Global Indemnity
ANNUAL REPORT 2014
Registered Office
25/28 North Wall Quay
Dublin 1
Ireland
www.GlobalIndemnity.ie
info@GlobalIndemnity.ie
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Global Indemnity
ANNUAL REPORT 2014
One Company. One Focus.
Global Indemnity plc (NASDAQ: GBLI) is a national
and international niche supplier of excess and surplus
lines, specialty property and casualty insurance, and
reinsurance. Global Indemnity offers underwriting,
claims, and actuarial support to its multi-distribution
field operations. The company’s products and services
are marketed through several direct and indirect wholly
owned subsidiary insurance and reinsurance companies.
More than 450 employees are responsible for
maintaining “A” (Excellent) A.M. Best ratings for each
of Global Indemnity’s seven operating units.
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
e 2015 Annual Meeting is
scheduled for 1:00 p.m., Bermuda Time,
on Wednesday, May 27, 2015, at
Seon Place, 141 Front Street,
Hamilton, HM 19, Bermuda.
ANNUAL REPORT 2014
Dear Fellow Shareholders:
For the past several years, Global Indemnity has been both
We made this acquisition for a number of compelling
diligent and disciplined in its pursuit of ProfitableGrowth.
reasons. Foremost is the fact that, while both companies
As our 2014 performance bears out, this is proving to be
distribute their products through general and retail agents,
a successful strategy.
Key measures continue to trend upward: Net income in
2014 was approximately $63 million, up slightly from
2013’s $62 million. By the end of the year, book value per
share grew by 3.5% to $35.86. A few small catastrophes in
the first half of the year notwithstanding, underwriting
the addition of American Reliable opens up cross-selling
opportunities for us. In fact, our domestic writings are
expected to be more than double in 2015. Moreover, by
absorbing formerly outsourced corporate functions, such
as finance and legal, we are confident we can achieve
expense reductions.
profitability again increased, as the company achieved a
At year-end, our investment portfolio stood at approximately
combined ratio of 92%, compared to 96% for the previous
$1.6 billion, about 80% of which was invested in short
year. e expense ratio has improved as the earned
duration fixed income investments with an average quality
premium increased through 2014 and our prior year
rating of AA-. Some 8% was in the publicly traded equities
losses continued to improve.
of Fortune 500-type companies and about 2% in alternative
On the premium side, revenues from small business
property and general liability lines increased approximately
10%, and small programs grew by 9%, while overall
revenue growth was somewhat muted. is was largely the
investments with the balance in cash. If we had closed our
acquisition of American Reliable Insurance Company
before 2014 ended, instead of on January 1, our investment
portfolio would have totaled $1.7 billion.
result of challenging price pressure on large property risks
With our “three-pronged” strategy (Commercial, Personal,
and reinsurance operations in the first half of 2014.
and International Reinsurance) in place and operational,
We have been searching for opportunities to profitably
grow, and on January 1, 2015, we acquired American
Reliable Insurance Company, which we believe to be
the right complement to the Global Indemnity family
of companies. It is a specialty provider—similar to
our specialty business—but on the personal lines and
agricultural side of the business.
Global Indemnity, and its new colleagues at American
Reliable, look forward to another year of sustained and
steady ProfitableGrowth.
Saul A. Fox
Chairman
Global Indemnity plc
Cynthia Y. Valko
Chief Executive Officer
Global Indemnity plc
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3
Building Enduring Value
by Pursuing
ProfitableGrowth
It’s been said that the hardest thing to do in sports is not
to achieve victory, but to repeat it. We couldn’t agree more.
at’s why the company’s strategy of ProfitableGrowth
measures achievement not just over the next quarter, but
over the next year—and well beyond. In 2014, the wisdom
of this principle was once again validated by a new and
dramatic addition to our product portfolio.
Capitalizing on Opportunity
Financial stability is an essential element of Global
Indemnity’s culture. Even as markets have fluctuated,
the company has insisted on remaining well-capitalized.
It enjoys a solid balance sheet, as well as an established
reputation in the insurance and reinsurance industries.
And it is rated “A” (Excellent) XI by A.M. Best. As a result,
when the company was presented with an opportunity to
acquire American Reliable Insurance Company (ARIC),
it was well prepared to act.
e result is an ideal match: not only do both companies
share the same high rating, but ARIC’s focus on specialty
personal lines and agricultural property and casualty
dovetails with Global Indemnity's strong presence in
related markets. e combined company will be
positioned as a new product line—one that will nearly
double the existing workforce and increase premium
production to an expected $550 million.
The Freedom of a Well-Defined Niche
Global Indemnity has prospered by focusing on a well-
defined segment of the insurance industry: specialty
property and casualty coverage for risks, programs, and
areas underserved or ignored by more conventional
insurers. Being one of the few companies to specialize
in this market has been anything but restrictive; on the
contrary, it has given Global Indemnity uncommon
freedom to create new solutions, develop new tools, and
find new paths to profit. rough planned growth and
purposeful innovation, Global Indemnity has evolved
into a forward-thinking, producer-focused, and
technologically advanced company whose belief in hard
work and commitment to produce results is borne out
by its 2014 successes.
Advancing with Confidence
e well-established strengths with which Global
Indemnity entered 2014 have, if anything, grown even
more robust. A seasoned management team has gained
more experience. Solid producer relationships have
been further reinforced. An extensive multi-channel
distribution network has continued to provide an
important competitive edge. e company’s technological
expertise has generated new efficiencies and increased
productivity. And, with the bold addition of a major new
venture, its prospects for the future have been significantly
enhanced. Whatever the future brings, Global Indemnity
is poised to make the most of it.
ANNUAL REPORT 2014
2014
FINANCIAL
HIGHLIGHTS
(Dollars in thousands, except per share and ratio data)
Stock Price as of December 31, 2014
Exchange/Symbol: GBLI
Closing Price: $28.37
52-Week Range: $23.16 - $29.50
Market Capitalization: $718.6M
Price/Book Ratio: 0.79
Gross Written Premium
$307,903 $244,053 $290,723 $291,253
2011 2012 2013 2014
Income Statement
Net Earned Premiums
297,854 238,862 248,722 268,519
Net Investment Income
53,112 47,557 37,209 28,821
Net Realized Gains
21,473 6,755 27,412 35,860
Other Income/(Loss)
12,581 (158) 5,791 555
Total Revenues
Total Expenses
385,020 293,016 319,134 333,755
423,358 258,259 257,444 270,899
Net Income/(Loss)
(38,338) 34,757 61,690 62,856
Earnings/(Loss) Per Share (Diluted) $(1.27) $1.30 $2.45 $2.48
Net Operating Income/(Loss)
(53,149) 29,309 40,453 43,194
Operating Income/(Loss) Per Share (Diluted) $(1.76) $1.10 $1.61 $1.71
Balance Sheet
Total Assets
2,072,916 1,903,703 1,911,779 1,930,033
Shareholders’ Equity
839,063 806,618 873,280 908,290
Book Value Per Share
$29.06 $32.15 $34.65 $35.86
GAAP Ratios
Combined Ratio
134.3 104.2 96.0 92.0
Market Capitalization (As of year-end) 572,533 555,293 637,621 718,559
134.3
104.2
96.0
92.0
150.0
120.0
90.0
60.0
30.0
0.0
$40
$30
$20
$10
$0
$29.06
$32.15
$34.65
$35.86
2011
2012
2013
2014
2011
2012
2013
2014
Combined Ratio
Book Value Per Share
One Company. One Focus.
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Global Indemnity is a worldwide company with
operating units in the United States and Bermuda.
Our strategy is a “three-pronged approach” that
includes Commercial Lines, Personal Lines, and
International Reinsurance.
