through innovative products, appropriate
pricing, niche underwriting expertise, and quality service to policyholders, general agencies and brokers.
Employees
The Company has approximately 280 employees. None of the Company’s employees are covered by collective
bargaining agreements.
Ratings
A.M. Best ratings for the industry range from “A++” (Superior) to “F” (In Liquidation) with some companies not
being rated. The Company’s Insurance Operations, which consist of its 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.
Best’s opinion, have an excellent ability to meet their ongoing obligations to policyholders. In evaluating a
company’s 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 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.
General
Regulation
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
17
insurance regulation 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
The Company has six 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 which is domiciled in Indiana; United National Specialty
Insurance Company, which is domiciled in Wisconsin; and Penn-Patriot Insurance Company, which is domiciled
in Virginia.
As the indirect parent of the U.S. insurance companies, Global Indemnity is subject to the insurance holding
company laws of Pennsylvania, Indiana, Wisconsin, and Virginia. These laws generally require each of the U.S.
insurance companies to register with its respective domestic state insurance department and to annually furnish
financial and other information about the operations of the companies within the insurance holding company
system. Generally, all material transactions among affiliated companies in the holding company system to which
any of the U.S. insurance companies 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, certain types of dividends, and
service agreements with the non-insurance companies within Global Indemnity’s family of companies, the
Insurance Operations, or the 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 applicant’s Board of Directors and
executive officers, the acquirer’s plans for the management, Board of Directors and executive officers of the
company being acquired, the acquirer’s 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 the Company’s ordinary shares would indirectly
control the same percentage of the stock of the U.S. insurance companies, the insurance change of control laws of
Pennsylvania, Indiana, Wisconsin, and Virginia would likely apply to such a transaction. While the Company’s
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.
Federal Insurance Regulation
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank 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
18
to large commercial policyholders. Significantly,
modernize and improve insurance regulation in the United States. With respect to surplus lines insurance, the
Dodd-Frank 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
the Dodd-Frank Act
provides that a state may not prevent a surplus lines broker from placing surplus lines insurance with a non-U.S.
insurer that appears on the quarterly listing of non-admitted insurers maintained by the International Insurers
Department of
for
reinsurance, the Dodd-Frank 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 Dodd-Frank 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 Dodd-Frank Act are currently under development and the Company is
continuing to monitor the impact the Dodd-Frank Act may have on operations.
Insurance Commissioners (“NAIC”). Regarding credit
the National Association of
State Insurance Regulation
limited to,
including, but not
State insurance authorities have broad regulatory powers with respect to various aspects of the business of U.S.
insurance companies,
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, management of enterprise risk, 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 Company’s U.S. insurance companies 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 Company’s U.S. insurance companies
prepare statutory financial statements in accordance with statutory accounting principles (“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 most recent financial examinations of the Company’s 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. The
insurance departments for the states of Pennsylvania, Indiana, Wisconsin, and Virginia are currently conducting
financial examinations of the Company’s U.S. insurance subsidiaries for the period ended December 31, 2012.
Their final reports are expected to be issued in 2014.
Insurance Regulatory Information System Ratios
The NAIC Insurance Regulatory Information System (“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 insurer’s
business. Insurers that report four or more ratios that fall outside the range of usual values are generally targeted
for increased regulatory review.
Our U.S. insurance subsidiaries have acceptable results for the IRIS ratios with the exception of investment
yields and changes to policyholders surplus which were outside of the standard industry ranges primarily as a
result of recording the declared extraordinary dividend in 2013. For further discussion on the extraordinary
dividend declared in 2013, see “Management’s 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 of this report.
19
Risk-Based Capital Regulations
The state insurance departments of Pennsylvania, Indiana, Wisconsin, and Virginia 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.
Based on the standards currently adopted, the U.S. insurance companies reported in their 2013 statutory filings
that their capital and surplus are above the prescribed company action level risk-based capital requirements.
Statutory Accounting Principles
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 insurer’s 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 insurer’s
domiciliary state.
GAAP is concerned with a company’s 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 Pennsylvania, Indiana,
Wisconsin, and Virginia 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 the 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 20 of the notes to consolidated financial statements in
Item 8 of Part II of this report for the dividends declared by Global Indemnity’s U.S. insurance companies in
2013 and dividend limitations for 2014.
Guaranty Associations and Similar Arrangements
Most of the jurisdictions in which the U.S. insurance companies are admitted to transact business require
property and casualty insurers doing business within that jurisdiction to participate in guaranty associations.
20
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 the United States regulate or prohibit the sale of insurance and reinsurance within their
jurisdictions by non-domestic 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. The Company does not
intend for Wind River Reinsurance to maintain offices or solicit, advertise, settle claims or conduct other
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 the
Company’s 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 Pennsylvania, Indiana, Wisconsin, and Virginia or other applicable states or any of the U.S. insurance
companies re-domesticate to one of the few states that do not allow credit for reinsurance ceded to non-licensed
reinsurers, the Company may be unable to realize some of the benefits expected from its business plan.
Accordingly, Wind River Reinsurance could be adversely affected.
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 Reinsurance’s
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 such 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, which is incorporated to carry on general insurance and reinsurance
business, is registered as a Class 3B insurer in Bermuda. A corporate body 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. An insurer’s 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.
The Insurance Act imposes on Bermuda insurance companies solvency and liquidity standards and auditing and
reporting requirements and grants the BMA powers to supervise, investigate, require information and the
production of documents and to intervene in the affairs of insurance companies. The BMA continues to make
amendments to the Insurance Act with a view to enhancing Bermuda’s insurance regulatory regime.
21
The BMA utilizes a risk-based approach when it comes to licensing and supervising insurance companies. As
part of the BMA’s risk-based system, an assessment of the inherent risks within each particular class of insurer is
used to determine the limitations and specific requirements which may be imposed. Thereafter the BMA keeps
its analysis of relative risk within individual institutions under review on an ongoing basis, including through the
scrutiny of regular audited statutory financial statements, and, as appropriate, meeting with senior management
during onsite visits.
Certain significant aspects of the Bermuda insurance regulatory framework are set forth as follows:
Principal Representative and Principal Office
A Bermuda insurer is required to maintain a principal office in Bermuda and to appoint and maintain a principal
representative in Bermuda. Wind River Reinsurance’s principal office is its executive offices in Hamilton,
Bermuda, and its principal representative is its external management firm.
It is the duty of the principal representative upon reaching the view that there is a likelihood of the insurer for
which the principal representative acts becoming insolvent or that a reportable “event” has, to the principal
representative’s knowledge, occurred or is believed to have occurred, to immediately notify the BMA and to
make a report in writing to the BMA within 14 days of the prior notification setting out all the particulars of the
case that are available to the principal representative.
Where there has been a significant loss which is reasonably likely to cause the insurer to fail to comply with its
enhanced capital requirement (in respect of its general business, as described below under the Enhanced Capital
Requirement (“ECR”) and Minimum Solvency Margin (“MSM”) section), the principal representative must also
furnish the BMA with a capital and solvency return reflecting an enhanced capital requirement prepared using
post-loss data. The principal representative must provide this within 45 days of notifying the BMA regarding the
loss.
Furthermore, where a notification has been made to the BMA regarding a material change to an insurer’s
business or structure (including a merger or amalgamation), the principal representative has 30 days from the
date of such notification to furnish the BMA with unaudited interim statutory financial statements in relation to
such period if so requested by the BMA, together with a general business solvency certificate in respect to those
statements.
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 statutory financial statements
are not prepared in accordance with GAAP or SAP. 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. Wind River
Reinsurance is also required to prepare audited annual financial statements prepared in accordance with GAAP or
International Financial Reporting Standards.
22
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, schedules of ceded reinsurance, the statutory
financial statements, a declaration of statutory ratios and the opinion of the loss reserve specialist.
Enhanced Capital Requirement (“ECR”) and Minimum Solvency Margin (“MSM”)
The BMA has promulgated the Insurance (Prudential Standards) (Class 4 and Class 3B Solvency Requirement)
Amendment Rules 2008, as amended (the “Rules”) which, among other things, mandate that a Class 3B insurer’s
ECR be calculated by either (a) the model set out in Schedule I to the Rules, or (b) an internal capital model
which the BMA has approved for use for this purpose. These measures are an integral part of the BMA’s ongoing
Solvency II equivalence program for Class 3B insurance companies. For 2013, Wind River Reinsurance used the
BMA’s model to calculate its capital and solvency requirements.
from
The risk-based regulatory capital adequacy and solvency requirements implemented with effect
December 31, 2008 (termed the Bermuda Solvency Capital Requirement or “BSCR”) provide a risk-based capital
model as a tool to assist the BMA both in measuring risk and in determining appropriate levels of capitalization.
BSCR employs a standard mathematical model that correlates the risk underwritten by Bermuda insurers to the
capital
is dedicated to their business. The framework that has been developed applies a standard
measurement format to the risk associated with an insurer’s assets, liabilities and premiums, including a formula
to take account of catastrophe risk exposure.
that
Where an insurer believes that its own internal model for measuring risk and determining appropriate levels of
capital better reflects the inherent risk of its business, it may apply to the BMA for approval to use its internal
capital model in substitution for the BSCR model. The BMA may approve an insurer’s internal model, provided
certain conditions have been established, and may revoke approval of an internal model in the event that the
conditions are no longer met or where it feels that the revocation is appropriate. The BMA will review the
internal model regularly to confirm that the model continues to meet the conditions.
In order to minimize the risk of a shortfall in capital arising from an unexpected adverse deviation, the BMA
seeks that insurers operate at or above a threshold capital level (termed the Target Capital Level or “TCL”),
which exceeds the BSCR or approved internal model minimum amounts. The Rules provide prudential standards
in relation to the ECR and Capital and Solvency Return (“CSR”). The ECR is determined using the BSCR or an
approved internal model, provided that at all times the ECR must be an amount equal to, or exceeding the MSM.
The CSR is the return setting out the insurer’s risk management practices and other information used by the
insurer to calculate its approved internal model ECR. The capital requirements require Class 3B insurers to hold
available statutory capital and surplus equal
to, or exceeding ECR and set TCL at 120% of ECR. In
circumstances where an insurer has failed to comply with an ECR given by the BMA, such insurer is prohibited
from declaring or paying any dividends until the failure is rectified.
The risk-based solvency capital framework referred to above represents a modification of the minimum solvency
margin test set out in the Insurance Returns and Solvency Amendment Regulations 1980 (as amended). While it
must calculate its ECR annually by reference to either the BSCR or an approved internal model, Wind River
Reinsurance must also ensure at all times that its ECR is at least equal to the MSM for a Class 3B insurer in
respect of its general business, which is the greater of: (i) $100.0 million; (ii) 50% of net premiums written; and
(iii) 15% of net loss and loss adjustment expense reserves and other general business insurance reserves.
The BMA has also introduced a three-tiered capital system for Class 3B insurers designed to assess the quality of
capital resources that an insurer has available to meet its capital requirements. The tiered capital system classifies
all capital instruments into one of three tiers based on their “loss absorbency” characteristics, with the highest
23
quality capital classified as Tier 1 Capital and lesser quality capital classified as either Tier 2 or Tier 3 Capital.
Only Tier 1 and Tier 2 Capital may be used to support an insurer’s MSM. Certain percentages of each of Tier 1,
2 and 3 Capital may be used to satisfy an insurer’s ECR. Any combination of Tier 1, 2 or 3 Capital may be used
to meet the TCL.
The Rules introduced a regime that requires Class 3B insurers to perform an assessment of their own risk and
solvency requirements, referred to as a Commercial Insurer’s Solvency Self Assessment (“CISSA”). The CISSA
will allow the BMA to obtain an insurer’s view of the capital resources required to achieve its business objectives
and to assess the company’s governance, risk management and controls surrounding this process. The Rules also
introduced a Catastrophe Risk Return, which must be filed with the BMA, which assesses an insurer’s reliance
on vendor models in assessing catastrophe exposure.
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 year’s financial statements, and any application for such approval must
include such information as the BMA may require. In addition, if 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. Further, the BMA has the power to appoint a
professional person to prepare a report on any aspect of any matter about which the BMA has or could require
information. If it appears to the BMA that there is a risk of Wind River Reinsurance becoming insolvent, or that
Wind River Reinsurance is in breach of the Insurance Act or any conditions imposed upon its registration, the
BMA may, among other things, direct Wind River Reinsurance not to take on any new business, not to vary any
current treaties if the effect would be to increase its liabilities, not to make certain investments, to realize or not
realize certain investments, to maintain in, or transfer to the custody of, a specified bank, certain assets, not to
declare or pay any dividends or other distributions or to restrict the making of such payments, or to limit its
premium income or remove an officer.
The BMA may also make additional rules prescribing prudential standards in relation to ECR, CSR’s, insurance
reserves and eligible capital which Wind River Reinsurance must comply with.
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Bermuda Code of Conduct
The BMA has implemented the Insurance Code of Conduct (the “Bermuda Code of Conduct”) which came into
effect on July 1, 2010. The BMA established July 1, 2011 as the date of compliance for commercial insurers. The
Bermuda Code of Conduct is divided into six categories: (i) Proportionality Principal, (ii) Corporate Governance,
(iii) Risk Management, (iv) Governance Mechanism, (v) Outsourcing, and (vi) Market Discipline and Disclosure.
These categories contain the duties, requirements and compliance standards to which all insurers must adhere. It
stipulates that in order to achieve compliance with the Bermuda Code of Conduct, insurers are to develop and
apply policies and procedures capable of assessment by the BMA. Wind River Reinsurance is in compliance with
the Bermuda Code of Conduct.
Group Supervision
Emerging international norms in the regulation of global insurance groups are trending increasingly towards the
imposition of group-wide supervisory regimes by one principal “home” regulator over all the legal entities in the
group, no matter where incorporated. Amendments to the Insurance Act in 2010 introduced such a regime into
Bermuda insurance regulation.
The Insurance Act contains provisions regarding group supervision, the authority to exclude specified entities
from group supervision, the power for the BMA to withdraw as a group supervisor, the functions of the BMA as
group supervisor and the power of the BMA to make rules regarding group supervision.
The BMA has issued the Insurance (Group Supervision) Rules 2011 (the “Group Supervision Rules”) and the
Insurance (Prudential Standards) (Insurance Group Solvency Requirement) Rules 2011 (the “Group Solvency
Rules”) each effective December 31, 2011. The Group Supervision Rules set out the rules in respect of the
assessment of the financial situation and solvency of an insurance group, the system of governance and risk
management of the insurance group, and supervisory reporting and disclosures of the insurance group. The Group
Solvency Rules set out the rules in respect of the capital and solvency return and enhanced capital requirements for
an insurance group. The BMA also intends to publish an insurance code of conduct in relation to group supervision.
Wind River Reinsurance was notified by the BMA that, having considered the matters set out in the 2010 amendments
to the Insurance Act, it had determined that it would not be Wind River Reinsurance’s group supervisor.
Notifications to the BMA
In the event that the share capital of an insurer (or its parent) is traded on any stock exchange recognized by the
BMA, then any shareholder must notify the BMA within 45 days of becoming a 10%, 20%, 33% or 50%
shareholder of such insurer. An insurer must also provide written notice to the BMA that a person has become, or
ceased to be, a “Controller” of that insurer. A Controller for this purpose means a managing director, chief
executive or other person in accordance with whose directions or instructions the Directors of Wind River
Reinsurance are accustomed to act, including any person who holds, or is entitled to exercise, 10% or more of the
voting shares or voting power or is otherwise able to exercise significant influence over the management of Wind
River Reinsurance.
Wind River Reinsurance is also required to notify the BMA in writing in the event any person has become or
ceased to be an officer of it, an officer being a director, chief executive or senior executive performing duties of
underwriting, actuarial, risk management, compliance, internal audit, finance or investment matters. Failure to
give required notice is an offense under the Insurance Act.
An insurer, or designated insurer in respect of the group of which it is a member, must notify the BMA in writing
that it proposes to take measures that are likely to be of material significance for the discharge, in relation to the
insurer or the group, of the BMA’s functions under the Insurance Act. Measures that are likely to be of material
significance include:
•
acquisition or transfer of insurance business being part of a scheme falling within section 25 of the
Insurance Act or section 99 of the Companies Act;
25
•
•
amalgamation with or acquisition of another firm; and
a material change in the insurer’s business plan not otherwise reported to the BMA.
In respect of the forgoing, the BMA will typically object to the material change unless it is satisfied that:
•
the interest of the policyholders and potential policyholders of the insurer or the group would not in any
manner be threatened by the material change; and
• without prejudice to the first point, that, having regard to the material change, the requirements of the
Insurance Act would continue to be complied with, or, if any of those requirements are not complied
with, that the insurer concerned is likely to undertake adequate remedial action.
Failure to give such notice constitutes an offence under the Insurance Act. It is possible to appeal a notice of
objection served by the BMA.
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 Finance’s 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.
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.
Taxation of Global Indemnity and Subsidiaries
Ireland
Global Indemnity 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
26
income, including interest and dividends from foreign companies. The capital gains tax rate is 33.0%. Currently,
Global Indemnity 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 laws. 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 laws. 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 laws.
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, the Company is not required to pay any taxes in the
Cayman Islands on its 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, the Company cannot be certain that it will not be subject to Cayman Islands
tax after the expiration of the 20 year period.
Bermuda
Under current Bermuda law, the Company and its Bermuda subsidiaries are not required to pay any taxes in
Bermuda on 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.
The Company has 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 31, 2035; 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, the Company cannot be certain that the Company will not be subject to any Bermuda
tax after March 31, 2035.
27
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
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., Wind River (Luxembourg) S.à.r.l., and
Global Indemnity (Luxembourg) S.à.r.l. (the “Luxembourg Companies”) 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 29.22% 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%, 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”)
the
Luxembourg Companies under the application of at arm’s length principals 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, the Company cannot be certain that the Company will not be subject to greater
Luxembourg taxes in the future.
financing activities of
the current
that
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 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 the
Company’s operations. The Company manages its 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.
28
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, the Company 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 the Company’s other non-U.S. entities are considered disregarded
entities for federal income tax purposes. The highest marginal federal income tax rates as of 2014 are 39.6% for a
corporation’s 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 company’s
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 the Company cannot be
certain that it 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. The Company 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 the Company’s 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
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 Reinsurance’s 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 Reinsurance’s investment income could be subject to U.S. federal income tax.
29
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.
The Company’s U.S. subsidiaries are each subject to taxation in the United States at regular corporate rates.
Item 1A. RISK FACTORS
The risks and uncertainties described below are those the Company believes to be material, but they are not the
only risks the Company faces. If any of the following risks, or other risks and uncertainties that the Company has
not yet identified or that it currently considers not to be material, actually occur, the Company’s 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 the Company’s current views with respect to future events and financial performance.
Such statements include forward-looking statements both with respect to the Company 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. The Company assumes no obligation to update its forward-looking statements to
reflect actual results or changes in or additions to such forward-looking statements.
Risks Related to the Company’s Business
If actual claims payments exceed the Company’s reserves for losses and loss adjustment expenses, the
Company’s financial condition and results of operations could be adversely affected.
The Company’s success depends upon its ability to accurately assess the risks associated with the insurance and
reinsurance policies that it writes. The Company establishes reserves on an undiscounted basis to cover its
estimated liability for the payment of all losses and loss adjustment expenses incurred with respect to premiums
earned on the insurance policies that it writes. Reserves do not represent an exact calculation of liability. Rather,
reserves are estimates of what the Company expects to be the ultimate cost of resolution and administration of
claims under the insurance policies that it writes. These estimates are based upon actuarial and statistical
projections, the Company’s 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. The Company
continually refines its reserve estimates in an ongoing process as experience develops and claims are reported
and settled. The Company’s 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 the Company’s future actual losses and loss adjustment experience:
•
•
•
•
claim and expense payments;
severity of claims;
legislative and judicial developments; and
changes in economic conditions, including the effect of inflation.
30
For example, as industry practices and legal, judicial, social and other conditions change, unexpected and
unintended exposures related to claims and coverage may emerge. 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 the Company’s underwriting intent or increase the
frequency or severity of claims. As a result, such developments could cause the Company’s level of reserves to
be inadequate.
Actual losses and loss adjustment expenses the Company incurs under insurance policies that it writes may be
different from the amount of reserves it establishes, and to the extent that actual losses and loss adjustment
expenses exceed the Company’s expectations and the reserves reflected on its financial statements, the Company
will be required to immediately reflect those changes by increasing its reserves. In addition, regulators could
require that the Company increases its reserves if they determine that the reserves were understated in the past.
When the Company increases reserves, pre-tax income for the period in which it does 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 the Company’s insurance companies’ surplus and could cause the
rating of its insurance company subsidiaries to be downgraded or placed on credit watch. Such a downgrade
could, in turn, adversely affect the Company’s ability to sell insurance policies.
Catastrophic events can have a significant impact on the Company’s financial and operational condition.
Results of operations of property and casualty insurers are subject to man-made and natural catastrophes. The
Company has experienced, and expects 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 the
Company’s operating results and financial condition. The Company’s operating results could be negatively
impacted if it experiences losses from catastrophes that are in excess of the catastrophe reinsurance coverage of
its Insurance Operations. The Company’s Reinsurance Operations also have exposure to losses from catastrophes
as a result of the reinsurance treaties that it writes. Operating results could be negatively impacted if losses and
expenses related to property catastrophe events exceed premiums assumed. Catastrophes include windstorms,
hurricanes, typhoons, floods, earthquakes, tornadoes, tsunamis, hail, severe winter weather, fires and may include
terrorist events such as the attacks of September 11, 2001. The Company 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.
A failure in the Company’s operational systems or infrastructure or those of third parties could disrupt
business, damage the Company’s reputation, and cause losses.
The Company’s operations rely on the secure processing, storage, and transmission of confidential and other
information in its computer systems and networks. The Company’s business depends on effective information
systems and the integrity and timeliness of the data it uses to run its business. The Company’s ability to
adequately price products and services, to establish reserves, to provide effective and efficient service to its
customers, and to timely and accurately report financial results also depends significantly on the integrity of the
data in the Company’s information systems. Although the Company takes protective measures and endeavors to
modify them as circumstances warrant, its computer systems, software, and networks may be vulnerable,
externally and internally, to unauthorized access, computer viruses or other malicious code, and other events that
could have security consequences. If one or more of such events occur, this potentially could jeopardize the
Company’s or its clients’ or counterparties’ confidential and other information processed and stored in, and
transmitted through,
the Company’s computer systems and networks, or otherwise cause interruptions or
malfunctions in the Company’s, its clients’, its counterparties’, or third parties’ operations, which could result in
significant losses or reputational damage. The Company may be required to expend significant additional
31
resources to modify its protective measures or to investigate and remediate vulnerabilities or other exposures, and
the Company 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 it has in place, the Company’s ability to conduct business may be
adversely affected by a disruption of the infrastructure that supports its business in the communities in which the
Company is located, or of outsourced services or functions. This may include a disruption involving electrical,
communications, transportation, or other services used by the Company. These disruptions may occur, for
example, as a result of events that affect only the buildings occupied by the Company 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 the
Company’s employees in that location are unable to occupy their offices and conduct business or communicate
with or travel to other locations, the Company’s ability to service and interact with clients may suffer and it may
not be able to successfully implement contingency plans that depend on communication or travel.
A decline in rating for any of the Company’s insurance or reinsurance subsidiaries could adversely affect its
position in the insurance market, make it more difficult to market its insurance products and cause premiums
and earnings to decrease.
If the rating of any of the companies in its Insurance Operations or Reinsurance Operations is reduced from its
current level of “A” (Excellent) by A.M. Best, the Company’s competitive position in the insurance industry
could suffer, and it could be more difficult to market its insurance products. A downgrade could result in a
significant reduction in the number of insurance contracts the Company writes 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.
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 the 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. Best’s rating system is to provide potential policyholders an opinion of an insurer’s financial
strength and its ability to meet ongoing obligations, including paying claims. In evaluating a company’s financial
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 the Company’s A ordinary shares and are not a recommendation to buy, sell or hold the
Company’s A ordinary shares. Publications of A.M. Best indicate that companies are assigned “A” (Excellent)
ratings if, in A.M. Best’s 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.
The Company cannot guarantee that its reinsurers will pay in a timely fashion, if at all, and as a result, the
Company could experience losses.
The Company cedes a portion of gross premiums written to third party reinsurers under reinsurance contracts.
Although reinsurance makes the reinsurer liable to the Company to the extent the risk is transferred, it does not
relieve the Company of its liability to its policyholders. Upon payment of claims, the Company will bill its
reinsurers for their share of such claims. The reinsurers may not pay the reinsurance receivables that they owe to
the Company or they may not pay such receivables on a timely basis. If the reinsurers fail to pay it or fail to pay
on a timely basis, the Company’s financial results would be adversely affected. Lack of reinsurer liquidity,
perceived improper underwriting, or claim handling by the Company, and other factors could cause a reinsurer
not to pay. See “Business—Reinsurance of Underwriting Risk” in Item 1 of Part I of this report.
32
See Note 10 of the notes to consolidated financial statements in Item 8 of Part II of this report for further
information surrounding the Company’s reinsurance receivable balances as of December 31, 2013 and 2012.
The Company’s investment performance may suffer as a result of adverse capital market developments or
other factors, which would in turn adversely affect its financial condition and results of operations.
The Company derives a significant portion of its income from its invested assets. As a result, the Company’s
operating results depend in part on the performance of its investment portfolio. The Company’s 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 the Company from future investments in fixed maturities will
generally increase or decrease with changes in interest rates. Additionally, with respect to certain of its
investments, the Company is subject to pre-payment or reinvestment risk.
Credit tightening could negatively impact the Company’s 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 generated by operations, sales, and maturities will need to be invested. If the Company
invests during a tight credit market, investment returns could be lower than the returns the Company is currently
realizing and/or it may have to invest in higher risk securities.
With respect to its longer-term liabilities, the Company strives to structure its investments in a manner that
recognizes liquidity needs for its future liabilities. However, if the Company’s liquidity needs or general and
specific liability profile unexpectedly changes, it may not be successful in continuing to structure its investment
portfolio in that manner. To the extent that the Company is unsuccessful in correlating its investment portfolio
with its expected liabilities, the Company may be forced to liquidate its investments at times and prices that are
not optimal, which could have a material adverse effect on the performance of its investment portfolio. The
Company refers 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.
The Company is also subject to credit risk due to non-payment of principal or interest. Several classes of
securities that the Company holds 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 the Company’s control. Although the
Company attempts to take measures to manage the risks of investing in a changing interest rate environment, the
Company 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 the Company’s fixed maturities securities. The
Company’s 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.
The Company also has an equity portfolio. The performance of the Company’s equity portfolio is dependent
upon a number of factors, including many of the same factors that affect the performance of its fixed income
investments, although those factors sometimes have the opposite effect on the performance of the equity
portfolio. Individual equity securities have unsystemic risk. The Company could experience market declines on
these investments. The Company also has systemic 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, the
Company anticipates that the value of its portfolio would be negatively affected.
33
The Company has 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 periodically, typically at intervals between one month and one year. 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.
The Company has investments in limited partnerships which are not liquid. The Company does not have the
contractual option to redeem its limited partnership interests but receives distributions based on the liquidation of
the underlying assets. The Company does not have the ability to sell or transfer its limited partnership interests
without consent from the general partner. The Company’s returns could be negatively affected if the market
value of the partnership declines. If the Company needs liquidity,
it might be forced to liquidate other
investments at a time when prices are not optimal.
See Note 6 of the notes to consolidated financial statements in Item 8 of Part II of this report for further
information surrounding the Company’s investments as of December 31, 2013 and 2012.
Deterioration in the debt and equity markets could result in a margin call which could have a material adverse
effect on the Company’s financial condition and/or results of operations.
The collateral backing the Company’s margin borrowing facility consist of fixed income and equity securities.
Declines in financial markets could negatively impact the value of the Company’s collateral. Adverse changes in
market value could result in a margin call which would require the posting of additional collateral thereby
reducing liquidity. Additionally, if such a margin call is not met, the Company could be required to liquidate
securities and incur realized losses.
Borrowings under the Company’s margin borrowing facility are based upon a variable rate of interest, which
could result in higher expense in the event of increases in interest rates.
As of December 31, 2013, $100 million of the Company’s outstanding indebtedness bore interest at a rate that
varies depending upon LIBOR. If LIBOR rises, the interest rates on outstanding debt will increase resulting in
increased interest payment obligations under the Company’s margin borrowing facility. This could have a
negative effect on the Company’s cash flow and financial condition.
The Company is dependent on its senior executives and the loss of any of these executives or the Company’s
inability to attract and retain other key personnel could adversely affect its business.
The Company’s success depends upon its ability to attract and retain qualified employees and upon the ability of senior
management and other key employees to implement the Company’s business strategy. The Company believes there are
a limited number of available, qualified executives in the business lines in which it competes. The success of the
Company’s initiatives and future performance depend, in significant part, upon the continued service of the senior
management team. The future loss of any of the services of members of the Company’s senior management team or
the inability to attract and retain other talented personnel could impede the further implementation of the Company’s
business strategy, which could have a material adverse effect on its business. In addition, the Company does not
currently maintain key man life insurance policies with respect to any of its employees.
Employee error and misconduct may be difficult to detect and prevent and could adversely affect the
Company’s business, results of operations, financial condition and reputation.
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 the Company takes to prevent and detect this
activity may not be effective in all cases. Resultant losses could adversely affect the Company’s business, results
of operations, financial condition and reputation.
34
Since the Company depends on professional general agencies, brokers, other insurance companies and other
reinsurance companies for a significant portion of its revenue, a loss of any one of them could adversely affect
the Company.
The Company markets and distributes its insurance products through a group of approximately 110 professional
general agencies that have specific quoting and binding authority and that in turn sell the Company’s insurance
products to insureds through retail insurance brokers. The Company also markets and distributes its reinsurance
products through third-party brokers,
insurance companies and reinsurance companies. A loss of all or
substantially all of the business produced by any one of these general agencies, brokers, insurance companies or
reinsurance companies could have an adverse effect on the Company’s results of operations.
If market conditions cause reinsurance to be more costly or unavailable, the Company may be required to
bear increased risks or reduce the level of its underwriting commitments.
As part of the Company’s overall strategy of risk and capacity management, it purchases reinsurance for a
portion of the risk underwritten by its insurance subsidiaries. Market conditions beyond the Company’s control
determine the availability and cost of the reinsurance it purchases, which may affect the level of its business and
profitability. The Company’s third party reinsurance facilities are generally subject to annual renewal. The
Company may be unable to maintain its current reinsurance facilities or obtain other reinsurance facilities in
adequate amounts and at favorable rates. If the Company is unable to renew expiring facilities or obtain new
reinsurance facilities, either the net exposure to risk would increase or, if the Company is unwilling to bear an
increase in net risk exposures, it would have to reduce the amount of risk it underwrites.
The Company’s 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 industry’s profitability can be affected significantly by:
•
•
•
•
•
•
competition;
capital capacity;
rising levels of actual costs that are not foreseen by companies at the time they price their products;
volatile and unpredictable developments,
catastrophes or terrorist attacks;
including man-made, weather-related and other natural
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
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.
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
in nature. These fluctuations in demand and competition could produce
industry historically is cyclical
underwriting results that would have a negative impact on the Company’s consolidated results of operations and
financial condition.
The Company faces significant competitive pressures in its business that could cause demand for its products
to fall and adversely affect the Company’s profitability.
The Company competes with a large number of other companies in its selected lines of business. The Company
competes, 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
35
diversified financial services companies. The Company’s 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, Markel Corporation,
Nationwide Insurance, Navigators Insurance Group, RLI Corporation, Selective Insurance Group, Inc., The
Travelers Companies, Inc., W.R. Berkley Corporation, and Western World Insurance Group. Some of the
Company’s competitors have greater financial and marketing resources than the Company does. The Company’s
profitability could be adversely affected if it loses business to competitors offering similar products at or below
the Company’s prices.
The Company’s general agencies typically pay the insurance premiums on business they have bound to the
Company on a monthly basis. This accumulation of balances due to the Company exposes it to credit risk.
Insurance premiums generally flow from the insured to their retail broker, then into a trust account controlled by
the Company’s professional general agencies. The Company’s professional general agencies are typically
required to forward funds, net of commissions, to the Company following the end of each month. Consequently,
the Company assumes a degree of credit risk on the aggregate amount of these balances that have been paid by
the insured but have yet to reach the Company.
Brokers, insurance companies and reinsurance companies typically pay premiums on reinsurance treaties
written with the Company on a quarterly basis. This accumulation of balances due to the Company exposes it
to credit risk.
Assumed premiums on reinsurance treaties generally flow from the ceding companies to the Company on a
quarterly basis. In some instances, the reinsurance treaties allow for funds to be withheld for longer periods as
specified in the treaties. Consequently, the Company assumes a degree of credit risk on the aggregate amount of
these balances that have been collected by the reinsured but have yet to reach the Company.
Because the Company provides its general agencies with specific quoting and binding authority, if any of them
fail to comply with pre-established guidelines, the Company’s results of operations could be adversely affected.
The Company markets and distributes its insurance products through professional general agencies that have
limited quoting and binding authority and that in turn sell the Company’s insurance products to insureds through
retail insurance brokers. These professional general agencies can bind certain risks without the Company’s initial
to comply with the Company’s
approval. If any of these wholesale professional general agencies fail
underwriting guidelines and the terms of their appointment, the Company could be bound on a particular risk or
number of risks that were not anticipated when it developed the insurance products or estimated loss and loss
adjustment expenses. Such actions could adversely affect the Company’s results of operations.
The Company’s holding company structure and regulatory constraints limit its ability to receive dividends
from subsidiaries in order to meet its cash requirements.
Global Indemnity is a holding company and, as such, has no substantial operations of its own. The Company’s
assets primarily consist of cash and 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 Indemnity’s sole source of funds
to meet ongoing cash requirements, including debt service payments and other expenses.
Due to its 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.
36
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 company’s 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.
the Company’s U.S.
In addition,
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
Indemnity. See
“Regulation—U.S. Regulation” in Item 1 of Part I of this report. Also, see Note 20 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 Company’s U.S. insurance subsidiaries in 2014.
first pass through Wind River Reinsurance before being paid to Global
The Company’s businesses are heavily regulated and changes in regulation may limit the way it operates.
The Company is subject to extensive supervision and regulation in the U.S. states in which the Insurance
Operations operate. This is particularly true in those states in which the Company’s insurance subsidiaries are
licensed, as opposed to those states where its insurance subsidiaries write business on a surplus lines basis. The
supervision and regulation relate to numerous aspects of the Company’s business and financial condition. The
primary purpose of the supervision and regulation is the protection of the Company’s insurance policyholders
and not its 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:
•
•
•
•
•
•
•
•
•
standards of solvency, including risk-based capital measurements;
restrictions on the nature, quality and concentration of investments;
restrictions on the types of terms that the Company can include or exclude in the insurance policies it
offers;
restrictions on the way rates are developed and the premiums the Company may charge;
standards for the manner in which general agencies may be appointed or terminated;
credit for reinsurance;
certain required methods of accounting;
reserves for unearned premiums, losses and other purposes; and
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.
The statutes or the state insurance department regulations may affect the cost or demand for the Company’s
products and may impede the Company from obtaining rate increases or taking other actions it might wish to take
to increase profitability. Further, the Company may be unable to maintain all required licenses and approvals and
its business may not fully comply with the wide variety of applicable laws and regulations or the relevant
authority’s 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 the Company does
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 the Company from carrying on some or all of its activities or monetarily penalize the
Company.
37
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 U.S. States and the District of Columbia, and state insurance regulators regularly re-
examine 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 the Company’s business.
Although the U.S. federal government has not historically regulated the insurance business, there have been
proposals from time to time to impose federal regulation on the insurance industry. In 2010, the President signed
into law the Dodd-Frank Act. Among other things, the Dodd-Frank 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 Dodd-Frank 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 the Company does not believe
that it is “systemically important,” as defined in the Dodd-Frank Act, it is possible that the Financial Stability
Oversight Council may conclude that it is. If the Company were designated as “systemically important,” the
Federal Reserve’s supervisory authority could include the ability to impose heightened financial regulation and
could impact requirements regarding the Company’s capital,
leverage, business and investment
conduct. As a result of the foregoing, the Dodd-Frank Act, or other additional federal regulation that is adopted in
the future, could impose significant burdens on the Company, including impacting the ways in which it conducts
business,
in a competitive
disadvantage, particularly relative to smaller insurers who may not be subject to the same level of regulation.
increasing compliance costs and duplicating state regulation, and could result
liquidity,
The Company may require additional capital in the future that may not be available or only available on
unfavorable terms.
The Company’s future capital requirements depend on many factors, including the incurring of significant net
catastrophe losses, its ability to write new business successfully and to establish premium rates and reserves at
levels sufficient to cover losses. To the extent that the Company needs 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 the Company. If the
Company cannot obtain adequate capital, its business, results of operations and financial condition could be
adversely affected.
The Company has used and may in the future use a significant amount of its cash resources to repurchase its
ordinary shares and such repurchases present potential risks and disadvantages to the Company and its
continuing shareholders.
The Company does not currently have authorization from the Board of Directors to repurchase A ordinary shares.
However, the Company may be authorized to purchase A ordinary shares by the Board of Directors in the future
and future repurchases of the Company’s shares exposes it to risks including:
•
•
•
the use of a substantial portion of the Company’s cash reserves, which may reduce its ability to engage
in significant cash acquisitions or to pursue other business opportunities that could create significant
value to shareholders;
the risk that the Company would not be able to replenish its cash reserves by raising debt or equity
financing in the future on terms acceptable to the Company, or at all; and
the risk that these repurchases would reduce the Company’s “public float,” which is the number of
shares owned by non-affiliate shareholders and available for trading in the securities markets, and
would likely reduce the number of the Company’s shareholders, which may reduce the volume of
trading in its shares and may result in lower stock prices and reduced liquidity in the trading of the
Company’s shares.
38
The interests of holders of A ordinary shares may conflict with the interests of the Company’s controlling
shareholder.
Fox Paine & Company, LLC (“Fox Paine & Company”) beneficially owns shares having approximately 93% of
the Company’s total voting power. The percentage of the Company’s total voting power that Fox Paine &
Company may exercise is greater than the percentage of the Company’s total shares that Fox Paine & Company
beneficially owns because Fox Paine & Company beneficially owns all of the Company’s B ordinary shares,
which have ten votes per share as opposed to A ordinary shares, which have one vote per share. The A ordinary
shares and the B ordinary shares generally vote together as a single class on matters presented to the Company’s
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 the Company’s 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:
•
•
•
•
•
•
elect all of the Company’s directors;
amend the Company’s articles of association (as long as their voting power is greater than 75%);
ratify the appointment of the Company’s auditors;
increase the Company’s share capital;
resolve to pay dividends or distributions; and
approve the annual report and the annual financial statements.
Subject to certain exceptions, Fox Paine & Company may also be able to prevent or cause a change of control.
Fox Paine & Company’s control over the Company, and Fox Paine & Company’s 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 when it is not favored by other shareholders. As a result, the trading price of the Company’s A
ordinary shares could be adversely affected.