We have seven companies that provide both admitted
and non-admitted specialty property and casualty
insurance in the United States, in addition to reinsurance
services internationally. Distributed through a broad
network, Global Indemnity’s product lines are both diverse
and expanding, which—along with our strong capital
reserve—facilitate our continued and successful quest
for ProfitableGrowth.
All of our operating units hold admitted business and
surplus lines qualifications in each of the 50 states
and the District of Columbia. Global Indemnity
proudly continues to maintain “A” (Excellent) A.M.
Best ratings, which help to reinforce relationships with
existing customers and attract prospective partners
and potential clients.
COMMERCIAL
LINES
PERSONAL
LINES
INTERNATIONAL
REINSURANCE
OPERATIONS
ANNUAL REPORT 2014
™
Penn-America Group®
Distributed through a specially selected nexus of wholesale general agents
with specific binding authority, Penn-America offers property and casualty
products specifically for small commercial businesses.
penn-america.com
Diamond State Group®
Distributes commercial property and auto, general liability, and professional
lines products through a specially selected network of skilled wholesale brokers
in all 50 states and D.C.
diamondstategroup.com
United National Group®
Focusing primarily on specific classes with a concentration on the program
market, program administrators distribute property and general liability
products nationally.
unitednat.com
J.H. Ferguson & Associates, LLC™
One of the nation’s leading property and casualty insurance wholesalers,
J.H. Ferguson specializes in vacant properties, renovations, builders risk, and
tenant occupied dwellings. The company utilizes web-based technology—
VacantExpress.com®.
jhferg.com
Collectibles Insurance Services, LLC™
Founded by collectors, a specialty retail agency known for “insuring today’s
treasures from tomorrow’s tragedy®.” The agency provides coverage for a
wide variety of collectibles such as comic books, sports cards and memorabilia,
stamps, and toys.
collectinsure.com
American Reliable Insurance Company™
The newest member of the Global Indemnity network of companies is a
specialty personal lines and agricultural (equine, farm, and ranch) property
and casualty insurance provider that distributes through a network of general
and independent agents.
americanreliable.com
Global Indemnity Reinsurance Company Ltd.
Formerly Wind River Reinsurance Company Ltd., the name of the company was
changed in June 2014. It continues to be a treaty and facultative reinsurer of excess
and surplus lines insurance and specialty property and casualty insurance.
The firm is headquartered in Bermuda to better serve the international market.
globalindemnityre.bm
BOARD MEMBERS & OFFICERS
The commitment of the Board and dedication
of Senior Officers and Staff enables Global
Indemnity to successfully focus on achieving
ProfitableGrowth.
6
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Saul A. Fox
Chairman
Global Indemnity plc
Cynthia Y. Valko
Chief Executive Officer
Global Indemnity plc
Stephen A. Cozen
James W. Crystal
Seth J. Gersch
John H. Howes
Chad A. Leat
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)
Retired 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
Matthew B. Scott
Chief Marketing Officer
William J. Devlin
Chief Operations & Claims Officer
Robert F. Hill
President
American Reliable Insurance Company
Steve Green
President
Global Indemnity Reinsurance Company Ltd.
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, 2014
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. È
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 $212,911,354. There are no B ordinary shares held by non-affiliates of the registrant.
As of March 9, 2015, the registrant had outstanding 13,394,145 A ordinary shares and 12,061,370 B ordinary shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement relating to the 2015 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
31
45
45
45
45
46
49
51
89
92
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
149
Item 9A.
CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
149
Item 9B.
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150
PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE . . . . . . . . . .
151
Item 11.
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
151
Item 12.
Item 13.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,
AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
151
151
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
151
PART IV
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
152
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.
References to the acquisition of American Reliable refer to the January 1, 2015 acquisition of American Reliable
Insurance Company (“American Reliable”). The discussion in this report relates to a period prior to the
acquisition of American Reliable and, except as otherwise noted, does not give effect to it.
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.”
On October 16, 2014, Global Indemnity Group, Inc., a subsidiary of Global Indemnity, entered into a Stock
Purchase Agreement (the “American Reliable SPA”) by and among American Bankers Insurance Group, Inc., a
subsidiary of Assurant, Inc. (NYSE: AIZ) to purchase all of the issued and outstanding capital stock of American
Reliable. On January 1, 2015, Global Indemnity Group, Inc. completed its acquisition of American Reliable
pursuant
to the American Reliable SPA upon payment of an aggregate purchase price of approximately
$113.7 million in cash and the assumption of approximately $322.9 million in customary insurance related
liabilities, obligations, and mandates. The ultimate purchase price is subject to accounting procedures that are
expected to be completed by June 30, 2015. The most recent estimate of the purchase price, based on available
financial information, is approximately $117.9 million. The purchase price is subject to adjustment based on
GAAP book value of the business as of the date of the closing of the transaction and the future development of
loss reserves as specified in the American Reliable SPA.
American Reliable was established in 1952 and is headquartered in Scottsdale Arizona. It has facilities in
Scottsdale, Arizona, and Omaha, Nebraska, and writes property and casualty insurance across all fifty states and
the District of Columbia. It writes specialty personal lines and agricultural property and casualty insurance, in
each case distributed through a network of general and independent agents. As of December 31, 2014, American
Reliable had approximately 200 full-time employees.
Please see “Recent Developments” in Item 7 of Part II of this report for additional discussion of American
Reliable.
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
Insurance Company, Diamond State Insurance Company,
includes the operations of United National
Insurance
United National Specialty Insurance Company, Penn-America Insurance Company, Penn-Star
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 Global Indemnity Reinsurance Company, Ltd.
(“Global Indemnity Reinsurance”). On June 10, 2014, Wind River Reinsurance Company, Ltd changed its name
to Global Indemnity Reinsurance Company, Ltd.
2
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 and 2012 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 did not have a significant impact on the Company’s
ongoing business operations.
Business Segments
See Note 18 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, 2014,
2013 and 2012. 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
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;
3
• 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 2014, gross premiums written for the U.S. Insurance Operations were $230.0 million compared to
$232.4 million for 2013. For 2014, surplus lines business accounts for approximately 76.4% of the business
written while specialty admitted business accounts for the remaining 23.6%.
Reinsurance Operations
Global Indemnity 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 Global Indemnity Reinsurance.
The reinsurance markets face many of the same issues confronted with the primary insurance markets including
excess capital capacity, low investment returns and increased pressure on generating acceptable return on
investment.
The limited number of catastrophic events in recent years and an increase in the available capacity has continued
to put pressure on pricing levels. Global Indemnity Reinsurance is focused on using its capital capacity to write
catastrophe-oriented placements and other niche or specialty-focused excess of loss contracts meeting the
Company’s risk tolerance and return thresholds.
In 2014, gross premiums written from third parties were $61.3 million compared to $58.4 million for 2013.
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.
The public may also read and copy any materials the Company files with the SEC at the SEC’s Public Reference
Room at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. The SEC maintains
4
an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
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.
Geographic Concentration
The following table sets forth the geographic distribution of gross premiums written for the periods indicated:
(Dollars in thousands)
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other states . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . . . .
For the Years Ended December 31,
2014
2013
2012
Amount
Percent
Amount
Percent
Amount
Percent
$ 29,371
26,711
26,170
16,326
13,470
7,615
7,289
7,121
6,474
5,394
145,941
84,037
61,275
10.1% $ 32,170
26,358
9.2
29,565
9.0
16,600
5.6
11,234
4.6
6,715
2.6
6,904
2.5
8,208
2.4
8,392
2.2
4,719
1.9
11.0% $ 28,738
22,277
9.1
21,554
10.1
14,876
5.7
8,291
3.9
6,130
2.3
6,496
2.4
8,529
2.8
7,579
2.9
4,680
1.6
50.1
28.9
21.0
150,865
81,508
58,350
51.9
28.0
20.1
129,150
72,640
42,263
11.8%
9.1
8.8
6.1
3.4
2.5
2.7
3.5
3.1
1.9
52.9
29.8
17.3
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$291,253
100.0% $290,723
100.0% $244,053
100.0%
Marketing and Distribution
The Company provides its insurance products across a full distribution network—binding authority, program,
brokerage, direct, and reinsurance. For its binding authority and program product classifications, the Company
distributes its insurance products primarily 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 and on a direct basis.
Of the Company’s non-affiliated professional wholesale general agents and program administrators, the top five
accounted for 32.7% of the Insurance Operations’ gross premiums written for the year ended December 31, 2014.
One agency represented 10.0% of the Insurance Operations’ gross premiums written. There is no agency which
accounts for more than 10% of the Company’s consolidated revenues for the year ended December 31, 2014.
5
Global Indemnity Reinsurance assumed premiums on three treaties accounted for 96% of the Reinsurance
Operations’ 2014 gross premiums written. There is no treaty that accounted for 10% or more of the Company’s
consolidated revenues for the year ended December 31, 2014.
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
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.
6
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—There are only two wholesale insurance brokers with specific binding authority. These brokers are
subject to the same guidelines and monitoring as discussed above. The majority of 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
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.
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;
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 Global
Indemnity 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. The Company also writes a small amount of professional lines excess
liability 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’s pricing actuaries establish pricing tailored to each specific product it underwrites, taking into
account historical loss experience, historical rate level changes, 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.
7
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 made up of proportional and 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.
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, 2014, the Company renewed its property catastrophe excess of loss treaty which provides occurrence
coverage for losses of $70 million in excess of $20 million. This treaty excludes business underwritten by
American Reliable. At this renewal, the Company participated on 60% of the $20 million in excess of
$20 million layer and 40% 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, 2014, which provided identical coverage with the
exception of the Company’s participation, which was 50% of the $20 million in excess of $20 million layer and
20% of the $50 million in excess of $40 million layer.
Property Catastrophe Industry Loss Warranty—Effective June 2, 2014, the Company purchased a property
catastrophe industry loss warranty which provides occurrence coverage for losses of $12 million in excess of
8
$10 thousand for a U.S. wind event. Recovery under the industry loss warranty is contingent on the property/
casualty insurance industry sustaining a $30 billion loss from the same event. This treaty, which covers both the
Company’s US Insurance Operations and Reinsurance Operations, has no reinstatements and expired on
December 15, 2014.
Property Per Risk Excess of Loss—Effective January 1, 2015, the Company renewed its property per risk excess
of loss treaty, which excludes business underwritten by American Reliable. This treaty provides coverage in two
sections: 50% of $9 million per risk in excess of $1 million per risk for all business with the exception of the
Property Brokerage unit, and 50% of $8 million in excess of $2 million for Property Brokerage business. This
treaty also provides coverage of 100% of $20 million per risk in excess of $10 million per risk for Property
Brokerage business. The treaty’s liability is limited to twice the named per risk limit by section and layer for all
risks involved in one loss occurrence.
Effective January 1, 2014, the Company renewed its property per risk excess of loss treaty which provides
coverage of 50% of $13 million per risk in excess of $2 million per risk. This replaces the treaty that expired
December 31, 2013, which provided identical coverage. The treaty provides coverage in two layers: $3 million
per risk in excess of $2 million per risk, and $10 million per risk in excess of $5 million per risk. The first layer is
subject to a $6 million limit of liability for all risks involved in one loss occurrence, and the second layer is
subject to a $10 million limit for all risks involved in one loss occurrence.
Casualty and Professional Liability Excess of Loss—Effective May 1, 2014, the Company renewed its casualty
and professional liability excess of loss treaty. The casualty section provides coverage for $2 million per
occurrence in excess of $1 million per occurrence for general liability and auto liability. The professional liability
section provides coverage of $4 million per policy/occurrence in excess of $1 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, 2014 provided identical coverage.
Casualty Clash Excess of Loss—Effective May 1, 2014, the Company renewed its casualty clash excess of loss
treaty which provides coverage of $10 million per occurrence in excess of $3 million per occurrence, subject to a
$20 million limit for all loss occurrences. The casualty clash treaty that expired April 30, 2014 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 2014.
9
The following table sets forth the ten reinsurers for which the Company has the largest reinsurance receivables as
of December 31, 2014. Also shown are the amounts of premiums ceded by the Company to these reinsurers
during the year ended December 31, 2014.
(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 Company . . . . . . . . . . . . . . . . . . . . . . .
Clearwater Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . .
Scor Reinsurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Paul Fire & Marine Insurance Company . . . . . . . . . . . . . . . A++
Cologne Reinsurance Company . . . . . . . . . . . . . . . . . . . . . . . . . A++
A
NR
A
Subtotal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other reinsurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total reinsurance receivables before purchase accounting
adjustments and allowance for uncollectible
reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 67.5
18.5
7.4
6.7
5.9
5.0
3.3
1.6
1.1
1.1
118.1
21.0
48.5% $ 6.0
—
13.3
3.2
5.3
—
4.8
0.1
4.2
—
3.6
—
2.4
—
1.2
—
0.8
—
0.8
84.9
15.1
9.3
8.8
33.3%
—
17.8
—
0.4
—
—
—
—
—
51.5
48.5
139.1
100.0% $18.1
100.0%
Purchase accounting adjustments and allowance for
uncollectible reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(13.4)
Total receivables, net of purchase accounting adjustments
and allowance for uncollectible reinsurance . . . . . . . . .
Collateral held in trust from reinsurers . . . . . . . . . . . . . . . . . . .
Net receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125.7
(8.7)
$117.0
At December 31, 2014,
the Company carried reinsurance receivables, net of collateral held in trust, of
$117.0 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 $4.0 million at
December 31, 2014. The allowance for uncollectible reinsurance receivables was $9.4 million at December 31,
2014.
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
10
exercise control over the claims process, with the exception of one statutory managing general agent. The
Insurance Operations’ claims management staff supervises or processes all claims. The Company’s Insurance
Operations has a formal claims review process, and all claims greater than $250,000, 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’s Insurance Operations 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 Insurance Operations’ 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, 2014, the Company has $154 million of direct outstanding loss and loss adjustment expense
case reserves at its Insurance Operations. Claims relating to approximately 84% of those reserves are handled by
in-house claims management professionals, while claims relating to approximately 5% 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
11
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.
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. 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 2004.
12
This loss development table shows development in Global Indemnity’s loss and loss expense reserves on a net
basis:
(Dollars in thousands)
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Balance sheet reserves:
Cumulative paid as of:
$ 344,614 $ 639,291 $ 735,342 $ 800,885 $ 835,839 $ 725,297 $ 638,906 $684,878 $629,558 $586,975 $552,271
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
Re-estimated liability as of:
85,960 $ 154,069 $ 169,899 $ 190,723 $ 215,903 $ 189,358 $ 160,204 $155,888 $134,065 $116,118
139,822
180,801
209,938
237,636
251,350
261,773
271,688
273,618
286,163
261,569 260,667 223,358
330,522 333,131
377,350
268,827
355,987
414,068
440,206
454,982
467,669
471,472
485,142
300,041
413,055
478,408
506,915
525,173
534,801
551,849
360,336
470,313
532,753
561,536
581,265
602,649
366,647
454,284
510,177
541,313
569,079
299,720
375,066
419,717
454,509
End of year . . . . . . . . . . . . . . $ 344,614 $ 639,291 $ 735,342 $ 800,885 $ 835,839 $ 725,297 $ 638,906 $684,878 $629,558 $586,975 $552,271
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
. . . . . . . . . . .