In addition, the Company has agreed to pay Fox Paine & Company an annual management fee of $1.9 million,
adjusted annually to reflect change in the consumer price index published by the US Department of Labor Bureau
of Labor Statistics “CPI”, in exchange for management services. The Company has also agreed to pay a
termination fee of cash in an amount to be agreed upon, plus reimbursement of expenses upon the termination of
Fox Paine & Company’s management services in connection with the consummation of a change of control
transaction that does not involve Fox Paine & Company and its affiliates. The Company has also agreed to pay
Fox Paine & Company a transaction advisory fee of cash in an amount to be agreed upon, plus reimbursement of
expenses upon the consummation of a change of control transaction that does not involve Fox Paine & Company
and its affiliates in exchange for advisory services to be provided by Fox Paine & Company in connection
investments in other insurance or
therewith. Fox Paine & Company may in the future make significant
reinsurance companies. Some of these companies may compete with the Company or its subsidiaries. Fox
Paine & Company is not obligated to advise the Company of any investment or business opportunities of which
they are aware, and they are not prohibited or restricted from competing with the Company or its subsidiaries.
The Company’s controlling shareholder has the contractual right to nominate a certain number of the
members of the 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 of the Board of Directors, dependent on Fox Paine & Company’s
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. The Company’s Board of Directors currently consists of seven
directors, all of which, other than Ms. Cynthia Y. Valko, were identified and proposed for consideration for the
Board of Directors by Fox Paine & Company.
39
The Company’s Board of Directors, in turn, and subject to its fiduciary duties under Irish law, appoints the
members of the Company’s 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 the Company’s senior
management and to prevent any changes in senior management that other shareholders or other members of the
Board of Directors may deem advisable.
Because the Company relies on certain services provided by Fox Paine & Company, the loss of such services
could adversely affect its business.
During 2013, 2012, and 2011, Fox Paine & Company provided certain management services to the Company. To
the extent that Fox Paine & Company is unable or unwilling to provide similar services in the future, and the
Company is unable to perform those services ourselves or is unable to secure replacement services, the
Company’s business could be adversely affected.
Adverse consequences of the U.S. and global economic and financial industry downturns could harm the
Company’s business, its liquidity and financial condition, and its stock price.
In recent years, global market and economic conditions were severely disrupted. While conditions have since
improved, there is continued uncertainty regarding the timing and strength of any economic recovery. The trend
may not continue or may continue at a slow rate for an extended period of time, or conditions may worsen. These
conditions may potentially affect (among other aspects of the Company’s business) the demand for and claims
made under the Company’s products, the ability of customers, counterparties and others to establish or maintain
their relationships with the Company, its ability to access and efficiently use internal and external capital
resources, the availability of reinsurance protection, the risks the Company assumes under reinsurance programs,
and the Company’s investment performance. Continued volatility in the U.S. and other securities markets may
adversely affect the Company’s stock price.
The Company’s operating results and shareholders’ equity may be adversely affected by currency fluctuations.
The Company’s functional currency is the U.S. dollar. The Reinsurance Operations conduct business with some
customers in foreign currencies, and some of the Company’s non-U.S. subsidiaries have foreign currency
denominated cash accounts and investments. 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 the Company’s risk management process. The
Company 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 the Company’s results of operations and financial
condition.
The Company is incorporated in Ireland and some of its 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.
The Company is organized under the laws of Ireland, and some of its 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 the Company in Ireland or in countries other than
the United States where the Company has 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 the Company
or its 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 the Company or those persons based on those laws. The Company
has 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
40
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 the Company has assets.
Irish law differs from the laws in effect in the United States and might afford less protection to shareholders.
The Company’s 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, the Company is 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 ordinary shares, other than one effected by means of the transfer of book entry interests
in Depository Trust Company (“DTC”), may be subject to Irish stamp duty.
A transfer of the Company’s A ordinary shares by a seller who holds A ordinary shares beneficially through DTC
to a buyer who holds the acquired A ordinary shares beneficially through DTC will not be subject to Irish stamp
duty. A transfer of the Company’s 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 the Company’s ordinary shares.
Risks Related to Taxation
Legislative and regulatory action by the U.S. Congress could materially and adversely affect the Company.
The Company’s 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 the Company relies or could broaden the
circumstances under which the Company would be considered a U.S. resident, each of which could materially
and adversely affect the Company’s effective tax rate and cash tax position.
The Company may become subject to taxes in the Cayman Islands or Bermuda in the future, which may have
a material adverse effect on its results of operations.
The Company has subsidiaries which have been incorporated under the laws of the Cayman Islands as exempted
companies 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
41
apply to the Company 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 the Company’s 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, the Company cannot be certain that it 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 the Company’s non-U.S. operations.
The Company 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 31, 2035.
Given the limited duration of the assurance, the Company cannot be certain that it will not be subject to any
Bermuda tax after March 31, 2035.
Following the expiration of the periods described above, the Company may become subject to taxes in the
Cayman Islands or Bermuda, which may have a material adverse effect on its 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 Indemnity’s or Wind River Reinsurance’s results of operations.
Global Indemnity is an Irish company and Wind River Reinsurance is a Bermuda company. The Company seeks
to manage its 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, the Company 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, the Company could be subject to U.S. corporate income and branch profits taxes on the portion
of its earnings effectively connected to such U.S. business, in which case its 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 the Company’s 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. The Cayman Islands and Bermuda are not listed as
uncooperative tax haven jurisdictions because each had previously 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. The Company is not able to predict what changes will arise from the OECD in the future or
whether such changes will subject it to additional taxes.
There is a risk that interest paid by the Company’s U.S. subsidiary to a Luxembourg affiliate may be subject to
30% U.S. withholding tax.
(Luxembourg)
U.A.I.
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
42
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 the Company’s financial condition and results of operation.
There is a risk that interest income imputed to the Company’s 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 the Company’s current
operations.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
The Company leases office space in Bala Cynwyd, Pennsylvania which holds the Insurance Operations’ principal
executive offices and headquarters. In addition, the Company leases additional office space in California,
Georgia, Illinois, Maryland and Texas, which serves as office space for field offices. Some of the office space in
California also serves as office space for the Company’s claims operations. The Company also leases office
space in Hamilton, Bermuda, which is used by the Reinsurance Operations. The Company leases office space in
Cavan, Ireland, which is used to support the operating needs of the Insurance and Reinsurance Operations. The
Company believes the properties listed are suitable and adequate to meet its needs.
Item 3.
LEGAL PROCEEDINGS
The Company is, from time to time, involved in various legal proceedings in the ordinary course of business. The
Company purchased insurance and reinsurance coverage for risks in amounts that
it considers adequate.
However, there can be no assurance that the insurance and reinsurance coverage that the Company maintains is
sufficient or will be available in adequate amounts or at a reasonable cost. The Company does not believe that the
resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a
material adverse effect on its business, results of operations, cash flows, or financial condition.
There is a greater potential for disputes with reinsurers who are in runoff. Some of the Company’s reinsurers’
have operations that are in runoff, and therefore, the Company closely monitors those relationships. The
Company anticipates that, similar to the rest of the insurance and reinsurance industry, it will continue to be
subject to litigation and arbitration proceedings in the ordinary course of business.
Item 4. MINE SAFETY DISCLOSURES
None.
43
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for the Company’s A Ordinary Shares
The Company’s 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 the Company changed its symbol to “INDM.” On July 6, 2010, the Company changed its 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 the Company’s A ordinary shares as reported by the NASDAQ Global Select Market.
Fiscal Year Ended December 31, 2013:
First Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Year Ended December 31, 2012:
First Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High
Low
$23.89
24.30
27.57
27.38
$21.50
21.81
22.61
22.58
$20.06
20.06
23.26
23.57
$17.36
17.22
18.62
20.91
There is no established public trading market for the Company’s B ordinary shares, par value $0.0001 per share.
As of March 7, 2014, there were 11 owners of the Company’s B ordinary shares, all of whom are affiliates of
Fox Paine & Company, LLC. The number of holders of record, including individual owners of the Company’s A
ordinary shares, was 1,256 as of March 7, 2014. This is not the actual number of beneficial owners of the
Company’s A ordinary shares as shares are held in “street name” by brokers and others on behalf of individual
owners.
See Note 17 to the consolidated financial statements in Item 8 of Part II of this report for information regarding
securities authorized under the Company’s equity compensation plans.
44
Performance of the Company’s A Ordinary Shares
The following graph represents a five-year comparison of the cumulative total return to shareholders for the
Company’s A ordinary shares and stock of companies included in the NASDAQ Insurance Index and NASDAQ
Composite Index, which the Company believes are the most comparative indexes.
S
R
A
L
L
O
D
275
250
225
200
175
150
125
100
75
50
25
0
12/31/2008
12/31/2009
12/31/2010
12/31/2011
12/31/2012
12/31/2013
Global Indemnity (GBLI)
NASDAQ Insurance (^IXIS)
NASDAQ Composite (^IXIC)
Global Indemnity plc . . . . . . . . . . . . . . . . . . . . . . . . . . .
NASDAQ Insurance Index . . . . . . . . . . . . . . . . . . . . . . .
NASDAQ Composite Index . . . . . . . . . . . . . . . . . . . . . .
$100.0
100.0
100.0
$ 61.8
100.6
143.9
$ 79.8
115.2
168.2
$ 77.4
118.8
165.2
$ 86.4
134.8
191.5
$ 98.8
173.6
264.8
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
Note: The Company completed a Rights Offering on May 5, 2009, which increased the Company’s total
outstanding A ordinary shares by 17.2 million shares.
Note: The Company completed a 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.
Recent Sales of Unregistered Securities
None.
Purchases of the Company’s A Ordinary Shares
The Company’s Share Incentive Plan allows employees to surrender A ordinary shares as payment for the tax
liability incurred upon the vesting of restricted stock that was issued under the Share Incentive Plan. During
2013, the Company purchased an aggregate 2,370 of surrendered A ordinary shares from employees for $0.1
million. All shares purchased from employees are held as treasury stock and recorded at cost.
See Note 14 to the consolidated financial statements in Item 8 of Part II of this report for tabular disclosure of the
Company’s share repurchases by month.
Dividend Policy
The Company did not declare or pay cash dividends on any class of its ordinary shares in 2013 or 2012. Payment of
dividends is subject to future determinations by the Board of Directors based on the Company’s results, financial
conditions, amounts required to grow the Company’s business, and other factors deemed relevant by the Board.
45
The Company is a holding company and has no direct operations. The Company’s ability to pay dividends
depends, in part, on the ability of its 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.
In December, 2013, each of the U.S. insurance subsidiaries declared an extraordinary dividend that aggregated to
$200 million. In January, 2014, each of the dividends for the U.S. insurance companies was approved by their
respective departments of insurance in Pennsylvania, Indiana, Wisconsin, and Virginia. On January 23, 2014, the
U.S. insurance companies paid an aggregate of $200 million to Global Indemnity Group, Inc. See Note 20 of the
notes to consolidated financial statements in Item 8 of Part II of this report for dividend limitations for 2014.
For 2014, the Company believes that Wind River Reinsurance should have sufficient liquidity and solvency to
pay dividends. In the future, the Company anticipates using 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 year’s statutory financial statements,
and any application for such approval must include such information as the BMA may require. Based upon the
total statutory capital plus the statutory surplus as set out in its 2013 statutory financial statements that will be
filed in 2014, Wind River Reinsurance could pay a dividend of up to $236.0 million without requesting BMA
approval. Wind River Reinsurance 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 it has no reasonable
grounds for believing that it is, or would after the payment be, unable to pay its liabilities as they become due, or
if the realizable value of its assets would not be less than the aggregate of its liabilities and its issued share capital
and share premium accounts.
In 2013, 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 were no Luxembourg dividends paid in 2013. 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 the Company’s ability to pay dividends, see “Business—Regulation” in
Item 1 of Part I, “Management’s 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 20 of the notes to
the consolidated financial statements in Item 8 of Part II of this report.
46
Item 6.
SELECTED FINANCIAL DATA
Effective January 1, 2012, the Company adopted new accounting guidance that modified the definition of costs
that can be capitalized in the acquisition of new and renewal business for insurance companies. Under the new
guidance, only direct incremental costs associated with successful insurance contract acquisitions or renewals are
deferrable. This guidance was adopted retrospectively and has been applied to all prior period information
contained in this Form 10-K. For further information please see Note 2 of the notes to the consolidated financial
statements in Item 8 of Part II of this report.
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 “Management’s 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.
(Dollars in thousands, except shares and per
share data)
Consolidated Statements of
Operations Data:
Gross premiums written . . . . . . . . . . .
Net premiums written . . . . . . . . . . . . .
Net premiums earned . . . . . . . . . . . . .
Net realized investment gains . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . .
Net income (loss) (4) . . . . . . . . . . . . . .
Per share data: (1) (2) (3) (4)
Net income (loss) available to
common shareholders . . . . . . . . . . .
Basic . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . .
Weighted-average number of shares
outstanding
For the Years Ended December 31,
2013
2012
2011
2010
2009
$
$
$
$
290,723
271,984
248,722
27,412
319,134
61,690
61,690
2.46
2.45
$
$
244,053
219,547
238,862
6,755
293,016
34,757
34,757
1.30
1.30
$
307,903
280,570
297,854
21,473
385,020
(38,338)
345,763
296,504
286,774
26,437
370,127
84,871
(38,338) $
(1.27)
(1.27)
84,871
2.81
2.80
$
$
340,999
290,995
301,674
15,862
388,115
74,662
74,662
2.89
2.88
Basic . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . .
25,072,712
25,174,015
26,722,772
26,748,833
30,246,095
30,246,095
30,237,787
30,274,259
25,856,049
25,881,382
(1)
(2)
In 2011, “Diluted” shares were the same as “Basic” shares since there was a net loss for that year.
In May 2009, the Company issued 17.2 million A ordinary shares and 11.4 million 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, any share counts
prior to May, 2009 have been restated.
(3) 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.
(4) Results for the year to date 2012 include the impact of an out-of-period adjustment which reduced net
income by $1.6 million, or $0.06 per diluted share.
47
Consolidated Insurance Operating Ratios
based on the Company’s GAAP
Results: (1)
Loss ratio (2) (3) . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio (2) (3) . . . . . . . . . . . . . . . . . .
Net / gross premiums written . . . . . . . . . . . .
Financial Position as of Last Day of
Period:
Total investments and cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance receivables, net of allowance . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Margin borrowing facility . . . . . . . . . . . . . . .
Senior notes payable . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . . . . . . . .
Unpaid losses and loss adjustment
expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . .
2013
2012
2011
2010
2009
53.5
42.5
96.0
93.6
64.3
39.9
104.2
90.0
93.5
40.8
134.3
91.1
45.4
41.2
86.6
85.8
56.2
40.1
96.3
85.3
$1,567,415
197,887
1,911,779
100,000
—
—
$1,533,989
241,827
1,903,703
$1,647,723
287,986
2,072,916
$1,717,186
422,844
2,290,728
$1,731,314
543,351
2,441,913
—
54,000
30,929
—
72,000
30,929
—
90,000
30,929
—
90,000
30,929
779,466
873,280
879,114
806,618
971,377
839,063
1,052,743
924,769
1,257,741
828,108
(1) The Company’s insurance operating ratios are 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 the Company’s Insurance
Operations and Reinsurance Operations.
(2) A summary of prior accident year adjustments is summarized as follows:
•
•
•
•
•
2013 loss and combined ratios reflect a $7.9 million reduction of net losses and loss adjustment
expenses
2012 loss and combined ratios reflect a $4.4 million increase of net losses and loss adjustment
expenses
2011 loss and combined ratios reflect a $3.4 million increase of net losses and loss adjustment
expenses
2010 loss and combined ratios reflect a $54.1 million reduction of net losses and loss adjustment
expenses
2009 loss and combined ratios reflect a $9.1 million reduction of net losses and loss adjustment
expenses
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) The Company’s loss and combined ratios for 2013, 2012, 2011, 2010, and 2009 include $10.0 million, $14.2
million, $20.6 million, $2.8 million, and $5.8 million, respectively, of catastrophic losses from the 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. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company’s financial condition and results of operations should be
read in conjunction with the consolidated financial statements and accompanying notes of Global Indemnity
included elsewhere in this report. Some of the information contained in this discussion and analysis or set forth
elsewhere in this report, including information with respect to the Company’s 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
On September 30, 2013, the Company redeemed the entire outstanding principal amount on its UNG Trust I
junior subordinated notes. The payment of $10.4 million consisted of principal of $10.3 million and interest of
$0.1 million. This payment was funded by borrowing $10.0 million pursuant to a margin borrowing facility. See
Note 13 of the notes to the consolidated financial statements in Item 8 of Part II of this report for details on the
terms of the margin borrowing facility.
On October 29, 2013, the Company redeemed the entire outstanding principal amount on its UNG Trust II junior
subordinated notes. The payment of $20.8 million consisted of principal of $20.6 million and interest of $0.2
million. This payment was funded by borrowing $20.2 million pursuant to the Company’s margin borrowing
facility. See Note 13 of the notes to the consolidated financial statements in Item 8 of Part II of this report for
details on the terms of the margin borrowing facility.
On October 31, 2013, the Company entered into an Amendment and Restatement of the Management Agreement
with Fox Paine & Company, LLC (the “Amended and Restated Agreement”). See Note 15 of the notes to the
consolidated financial statements in Item 8 of Part II and Exhibit 10.6 in Item 15 of Part IV of this report for
details on the Amended and Restated Agreement.
In December, 2013, the Company entered into two interest rate swap agreements as a fixed rate payor to mitigate
interest rate risk. See Note 7 of the notes to the consolidated financial statements in Item 8 of Part II of this report
for details on the interest rate swap agreements.
On December 31, 2013, Diamond State Insurance Company sold all the outstanding shares of capital stock of one
of its wholly owned subsidiaries, United National Casualty Insurance Company, to an unrelated party. Diamond
State Insurance Company received a one-time payment of $26.6 million and recognized a pre-tax gain of $5.2
million. The financial results for 2013, 2012, and 2011 include the financial results for United National Casualty
Insurance Company. Management deemed this transaction to be an asset sale with the assets primarily comprised
of investments and insurance licenses. This transaction will not have a significant impact on the Company’s
ongoing business operations.
In December, 2013, each of the U.S. insurance subsidiaries declared an extraordinary dividend that aggregated to
$200 million. In January, 2014, each of the dividends for the U.S. insurance companies was approved by their
respective departments of insurance in Pennsylvania, Indiana, Wisconsin, and Virginia. On January 23, 2014, the
U.S. insurance companies paid an aggregate of $200 million to Global Indemnity Group, Inc.
The Company’s Insurance Operations distribute property and casualty insurance products through a group of
approximately 110 professional general agencies that have limited quoting and binding authority, as well as a
Overview
49
number of wholesale insurance brokers who in turn sell the Company’s insurance products to insureds through retail
insurance brokers. The Company operates predominantly in the excess and surplus lines marketplace. To manage its
operations, the Company differentiates them by product classification. These product classifications are: 1) Penn-
America, which includes property and general liability products for small commercial businesses distributed
through a select network of wholesale general agents with specific binding authority; 2) United National, which
includes property, general liability, and professional lines products distributed through program administrators with
specific binding authority; and 3) Diamond State, which includes property, casualty, and professional lines products
distributed through wholesale brokers and program administrators with specific binding authority.
Currently, the Company’s Reinsurance Operations segment, which consists solely of the operations of Wind
River Reinsurance, provides reinsurance solutions through brokers and on a direct basis. In prior years, the
Company provided reinsurance solutions through program managers and primary writers, including regional
insurance companies. Wind River Reinsurance is a Bermuda based treaty reinsurer for specialty property and
casualty insurance and reinsurance companies. Wind River Reinsurance conducts business in Bermuda and is
focused on using its capital capacity to write catastrophe-oriented placements and other niche or specialty-
focused treaties meeting the Company’s risk tolerance and return thresholds. Given the current pricing
environment, Wind River Reinsurance continues to cautiously deploy and manage its capital while seeking to
position itself as a niche reinsurance solution provider.
The Company derives its revenues primarily from premiums paid on insurance policies that it writes and from
income generated by its investment portfolio, net of fees paid for investment management services. The amount
of insurance premiums that the Company receives is a function of the amount and type of policies it writes, as
well as of prevailing market prices.
The Company’s expenses include losses and loss adjustment expenses, acquisition costs and other underwriting
expenses, corporate and other operating expenses, interest, investment expenses, and income taxes. Losses and
loss adjustment expenses are estimated by management and reflect the Company’s best estimate of ultimate
losses and costs arising during the reporting period and revisions of prior period estimates. The Company records
losses and loss adjustment expenses based on an actuarial analysis of the estimated losses the Company expects
to incur on the insurance policies it writes. The ultimate losses and loss adjustment expenses will depend on the
actual costs to resolve claims. Acquisition costs consist principally of commissions and premium taxes that are
typically a percentage of the premiums on the insurance policies the Company writes, net of ceding commissions
earned from reinsurers. Other underwriting expenses consist primarily of personnel expenses and general
operating expenses. Corporate and other operating expenses are comprised primarily of outside legal fees, other
professional and accounting fees, directors’ fees, management fees, and salaries and benefits for company
personnel whose services relate to the support of corporate activities. Interest expense is primarily comprised of
amounts due on outstanding debt.
Critical Accounting Estimates and Policies
The Company’s consolidated financial statements are prepared in conformity with GAAP, which require it to
make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting periods. See Note 5
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.
The Company believes that of the Company’s 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, the Company believes that the liability for unpaid losses and loss
adjustment expenses reflects its best estimate for future amounts needed to pay losses and related loss adjustment
expenses and the impact of its reinsurance coverage with respect to insured events.
50
In developing loss and loss adjustment expense (“loss” or “losses”) reserve estimates for the Company’s
Insurance Operations, its 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 and 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. The Company’s
long-tail exposures include general liability, professional liability, products liability, commercial automobile
liability, and excess and umbrella. Short-tail exposures include property, commercial automobile physical
damage, and equine mortality. To manage its insurance operations, the Company differentiates by product
classifications, which are Penn-America, United National, and Diamond State. For further discussion about the
Company’s product classifications, see “General—Business Segments—Insurance Operations” in Item 1 of Part I
of this report. Each of the Company’s product classifications contain both long-tail and short-tail exposures.
Every reserve category is analyzed by the Company’s actuaries each quarter. The analyses generally include
reviews of losses gross of reinsurance and net of reinsurance.
Loss reserve estimates for the Company’s Reinsurance Operations are developed by independent, external
actuaries; however management is responsible for the final determination of loss reserve selections. The data for
this analysis is organized by treaty and treaty year. As with the Company’s reserves for its Insurance Operations,
reserves for its Reinsurance Operations are characterized as short-tail and long-tail. Long-tail exposures include
workers compensation, professional liability, and excess and umbrella liability. Short-tail exposures are primarily
catastrophe exposed property accounts.
In addition to the Company’s internal reserve analysis, independent external actuaries perform a full, detailed
review of the Insurance Operations’ reserves annually. The Company does not rely upon the review by the
independent actuaries to develop its reserves; however, the data is used to corroborate the analysis performed by
the in-house actuarial staff. The Company’s independent external actuaries also perform a full, detailed review of
the Reinsurance Operations’ reserves annually. In 2013, the independent external actuaries also performed a
detailed review of the Reinsurance Operations’ loss reserves at June 30, 2013.
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
51
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 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. 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 the Company, the impact of
judicial decisions, the impact of underwriting changes and other factors. Estimating the ultimate average loss
requires analysis of the impact of large losses and claim cost trends based on changes in the cost of repairing or
replacing property, changes in the cost of medical care, changes in the cost of wage replacement, judicial
decisions, legislative changes and other factors.
For many 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, the
Company’s actuaries typically assign more weight to the Incurred Development method than to the Paid
Development method. As claims continue to settle and the volume of paid losses increases, the actuaries may
assign additional weight to the Paid Development method. For most of the Company’s reserve categories, even
52
the incurred losses for accident years that are early in the claim settlement process will not be of sufficient
volume to produce a reliable estimate of ultimate losses. In these cases, the Company will not assign any weight
to the Paid and Incurred Development methods and will use the Bornhuetter-Ferguson and Expected Loss Ratio
methods. For short-tail exposures, the Paid and Incurred Development methods can often be relied on sooner
primarily because the Company’s history includes a sufficient number of years to cover the entire period over
which paid and incurred losses are expected to change. However, the Company may also use the Expected Loss
Ratio, Bornhuetter-Ferguson and Average Loss methods for short-tail exposures.
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
to the Incurred and/or Paid
Bornhuetter-Ferguson methods for the most recent accident year and shift
Development method in subsequent years.
For other more complex reserve categories where the above methods may not produce reliable indications, the
Company uses additional methods tailored to the characteristics of the specific situation. Such reserve categories
include losses from construction defects and A&E.
For construction defect losses, the Company’s actuaries organize losses by the year in which they were reported. To
estimate losses from claims that have not been reported, various extrapolation techniques are applied to the pattern
of claims that have been reported to estimate the number of claims yet to be reported. This process requires analysis
of several factors including the rate at which policyholders report claims to the Company, the impact of judicial
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
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 2008 to reflect its best estimate of A&E exposures.
In 2009, one of the Company’s 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 may
trigger financial obligations by the insurance company. One such event is the confirmation of a Plan involving an
asbestos trust established under the bankruptcy code and funded in part by settlement proceeds. On February 24,
2014, the United States Bankruptcy Court for the Northern District of California (District Court) issued a
Memorandum Re Confirmation of a Revised Plan following a remand from the Ninth Circuit Court of
Appeals. The confirmation of the Revised Plan includes an injunction under 11 U.S.C. Section 524(g) (US
bankruptcy code) related to the suit above. The injunction, also called a “channeling injunction,” precludes,
among other things, non-settling insurers from asserting claims against one of the Company’s insurance
companies and asbestos related claims by third parties against one of the Company’s insurance companies that
are related to the named insured. The most recent ruling may be subject to an appeal by the non-settling insurer
group. Management will continue to monitor the developments of the litigation to determine if any additional
financial exposure is present.
53
In addition, the Company has exposure to other asbestos related matters. In 2013, three claims were reported on
an excess policy that was written in 1985. Management will continue to monitor the developments of the
litigation noted above as well as the new claims that have been reported to determine if any additional financial
exposure is present.
Reserve analyses performed by the Company’s internal and external actuaries result
in actuarial point
estimates. The results of the detailed reserve reviews were summarized and discussed with the Company’s senior
management to determine the best estimate of reserves. This group considered many factors in making this
decision. The factors included, but were not limited to, the historical pattern and volatility of the actuarial
indications to changes in paid and incurred loss patterns, the
indications,
consistency of claims handling processes, the consistency of case reserving practices, changes in the Company’s
pricing and underwriting, and overall pricing and underwriting trends in the insurance market.
the sensitivity of the actuarial
Management’s best estimate at December 31, 2013 was recorded as the loss reserve. Management’s best estimate
is as of a particular point in time and is based upon known facts, the Company’s actuarial analyses, current law,
and the Company’s judgment. This resulted in carried gross and net reserves of $779.5 million and $587.0
million, respectively, as of December 31, 2013. A breakout of the Company’s gross and net reserves, excluding
the effects of the Company’s intercompany pooling arrangements and intercompany stop loss and quota share
reinsurance agreements, as of December 31, 2013 is as follows:
(Dollars in thousands)
Gross Reserves
Case
IBNR (1)
Total
Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . . . . . . .
$206,141
38,048
$472,239
63,038
$678,380
101,086
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$244,189
$535,277
$779,466
(Dollars in thousands)
Net Reserves (2)
Case
IBNR (1)
Total
Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . . . . . . .
$138,483
38,047
$348,169
62,276
$486,652
100,323
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$176,530
410,445
586,975
(1) Losses incurred but not reported, including the expected future emergence of case reserves.
(2) Does not include reinsurance receivable on paid losses.
The Company continually reviews these estimates and, based on new developments and information, includes
adjustments of the estimated ultimate liability in the operating results for the periods in which the adjustments are
made. The establishment of loss and loss adjustment expense reserves makes no provision for the possible
broadening of coverage by legislative action or judicial interpretation, or the emergence of new types of losses
not sufficiently represented in the Company’s historical experience or that cannot yet be quantified or estimated.
The Company regularly analyzes its reserves and reviews pricing and reserving methodologies so that future
adjustments to prior year reserves can be minimized. However, given the complexity of this process, reserves
require continual updates and the ultimate liability may be higher or lower than previously indicated. Changes in
estimates for loss and loss adjustment expense reserves are recorded in the period that the change in these
estimates is made. See Note 12 to the consolidated financial statements in Item 8 of Part II of this report for
details concerning the changes in the estimate for incurred loss and loss adjustment expenses related to prior
accident years.
The detailed reserve analyses that the Company’s internal and external actuaries complete use a variety of
generally accepted actuarial methods and techniques to produce a number of estimates of ultimate loss. The
Company determines its best estimate of ultimate loss by reviewing the various estimates and assigning weight to
each estimate given the characteristics of the reserve category being reviewed. The reserve estimate is the
54
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, the Company reviews its reserve estimates on a regular basis and makes
adjustments in the period that the need for such adjustments is determined. The anticipated future loss emergence
continues to be reflective of historical patterns, and the selected development patterns have not changed
significantly from those underlying the Company’s 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 the Company’s identification of information and trends that have
caused it to increase or decrease frequency and severity assumptions in prior periods and could lead to the
identification of a need for additional material changes in loss and loss adjustment expense reserves, which could
materially affect results of operations, equity, business and insurer financial strength and debt ratings. Factors
affecting loss frequency include, among other things, the effectiveness of loss controls and safety programs and
changes in economic activity or weather patterns. Factors affecting loss severity include, among other things,
changes in policy limits and deductibles, rate of inflation and judicial interpretations. Another factor affecting
estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the
occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects
the Company’s 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
than management’s best estimate. For most of its reserving classes, the Company believes that
different
frequency can be predicted with greater accuracy than severity. Therefore, the Company believes management’s
best estimate is more sensitive to changes in severity than frequency. The following table, which the Company
believes reflects a reasonable range of variability around its best estimate based on historical loss experience and
management’s judgment, reflects the impact of changes (which could be favorable or unfavorable) in frequency
and severity on the Company’s current accident year net loss estimate of $140.9 million for claims occurring
during the year ended December 31, 2013:
(Dollars in thousands)
Frequency Change . . . . . . . . . . . . .
Severity Change
-10%
-5%
0%
5%
10%
-5% $(20,431)
-3% (17,894)
-2% (16,626)
-1% (15,358)
0% (14,090)
1% (12,822)
2% (11,554)
3% (10,286)
5% (7,749)
$(13,738)
(11,061)
(9,722)
(8,384)
(7,045)
(5,706)
(4,368)
(3,029)
(352)
$(7,045)
(4,227)
(2,818)
(1,409)
—
1,409
2,818
4,227
7,045
$ (352)
2,607
4,086
5,566
7,045
8,524
10,004
11,483
14,442
$ 6,340
9,440
10,990
12,540
14,090
15,640
17,190
18,740
21,840
55
The Company’s net reserves for losses and loss expenses of $587.0 million as of December 31, 2013 relate to
multiple accident years. Therefore, the impact of changes in frequency and severity for more than one accident
year could be higher or lower than the amounts reflected above.
Recoverability of Reinsurance Receivables
The Company regularly reviews the collectability of its reinsurance receivables, and includes adjustments
resulting from this review in earnings in the period in which the adjustment arises. A.M. Best ratings, financial
history, available collateral, and payment history with the reinsurers are several of the factors that the Company
considers when judging collectability. Changes in loss reserves can also affect the valuation of reinsurance
receivables if the change is related to loss reserves that are ceded to reinsurers. Certain amounts may be
uncollectible if the Company’s reinsurers dispute a loss or if the reinsurer is unable to pay. If its reinsurers do not
pay, the Company is still legally obligated to pay the loss.
See Note 10 of the notes to consolidated financial statements in Item 8 of Part II of this report for further
information surrounding the Company’s reinsurance receivable balances and collectability as of December 31,
2013 and 2012. For a listing of the ten reinsurers for which the Company has the largest reinsurance asset
amounts as of December 31, 2013, see “Reinsurance of Underwriting Risk” in Item 1 of Part I of this report.
Investments
The carrying amount of the Company’s investments approximates their fair value. The Company regularly
performs various analytical valuation procedures with respect to investments, including reviewing each fixed
maturity security in an unrealized loss position to determine the amount of unrealized loss related to credit loss
and the amount related to all other factors, such as changes in interest rates. The credit loss represents the portion
of the amortized book value in excess of the net present value of the projected future cash flows discounted at the
effective interest rate implicit in the debt security prior to impairment. The credit loss component of the other
than temporary impairment is recorded through earnings, whereas the amount relating to factors other than credit
losses are recorded in other comprehensive income, net of taxes. During its review, the Company considers credit
rating, market price, and issuer specific financial information, among other factors, to assess the likelihood of
collection of all principal and interest as contractually due. Securities for which the Company determines that a
credit loss is likely are subjected to further analysis to estimate the credit loss to be recognized in earnings, if any.
See Note 5 of the notes to consolidated financial statements in Item 8 of Part II of this report for the specific
methodologies and significant assumptions used by asset class. Upon identification of such securities and
periodically thereafter, a detailed review is performed to determine whether the decline is considered other than
temporary. This review includes an analysis of several factors, including but not limited to, the credit ratings and
cash flows of the securities, and the magnitude and length of time that the fair value of such securities is below
cost.
For an analysis of the Company’s securities with gross unrealized losses as of December 31, 2013 and 2012, and
for other than temporary impairment losses that the Company recorded for the years ended December 31, 2013,
2012, and 2011, please see Note 6 of the notes to the consolidated financial statements in Item 8 of Part II of this
report.
Fair Value Measurements
The Company categorizes its 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. The reported value of financial instruments not carried
at fair value, principally cash and cash equivalents, margin borrowing facility, and notes payable, approximate
fair value. See Note 8 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 the Company’s assets that are accounted for at fair value.
56
Goodwill and Intangible Assets
The Company tests for impairment of goodwill at least annually and more frequently as circumstances warrant in
accordance with applicable accounting guidance. Accounting guidance allows for the testing of goodwill for
impairment using both qualitative and quantitative factors. Impairment of goodwill is recognized only if the
carrying amount of the business unit, including goodwill, exceeds the fair value of the reporting unit. The amount
of the impairment loss would be equal to the excess carrying value of the goodwill over the implied fair value of
the reporting unit goodwill. Based on the qualitative assessment performed in 2013, there was no impairment of
goodwill as of December 31, 2013.
Impairment of intangible assets with indefinite useful lives is tested at least annually and more frequently as
circumstances warrant in accordance with applicable accounting guidance. Accounting guidance allows for the
testing of intangible assets for impairment using both qualitative and quantitative factors. Impairment of
indefinite lived intangible assets is recognized only if the carrying amount of the intangible assets exceeds the
fair value of said assets. The amount of the impairment loss would be equal to the excess carrying value of the
assets over the fair value of said assets. Based on the qualitative assessment performed in 2013, there were no
impairments of indefinite lived intangible assets as of December 31, 2013.
Intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful
lives. The carrying amounts of definite lived intangible assets are regularly reviewed for indicators of impairment
in accordance with applicable accounting guidance. Impairment is recognized only if the carrying amount of the
intangible asset is in excess of its undiscounted projected cash flows. The impairment is measured as the
difference between the carrying amount and the estimated fair value of the asset. As of December 31, 2013, there
were no triggering events that occurred during the year that would result in an impairment of definite lived
intangible assets.
See Note 9 of the notes to the consolidated financial statements in Item 8 of Part II of this report for more details
concerning the Company’s goodwill and intangible assets.
Deferred Acquisition Costs
The costs of acquiring new and renewal insurance and reinsurance contracts include commissions, premium taxes
and certain other costs that vary with and are directly related to the successful acquisition of new and renewal
insurance and reinsurance contracts. The excess of the Company’s costs of acquiring new and renewal insurance
and reinsurance contracts over the related ceding commissions earned from reinsurers is capitalized as deferred
acquisition costs and amortized over the period in which the related premiums are earned.
In accordance with accounting guidance for insurance enterprises, the method followed in computing such
amounts limits them to their estimated realizable value that gives effect to the premium to be earned, related
investment income, losses and loss adjustment expenses, and certain other costs expected to be incurred as the
premium is earned. A premium deficiency is recognized if the sum of expected loss and loss adjustment expenses
and unamortized acquisition costs exceeds related unearned premium. This evaluation is done at a product line
level in Insurance Operations and at a treaty level in Reinsurance Operations. Any future expected loss on the
related unearned premium is recorded first by impairing the unamortized acquisition costs on the related
unearned premium followed by an increase to loss and loss adjustment expense reserves on additional expected
loss in excess of unamortized acquisition costs. The Company calculates deferred acquisition costs for Insurance
Operations separately by product lines and for its Reinsurance Operations separately for each treaty.
Taxation
The Company provides for income taxes in accordance with applicable accounting guidance. The Company’s
deferred tax assets and liabilities primarily result from temporary differences between the amounts recorded in
the consolidated financial statements and the tax basis of the Company’s assets and liabilities.
57
At each balance sheet date, management assesses the need to establish a valuation allowance that reduces
deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax assets will not be
realized. A valuation allowance would be based on all available information including the Company’s 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, 2013 and 2012. The deferred tax asset balance is analyzed regularly by
management. Based on these analyses, the Company has determined that its deferred tax asset is recoverable.
Projections of future taxable income incorporate several assumptions of future business and operations that are
apt to differ from actual experience. If, in the future, the Company’s assumptions and estimates that resulted in
the forecast of future taxable income for each tax-paying component prove to be incorrect, a valuation allowance
may be required. This could have a material adverse effect on the Company’s financial condition, results of
operations, and liquidity.
The Company applies a more likely than not recognition threshold for all tax uncertainties, only allowing the
recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by
the taxing authorities. Please see Note 11 of the notes to the consolidated financial statements in Item 8 of Part II
of this report for a discussion of the Company’s tax uncertainties.
Business Segments
The Company manages its business through two business segments: Insurance Operations, which includes the
operations of United National Insurance Company, Diamond State Insurance Company, United National
Specialty Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, Penn-Patriot
Insurance Company, American Insurance Adjustment Agency, Inc., Collectibles Insurance Services, LLC,
Global Indemnity Insurance Agency, LLC, and J.H. Ferguson & Associates, LLC, and Reinsurance Operations,
which includes the operations of Wind River Reinsurance Company, Ltd.
The Company evaluates the performance of its 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 the Company’s segments.
58
The following table sets forth an analysis of financial data for the Company’s segments during the periods
indicated:
(Dollars in thousands)
Insurance Operations premiums written:
Years Ended December 31,
2012
2013 (6)
2011
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$232,373
18,668
$213,705
Reinsurance Operations premiums written:
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 58,350
71
$ 58,279
Revenues: (1)
Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$202,097
52,416
$254,513
Expenses: (2)
Insurance Operations (3)
Reinsurance Operations (5)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$204,197
34,445
$238,642
$201,790
23,958
$177,832
$ 42,263
548
$ 41,715
$179,721
58,983
$238,704
$198,425
50,606
$249,031
$229,148
26,831
$202,317
$ 78,755
502
$ 78,253
$228,687
81,748
$310,435
$283,033
117,142
$400,175
Income (loss) from segments:
Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations (5)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income (loss) from segments . . . . . . . . . . . . . . . . . . . . . . . .
$ (2,100)
17,971
$ 15,871
$ (18,704)
8,377
$ (10,327)
$ (54,346)
(35,394)
$ (89,740)
Insurance combined ratio analysis: (4)
Insurance Operations
Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations
Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated
Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59.5
44.5
104.0
30.8
34.9
65.7
53.5
42.5
96.0
66.1
44.6
110.7
58.8
25.9
84.7
64.3
39.9
104.2
86.9
43.7
130.6
111.1
33.0
144.1
93.5
40.8
134.3
(1) Excludes net investment income and net realized investment gains, which are not allocated to the Company’s segments.