Cumulative redundancy/
643,569 690,004 619,887 575,256
642,478 679,689 602,217
640,581 661,592
624,183
343,332
326,031
323,696
332,302
323,547
316,195
312,860
307,822
313,731
326,891
632,327
629,859
635,504
622,122
608,050
598,384
591,562
596,405
607,118
716,361
732,056
707,525
672,712
658,429
651,850
654,983
665,293
832,733
812,732
765,435
737,614
731,468
729,228
734,695
827,439
768,623
730,079
719,486
715,067
713,106
671,399
640,750
636,051
631,101
621,098
(deficiency) . . . . . . . . . . . . . . . . $
17,723 $
32,173 $
70,049 $
66,190 $ 122,733 $ 104,199 $
14,723 $ 23,286 $ 27,341 $ 11,719 $ —
Gross Liability—end of year . . . . 1,876,510 1,914,224 1,702,010 1,503,238 1,506,430 1,257,741 1,059,756 971,377 879,113 779,466 675,472
420,850 286,499 249,555 192,491 123,201
Less: Reinsurance recoverable . . . 1,531,896 1,274,933
702,353
966,668
670,591
532,444
Net liability-end of year . . . . . . . .
344,614
639,291
735,342
800,885
835,839
725,297
638,906 684,878 629,558 586,975 552,271
Gross re-estimated liability . . . . . . 1,152,525 1,251,799 1,035,224 1,158,067 1,086,422
Less: Re-estimated recoverable
888,007
826,971 838,537 767,365 707,169 675,472
at December 31, 2013 . . . . . . . .
825,635
644,681
369,931
423,372
373,315
266,909
202,788 176,944 165,148 131,912 123,201
Net re-estimated liability
at December 31, 2013 . . . . . . . . $ 326,890 $ 607,118 $ 665,293 $ 734,695 $ 713,107 $ 621,098 $ 624,183 $661,593 $602,217 $575,257 $552,271
Gross cumulative redundancy/ . . .
(deficiency) . . . . . . . . . . . . . . . . . . $ 723,985 $ 662,425 $ 666,786 $ 345,171 $ 420,008 $ 369,734 $ 232,785 $132,840 $111,748 $ 72,297 $ —
See Note 9 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
13
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.
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, 2014, the
Company has $15.9 million of net loss reserves for asbestos-related claims and $15.3 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 9 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 entered into a settlement agreement to resolve asbestos
related coverage litigation related to approximately 3,900 existing asbestos-related bodily injury claims and
future claims. The settlement was approved by the Court and a final order was issued in September 2014.
See Note 9 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 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 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 $272.5 million at December 31, 2014. As of December 31, 2014, the Company had $1,498.1 million of
investments and cash and cash equivalent assets, including $155.7 million of equity and limited partnership
investments plus a $0.1 million receivable for securities sold.
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.
14
The following table summarizes by type the estimated fair value of Global Indemnity’s investments and cash and
cash equivalents as of December 31, 2014, 2013, and 2012:
(Dollars in thousands)
December 31, 2014
December 31, 2013
December 31, 2012
Estimated
Fair Value
Percent
of Total
Estimated
Fair Value
Percent
of Total
Estimated
Fair Value
Percent
of Total
Cash and cash equivalents . . . . . . . . . . . . . . .
$
58,823
3.9% $ 105,492
6.7% $ 104,460
80,767
5.4
81,674
5.2
108,744
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 . . . . . . . . . . . . . . . .
191,473
208,759
133,158
178,263
383,416
107,639
Total fixed maturities . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . .
1,283,475
122,048
33,663
Total investments and cash and cash
12.8
13.9
8.9
11.9
25.6
7.2
85.7
8.2
2.2
180,936
229,910
53,975
168,436
435,392
54,041
1,204,364
254,070
3,489
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
6.8%
7.1
13.1
16.7
0.5
7.4
31.7
3.7
80.2
12.8
0.2
equivalents (2) . . . . . . . . . . . . . . . . . . . . . .
$1,498,009
100.0% $1,567,415
100.0% $1,533,989
100.0%
(1)
Includes collateralized mortgage obligations of $49,322, $63,322, and $59,026 for 2014, 2013, and 2012,
respectively.
(2) Does not include net receivable (payable) for securities sold (purchased) of $60, $723, and ($2,634) for
2014, 2013, and 2012, 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, 2014, the Company’s fixed
maturities, excluding the mortgage-backed, commercial mortgage-backed and collateralized mortgage
obligations, had a weighted average maturity of 2.6 years and a weighted average duration, excluding mortgage-
backed, commercial mortgage-backed and collateralized mortgage obligations and including cash and short-term
investments, of 1.8 years. The Company’s financial statements reflect a net unrealized gain on fixed maturities
available for sale as of December 31, 2014 of $10.5 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,
2014
2013
2012
Average fixed maturities at book value . . . . . . .
Gross income on fixed maturities (1) . . . . . . . . .
Book yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed maturities at book value . . . . . . . . . . . . . .
Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,230,317
26,788
$1,187,390
35,669
$1,222,814
41,969
2.18%
3.00%
3.43%
$1,272,948
10,527
$1,187,685
16,679
$1,187,094
42,228
(1) Represents income earned by fixed maturities, gross of investment expenses and excluding realized gains
and losses.
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 $208.8 million of mortgage-backed securities, $159.5 million
is invested in U.S. agency paper and $49.3 million is invested in collateralized mortgage obligations, of which
15
$48.3 million, or 98.1%, are rated AA+ or better. In addition, the Company holds $178.3 million in asset-backed
securities, of which 85.0% are rated AA or better and $133.2 million in commercial mortgaged-backed securities, of
which 97.6% are rated A- or better. The weighted average credit enhancement for the Company’s asset-backed
securities is 20.5. 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. 98.3% of the Company’s fixed
income securities are investment grade securities. 12.7% of the Company’s fixed maturities are rated AAA. See
“Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of Part II of this report for a more detailed
discussion of the credit market and 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, 2014 and 2013:
(Dollars in thousands)
December 31, 2014
December 31, 2013
Estimated
Fair Value
Percent of
Total
Estimated
Fair Value
Percent of
Total
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Not rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 162,649
557,919
372,925
167,422
11,393
4,033
580
316
6,238
12.7% $ 199,515
491,166
43.5
268,598
29.1
182,271
13.0
10,665
0.9
33,978
0.3
10,696
0.0
354
0.0
7,121
0.5
16.6%
40.8
22.3
15.1
0.9
2.8
0.9
0.0
0.6
Total fixed maturities . . . . . . . . . . . . . . . . .
$1,283,475
100.0% $1,204,364
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, 2014 and 2013:
(Dollars in thousands)
December 31, 2014
December 31, 2013
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 . . . . . . . . . . . . . . . . . . .
$ 134,722
552,135
42,469
11,316
22,653
763,295
208,759
133,158
178,263
10.5% $ 120,974
529,604
42.9
75,424
3.3
3,147
0.9
22,894
1.8
59.4
16.3
10.4
13.9
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
Total fixed maturities . . . . . . . . . . . . . . . .
$1,283,475
100.0% $1,204,364
100.0%
The expected weighted average duration of the Company’s asset-backed, mortgage-backed and commercial
mortgage-backed securities is 1.9 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
reinvestment risk should interest rates fall and issuers call their securities and the Company is forced to invest the
16
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.
As of December 31, 2014, the Company has aggregate equity securities of $122.0 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 invests in distressed securities and assets, which was valued at $30.3 million at
December 31, 2014, a limited liability partnership investment where the partnership has acquired control of a
business as a lead or organizing investor, which was valued at $3.4 million at December 31, 2014, and another
limited liability partnership investment that invests in real estate, which was valued at zero at December 31,
2014. 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, 2014, 2013, and
2012 were $35.9 million, $27.4 million, and $6.8 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;
• 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
17
companies who are establishing relationships with wholesale brokers, and other excess and surplus lines
competitors.
Competition may 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
At December 31, 2014, the Company had approximately 270 employees. None of the Company’s employees are
covered by collective bargaining agreements as of December 31, 2014.
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 Global Indemnity 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
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
At December 31, 2014, the Company had 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 these 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
18
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 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
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
to large commercial policyholders. Significantly,
the National Association of
19
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, 2012. Their final reports were issued in 2014, and there were no materially adverse findings.
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.
The Company’s U.S. insurance subsidiaries have acceptable results for the IRIS ratios with the exception of
investment yields, changes to policyholders’ surplus and adjusted liabilities to liquid assets which were outside of
the standard industry ranges primarily as a result of the extraordinary dividend paid in 2014. For further
discussion on the extraordinary dividend paid in 2014, 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.
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.
20
Based on the standards currently adopted, the U.S. insurance companies reported in their 2014 statutory filings
that their capital and surplus are above the prescribed company action level risk-based capital requirements. See
Note 17 of the notes to the consolidated financial statements in Item 8 of Part II of this report for additional
information on the NAIC’s risk-based capital model for determining the levels of statutory capital and surplus an
insurer must maintain.
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 17 of the notes to consolidated financial statements in
Item 8 of Part II of this report for the dividends paid by Global Indemnity’s U.S. insurance companies in 2014
and dividend limitations for 2015.
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.
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.
21
Operations of Global Indemnity 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. Global Indemnity Reinsurance is not admitted to do business in the United States. The Company
does not intend for Global Indemnity 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 Global Indemnity Reinsurance be admitted or authorized.
As a reinsurer that is not licensed, accredited, or approved in any state in the United States, Global Indemnity
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
to reinsurance liabilities ceded to unlicensed or unaccredited reinsurers. Under applicable
with respect
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, Global Indemnity Reinsurance could be adversely affected.
Global Indemnity 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 Global Indemnity
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 Global Indemnity 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. Global Indemnity 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 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 solvency and liquidity standards, 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 Bermuda insurance companies. The BMA continues to make amendments to the Insurance Act with
a view to enhancing Bermuda’s insurance regulatory regime.
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.
22
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. Global Indemnity 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 Global Indemnity 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, Global Indemnity 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
Global Indemnity Reinsurance must prepare annual statutory financial statements in accordance with the
Bermuda Insurance Act 1978. These 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).
Annual Statutory Financial Return
Global Indemnity 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.
Pursuant to the Bermuda Insurance (Prudential Standards) (Class 4 and 3B Solvency Requirement) rules 2008,
23
Global Indemnity Reinsurance is required to give detailed information and analyses regarding premiums, claims,
reinsurance, and investments and is also required to provide audited annual financial statements prepared in
accordance with GAAP or International Financial Reporting Standards.
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 2014, Global Indemnity Reinsurance
used the BMA’s model to calculate its capital and solvency requirements.
The risk-based regulatory capital adequacy and solvency requirements implemented with effect
from
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
is dedicated to their business. The framework that has been developed applies a standard
capital
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, Global
Indemnity 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
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,
24
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 Global Indemnity
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
Global Indemnity 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, Global Indemnity
Reinsurance will be prohibited, without the approval of the BMA, from declaring or paying any dividends during
the next financial year.
Global Indemnity Reinsurance is prohibited, without the approval of the BMA, from reducing by 15% or more its
total statutory capital as set out in its previous year’s 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, Global Indemnity 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, Global Indemnity 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 Global Indemnity 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 Global Indemnity Reinsurance becoming insolvent, or
that Global Indemnity Reinsurance is in breach of the Insurance Act or any conditions imposed upon its
registration, the BMA may, among other things, direct Global Indemnity 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 Global Indemnity Reinsurance must comply with.
25
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. Global Indemnity 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.
Global Indemnity 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 Global Indemnity 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 Global Indemnity
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
Global Indemnity Reinsurance.
Global Indemnity 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
26
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;
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
the BMA must consider whether
regulatory responsibilities of the foreign regulatory authority. Further,
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 Global Indemnity 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, Global Indemnity 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, Global Indemnity
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.
27
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
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 Global Indemnity
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
Global Indemnity Reinsurance, other than holders ordinarily resident in Bermuda, if any. There can be no
assurance that Global Indemnity 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 Global
Indemnity Reinsurance or to any of its operations, shares, debentures or obligations through March 31, 2035;
28
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 Global
Indemnity 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.
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. In
accordance with Luxembourg regulations, 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
29
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 Global Indemnity Reinsurance will be treated as engaged in a U.S. trade or business for U.S.
federal income tax purposes. However, whether business is being conducted in the United States is an inherently
factual determination. Because the United States Internal Revenue Code (the “Code”), regulations and court
decisions fail to identify definitively activities that constitute being engaged in a trade or business in the
United States, the Company cannot be certain that the IRS will not contend successfully that Global Indemnity or
Global Indemnity 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 Global Indemnity 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 2015 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 Global Indemnity Reinsurance is entitled to the benefits under the income tax treaty between Bermuda and the
United States (the “Bermuda Treaty”), Global Indemnity 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. Global Indemnity 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 Global Indemnity
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 Global Indemnity Reinsurance is
considered to be engaged in the conduct of an insurance business in the United States and it is not entitled to the
30
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 Global Indemnity 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 Global Indemnity
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 Global Indemnity Reinsurance’s investment income could be subject to U.S.
federal income tax.
Foreign corporations not engaged in a trade or business in the United States are subject to 30% U.S. income tax
imposed by withholding on the gross amount of certain “fixed or determinable annual or periodic gains, profits
and income” derived from sources within the United States (such as dividends and certain interest on
investments), subject to exemption under the Code or reduction by applicable treaties. The Bermuda Treaty does
not reduce the rate of tax in such circumstances. The United States also imposes an excise tax on insurance and
reinsurance premiums paid to foreign insurers or reinsurers with respect to risks located in the United States. The
rates of tax applicable to premiums paid to Global Indemnity 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. If any of the
following actually occur, the Company’s business, prospects, financial condition, results of operations and cash
flows could be materially and adversely affected.
Risks Related to the Company’s Business
The Benefits of Acquiring American Reliable May Not Be Realized.
There may be difficulties in integrating the businesses of American Reliable, which could result in a failure to
realize the potential benefits of the acquisition. Although it is expected that American Reliable will continue to
operate as it did prior to the acquisition, achieving the anticipated benefits of the acquisition will depend in part
upon whether the common aspects of the business can be integrated in an efficient and effective manner with
Global Indemnity’s existing businesses. In addition, there is the risk that the acquisition proves disruptive to the
operations of the Company or American Reliable. Furthermore, the risk that the Company’s or American
Reliable’s prospective insurance premiums, investment yield, or net earnings are less than anticipated (including
as a result of unexpected events, competition, costs, charges or outlays whether as a consequence of the
transaction or otherwise) could negatively impact the Company’s profitability and results of operations.
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
31
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.
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
increasing or
corresponding amount. In addition to having an effect on reserves and pre-tax income,
“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
32
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
the Company’s computer systems and networks, or otherwise cause interruptions or
transmitted through,
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
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; making 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.
33
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.
See Note 7 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, 2014 and 2013.
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
34
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 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.
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 3 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, 2014 and 2013.
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 facilities 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 facilities 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, 2014, $175 million of the Company’s outstanding indebtedness bore interest at a rate that
varies depending upon the London Interbank Offered Rate (“LIBOR”). If LIBOR rises, the interest rates on
outstanding debt will increase resulting in increased interest payment obligations under the Company’s margin
borrowing facilities. 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.
35
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.
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
36
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
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
approval. If any of these wholesale professional general agencies fail
to comply with the Company’s
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
37
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 Global Indemnity Reinsurance. The inability of Global Indemnity 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.