(2) Excludes corporate and other operating expenses and interest expense, which are not allocated to the Company’s
(3)
segments.
Includes excise tax of $1,026, $936, and $1,125 related to cessions from the Company’s Insurance Operations to its
Reinsurance Operations for 2013, 2012, and 2011, respectively.
(4) The Company’s insurance combined ratios are 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.
(5) Results for the year to date 2012 include the impact of an out-of-period adjustment which reduced Reinsurance
Operations segment income by $1.6 million.
(6) On December 31, 2013, Diamond State Insurance Company sold all the outstanding shares of capital stock of one of its
wholly owned subsidiaries, United National Casualty Insurance Company. Financial results for 2013 include United
National Casualty Insurance Company. This was an asset sale which will not have a significant impact on the Company’s
ongoing business operations.
59
Results of Operations
Year Ended December 31, 2013 Compared with the Year Ended December 31, 2012
Insurance Operations
The components of income from the Company’s Insurance Operations segment and corresponding underwriting
ratios are as follows:
(Dollars in thousands)
Years Ended
December 31,
Increase / (Decrease)
2013
2012
$
%
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$232,373
$201,790
$30,583
15.2%
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$213,705
$177,832
$35,873
20.2%
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$196,302
5,795
$179,153
568
$17,149
5,227
9.6%
920.2%
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$202,097
$179,721
$22,376
12.5%
Losses and expenses:
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . .
Acquisition costs and other underwriting expenses (1)
. . . . . . . .
116,837
87,360
118,515
79,910
(1,678)
7,450
(1.4%)
9.3%
Loss from segment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (2,100) $ (18,704) $16,604
(88.8%)
Underwriting Ratios:
Loss ratio:
Current accident year (“CAY”) . . . . . . . . . . . . . . . . . . . . . . .
Prior accident year (“PAY”) . . . . . . . . . . . . . . . . . . . . . . . . .
Calendar year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63.4
(3.9)
59.5
44.5
68.5
(2.4)
66.1
44.6
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
104.0
110.7
(5.1)
(1.5)
(6.6)
(0.1)
(6.7)
Reconciliation of Non-GAAP Measures
Combined ratio excluding the effect of prior accident year (2) (9)
. . .
Effect of prior accident year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio excluding the effect of prior accident year and
premium deficiency (3) (10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of prior accident year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of premium deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss ratio excluding the effect of prior accident year (9) (12) . . . . . . .
Effect of prior accident year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss ratio excluding the effect of prior accident year and premium
deficiency (4) (10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of prior accident year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of premium deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property loss ratio excluding the effect of prior accident
year (9) (13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of prior accident year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
107.9
(3.9)
104.0
107.3
(3.9)
0.6
104.0
63.4
(3.9)
59.5
63.4
(3.9)
—
59.5
50.4
(8.0)
42.4
113.1
(2.4)
110.7
115.3
(2.4)
(2.2)
110.7
68.5
(2.4)
66.1
70.4
(2.4)
(1.9)
66.1
65.0
1.0
66.0
60
(Dollars in thousands)
Casualty loss ratio excluding the effect of prior accident
year (9) (14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of prior accident year casualty loss . . . . . . . . . . . . . . . . . . . . . .
Casualty loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Casualty loss ratio excluding the effect of prior accident year and
premium deficiency (10) (15)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of prior accident year casualty loss . . . . . . . . . . . . . . . . . . . . . .
Effect of premium deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Casualty loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio excluding the effect of premium deficiency (6) (11) . .
Effect of premium deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
December 31,
Increase / (Decrease)
2013
2012
$
%
81.5
1.9
83.4
81.5
1.9
—
83.4
43.9
0.6
44.5
72.5
(6.2)
66.3
76.5
(6.2)
(4.0)
66.3
44.9
(0.3)
44.6
Net losses and loss adjustment expenses excluding the effects of
prior accident year and premium deficiency (7) (10)
. . . . . . . . . . .
Effect of prior accident year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of premium deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
124,470
(7,633)
—
126,126
(4,212)
(3,399)
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . .
116,837
118,515
Acquisition costs and other underwriting expenses excluding the
effects of premium deficiency (8) (11) . . . . . . . . . . . . . . . . . . . . . .
Effect of premium deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition cost and other underwriting expenses . . . . . . . . . . . . . . .
86,164
1,196
87,360
80,416
(506)
79,910
(1)
Includes excise tax of $1,026 and $936 related to cessions from the Company’s Insurance Operations to its
Reinsurance Operations for 2013 and 2012, respectively.
(2) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments. The most directly
comparable GAAP measure is the combined ratio.
(3) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments and premium
deficiency charges. The most directly comparable GAAP measure is the combined ratio.
(4) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments and premium
deficiency charges. The most directly comparable GAAP measure is the loss ratio.
(5) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments and premium
deficiency charges. The most directly comparable GAAP measure is the casualty loss ratio.
(6) This is a non-GAAP ratio that excludes the impact of premium deficiency charges. The most directly
comparable GAAP measure is the expense ratio.
(7) This is a non-GAAP measure that excludes the impact of prior accident year adjustments and premium deficiency
charges. The most directly comparable GAAP measure is the net losses and loss adjustment expenses.
(8) This is a non-GAAP measure that excludes the impact of premium deficiency charges. The most directly
comparable GAAP measure is the acquisition cost and other underwriting expenses
(9) The Company believes that this non-GAAP ratio is useful to investors when evaluating the Company’s
underwriting performance as trends in the Company’s U.S. insurance operations may be obscured by prior
accident year adjustments. This non-GAAP ratio should not be considered as a substitute for its most directly
comparable GAAP measure and does not reflect the overall underwriting profitability of the Company.
(10) The Company believes that this non-GAAP ratio or measure is useful to investors when evaluating the
Company’s underwriting performance as trends in the Company’s U.S. insurance operations may be
obscured by prior accident year adjustments and premium deficiency charges. This non-GAAP ratio or
measure should not be considered as a substitute for its most directly comparable GAAP measure and does
not reflect the overall underwriting profitability of the Company
61
(11) The Company believes that this non-GAAP ratio or measure is useful to investors when evaluating the
Company’s underwriting performance as trends in the Company’s U.S. insurance operations may be
obscured by premium deficiency charges. This non-GAAP ratio or measure should not be considered as a
substitute for its most directly comparable GAAP measure and does not reflect the overall underwriting
profitability of the Company.
(12) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments. The most directly
comparable GAAP measure is the loss ratio.
(13) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments. The most directly
comparable GAAP measure is the property loss ratio.
(14) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments. The most directly
comparable GAAP measure is the casualty loss ratio.
(15) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments and premium
deficiency charges. The most directly comparable GAAP measure is the casualty loss ratio.
Management’s discussion and analysis of financial condition and results of operation references various non-
GAAP measures related to combined ratio, loss ratio, expense ratio, net losses and loss adjustment expenses, and
acquisition cost and other underwriting expenses throughout the discussion and should be read in conjunction
with the reconciliation of non-GAAP measures listed above.
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 $232.4 million for 2013, compared with $201.8
million for 2012, an increase of $30.6 million or 15.2%. The increase was primarily driven by growth in the
Company’s small business binding authority of $19.7 million, as well as growth in the property brokerage,
programs and other lines. Growth was driven by new business, pricing increases, and increased agent
relationships as well as a new product offering in property brokerage.
Net premiums written, which equals gross premiums written less ceded premiums written, was $213.7 million for
2013, compared with $177.8 million for 2012, an increase of $35.9 million or 20.2%. The increase was primarily
due to the increase in gross premiums written and a reduction of ceded premiums written as a result of an
increase in retention in property excess of loss and property catastrophe. The ratio of net premiums written to
gross premiums written was 92.0% for 2013 and 88.1% for 2012.
Net premiums earned were $196.3 million for 2013, compared with $179.2 million for 2012, an increase of $17.1
million or 9.6%. Property net premiums earned for 2013 and 2012 were $114.1 million and $94.8 million,
respectively. Casualty net premiums earned for 2013 and 2012 were $82.2 million and $84.3 million, respectively.
The Company’s Insurance Operations’ gross written, net written, and net earned premiums by product line are as
follows:
(Dollars in thousands)
Year Ended December 31, 2013
Year Ended December 31, 2012
Gross
Written
Net
Written
Net
Earned
Gross
Written
Net
Written
Net
Earned
Small Business Binding Authority . . . . . .
Property Brokerage . . . . . . . . . . . . . . . . . .
Programs . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$110,412
40,313
60,347
21,301
$103,726
34,469
55,524
19,986
$ 95,070
30,294
53,094
17,844
$ 90,741
35,124
56,872
19,053
$ 84,892
24,379
52,055
16,506
$ 80,014
23,172
49,028
26,939
Total
. . . . . . . . . . . . . . . . . . . . . . . . .
$232,373
$213,705
$196,302
$201,790
$177,832
$179,153
Other Income
Other income was $5.8 million and $0.6 million for the years ended December 31, 2013 and 2012,
respectively. In 2013, other income is primarily comprised of the net gain on the asset sale of the Company’s
62
wholly owned subsidiary, United National Casualty Insurance Company of $5.2 million and fee income. In
2012, other income is primary comprised of fee income.
Net Losses and Loss Adjustment Expenses
The loss ratio for the Company’s Insurance Operations was 59.5% for 2013 compared with 66.1% for 2012. The
decrease in the loss ratio was driven by better performance in property lines for the current accident year offset
by a higher current accident year loss ratio in casualty lines mainly due to poor performance of the commercial
automobile line of business. The loss ratio is a GAAP financial measure that is generally viewed in the insurance
industry as an indicator of underwriting profitability and is calculated by dividing net losses and loss adjustment
expenses by net premiums earned.
The current accident year loss ratio decreased 5.1% to 63.4% in 2013 from 68.5% in 2012. Net losses for 2012
were lower than they otherwise would have been as a result of premium deficiency charges recorded in 2011.
Excluding the impact of the 2011 premium deficiency charges, the current accident year loss ratio was 70.4% for
2012.
• The current accident year property loss ratio decreased 14.6% from 65.0% in 2012 to 50.4% in 2013.
• The non-catastrophe loss ratio decreased 8.4% from 50.0% in 2012 to 41.6% in 2013. Non-
catastrophe losses were $47.5 million and $47.4 million for the years ended December 31, 2013
and 2012, respectively.
• The catastrophe loss ratio decreased 6.3% from 15.0% in 2012 to 8.7% in 2013. Catastrophe
losses were $10.0 million and $14.2 million for the years ended December 31, 2013 and 2012,
respectively.
• The current accident year casualty loss ratio increased 9.0% from 72.5% in 2012 to 81.5% in 2013. Net
losses for 2012 were lower than they otherwise would have been as a result of premium deficiency
charges recorded in 2011. Excluding the impact of 2011 premium deficiency charges, the casualty loss
ratio for 2012 was 76.5%.
The prior accident year loss ratio decreased by 1.5% resulting from a decrease of net losses and loss adjustment
expenses for prior accident years of $7.6 million in 2013 compared to a decrease of net losses and loss
adjustment expenses for prior accident years of $4.2 million in 2012. When analyzing loss reserves and prior
year development, the Company considers many factors, including the frequency and severity of claims, loss
credit trends, case reserve settlements that may have resulted in significant development, and any other additional
or pertinent factors that may impact reserve estimates.
In 2013, the Company reduced its prior accident year loss reserves by $7.6 million, which primarily consisted of
the following:
• Property: A $9.2 million reduction primarily driven by better than expected development from
accident years 2010, 2011, and 2012 related primarily to lower than expected non-catastrophe severity.
• General Liability: A $6.7 million reduction primarily due to better than expected emergence in nearly
all accident years between 2003 through 2011 partially offset by an increase to accident years 1998
through 2002 and 2012 due to higher than anticipated loss emergence.
• Asbestos and Environmental: A $6.8 million increase primarily related to policies written prior to
1990.
• Professional: A $0.7 million increase primarily driven by $2.2 million increase in aggregate from
unexpected loss emergence in accident years 2006 to 2008 and 2010 offset by $1.5 million of favorable
emergence from accident years 1998 and 2011.
• Umbrella: A $1.1 million decrease primarily driven by better than expected loss emergence in accident
years 2002 to 2010 offset by increases in 2011 and 2012.
63
• Commercial Auto: A $0.9 million increase primarily related to accident year 2011.
• Marine: A $0.9 million increase primarily related to accident years 2011 and 2012.
In 2012, the Company reduced its prior accident year loss reserves by $4.2 million, which primarily consisted of
the following:
• General liability: A $6.3 million reduction primarily due to favorable emergence of $4.7 million on
small business binding and $3.3 million on casualty brokerage exposures primarily in accident years
2002 through 2005. Partially offsetting these reductions were increases of $2.0 million on construction
defect reserves in accident year 2007. The Company also decreased its reinsurance allowance by $0.7
million in this line due to changes in its reinsurance exposure on specifically identified claims and
general decreases in ceded reserves.
• Umbrella: A $0.7 million reduction primarily due to continued favorable emergence. Umbrella
coverage typically attaches to other coverage lines, so these net decreases follow the decreases in
general liability above.
• Property: A $1.2 million increase primarily related to accident year 2011 due to greater than expected
loss emergence on a large sinkhole claim.
• Auto liability: A $1.2 million increase primarily driven by continued loss emergence on casualty
brokerage exposures.
Excluding prior accident year adjustments and premium deficiency charges which caused 2012 losses to be lower
than what they otherwise would have been, the current accident year net losses and loss adjustment expenses
were $124.5 million and $126.1 million for 2013 and 2012, respectively.
Acquisition Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were $87.4 million for 2013, compared with $79.9 million for
2012, an increase of $7.5 million or 9.3%. Acquisition costs and other underwriting expenses for 2013 were $1.2
million higher than they otherwise would have been as a result of the premium deficiency charges recorded in 2013
related to the commercial automobile product. Acquisition costs and other underwriting expenses for 2012 were
lower than they otherwise would have been as a result of the premium deficiency charges recorded in 2011.
Excluding the impact of the 2011 and 2013 premium deficiency charges,
the acquisition costs and other
underwriting expenses would have been $86.2 million and $80.4 million for 2013 and 2012, respectively. Excluding
the premium deficiency charges, the increase is primarily due to the increase in earned premium volume.
Expense and Combined Ratios
The expense ratio for the Company’s Insurance Operations was 44.5% for 2013, compared with 44.6% for 2012.
The expense ratio is a GAAP financial measure that is calculated by dividing the sum of acquisition costs and
other underwriting expenses by net premiums earned. Excluding the impact of the 2011 and 2013 premium
deficiency charges, the expense ratio would have been 43.9% and 44.9% for 2013 and 2012, respectively.
The combined ratio for the Company’s Insurance Operations was 104.0% for 2013, compared with 110.7% for
2012. The combined ratio is a GAAP financial measure and is the sum of the Company’s loss and expense ratios.
Excluding the impact of prior accident year adjustments, the current accident year combined ratio decreased from
113.1% in 2012 to 107.9% in 2013. Excluding the impact of the 2011 and 2013 premium deficiency charges, the
current accident year combined ratio would have been 107.3% and 115.3% for 2013 and 2012, respectively. 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 Segment
The factors described above resulted in a loss from the Company’s Insurance Operations of $2.1 million for
2013, compared with a loss of $18.7 million for 2012, an improvement of $16.6 million.
64
Reinsurance Operations
The components of
underwriting ratios are as follows:
income from the Company’s Reinsurance Operations segment and corresponding
(Dollars in thousands)
Years Ended
December 31,
Increase / (Decrease)
2013
2012
$
%
Gross premiums written (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$58,350
$42,263
$ 16,087
38.1%
Net premiums written (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$58,279
$41,715
$ 16,564
39.7%
Net premiums earned (2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$52,420
(4)
$59,709
(726)
$ (7,289)
722
(12.2%)
(99.4%)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$52,416
$58,983
$ (6,567)
(11.1%)
Losses and expenses:
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . .
Acquisition costs and other underwriting expenses (1) . . . . . . . . .
16,154
18,291
35,113
15,493
(18,959)
2,798
(54.0%)
18.1%
Income from segment (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,971
$ 8,377
$ 9,594
114.5%
(18.0)
(10.0)
(28.0)
9.0
(19.0)
Underwriting Ratios:
Loss ratio:
Current accident year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior accident year (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Calendar year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reconciliation of Non-GAAP Measures
Combined ratio excluding the effect of prior accident year (3) (9) . . . .
Effect of prior accident year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio excluding the effect of prior accident year and
premium deficiency (4) (10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of prior accident year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of premium deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss ratio excluding the effect of prior accident year (5) (9) . . . . . . . . .
Effect of prior accident year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio excluding the effect of premium deficiency (6) (11) . . . .
Effect of premium deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31.3
(0.5)
30.8
34.9
65.7
66.2
(0.5)
65.7
66.2
(0.5)
—
65.7
31.3
(0.5)
30.8
34.9
—
34.9
49.3
9.5
58.8
25.9
84.7
75.2
9.5
84.7
76.5
9.5
(1.3)
84.7
49.3
9.5
58.8
31.0
(5.1)
25.9
Net losses and loss adjustment expenses excluding the effects of prior
accident year (7) (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of prior accident year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,403
(249)
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . .
16,154
26,456
8,657
35,113
Acquisition costs and other underwriting expenses excluding the
effects of premium deficiency (8) (11) . . . . . . . . . . . . . . . . . . . . . . . .
Effect of premium deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,322
(31)
18,498
(3,005)
Acquisition cost and other underwriting expenses . . . . . . . . . . . . . . . . .
18,291
15,493
65
(1) Results for the year to date 2012 include the impact of an out-of-period adjustment which reduced
Reinsurance Operations segment income by $1.6 million.
(2) Net premiums written and earned for the year to date 2012 includes $6.0 million related to reinsurance
treaties written in 2009 and 2010 which were contractually due as a result of losses incurred on these
treaties. The impact of these premiums are included in the “Prior accident year” ratios.
(3) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments. The most directly
comparable GAAP measure is the combined ratio.
(4) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments and premium
deficiency charges. The most directly comparable GAAP measure is the combined ratio.
(5) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments. The most directly
comparable GAAP measure is the loss ratio.
(6) This is a non-GAAP ratio that excludes the impact of premium deficiency charges. The most directly
comparable GAAP measure is the expense ratio.
(7) This is a non-GAAP measure that excludes the impact of prior accident year adjustments. The most directly
comparable GAAP measure is the net losses and loss adjustment expenses.
(8) This is a non-GAAP measure that excludes the impact of premium deficiency charges. The most directly
comparable GAAP measure is the acquisition cost and other underwriting expenses
(9) The Company believes that this non-GAAP ratio or measure is useful to investors when evaluating the
Company’s underwriting performance as trends in the Company’s reinsurance operations may be obscured
by prior accident year adjustments. This non-GAAP ratio or measure should not be considered as a
substitute for its most directly comparable GAAP measure and does not reflect the overall underwriting
profitability of the Company.
(10) The Company believes that this non-GAAP ratio or measure is useful to investors when evaluating the
Company’s underwriting performance as trends in the Company’s reinsurance operations may be obscured
by prior accident year adjustments and premium deficiency charges. This non-GAAP ratio or measure
should not be considered as a substitute for its most directly comparable GAAP measure and does not reflect
the overall underwriting profitability of the Company
(11) The Company believes that this non-GAAP ratio or measure is useful to investors when evaluating the
Company’s underwriting performance as trends in the Company’s reinsurance operations may be obscured
by premium deficiency charges. This non-GAAP ratio or measure should not be considered as a substitute
for its most directly comparable GAAP measure and does not reflect the overall underwriting profitability of
the Company.
Management’s discussion and analysis of financial condition and results of operation references various non-
GAAP measures related to combined ratio, loss ratio, expense ratio, net losses and loss adjustment expenses, and
acquisition cost and other underwriting expenses throughout the discussion and should be read in conjunction
with the reconciliation of non-GAAP measures listed above.
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 $58.4 million for 2013, compared with
$42.3 million for 2012, an increase of $16.1 million or 38.1%. The increase was primarily due to several new
treaties written during 2013. Wind River treaties written during 2012 and 2013 are predominantly related to
property exposure comprised of property catastrophe business.
Net premiums written, which equals gross premiums written less ceded premiums written, was $58.3 million for
2013, compared with $41.7 million for 2012, an increase of $16.6 million or 39.7%. The increase was primarily
due to the increase in gross premiums written.
Net premiums earned were $52.4 million for 2013, compared with $59.7 million for 2012, a decrease of $7.3
million or 12.2%. The decrease was primarily due to net earned premiums for 2012 including a premium increase
66
of $6.0 million related to reinsurance treaties written in 2009 and 2010 which were contractually due as a result
of losses incurred on these treaties. Property net premiums earned for 2013 and 2012 were $48.8 million and
$34.2 million, respectively. Casualty net premiums earned for 2013 and 2012 were $3.6 million and $25.5
million, respectively.
Other Income (Loss)
The Company recognized a loss of less than $0.1 million for 2013 compared with a loss of $0.7 million for 2012.
Other income or loss is comprised of foreign exchange gains and losses.
Net Losses and Loss Adjustment Expenses
The loss ratio for the Company’s Reinsurance Operations was 30.8% for 2013 compared with 58.8% for 2012.
The decrease is primarily due to having more casualty business in 2012 as compared to 2013. The Company’s
casualty business has a higher loss ratio than its property business. The loss ratio is a GAAP financial measure
that is generally viewed in the insurance industry as an indicator of underwriting profitability and is calculated by
dividing net losses and loss adjustment expenses by net premiums earned.
The current accident year loss ratio decreased 18.0% from 49.3% for 2012 to 31.3% for 2013. This decrease is
primarily due to no major property catastrophes affecting losses in 2013 as well as having more casualty business
in 2012 as compared to 2013.
There was a decrease in net losses and loss adjustment expenses for prior accident years of $0.3 million in 2013
which decreased the loss ratio by 0.5%, compared to an increase in net losses and loss adjustment expenses for
prior accident years of $8.7 million in 2012 which increased the loss ratio by 9.5%.
In 2013, the Company decreased its prior accident year loss reserves by $0.3 million primarily due to better than
anticipated loss emergence on property lines partially offset by adverse development on director and officer,
general liability, automobile, and marine.
In 2012, the Company increased its prior accident year loss reserves by $8.7 million, which primarily consisted
of the following:
• Workers’ Compensation: An $8.3 million increase in workers’ compensation lines primarily related
to accident years 2009 and 2010 driven by increased frequency and severity. This increase in losses
triggered $6.0 million in additional premium during 2012.
• Marine: A $2.7 million increase in marine lines primarily related to accident year 2011 primarily due
to higher than expected reported losses.
• Automobile Liability: A $1.3 million increase in auto liability lines primarily related to accident year
2009 resulting from further unexpected development on non-standard auto treaties which were not
renewed.
• Property: A $3.4 million decrease in property lines primarily related to accident years 2009 and 2011
as a result of further development on worldwide catastrophe treaties.
Net losses and loss adjustment expenses were $16.2 million for 2013, compared with $35.1 million for 2012, a
decrease of $19.0 million or 54.0%. Excluding the impact of prior year adjustments, the current accident year net
losses and loss adjustment expenses decreased from $26.5 million for 2012 to $16.4 million for 2013. This
decrease is primarily attributable to the exiting of unprofitable treaties in previous years offset by increased
property writings in 2013.
67
Acquisition Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were $18.3 million for 2013, compared with $15.5 million for
2012, an increase of $2.8 million or 18.1%. In 2012, acquisition costs and other underwriting expenses were
lower than they otherwise would have been as a result of premium deficiency charges recorded in 2011.
Excluding the impact of the 2011 premium deficiency charges, acquisition costs and other underwriting expenses
were $18.3 million and $18.5 million for 2013 and 2012, respectively. Profit commissions of $5.1 million, which
were the result of good performance of the property catastrophe treaties, were included in acquisition costs
during 2013.
Expense and Combined Ratios
The expense ratio for the Company’s Reinsurance Operations was 34.9% for 2013, compared with 25.9% for
2012. The expense ratio is a GAAP financial measure that is calculated by dividing the sum of acquisition costs
and other underwriting expenses by net premiums earned. Excluding the impact of 2011 premium deficiency
charges, the expense ratio would have been 34.9% and 31.0% for 2013 and 2012, respectively. The increase is
related to an increase in commissions and contingent commissions due to business mix and good performance of
the property catastrophe treaties in 2013.
The combined ratio for the Company’s Reinsurance Operations was 65.7% for 2013, compared with 84.7% for
2012. The combined ratio is a GAAP financial measure and is the sum of the Company’s loss and expense ratios.
Excluding the impact of prior accident year adjustments, the combined ratio decreased from 75.2% in 2012 to
66.2% in 2013. Net losses and acquisition costs for 2012 were lower than they otherwise would have been as a
result of premium deficiency charges recorded in 2011. Excluding the impact of 2011 premium deficiency
charges, the current accident year combined ratio was 76.5% for 2012. 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.
Income (Loss) from Segment
The factors described above resulted in income from the Company’s Reinsurance Operations of $18.0 million in
2013, compared to $8.4 million in 2012, an increase of $9.6 million.
Unallocated Corporate Items
The following items are not allocated to the Company’s Insurance Operations or Reinsurance Operations
segments:
(Dollars in thousands)
Year Ended December 31,
Increase / (Decrease)
2013
2012
$
%
Net investment income . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . .
Corporate and other operating expenses . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (expense) benefit . . . . . . . . . . . . . . . . . . .
$ 37,209
27,412
(11,614)
(6,169)
(1,019)
$47,557
6,755
(9,691)
(5,393)
5,856
$(10,348)
20,657
1,923
776
6,875
(21.8%)
305.8%
19.8%
14.4%
(117.4%)
Net Investment Income
Net investment income, which is gross investment income less investment expenses, was $37.2 million for 2013,
compared with $47.6 million for 2012, a decrease of $10.3 million or 21.8%.
• Gross investment income, which excludes realized gains and losses, was $41.4 million for 2013,
compared with $52.0 million for 2012, a decrease of $10.6 million or 20.4%. The decrease was partly
due to gross investment income of $4.8 million generated from distributions from limited partnership
68
investments during 2012. Gross investment income of $0.1 million was generated from distributions
from limited partnership investments during 2013. Excluding distributions from limited partnership
investments, gross investment income for 2013 decreased $6.0 million or 12.6% compared to 2012.
This decrease was primarily due to lower reinvestment yields, a reduction in the Company’s fixed
income portfolio related to funding the share repurchase program in 2012, and repayment of debt.
•
Investment expenses were $4.2 million for 2013, compared with $4.5 million for 2012, a decrease of
$0.3 million or 6.2%. The decrease is primarily due to a reduction of investments in corporate loans
and a reduction in trust fees which is partially offset by an increase in investment management fees
related to the Company’s common stock portfolio.
As of December 31, 2013, the Company held agency mortgage-backed securities with a book value of $164.8
million. Excluding the agency mortgage-backed securities, the average duration of the Company’s fixed maturities
portfolio was 1.9 years as of December 31, 2013, compared with 2.2 years as of December 31, 2012. Including cash
and short-term investments, the average duration of the Company’s fixed maturities portfolio, excluding agency
mortgage-backed securities, as of December 31, 2013 was 1.7 years compared with 2.0 years as of December 31,
2012. Changes in interest rates can cause principal payments on certain investments to extend or shorten which can
impact duration. At December 31, 2013, the Company’s embedded book yield on its fixed maturities, not including
cash, was 2.6% compared with 3.1% at December 31, 2012. As of December 31, 2013, the Company’s investment
portfolio held $98.7 million in tax-free municipal bonds with an embedded book yield of 3.0% compared with an
embedded book yield of 3.2% on $129.4 million in tax-free municipal bonds as of December 31, 2012.
Net Realized Investment Gains
Net realized investment gains were $27.4 million for 2013, compared with $6.8 million for 2012. The net
realized investment gains for 2013 consist primarily of net gains of $1.4 million related to the Company’s fixed
maturities, $25.8 million related to its equity securities, and $1.4 million related to its interest rate swaps, offset
by other than temporary impairment losses of $1.2 million. The net realized investment gains for 2012 consist
primarily of net gains of $3.0 million related to the Company’s fixed maturities and $9.2 million related to its
equity securities, offset by other than temporary impairment losses of $5.4 million.
See Note 6 of the notes to the consolidated financial statements in Item 8 of Part II of this report for an analysis
of total investment return on a pre-tax basis for the years ended December 31, 2013 and 2012.
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, development costs for new products, and
taxes incurred which are not directly related to operations. Corporate and other operating expenses were $11.6
million for 2013, compared with $9.7 million for 2012, an increase of $1.9 million or 19.8%. The increase is
primarily due to an increase in travel cost, legal expenses, and consulting fees offset by a reduction in audit fees.
Interest Expense
Interest expense was $6.2 million and $5.4 million for 2013 and 2012, respectively. This increase was primarily
due to a make-whole payment of $2.9 million related to the early prepayment of the guaranteed senior notes
during the 2013 partially offset by lower interest expense on new margin borrowing facility and repayment of
debt in 2013. See Note 13 of the notes to the consolidated financial statements in Item 8 of Part II of this report
for details on the Company’s debt.
Income Tax Expense (Benefit)
Income tax expense was $1.0 million for 2013, compared with a benefit of $5.9 million for 2012. See Note 11 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.
69
Net Income (Loss)
The factors described above resulted in net income of $61.7 million in 2013, compared with net income of $34.8
million in 2012, an increase of $26.9 million.
Year Ended December 31, 2012 Compared with the Year Ended December 31, 2011
Insurance Operations
The components of income from the Company’s Insurance Operations segment and corresponding underwriting
ratios are as follows:
(Dollars in thousands)
Years Ended December 31,
Increase / (Decrease)
2012
2011
$
%
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$201,790
$229,148
$(27,358)
(11.9%)
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$177,832
$202,317
$(24,485)
(12.1%)
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$179,153
568
$216,549
12,138
$(37,396)
(11,570)
(17.3%)
(95.3%)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$179,721
$228,687
$(48,966)
(21.4%)
Losses and expenses:
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . . .
Acquisition costs and other underwriting expenses (1) . . . . . . .
118,515
79,910
188,358
94,675
(69,843)
(14,765)
(37.1%)
(15.6%)
Loss from segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (18,704)
$ (54,346) $ 35,642
65.6%
Underwriting Ratios:
Loss ratio:
Current accident year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior accident year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Calendar year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68.5
(2.4)
66.1
44.6
91.4
(4.5)
86.9
43.7
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
110.7
130.6
(22.9)
2.1
(20.8)
0.9
(19.9)
(16) Includes excise tax of $936 and $1,125 related to cessions from the Company’s Insurance Operations to its
Reinsurance Operations for 2012 and 2011, 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 $201.8 million for 2012, compared with $229.1
million for 2011, a decrease of $27.4 million or 11.9%. In the second half of 2011 the Company began exiting
certain unprofitable classes of business which contributed to the decrease in 2012. This was partially offset by
increases in the Company’s small business class, property brokerage class, and commercial auto class, which is
included in “Other” in the table below.
Net premiums written, which equals gross premiums written less ceded premiums written, was $177.8 million for
2012, compared with $202.3 million for 2011, a decrease of $24.5 million or 12.1%. The decrease was primarily
due to the decrease in gross premiums written noted above. The ratio of net premiums written to gross premiums
written was 88.1% for 2012 and 88.3% for 2011, a decrease of 0.2 points.
Net premiums earned were $179.2 million for 2012, compared with $216.5 million for 2011, a decrease of $37.4
million or 17.3%. Property net premiums earned for 2012 and 2011 were $94.8 million and $97.6 million,
respectively. Casualty net premiums earned for 2012 and 2011 were $84.3 million and $118.9 million,
respectively.
70
The Company’s Insurance Operations’ gross written, net written, and net earned premiums by product line are as
follows:
(Dollars in thousands)
Year Ended December 31, 2012
Year Ended December 31, 2011
Gross
Written
Net
Written
Net
Earned
Gross
Written
Net
Written
Net
Earned
Small Business Binding Authority . . . . . .
Property Brokerage . . . . . . . . . . . . . . . . . .
Programs . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 90,741
35,124
56,872
19,053
$ 84,892
24,379
52,055
16,506
$ 80,014
23,172
49,028
26,939
$ 87,446
30,957
54,990
55,754
$ 80,285
22,910
50,671
48,451
$ 82,071
20,938
51,061
62,479
Total
. . . . . . . . . . . . . . . . . . . . . . . . .
$201,790
$177,832
$179,153
$229,148
$202,317
$216,549
Other Income
Other income was $0.6 million and $12.1 million for the years ended December 31, 2012 and 2011, respectively.
Other income is primarily comprised of fee income and for 2011, $11.5 million received from the Company’s
settlement with AON, net of attorney’s fees. Income from the AON settlement is non-recurring. Please see Note
16 to the consolidated financial statements in Item 8 of Part II of this report for additional details regarding
income and related tax expense from this settlement.
Net Losses and Loss Adjustment Expenses
The loss ratio for the Company’s Insurance Operations was 66.1% for 2012 compared with 86.9% for 2011. The
loss ratio is a GAAP financial measure that is generally viewed in the insurance industry as an indicator of
underwriting profitability and is calculated by dividing net losses and loss adjustment expenses by net premiums
earned.
The current accident year loss ratio decreased 22.9 points to 68.5% in 2012 from 91.4% in 2011:
• The current accident year property loss ratio decreased 12.5 points from 77.5% in 2011 to 65.0% in
2012.
• The non-catastrophe loss ratio decreased 6.4 points from 56.4% in 2011 to 50.0% in 2012. Non-
catastrophe losses were $47.4 million and $55.1 million for the years ended December 31, 2012
and 2011, respectively.
• The catastrophe loss ratio decreased 6.1 points from 21.1% in 2011 to 15.0% in 2012. The
decrease in the catastrophe loss ratio is primarily due to a decrease in severe losses when
compared to prior year. Results for 2011 included losses from tornados and severe weather in the
Midwest, Hurricane Irene and Tropical Storm Lee while 2012 included losses from Superstorm
Sandy. Catastrophe losses were $14.2 million and $20.6 million for the years ended December 31,
2012 and 2011, respectively.
• The current accident year casualty loss ratio decreased 30.5 points from 102.9% in 2011 to 72.4% in
2012 primarily due to the Company exiting certain unprofitable classes of business in the second half
of 2011.
The prior accident year loss ratio increased by 2.1 points resulting from a decrease of net losses and loss
adjustment expenses for prior accident years of $4.2 million in 2012 compared to a decrease of net losses and
loss adjustment expenses for prior accident years of $9.7 million in 2011.
In 2012, the Company reduced its prior accident year loss reserves by $4.2 million, which primarily consisted of
the following:
• General liability: A $6.3 million reduction primarily due to favorable emergence of $4.7 million on
small business binding and $3.3 million on casualty brokerage exposures primarily in accident years
71
2002 through 2005. Partially offsetting these reductions were increases of $2.0 million on construction
defect reserves in accident year 2007. The Company also decreased its reinsurance allowance by $0.7
million in this line due to changes in its reinsurance exposure on specifically identified claims and
general decreases in ceded reserves.
• Umbrella: A $0.7 million reduction primarily due to continued favorable emergence. Umbrella
coverage typically attaches to other coverage lines, so these net decreases follow the decreases in
general liability above.
• Property: A $1.2 million increase primarily related to accident year 2011 due to greater than expected
loss emergence on a large sinkhole claim.
• Auto liability: A $1.2 million increase primarily driven by continued loss emergence on casualty
brokerage exposures.
In 2011, the Company reduced its prior accident year loss reserves by $9.7 million, which primarily consisted of
the following:
• General Liability: A $12.9 million reduction in general liability lines primarily consisted of net
reductions of $25.5 million in accident years 2008 and prior due to continued favorable emergence.
Incurred losses for these years have developed at a rate lower than the Company’s historical averages.
The Company also decreased its reinsurance allowance by $1.3 million in this line due to changes in
reinsurance exposure on specifically identified claims and general decreases in ceded reserves. Offsetting
these decreases were increases of $13.9 million in accident years 2009 and 2010 primarily driven by loss
emergence as well as revised exposure estimates for construction defect liability. Increased estimates for
construction defect were primarily the result of a methodology change during the year, with some
increases in recent years due to a slight increase in claim frequency in one of the reviewed segments. The
Company has addressed profitability concerns by exiting certain classes of business within this line.
• Property: A $2.5 million reduction in property lines primarily related to accident years 2009 and 2010
related to subrogation on a large equine mortality claim as well as favorable development on prior year
catastrophe claims.
• Umbrella: A $1.7 million reduction in umbrella lines primarily related to accident years 2010 and
prior primarily due to continued favorable emergence. Umbrella coverage typically attaches to other
coverage lines, so these net decreases follow the decreases in general liability above.
• Professional Liability: A $5.7 million increase in professional liability lines primarily consisted of
increases of $19.0 million related to accident years 1998, 2009 and 2010, offset partially by decreases
of $13.2 million related to all other accident years. In 2011, the Company exited certain professional
liability classes where the volume of premium was low and loss volatility was high. The Company is
focused on writing business where it expects to realize profit
that meets return on investment
thresholds.
• Auto Liability: A $1.8 million increase in auto liability lines is primarily related to accident year 2010
due to higher than expected severity.
Net losses and loss adjustment expenses were $118.5 million for 2012, compared with $188.4 million for 2011, a
decrease of $69.8 million or 37.1%. Excluding the impact of prior accident year adjustments, the current accident
year net losses and loss adjustment expenses were $122.7 million and $198.0 million for 2012 and 2011,
respectively. This decrease is primarily attributable to a decrease in catastrophe losses incurred in 2012 and the
Company exiting certain unprofitable classes of business in the second half of 2011, as described above.
Acquisition Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were $79.9 million for 2012, compared with $94.7 million for
2011, a decrease of $14.8 million or 15.6%. The decrease is primarily due to a decrease in commissions related
to the decrease in net earned premiums and a decrease in property and office costs.
72
Expense and Combined Ratios
The expense ratio for the Company’s Insurance Operations was 44.6% for 2012, compared with 43.7% for 2011.
The expense ratio is a GAAP financial measure that is calculated by dividing the sum of acquisition costs and
other underwriting expenses by net premiums earned.
The combined ratio for the Company’s Insurance Operations was 110.7% for 2012, compared with 130.6% for
2011. The combined ratio is a GAAP financial measure and is the sum of the Company’s loss and expense ratios.
Excluding the impact of prior accident year adjustments, the combined ratio decreased from 135.1% in 2011 to
113.1% in 2012. 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 Segment
The factors described above resulted in a loss from underwriting for the Company’s Insurance Operations of
$18.7 million for 2012, compared with a loss from underwriting of $54.3 million for 2011, a decrease in loss of
$35.6 million.
Reinsurance Operations
The components of
underwriting ratios are as follows:
income from the Company’s Reinsurance Operations segment and corresponding
(Dollars in thousands)
Years Ended December 31,
Increase / (Decrease)
2012
2011
$
%
Gross premiums written (2) . . . . . . . . . . . . . . . . . . . .
$42,263
$ 78,755
$(36,492)
(46.3%)
Net premiums written (2) . . . . . . . . . . . . . . . . . . . . . .
$41,715
$ 78,253
$(36,538)
(46.7%)
Net premiums earned (2) . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss)
$59,709
(726)
$ 81,305
443
$(21,596)
(1,169)
(26.6%)
(263.9%)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .
$58,983
$ 81,748
$(22,765)
(27.8%)
Losses and expenses:
Net losses and loss adjustment expenses . . . . . .