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
than the aggregate of its liabilities and its issued share capital and share premium accounts.
payment,
Furthermore, pursuant to the Bermuda Insurance Act 1978, an insurance company is prohibited from declaring or
paying a dividend during the financial year if it is in breach of its minimum solvency margin or minimum
liquidity ratio or if the declaration or payment of such dividends would cause it to fail to meet such margin or
ratio. See “Regulation—Bermuda Insurance Regulation” in Item 1 of Part I of this report.
In addition, the Company’s U.S. insurance subsidiaries, which are indirect subsidiaries of Global Indemnity
Reinsurance, are subject to significant regulatory restrictions limiting their ability to declare and pay dividends,
which must first pass through Global Indemnity Reinsurance before being paid to Global Indemnity. See
“Regulation—U.S. Regulation” in Item 1 of Part I of this report. Also, see Note 17 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 2015.
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.
38
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.
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
in a competitive
business,
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.
39
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.
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-U”, 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
40
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
therewith. Fox Paine & Company may in the future make significant
investments in other insurance or
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 whom
were identified and proposed for consideration for the Board of Directors by Fox Paine & Company.
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.
Fox Paine & Company provides 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 itself 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.
Global Indemnity has identified a material weakness in its internal control over financial reporting. If Global
Indemnity is unable to maintain effective internal control over financial reporting in the future, investors may
lose confidence in the accuracy and completeness of its financial reports and the trading price of its common
stock may be negatively affected.
In connection with its preparation of the 2014 financial statements, the Company determined that a material
weakness existed in its internal control over financial reporting, as described in more detail in Item 9A of this
41
report. In light of this material weakness in internal control over financial reporting, management concluded that
the Company’s internal control over financial reporting and disclosure controls and procedures were not effective
as of December 31, 2014.
Management is taking steps to remediate the identified material weakness, as described in more detail in Item 9A
of this report, and expects these steps to be completed in the first quarter of 2015. While the Company believes
these steps will improve the effectiveness of its internal control over financial reporting, if its remediation efforts
are insufficient to address the material weakness, or if additional material weaknesses in its internal controls are
discovered in the future, they may adversely affect the Company’s ability to record, process, summarize and
report financial information timely and accurately and, as a result, the Company’s financial statements may
contain material misstatements or omissions.
Any of the foregoing could cause investors to lose confidence in the accuracy and completeness of the
Company’s financial reports, negatively affect the market price of the Company’s common stock, result in
regulatory scrutiny (which could require additional financial and management resources), and otherwise
materially adversely affect the Company’s business and financial condition.
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 conducts business with some
customers in foreign currencies and several of the Company’s U.S. and non-U.S. subsidiaries maintains
investments and cash accounts in foreign currencies. 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. 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
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.
42
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 2013 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
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.
43
Global Indemnity 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 Global Indemnity 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 Global Indemnity Reinsurance may be subject to U.S. tax that may have a material
adverse effect on Global Indemnity’s or Global Indemnity Reinsurance’s results of operations.
Global Indemnity is an Irish company and Global Indemnity Reinsurance is a Bermuda company. The Company
seeks to manage its business in a manner designed to reduce the risk that Global Indemnity and Global Indemnity
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 Global Indemnity Reinsurance will be engaged in a trade or
business in the United States. If Global Indemnity or Global Indemnity 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.
U.A.I. (Luxembourg) Investment, S.à.r.l., an indirectly owned Luxembourg subsidiary of Global Indemnity
Reinsurance, owns two notes and a loan issued by Global Indemnity Group, Inc., a Delaware corporation. Under
U.S. federal income tax law, interest paid by a U.S. corporation to a non-U.S. shareholder is generally subject to
a 30% withholding tax, unless reduced by treaty. The income tax treaty between the United States and
Luxembourg (the “Luxembourg Treaty”) generally eliminates the withholding tax on interest paid to qualified
residents of Luxembourg. Were the IRS to contend successfully that U.A.I. (Luxembourg) Investment, S.à.r.l. is
not eligible for benefits under the Luxembourg Treaty, interest paid to U.A.I. (Luxembourg) Investment, S.à.r.l.
by Global Indemnity Group, Inc. would be subject to the 30% withholding tax. Such tax may be applied
retroactively to all previous years for which the statute of limitations has not expired, with interest and penalties.
Such a result may have a material adverse effect on the Company’s financial condition and results of operation.
44
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
At December 31, 2014, the Company leased office space in Bala Cynwyd, Pennsylvania which holds the
Insurance Operations’ principal executive offices and headquarters. In addition, the Company leased additional
office space in California, Georgia, Illinois, Maryland, North Carolina and Texas, which serves as office space
for field offices. Some of the office space in California also serves as office space for the Company’s claims
operations. The Company also leased office space in Hamilton, Bermuda, which is used by the Reinsurance
Operations. The Company leased office space in Cavan, Ireland, which is used to support the operating needs of
the Insurance and Reinsurance Operations. As a result of the American Reliable acquisition on January 1, 2015,
the Company assumed leases in Arizona, Nebraska, and Florida. The Company believes the properties listed are
suitable and adequate to meet its needs.
Item 3.
LEGAL PROCEEDINGS
The Company is, from time to time, involved in various legal proceedings in the ordinary course of business. The
it considers adequate.
Company purchased insurance and reinsurance coverage for risks in amounts that
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.
45
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, 2014:
First Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Year Ended December 31, 2013:
First Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High
Low
$26.98
27.78
27.23
29.50
$23.89
24.30
27.57
27.38
$23.16
24.44
24.68
25.15
$20.06
20.06
23.26
23.57
There is no established public trading market for the Company’s B ordinary shares, par value $0.0001 per share.
As of March 7, 2015, there were 11 holders of record 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 1,266 as of March 6, 2015. 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 14 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.
46
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
225
200
175
150
125
100
75
50
25
0
12/31/2009
12/31/2010
12/31/2011
12/31/2012
12/31/2013
12/31/2014
Global Indemnity (GBLI)
NASDAQ Insurance (^IXIS)
NASDAQ Composite (^IXIC)
Global Indemnity plc . . . . . . . . . . . . . . . . . . . . . . . . . . .
NASDAQ Insurance Index . . . . . . . . . . . . . . . . . . . . . . .
NASDAQ Composite Index . . . . . . . . . . . . . . . . . . . . . .
$100.0
100.0
100.0
$129.1
114.6
116.9
$125.2
118.1
114.8
$139.7
134.1
133.1
$159.7
172.7
184.1
$179.1
178.1
208.7
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
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.
Company Purchases of 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
2014, the Company purchased an aggregate 5,444 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 11 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 2014 or 2013. 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.
47
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. Global Indemnity 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 17 of the
notes to consolidated financial statements in Item 8 of Part II of this report for dividend limitations for 2015.
For 2015, the Company believes that Global Indemnity Reinsurance should have sufficient liquidity and solvency
to pay dividends. In the future, the Company anticipates using dividends from Global Indemnity Reinsurance to
fund obligations of Global Indemnity. Global Indemnity Reinsurance is prohibited, without the approval of the
BMA, from reducing by 15% or more its total statutory capital as set out in its previous year’s statutory financial
statements, and any application for such approval must include such information as the BMA may require. Based
upon the total statutory capital plus the statutory surplus as set out in its 2014 statutory financial statements that
will be filed in 2015, Global Indemnity Reinsurance could pay a dividend of up to $287.1 million without
requesting BMA approval. Global Indemnity Reinsurance is dependent on receiving distributions from its
subsidiaries in order to pay the full dividend.
Under the Companies Act, Global Indemnity 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 2014, 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. 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. In December, 2014, Global
Indemnity Group, Inc. declared and paid a dividend of $125 million to U.A.I. (Luxembourg) Investment S.à.r.l.
and U.A.I. (Luxembourg) Investment S.à.r.l. declared and paid a dividend of $125 million to U.A.I.
(Luxembourg) IV S.à.r.l.
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 17 of the notes to
the consolidated financial statements in Item 8 of Part II of this report.
48
Item 6.
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated historical financial data for Global Indemnity and should be
read together with the consolidated financial statements and accompanying notes and “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) (3) . . . . . . . . . . . . . .
Per share data: (1) (2) (3)
Net income (loss) available to
common shareholders . . . . . . . . . . .
Basic . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . .
Weighted-average number of shares
outstanding
For the Years Ended December 31,
2014
2013
2012
2011
2010
$
$
$
$
291,253
273,181
268,519
35,860
333,755
62,856
62,856
2.50
2.48
$
$
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
Basic . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . .
25,131,811
25,331,420
25,072,712
25,174,015
26,722,772
26,748,833
30,246,095
30,246,095
30,237,787
30,274,259
In 2011, “Diluted” shares were the same as “Basic” shares since there was a net loss for that year.
(1)
(2) Shares outstanding and per share amounts have been restated to reflect the 1-for-2 stock exchange effective
July 2, 2010 when the Company completed its re-domestication to Ireland.
(3) 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.
49
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 facilities . . . . . . . . . . . . . .
Senior notes payable . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . . . . . . . .
Unpaid losses and loss adjustment
expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . .
2014
2013
2012
2011
2010
51.2
40.8
92.0
93.8
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
$1,498,009
125,718
1,930,033
174,673
—
—
$1,567,415
197,887
1,911,779
100,000
—
—
$1,533,989
241,827
1,903,703
—
54,000
30,929
$1,647,723
287,986
2,072,916
—
72,000
30,929
$1,717,186
422,844
2,290,728
—
90,000
30,929
675,472
908,290
779,466
873,280
879,114
806,618
971,377
839,063
1,052,743
924,769
(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:
•
•
•
•
•
2014 loss and combined ratios reflect a $16.4 million reduction of net losses and loss adjustment
expenses
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
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 2014, 2013, 2012, 2011, and 2010 include $14.0 million,
$10.0 million, $14.2 million, $20.6 million, and $2.8 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.
50
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.
Unless otherwise specifically noted, discussion and analysis of the financial condition and results of operations of
American Reliable are not included in the following discussion. Any reference to 2014 annual financial
information for American Reliable has not been audited.
Recent Developments
During the first quarter of 2014, the Company exited its corporate loan portfolio and made a $50 million
commitment to purchase an alternative investment vehicle which is comprised of European non-performing
leaving
loans. As of December 31, 2014,
$20.1 million as unfunded.
the Company has funded $29.9 million of this commitment
On June 13, 2014, A.M. Best affirmed the financial strength rating of “A” (Excellent) for Global Indemnity
Reinsurance and its U.S. insurance subsidiaries. Global Indemnity Reinsurance and subsidiaries have a financial
size category of “XI” with A.M. Best, which represents an adjusted policyholder’s surplus of $750 million to
$1 billion.
On June 26, 2014, the Company sold approximately $148.7 million of the Company’s equity portfolio.
Acquisition of American Reliable
On January 1, 2015, Global Indemnity Group, Inc. completed its acquisition of American Reliable pursuant to
the American Reliable SPA upon payment of an aggregate purchase price of approximately $113.7 million in
cash and the assumption of approximately $322.9 million in customary insurance related liabilities, obligations,
and mandates. The ultimate purchase price is subject to accounting procedures that are expected to be completed
by June 30, 2015. The most recent estimate of the purchase price, based on available financial information, is
approximately $117.9 million. The purchase price is subject to adjustment based on GAAP book value of the
business as of the date of the closing of the transaction and the future development of loss reserves as specified in
the American Reliable SPA.
The cash portion of the acquisition price was financed primarily by a $102.0 million borrowing on December 26,
2014 pursuant to the Company’s margin borrowing facilities. The borrowing rate is tied to LIBOR and is
currently approximately 1%. Approximately $130.5 million in collateral supported the borrowing. See Note 13 of
the notes to the consolidated financial statements in Item 8 of Part II of this report for details on the terms of the
margin borrowing facilities.
American Reliable was established in 1952 and is headquartered in Scottsdale Arizona. It is rated “A” (Excellent)
by A.M. Best. As of December 31, 2014, it employed approximately 200 full-time employees between its
facilities in Scottsdale, Arizona, and Omaha, Nebraska. American Reliable writes property and casualty
insurance across all fifty states primarily through a network of retail and general agents and select brokers. The
two primary lines of business are Specialty Personal Lines and Agriculture.
51
The Company expects that the acquisition of American Reliable will have a material impact on the future
financial condition and operating performance of Global Indemnity.
Key products of American Reliable’s Specialty Personal Lines include manufactured home, dwelling,
homeowners and recreational vehicle insurance including a small commercial portfolio. During 2014 these
products generated $188.2 million of gross written premium, $176.9 million of net written premium and
$178.0 million of net earned premium.
Key products of American Reliable’s Agriculture lines include farmers and ranchers, farmowners, commercial
farm auto and liability. During 2014 these products generated $78.1 million of gross written premium,
$72.9 million of net written premium and $71.3 million of net earned premium.
In total, American Reliable had $266.3 million of gross written premium, $249.8 million of net written premium
and $249.3 million of net earned premium.
As part of the acquisition the Company acquired the American Reliable portfolio of cash and invested assets,
which totaled $251.1 million as of December 31, 2014. The portfolio consists of $225.1 million in fixed income
securities, $24.6 million of cash and cash equivalents, and $1.4 million in preferred stock.
Excluding cash and preferred stock, the fixed income portfolio has a weighted average duration of 2.6 years with
an average credit rating of A and 94.7% of securities investment grade or higher.
Overview
The Company’s Insurance Operations distribute property and casualty insurance products through a group of
approximately 110 professional general agencies that have limited quoting and binding authority, as well as a
number of wholesale insurance brokers who in turn sell the Company’s insurance products to insureds through
retail insurance brokers. The Company operates predominantly in the excess and surplus lines marketplace. To
manage its operations, the Company differentiates them by product classification. These product classifications
are: 1) Penn-America, which includes property and general liability products for small commercial businesses
distributed through a select network of wholesale general agents with specific binding authority; 2)
United National, which includes property, general liability, and professional lines products distributed through
program administrators with specific binding authority; and 3) Diamond State, which includes property, casualty,
and professional lines products distributed through wholesale brokers and program administrators with specific
binding authority.
Currently, the Company’s Reinsurance Operations segment, which consists solely of the operations of Global
Indemnity Reinsurance, provides reinsurance solutions through brokers and on a direct basis. In prior years, the
Company provided reinsurance solutions through program managers and primary writers, including regional
insurance companies. Global Indemnity Reinsurance is a Bermuda based treaty reinsurer for specialty property
and casualty insurance and reinsurance companies. Global Indemnity Reinsurance conducts business in Bermuda
and is focused on using its capital capacity to write catastrophe-oriented placements and other niche or specialty-
focused treaties meeting the Company’s risk tolerance and return thresholds. Given the current pricing
environment, Global Indemnity Reinsurance continues to cautiously deploy and manage its capital while seeking
to position itself as a niche reinsurance solution provider.
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.
52
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
its best estimate of losses and loss adjustment expenses based on both internal and external’s actuarial analyses
of the estimated losses the Company expects to incur on the insurance policies it writes. The ultimate losses and
loss adjustment expenses will depend on the actual costs to resolve claims. Acquisition costs consist principally
of commissions and premium taxes that are typically a percentage of the premiums on the insurance policies the
Company writes, net of ceding commissions earned from reinsurers. Other underwriting expenses consist
primarily of personnel expenses and general operating expenses. 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 2
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.