Acquisition costs and other underwriting
35,113
90,326
(55,213)
(61.1%)
expenses (1) . . . . . . . . . . . . . . . . . . . . . . . . . .
15,493
26,816
(11,323)
(42.2%)
Income (loss) from segment (1) . . . . . . . . . . . . . . . . .
$ 8,377
$(35,394)
$ 43,771
123.7%
Underwriting Ratios:
Loss ratio:
Current accident year . . . . . . . . . . . . . . . . .
Prior accident year (2)
. . . . . . . . . . . . . . . .
Calendar year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . .
49.3
9.5
58.8
25.9
84.7
95.0
16.1
111.1
33.0
144.1
(45.7)
(6.6)
(52.3)
(7.1)
(59.4)
(1) Results for the year to date 2012 include the impact of an out-of-period adjustment which reduced
Reinsurance Operations segment income by $1.6 million.
(2) Net premiums written and earned for the year to date 2012 includes $6.0 million related to reinsurance
treaties written in 2009 and 2010 which were contractually due as a result of losses incurred on these
treaties. The impact of these premiums are included in the “Prior accident year” ratios.
73
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 $42.3 million for 2012, compared with
$78.8 million for 2011, a decrease of $36.5 million or 46.3%. The decrease was primarily due to the cancellation
of several unprofitable treaties in 2012, partially offset by $6.0 million in new premium related to reinsurance
treaties written in 2009 and 2010 which was contractually due as a result of losses incurred on these treaties. This
income is non-recurring. Wind River only writes primarily property treaties at the current time.
Net premiums written, which equals gross premiums written less ceded premiums written, was $41.7 million for
2012, compared with $78.3 million for 2011, a decrease of $36.5 million or 46.7%. The decrease was primarily
due to the decrease in gross premiums written noted above.
Net premiums earned were $59.7 million for 2012, compared with $81.3 million for 2011, a decrease of $21.6
million or 26.6%. The decrease was primarily due to decreases in net premiums written within the previous year.
Property net premiums earned for 2012 and 2011 were $34.2 million and $32.8 million, respectively. Casualty
net premiums earned for 2012 and 2011 were $25.5 million and $48.5 million, respectively.
Other Income (Loss)
The Company recognized a loss of $0.7 million for 2012 compared with income of $0.4 million for 2011. Other
income or loss is comprised of exchange gains and losses related to business written in foreign currencies.
Net Losses and Loss Adjustment Expenses
The loss ratio for the Company’s Reinsurance Operations was 58.8% for 2012 compared with 111.1% for 2011.
The loss ratio is a GAAP financial measure that is generally viewed in the insurance industry as an indicator of
underwriting profitability and is calculated by dividing net losses and loss adjustment expenses by net premiums
earned.
The current accident year loss ratio decreased 45.7 points from 95.0% in 2011 to 49.3% in 2012.
• The current accident year property loss ratio was 30.3% in 2012 compared to 94.3% in 2011. This
decrease was primarily due to losses on a worldwide catastrophe treaty in 2011 related to the Japan
earthquake and tsunami, New Zealand earthquakes, Australian floods, Alabama tornadoes, Hurricane
Irene, Tropical Storm Lee, and other U.S. catastrophic events, compared with losses from Superstorm
Sandy in 2012. Current accident year property losses for 2012 and 2011 were $10.4 million and $31.0
million, respectively.
• The current accident year casualty loss ratio was 82.6% in 2012 compared to 95.5% in 2011. This
decrease was primarily due to lower than expected losses on general liability treaties.
The prior accident year loss ratio decreased by 6.6 points resulting from an increase of net losses and loss
adjustment expenses for prior accident years of $8.7 million in 2012 compared to an increase of net losses and
loss adjustment expenses for prior accident years of $13.1 million in 2011.
In 2012, the Company increased its prior accident year loss reserves by $8.7 million, which primarily consisted
of the following:
• Workers’ Compensation: An $8.3 million increase in workers’ compensation lines primarily related
to accident years 2009 and 2010 driven by increased frequency and severity. This increase in losses
triggered $6.0 million in additional premium during the current period.
• Marine: A $2.7 million increase in marine lines primarily related to accident year 2011 primarily due
to higher than expected reported losses.
74
• Automobile Liability: A $1.3 million increase in auto liability lines primarily related to accident year
2009 resulting from further unexpected development on non-standard auto treaties which were not
renewed.
• Property: A $3.4 million decrease in property lines primarily related to accident years 2009 and 2011
as a result of further development on worldwide catastrophe treaties.
In 2011, the Company increased its prior accident year loss reserves by $13.1 million, which primarily consisted
of the following:
• General Liability: An $8.7 million increase in general liability lines primarily related to accident years
2009 and 2010 due to loss emergence that was greater than expected.
• Automobile Liability: A $3.1 million increase in auto liability lines primarily related to accident year
2010 resulting from further unexpected development on non-standard auto treaties which were not
renewed in 2011.
• Property: A $1.5 million increase in property lines primarily related to accident year 2010 and is
primarily related to loss emergence on a worldwide catastrophe treaty.
• Workers’ Compensation: A $1.0 million increase in workers’ compensation lines primarily related to
accident years 2009 and 2010 and is the result of expected losses recorded on adjustment premiums
recorded in 2011.
• Professional Liability: A $1.3 million decrease in professional liability lines primarily related to
accident years 2009 and 2010 and is the result of better than expected development on certain treaties.
Net losses and loss adjustment expenses were $35.1 million for 2012, compared with $90.3 million for 2011, a
decrease of $55.2 million or 61.1%. Excluding the impact of prior accident year adjustments, the current accident
year net losses and loss adjustment expenses were $26.5 million and $77.3 million for 2012 and 2011,
respectively. This decrease is primarily attributable to large catastrophe losses incurred in 2011 related to the
Japan earthquake and tsunami, New Zealand earthquakes, Australian floods, Alabama tornadoes, Hurricane
Irene, Tropical Storm Lee, and other U.S. catastrophic events, as well as the cancellation of unprofitable treaties
in 2012, partially offset by the impact of Superstorm Sandy.
Acquisition Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were $15.5 million for 2012, compared with $26.8 million for
2011, a decrease of $11.3 million or 42.2%. The decrease is primarily due to a decrease in commissions as a
result of the decrease in net earned premiums.
Expense and Combined Ratios
The expense ratio for the Company’s Reinsurance Operations was 25.9% for 2012, compared with 33.0% for
2011. The expense ratio is a 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
changes in mix of business as a result of cancelling several unprofitable treaties in 2011 and 2012, partially offset
by an increase in contingent commissions due to the profitability of business in 2012.
The combined ratio for the Company’s Reinsurance Operations was 84.7% for 2012, compared with 144.1% for
2011. The combined ratio is a GAAP financial measure and is the sum of the Company’s loss and expense ratios.
Excluding the impact of prior accident year adjustments, the combined ratio decreased from 128.0% in 2011 to
75.2% in 2012. 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.
75
Income (Loss) from Segment
The factors described above resulted in income from underwriting for the Company’s Reinsurance Operations of
$8.4 million in 2012, compared to a loss from underwriting of $35.4 million in 2011, an increase of $43.8
million.
Unallocated Corporate Items
The following items are not allocated to the Company’s Insurance Operations or Reinsurance Operations
segments:
(Dollars in thousands)
Year Ended
December 31,
Increase / (Decrease)
2012
2011
$
%
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . .
Corporate and other operating expenses . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Income tax (expense) benefit
Equity in net income of partnership, net of tax . . . . . . . .
$47,557
6,755
(9,691)
(5,393)
5,856
—
$ 53,112
21,473
(13,973)
(6,476)
(2,787)
53
$ (5,555)
(14,718)
(4,282)
(1,083)
8,643
(53)
(10.5%)
(68.5%)
(30.6%)
(16.7%)
310.1%
(100.0%)
Net Investment Income
Net investment income, which is gross investment income less investment expenses, was $47.6 million for 2012,
compared with $53.1 million for 2011, a decrease of $5.6 million or 10.5%.
• Gross investment income, which excludes realized gains and losses, was $52.0 million for 2012,
compared with $57.8 million for 2011, a decrease of $5.8 million or 10.1%. The decrease was
primarily due to a reduction in the Company’s fixed maturities portfolio related to funding the share
repurchase program, repayment of debt and negative operating cash flow. This decrease was offset by
investment
income of $4.8 million generated from distributions from two limited partnership
investments. There was no investment income generated by limited partnership investments during
2011. Excluding distributions from limited partnership investments, gross investment income for 2012
decreased $10.6 million or 18.4% compared to 2011.
•
Investment expenses were $4.5 million for 2012, compared with $4.7 million for 2011, a decrease of
$0.2 million or 5.6%. The decrease is primarily due to the reduction of investments in corporate loans.
As of December 31, 2012, the Company held mortgage-backed securities with a book value of $189.9 million.
Excluding the mortgage-backed securities, the average duration of the Company’s fixed maturities portfolio was
2.2 years as of December 31, 2012, compared with 2.0 years as of December 31, 2011. Including cash and short-
term investments, the average duration of the Company’s fixed maturities portfolio, excluding mortgage-backed
securities, as of December 31, 2012 was 2.0 years compared with 1.7 years as of December 31, 2011. Changes in
interest rates can cause principal payments on certain investments to extend or shorten which can impact
duration. At December 31, 2012, the Company’s embedded book yield on its fixed maturities, not including cash,
was 3.1% compared with 3.6% at December 31, 2011. As of December 31, 2012, the Company’s investment
portfolio held $201.1 million in municipal bonds with an embedded book yield of 3.0% compared with an
embedded book yield of 3.6% on $206.1 million in municipal bonds as of December 31, 2011.
Net Realized Investment Gains
Net realized investment gains were $6.8 million for 2012, compared with $21.5 million for 2011. The net
realized investment gains for 2012 consist primarily of net gains of $3.0 million relative to the Company’s fixed
maturities and $9.2 million relative to its equity securities, offset by other than temporary impairment losses of
76
$5.4 million. The net realized investment gains for 2011 consist primarily of net gains of $14.2 million relative to
the Company’s fixed maturities and $14.7 million relative to its equity securities, offset by mutual fund losses of
$0.8 million and other than temporary impairment losses of $6.6 million.
See Note 6 of the notes to the consolidated financial statements in Item 8 of Part II of this report for an analysis
of total investment return on a pre-tax basis for the years ended December 31, 2012 and 2011.
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, development costs for new products, and
taxes incurred which are not directly related to operations. Corporate and other operating expenses were $9.7
million for 2012, compared with $14.0 million for 2011, a decrease of $4.3 million or 30.6%. The decrease is
primarily due to a decrease in outside legal and other professional fees.
Interest Expense
Interest expense was $5.4 million and $6.5 million for 2012 and 2011, respectively. This reduction was primarily
due to principal payments of $18.0 million on the Company’s senior notes payable made during July, 2011 and
2012. See Note 13 of the notes to the consolidated financial statements in Item 8 of Part II of this report for
details on the Company’s debt.
Income Tax Expense (Benefit)
Income tax expense was a benefit of $5.9 million for 2012, compared with expense of $2.8 million for 2011. See
Note 11 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 Income of Partnerships
Equity in net income of partnerships, net of tax was $0.05 million for 2011. There was no equity in net income of
partnerships during 2012.
Net Income (Loss)
The factors described above resulted in net income of $34.8 million in 2012, compared with a net loss of $38.3
million in 2011, an increase of $73.1 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 those of its U.S. insurance companies: United National Insurance Company, Diamond
State Insurance Company, United National Specialty Insurance Company, Penn-America Insurance Company,
Penn-Star Insurance Company, and Penn-Patriot Insurance Company; and its Reinsurance Operations: Wind
River Reinsurance.
The principal source of cash that Global Indemnity needs to meet its short term and long term liquidity needs,
including the payment of corporate expenses and share repurchases,
includes dividends, other permitted
disbursements from its direct and indirect subsidiaries, reimbursement for equity awards granted to employees
and intercompany borrowings. The principal sources of funds at these direct and indirect subsidiaries include
77
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,
fund margin requirements on interest rate swap agreements, to purchase investments, and to make dividend
payments. The future liquidity of Global Indemnity is dependent on the ability of its subsidiaries to pay
dividends. Global Indemnity has no planned capital expenditures that could have a material impact on its short-
term or long-term liquidity needs.
Global Indemnity’s U.S. insurance companies are restricted by statute as to the amount of dividends that they
may pay without the prior approval of regulatory authorities. The dividend limitations imposed by state laws are
based on the statutory financial results of each insurance company within the Insurance Operations that are
determined by using statutory accounting practices that differ in various respects from accounting principles used
in financial statements prepared in conformity with GAAP. See “Regulation—Statutory Accounting Principles.”
Key differences relate to, among other items, deferred acquisition costs, limitations on deferred income taxes,
reserve calculation assumptions and surplus notes.
Under Indiana law, Diamond State Insurance Company may not pay any dividend or make any distribution of
cash or other property, the fair market value of which, together with that of any other dividends or distributions
made within the 12 consecutive months ending on the date on which the proposed dividend or distribution is
scheduled to be made, exceeds the greater of (1) 10% of its surplus as of the 31st day of December of the last
preceding year, or (2) its net income for the 12 month period ending on the 31st day of December of the last
preceding year, unless the commissioner approves the proposed payment or fails to disapprove such payment
within 30 days after receiving notice of such payment. An additional limitation is that Indiana does not permit a
domestic insurer to declare or pay a dividend except out of unassigned surplus unless otherwise approved by the
commissioner before the dividend is paid.
Under Pennsylvania law, United National Insurance Company, Penn-America Insurance Company, and Penn-
Star Insurance Company may not pay any dividend or make any distribution that, together with other dividends
or distributions made within the preceding 12 consecutive months, exceeds the greater of (1) 10% of its surplus
as shown on its last annual statement on file with the commissioner or (2) its net income for the period covered
by such statement, not including pro rata distributions of any class of its own securities, unless the commissioner
has received notice from the insurer of the declaration of the dividend and the commissioner approves the
proposed payment or fails to disapprove such payment within 30 days after receiving notice of such payment. An
additional limitation is that Pennsylvania does not permit a domestic insurer to declare or pay a dividend except
out of unassigned funds (surplus) unless otherwise approved by the commissioner before the dividend is paid.
Furthermore, no dividend or other distribution may be declared or paid by a Pennsylvania insurance company
that would reduce its total capital and surplus to an amount that is less than the amount required by the Insurance
Department for the kind or kinds of business that it is authorized to transact. Pennsylvania law allows loans to
affiliates up to 10% of statutory surplus without prior regulatory approval.
Under Virginia law, Penn-Patriot Insurance Company may not pay any dividend or make any distribution of cash
or other property, the fair market value of which, together with that of any other dividends or distributions made
within the preceding 12 consecutive months exceeds the lesser of either (1) 10% of its surplus as of the 31st day
of December of the last preceding year, or (2) its net income, not including net realized capital gains, for the 12
month period ending on the 31st day of December of the last preceding year, not including pro rata distributions
of any class of its securities, unless the commissioner approves the proposed payment or fails to disapprove such
payment within 30 days after receiving notice of such payment. In determining whether the dividend must be
approved, undistributed net income from the second and third preceding years, not including net realized capital
gains, may be carried forward.
Under Wisconsin law, United National Specialty Insurance Company may not pay any dividend or make any
distribution of cash or other property, other than a proportional distribution of its stock, the fair market value of
which, together with that of other dividends paid or credited and distributions made within the preceding 12
months, exceeds the lesser of (1) 10% of its surplus as of the preceding 31st day of December, or (2) the greater
78
of (a) its net income for the calendar year preceding the date of the dividend or distribution, minus realized
capital gains for that calendar year or (b) the aggregate of its net income for the three calendar years preceding
the date of the dividend or distribution, minus realized capital gains for those calendar years and minus dividends
paid or credited and distributions made within the first two of the preceding three calendar years, unless it reports
the extraordinary dividend to the commissioner at least 30 days before payment and the commissioner does not
disapprove the extraordinary dividend within that period. Additionally, under Wisconsin law, all authorizations
of distributions to shareholders, other than stock dividends, shall be reported to the commissioner in writing and
no payment may be made until at least 30 days after such report.
In December, 2013, each of the U.S. insurance companies declared an extraordinary dividend that aggregated to
$200 million. In January, 2014, each of the dividends for the U.S. insurance companies was approved by the
respective departments of insurance in Pennsylvania, Indiana, Wisconsin, and Virginia. On January 23, 2014, the
U.S. insurance companies paid an aggregate dividend of $200 million to Global Indemnity Group, Inc. See Note
20 of the notes to consolidated financial statements in Item 8 of Part II of this report for the dividend limitations
for 2014.
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 year’s statutory financial statements, and any application for such
approval must include such information as the BMA may require. Based upon the total statutory capital plus the
statutory surplus as set out in its 2013 statutory financial statements that will be filed in 2014, the Company
believes Wind River Reinsurance could pay a dividend of up to $236.0 million without requesting BMA
approval. Wind River Reinsurance did not declare or pay any dividends during 2013. For 2014, the Company
believes that Wind River Reinsurance, including distributions it could receive from its subsidiaries, should have
sufficient liquidity and solvency to pay dividends.
Surplus Levels
Global Indemnity’s U.S. insurance companies are required by law to maintain a certain minimum level of
policyholders’ surplus on a statutory basis. Policyholders’ surplus is calculated by subtracting total liabilities
from total assets. The NAIC has risk-based capital standards that are designed to identify property and casualty
insurers that may be inadequately capitalized based on the inherent risks of each insurer’s assets and liabilities
and mix of net premiums written. Insurers falling below a calculated threshold may be subject to varying degrees
of regulatory action. Based on the standards currently adopted, the policyholders’ surplus of each of the U.S.
insurance companies is in excess of the prescribed minimum company action level risk-based capital
requirements.
Cash Flows
Sources of operating funds consist primarily of net premiums written and investment income. Funds are used
primarily to pay claims and operating expenses and to purchase investments.
The Company’s reconciliation of net income to cash provided from operations is generally influenced by the
following:
•
•
•
the fact that the Company collect premiums, net of commission, in advance of losses paid;
the timing of the Company’s settlements with its reinsurers; and
the timing of the Company’s loss payments.
Net cash used for operating activities in 2013, 2012, and 2011 was $4.9 million, $35.0 million and $7.7 million,
respectively.
79
In 2013, the increase in operating cash flows of approximately $30.1 million from the prior year was primarily a
net result of the following items:
Net premiums collected . . . . . . . . . . . . . . . . . . . . . . .
Net losses paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting and corporate expenses . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . .
Net federal income taxes recovered (paid) . . . . . . . . .
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
2012
Change
$ 250,987
(188,690)
(111,358)
44,367
7,451
(7,678)
—
$ 214,158
(199,732)
(99,767)
55,768
(228)
(5,895)
683
$ 36,829
11,042
(11,591)
(11,401)
7,679
(1,783)
(683)
Net cash used for operating activities . . . . . . . .
$
(4,921)
$ (35,013)
$(30,334)
In 2012, the decrease in operating cash flows of approximately $27.3 million from the prior year was primarily a
net result of the following items
Net premiums collected . . . . . . . . . . . . . . . . . . . . . . .
Net losses paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting and corporate expenses . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . .
Net federal income taxes paid . . . . . . . . . . . . . . . . . .
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
Change
$ 214,158
(199,732)
(99,767)
55,768
(228)
(5,895)
683
$ 284,297
(225,192)
(116,975)
61,058
(4,895)
(6,900)
869
$(70,139)
25,460
17,208
(5,290)
4,667
1,005
(186)
Net cash used for operating activities . . . . . . . .
$ (35,013)
$
(7,738)
$(27,275)
See the consolidated statement of cash flows in the financial statements in Item 8 of Part II of this report for
details concerning the Company’s investing and financing activities.
Liquidity
Currently, Global Indemnity believes each company in its Insurance Operations and Reinsurance Operations
maintains sufficient liquidity to pay claims through cash generated by operations and investments in liquid
investments. The holding companies also maintain sufficient liquidity to meet their obligations. At December 31,
2013, the Company had cash and cash equivalents of $105.5 million.
On December 31, 2013, Diamond State Insurance Company sold all the outstanding shares of capital stock of one
of its wholly owned subsidiaries, United National Casualty Insurance Company, to an unrelated party. Diamond
State Insurance Company received a one-time payment of $26.6 million and recognized a pre-tax gain of $5.2
million. Management deemed this transaction to be an asset sale with the assets primarily comprised of
investments and insurance licenses. This transaction will not have a significant impact on the ongoing business
operations.
On September 30, 2013, the Company redeemed the entire outstanding principal amount on its UNG Trust I
junior subordinated notes. The payment of $10.4 million consisted of principal of $10.3 million and interest of
$0.1 million. This payment was funded by borrowing $10.0 million pursuant to a margin borrowing facility. The
Company redeemed the entire outstanding principal amount on its UNG Trust II junior subordinated notes on
October 29, 2013. The payment of $20.8 million consisted of principal of $20.6 million and interest of $0.2
million. This payment was funded by borrowing $20.2 million pursuant to the Company’s margin borrowing
facility. See Note 13 of the notes to the consolidated financial statements in Item 8 of Part II of this report for
details on the terms of the margin borrowing facility.
80
On July 19, 2013, the Company paid the entire outstanding principal amount on its guaranteed senior notes. The
payment of $58.6 million consisted of principal of $54.0 million and interest of $4.6 million, which included a
make-whole provision of $2.9 million. This payment was funded by borrowing $60.0 million pursuant to the
Company’s margin borrowing facility. Please see Note 13 of the notes to the consolidated financial statements in
Item 8 of Part II of this report.
In 2011 and 2012, the Board of Directors authorized the Company to repurchase up to $125.0 million of its A
ordinary shares through share repurchase programs. The Company repurchased and retired an aggregate
5,371,419 of its A ordinary shares in the open market and in privately negotiated transactions at an aggregate
price of $112.2 million or an average of $20.89 per share. The Company did not repurchase any additional A
ordinary shares under the share repurchase programs during the year ended December 31, 2013. The Company
does not have authorization from the Board of Directors to repurchase any additional A ordinary shares as of
December 31, 2013. The excess cost of the repurchased shares over their par value was classified to additional
paid-in capital as of December 31, 2013.
Included in the share repurchases above, on May 9, 2012, the Company announced a self-tender offer pursuant to
which it could repurchase up to $61.0 million of its A ordinary shares. On June 14, 2012, the Company accepted
for purchase 2,913,464 of its A ordinary shares at a price of $21.75 per share for a total cost of $63.4 million,
excluding fees and expenses related to the tender offer. The Company funded the purchase of the shares using
cash on hand. Included within the A ordinary shares accepted for purchase were 122,578 A ordinary shares that
Global Indemnity elected to purchase pursuant to its option to increase the size of the tender offer by up to 2.0%
of the outstanding A ordinary shares.
Stop Loss Agreement, Quota Share Arrangements and Intercompany Pooling Arrangement
Global Indemnity’s U.S. insurance companies and Wind River Reinsurance participate in a stop loss agreement
that provides protection to the U.S. insurance companies in a loss corridor from 75% to 95% subject to certain
restrictions.
The Company’s U.S. insurance companies participate in quota share reinsurance agreements with Wind River
Reinsurance whereby 50% of the net retained business of the U.S. insurance companies is ceded to Wind River
Reinsurance. These agreements exclude named storms. Wind River Reinsurance is an unauthorized reinsurer. As
a result, any losses and unearned premiums that are ceded to Wind River Reinsurance by the U.S. insurance
companies must be collateralized. To satisfy this requirement, Wind River Reinsurance has set up custodial trust
accounts on behalf of the U.S. insurance companies.
Wind River also has established trust accounts to collateralize exposure it has to third party ceding companies.
The Company invests the funds in securities that have durations that closely match the expected duration of the
liabilities assumed. The Company believes that Wind River Reinsurance will have sufficient liquidity to pay
claims prospectively.
Global Indemnity’s U.S. insurance companies participate in an intercompany pooling arrangement whereby
premiums, losses, and expenses are shared pro rata amongst the U.S. insurance companies. United National
Insurance Company is not an authorized reinsurer in all states. As a result, any losses and unearned premiums that
are ceded to United National Insurance Company are collateralized. The state insurance departments that regulate
the parties to the intercompany pooling agreements require United National Insurance Company to place assets on
deposit subject to trust agreements for the protection of the other members of the U.S. insurance companies.
All trusts that the Company is required to maintain as a result of the above mentioned pooling agreements and
quota share arrangements are adequately funded.
In 2014, the Company expects that, in the aggregate, the Insurance Operations and Reinsurance Operations will
have sufficient liquidity to pay claims. The Company monitors its portfolios to assure liability and investment
durations are closely matched.
81
Prospectively, as fixed income investments mature and new cash is obtained, the cash available to invest will be
invested in accordance with the Company’s investment policy. The Company’s investment policy allows the
Company to invest in taxable and tax-exempt fixed income investments as well as publicly traded and private
equity investments. With respect to bonds, the Company’s credit exposure limit for each issuer varies with the
issuer’s credit quality. The allocation between taxable and tax-exempt bonds is determined based on market
conditions and tax considerations. During 2011, the Company decreased the average duration on its investment
portfolio in order to defensively position it during the current low interest rate environment. The fixed income
portfolio currently has a duration of 2.19 years.
The Company has access to various capital sources including dividends from insurance subsidiaries, invested
assets in its non-U.S. subsidiaries, and access to the debt and equity capital markets. The Company believes it has
sufficient liquidity to meet its capital needs. See Note 20 of the notes to consolidated financial statements in
Item 8 of Part II of this report for the dividends declared by Global Indemnity’s U.S. insurance companies in
2013 and dividend limitations for 2014.
Capital Resources
On January 18, 2006, U.A.I. (Luxembourg) Investment S.à.r.l. loaned $6.0 million to United America Indemnity,
Ltd. The loan was used to pay operating expenses that arise in the normal course of business. The loan is a
demand loan and bears interest at 4.38%. In May, 2012, United America Indemnity, Ltd. repaid $5.0 million of
principal under this loan. At December 31, 2013, there was $1.8 million of accrued interest on the loan. United
America Indemnity, Ltd. is dependent on its subsidiaries to pay its dividends and operating expenses.
On November 12, 2007, Wind River Reinsurance issued a $50.0 million demand line of credit to United America
Indemnity, Ltd. which bears interest at 5.25%. The proceeds of the line were used to fund purchases of the
Company’s A ordinary shares as part of two $50.0 million share buyback programs that were initiated in
November 2007 and February 2008, respectively. On February 13, 2008, the demand line of credit was amended.
The interest rate was decreased to 3.75% per annum, and the loan amount was increased to $100.0 million. 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 line of credit. In
February, 2010 the line of credit was converted to a non-interest bearing note payable for the full amount of
principal and accrued interest to date. As of December 31, 2013, there was $53.0 million outstanding on the note
payable.
U.A.I. (Luxembourg) Investment S.à.r.l. holds promissory notes of $175.0 million and $110.0 million from
Global Indemnity Group, Inc. which have interest rates of 6.64% and 6.20%, respectively, and mature in 2018
and 2020, respectively. Interest on these notes is paid annually. Other than its investment portfolio, Global
Indemnity Group, Inc. has no income producing operations. The ability of Global Indemnity Group, Inc. to
generate cash to repay the notes is dependent on dividends that it receives from its subsidiaries or using other
assets it holds.
In November, 2011, U.A.I. (Luxembourg) Investment S.à.r.l. issued a $100.0 million demand line of credit to
Global Indemnity (Cayman) Ltd. which bears interest at 1.2%. The proceeds of the line were loaned from Global
Indemnity (Cayman) Ltd. to Global Indemnity plc, bearing interest at 1.2%, to fund purchases of the Company’s
A ordinary shares as part of the $100.0 million share repurchase program announced in September, 2011. In
August, 2012, the demand line of credit was increased to $125.0 million to fund additional purchases under the
Company’s $25.0 million share repurchase authorization. As of December 31, 2013, Global Indemnity plc owed
Global Indemnity (Cayman) Ltd. $108.0 million under this arrangement, with accrued interest of $2.2 million,
and Global Indemnity (Cayman) Ltd. had $102.5 million outstanding on the line of credit, with accrued interest
of $2.2 million.
In November, 2012, American Insurance Service, Inc. (“AIS”) issued a $35.0 million loan to Wind River
Reinsurance, bearing interest at the six month London Interbank Offered Rate (“LIBOR”) plus 3.5%. Interest is
payable semi-annually. The proceeds of the loan were used to fund trust accounts in the normal course of
82
business. Effective October 31, 2013, American Insurance Service, Inc. (“AIS”) assigned all of its rights,
obligations, duties, and liabilities under the note to Global Indemnity Group, Inc. As of December 31, 2013, there
was $25.0 million outstanding on the note payable, with accrued interest of $0.2 million payable to AIS and $0.2
million payable to Global Indemnity Group, Inc.
On July 19, 2013, the Company entered into a margin borrowing facility with a borrowing rate that is currently
equal to the one week LIBOR rate plus 65 basis points, which combined is currently less than 1%. This facility is
due on demand. The borrowing is subject to maintenance margin, which is a minimum account balance that must
be maintained. A decline in market conditions could require an additional deposit of collateral. As of
December 31, 2013, approximately $120.9 million in collateral was deposited to support the borrowing. The
amount borrowed against the margin account may fluctuate as routine investment transactions, such as dividends
received, investment income received, maturities and pay-downs, impact cash balances. The margin facility
contains customary events of default,
insolvency, failure to make required
payments, failure to comply with any representations or warranties, failure to adequately assure future
performance, and failure of a guarantor to perform under its guarantee.
including, without
limitation,
Contractual Obligations
The Company has commitments in the form of operating leases, a revolving line of credit, and unpaid losses and
loss expense obligations. As of December 31, 2013, contractual obligations related to Global Indemnity’s
commitments, including any principal and interest payments, were as follows:
(Dollars in thousands)
Total
2014
Payment Due by Period
2015 and
2016
2017 and
2018
Thereafter
Operating leases (1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments to fund limited partnerships . . . . . . . . .
Unpaid losses and loss adjustment expenses
$ 11,620
2,490
$
2,362
2,490
$
3,810
—
$
3,560
—
$
1,888
—
obligations (2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
779,466
252,439
276,111
127,982
122,934
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$793,576
$257,291
$279,921
$131,542
$124,822
(1) The Company leases office space and equipment as part of its normal operations. The amounts shown above
represent future commitments under such operating leases, net of expected sub-lease income from
abandoned space. As part of its Profit Enhancement Initiative, the Company incurred charges in 2011 and
2010 resulting from future minimum lease commitments related to unused space. Cash payments on leases
related to unused space will be paid in future periods and are included in this table.
(2) These amounts represent the gross future amounts needed to pay losses and related loss adjustment expenses
and do not reflect amounts that are expected to be recovered from the Company’s reinsurers. See discussion
in “Liability for Unpaid Losses and Loss Adjustment Expenses” for more details.
Off Balance Sheet Arrangements
The Company has no off balance sheet arrangements other than the floating rate common securities discussed in
the “Capital Resources” section of “Liquidity and Capital Resources.” These floating rate common securities
were cancelled in 2013.
Property and casualty insurance premiums are established before the Company knows the amount of losses and
loss adjustment expenses or the extent to which inflation may affect such amounts. The Company attempts to
anticipate the potential impact of inflation in establishing its reserves.
Inflation
83
Future increases in inflation could result in future increases in interest rates, which in turn are likely to result in a
decline in the market value of the investment portfolio and resulting in unrealized losses and reductions in
shareholders’ equity.
Cautionary Note Regarding Forward-Looking Statements
Some of the statements under “Business,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and elsewhere in this report may include forward-looking statements that reflect the
Company’s current views with respect to future events and financial performance that are intended to be covered
by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of
1995. Forward-looking statements are statements that are not historical facts. These statements can be identified
by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “project,”
“plan,” “seek,” “intend,” or “anticipate” or the negative thereof or comparable terminology, and include
discussions of strategy, financial projections and estimates and their underlying assumptions, statements
regarding plans, objectives, expectations or consequences of identified transactions or natural disasters, and
statements about the future performance, operations, products and services of the companies.
The Company’s business and operations are and will be subject to a variety of risks, uncertainties and other
factors. Consequently, actual results and experience may materially differ from those contained in any forward-
looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to
limited to, the following: (1) the ineffectiveness of the
differ from those projected include, but are not
Company’s business strategy due to changes in current or future market conditions; (2) the effects of
competitors’ pricing policies, and of changes in laws and regulations on competition,
including industry
consolidation and development of competing financial products; (3) greater frequency or severity of claims and
loss activity than the Company’s underwriting, reserving or investment practices have anticipated; (4) decreased
level of demand for the Company’s insurance products or increased competition due to an increase in capacity of
property and casualty insurers; (5) risks inherent in establishing loss and loss adjustment expense reserves;
(6) uncertainties relating to the financial ratings of the Company’s insurance subsidiaries; (7) uncertainties
arising from the cyclical nature of the Company’s business; (8) changes in the Company’s relationships with, and
the capacity of, its general agents, brokers, insurance companies and reinsurance companies from which the
Company derives its business; (9) the risk that the Company’s reinsurers may not be able to fulfill obligations;
(10) investment performance and credit risk; (11) new tax legislation or interpretations that could lead to an
increase in the Company’s tax burden; (12) uncertainties relating to governmental and regulatory policies, both
domestically and internationally; (13) foreign currency fluctuations; (14) the impact of catastrophic events;
(15) the Company’s subsidiaries’ ability to pay dividends; (16) deterioration of debt and equity markets;
(17) interest rate changes; and (18) uncertainties relating to ongoing or future litigation matters.
The foregoing review of important factors should not be construed as exhaustive and should be read in
conjunction with the other cautionary statements that are set forth in “Risk Factors” in Item 1A and elsewhere in
this Annual Report on Form 10-K. The Company’s forward-looking statements speak only as of the date of this
report or as of the date they were made. The Company undertake no obligation to publicly update or review any
forward-looking statement, whether as a result of new information, future developments or otherwise.
84
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial
instrument as the result of changes in interest rates, equity prices, credit risk, illiquidity, foreign exchange rates
and commodity prices. The Company’s consolidated balance sheet includes the estimated fair values of assets
that are subject to market risk. The Company’s primary market risks are interest rate risk and credit risks
associated with investments in fixed maturities, equity price risk associated with investments in equity securities,
and foreign exchange risk associated with premium received that is denominated in foreign currencies. Each of
these risks is discussed in more detail below. The Company has no commodity risk.
Interest Rate Risk
The Company’s primary market risk exposure is to changes in interest rates. The Company’s fixed income
investments are exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market
valuation of these securities. As interest rates rise, the market value of the Company’s fixed income investments
fall, and the converse is also true. The Company seeks to manage interest rate risk through an active portfolio
management strategy that involves the selection, by the Company’s managers, of investments with appropriate
characteristics, such as duration, yield, currency, and liquidity that are tailored to the anticipated cash outflow
characteristics of the Company’s liabilities. The Company’s strategy for managing interest rate risk also includes
maintaining a high quality bond portfolio with a relatively short duration to reduce the effect of interest rate
changes on book value. A significant portion of the Company’s investment portfolio matures each year, allowing
for reinvestment at current market rates.
As of December 31, 2013, assuming identical shifts in interest rates for securities of all maturities, the table
below illustrates the sensitivity of market value in Global Indemnity’s bonds to selected hypothetical changes in
basis point increases and decreases:
(Dollars in thousands)
Change in Market Value
Basis Point Change
Market Value
(200)
(100)
No change
100
200
$1,231,389
1,222,887
1,204,364
1,178,906
1,154,146
$
$ 27,025
18,523
—
(25,458)
(50,218)
%
2.2%
1.5%
0.0%
(2.1%)
(4.2%)
The Company’s interest rate swaps are also exposed to interest rate risk. Fluctuations in interest rates have a
direct impact on the market valuation of these financial instruments. As interest rates decline, the market value of
the Company’s interest rate swaps fall, and the converse is also true. Since the Company has designated the
interest rate swaps as non-hedge instruments, the changes in the fair value is recognized as net realized
investment gains in the consolidated statement of operations. Therefore, changes in interest rates will have a
direct impact to the Company’s results of operation. In addition, on a daily basis, a margin requirement is
calculated. If interest rates decline, the Company is required to pay a margin call equal to the change in the fair
market value of the interest rate swap. When interest rates rise, the counterparty is required to pay to the
Company a margin call equal to the change in fair market value of the interest rate swap.
85
As of December 31, 2013, the table below illustrates the sensitivity of market value of the Company’s interest
rate swaps as well as the impact on the consolidated statement of operation to selected hypothetical changes in
basis point increases and decreases:
(Dollars in thousands)
Basis Point Change
Market Value
(200)
(100)
No change
100
200
$(37,500)
(16,895)
1,668
18,398
33,480
Credit Risk
Change in Market
Value and Impact to
Consolidated
Statement of Income
$(39,168)
(18,563)
—
16,730
31,812
The Company has exposure to credit risk primarily as a holder of fixed income investments as well as corporate
loans. With the exception of corporate loans, the Company’s investment policy requires that it invests in debt
instruments of high credit quality issuers and limits the amount of credit exposure to any one issuer based upon
the rating of the security.
The Company’s corporate loan portfolio is subject to default risk since these investments are typically below
investment grade. To mitigate this risk, the Company’s 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 company’s capital structure and the appropriate covenant protection. In addition, as part of the
Company’s risk control, its investment managers maintain appropriate portfolio diversification by limiting issuer
and industry exposure. This asset class was exited in the first quarter of 2014.
As of December 31, 2013, the Company had approximately $30.2 million worth of investment exposure to
subprime and Alt-A investments. As of December 31, 2013, approximately $29.5 million of those investments
have been rated BBB+ to AAA by Standard & Poor’s and $0.7 million were rated below investment grade. As of
December 31, 2012, the Company had approximately $35.2 million worth of investment exposure to subprime
and Alt-A investments. As of December 31, 2012, approximately $33.3 million of those investments have been
rated BBB+ to AAA by Standard & Poor’s and $1.9 million were rated below investment grade. There were no
impairments recognized on these investments during the year ended December 31, 2013. There was an
impairment of $0.03 million recognized on these investments during the year ended December 31, 2012.
In addition, the Company has credit risk exposure to its general agencies and reinsurers. The Company seeks to
mitigate and control its risks to producers by typically requiring its general agencies to render payments within
no more than 45 days after the month in which a policy is effective and including provisions within the
Company’s general agency contracts that allow it to terminate a general agency’s authority in the event of non-
payment.
With respect to its credit exposure to reinsurers, the Company seeks to mitigate and control its risk by ceding
business to only those reinsurers having adequate financial strength and sufficient capital to fund their obligation.
In addition, the Company seeks to mitigate credit risk to reinsurers through the use of trusts and letters of credit
for collateral.
Equity Price Risk
In 2013, the strategy for the Company’s equity portfolio followed a large cap value approach. This investment
style placed primary emphasis on selecting the best relative values from those issues having a projected
normalized price-earnings ratio at a discount to the market multiple.
86
The Company compares the results of the Company’s equity portfolio to a customized benchmark. Effective
July, 2011, the custom benchmark is the S&P 500 Value excluding financials. Prior to July, 2011, the custom
benchmark was the S&P Value/Citigroup excluding P&C Insurers, Multi-line insurers and Investment Banks/
Brokers Index. To protect against equity price risk, the sector exposures within the Company’s equity portfolio
closely correlate to the sector exposures within the custom benchmark index. In 2013, the Company’s common
stock portfolio had a return of 31.6%, not including investment advisor fees, compared to the benchmark return
of 30.5%.
The carrying values of investments subject to equity price risk are based on quoted market prices as of the
balance sheet dates. Market prices are subject to fluctuation and thus the amount realized in the subsequent sale
of an investment may differ from the reported market value. Fluctuation in the market price of an equity security
results from perceived changes in the underlying economic makeup of a stock,
the price of alternative
investments and overall market conditions.
The Company attempts to mitigate its unsystemic risk, which is the risk that is associated with holding a
particular security, by holding a large number of securities in that market. At year end, no security represented
more than 3.8% of the market value of the equity portfolio. The Company continues to have systemic risk, which
is the risk inherent in the general market due to broad macroeconomic factors that affect all companies in the
market.
As of December 31, 2013, the table below summarizes the Company’s equity price risk and reflects the effect of
a hypothetical 10% and 20% increase or decrease in market prices. The selected hypothetical changes do not
indicate what could be the potential best or worst scenarios.
Hypothetical Price
Change
(20%)
(10%)
No change
10%
20%
(Dollars in thousands)
Estimated Fair Value
after Hypothetical
Change in Prices
Hypothetical Percentage
Increase (Decrease) in
Shareholders’ Equity (1)
$ 203,256
228,663
254,070
279,477
304,884
(3.8%)
(1.9%)
—
1.9%
3.8%
(1) Net of 35% tax
Foreign Currency Exchange Risk
The Company has foreign currency exchange risk associated with a portion of the business written at Wind River
Reinsurance, as well as a small portion of expenses related to corporate overhead in its Ireland and Luxembourg
offices. The Company also maintains investments in foreign denominated securities and cash accounts in foreign
currencies in order to pay expenses in foreign countries. At period-end, the Company re-measures those non-U.S.
currency financial assets to their current U.S. dollar equivalent. Financial liabilities, if any, are generally adjusted
within the reserving process. However, for known losses on claims to be paid in foreign currencies, the Company
re-measures the liabilities to their current U.S. dollar equivalent each period end.
87
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GLOBAL INDEMNITY PLC
Index to Financial Statements
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89
90
91
92
93
94
95
Index to Financial Statement Schedules
Schedule I
Summary of Investments—Other Than Investments in Related Parties . . . . . . . . . . . . . . . . . S-1
Schedule II
Condensed Financial Information of Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Schedule III
Supplementary Insurance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Schedule IV
Reinsurance Earned Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Schedule V
Valuation and Qualifying Accounts and Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Schedule VI
Supplementary Information for Property Casualty Underwriters . . . . . . . . . . . . . . . . . . . . . . S-8
88
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Global Indemnity, plc:
in our opinion,
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all
material respects, the financial position of Global Indemnity, plc. and its subsidiaries (the “Company”) at
December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the
United States of America. In addition,
the financial statement schedules listed in the
accompanying index present fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria
established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these
financial statements and financial statement schedules, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
“Management’s Report on Internal Control over Financial Reporting” appearing under
Item 9A. Our
responsibility is to express opinions on these financial statements, on the financial statement schedules, and on
the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
limitations,
Philadelphia, Pennsylvania
March 14, 2014
89
GLOBAL INDEMNITY PLC
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31,
2013
December 31,
2012
Fixed maturities:
ASSETS
Available for sale, at fair value (amortized cost: $1,187,685 and $1,187,094) . . .
$1,204,364
$1,229,322
Equity securities:
Available for sale, at fair value (cost: $191,425 and $167,179) . . . . . . . . . . . . . .
254,070
197,075
Other invested assets:
Available for sale, at fair value (cost: $3,065 and $3,049) . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premiums receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance receivables, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds held by ceding insurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivable for securities sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded balances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingent commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable for securities purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Margin borrowing facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes and debentures payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (Note 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity:
Ordinary shares, $0.0001 par value, 900,000,000 ordinary shares authorized; A
ordinary shares issued: 16,200,406 and 16,087,939, respectively; A ordinary
shares outstanding: 13,141,035 and 13,030,938, respectively; B ordinary shares
issued and outstanding: 12,061,370 and 12,061,370, respectively . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income, net of taxes . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A ordinary shares in treasury, at cost: 3,059,371 and 3,057,001 shares,
3,489
1,461,923
105,492
49,888
197,887
18,662
—
4,206
22,177
17,990
4,820
5,199
723
22,812
$1,911,779
$ 779,466
116,629
1,595
5,177
12,677
—
100,000
—
22,955
1,038,499
—
3,132
1,429,529
104,460
37,752
241,827
7,410
6,844
10,824
18,265
18,343
4,820
5,945
—
17,684
$1,903,703
$ 879,114
94,114
—
4,201
9,911
2,634
—
84,929
22,182
1,097,085
—
3
516,653
54,028
403,861
3
512,304
53,350
342,171
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(101,265)
873,280
$1,911,779
(101,210)
806,618
$1,903,703
See accompanying notes to consolidated financial statements.
90
GLOBAL INDEMNITY PLC
Consolidated Statements of Operations
(In thousands, except shares and per share data)
Revenues:
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains:
Other than temporary impairment losses on investments . . . . . .
Other than temporary impairment losses on investments
recognized in other comprehensive income . . . . . . . . . . . . . .
Other net realized investment gains . . . . . . . . . . . . . . . . . . . . . .
Total net realized investment gains . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2013
2012
2011
$
$
$
290,723
271,984
248,722
37,209
$
$
$
244,053
219,547
238,862
47,557
$
$
$
307,903
280,570
297,854
53,112
(1,239)
(5,914)
(6,628)
—
28,651
27,412
5,791
541
12,128
6,755
(158)
—
28,101
21,473
12,581
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
319,134
293,016
385,020
Losses and Expenses:
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . .
Acquisition costs and other underwriting expenses . . . . . . . . . . . . . .
Corporate and other operating expenses . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit)
Income (loss) before equity in net income of partnerships . . . . .
Equity in net income of partnerships, net of taxes . . . . . . . . . . . . . . .
132,991
105,651
11,614
6,169
62,709
1,019
61,690
—
153,628
95,403
9,691
5,393
28,901
(5,856)
34,757
—
278,684
121,491
13,973
6,476
(35,604)
2,787
(38,391)
53
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
61,690
$
34,757
$
(38,338)
Per share data (1):
Net income (loss)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2.46
2.45
$
$
1.30
1.30
$
$
(1.27)
(1.27)
Weighted-average number of shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,072,712
26,722,772
30,246,095
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,174,015
26,748,833
30,246,095
(1) For the year ended December 31, 2011, “diluted” shares are the same as “basic” shares since there was a net
loss for the period.
See accompanying notes to consolidated financial statements.
91
GLOBAL INDEMNITY PLC
Consolidated Statements of Comprehensive Income
(In thousands)
Years Ended December 31,
2013
2012
2011
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 61,690
$34,757
$(38,338)
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portion of other than temporary impairment losses recognized in other
17,466
8,295
(2,226)
comprehensive income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognition of previously unrealized holding (gains) losses . . . . . . . . . . . .
Unrealized foreign currency translation gains (losses) . . . . . . . . . . . . . . . . .
—
(16,951)
163
(538)
5,448
(29)
(31)
(14,724)
(56)
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
678
13,176
(17,037)
Comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 62,368
$47,933
$(55,375)
See accompanying notes to consolidated financial statements.
92
GLOBAL INDEMNITY PLC
Consolidated Statements of Changes in Shareholders’ Equity
(In thousands, except share amounts)
Years Ended December 31,
2013
2012
2011
Number of A ordinary shares issued:
Number at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ordinary shares issued under share incentive plans . . . . . . . . . . . . . . . . . .
Ordinary shares issued to directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ordinary shares retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,087,939
74,400
38,067
—
16,200,406
21,429,683
29,675
—
(5,371,419)
16,087,939
21,340,821
47,682
41,180
—
21,429,683
Number of B ordinary shares issued:
Number at beginning and end of period . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,061,370
12,061,370
12,061,370
Par value of A ordinary shares:
Balance at beginning and end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Par value of B ordinary shares:
Balance at beginning and end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital:
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A ordinary shares retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income, net of deferred income tax:
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss):
Change in unrealized holding gains (losses) . . . . . . . . . . . . . . . . . . . .
Change in other than temporary impairment losses recognized in
other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized foreign currency translation gains (losses) . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings:
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of treasury shares:
$
$
$
$
$
$
$
$
2
1
512,304
4,349
—
516,653
53,350
514
1
163
678
54,028
342,171
61,690
403,861
$
$
$
$
$
$
$
$
2
1
621,917
2,582
(112,195)
512,304
40,174
13,219
(14)
(29)
13,176
53,350
307,413
34,757
342,171
$
$
$
$
$
$
$
$
2
1
622,725
(808)
—
621,917
57,211
(16,952)
(29)
(56)
(17,037)
40,174
345,751
(38,338)
307,413
Number at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A ordinary shares purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A ordinary shares retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,057,001
2,370
—
3,059,371
4,619,005
3,809,415
(5,371,419)
3,057,001
3,040,277
1,578,728
—
4,619,005
Treasury shares, at cost:
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A ordinary shares purchased, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A ordinary shares retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (101,210) $ (130,444) $ (100,912)
(29,532)
—
(82,961)
112,195
(55)
—
$ (101,265) $ (101,210) $ (130,444)
839,063
$
806,618
873,280
$
$
See accompanying notes to consolidated financial statements.
93
GLOBAL INDEMNITY PLC
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash used for operating
activities:
Amortization of trust preferred securities issuance costs . . . . . . . . . . . .
Amortization and depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock and stock option expense . . . . . . . . . . . . . . . . . . . . . . .
Deferred federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of bond premium and discount, net . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on the disposition of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in net income of partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in:
Premiums receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance receivables, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds held by ceding insurers . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded balances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingent commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal income tax receivable/payable . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used for operating activities . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Proceeds from sale of fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturity of fixed maturities . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of other invested assets . . . . . . . . . . . . . . . . . . . . . .
Proceeds from disposition of subsidiary, net of cash and cash
equivalents disposed of $679 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount held in connection with derivatives . . . . . . . . . . . . . . . . . . . . .
Purchases of fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used for) investing activities . . . . . . .
Years Ended December 31,
2013
2012
2011
$ 61,690
$ 34,757
$ (38,338)
77
832
4,349
(3)
6,696
(27,412)
(5,166)
—
(12,136)
43,940
(11,252)
(99,639)
22,515
976
1,539
2,766
8,473
(3,912)
746
(4,921)
292,200
101,379
143,034
—
25,885
(5,421)
(465,318)
(100,806)
(16)
(9,063)
59
1,880
2,625
(1,463)
6,981
(6,755)
—
—
8,594
46,159
(5,912)
(92,263)
(19,927)
(4,686)
(6,788)
2,438
(4,621)
3,299
610
(35,013)
454,655
50,176
73,370
1,114
—
—
76
2,224
(651)
169
6,196
(21,473)
—
(53)
7,948
134,858
865
(81,366)
(21,831)
(3,489)
(1,153)
(1,787)
(2,277)
7,795
4,549
(7,738)
724,969
122,045
45,225
10,565
—
—
(457,150)
(57,509)
(13)
64,643
(635,736)
(145,355)
(10,054)
111,659
Cash flows from financing activities:
Borrowings under margin borrowing facility . . . . . . . . . . . . . . . . . . . .
Tax expense associated with share-based compensation plans . . . . . . .
Purchases of A ordinary shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of junior subordinated debentures . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments of term debt
Net cash provided by (used for) financing activities . . . . . . .
Net change in cash and cash equivalents . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . .
100,000
—
(55)
(30,929)
(54,000)
15,016
1,032
104,460
$ 105,492
—
—
(82,959)
—
(18,071)
(101,030)
(71,400)
175,860
$ 104,460
—
(132)
(29,532)
—
(18,285)
(47,949)
55,972
119,888
$ 175,860
See accompanying notes to consolidated financial statements.
94
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Principles of Consolidation and Basis of Presentation
Global Indemnity plc (“Global Indemnity” or “the Company”) was incorporated on March 9, 2010 and is
domiciled in Ireland. Global Indemnity replaced the Company’s predecessor, United America Indemnity, Ltd., as
the ultimate parent company as a result of a re-domestication transaction. United America Indemnity, Ltd. was
incorporated on August 26, 2003, and is domiciled in the Cayman Islands. United America Indemnity, Ltd. is
now a subsidiary of the Company. The Company’s A ordinary shares are publicly traded on the NASDAQ
Global Select Market under the trading symbol “GBLI.”
The Company manages its business through two business segments: Insurance Operations, which includes the
operations of United National Insurance Company, Diamond State Insurance Company, United National
Specialty Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, Penn-Patriot
Insurance Company, American Insurance Adjustment Agency, Inc., Collectibles Insurance Services, LLC,
Global Indemnity Insurance Agency, LLC, and J.H. Ferguson & Associates, LLC, and Reinsurance Operations,
which includes the operations of Wind River Reinsurance Company, Ltd. (“Wind River Reinsurance”)
On December 31, 2013, Diamond State Insurance Company sold all the outstanding shares of capital stock of one
of its wholly owned subsidiaries, United National Casualty Insurance Company, to an unrelated party. The
financial results for 2013, 2012, and 2011 include the financial results for United National Casualty Insurance
Company. Management deemed this transaction to be an asset sale with the assets primarily comprised of
investments and insurance licenses. This transaction will not have a significant impact on the Company’s
ongoing business operations.
The Company offers property and casualty insurance products in the excess and surplus lines marketplace
through its Insurance Operations and provides third party treaty reinsurance for specialty property and casualty
insurance and reinsurance companies through its Reinsurance Operations. The Company manages its Insurance
Operations by differentiating them into three product classifications: Penn-America, which markets to small
commercial businesses through a select network of wholesale general agents with specific binding authority;
United National, which markets insurance products for targeted insured segments, including specialty products,
such as property, general liability, and professional lines through program administrators with specific binding
authority; and Diamond State, which markets property, casualty, and professional lines products, which are
developed by the Company’s underwriting department by individuals with expertise in those lines of business,
through wholesale brokers and also markets through program administrators having specific binding authority.
These product classifications comprise the Company’s Insurance Operations business segment and are not
considered individual business segments because each product has similar economic characteristics, distribution,
and coverage. Collectively, the Company’s U.S. insurance subsidiaries are licensed in all 50 states and the
District of Columbia. The Company’s Reinsurance Operations consist solely of the operations of its Bermuda-
based wholly-owned
provides
reinsurance solutions through brokers, primary writers, including regional insurance companies, and program
managers and is focused on using its capital capacity to write catastrophe-oriented placements and other niche or
specialty-focused treaties meeting the Company’s risk tolerance and return thresholds.
subsidiary, Wind River Reinsurance. Wind River Reinsurance
The consolidated financial statements have been prepared in conformity with United States of America generally
accepted accounting principles (“GAAP”), which differs in certain respects from those principles followed in
reports to insurance regulatory authorities. The preparation of consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
95
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The consolidated financial statements include the accounts of Global Indemnity and its wholly owned
subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The Company’s wholly owned business trust subsidiaries, United National Group Capital Trust I (“UNG
Trust I”) and United National Group Capital Statutory Trust II (“UNG Trust II”) were not consolidated as of
December 31, 2012 pursuant to the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification. The Company’s business trust subsidiaries in the aggregate issued $30.0 million of Trust Preferred
Securities and $0.9 million of floating rate common securities. The sole assets of the Company’s business trust
subsidiaries were $30.9 million of junior subordinated debentures issued by the Company. In 2013, the Company
repaid the entire outstanding principal due on the junior subordinated debentures. The Company’s business trust
subsidiaries were cancelled in the 4th quarter of 2013.
Certain prior period amounts have been reclassified to conform to the current period presentation.
2. Change in Accounting Principle
In October, 2010, the FASB issued new accounting guidance that modified the definition of costs that can be
capitalized in the acquisition of new and renewal business for insurance companies. Under the new guidance,
only direct
insurance contract acquisitions or renewals are
deferrable. The Company adopted this guidance retrospectively effective January 1, 2012.
incremental costs associated with successful
The Company’s deferrable costs include: incremental direct costs of contract acquisition, primarily commissions
and premium taxes, the portion of an employee’s total compensation attributable to successful acquisition or
renewal of insurance and reinsurance contracts and other costs directly related to acquisition activities that would
not have been incurred had the contract not been acquired. These costs are deferred and amortized ratably over
the period in which the related premiums are earned.
In accordance with accounting guidance for insurance enterprises, the method followed in computing such
amounts limits them to their estimated realizable value that gives effect to the premium to be earned, related
investment income, losses and loss adjustment expenses, and certain other costs expected to be incurred as the
premium is earned. A premium deficiency is recognized if the sum of expected loss and loss adjustment expenses
and unamortized acquisition costs exceeds related unearned premium after consideration of investment
income. Any future expected loss on the related unearned premium is recorded first by impairing the
unamortized acquisition costs on the related unearned premium followed by an increase to loss and loss
adjustment expense reserves on additional expected loss in excess of unamortized acquisition costs. For
additional information surrounding premium deficiencies, see Note 3.
The effect of adoption of this guidance on the consolidated balance sheet as of December 31, 2011 was as
follows:
Balance Sheet
(Dollars in thousands)
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . .
Deferred federal income taxes . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . .
December 31, 2011
As Previously
Reported
As Currently
Reported
$
25,565
13,242
2,075,517
310,014
841,664
2,075,517
$
21,564
14,642
2,072,916
307,413
839,063
2,072,916
96
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The effect of adoption of this guidance on the consolidated income statement for the year ended December 31,
2011 was as follows:
Income Statement
(Dollars in thousands, except per share data)
Year Ended
December 31, 2011
As Previously
Reported
As Currently
Reported
Acquisition costs and other underwriting expenses . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss per share—basic . . . . . . . . . . . . . . . . . . . . . .
$123,475
(37,588)
2,093
(39,628)
(1.31)
$
$121,491
(35,604)
2,787
(38,338)
(1.27)
$
Net loss per share—diluted . . . . . . . . . . . . . . . . . . . .
$
(1.31)
$
(1.27)
The effect of adoption of this guidance on the consolidated statement of cash flows for the year ended
December 31, 2011 was as follows:
Statement of Cash Flows
(Dollars in thousands)
Year Ended
December 31, 2011
As Previously
Reported
As Currently
Reported
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred federal income taxes . . . . . . . . . . . . . . . . . .
Change in deferred acquisition costs . . . . . . . . . . . . .
$(39,628)
(525)
9,779
$(38,338)
169
7,795
3.
Premium Deficiency
The Company recognizes a premium deficiency charge if the sum of expected loss and loss adjustment expenses
and unamortized acquisition costs exceeds related unearned premium after consideration of investment
income. This evaluation is done at a product line level in Insurance Operations and at a treaty level in
Reinsurance Operations. Any future expected loss on the related unearned premium is recorded first by impairing
the unamortized acquisition costs on the related unearned premium followed by an increase to loss and loss
adjustment expense reserves on additional expected loss in excess of unamortized acquisition costs.
For the years ended December 31, 2013 and 2012, the total premium deficiency charges were $1.7 million and
$0.5 million, comprised solely of reductions to unamortized deferred acquisition costs within the commercial
automobile lines in Insurance Operations. The 2013 premium deficiency charge of $1.7 million was recorded as
of September 30, 2013. Based on the Company’s analysis, the Company expensed acquisition cost as incurred for
the remainder of 2013 for the commercial automobile lines in Insurance Operations. The 2012 premium
deficiency charge was recorded as of December 31, 2012. As the charges were a reduction of unamortized
deferred acquisition costs in each respective period, no premium deficiency reserve exists as of December 31,
2013 or 2012.
For the year ended December 31, 2011, the Company recorded $13.3 million of total premium deficiency
charges, comprised of reductions to deferred acquisition costs of $8.2 million and increases to unpaid loss and
loss adjustment expenses of $5.1 million. The $13.3 million of total premium deficiency charges recorded during
the year ended December 31, 2011 consisted of $8.1 million recorded in Insurance Operations and $5.2 million
recorded in Reinsurance Operations. The $8.1 million recorded in Insurance Operations related primarily to
casualty and professional lines products distributed through wholesale brokers and consisted of $3.7 million of
97
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
reductions to deferred acquisition costs and $4.4 million of increases to unpaid loss and loss adjustment
expenses. The $5.2 million recorded in Reinsurance Operations related primarily to marine lines and consisted of
$4.5 million of reductions to deferred acquisition costs and $0.7 million of increases to unpaid loss and loss
adjustment expenses. As of December 31, 2011, $4.1 million of premium deficiency reserves were included in
unpaid losses and loss adjustment expenses. The net increase to expense for the period was $8.9 million,
consisting of $5.3 million recorded in Insurance Operations and $3.6 million recorded in Reinsurance Operations,
as $4.4 million would have been expensed regardless as a result of normal amortization of deferred acquisition
costs.
4.
Profit Enhancement Initiative
In 2010 and 2011, the Company committed to a Profit Enhancement Initiative in response to the continuing
impact of the domestic recession and the competitive landscape within the excess and surplus lines market. In the
the Company reduced its U.S. based census by approximately 25%, closed
fourth quarter of 2010,
underperforming U.S. facilities, and supplemented staffing in Bermuda and in Ireland. The total cost of this
initiative was recorded in the Company’s consolidated statements of operations within its Insurance Operations
segment
in the fourth quarter of 2010. All action items relating to this initiative were implemented by
December 31, 2010.
In December of 2011, the Company incurred additional costs related to streamlining its operations in response to
the continued competitive landscape within the excess and surplus lines market. These charges were recorded
within the Company’s consolidated statement of operations in the fourth quarter of 2011 and impacted both its
Insurance Operations as well as its Reinsurance Operations. All action items related to the reorganization were
implemented by December 31, 2011.
Components of the 2011 reorganization included (1) employee termination and severance charges of $0.79
million; (2) charges of $0.84 million related to discontinuing use of leased office space, net of expected sub-lease
income; and (3) fixed asset and leasehold improvement impairments of $1.17 million. Of the $2.79 million in
additional charges incurred, $2.03 million were recorded within the Insurance Operations segment and $0.76
million were recorded within the Reinsurance Operations segment.
The following table summarizes charges incurred by expense type and the remaining liability as of December 31,
2013, 2012 and 2011:
(Dollars in thousands)
Employee
Termination
Operating
Leases
Asset
Impairments
Workers’
Compensation
Liability at January 1, 2011 . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional charges incurred in 2011 . . . . . . . . . . .
Non-cash adjustments . . . . . . . . . . . . . . . . . . . . . .
Liability at December 31, 2011 . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash adjustments . . . . . . . . . . . . . . . . . . . . . .
Liability at December 31, 2012 . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash adjustments . . . . . . . . . . . . . . . . . . . . . .
$ 1,129
(1,129)
785
—
$
$
785
(773)
—
12
(12)
—
Liability at December 31, 2013 . . . . . . . . . . .
$ —
$1,532
(805)
842
259
$1,828
(690)
(267)
$ 871
(487)
(6)
$ 378
$ —
—
1,165
(1,165)
$ —
—
—
$ —
—
—
$ —
$ 492
(492)
—
—
$ —
—
—
$ —
—
—
$ —
Total
$ 3,153
(2,426)
2,792
(906)
$ 2,613
(1,463)
(267)
$
883
(499)
(6)
$
378
98
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the charges incurred within the Company’s consolidated statement of operations
related to profit enhancement initiative for the years ended December 31, 2013, 2012 and 2011:
(Dollars in thousands)
Years Ended December 31,
2013
2012
2011
Acquisition costs and other underwriting expenses . . . . . . . . . . . .
$(6)
$(267)
$3,051
5.
Summary of Significant Accounting Policies
Investments
The Company’s investments in fixed maturities and equity securities are classified as available for sale and are
carried at their fair value. Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. The fair values
of the Company’s available for sale portfolio, excluding limited partnership interests, are determined on the basis
of quoted market prices where available. If quoted market prices are not available, the Company uses third party
pricing services to assist in determining fair value. In many instances, these services examine the pricing of
similar instruments to estimate fair value. The Company purchases bonds with the expectation of holding them to
their maturity; however, changes to the portfolio are sometimes required to assure it is appropriately matched to
liabilities. In addition, changes in financial market conditions and tax considerations may cause the Company to
sell an investment before it matures. Corporate loans have stated maturities; however, they generally do not reach
their final maturity due to borrowers refinancing. The difference between amortized cost and fair value of the
Company’s available for sale investments, net of the effect of deferred income taxes, is reflected in accumulated
other comprehensive income in shareholders’ equity and, accordingly, has no effect on net income other than for
the credit loss component of impairments deemed to be other than temporary.
As of December 31, 2013 and 2012, the Company held $53.9 million and $130.0 million in corporate loans,
respectively. 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 which resets
periodically, typically at intervals between one month and one year. The Company’s investments in corporate
loans are purchased in secondary markets for the purpose of being held as investments. They are carried at fair
value with any change in the difference between amortized cost and fair value, net of the effect of deferred
income taxes, reflected in accumulated other comprehensive income in shareholders’ equity. These investments
are typically below investment grade.
The Company’s investments in other invested assets are comprised of limited liability partnership interests and
are carried at their fair value. The change in the difference between cost and the fair value of the partnership
interests, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in
shareholders’ equity and, accordingly, has no effect on net income other than for impairments deemed to be other
than temporary.
The Company’s investments in other invested assets were valued at $3.5 million and $3.1 million as of
December 31, 2013 and 2012, respectively. Both of these amounts relate to investments in limited partnerships.
The Company does not have access to daily valuations, therefore; the estimated fair value of the limited
partnerships are measured utilizing net asset value as a practical expedient for the limited partnerships.
Net realized gains and losses on investments are determined based on the specific identification method.
The Company regularly performs various analytical valuation procedures with respect to its investments,
including reviewing each fixed maturity security in an unrealized loss position to assess whether the security is a
99
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
candidate for credit loss. Specifically, the Company considers credit rating, market price, and issuer specific
financial information, among other factors, to assess the likelihood of collection of all principal and interest as
contractually due. Securities for which the Company determines that a credit loss is likely are subjected to further
analysis through discounted cash flow testing to estimate the credit loss to be recognized in earnings, if any. The
specific methodologies and significant assumptions used by asset class are discussed below. Upon identification
of such securities and periodically thereafter, a detailed review is performed to determine whether the decline is
considered other than temporary. This review includes an analysis of several factors, including but not limited to,
the credit ratings and cash flows of the securities and the magnitude and length of time that the fair value of such
securities is below cost.
For fixed maturities, the factors considered in reaching the conclusion that a decline below cost is other than
temporary include, among others, whether:
(1)
the issuer is in financial distress;
(2)
the investment is secured;
(3) a significant credit rating action occurred;
(4)
scheduled interest payments were delayed or missed;
(5) changes in laws or regulations have affected an issuer or industry;
(6)
(7)
the investment has an unrealized loss and was identified by the Company’s investment manager as an
investment to be sold before recovery or maturity; and
the investment failed cash flow projection testing to determine if anticipated principal and interest
payments will be realized.
According to accounting guidance, for debt securities in an unrealized loss position, the Company is required to
assess whether it has the intent to sell the debt security or more likely than not will be required to sell the debt
security before the anticipated recovery. If either of these conditions is met, the Company must recognize an
other than temporary impairment with the entire unrealized loss being recorded through earnings. For debt
securities in an unrealized loss position not meeting these conditions, the Company assesses whether the
impairment of a security is other than temporary. If the impairment is deemed to be other than temporary, the
Company must separate the other than temporary impairment into two components: the amount representing the
credit loss and the amount related to all other factors, such as changes in interest rates. The credit loss represents
the portion of the amortized book value in excess of the net present value of the projected future cash flows
discounted at the effective interest rate implicit in the debt security prior to impairment. The credit loss
component of the other than temporary impairment is recorded through earnings, whereas the amount relating to
factors other than credit losses is recorded in other comprehensive income, net of taxes.
For equity securities, management carefully reviews all securities with unrealized losses to determine if a
security should be impaired and further focuses on securities that have either:
(1) persisted with unrealized losses for more than twelve consecutive months or
(2)
the value of the investment has been 20% or more below cost for six continuous months or more.
The amount of any write-down, including those that are deemed to be other than temporary, is included in
earnings as a realized loss in the period in which the impairment arose.
For an analysis of other than temporary losses that were recorded for the years ended December 31, 2013, 2012,
and 2011, please see Note 6 below.
100
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cash and Cash Equivalents
For the purpose of the statements of cash flows, the Company considers all liquid instruments with an original
maturity of three months or less to be cash equivalents. The Company has a cash management program that
provides for the investment of excess cash balances primarily in short-term money market
instruments.
Generally, bank balances exceed federally insured limits. The carrying amount of cash and cash equivalents
approximates fair value.
At December 31, 2013, the Company had approximately $67.6 million of cash and cash equivalents that was
invested in a diversified portfolio of high quality short-term debt securities.
Valuation of Premium Receivable
The Company evaluates the collectability of premium receivable based on a combination of factors. In instances
in which the Company is aware of a specific circumstance where a party may be unable to meet its financial
obligations to the Company, a specific allowance for bad debts against amounts due is recorded to reduce the net
receivable to the amount reasonably believed by management to be collectible. For all remaining balances,
allowances are recognized for bad debts based on the length of time the receivables are past due. The allowance
for bad debts was $1.8 million and $1.3 million as of December 31, 2013 and 2012, respectively.
Goodwill and Intangible Assets
The Company tests for impairment of goodwill at least annually and more frequently as circumstances warrant in
accordance with applicable accounting guidance. Accounting guidance allows for the testing of goodwill for
impairment using both qualitative and quantitative factors. Impairment of goodwill is recognized only if the
carrying amount of the business unit, including goodwill, exceeds the fair value of the reporting unit. The amount
of the impairment loss would be equal to the excess carrying value of the goodwill over the implied fair value of
the reporting unit goodwill. Based on the qualitative assessment performed in 2013, there was no impairment of
goodwill as of December 31, 2013.
Impairment of intangible assets with an indefinite useful life is tested at least annually and more frequently as
circumstances warrant in accordance with applicable accounting guidance. Accounting guidance allows for the
testing of indefinite lived intangible assets for impairment using both qualitative and quantitative factors.
Impairment of indefinite lived intangible assets is recognized only if the carrying amount of the intangible assets
exceeds the fair value of said assets. The amount of the impairment loss would be equal to the excess carrying
value of the assets over the fair value of said assets. Based on the qualitative assessment performed in 2013, there
were no impairments of indefinite lived intangible assets as of December 31, 2013.
Intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives.
The carrying amounts of definite lived intangible assets are regularly reviewed for indicators of impairment in
accordance with applicable accounting guidance. Impairment is recognized only if the carrying amount of the
intangible asset is in excess of its undiscounted projected cash flows. The impairment is measured as the difference
between the carrying amount and the estimated fair value of the asset. As of December 31, 2013, there were no
triggering events that occurred during the year that would result in an impairment of definite lived intangible assets.
Reinsurance
In the normal course of business, the Company seeks to reduce the loss that may arise from events that cause
unfavorable underwriting results by reinsuring certain levels of risk from various areas of exposure with
reinsurers. Amounts receivable from reinsurers are estimated in a manner consistent with the reinsured policy
and the reinsurance contract.
101
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company regularly reviews the collectability of reinsurance receivables. An allowance for uncollectible
reinsurance receivable is recognized based on the financial strength of the reinsurers and the length of time any
balances are past due. Any changes in the allowance resulting from this review are included in income during the
period in which the determination is made. During 2013, there was no change in the Company’s uncollectible
reinsurance reserve. During 2012, the Company decreased its uncollectible reinsurance reserve by $1.0 million,
due to write-offs of receivables deemed to be uncollectible and a decrease in the amount of carried reinsurance
receivables.
The applicable accounting guidance 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. The Company has evaluated its reinsurance
contracts and concluded that each contract qualifies for reinsurance accounting treatment pursuant to this
guidance.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will
not be realized. Management believes that it is more likely than not that the results of future operations will
generate sufficient taxable income to realize the remaining deferred income tax assets, and accordingly, the
Company has not established any valuation allowances.
Deferred Acquisition Costs
The costs of acquiring new and renewal insurance and reinsurance contracts include commissions, premium taxes
and certain other costs that vary with and are directly related to the successful acquisition of new and renewal
insurance and reinsurance contracts. The excess of the Company’s costs of acquiring new and renewal insurance
and reinsurance contracts over the related ceding commissions earned from reinsurers is capitalized as deferred
acquisition costs and amortized over the period in which the related premiums are earned.
The amortization of deferred acquisition costs for the years ended December 31, 2013, 2012, and 2011 was $53.8
million, $48.9 million, and $78.1 million, respectively.
Premium Deficiency
In accordance with accounting guidance for insurance enterprises, the method followed in computing deferred
acquisition costs limits them to their estimated realizable value that gives effect to the premium to be earned,
related investment income, losses and loss adjustment expenses, and certain other costs expected to be incurred
as the premium is earned. A premium deficiency is recognized if the sum of expected loss and loss adjustment
expenses and unamortized acquisition costs exceeds related unearned premium after consideration of investment
income. Any future expected loss on the related unearned premium is recorded first by impairing the
unamortized acquisition costs on the related unearned premium followed by an increase to loss and loss
adjustment expense reserves on additional expected loss in excess of unamortized acquisition costs.
102
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the years ended December 31, 2013, 2012, and 2011, the Company recorded premium deficiencies of $1.7
information surrounding premium
million, $0.5 million and $13.3 million,
deficiencies, see Note 3.
respectively. For additional
Derivative Instruments
The Company uses derivative instruments to manage its exposure to cash flow variability from interest rate risk.
The derivative instruments are carried on the balance sheet at fair value and included in other assets or other
liabilities. Changes in the fair value of the derivative instruments are recognized as net realized investment gains
on the consolidated statement of operations.
Margin Borrowing Facility
The carrying amounts reported in the balance sheet represent the outstanding borrowings.
Notes and Debentures Payable
The carrying amounts reported in the balance sheet represent the outstanding balances.
In accordance with the applicable accounting guidance that establishes standards for classifying and measuring
certain financial
the Company’s junior
subordinated debentures are classified as a liability on the balance sheet and the related distributions are recorded
as interest expense in the statement of operations.
instruments with characteristics of both liabilities and equity,
In 2013, the Company repaid the entire outstanding principal due on the junior subordinated debentures. The
Company’s business trust subsidiaries were cancelled in the 4th quarter of 2013.
Unpaid Losses and Loss Adjustment Expenses
The liability for unpaid losses and loss adjustment expenses represents the Company’s best estimate of future
amounts needed to pay losses and related settlement expenses with respect to events insured by the Company.
This liability is based upon the accumulation of individual case estimates for losses reported prior to the close of
the accounting period with respect to direct business, estimates received from ceding companies with respect to
assumed reinsurance, and estimates of unreported losses.
The process of establishing the liability for unpaid losses and loss adjustment expenses of a property and casualty
insurance company is complex, requiring the use of informed actuarially based estimates and judgments. In some
cases, significant periods of time, up to several years or more, may elapse between the occurrence of an insured
loss and the reporting of that loss to the Company. To establish this liability, the Company regularly reviews and
updates the methods of making such estimates and establishing the resulting liabilities. Any resulting adjustments
are recorded in income during the period in which the determination is made.
Premiums
Premiums are recognized as revenue ratably over the term of the respective policies and treaties. Unearned
premiums are computed on a pro rata basis to the day of expiration.
Contingent Commissions
Certain professional general agencies of the Insurance Operations are paid special incentives, referred to as
contingent commissions, when results of business produced by these agencies are more favorable than
103
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
predetermined thresholds. Similarly, in some circumstances, companies that cede business to the Reinsurance
Operations are paid profit commissions based on the profitability of the ceded portfolio. These commissions are
charged to other underwriting expenses when incurred. The liability for the unpaid portion of these commissions,
which is stated separately on the face of the consolidated balance sheet as contingent commissions, was $12.7
million and $9.9 million as of December 31, 2013 and 2012, respectively.
Share-Based Compensation
The Company accounts for stock options and other equity based compensation using the modified prospective
application of the fair value-based method permitted by the appropriate accounting guidance. See Note 17 for
details.
Earnings per Share
Basic earnings per share have been calculated by dividing net income available to common shareholders by the
weighted-average ordinary shares outstanding. Diluted earnings per share has been calculated by dividing net
income available to common shareholders by the sum of the weighted-average ordinary shares outstanding and
the weighted-average common share equivalents outstanding, which include options, warrants, and other equity
awards. See Note 19 for details.
Foreign Currency
The Company maintains investments and cash accounts in foreign currencies related to the operations of its
business. At period-end, the Company re-measures non-U.S. currency financial assets to their current U.S. dollar
equivalent. The resulting gain or loss for foreign denominated investments is reflected in accumulated other
comprehensive income in shareholders’ equity; whereas, the gain or loss on foreign denominated cash accounts
is reflected in income during the period. Financial liabilities, if any, are generally adjusted within the reserving
process. However, for known losses on claims to be paid in foreign currencies, the Company re-measures the
liabilities to their current U.S. dollar equivalent each period end with the resulting gain or loss reflected in
income during the period. Net transaction gains, primarily comprised of re-measurement of known losses on
claims to be paid in foreign currencies, were $0.3 million for each of the years ended December 31, 2013 and
2011. Net transaction losses, primarily comprised of re-measurement of known losses on claims to be paid in
foreign currencies, were $0.7 million for the year ended December 31, 2012.
Out-of-Period Adjustment
During the preparation of the Company’s consolidated financial statements for the year ended December 31,
2012, the Company identified an error in the consolidated financial statements as of and for the years ended
December 31, 2011, 2010 and 2009 related to the recognition of incurred losses on two of the assumed
reinsurance treaties at the Company’s Reinsurance Operations. These contracts relate to accident years 2009 and
2010 and have not been renewed. During the years ended December 31, 2009, 2010 and 2011, the Company’s
internal calculations over-recorded the profitability of these two treaties, resulting in net income and equity being
overstated by approximately $1.6 million over the three year period. There was no impact to the Company’s cash
flows during these periods.
The Company corrected this error in its consolidated financial statements as of and for the year ended
December 31, 2012 by increasing the “Unpaid losses and loss adjustment expenses” line item on the consolidated
balance sheet and the “Net losses and loss adjustment expenses” line item on the consolidated statement of
104
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
operations by $1.6 million, or $0.06 per diluted share, the cumulative effect of the error. The Company does not
believe that these adjustments are material to any prior years’ consolidated financial statements. As a result, the
Company has not restated or adjusted any prior period amounts for this error.
Other income (loss)
On December 31, 2013, Diamond State Insurance Company sold all the outstanding shares of capital stock of one
of its wholly owned subsidiaries, United National Casualty Insurance Company to an unrelated party. Diamond
State Insurance Company received a one-time payment of $26.6 million and recognized a pretax gain of $5.2
million which is reflected in other income (loss). Management deemed this transaction to be an asset sale with
the assets primarily comprised of investments and insurance licenses. This transaction will not have a significant
impact on the ongoing business operations of the Company.
6.
Investments
The amortized cost and estimated fair value of investments were as follows as of December 31, 2013 and 2012:
(Dollars in thousands)
As of December 31, 2013
Fixed maturities:
U.S. treasury and agency obligations . . . . . .
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . .
Commercial mortgage-backed securities . . .
Corporate bonds and loans . . . . . . . . . . . . . .
Foreign corporate bonds . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . .
1,187,685
191,425
3,065
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Other than
temporary
impairments
recognized
in AOCI (1)
$
78,510
$ 3,330
$ (166) $
81,674
$—
178,705
228,550
167,454
54,822
426,872
52,772
4,472
4,219
1,210
9
9,112
1,269
23,621
63,281
424
(2,241)
(2,859)
(228)
(856)
(592)
—
(6,942)
(636)
—
180,936
229,910
168,436
53,975
435,392
54,041
1,204,364
254,070
3,489
—
(5)
(19)
—
—
—
(24)
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,382,175
$87,326
$(7,578) $1,461,923
$ (24)
(1) Represents the total amount of other than temporary impairment losses relating to factors other than credit
losses recognized in accumulated other comprehensive income (“AOCI”).
105
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands)
As of December 31, 2012
Fixed maturities:
U.S. treasury and agency obligations . . . . . .
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . .
Commercial mortgage-backed securities . . .
Corporate bonds and loans . . . . . . . . . . . . . .
Foreign corporate bonds . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . .
1,187,094
167,179
3,049
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Other than
temporary
impairments
recognized
in AOCI (2)
$ 102,186
$ 6,559
$
(1) $ 108,744
$—
194,326
247,639
111,289
8,070
469,860
53,724
6,883
8,492
2,071
60
16,739
2,196
43,000
32,847
83
(132)
(189)
(9)
(13)
(428)
—
201,077
255,942
113,351
8,117
486,171
55,920
(772)
(2,951)
—
1,229,322
197,075
3,132
—
(8)
(24)
—
—
—
(32)
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,357,322
$75,930
$(3,723) $1,429,529
$ (32)
(2) Represents the total amount of other than temporary impairment losses relating to factors other than credit
losses recognized in accumulated other comprehensive income (“AOCI”).
Excluding U.S. treasuries and agency bonds, the Company did not hold any debt or equity investments in a single
issuer that was in excess of 4% and 3% of shareholders’ equity at December 31, 2013 or 2012, respectively.
The amortized cost and estimated fair value of the Company’s fixed maturities portfolio classified as available
for sale at December 31, 2013, by contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties.
(Dollars in thousands)
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . .
Due in one year through five years . . . . . . . . . . . . . . .
Due in five years through ten years . . . . . . . . . . . . . . .
Due in ten years through fifteen years . . . . . . . . . . . .
Due after fifteen years . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage-backed securities . . . . . . . . . .
Amortized
Cost
Estimated
Fair Value
$ 119,111
516,463
75,290
2,843
23,152
228,550
167,454
54,822
$ 120,974
529,604
75,424
3,147
22,894
229,910
168,436
53,975
$1,187,685
$1,204,364
106
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table contains an analysis of the Company’s securities with gross unrealized losses, categorized by
the period that the securities were in a continuous loss position as of December 31, 2013:
(Dollars in thousands)
Fixed maturities:
U.S. treasury and agency
Less than 12 months
12 months or longer (1)
Total
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
obligations . . . . . . . . . . . . . . . . . . . .
$
9,335
$ (166) $ —
$ —
$
9,335
$ (166)
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . .
Asset-backed securities . . . . . . . . . . . .
Commercial mortgage-backed
securities . . . . . . . . . . . . . . . . . . . . .
Corporate bonds and loans . . . . . . . . .
Total fixed maturities . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . .
61,401
110,304
42,247
45,642
60,306
329,235
18,622
(2,000)
(2,859)
(228)
(856)
(582)
9,922
2
3
—
376
(6,691)
(627)
10,303
140
(241)
—
—
—
(10)
(251)
(9)
71,323
110,306
42,250
45,642
60,682
339,538
18,762
(2,241)
(2,859)
(228)
(856)
(592)
(6,942)
(636)
Total . . . . . . . . . . . . . . . . . . . . . . .
$347,857
$(7,318) $10,443
$(260)
$358,300
$(7,578)
(1) Fixed maturities in a gross unrealized loss position for twelve months or longer are primarily comprised of
non-credit losses on investment grade securities where management does not intend to sell, and it is more
likely than not that the Company will not be forced to sell the security before recovery. The Company has
analyzed these securities and has determined that they are not impaired.
The following table contains an analysis of the Company’s securities with gross unrealized losses, categorized by
the period that the securities were in a continuous loss position as of December 31, 2012:
(Dollars in thousands)
Fixed maturities:
U.S. treasury and agency
Less than 12 months
12 months or longer (2)
Total
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
obligations . . . . . . . . . . . . . . . . . . . .
$
2,002
$
(1) $ —
$ —
$
2,002
$
(1)
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . .
Asset-backed securities . . . . . . . . . . . .
Commercial mortgage-backed
securities . . . . . . . . . . . . . . . . . . . . .
Corporate bonds and loans . . . . . . . . .
Total fixed maturities . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . .
33,204
33,635
5,722
2,839
8,202
85,604
30,153
(132)
(172)
(3)
(13)
(274)
(595)
(2,284)
—
640
4,763
—
3,308
8,711
3,950
—
(17)
(6)
—
(154)
(177)
(667)
33,204
34,275
10,485
2,839
11,510
94,315
34,103
(132)
(189)
(9)
(13)
(428)
(772)
(2,951)
Total . . . . . . . . . . . . . . . . . . . . . . .
$115,757
$(2,879) $12,661
$(844)
$128,418
$(3,723)
107
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(2) Fixed maturities in a gross unrealized loss position for twelve months or longer are primarily comprised of
non-credit losses on investment grade securities where management does not intend to sell, and it is more
likely than not that the Company will not be forced to sell the security before recovery. The Company has
analyzed these securities and has determined that they are not impaired.
Subject to the risks and uncertainties in evaluating the potential impairment of a security’s value, the impairment
evaluation conducted by the Company as of December 31, 2013 concluded the unrealized losses discussed above
are not other than temporary impairments. The impairment evaluation process is discussed in the “Investment”
section of Note 5 (“Summary of Significant Accounting Policies”).
The following is a description, by asset type, of the methodology and significant inputs that the Company used to
measure the amount of credit loss recognized in earnings, if any:
U.S. treasury and agency obligations—As of December 31, 2013, gross unrealized losses related to U.S.
treasury and agency obligations were $0.166 million. All unrealized losses have been in an unrealized loss
position for less than twelve months. All of these securities are rated AA+. Extensive macroeconomic and market
analysis is conducted in evaluating these securities. The analysis is driven by moderate interest rate anticipation,
yield curve management, and security selection.
Obligations of states and political subdivisions—As of December 31, 2013, gross unrealized losses related to
obligations of states and political subdivisions were $2.241 million. Of this amount, $0.241 million have been in
an unrealized loss position for twelve months or greater and are rated A- or better. All factors that influence
performance of the municipal bond market are considered in evaluating these securities. The aforementioned
factors include investor expectations, supply and demand patterns, and current versus historical yield and spread
relationships. The analysis relies on the output of fixed income credit analysts, as well as dedicated municipal
bond analysts who perform extensive in-house fundamental analysis on each issuer, regardless of their rating by
the major agencies.
Mortgage-backed securities (“MBS”)—As of December 31, 2013, gross unrealized losses related to mortgage-
backed securities were $2.859 million. Of this amount, less than $0.001 million have been in an unrealized loss
position for twelve months or greater and are rated AA+. Mortgage-backed securities are modeled to project
principal losses under downside, base, and upside scenarios for the economy and home prices. The primary
assumption that drives the security and loan level modeling is the Home Price Index (“HPI”) projection. The
model first projects HPI at the national level, then at the zip-code level based on the historical relationship
between the individual zip code HPI and the national HPI. The model utilizes loan level data and borrower
characteristics including FICO score, geographic location, original and current loan size, loan age, mortgage rate
and type (fixed rate / interest-only / adjustable rate mortgage), issuer / originator, residential type (owner
occupied / investor property), dwelling type (single family / multi-family), loan purpose, level of documentation,
and delinquency status as inputs. The model also includes the explicit treatment of silent second liens, utilization
of loan modification history, and the application of roll rate adjustments.
Asset backed securities (“ABS”)—As of December 31, 2013, gross unrealized losses related to asset backed
securities were $0.228 million. Of this amount, less than $0.001 million have been in an unrealized loss position
for twelve months or greater and are rated A or better. The weighted average credit enhancement for the
Company’s asset backed portfolio is 26.4. This represents the percentage of pool losses that can occur before an
asset backed security will incur its first dollar of principal losses. Every ABS transaction is analyzed on a stand-
alone basis. This analysis involves a thorough review of the collateral, prepayment, and structural risk in each
transaction. Additionally, the analysis includes an in-depth credit analysis of the originator and servicer of the
collateral. The analysis projects an expected loss for a deal given a set of assumptions specific to the asset type.
108
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
These assumptions are used to calculate at what level of losses the deal will incur its first dollar of principal loss.
The major assumptions used to calculate this ratio are loss severities, recovery lags, and no advances on principal
and interest.
Commercial mortgage-backed securities (“CMBS”)—As of December 31, 2013, gross unrealized losses
related to the CMBS portfolio were $0.856 million. All unrealized losses have been in an unrealized loss position
for less than twelve months. The weighted average credit enhancement for the Company’s CMBS portfolio is
28.7. This represents the percentage of pool losses that can occur before a mortgage-backed security will incur its
first dollar of principal loss. For the Company’s CMBS portfolio, a loan level analysis is utilized where every
underlying CMBS loan is re-underwritten based on a set of assumptions reflecting expectations for the future
path of the economy. In the analysis, the focus is centered on stressing the significant variables that influence
commercial loan defaults and collateral losses in CMBS deals. These variables include: (1) a projected drop in
occupancies; (2) capitalization rates that vary by property type and are forecasted to return to more normalized
levels as the capital markets repair and capital begins to flow again; and (3) property value stress testing using
projected property performance and projected capitalization rates. Term risk is triggered if the projected debt
service coverage rate falls below 1x. Balloon risk is triggered if a property’s projected performance does not
satisfy new, tighter mortgage standards.
Corporate bonds and loans—As of December 31, 2013, gross unrealized losses related to corporate bonds and
loans were $0.592 million. Of this amount, $0.010 million have been in an unrealized loss position for twelve
months or greater. The analysis for this sector includes maintaining detailed financial models that include a
projection of each issuer’s future financial performance, including prospective debt servicing capabilities, capital
structure composition, and the value of the collateral. The analysis incorporates the macroeconomic environment,
industry conditions in which the issuer operates, the issuer’s current competitive position, its vulnerability to
changes in the competitive and regulatory environment, issuer liquidity, issuer commitment to bondholders,
issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to
evaluate the expected likelihood of default as well as potential losses in the event of default.
Foreign bonds—As of December 31, 2013, the Company did not have any gross unrealized losses related to
foreign bonds. For this sector, detailed financial models are maintained that include a projection of each issuer’s
future financial performance, including prospective debt servicing capabilities, capital structure composition, and
the value of the collateral. The analysis incorporates the macroeconomic environment, industry conditions in
which the issuer operates, the issuer’s current competitive position, its vulnerability to changes in the competitive
and regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and
asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood
of default as well as potential losses in the event of default.
Common stock—As of December 31, 2013, gross unrealized losses related to common stock were $0.636
million. Of this amount, $0.009 million have been in an unrealized loss position for twelve months or greater. To
determine if an other than temporary impairment of an equity security has occurred, the Company considers,
among other things, the severity and duration of the decline in fair value of the equity security. The Company
also examines other factors to determine if the equity security could recover its value in a reasonable period of
time.
109
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company recorded the following other than temporary impairments (“OTTI”) on its investment portfolio for
the years ended December 31, 2013, 2012, and 2011:
(Dollars in thousands)
Fixed maturities:
Years Ended December 31,
2013
2012
2011
OTTI losses, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portion of loss recognized in other comprehensive income (pre-tax) . . . . . . . .
Net impairment losses on fixed maturities recognized in earnings . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (280) $(1,258) $(2,449)
—
(280)
(959)
—
541
(2,449)
(717)
(4,179)
(4,656)
$(1,239) $(5,373) $(6,628)
The following table is an analysis of the credit losses recognized in earnings on debt securities held by the
Company as of December 31, 2013, 2012, and 2011 for which a portion of the OTTI loss was recognized in other
comprehensive income (loss).
(Dollars in thousands)
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions where no OTTI was previously recorded . . . . . . . . . . . . . . . . . . . . .
Additions where an OTTI was previously recorded . . . . . . . . . . . . . . . . . . . . .
Reductions for securities for which the company intends to sell or more
likely than not will be required to sell before recovery . . . . . . . . . . . . . . . .
Reductions reflecting increases in expected cash flows to be collected . . . . . .
Reductions for securities sold during the period . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2013
$ 86
—
—
—
—
(32)
2012
$ 86
55
—
—
—
(55)
2011
$115
—
—
—
—
(29)
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 54
$ 86
$ 86
Accumulated Other Comprehensive Income, Net of Tax
Accumulated other comprehensive income, net of tax, as of December 31, 2013 and 2012 was as follows:
(Dollars in thousands)
Net unrealized gains from:
December 31,
2013
2012
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 16,679
62,645
184
(25,480)
$ 42,228
29,896
83
(18,857)
Accumulated other comprehensive income, net of tax . . . . . . . . . . .
$ 54,028
$ 53,350
110
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The changes in accumulated other comprehensive income, net of tax, by component for the year ended
December 31, 2013 was as follows:
Year Ended December 31, 2013
(Dollars in thousands)
Unrealized Gains
and Losses on
Available for Sale
Securities, Net of
Tax
Foreign Currency
Items, Net of Tax
Accumulated Other
Comprehensive
Income, Net of Tax
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 53,435
$ (85)
$ 53,350
Other comprehensive income (loss) before
reclassification . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,630
(1)
17,629
Amounts reclassified from accumulated other
comprehensive income (loss) . . . . . . . . . . . . . . . . .
(17,115)
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . .
515
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 53,950
164
163
$ 78
(16,951)
678
$ 54,028
The reclassifications out of accumulated other comprehensive income for the year ended December 31, 2013
were as follows:
(Dollars in thousands)
Details about Accumulated Other
Comprehensive Income Components
Unrealized gains and losses on available for sale
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts Reclassified
from Accumulated
Other Comprehensive
Income
Affected Line Item in the
Consolidated Statements of Operations
Year Ended
December 31, 2013
Other net realized investment
gains
Other than temporary impairment
losses on investments
Total before tax
Income tax (expense) benefit
Net of tax
$(27,476)
1,239
(26,237)
9,122
$(17,115)
252
(88)
164
$
$(16,951)
Foreign Currency Items . . . . . . . . . . . . . . . . . . . . . . . . Other net realized investment
gains
Income tax (expense) benefit
Net of tax
Total reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . Net of tax
111
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Net Realized Investment Gains
The components of net realized investment gains for the years ended December 31, 2013, 2012, and 2011 were
as follows:
(Dollars in thousands)
Fixed maturities:
Years Ended December 31,
2013
2012
2011
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,857
(691)
$ 4,100
(1,800)
$15,295
(3,511)
Net realized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . .
1,166
2,300
11,784
Common stock:
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . .
27,302
(2,483)
10,630
(6,175)
15,792
(6,862)
Net realized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . .
24,819
4,455
8,930
Preferred stock:
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
Derivatives:
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . .
1,668
(241)
1,427
—
—
—
—
—
—
—
—
—
1,546
—
1,546
—
(787)
(787)
—
—
—
Total net realized investment gains . . . . . . . . . . . . . . . . . .
$27,412
$ 6,755
$21,473
The proceeds from sales of available for sale securities resulting in net realized investment gains for the years
ended December 31, 2013, 2012, and 2011 were as follows:
(Dollars in thousands)
Years Ended December 31,
2013
2012
2011
Fixed maturities . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . .
$292,200
101,379
—
$454,655
50,176
1,114
$724,969
122,045
9,217
112
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Net Investment Income
The sources of net investment income for the years ended December 31, 2013, 2012, and 2011 were as follows:
(Dollars in thousands)
Years Ended December 31,
2013
2012
2011
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . .
$35,669
5,452
126
141
$41,969
5,132
111
4,802
$54,153
3,602
68
11
Total investment income . . . . . . . . . . . . . .
Investment expense . . . . . . . . . . . . . . . . . . . . . .
41,388
(4,179)
52,014
(4,457)
57,834
(4,722)
Net investment income . . . . . . . . . . . . . . . .
$37,209
$47,557
$53,112
The Company’s total investment return on a pre-tax basis for 2013, 2012, and 2011 were as follows:
Years Ended December 31,
(Dollars in thousands)
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . .
Net equity in net income of partnerships . . . . . . . . . . . . . .
Net unrealized investment gains (losses) . . . . . . . . . . . . . .
Net investment return . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment return . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
37,209
27,412
—
7,301
34,713
71,922
$
$
2012
47,557
6,755
—
18,417
25,172
72,729
$
$
2011
53,112
21,473
81
(22,882)
(1,328)
51,784
$
$
Total investment return % . . . . . . . . . . . . . . . . . . . . . . . . . .
4.6%
4.6%
3.1%
Average investment portfolio (1) . . . . . . . . . . . . . . . . . . . .
$1,549,747
$1,590,281
$1,680,813
(1) Average of total cash and invested assets, net of receivable/payable for securities purchased and sold, as of
the beginning and end of the period.
Insurance Enhanced Municipal Bonds
As of December 31, 2013, the Company held insurance enhanced municipal bonds of approximately $27.4
million, which represented approximately 1.7% of its total cash and invested assets, net of payable/ receivable for
securities purchased and sold. These securities had an average rating of “AA-.” Approximately $3.0 million of
these bonds are pre-refunded with U.S. treasury securities, of which $1.4 million are backed by financial
guarantors, meaning that funds have been set aside in escrow to satisfy the future interest and principal
obligations of the bond. Of the remaining $24.4 million of insurance enhanced municipal bonds, $15.1 million
would have carried a lower credit rating had they not been insured. The following table provides a breakdown of
the ratings for these municipal bonds with and without insurance.
(Dollars in thousands)
Rating
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratings
with
Insurance
$ 8,851
—
6,245
$15,096
Ratings
without
Insurance
$ —
8,851
6,245
$15,096
113
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A summary of the Company’s insurance enhanced municipal bonds that are backed by financial guarantors,
including the pre-refunded bonds that are escrowed in U.S. government obligations, as of December 31, 2013, is
as follows:
(Dollars in thousands)
Financial Guarantor
Ambac Financial Group . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assured Guaranty Corporation . . . . . . . . . . . . . . . . . . . . . . .
Municipal Bond Insurance Association . . . . . . . . . . . . . . . .
Gov’t National Housing Association . . . . . . . . . . . . . . . . . .
Permanent School Fund Guaranty . . . . . . . . . . . . . . . . . . . .
Total backed by financial guarantors . . . . . . . . . . . . . .
Other credit enhanced municipal bonds . . . . . . . . . . . . . . . .
Pre-refunded
Securities
Government
Guaranteed
Securities
Exposure Net
of Pre-refunded
& Government
Guaranteed
Securities
$1,239
—
—
135
—
1,374
1,650
$ —
—
—
1,264
8,852
10,116
—
$ 1,052
9,130
4,048
—
—
14,230
—
Total
$ 2,291
9,130
4,048
1,399
8,852
25,720
1,650
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$27,370
$3,024
$10,116
$14,230
In addition to the $27.4 million of insurance enhanced municipal bonds, the Company also held insurance
enhanced asset-backed and credit securities with a market value of approximately $20.3 million, which
represented approximately 1.3% of the Company’s total invested assets, net of receivable/payable for securities
purchased and sold. The financial guarantors of the Company’s $20.3 million of insurance enhanced asset-
backed and credit securities include Municipal Bond Insurance Association ($6.8 million), Ambac ($1.6 million),
Assured Guaranty Corporation ($6.8 million), and Other ($5.1 million).
The Company had no direct investments in the entities that have provided financial guarantees or other credit
support to any security held by the Company at December 31, 2013.
Bonds Held on Deposit
Certain cash balances, cash equivalents, equity securities, and bonds available for sale were deposited with
various governmental authorities in accordance with statutory requirements, were held as collateral pursuant to
borrowing arrangement, or were held in trust pursuant to intercompany reinsurance agreements. The fair values
were as follows as of December 31, 2013 and 2012:
(Dollars in thousands)
On deposit with governmental authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany trusts held for the benefit of U.S. policyholders . . . . . . . . . . . . . . . . . . .
Held in trust pursuant to third party requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Held in trust pursuant to U.S. regulatory requirements for the benefit of U.S.
Estimated Fair Value
December 31,
2013
December 31,
2012
$ 36,176
584,683
129,339
$ 42,492
553,893
132,684
policyholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held as collateral for borrowing arrangements . . . . . . . . . . . . . . . . . . . . . . .
—
120,937(a)
6,368
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$871,135
$735,437
(a) Amount required to collateralize margin borrowing facility.
7. Derivative Instruments
The Company uses interest rate swaps to reduce its exposure to changes in interest rates. Interest rate swaps are
used by the Company primarily to reduce risks from changes in interest rates. In an interest rate swap, the
114
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and
floating rate interest amounts as calculated by reference to an agreed notional amount. As of December 31, 2013,
the Company posted collateral of $5.0 million which is included in other assets on the consolidated balance
sheets.
The Company accounts for its interest rate swaps in accordance with accounting guidance under Financial
Accounting Standards Codification (“ASC”) section 815, Derivatives and Hedging. The Company has designated
the interest rate swaps as non-hedge instruments. Accordingly, the Company recognizes the fair value of the
interest rate swaps as other assets or other liabilities on the consolidated balance sheets with the changes in fair
value recognized as net realized investment gains in the consolidated statement of operations. The estimated fair
value of the interest rate swaps, which is primarily derived from the forward interest rate curve, is based on the
valuation received from a third party financial institution.
The following table summarizes information on the location and amount of the derivatives’ fair value on the
consolidated balance sheets as of December 31, 2013 and 2012:
(Dollars in thousands)
Derivatives Not Designated as Hedging
Instruments under ASC 815
Interest rate swap agreements . . . . . . . . . . . . . . . . . . . . . Other assets
Balance Sheet
Location
December 31, 2013
December 31, 2012
Notional
Amount
Fair
Value
Notional
Amount
Fair Value
$200,000
$1,668
$—
$—
The following table summarizes the net gains included in the consolidated statement of operations for changes in
the fair value of the derivatives and the periodic net settlements under the derivatives for the years ended
December 31, 2013, 2012, and 2011:
(Dollars in thousands)
Statement of Operations Line
2013
2012
2011
Interest rate swap agreements . . . . . . . . . . . . . . . . . . . . Net realized investment gains
$1,427
$— $—
Years Ended December 31,
8.
Fair Value Measurements
The accounting standards related to fair value measurements define fair value, establish a framework for
measuring fair value, outline a fair value hierarchy based on inputs used to measure fair value, and enhance
disclosure requirements for fair value measurements. These standards do not change existing guidance as to
whether or not an instrument
its fair value
measurements are in accordance with the requirements of these accounting standards.
is carried at fair value. The Company has determined that
The Company’s invested assets are carried at their fair value and are categorized based upon a fair value
hierarchy:
• Level 1—inputs utilize quoted prices (unadjusted) in active markets for identical assets that the
Company has the ability to access at the measurement date.
• Level 2—inputs utilize other than quoted prices included in Level 1 that are observable for similar
assets, either directly or indirectly.
• Level 3—inputs are unobservable for the asset, and include situations where there is little, if any,
market activity for the asset.
115
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In
such cases, the level in the fair value hierarchy within which the fair value measurement falls has been
determined based on the lowest level input that is significant to the fair value measurement in its entirety. The
Company’s assessment of the significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset.
Both observable and unobservable inputs may be used to determine the fair value of positions that the Company
has classified within the Level 3 category. As a result, the unrealized gains and losses for invested assets within
the Level 3 category presented in the tables below may include changes in fair value that are attributed to both
observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated
volatilities) inputs.
The following table presents information about the Company’s invested assets measured at fair value on a
recurring basis as of December 31, 2013 and 2012, and indicates the fair value hierarchy of the valuation
techniques utilized by the Company to determine such fair value.
As of December 31, 2013
(Dollars in thousands)
Fixed maturities:
Fair Value Measurements
Level 1
Level 2
Level 3
Total
U.S. treasury and agency obligations . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage-backed securities . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds and loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 71,294
—
—
—
—
—
—
71,294
254,070
—
—
$
10,380
180,936
229,910
53,975
168,436
435,392
54,041
$ — $
—
—
—
—
—
—
81,674
180,936
229,910
53,975
168,436
435,392
54,041
1,133,070
—
—
1,668
—
—
3,489
—
1,204,364
254,070
3,489
1,668
Total assets measured at fair value . . . . . . . . . . . . . . . . . . . .
$325,364
$1,134,738
$3,489
$1,463,591
As of December 31, 2012
(Dollars in thousands)
Fixed maturities:
Fair Value Measurements
Level 1
Level 2
Level 3
Total
U.S. treasury and agency obligations . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage-backed securities . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds and loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 89,981
—
—
—
—
—
—
89,981
197,075
—
—
$
18,763
201,077
255,942
8,117
113,351
486,171
55,920
$ — $ 108,744
201,077
255,942
8,117
113,351
486,171
55,920
—
—
—
—
—
—
1,139,341
—
—
—
—
—
3,132
—
1,229,322
197,075
3,132
—
Total assets measured at fair value . . . . . . . . . . . . . . . . . . . .
$287,056
$1,139,341
$3,132
$1,429,529
116
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The securities classified as Level 1 in the above table consist of U.S. Treasuries and equity securities actively
traded on an exchange.
The securities classified as Level 2 in the above table consist primarily of fixed maturity securities and derivative
instruments. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, security
prices are derived through recent reported trades for identical or similar securities making adjustments through the
reporting date based upon available market observable information. If there are no recent reported trades, matrix or
model processes are used to develop a security price where future cash flow expectations are developed based upon
collateral performance and discounted at an estimated market rate. Included in the pricing of asset-backed securities,
collateralized mortgage obligations, and mortgage-backed securities are estimates of the rate of future prepayments of
principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the
underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the
underlying collateral. For corporate loans, price quotes from multiple dealers along with recent reported trades for
identical or similar securities are used to develop prices. The estimated fair value of the interest rate swaps is obtained
from a third party financial institution who utilizes observable inputs such as the forward interest rate curve.
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2013, 2012, and 2011.
The following tables present the changes in Level 3 investments measured at fair value on a recurring basis for
2013 and 2012:
(Dollars in thousands)
Other
Invested Assets
Beginning balance at January 1, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,132
Total gains (losses) (realized / unrealized):
Included in equity in net income of partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
341
16
—
Ending balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,489
Losses for 2013 included in earnings attributable to the change in unrealized losses related to
assets still held at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
(Dollars in thousands)
Other
Invested Assets
Beginning balance at January 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,617
Total gains (losses) (realized / unrealized):
Included in equity in net income of partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in accumulated other comprehensive income (loss) (1) . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(2,384)
13
(1,114)
Ending balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,132
Losses for 2012 included in earnings attributable to the change in unrealized losses related to
assets still held at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
(1) The Company received a $4.8 million distribution on a limited partnership investment during the year ended
income and reduced accumulated other
December 31, 2012, which was recognized in investment
comprehensive income.
117
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The investments classified as Level 3 in the above table relate to investments in limited partnerships. The
Company does not have access to daily valuations; therefore, the estimated fair values of the limited partnerships
are measured utilizing net asset value as a practical expedient for the limited partnerships.
In February, 2011, the Company’s remaining interest of $1.1 million related to a limited partnership which holds
convertible preferred securities of a privately held company was liquidated.
Fair Value of Alternative Investments
Included in “Other invested assets” in the fair value hierarchy at December 31, 2013 and 2012 are limited
liability partnerships measured at fair value. The following table provides the fair value and future funding
commitments related to these investments at December 31, 2013 and 2012.
(Dollars in thousands)
Fair
Value
Future
Funding
Commitment
Equity Fund, LP (1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate Fund, LP (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,489
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,489
$2,490
—
$2,490
Fair
Value
$3,132
—
$3,132
Future
Funding
Commitment
$2,507
—
$2,507
December 31, 2013
December 31, 2012
(1) This limited partnership invests in companies, from various business sectors, whereby the partnership has
acquired control of the operating business as a lead or organizing investor. The Company does not have the
contractual option to redeem its limited partnership interest but receives distributions based on the
liquidation of the underlying assets. The Company does not have the ability to sell or transfer its limited
partnership interest without consent from the general partner.
(2) This limited partnership invests in real estate assets through a combination of direct or indirect investments
in partnerships, limited liability companies, mortgage loans, and lines of credit. The Company does not have
the contractual option to redeem its limited partnership interest but receives distributions based on the
liquidation of the underlying assets. The Company does not have the ability to sell or transfer its limited
partnership interest without consent from the general partner. The Company continues to hold an investment
in this limited partnership and has written the fair value down to zero.
Pricing
The Company’s pricing vendors provide prices for all investment categories except for investments in limited
partnerships. One vendor provides prices for equity securities and all fixed maturity categories except for
corporate loans. A second vendor provides prices for the corporate loan securities.
The following is a description of the valuation methodologies used by the Company’s pricing vendors for
investment securities carried at fair value:
• Equity prices are received from all primary and secondary exchanges.
• Corporate and agency bonds are evaluated by utilizing a multi-dimensional relational model. For bonds
with early redemption options, an option adjusted spread model is utilized. Both asset classes use
standard inputs and incorporate security set up, defined sector breakdown, benchmark yields, apply
base spreads, yield to maturity, and adjust for corporate actions.
• A volatility-driven multi-dimensional spread table or an option-adjusted spread model and prepayment
model is used for agency commercial mortgage obligations (“CMO”). For non-agency CMOs, a
118
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
prepayment/spread/yield/price adjustment model is utilized. CMOs are categorized with mortgage-
backed securities in the tables listed above. For ABSs, a multi-dimensional, collateral specific spread /
prepayment speed tables is utilized. For both asset classes, evaluations utilize standard inputs plus new
issue data, monthly payment information, and collateral performance. The evaluated pricing models
incorporate security set-up, prepayment speeds, cash flows, and treasury swap curves and spread
adjustments.
•
For municipals, a multi-dimensional relational model is used to evaluate securities within this asset
class. The evaluated pricing models for this asset class incorporate security set-up, benchmark yields,
apply base spreads, yield to worst or market convention, ratings updates, prepayment schedules and
adjustments for material events notices.
• U.S. treasuries are evaluated by obtaining feeds from a number of live data sources including active
market makers and inter-dealer brokers.
•
For MBSs, a matrix model correlation to TBA (a forward MBS trade) or benchmarking is utilized to
value a security.
• Corporate loans are priced using averages of bids and offers obtained from the broker/dealer
community involved in trading such loans.
The Company performs certain procedures to validate whether the pricing information received from the pricing
vendors is reasonable, to ensure that the fair value determination is consistent with accounting guidance, and to
ensure that its assets are properly classified in the fair value hierarchy. The Company’s procedures include, but
are not limited to:
• Reviewing periodic reports provided by the Investment Manager that provide information regarding
rating changes and securities placed on watch. This procedure allows the Company to understand why
a particular security’s market value may have changed.
• Understanding and periodically evaluating the various pricing methods and procedures used by the
Company’s pricing vendors to ensure that investments are properly classified within the fair value
hierarchy.
• On a quarterly basis, the Company corroborates investment security prices received from its pricing
vendors by obtaining pricing from a second pricing vendor for a sample of securities.
During 2013 or 2012, the Company has not adjusted quotes or prices obtained from the pricing vendors.
The reported value of financial instruments not carried at fair value, principally cash and cash equivalents,
margin borrowing facility, and notes payable, approximate fair value.
9. Goodwill and Intangible Assets
Goodwill
As of December 31, 2013 and 2012, the Company has goodwill of $4.8 million as a result of a 2010 acquisition,
which represents the excess purchase price over the Company’s best estimate of the fair value of the assets
acquired. Impairment testing performed in 2013 and 2012 did not result in impairment of the goodwill acquired.
119
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Intangible assets
The following table presents details of the Company’s intangible assets as of December 31, 2013:
(Dollars in thousands)
Description
Useful Life
Cost
Accumulated
Amortization
Net
Value
Trademarks . . . . . . . . . . . . . . . . . . . . . . .
Trade names . . . . . . . . . . . . . . . . . . . . . .
State insurance licenses . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . .
Indefinite
Indefinite
Indefinite
15 years
2 years
$ 4,800
4,200
5,000
5,300
50
$19,350
$ —
—
—
1,310
50
$1,360
$ 4,800
4,200
5,000
3,990
—
$17,990
The following table presents details of the Company’s intangible assets as of December 31, 2012:
(Dollars in thousands)
Description
Useful Life
Cost
Accumulated
Amortization
Net
Value
Trademarks . . . . . . . . . . . . . . . . . . . . . . .
Trade names . . . . . . . . . . . . . . . . . . . . . .
State insurance licenses . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . .
Indefinite
Indefinite
Indefinite
15 years
2 years
$ 4,800
4,200
5,000
5,300
50
$19,350
$ —
—
—
957
50
$1,007
$ 4,800
4,200
5,000
4,343
—
$18,343
Amortization related to the Company’s definite lived intangible assets was $0.4 million in each of the years
ended December 31, 2013, 2012 and 2011.
The Company expects that amortization expense for the next five years will be as follows:
(Dollars in thousands)
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(353)
(353)
(353)
(353)
(353)
Intangible assets with indefinite lives
As of December 31, 2013 and 2012, indefinite lived intangible assets, which are comprised of trade names,
trademarks, and state insurance licenses, were $14.0 million. The Company reviewed internal business unit
results, the growth of competitors and the overall property and casualty insurance market for indicators of
impairment of its indefinite lived intangible assets. Impairment testing performed in 2013 and 2012 indicated that
there was no impairment of these assets.
Intangible assets with definite lives
As of December 31, 2013 and 2012, definite lived intangible assets were $4.0 million and $4.3 million, net of
accumulated amortization, and were comprised of customer relationships and non-compete agreements. The
Company reviewed internal business unit results, the growth of competitors and the overall property and casualty
insurance market for indicators of impairment of its definite lived intangible assets. There was no impairment of
these assets in 2013 or 2012.
120
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
10. Reinsurance
The Company cedes risk to unrelated reinsurers on a pro rata (“quota share”) and excess of loss basis in the
ordinary course of business to limit its net loss exposure on insurance contracts. Reinsurance ceded arrangements
do not discharge the Company of primary liability. Moreover, reinsurers may fail to pay the Company due to a
lack of reinsurer liquidity, perceived improper underwriting, losses for risks that are excluded from reinsurance
coverage and other similar factors, all of which could adversely affect the Company’s financial results.
The Company had the following reinsurance balances as of December 31, 2013 and December 31, 2012:
(Dollars in thousands)
December 31, 2013 December 31, 2012
Reinsurance receivables . . . . . . . . . . . . . . . . .
Collateral securing reinsurance receivables . . .
$197,887
(9,436)
Reinsurance receivables, net of collateral
. .
$188,451
$ 241,827
(155,082)
$ 86,745
Allowance for uncollectible reinsurance
receivables . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid reinsurance premiums . . . . . . . . . . . .
$
9,010
5,199
$
9,010
5,945
The reinsurance receivables above are net of a purchase accounting adjustment related to discounting acquired
loss reserves to their present value and applying a risk margin to the discounted reserves. This adjustment was
$6.0 million and $8.0 million at December 31, 2013 and 2012, respectively.
As of December 31, 2013, the Company had aggregate unsecured reinsurance receivables that exceeded 3% of
shareholders’ equity from the following reinsurers. Unsecured reinsurance receivables include amounts
receivable for paid and unpaid losses and loss adjustment expenses, less amounts secured by collateral.
(Dollars in millions)
A.M. Best
Ratings
(As of
December 31,
2013)
Reinsurance
Receivables
Munich Re America Corporation . . . . . . . . . . . . . . . . . . . . . . . .
Westport Insurance Corporation . . . . . . . . . . . . . . . . . . . . . . . . .
$112.8
30.0
A+
A+
121
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The effect of reinsurance on premiums written and earned is as follows:
(Dollars in thousands)
For the year ended December 31, 2013:
Written
Earned
Direct business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$232,373
58,350
(18,739)
$215,713
52,494
(19,485)
Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$271,984
$248,722
For the year ended December 31, 2012:
Direct business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$201,787
42,266
(24,506)
$203,587
60,393
(25,118)
Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$219,547
$238,862
For the year ended December 31, 2011:
Direct business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$228,910
78,993
(27,333)
$247,816
81,920
(31,882)
Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$280,570
$297,854
11. Income Taxes
The statutory income tax rates of the countries where the Company does business are 35.0% in the United States,
0.0% in Bermuda, 0.0% in the Cayman Islands, 0.0% in Gibraltar, 29.22% in the Duchy of Luxembourg, and
25.0% on non-trading income, 33.0% on capital gains and 12.5% on trading income in the Republic of Ireland.
The statutory income tax rate of each country is applied against the annual taxable income of each country to
calculate the annual income tax expense.
The Company’s income before income taxes from its non-U.S. subsidiaries and U.S. subsidiaries, including the
results of the quota share and stop-loss agreements between Wind River Reinsurance and the Insurance
Operations, for the years ended December 31, 2013, 2012, and 2011 were as follows:
Year Ended December 31, 2013:
(Dollars in thousands)
Non-U.S.
Subsidiaries
U.S.
Subsidiaries Eliminations
Total
Revenues:
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$169,618
$232,374
$(111,269) $290,723
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$169,547
$102,437
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$154,987
35,750
175
(4)
$ 93,735
21,064
27,237
5,795
$
$
— $271,984
— $248,722
37,209
27,412
5,791
(19,605)
—
—
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
190,908
147,831
(19,605)
319,134
Losses and Expenses:
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . . .
Acquisition costs and other underwriting expenses . . . . . . . . .
Corporate and other operating expenses . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65,337
64,822
4,745
1,165
67,654
40,829
6,869
24,609
—
—
—
(19,605)
132,991
105,651
11,614
6,169
Income (loss) before income taxes . . . . . . . . . . . . . . . . . .
$ 54,839
$
7,870
$
— $ 62,709
122
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Year Ended December 31, 2012:
(Dollars in thousands)
Non-U.S.
Subsidiaries
U.S.
Subsidiaries Eliminations
Total
Revenues:
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$135,176
$201,791
$(92,914)
$244,053
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$134,628
$ 84,919
$ — $219,547
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$153,283
42,012
995
(726)
$ 85,579
23,985
5,760
568
$ — $238,862
47,557
(18,440)
6,755
—
(158)
—
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
195,564
115,892
(18,440)
293,016
Losses and Expenses:
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . . .
Acquisition costs and other underwriting expenses . . . . . . . . .
Corporate and other operating expenses . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
93,044
59,046
4,753
—
60,584
36,357
4,938
23,833
—
—
—
(18,440)
153,628
95,403
9,691
5,393
Income (loss) before income taxes . . . . . . . . . . . . . . . . . .
$ 38,721
$ (9,820)
$ — $ 28,901
Year Ended December 31, 2011:
(Dollars in thousands)
Revenues:
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S.
Subsidiaries
U.S.
Subsidiaries Eliminations
Total
$184,854
$229,148
$(106,099) $307,903
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$184,352
$ 96,218
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses and Expenses:
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . . .
Acquisition costs and other underwriting expenses . . . . . . . . .
Corporate and other operating expenses . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . .
$193,816
43,837
4,304
443
242,400
202,633
80,272
9,414
—
$ (49,919)
$104,038
27,716
17,169
12,138
161,061
76,051
41,219
4,559
24,917
$ 14,315
$
$
— $280,570
— $297,854
53,112
21,473
12,581
385,020
(18,441)
—
—
(18,441)
—
—
—
(18,441)
278,684
121,491
13,973
6,476
— $ (35,604)
$
The following table summarizes the components of income tax expense (benefit):
(Dollars in thousands)
Current income tax expense (benefit):
Years Ended December 31,
2013
2012
2011
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Federal
Total current income tax expense (benefit)
. . . . . . . . . . . .
Deferred income tax expense (benefit):
U.S. Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income tax expense (benefit)
. . . . . . . . . . .
$ 163
859
1,022
$ (628)
(3,765)
$ 729
1,889
(4,393)
2,618
(3)
(3)
(1,463)
(1,463)
169
169
Total income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . .
$1,019
$(5,856)
$2,787
123
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The weighted average expected tax provision has been calculated using income (loss) before income taxes in
each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate.
The following table summarizes the differences between the tax provision for financial statement purposes and
the expected tax provision at the weighted average tax rate:
(Dollars in thousands)
Expected tax provision at weighted
Years Ended December 31,
2013
2012
2011
Amount
% of Pre-
Tax Income Amount
% of Pre-
Tax Income Amount
% of Pre-
Tax Income
average . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,954
4.7% $(3,283)
(11.4%) $ 5,740
(16.1%)
Adjustments:
Tax exempt interest . . . . . . . . . . . . . . . .
Dividend exclusion . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,009)
(1,135)
209
(1.6)
(1.8)
0.3
(1,445)
(1,060)
(68)
(5.0)
(3.7)
(0.2)
(1,915)
(734)
(304)
5.4
2.1
0.8
Actual taxes on continuing operations . . . . .
$ 1,019
1.6% $(5,856)
(20.3%) $ 2,787
(7.8%)
The effective income tax rate for 2013 was 1.6%, compared with an effective income tax benefit rate of 20.3%
for 2012 and an effective income tax benefit rate of 7.8% for 2011. The increase in the effective income tax rate
in 2013 compared with 2012 is primarily due to the gain on the disposition of a subsidiary and an increase in
capital gains in taxable jurisdictions in 2013 compared with 2012. The increase in the effective income tax
benefit rate in 2012 compared to 2011 is primarily due to an increase in net losses in taxable jurisdictions in 2012
compared with 2011. For 2013, 2012 and 2011, the effective rate differed from the weighted average expected
income tax expense rate primarily due to investments in tax-exempt securities and dividend exclusion.
124
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets at
December 31, 2013 and 2012 are presented below:
(Dollars in thousands)
Deferred tax assets:
2013
2012
Discounted unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alternative minimum tax credit carryover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partnership K1 basis differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stat-to-GAAP reinsurance reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,459
3,346
9,947
178
852
1,526
789
1,359
4,605
2,563
$10,375
2,737
9,185
678
2,926
1,046
722
2,361
1,980
2,548
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,624
34,558
Deferred tax liabilities:
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on securities available-for-sale and investments in limited partnerships
included in accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . .
Investment basis differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,220
3,220
25,480
400
355
963
18,857
398
269
990
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,418
23,734
Total net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,206
$10,824
Management believes it is more likely than not that the deferred tax assets will be completely utilized in future
years. As a result, the Company has not recorded a valuation allowance at December 31, 2013 and 2012.
The Company had an alternative minimum tax (“AMT”) credit carryforward of $9.9 million and $9.2 million as
of December 31, 2013 and 2012, respectively, which can be carried forward indefinitely. The company has a net
operating loss (“NOL”) carryforward of $1.2 million and $0.9 million as of December 31, 2013 and 2012,
respectively, that expires in 2032.
The Company and some of its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various
states and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations by tax
authorities for tax years before 2009.
Should the Company’s subsidiaries that are subject to income taxes imposed by the U.S. authorities pay a
dividend to their foreign affiliates, withholding taxes would apply. The Company has not recorded deferred taxes
for potential withholding tax on undistributed earnings. The Company believes it qualifies for treaty benefits
under the Tax Convention with Luxembourg and would be subject to a 5% withholding tax if it were to pay a
dividend. Determination of the unrecognized deferred tax liability related to these undistributed earnings is not
practicable because of the complexities with its hypothetical calculation.
The Company applies a more-likely-than-not recognition threshold for all tax uncertainties whereby it only
recognizes those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the
125
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
taxing authorities. If recognized, the gross unrecognized tax benefits could lower the effective income tax rate in
any future period. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows:
(Dollars in thousands)
Balance as of January 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapses on statutes of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 277
(277)
Balance as of December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapses on statutes of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Balance as of December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
The Company classifies all interest and penalties related to uncertain tax positions as income tax expense. As of
December 31, 2013, the Company did not record any liabilities for tax-related interest and penalties on its
consolidated balance sheet.
12. Liability for Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:
(Dollars in thousands)
Years Ended December 31,
2013
2012
2011
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Ceded reinsurance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$879,114
240,566
$971,377
283,652
$1,052,743
407,195
Net balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
638,548
687,725
645,548
Incurred losses and loss adjustment expenses related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
140,873
(7,882)
149,183
4,445
Total incurred losses and loss adjustment expenses . . . . . . . . . . . .
132,991
153,628
Paid losses and loss adjustment expenses related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50,732
133,832
52,164
150,641
Total paid losses and loss adjustment expenses . . . . . . . . . . . . . . .
184,564
202,805
Net balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: Ceded reinsurance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
586,975
192,491
638,548
240,566
275,284
3,400
278,684
78,340
158,167
236,507
687,725
283,652
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$779,466
$879,114
$ 971,377
When analyzing loss reserves and prior year development, the Company considers many factors, including the
frequency and severity of claims, loss trends, case reserve settlements that may have resulted in significant
development, and any other additional or pertinent factors that may impact reserve estimates.
During 2013, the Company reduced its prior accident year loss reserves by $7.9 million, which consisted of a
$7.6 million decrease related to Insurance Operations and a $0.3 million decrease related to Reinsurance
Operations.
During 2013, the Company reduced its prior accident year loss reserves for its Insurance Operations by $7.6
million, which primarily consisted of the following:
• Property: A $9.2 million reduction primarily driven by better than expected development from
accident years 2010, 2011, and 2012 related primarily to lower than expected non-catastrophe severity.
126
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
• General Liability: A $6.7 million reduction primarily due to better than expected emergence in nearly
all accident years between 2003 through 2011 partially offset by an increase to accident years 1998
through 2002 and 2012 due to higher than anticipated loss emergence.
• Asbestos and Environmental: A $6.8 million increase primarily related to policies written prior to
1990.
• Professional: A $0.7 million increase primarily driven by $2.2 million increase in aggregate from
unexpected loss emergence in accident years 2006 to 2008 and 2010 offset by $1.5 million of favorable
emergence from accident years 1998 and 2011.
• Umbrella: A $1.1 million decrease primarily driven by better than expected loss emergence in accident
years 2002 to 2010 offset by increases in 2011 and 2012.
• Commercial Auto: A $0.9 million increase primarily related to accident year 2011.
• Marine: A $0.9 million increase primarily related to accident years 2011 and 2012.
In 2013, the Company decreased its prior accident year loss reserves for its Reinsurance Operations by $0.3
million primarily due to better than anticipated loss emergence on property lines partially offset by adverse
development on director and officer, general liability, automobile, and marine.
During 2012, the Company increased its prior accident year loss reserves by $4.4 million, which consisted of a
$4.2 million decrease related to Insurance Operations and a $8.7 million increase related to Reinsurance
Operations.
The $4.2 million decrease related to Insurance Operations primarily consisted of the following:
• General liability: A $6.3 million reduction primarily due to favorable emergence of $4.7 million on
small business binding and $3.3 million on casualty brokerage exposures primarily in accident years
2002 through 2005. Partially offsetting these reductions were increases of $2.0 million on construction
defect reserves in accident year 2007. The Company also decreased its reinsurance allowance by $0.7
million in this line due to changes in its reinsurance exposure on specifically identified claims and
general decreases in ceded reserves.
• Umbrella: A $0.7 million reduction primarily due to continued favorable emergence. Umbrella
coverage typically attaches to other coverage lines, so these net decreases follow the decreases in
general liability above.
• Property: A $1.2 million increase primarily related to accident year 2011 due to greater than expected
loss emergence on a large sinkhole claim.
• Auto liability: A $1.2 million increase primarily driven by continued loss emergence on casualty
brokerage exposures.
The $8.7 million increase related to Reinsurance Operations primarily consisted of the following:
• Workers’ Compensation: An $8.3 million increase in workers’ compensation lines primarily related
to accident years 2009 and 2010 driven by increased frequency and severity. As a result of these
increased losses, the Company recorded $6.0 million in additional premium related to these treaties.
• Marine: A $2.7 million increase in marine lines primarily related to accident year 2011 primarily due
to higher than expected reported losses.
• Automobile Liability: A $1.3 million increase in auto liability lines primarily related to accident year
2009 resulting from further unexpected development on non-standard auto treaties which were not
renewed.
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GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
• Property: A $3.4 million decrease in property lines primarily related to accident years 2009 and 2011
as a result of further development on worldwide catastrophe treaties.
During 2011, the Company increased its prior accident year loss reserves by $3.4 million, which consisted of a
$9.7 million decrease related to Insurance Operations and a $13.1 million increase related to Reinsurance
Operations.
The $9.7 million decrease related to Insurance Operations primarily consisted of the following:
• General Liability: A $12.9 million reduction in general liability lines primarily consisted of net
reductions of $25.5 million in accident years 2008 and prior due to continued favorable emergence.
Incurred losses for these years have developed at a rate lower than the Company’s historical averages.
The Company also decreased its reinsurance allowance by $1.3 million in this line due to changes in
reinsurance exposure on specifically identified claims and general decreases in ceded reserves.
Offsetting these decreases were increases of $13.9 million in accident years 2009 and 2010 primarily
driven by loss emergence as well as
for construction defect
liability. Increased estimates for construction defect were primarily the result of a methodology change
during the year, with some increases in recent years due to a slight increase in claim frequency in one
of the reviewed segments. The Company has addressed profitability concerns by exiting certain classes
of business within this line.
revised exposure estimates
• Property: A $2.5 million reduction in property lines primarily related to accident years 2009 and 2010
related to subrogation on a large equine mortality claim as well as favorable development on prior year
catastrophe claims.
• Umbrella: A $1.7 million reduction in umbrella lines primarily related to accident years 2010 and
prior primarily due to continued favorable emergence. Umbrella coverage typically attaches to other
coverage lines, so these net decreases follow the decreases in general liability above.
• Professional Liability: A $5.7 million increase in professional liability lines primarily consisted of
increases of $19.0 million related to accident years 1998, 2009 and 2010, offset partially by decreases
of $13.2 million related to all other accident years. In 2011, the Company exited certain professional
liability classes where the volume of premium was low and loss volatility was high. The Company is
focused on writing business where it expects to realize profit
that meets return on investment
thresholds.
• Auto Liability: A $1.8 million increase in auto liability lines is primarily related to accident year 2010
due to higher than expected severity.
The $13.1 million increase related to Reinsurance Operations primarily consisted of the following:
• General Liability: An $8.7 million increase in general liability lines primarily related to accident years
2009 and 2010 due to loss emergence that was greater than expected.
• Automobile Liability: A $3.1 million increase in automobile liability lines primarily related to
accident year 2010 resulting from further unexpected development on non-standard auto treaties which
were not renewed in 2011.
• Property: A $1.5 million increase in property lines primarily related to accident year 2010 and is
primarily related to loss emergence on a worldwide catastrophe treaty.
• Workers’ Compensation: A $1.0 million increase in workers’ compensation lines primarily related to
accident years 2009 and 2010 and is the result of expected losses recorded on adjustment premiums
recorded in 2011.
128
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
• Professional Liability: A $1.3 million decrease in professional liability lines primarily related to
accident years 2009 and 2010 and is the result of better than expected development on certain treaties.
Prior to 2001, the Company underwrote multi-peril business insuring general contractors, developers, and
sub-contractors primarily involved in residential construction that has resulted in significant exposure to
construction defect (“CD”) claims. The Company’s reserves for CD claims ($70.5 million and $74.8 million as of
December 31, 2013 and 2012, net of reinsurance, respectively) are established based upon management’s best
estimate in consideration of known facts, existing case law and generally accepted actuarial methodologies.
However, due to the inherent uncertainty concerning this type of business, the ultimate exposure for these claims
may vary significantly from the amounts currently recorded.
The Company has exposure to asbestos & environmental (“A&E”) claims. The asbestos exposure primarily
arises from the sale of product liability insurance, and the environmental exposure arises from the sale of general
liability and commercial multi-peril insurance. In establishing the liability for unpaid losses and loss adjustment
expenses related to A&E exposures, management considers facts currently known and the current state of the law
and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when
sufficient information has been developed to indicate the involvement of a specific insurance policy, and
management can reasonably estimate its liability. In addition, liabilities have been established to cover additional
exposures on both known and unasserted claims. Estimates of the liabilities are reviewed and updated regularly.
Case law continues to evolve for such claims, and significant uncertainty exists about the outcome of coverage
litigation and whether past claim experience will be representative of future claim experience. Included in net
unpaid losses and loss adjustment expenses as of December 31, 2013, 2012, and 2011 were IBNR reserves of
$18.2 million, $14.6 million, and $26.2 million, respectively, and case reserves of approximately $4.8 million,
$5.5 million, and $3.6 million, respectively, for known A&E-related claims.
The following table shows the Company’s gross reserves for A&E losses:
(Dollars in thousands)
Years Ended December 31,
2013
2012
2011
Gross reserve for A&E losses and loss adjustment expenses—beginning of
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: Incurred losses and loss adjustment expenses—case reserves . . . . . . . .
Plus: Incurred losses and loss adjustment expenses—IBNR . . . . . . . . . . . . . .
Less: Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$44,767
2,154
5,961
2,727
$50,601
7,687
(5,860)
7,661
$49,151
2,005
2,395
2,950
Gross reserves for A&E losses and loss adjustment expenses—end of period . . . .
$50,155
$44,767
$50,601
The following table shows the Company’s net reserves for A&E losses:
(Dollars in thousands)
Years Ended December 31,
2013
2012
2011
Net reserve for A&E losses and loss adjustment expenses—beginning of
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: Incurred losses and loss adjustment expenses—case reserves . . . . . . . .
Plus: Incurred losses and loss adjustment expenses—IBNR . . . . . . . . . . . . . .
Less: Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,134
1,351
3,506
1,953
$25,285
6,934
(5,683)
6,402
$30,333
1,873
(4,926)
1,995
Net reserves for A&E losses and loss adjustment expenses—end of period . . . . . .
$23,038
$20,134
$25,285
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GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Establishing reserves for A&E and other mass tort claims involves more judgment than other types of claims due
inconsistent court decisions, an increase in bankruptcy filings as a result of
to, among other things,
asbestos-related liabilities, and judicial interpretations that often expand theories of recovery and broaden the
scope of coverage. The insurance industry continues to receive a substantial number of asbestos-related bodily
injury claims, with an increasing focus being directed toward other parties, including installers of products
containing asbestos rather than against asbestos manufacturers. This shift has resulted in significant insurance
coverage litigation implicating applicable coverage defenses or determinations, if any, including but not limited
to, determinations as to whether or not an asbestos-related bodily injury claim is subject to aggregate limits of
liability found in most comprehensive general liability policies.
In 2009, one of the Company’s 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 may
trigger financial obligations by the insurance company. One such event is the confirmation of a Plan involving an
asbestos trust established under the bankruptcy code and funded in part by settlement proceeds. On February 24,
2014, the United States Bankruptcy Court for the Northern District of California (District Court) issued a
Memorandum Re Confirmation of a Revised Plan following a remand from the Ninth Circuit Court of
Appeals. The confirmation of the Revised Plan includes an injunction under 11 U.S.C. Section 524(g) (US
bankruptcy code) related to the suit above. The injunction, also called a “channeling injunction,” precludes,
among other things, non-settling insurers from asserting claims against one of the Company’s insurance
companies and asbestos related claims by third parties against one of the Company’s insurance companies that
are related to the named insured. The most recent ruling may be subject to an appeal by the non-settling insurer
group. Management will continue to monitor the developments of the litigation to determine if any additional
financial exposure is present.
As of December 31, 2013, 2012, and 2011, the survival ratio on a gross basis for the Company’s open A&E
claims was 11.3 years, 11.3 years, and 8.9 years, respectively. As of December 31, 2013, 2012, and 2011, the
survival ratio on a net basis for the Company’s open A&E claims was 6.7 years, 7.0 years, and 6.4 years,
respectively. The survival ratio, which is the ratio of gross or net reserves to the 3-year average of annual paid
claims, is a financial measure that indicates how long the current amount of gross or net reserves are expected to
last based on the current rate of paid claims.
13. Debt
Debt consisted of the following as of December 31, 2013 and 2012:
Margin borrowing facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.22% guaranteed senior notes due July 2013 to July 2015 . . . . . . . . . . . . . . . . . . . . . . . . . .
Three-month LIBOR plus 4.05% junior subordinated debentures due September 2033 . . . .
Three-month LIBOR plus 3.85% junior subordinated debentures due October 2033 . . . . . .
Loans payable, due 2012, 4.0% stated interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$100,000
—
—
—
—
$ —
54,000
10,310
20,619
—
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$100,000
$84,929
December 31,
2013
2012
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GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Margin Borrowing Facility
On July 19, 2013, the Company entered into a margin borrowing facility with a borrowing rate that is currently
equal to the one week LIBOR rate plus 65 basis points, which combined is currently less than 1% as of
December 31, 2013. This facility is due on demand. The borrowing is subject to maintenance margin, which is a
minimum account balance that must be maintained. A decline in market conditions could require an additional
deposit of collateral. As of December 31, 2013, approximately $120.9 million in collateral was deposited to
support the borrowing. The amount borrowed against the margin account may fluctuate as routine investment
transactions, such as dividends received, investment income received, maturities and pay-downs, impact cash
balances. The margin facility contains customary events of default, including, without limitation, insolvency,
failure to make required payments, failure to comply with any representations or warranties, failure to adequately
assure future performance, and failure of a guarantor to perform under its guarantee.
Guaranteed Senior Notes
On July 19, 2013, the Company paid the entire outstanding principal amount on its guaranteed senior notes. The
payment of $58.6 million consisted of principal of $54.0 million and interest of $4.6 million, which included a
make-whole provision of $2.9 million. This payment was funded by borrowing $60.0 million pursuant to the
Company’s margin borrowing facility.
Junior Subordinated Debentures
On September 30, 2013, the Company redeemed the entire outstanding principal amount on its UNG Trust I
junior subordinated notes. The payment of $10.4 million consisted of principal of $10.3 million and interest of
$0.1 million. This payment was funded by borrowing $10.0 million pursuant
to the Company’s margin
borrowing facility.
On October 29, 2013, the Company redeemed the entire outstanding principal amount on its UNG Trust II junior
subordinated notes. The payment of $20.8 million consisted of principal of $20.6 million and interest of $0.2
million. This payment was funded by borrowing $20.2 million pursuant to the Company’s margin borrowing
facility.
14. Shareholders’ Equity
Repurchases of the Company’s A Ordinary Shares
The Company allows employees to surrender A ordinary shares as payment for the tax liability incurred upon the
vesting of restricted stock that was issued under the Share Incentive Plan. During 2013, 2012, and 2011, the
Company purchased an aggregate of 2,370, 4,997 and 8,347, respectively, of surrendered A ordinary shares from
its employees for $0.1 million, $0.1 million and $0.2 million, respectively. All shares purchased from employees
by the Company are held as treasury stock and recorded at cost.
In 2011 and 2012, the Board of Directors authorized the Company to repurchase up to $125.0 million of its A
ordinary shares through share repurchase programs. The Company repurchased and retired an aggregate
5,371,419 of its A ordinary shares in the open market and in privately negotiated transactions at an aggregate
price of $112.2 million or an average of $20.89 per share. The Company does not have authorization from the
Board of Directors to repurchase any additional A ordinary shares as of December 31, 2013. The excess cost of
the repurchased shares over their par value was classified to additional paid-in capital as of December 31, 2013.
Included in the share repurchases above, on May 9, 2012, the Company announced a self-tender offer pursuant to
which it could repurchase up to $61.0 million of its A ordinary shares. On June 14, 2012, the Company accepted
131
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
for purchase 2,913,464 of its A ordinary shares at a price of $21.75 per share for a total cost of $63.4 million,
excluding fees and expenses related to the tender offer. The Company funded the purchase of the shares using
cash on hand. Included within the A ordinary shares accepted for purchase were 122,578 A ordinary shares that
Global Indemnity elected to purchase pursuant to its option to increase the size of the tender offer by up to 2.0%
of the outstanding A ordinary shares.
The following table provides information with respect to the A ordinary shares that were surrendered or
repurchased in 2013:
Period (1)
Total Number
of Shares
Purchased
Average
Price Paid
Per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plan or Program
Approximate Dollar Value
of Shares That May Yet Be
Purchased Under the
Plan or Program (2)
February 1 – 28, 2013 . . . . . . .
March 1 – 31, 2013 . . . . . . . . .
June 1 – 30, 2013 . . . . . . . . . . .
December 1 – 31, 2013 . . . . . .
362(3)
891(3)
507(3)
610(3)
Total . . . . . . . . . . . . . . . . .
2,370
$20.25
$22.78
$23.03
$26.07
$23.29
—
—
—
—
—
$16,857,963
$16,857,963
$16,857,963
$16,857,963
(1) Based on settlement date.
(2) Approximate dollar value of shares is as of the last date of the applicable month.
(3) Surrendered by employees as payment of taxes withheld on the vesting of restricted stock.
The following table provides information with respect to the A ordinary shares that were surrendered or
repurchased in 2012:
Period (1)
Total Number
of Shares
Purchased
Average
Price Paid
Per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plan or Program
Approximate Dollar Value
of Shares That May Yet Be
Purchased Under the
Plan or Program (2)
199,811
$19.74
January 1 – 31, 2012 . . . . . . . . .
100,932(3) $20.04
February 1 – 29, 2012 . . . . . . . .
$18.77
153,524
March 1 – 31, 2012 . . . . . . . . . .
54,419(3) $18.85
April 1 – 30, 2012 . . . . . . . . . . .
June 1 – 30, 2012 . . . . . . . . . . . . 2,913,959(3) $21.75
265,789
September 1 – 30, 2012 . . . . . . .
$20.70
20,481(3) $22.03
October 1 – 31, 2012 . . . . . . . . .
82,500
November 1 – 30, 2012 . . . . . . .
$21.95
18,000(3) $22.02
December 1 – 31, 2012 . . . . . . .
Total . . . . . . . . . . . . . . . . . . 3,809,415
$21.37
196,431
96,996
153,524
54,334
2,913,464
265,789
20,000
82,500
18,000
3,801,038
$66,748,165
$64,804,270
$61,925,785
$60,902,382
$
—
$19,503,588
$19,063,588
$17,253,963
$16,857,963
(1) Based on settlement date.
(2) Approximate dollar value of shares is as of the last date of the applicable month.
(3)
Includes shares surrendered by employees as payment of taxes withheld on the vesting of restricted stock.
15. Related Party Transactions
Fox Paine & Company
As of December 31, 2013, Fox Paine & Company LLC (“Fox Paine”) beneficially owned shares having
approximately 93.0% of the Company’s total outstanding voting power. Fox Paine has the right to appoint a
132
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
number of the Company’s Directors equal
in aggregate to the pro rata percentage of the voting shares
beneficially held by Fox Paine of the Company for so long as Fox Paine holds an aggregate of 25% or more of
the voting power in the Company. Fox Paine & Company controls the election of all of the Company’s Directors
due to its controlling share ownership. The Company’s Chairman is a member of Fox Paine. The Company relies
on Fox Paine to provide management services and other services related to the operations of the Company.
At December 31, 2013 and 2012, Wind River Reinsurance was a limited partner in Fox Paine Capital Fund, II,
which is managed by Fox Paine. This investment was originally made by United National Insurance Company in
June 2000 and pre-dates the September 5, 2003 acquisition by Fox Paine of Wind River Investment Corporation,
which was the predecessor holding company for United National Insurance Company. The Company’s
investment in this limited partnership was valued at $3.5 million and $3.1 million at December 31, 2013 and
2012, respectively. At December 31, 2013, the Company had an unfunded capital commitment of $2.5 million to
the partnership. There were no distributions received during 2013 and 2011. The Company received a
distribution from the limited partnership of $5.4 million, of which $4.3 million was recorded as investment
income, during 2012.
An annual management fee of $1.9, $1.5, and $1.5 million was paid to Fox Paine in 2013, 2012 and 2011,
respectively, and was recognized ratably over those years. The Company relies on Fox Paine to provide
management services and other services related to the operations of the Company. This fee will be adjusted
annually to reflect change in CPI. Beginning on September 5, 2014, the payment of the annual management fee
will be deferred until a change of control or September, 2018, whichever occurs first, in exchange for an annual
adjustment (the “adjustment amount”) equal to the percentage rate of return the Company earns on its investment
portfolio multiplied by the aggregate annual services fees and adjustment amounts accumulated and unpaid
through such date.
Cozen O’Connor
The Company incurred $0.02 and $0.2 million for legal services rendered by Cozen O’Connor. Stephen A.
Cozen, the chairman of Cozen O’Connor, is a member of the Company’s Board of Directors in 2013 and 2012,
respectively.
Crystal & Company
During each of the years ended December 31, 2013, 2012 and 2011, the Company incurred $0.2 million in
brokerage fees to Crystal & Company, an insurance broker. Prior to October 15, 2012, Crystal & Company was
known as Frank Crystal & Company. James W. Crystal, the chairman and chief executive officer of Crystal &
Company, is a member of the Company’s Board of Directors.
Hiscox Insurance Company (Bermuda) Ltd.
Wind River Reinsurance is a participant in a reinsurance agreement with Hiscox Insurance Company (Bermuda)
Ltd. (“Hiscox Bermuda”) effective January 1, 2013. Steve Green, the President of Wind River Reinsurance, is a
member of Hiscox Bermuda’s Board of Directors. The Company estimated that the following earned premium
and incurred losses related to the agreement have been assumed by Wind River Reinsurance from Hiscox
Bermuda:
(Dollars in thousands)
Year Ended
December 31, 2013
Assumed earned premium . . . . . . . . . . . . . . . . . . . . . .
Assumed losses and loss adjustment expenses . . . . . .
$3,053
987
133
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Net balances due to Wind River Reinsurance under this agreement are as follows:
(Dollars in thousands)
As of
December 31, 2013
Net balance receivable . . . . . . . . . . . . . . . . . . . . . . . . .
$3,337
16. Commitments and Contingencies
Lease Commitments
Total rental expense under operating leases, net of sub-lease income for the years ended December 31, 2013,
2012, and 2011 were $2.4 million, $2.2 million, and $4.1 million, respectively. As part of its Profit Enhancement
Initiative, the Company incurred charges in 2011 resulting from future minimum lease commitments related to
unused space. Cash payments on leases related to unused space will be paid in future periods and are included in
the table below. See Note 4 for additional details. At December 31, 2013, future minimum cash payments under
non-cancelable operating leases were as follows:
(Dollars in thousands)
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,362
1,952
1,858
1,769
3,679
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,620
Legal Proceedings
The Company is, from time to time, involved in various legal proceedings in the ordinary course of business. The
Company maintains insurance and reinsurance coverage for such risks in amounts that it considers adequate.
However, there can be no assurance that the insurance and reinsurance coverage that the Company maintains is
sufficient or will be available in adequate amounts or at a reasonable cost. The Company does not believe that the
resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a
material adverse effect on its business, results of operations, cash flows, or financial condition.
There is a greater potential for disputes with reinsurers who are in runoff. Some of the Company’s reinsurers’
have operations that are in runoff, and therefore, the Company closely monitors those relationships. The
Company anticipates that, similar to the rest of the insurance and reinsurance industry, it will continue to be
subject to litigation and arbitration proceedings in the ordinary course of business.
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, 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, the Company settled with AON for $16.3
million. The Company realized approximately $7.5 million in 2011, net of income taxes and attorney’s fees.
Other Commitments
As mentioned in Note 15 above, the Company has a remaining commitment of $2.5 million to the Fox Paine
Capital Fund, II.
134
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company is party to a Management Agreement, as amended, with Fox Paine, whereby in connection with
certain management services provided to it by Fox Paine, the Company agreed to pay an annual management fee
of $1.9 million to Fox Paine & Company. See note 15 above for additional information pertaining to this
management agreement.
17. Share-Based Compensation Plans
The fair value method of accounting recognizes share-based compensation to employees and non-employee
directors in the statements of operations using the grant-date fair value of the stock options and other
equity-based compensation expensed over the requisite service and vesting period.
For the purpose of determining the fair value of stock option awards, the Company uses the Black-Scholes
option-pricing model. An estimation of forfeitures is required when recognizing compensation expense which is
then adjusted over the requisite service period should actual forfeitures differ from such estimates. Changes in
estimated forfeitures are recognized through a cumulative adjustment to compensation in the period of change.
The prescribed accounting guidance also requires tax benefits relating to excess stock-based compensation
deductions to be prospectively presented in the statement of cash flows as financing cash inflows. Tax expense
resulting from stock-based compensation deductions less than amounts reported for financial reporting purposes
was $0.1 million for the year ended December 31, 2011. There was no tax expense resulting from stock-based
compensation deductions in excess of amounts reported for financial reporting purposes during 2013 and 2012.
Share Incentive Plan
The Company maintains the Global Indemnity plc Share Incentive Plan (as so amended, the “Plan”). The purpose
of the Plan is to give the Company a competitive advantage in attracting and retaining officers, employees,
consultants and non-employee directors by offering stock options, restricted shares and other stock-based awards.
As amended and restated on July 2, 2010, the Company may issue up to 5.0 million A ordinary shares for
issuance pursuant to awards granted under the Plan. The Plan expired per its terms on September 5, 2013. It is
expected that a new share incentive plan will be presented for approval at the Company’s 2014 annual
shareholder meeting.
135
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Options
Award activity for stock options granted under the Plan and the weighted average exercise price per share are
summarized as follows:
Time-Based
Options
Performance-
Based Options
Total
Options
Weighted
Average
Exercise Price
Per Share
Options outstanding at January 1, 2011 . . . . . . . . . . . . . . . .
Options issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options purchased by the Company . . . . . . . . . . . . . . .
Options outstanding at December 31, 2011 . . . . . . . . . . . . .
Options issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options purchased by the Company . . . . . . . . . . . . . . .
Options outstanding at December 31, 2012 . . . . . . . . . . . . .
Options issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options purchased by the Company . . . . . . . . . . . . . . .
205,309
400,000
(31,178)
—
(8,150)
—
565,981
—
(96,238)
(5,000)
—
—
464,743
—
(5,000)
(14,292)
(32,951)
—
Options outstanding at December 31, 2013 . . . . . . . . . . . . .
412,500
Options exercisable at December 31, 2013 . . . . . . . . . . . . . .
262,500
124,709
—
(124,709)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
330,018
400,000
(155,887)
—
(8,150)
—
565,981
—
(96,238)
(5,000)
—
—
464,743
—
(5,000)
(14,292)
(32,951)
—
412,500
$25.55
$18.03
$23.80
—
$34.00
—
$20.59
—
$24.09
$20.00
—
—
$19.87
—
$29.24
$20.00
$34.00
—
$18.62
262,500
$18.93
During 2013 and 2012, the company did not grant any new stock options. During 2011, the Company granted
400,000 Time-Based Options under the Plan, which consisted of 300,000 Time-Based Options which vest in
33 1/3% increments on December 31, 2012, 2013 and 2014 and 100,000 Time-Based Options which vest in 25%
increments on December 31, 2012, 2013, 2014 and 2015. These options are subject to accident year true-up of
underwriting results and are subject to Board approval. Any unvested options are forfeited upon termination of
employment for any reason, and expire 10 years after the grant date.
The Company recorded $1.2 million of compensation expense for stock options outstanding under the Plan in
each of the years ended December 31, 2013 and 2012. In 2011, due to the impact of forfeitures, the Company
recorded a net favorable adjustment to compensation expense of $1.8 million for stock options outstanding under
the Plan.
In 2013, the Company received $0.3 million from the issuance of 14,292 A ordinary shares at a weighted average
grant date value of $20.00 per share exercised by a former employee of the Company under the Plan. In 2012, the
Company received $0.1 million from the issuance of 5,000 A ordinary shares at a weighted average grant date
value of $20.00 per share exercised by a former employee of the Company under the Plan. The Company did not
receive any proceeds from the exercise of options during 2011 under the Plan.
Amortization expense related to options outstanding is anticipated to be $0.9 million in 2014 and $0.2 million in
2015.
136
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Option intrinsic values, which are the differences between the fair value of $25.30 at December 31, 2013 and the
strike price of the option, are as follows:
Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercisable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
of Shares
412,500
262,500
14,292
Weighted
Average
Strike Price
$18.62
$18.93
$20.00
Intrinsic
Value
$2.9 million
$1.8 million
$0.1 million
NOTE: The intrinsic value of the exercised options is the difference between the fair market value at time of
exercise and the strike price of the option.
The options exercisable at December 31, 2013 include the following:
Option Price
Number of options
exercisable
$17.87 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18.50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$29.24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$34.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$37.70 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercisable at December 31, 2013 . . . . . . . . .
200,000
50,000
—
—
—
12,500
262,500
The weighted average fair value of options granted under the Plan was $9.52 in 2011 using a Black-Scholes
option-pricing model and the following weighted average assumptions. There were no options granted under the
Plan in 2013 or 2012.
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected option life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
0.0%
55.21%
1.4%
6.2 years
The following tables summarize the range of exercise prices of options outstanding at December 31, 2013, 2012,
and 2011:
Ranges of
Exercise Prices
Outstanding at
December 31, 2013
Weighted Average Per
Share Exercise Price
Weighted Average
Remaining Life
$17.87 – $19.99 . . . . . . . . . . . .
$30.00 – $34.00 . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . .
400,000
12,500
412,500
$18.03
$37.70
7.8 years
1.8 years
Ranges of
Exercise Prices
Outstanding at
December 31, 2012
Weighted Average Per
Share Exercise Price
Weighted Average
Remaining Life
$17.87 – $19.99 . . . . . . . . . . . .
$20.00 – $29.99 . . . . . . . . . . . .
$30.00 – $34.00 . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . .
400,000
19,293
45,450
464,743
137
$18.03
$22.39
$35.02
8.8 years
0.9 years
1.5 years
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Ranges of
Exercise Prices
Outstanding at
December 31, 2011
Weighted Average Per
Share Exercise Price
Weighted Average
Remaining Life
$16.98 – $19.99 . . . . . . . . . . . .
$20.00 – $29.99 . . . . . . . . . . . .
$30.00 – $37.70 . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . .
400,207
117,824
47,950
565,981
$18.03
$23.41
$35.11
9.8 years
6.5 years
2.0 years
Restricted Shares
In addition to stock option awards, the Plan also provides for the issuance of restricted shares to employees and
non-employee Directors. The Company recognized compensation expense for restricted stock of $2.1 million,
$1.8 million and $1.2 million for 2013, 2012, and 2011, respectively. The total unrecognized compensation
expense for the non-vested restricted stock was $2.9 million at December 31, 2013, which will be recognized
over a weighted average life of 1.8 years.
The following table summarizes the restricted stock awards since inception.
Year
Restricted Stock Awards
Employees
Directors
Total
Inception through 2010 (1) . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
534,325
65,481
29,675
81,587
248,623
55,351
50,885
50,421
782,948
120,832
80,560
132,008
711,068
405,280
1,116,348
(1)
Includes 122,603 shares that were purchased by key employees in 2003.
The following table summarizes the non-vested Restricted Shares activity for the years ended December 31,
2013, 2012, and 2011:
Non-vested Restricted Shares at January 1, 2011 . . . . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested Restricted Shares at December 31, 2011 . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested Restricted Shares at December 31, 2012 . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Shares
65,945
120,832
(93,156)
(67,605)
26,016
80,560
(68,649)
(3,423)
34,504
132,008
(67,937)
(454)
Non-vested Restricted Shares at December 31, 2013 . . . . .
98,121
Weighted
Average
Price
Per Share
$20.26
$21.12
$20.77
$20.25
$18.29
$19.67
$19.99
$20.87
$17.87
$22.78
$22.17
$22.13
$21.48
Based on the terms of the Restricted Shares awards, all forfeited shares revert back to the Company.
138
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During 2011, the Company granted an aggregate of 65,481 Restricted Shares to key employees of the Company
at a weighted average grant date fair value of $21.44 per share and an aggregate of 55,351 fully vested Director
Restricted Shares, which are subject to certain restrictions, at a weighted average grant date fair value of $20.74
per share to non-employee Directors of the Company under the Plan. In 2011, the Company granted 17,799
Restricted Shares to key employees and 14,171 fully vested Director Restricted Shares to non-employee
Directors of the Company out of shares previously forfeited. Included in the 65,481 are 54,233 Restricted Shares
granted by the Company to key executives of the Company. Included in the 54,233 are 38,585 shares that were
forfeited in 2011 and 15,648 shares that vest 100% on the first subsequent anniversary date of the award.
During 2012, the Company granted an aggregate of 29,675 Restricted Shares to key employees of the Company
at a weighted average grant date fair value of $18.60 per share which vest 33 1/3% on each subsequent
anniversary date of the award for a period of three years. During 2012, the Company granted an aggregate of
50,885 fully vested Director Restricted Shares, which are subject to certain restrictions, at a weighted average
grant date fair value of $20.29 per share to non-employee Directors of the Company under the Plan. The fully
vested Director Restricted Shares were granted from shares previously forfeited.
During 2013, the Company granted an aggregate of 81,587 Restricted Shares to key employees of the Company
at a weighted average grant date fair value of $22.13 per share which vest as follows:
•
•
50% of granted stock vests 33 1/3% on each subsequent anniversary date of the award for a period of
three years.
50% of granted stock vests 100% on the anniversary of the third year subject to accident year true-up
of bonus year underwriting results and are subject to Board approval.
During 2013, the Company awarded an aggregate of 50,421 fully vested Director Restricted Shares, which are
subject to certain restrictions, at a weighted average grant date fair value of $23.83 per share to non-employee
Directors of the Company under the Plan.
Included in the 50,421 are 18,838 A ordinary shares earned by the non-employee directors of the Company
during 2013 which have a weighted average grant date fair value of $25.38 per share. These shares have not yet
been granted but are considered issued and outstanding for purposes of this financial statement and are subject to
shareholder approval of the Company’s revised share incentive plan at the Company’s 2014 annual shareholder
meeting.
Chief Executive Officer
Effective September 19, 2011, Cynthia Y. Valko was hired as the Company’s Chief Executive Officer as
successor to Larry A. Frakes, who announced his retirement effective December 31, 2011 and, in accordance
with his employment agreement, forfeited 31,178 time-based options and 124,709 performance-based options.
During 2012, Mr. Frakes’ remaining 93,531 options expired.
Ms. Valko’s terms of employment included two equity components including the granting of 300,000 time-based
stock options with a strike price equal to the closing price of the Company’s shares on the trading day preceding
the start date, or $17.87 per share, and an annual bonus opportunity of which 50% shall be paid in restricted
shares based on the market value of the Company’s shares as of December 31 of the subject bonus year. The
time-based options vested 33 1/3% on December 31, 2012 and will vest 33 1/3% on December 31, 2013 and
2014 pending Board approval at the time of vesting. The restricted shares vest 33 1/3% on each anniversary of
the subject bonus year. All equity components based on performance are subject to accident year true-up of
bonus year underwriting results and are subject to Board approval.
139
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
18. 401(k) Plan
The Company maintains a 401(k) defined contribution plan that covers all eligible U.S. employees. Under this
plan, the Company matches 100% of the first 6% contributed by an employee. Vesting on contributions made by
the Company is immediate. Total expenses for the plan were $1.2 million, $1.1 million, and $1.1 million for the
years ended December 31, 2013, 2012, and 2011, respectively.
19. Earnings (Loss) Per Share
Earnings (loss) per share have been computed using the weighted average number of ordinary shares and
ordinary share equivalents outstanding during the period.
The following table sets forth the computation of basic and diluted earnings (loss) per share. In 2011, “Diluted”
shares were the same as “Basic” shares since there was a net loss for that year.
(Dollars in thousands, except share and per share data)
Years Ended December 31,
2013
2012
2011
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
61,690
$
34,757
$
(38,338)
Basic earnings (loss) per share:
Weighted average shares outstanding—basic . . . . . . . . . . . . . . . . . . .
25,072,712
26,722,772
30,246,095
Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2.46
$
1.30
$
(1.27)
Diluted earnings (loss) per share:
Weighted average shares outstanding—diluted . . . . . . . . . . . . . . . . .
25,174,015
26,748,833
30,246,095
Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2.45
$
1.30
$
(1.27)
A reconciliation of weighted average shares for basic earnings per share to weighted average shares for diluted
earnings per share is as follows:
Years Ended December 31,
2013
2012
2011
Weighted average shares for basic earnings per share . . . . . . . . . . . . . . .
Non-vested restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,072,712
53,876
47,427
26,722,772
17,474
8,587
30,246,095
—
—
Weighted average shares for diluted earnings per share . . . . . . . . . . . . . .
25,174,015
26,748,833
30,246,095
If the Company had not incurred a loss in 2011, then 30,278,920 weighted average shares would have been used
to compute the diluted loss per share calculation. In addition to the basic shares, weighted average shares for the
diluted calculation would have included 24,150 shares of non-vested restricted stock and 8,675 share equivalents
for options and warrants.
The weighted average shares outstanding used to determine dilutive earnings per share for the years ended
December 31, 2013, 2012 and 2011 do not include 12,500, 452,450 and 551,732 shares, respectively, which were
deemed to be anti-dilutive.
140
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
20. Statutory Financial Information
GAAP differs in certain respects from Statutory Accounting Principles (“SAP”) as prescribed or permitted by the
various U.S. state insurance departments. The principal differences between SAP and GAAP are as follows:
• Under SAP, investments in debt securities are primarily carried at amortized cost, while under GAAP
the Company records its debt securities at estimated fair value.
• Under SAP, policy acquisition costs, such as commissions, premium taxes, fees and other costs of
underwriting policies are charged to current operations as incurred, while under GAAP such costs are
deferred and amortized on a pro rata basis over the period covered by the policy.
• Under SAP, certain assets designated as “Non-admitted assets” (such as prepaid expenses) are charged
against surplus.
• Under SAP, net deferred income tax assets are admitted following the application of specified criteria,
with the resulting admitted deferred tax amount being credited directly to surplus.
• Under SAP, certain premium receivables are non-admitted and are charged against surplus based upon
aging criteria.
• Under SAP, the costs and related receivables for guaranty funds and other assessments are recorded
based on management’s estimate of the ultimate liability and related receivable settlement, while under
GAAP such costs are accrued when the liability is probable and reasonably estimable and the related
receivable amount is based on future premium collections or policy surcharges from in-force policies.
• Under SAP, unpaid losses and loss adjustment expenses and unearned premiums are reported net of the
effects of reinsurance transactions, whereas under GAAP, unpaid losses and loss adjustment expenses
and unearned premiums are reported gross of reinsurance.
• Under SAP, a provision for reinsurance is charged to surplus based on the authorized status of
reinsurers, available collateral, and certain aging criteria, whereas under GAAP, an allowance for
uncollectible reinsurance is established based on management’s best estimate of the collectability of
reinsurance receivables.
The National Association of Insurance Commissioners (“NAIC”) issues model laws and regulations, many of
which have been adopted by state insurance regulators, relating to: (a) risk-based capital (“RBC”) standards;
(b) codification of insurance accounting principles; (c) investment restrictions; and (d) restrictions on the ability
of insurance companies to pay dividends.
The Company’s U.S. insurance subsidiaries are required by law to maintain certain minimum surplus on a
statutory basis, and are subject to regulations under which payment of a dividend from statutory surplus is
restricted and may require prior approval of regulatory authorities. In December, 2013, each of the U.S. insurance
subsidiaries declared an extraordinary dividend that aggregated to $200 million. In January, 2014, each of the
dividends for the U.S. insurance companies was approved by their respective departments of insurance in
Pennsylvania, Indiana, Wisconsin, and Virginia. On January 23, 2014, the U.S. insurance companies paid an
aggregate of $200 million to Global Indemnity Group, Inc. Applying the current regulatory restrictions as of
December 31, 2013, the maximum amount of distributions that could be paid after January 23, 2015 by the
United National insurance companies and the Penn-America insurance companies as dividends under applicable
laws and regulations without regulatory approval is approximately $19.6 million and $8.0 million, respectively.
The Penn-America insurance companies limitation includes $2.6 million that would be distributed to United
National Insurance Company or its subsidiary Penn Independent Corporation based on the December 31, 2013
ownership percentages.
141
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The NAIC’s RBC model provides a tool for insurance regulators to determine the levels of statutory capital and
surplus an insurer must maintain in relation to its insurance and investment risks, as well as its reinsurance
exposures, to assess the potential need for regulatory attention. The model provides four levels of regulatory
attention, varying with the ratio of an insurance company’s total adjusted capital to its authorized control level
RBC (“ACLRBC”). If a company’s total adjusted capital is:
(a)
(b)
(c)
less than or equal to 200%, but greater than 150% of its ACLRBC (the “Company Action Level”), the
company must submit a comprehensive plan to the regulatory authority proposing corrective actions
aimed at improving its capital position;
less than or equal to 150%, but greater than 100% of its ACLRBC (the “Regulatory Action Level”), the
regulatory authority will perform a special examination of the company and issue an order specifying
the corrective actions that must be followed;
less than or equal to 100%, but greater than 70% of its ACLRBC (the “Authorized Control Level”), the
regulatory authority may take any action it deems necessary, including placing the company under
regulatory control; and
(d)
less than or equal to 70% of its ACLRBC (the “Mandatory Control Level”), the regulatory authority
must place the company under its control.
Based on the standards currently adopted, the Company reported in its 2013 statutory filings that the capital and
surplus of the U.S. insurance companies are above the prescribed Company Action Level RBC requirements.
The following is selected information for the Company’s U.S. insurance companies, net of intercompany
eliminations, where applicable, as determined in accordance with SAP:
(Dollars in thousands)
Years Ended December 31,
2013
2012
2011
Statutory capital and surplus, as of end of period (1)
. . . .
Statutory net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . .
$251,464
31,781
$413,303
10,813
$434,767
30,792
(1)
Includes extraordinary dividend declared in 2013 for an aggregate of $200 million.
Wind River Reinsurance must also prepare annual statutory financial statements. The Bermuda Insurance Act
1978 (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. 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 Reinsurance’s shareholders
and under the Bermuda Companies Act 1981 (the “Companies Act”), which financial statements will be prepared
in accordance with GAAP.
The principal differences between statutory financial statements prepared under the Insurance Act and GAAP are
as follows:
• Under the Insurance Act, policy acquisition costs, such as commissions, premium taxes, fees and other
costs of underwriting policies are charged to current operations as incurred, while under GAAP such
costs are deferred and amortized on a pro rata basis over the period covered by the policy.
• Under the Insurance Act, prepaid expenses and intangible assets are charged to current operations as
incurred, while under GAAP such costs are deferred and amortized on a pro rata basis.
142
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
• Under the Insurance Act, unpaid losses and loss adjustment expenses and unearned premiums are
reported net of the effects of reinsurance transactions, whereas under GAAP, unpaid losses and loss
adjustment expenses and unearned premiums are reported gross of reinsurance.
Under the Companies Act, Wind River Reinsurance may only declare or pay a dividend if it has no reasonable
grounds for believing that it is, or would after the payment be, unable to pay its liabilities as they become due, or
if the realizable value of its assets would not be less than the aggregate of its liabilities and its issued share capital
and share premium accounts. Wind River Reinsurance is also prohibited, without the approval of the BMA, from
reducing by 15% or more its total statutory capital as set out in its previous year’s statutory financial statements,
and any application for such approval must include such information as the BMA may require. Based upon the
total statutory capital plus the statutory surplus as set out in its 2013 statutory financial statements that will be
filed in 2014, Wind River Reinsurance could pay a dividend of up to $236.0 million without requesting BMA
approval. Wind River Reinsurance is dependent on receiving distributions from its subsidiaries in order to pay
the full dividend.
21. Segment Information
The Company manages its business through two business segments: Insurance Operations, which includes the
operations of United National Insurance Company, Diamond State Insurance Company, United National
Specialty Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, Penn-Patriot
Insurance Company, American Insurance Adjustment Agency, Inc., Collectibles Insurance Services, LLC,
Global Indemnity Insurance Agency, LLC, and J.H. Ferguson & Associates, LLC, and Reinsurance Operations,
which includes the operations of Wind River Reinsurance Company, Ltd.
On December 31, 2013, Diamond State Insurance Company sold all the outstanding shares of capital stock of one
of its wholly owned subsidiaries, United National Casualty Insurance Company, to an unrelated party. The
financial results of the Insurance Operations for 2013, 2012, and 2011 include the financial results for United
National Casualty Insurance Company. Management deemed this transaction to be an asset sale with the assets
primarily comprised of investments and insurance licenses. This transaction will not have a significant impact on
the ongoing business operations.
The Insurance Operations segment and the Reinsurance Operations segment follow the same accounting policies
used for the Company’s consolidated financial statements. For further disclosure regarding the Company’s
accounting policies, please see Note 5.
143
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following are tabulations of business segment information for the years ended December 31, 2013, 2012, and
2011. Corporate information is included to reconcile segment data to the consolidated financial statements.
2013:
(Dollars in thousands)
Insurance
Operations (1)
Reinsurance
Operations (2)
Total
Revenues:
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 232,373
$ 58,350
$ 290,723
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 213,705
$ 58,279
$ 271,984
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 196,302
5,795
$ 52,420
(4)
$ 248,722
5,791
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
202,097
52,416
254,513
Losses and Expenses:
Net losses and loss adjustment expenses . . . . . . . . . . . . .
Acquisition costs and other underwriting expenses . . . .
116,837
87,360(3)
16,154
18,291
Income (loss) from segments . . . . . . . . . . . . . . . . . .
(2,100)
$ 17,971
Unallocated items:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . .
Corporate and other operating expenses . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
132,991
105,651
15,871
37,209
27,412
(11,614)
(6,169)
62,709
1,019
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
61,690
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,264,306
$647,473(4) $1,911,779
(1)
Includes business ceded to the Company’s Reinsurance Operations.
(2) External business only, excluding business assumed from affiliates.
(3)
(4) Comprised of Wind River Reinsurance’s total assets less its investment in subsidiaries.
Includes excise tax of $1,026 related to cessions from Insurance Operations to Reinsurance Operations.
144
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2012:
(Dollars in thousands)
Insurance
Operations (1)
Reinsurance
Operations (2)
Total
Revenues:
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 201,790
$ 42,263
$ 244,053
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 177,832
$ 41,715
$ 219,547
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 179,153
568
$ 59,709
(726)
$ 238,862
(158)
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
179,721
58,983
238,704
Losses and Expenses:
Net losses and loss adjustment expenses . . . . . . . . . . . . .
Acquisition costs and other underwriting expenses . . . .
118,515
79,910(3)
35,113
15,493
Income (loss) from segments . . . . . . . . . . . . . . . . . .
(18,704)
$
8,377
Unallocated items:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . .
Corporate and other operating expenses . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
153,628
95,403
(10,327)
47,557
6,755
(9,691)
(5,393)
28,901
(5,856)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
34,757
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,259,083
$644,620(4) $1,903,703
(1)
Includes business ceded to the Company’s Reinsurance Operations.
(2) External business only, excluding business assumed from affiliates.
(3)
(4) Comprised of Wind River Reinsurance’s total assets less its investment in subsidiaries.
Includes excise tax of $936 related to cessions from Insurance Operations to Reinsurance Operations.
145
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2011:
(Dollars in thousands)
Insurance
Operations (1)
Reinsurance
Operations (2)
Total
Revenues:
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 229,148
$ 78,755
$ 307,903
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 202,317
$ 78,253
$ 280,570
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 216,549
12,138
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
228,687
$ 81,305
443
81,748
$ 297,854
12,581
310,435
Losses and Expenses:
Net losses and loss adjustment expenses . . . . . . . . . . . . .
Acquisition costs and other underwriting expenses . . . .
188,358
94,675(3)
90,326
26,816
Loss from segments . . . . . . . . . . . . . . . . . . . . . . . . .
$ (54,346)
$ (35,394)
Unallocated items:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . .
Corporate and other operating expenses . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before equity in net income of partnerships . .
Equity in net income of partnerships, net of tax . . . . . . .
278,684
121,491
(89,740)
53,112
21,473
(13,973)
(6,476)
(35,604)
2,787
(38,391)
53
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (38,338)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,437,616
$635,300(4) $2,072,916
(1)
Includes business ceded to the Company’s Reinsurance Operations.
(2) External business only, excluding business assumed from affiliates.
(3)
(4) Comprised of Wind River Reinsurance’s total assets less its investment in subsidiaries.
Includes excise tax of $1,125 related to cessions from Insurance Operations to Reinsurance Operations.
22. Supplemental Cash Flow Information
Taxes and Interest Paid
The Company paid the following net federal income taxes and cash interest for 2013, 2012, and 2011:
(Dollars in thousands)
Years Ended December 31,
2013
2012
2011
Federal income taxes recovered . . . . . . . . . . . . . . . . . . . . . . . .
Federal income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,613
162
7,678
$
38
265
5,895
$ —
5,025
6,900
23. New Accounting Pronouncements
In February, 2013, the FASB issued new accounting guidance surrounding other comprehensive income. The
new guidance requires additional disclosure surrounding amounts reclassified out of accumulated other
comprehensive by component. This guidance is effective for reporting periods beginning after December 15,
2012. The Company adopted this guidance effective January 1, 2013.
146
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
24. Summary of Quarterly Financial Information (Unaudited)
An unaudited summary of the Company’s 2013 and 2012 quarterly performance is as follows:
(Dollars in thousands, except per share data)
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains (losses) . . . . . . . . . . . . . .
Net losses and loss adjustment expenses . . . . . . . . . . . .
Acquisition costs and other underwriting expenses . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . .
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per share data—Diluted:
Year Ended December 31, 2013
First
Quarter
$55,996
10,034
5,757
31,788
24,477
12,058
12,365
Second
Quarter
$58,671
9,765
2,806
34,924
24,472
8,440
8,664
Third
Quarter
$64,469
8,486
1,641
35,483
28,028
5,056
6,948
Fourth
Quarter
$69,586
8,924
17,208
30,796
28,674
37,155
33,713
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.49
$
0.34
$
0.28
$
1.34
(Dollars in thousands, except per share data)
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains (losses) . . . . . . . . . . . . . .
Net losses and loss adjustment expenses . . . . . . . . . . . .
Acquisition costs and other underwriting expenses . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . .
Net income (loss) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per share data—Diluted:
Year Ended December 31, 2012
First
Quarter
$64,470
11,417
1,761
42,009
23,167
8,154
10,862
Second
Quarter
$57,859
11,071
1,941
36,158
23,760
7,107
9,604
Third
Quarter
$55,329
14,777
3,211
35,407
23,223
11,484
9,913
Fourth
Quarter
$61,204
10,292
(158)
40,054
25,253
2,156
4,378
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.38
$
0.35
$
0.39
$
0.17
(1) Results for the fourth quarter of 2012 include the impact of an out-of-period adjustment which reduced net
income by $1.6 million.
147
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Item 9.
None
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure
that information required to be disclosed in the Company’s reports under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures. Any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s
management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of disclosure controls and procedures as of December 31, 2013. Based
upon that evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2013, the design and operation of the Company’s disclosure controls and
procedures were effective to accomplish their objectives at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable
assurances regarding the reliability of financial reporting and the preparation of the consolidated financial
statements of the Company in accordance with U.S. generally accepted accounting principles.
The Company’s internal control over financial reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with U.S. generally accepted accounting principles, and that receipts
and expenditures are being made only in accordance with authorizations of
the Company’s
management and Directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of assets that could have a material effect on the financial statements.
Because of its inherent
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree or compliance with the
policies or procedures may deteriorate.
limitations,
Management has assessed the Company’s internal control over financial reporting as of December 31, 2013. The
standard measures adopted by management in making its evaluation are the measures in the Internal Control
Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission in
1992.
Based upon its assessment, management has concluded that the Company’s internal control over financial
reporting was effective at December 31, 2013, and that there were no material weaknesses in the Company’s
internal control over financial reporting as of that date.
148
PricewaterhouseCoopers LLP, an independent registered public accounting firm, which has audited and reported
on the consolidated financial statements contained in this Form 10-K, has issued its report on the effectiveness of
the Company’s internal control over financial reporting. See “Report of Independent Registered Public
Accounting Firm” on page 83.
Changes in Internal Control over Financial Reporting
The Company has added, deleted, or modified certain of its internal controls over financial reporting during
2013. However, there have been no changes in the Company’s internal controls over financial reporting that
occurred during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal controls over financial reporting.
Item 9B. OTHER INFORMATION
None.
149
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference to, and will be contained in, the Company’s
definitive proxy statement relating to the 2014 Annual Meeting of Shareholders.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to, and will be contained in, the Company’s
definitive proxy statement relating to the 2014 Annual Meeting of Shareholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,
AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to, and will be contained in, the Company’s
definitive proxy statement relating to the 2014 Annual Meeting of Shareholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item is incorporated by reference to, and will be contained in, the Company’s
definitive proxy statement relating to the 2014 Annual Meeting of Shareholders.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to, and will be contained in, the Company’s
definitive proxy statement relating to the 2014 Annual Meeting of Shareholders.
150
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The agreements and other documents filed as exhibits to this report are not intended to provide factual
information or other disclosure other than with respect to the terms of the agreements or other documents
themselves, and you should not rely on them for that purpose. In particular, any representations and warranties
made by the Company in these agreements or other documents were made solely within the specific context of
the relevant agreement or document and may not describe the actual state of affairs as of the date they were made
or at any other time.
The following documents are filed as part of this report:
(1) The Financial Statements listed in the accompanying index on page 82 are filed as part of this report.
(2) The Financial Statement Schedules listed in the accompanying index on page 82 are filed as part of this
report.
Exhibit No.
Description
3.1
3.2
10.1*
10.2*
10.3*
10.4*
10.5*
Memorandum and Articles of Association of Global Indemnity plc (incorporated by reference to
Exhibit 3.1 of the Company’s Quarterly Report on Form 10Q for the quarter ended June 30, 2013
(File No. 001-34809)).
Incorporation of Global
Certificate of
Indemnity plc, an Irish public limited company
(incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K12B dated
July 2, 2010 (File No. 001-34809)).
Management Agreement, dated as of September 5, 2003, by and among United National Group,
Ltd., Fox Paine & Company, LLC and The AMC Group, L.P. with related Indemnity Letter
(incorporated herein by reference to Exhibit 10.3 of Amendment No. 1 to the Company’s
Registration Statement on Form S-1 (Registration No. 333-108857) filed on October 28, 2003)
(File No. 000-50511)).
Amendment No. 1 to the Management Agreement, dated as of May 25, 2006, by and among
United America Indemnity, Ltd., Fox Paine & Company, LLC and Wind River Holdings, L.P.,
formerly The AMC Group, L.P. (incorporated herein by reference to Exhibit 10.3 of the
Company’s Current Report on Form 8-K filed on June 1, 2006) (File No. 000-50511)).
Letter Agreement, dated March 16, 2011, assigning the 2003 Management Agreement (as
amended) and related indemnity agreement, by and among United America Indemnity, Ltd.,
Global Indemnity (Cayman) Ltd. and Fox Paine & Company, LLC (incorporated herein by
reference to Exhibit 10.26 of the Company’s annual report on Form 10-K for the fiscal year ended
December 31, 2010 (File No. 000-34809)).
Guaranties, dated March 15, 2011, provided by each of United America Indemnity, Ltd., Wind
River Reinsurance Company, Ltd., and Global Indemnity Group, Inc., in each case in favor of Fox
Paine & Company, LLC, relating to the obligations of Global Indemnity (Cayman) Ltd. under the
Letter Agreement, dated March 15, 2011 (incorporated herein by reference to Exhibit 10.27 of the
Company’s annual report on Form 10-K for the fiscal year ended December 31, 2010 (File No.
000-34809)).
Amendment No. 3 to the Management Agreement, dated as of April 10, 2011, by and among
Global Indemnity (Cayman) Ltd. and Fox Paine & Company, LLC (incorporated herein by
reference to Exhibit 10.5 of the Company’s annual report on Form 10-K for the fiscal year ended
December 31, 2012 (File No. 001-34809)).
151
Exhibit No.
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
Description
Amended and Restated Management Agreement, dated as of October 31, 2013, by and among
Global Indemnity (Cayman) Ltd. and Fox Paine & Company, LLC (incorporated herein by
reference to Exhibit 10.1 of the Company’s quarterly report on Form 10-Q for the quarter ended
September 30, 2013 (File No. 001-34809)).
Reaffirmation Agreements, dated as of October 31, 2013, provided by each of United America
Indemnity, Ltd., Wind River Reinsurance Company, Ltd., and Global Indemnity Group, Inc.
reaffirming the March 15, 2011 Guaranty Agreements (incorporated herein by reference to Exhibit
10.2 of the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2013
(File No. 001-34809)).
Global Indemnity plc Share Incentive Plan, amended and restated effective July 2, 2010
(incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form
8-K12B dated July 2, 2010 (File No. 001-34809)).
Amendment to Global Indemnity plc Share Incentive Plan dated July 2, 2010 (incorporated herein
by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K12B dated July 2, 2010
(File No. 001-34809)).
Deed Poll of Assumption for United America Indemnity, Ltd. Share Incentive Plan by Global
Indemnity plc, dated July 2, 2010 (incorporated herein by reference to Exhibit 10.3 of the
Company’s Current Report on Form 8-K12B dated July 2, 2010 (File No. 001-34809)).
Global Indemnity plc Annual Incentive Award Program, amended and restated effective July 2,
2010 (incorporated herein by reference to Exhibit 10.4 of the Company’s Current Report on Form
8-K12B dated July 2, 2010 (File No. 001-34809)).
Deed Poll of Assumption for United America Indemnity, Ltd. Annual Incentive Award Program
by Global Indemnity plc, dated July 2, 2010 (incorporated herein by reference to Exhibit 10.5 of
the Company’s Current Report on Form 8-K12B dated July 2, 2010 (File No. 001-34809)).
Amended and Restated Shareholders Agreement, dated July 2, 2010, by and among Global
Indemnity plc (as successor to United America Indemnity, Ltd.) and the signatories thereto
(incorporated herein by reference to Exhibit 10.6 of the Company’s Current Report on Form
8-K12B dated July 2, 2010 (File No. 001-34809)).
Assignment and Assumption Agreement relating to the Amended and Restated Shareholders
Agreement, dated July 2, 2010 (incorporated herein by reference to Exhibit 10.7 of the Company’s
Current Report on Form 8-K12B dated July 2, 2010 (File No. 001-34809))
Amendment to the Amended and Restated Shareholders Agreement, dated as of October 31, 2013,
by and among Global Indemnity plc and the signatories thereto (incorporated herein by reference
to Exhibit 10.3 of the Company’s quarterly report on Form 10-Q for the fiscal quarter ended
September 30, 2013 (File No. 001-34809)).
Indemnification Agreement between United America Indemnity, Ltd. and Fox Paine Capital Fund
II International L.P., dated July 2, 2010 (incorporated herein by reference to Exhibit 10.8 of the
Company’s Current Report on Form 8-K12b dated July 2, 2010 (File No. 001-34809)).
Form of Indemnification Agreement between United America Indemnity, Ltd. and certain
directors and officers of Global Indemnity plc, dated July 2, 2010 (incorporated herein by
reference to Exhibit 10.9 of the Company’s Current Report on form 8-K12B dated July 2, 2010
(File No. 001-34809)).
Employment Agreement, as amended, for William J. Devlin, Jr., dated October 24, 2005
(incorporated herein by reference to exhibit 10.14 of the Company’s amended Annual Report on
the fiscal year ended December 31, 2011 dated September 5, 2012
Form 10-K/A for
(File No. 001-34809)).
152
Exhibit No.
10.19*
10.20*
10.21*
10.22*
10.23
21.1+
23.1+
31.1+
31.2+
32.1+
32.2+
101.1+
Description
Executive Employment Agreement, dated as of June 8, 2009, between Penn-America Insurance
Company and Matthew B. Scott (incorporated herein by reference to Exhibit 10.25 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (File No.
000-50511)).
Executive Employment Agreement, dated as of December 8, 2009, between United America
Indemnity, Ltd. and Thomas M. McGeehan (incorporated herein by reference to Exhibit 10.27 to
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (File
No. 000-50511)).
Description of Employment Arrangement with Cynthia Y. Valko, dated September 12, 2011
(incorporated herein by reference to exhibit 10.28 of the Company’s amended Annual Report on
Form 10-K/A for the fiscal year ended December 31, 2011dated September 5, 2012 (File No.
001-34809)).
Description of Employment Arrangement with Joseph R. Lebens, dated December 6, 2011
(incorporated herein by reference to exhibit 10.29 of the Company’s amended Annual Report on
Form 10-K/A for the fiscal year ended December 31, 2011dated September 5, 2012 (File No.
001-34809)).
Amended and Restated Institutional Account Agreement dates as of June 7, 2013 (incorporated
herein by reference to exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2013 (File No. 001-34809)).
List of Subsidiaries.
Consent of PricewaterhouseCoopers LLP.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
The following financial information from Global Indemnity’s Annual Report on Form 10-K for
the year ended December 31, 2013 formatted in XBRL: (i) Consolidated Balance Sheets for the
years ended December 31, 2013 and 2012; (ii) Consolidated Statements of Operations for the
years ended December 31, 2013, 2012 and 2011; (iii) Consolidated Statements of Comprehensive
Income for the years ended December 31, 2013, 2012 and 2011; (iv) Consolidated Statements of
Changes in Shareholders’ Equity for the years ended December 31, 2013, 2012 and 2011; (v)
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011;
(vi) Notes to Consolidated Financial Statements; and (vii) Financial Statement Schedules.
+ Filed or furnished herewith.
* Management contract or compensatory plan or arrangement required to be filed as an exhibit
to this
Form 10-K.
153
Pursuant to the requirements of the Section 13 or 15 (d) of the Securities Exchange Act of 1934, Global
Indemnity has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
GLOBAL INDEMNITY PLC
By:
Name:
Title:
Date:
/s/ CYNTHIA Y. VALKO
Cynthia Y. Valko
Chief Executive Officer
March 14, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the registrant and in the capacities indicated below on March 14, 2014.
SIGNATURE
TITLE
/S/ SAUL A. FOX
Saul A. Fox
Chairman and Director
/S/ CYNTHIA Y. VALKO
Chief Executive Officer and Director
Cynthia Y. Valko
/S/ THOMAS M. MCGEEHAN
Principal Financial and Accounting Officer
Thomas M. McGeehan
/S/
JAMES W. CRYSTAL
James W. Crystal
/S/ SETH J. GERSCH
Seth J. Gersch
Director
Director
/S/ STEPHEN A. COZEN
Director
Stephen A. Cozen
/S/ CHAD A. LEAT
Chad A. Leat
/S/
JOHN H. HOWES
John H. Howes
Director
Director
154
GLOBAL INDEMNITY PLC
SCHEDULE I—SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS
IN RELATED PARTIES
(In thousands)
As of December 31, 2013
Cost *
Value
Amount
Included in
the Balance
Sheet
Type of Investment:
Fixed maturities:
United States Government and government agencies and
authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States, municipalities, and political subdivisions . . . . . . . . . . . . . . .
Mortgage-backed and asset-backed securities . . . . . . . . . . . . . . . . .
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
78,510
178,705
450,826
30,242
449,402
$
81,674
180,936
452,321
30,867
458,566
$
81,674
180,936
452,321
30,867
458,566
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,187,685
1,204,364
1,204,364
Equity securities:
Common stocks:
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial and miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,051
184,374
191,425
8,460
245,610
254,070
8,460
245,610
254,070
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,379,110
$1,458,434
$1,458,434
* Original cost of equity securities; original cost of fixed maturities adjusted for amortization of premiums and
accretion of discounts. All amounts are shown net of impairment losses.
S-1
GLOBAL INDEMNITY PLC
SCHEDULE II—Condensed Financial Information of Registrant
(Parent Only)
Balance Sheets
(Dollars in thousands, except share data)
As of
December 31, 2013
As of
December 31, 2012
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in unconsolidated subsidiaries (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,746
982,396
683
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 984,825
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Intercompany notes payable (1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to affiliates(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 108,000
139
3,351
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
111,490
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity:
Ordinary shares, $0.0001 par value, 900,000,000 ordinary shares
authorized; A ordinary shares issued: 16,200,406 and 16,087,939,
respectively; A ordinary shares outstanding: 13,141,035 and
13,030,938, respectively; B ordinary shares issued and outstanding:
12,061,370 and 12,061,370, respectively . . . . . . . . . . . . . . . . . . . . . .
Deferred shares, €1 par value, 40,000 ordinary shares authorized,
issued and outstanding (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred shares, $0.0001 par value, 100,000,000 shares authorized,
none issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income, net of tax . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A ordinary shares in treasury, at cost: 3,059,371 and 3,057,001 shares,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
3
55
—
516,653
54,028
403,861
(101,265)
873,335
$
1,744
933,989
1,004
$ 936,737
$ 108,000
19,554
2,510
130,064
—
3
55
—
512,304
53,350
342,171
(101,210)
806,673
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . .
$ 984,825
$ 936,737
(1) This item has been eliminated in the Company’s Consolidated Financial Statements.
See Notes to Consolidated Financial Statements included in Item 8.
S-2
GLOBAL INDEMNITY PLC
SCHEDULE II—Condensed Financial Information of Registrant—(continued)
(Parent Only)
Statement of Operations and Comprehensive Income
(Dollars in thousands)
Revenues:
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses:
Intercompany interest expense (1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before equity in earnings (loss) of unconsolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . .
Equity in earnings (loss) of unconsolidated subsidiaries (1)
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax:
Equity in other comprehensive income (loss) of unconsolidated
subsidiaries (1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax . . . . . . . . . . . .
Year Ended
December 31,
2013
Year Ended
December 31,
2012
Year Ended
December 31,
2011
$ —
$ —
$ —
1,296
3,848
(5,144)
66,834
61,690
918
4,169
(5,087)
39,844
34,757
29
9,909
(9,938)
(28,400)
(38,338)
678
678
13,176
13,176
(17,037)
(17,037)
Comprehensive income (loss), net of tax . . . . . . . . . . . . . . . .
$62,368
$47,933
$(55,375)
(1) This item has been eliminated in the Company’s Consolidated Financial Statements.
See Notes to Consolidated Financial Statements included in Item 8.
S-3
GLOBAL INDEMNITY PLC
SCHEDULE II—Condensed Financial Information of Registrant—(continued)
(Parent Only)
Statement of Cash Flows
(Dollars in thousands)
Year Ended
December 31,
2013
Year Ended
December 31,
2012
Year Ended
December 31,
2011
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . .
$
57
$ 6,011
$
305
Cash flows from financing activities:
Excess tax expense from share-based compensation plan . . . . . . .
Purchases of A ordinary shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of intercompany note payable (1) . . . . . . . . . . . . . . . . . . .
Net cash provided by (used for) financing activities . . . . . . .
—
(55)
—
(55)
Net change in cash and equivalents . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . .
2
1,744
—
(82,959)
68,900
(14,059)
(8,048)
9,792
(132)
(29,532)
39,100
9,436
9,741
51
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . .
$1,746
$ 1,744
$ 9,792
(1) This item has been eliminated in the Company’s Consolidated Financial Statements.
Supplemental Non-Cash Disclosure:
During the year ended December 31, 2013, the Company received a non-cash dividend of $19.1 million from one
of its subsidiaries which was used to repay intercompany balances due.
See Notes to Consolidated Financial Statements included in Item 8.
S-4
GLOBAL INDEMNITY PLC
SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in thousands)
Segment
At December 31, 2013:
Insurance Operations . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . .
At December 31, 2012:
Insurance Operations . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . .
At December 31, 2011:
Insurance Operations . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . .
Segment
Deferred Policy
Acquisition Costs
Future
Policy Benefits,
Losses, Claims And
Loss Expenses
Unearned
Premiums
Other Policy and
Benefits Payable
$19,036
3,141
$16,235
2,030
$16,305
5,259
$678,381
101,085
$764,737
114,377
$854,381
116,996
$100,791
15,838
$ 84,130
9,984
$ 86,062
27,979
$—
—
$—
—
$—
—
Benefits, Claims,
Losses And
Settlement
Expenses
Premium
Revenue
Amortization of
Deferred Policy
Acquisition Costs
Net
Written
Premium
For the year ended December 31, 2013:
Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . . . . . . . .
$196,302
52,420
$116,837
16,154
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$248,722
$132,991
For the year ended December 31, 2012:
Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . . . . . . . .
$179,153
59,709
$118,515
35,113
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$238,862
$153,628
For the year ended December 31, 2011:
Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . . . . . . . .
$216,549
81,305
$188,358
90,326
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$297,854
$278,684
Unallocated Corporate Items
For the year ended December 31, 2013 . . . . . . . . . . . . . . .
For the year ended December 31, 2012 . . . . . . . . . . . . . . .
For the year ended December 31, 2011 . . . . . . . . . . . . . . .
Net
Investment
Income
$37,209
$47,557
$53,112
$213,705
58,279
$271,984
$177,832
41,715
$219,547
$202,317
78,253
$280,570
$44,115
9,672
$53,787
$38,177
10,675
$48,852
$55,754
22,370
$78,124
Corporate
and Other
Operating
Expenses
$11,614
$ 9,691
$13,973
S-5
GLOBAL INDEMNITY PLC
SCHEDULE IV—REINSURANCE
EARNED PREMIUMS
(Dollars in thousands)
Direct
Amount
Ceded to Other
Companies
Assumed from
Other Companies Net Amount
Percentage
of Amount
Assumed to Net
For the year ended December 31, 2013:
Property & Liability Insurance . . . . . . . . . . . . $215,713
For the year ended December 31, 2012:
Property & Liability Insurance . . . . . . . . . . . . $203,587
For the year ended December 31, 2011:
Property & Liability Insurance . . . . . . . . . . . . $247,816
$19,485
$52,494
$248,722
21.1%
$25,118
$60,393
$238,862
25.3%
$31,882
$81,920
$297,854
27.5%
S-6
GLOBAL INDEMNITY PLC
SCHEDULE V—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in thousands)
Balance at
Beginning of
Period
Charged
(Credited) to Costs
and Expenses
Charged (Credited)
to Other Accounts
Other
Deductions
Balance at End
of Period
$—
—
$—
—
—
$—
—
$—
—
—
$—
—
$—
—
—
$—
—
$ —
—
$—
$ 1,782
—
—
$—
—
—
9,010
$ —
—
$—
$ 1,338
—
—
$—
—
—
9,010
$ —
—
$—
$ 1,476
—
—
—
10,022
Description
For the year ended December 31,
2013:
Investment asset valuation reserves:
Mortgage loans . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts:
Premiums, accounts and notes
$ —
—
$ —
—
receivable . . . . . . . . . . . . . . .
$ 1,338
$
444
Deferred tax asset valuation
allowance . . . . . . . . . . . . . . .
Reinsurance receivables . . . . . .
For the year ended December 31,
2012:
Investment asset valuation reserves:
Mortgage loans . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts:
Premiums, accounts and notes
—
9,010
—
—
$ —
—
$ —
—
receivable . . . . . . . . . . . . . . .
$ 1,476
$ (138)
Deferred tax asset valuation
allowance . . . . . . . . . . . . . . .
Reinsurance receivables . . . . . .
—
10,022
—
(1,012)
For the year ended December 31,
2011:
Investment asset valuation reserves:
Mortgage loans . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts:
Premiums, accounts and notes
$ —
—
$ —
—
receivable . . . . . . . . . . . . . . .
$ 1,237
$
239
Deferred tax asset valuation
allowance . . . . . . . . . . . . . . .
Reinsurance receivables . . . . . .
—
12,743
—
(2,721)
S-7
GLOBAL INDEMNITY PLC
SCHEDULE VI—SUPPLEMENTARY INFORMATION FOR PROPERTY CASUALTY
UNDERWRITERS
(Dollars in thousands)
Deferred
Policy
Acquisition
Costs
Reserves for
Unpaid Claims
and Claim
Adjustment
Expenses
Discount If
Any Deducted
Unearned
Premiums
Consolidated Property & Casualty Entities:
As of December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . .
$22,177
18,265
21,564
$779,466
879,114
971,377
$ 6,000
8,000
10,000
$116,629
94,114
114,041
Earned
Premiums
Net
Investment
Income
Claims and Claim Adjustment
Expense Incurred Related To
Current Year
Prior Year
Amortization Of
Deferred Policy
Acquisition Costs
Paid Claims
and Claim
Adjustment
Expenses
Premiums
Written
Consolidated Property &
Casualty Entities:
For the year ended
December 31, 2013 . . . $248,722 $37,209
$140,873
$(7,882)
$53,787
$184,564 $271,984
For the year ended
December 31, 2012 . . .
238,862
47,557
149,183
4,445
48,852
202,786
219,547
For the year ended
December 31, 2011 . . .
297,854
53,112
275,284
3,400
78,124
236,507
280,570
Note: All of the Company’s insurance subsidiaries are 100% owned and consolidated.
S-8
Just For PDF_Layout 1 4/20/14 10:50 AM Page 4
Independent Auditors
PricewaterhouseCoopers
2001 Market Street
Philadelphia, PA 19103
Registrar & Transfer Agent
Computershare
250 Royall Street
Canton, MA 02021
781-575-3120
800-962-4284
Stock Trading
Class A Ordinary Shares of
Global Indemnity plc on NASDAQ
under the ticker symbol “GBLI”
Annual General Meeting
The 2014 Annual Meeting is
scheduled for 1:00 p.m., Bermuda Time,
on Wednesday, June 11, 2014 at
Seon Place, 141 Front Street,
Hamilton, HM 19, Bermuda.
FNL 2013 GLB Indemnity Annual Report Cover_Layout 1 4/20/14 10:36 AM Page 1
Magenta rules indicate capacity - do not print. Capacity is an estimate - needs to be confirmed.
2013 AnnuAl RepoRt
GLOBAL INDEMNITY
ReGISteReD oFFICe
25/28 NORTH WALL QUAY
DUBLIN 1
IRELAND
WWW.GLOBALINDEMNITY.IE
INFO@GLOBALINDEMNITY.IE