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 and marine accounts.
53
In addition to the Company’s internal reserve analysis, independent external actuaries perform a full, detailed
review of the Insurance Operations’ and Reinsurance Operations’ reserves annually. The Company reviews both
the internal and external actuarial analyses in determining its reserve position.
The methods used to project ultimate losses for both long-tail and short-tail exposures include, but are not limited
to, the following:
•
•
Paid Development method;
Incurred Development method;
• Expected Loss Ratio method;
• Bornhuetter-Ferguson method using premiums and paid loss;
• Bornhuetter-Ferguson method using premiums and incurred loss; and
• Average Loss method.
The Paid Development method estimates ultimate losses by reviewing paid loss patterns and applying them to
accident years with further expected changes in paid loss. Selection of the paid loss pattern requires analysis of
several factors including the impact of inflation on claims costs, the rate at which claims professionals make
claim payments and close claims, the impact of judicial decisions, the impact of underwriting changes, the
impact of large claim payments and other factors. Claim cost inflation itself requires evaluation of changes in the
cost of repairing or replacing property, changes in the cost of medical care, changes in the cost of wage
replacement, judicial decisions, legislative changes and other factors. Because this method assumes that losses
are paid at a consistent rate, changes in any of these factors can impact the results. Since the method does not rely
on case reserves, it is not directly influenced by changes in the adequacy of case reserves.
For many reserve categories, paid loss data for recent periods may be too immature or erratic for accurate
predictions. This situation often exists for long-tail exposures. In addition, changes in the factors described above
may result in inconsistent payment patterns. Finally, estimating the paid loss pattern subsequent to the most
mature point available in the data analyzed often involves considerable uncertainty for long-tail reserve
categories.
The Incurred Development method is similar to the Paid Development method, but it uses case incurred losses
instead of paid losses. Since this method uses more data (case reserves in addition to paid losses) than the Paid
Development method, the incurred development patterns may be less variable than paid development patterns.
However, selection of the incurred loss pattern requires analysis of all of the factors listed in the description of
the Paid Development method. In addition, the inclusion of case reserves can lead to distortions if changes in
case reserving practices have taken place and the use of case incurred losses may not eliminate the issues
associated with estimating the incurred loss pattern subsequent to the most mature point available.
The Expected Loss Ratio method multiplies premiums by an expected loss ratio to produce ultimate loss
estimates for each accident year. This method may be useful if loss development patterns are inconsistent, losses
emerge very slowly, or there is relatively little loss history from which to estimate future losses. The selection of
the expected loss ratio requires analysis of loss ratios from earlier accident years or pricing studies and analysis
of inflationary trends, frequency trends, rate changes, underwriting changes, and other applicable factors.
The Bornhuetter-Ferguson method using premiums and paid losses is a combination of the Paid Development
method and the Expected Loss Ratio method. This method normally determines expected loss ratios similar to
the method used for the Expected Loss Ratio method and requires analysis of the same factors described above.
The method assumes that only future losses will develop at the expected loss ratio level. The percent of paid loss
to ultimate loss implied from the Paid Development method is used to determine what percentage of ultimate loss
is yet to be paid. The use of the pattern from the Paid Development method requires consideration of all factors
54
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
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 give more weight to the Expected Loss Ratio method in the more recent
immature years. As the accident years mature, weight shifts to the Bornhuetter-Ferguson methods and eventually to
the Incurred and/or Paid Development method. Claims related to umbrella business are usually reported later than
claims for other long-tail lines. For umbrella business, the shift from the Expected Loss Ratio method to the
Bornhuetter-Ferguson methods to the Loss Development method may be more protracted than for most long-tailed
lines. Reserves for short-tail lines tend to make the shift across methods more quickly than the long-tail lines.
For other more complex reserve categories where the above methods may not produce reliable indications, the
Company uses additional methods tailored to the characteristics of the specific situation. Such reserve categories
include losses from construction 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
55
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, and 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. The Company continues to closely
monitor its asbestos exposure and make adjustments where they are warranted
In 2009, one of the Company’s insurance companies entered into a settlement agreement to resolve asbestos
related coverage litigation related to approximately 3,900 existing asbestos-related bodily injury claims and
future claims. The settlement was approved by the Court and a final order was issued in September 2014.
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. These claims were settled in April, 2014. 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,
indications to changes in paid and incurred loss patterns, the
consistency of claims handling processes, the consistency of case reserving practices, changes in the Company’s
pricing and underwriting, and overall pricing and underwriting trends in the insurance market.
the sensitivity of the actuarial
Management’s best estimate at December 31, 2014 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 $675.5 million and
$552.3 million, respectively, as of December 31, 2014. 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, 2014 is as follows:
(Dollars in thousands)
Gross Reserves
Case
IBNR (1)
Total
Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . . . . . . .
$155,958
36,678
$423,663
59,173
$579,621
95,851
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$192,636
$482,836
$675,472
(Dollars in thousands)
Net Reserves (2)
Case
IBNR (1)
Total
Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . . . . . . .
$115,587
36,678
$341,317
58,689
$456,904
95,367
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$152,265
$400,006
$552,271
(1) Losses incurred but not reported, including the expected future emergence of case reserves.
(2) Does not include reinsurance receivable on paid losses.
56
The Company continually reviews these estimates and, based on new developments and information, includes
adjustments of the estimated ultimate liability in the operating results for the periods in which the adjustments are
made. The establishment of loss and loss adjustment expense reserves makes no provision for the possible
broadening of coverage by legislative action or judicial interpretation, or the emergence of new types of losses not
sufficiently represented in the Company’s historical experience or that cannot yet be quantified or estimated. The
Company regularly analyzes its reserves and reviews pricing and reserving methodologies so that future
adjustments to prior year reserves can be minimized. However, given the complexity of this process, reserves
require continual updates and the ultimate liability may be higher or lower than previously indicated. Changes in
estimates for loss and loss adjustment expense reserves are recorded in the period that the change in these estimates
is made. See Note 9 to the consolidated financial statements in Item 8 of Part II of this report for details concerning
the changes in the estimate for incurred loss and loss adjustment expenses related to prior accident years.
The 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
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
different
than management’s best estimate. For most of its reserving classes, the Company believes that
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
57
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 $154.0 million for claims occurring
during the year ended December 31, 2014:
(Dollars in thousands)
Frequency Change . . . . . . . . . . . . .
Severity Change
-10%
-5%
0%
5%
10%
-5% $(22,330)
-3% (19,558)
-2% (18,172)
-1% (16,786)
0% (15,400)
1% (14,014)
2% (12,628)
3% (11,242)
5% (8,470)
$(15,015)
(12,089)
(10,626)
(9,163)
(7,700)
(6,237)
(4,774)
(3,311)
(385)
$(7,700)
(4,620)
(3,080)
(1,540)
—
1,540
3,080
4,620
7,700
$ (385)
2,849
4,466
6,083
7,700
9,317
10,934
12,551
15,785
$ 6,930
10,318
12,012
13,706
15,400
17,094
18,788
20,482
23,870
The Company’s net reserves for losses and loss expenses of $552.3 million as of December 31, 2014 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 7 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,
2014 and 2013. For a listing of the ten reinsurers for which the Company has the largest reinsurance asset
amounts as of December 31, 2014, 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 2 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.
58
For an analysis of the Company’s securities with gross unrealized losses as of December 31, 2014 and 2013, and for
other than temporary impairment losses that the Company recorded for the years ended December 31, 2014, 2013,
and 2012, please see Note 3 of the notes to the consolidated financial statements in Item 8 of Part II of this report.
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 5 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.
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 2014, there was no impairment of
goodwill as of December 31, 2014.
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 2014, there were no
impairments of indefinite lived intangible assets as of December 31, 2014.
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, 2014, there
were no triggering events that occurred during the year that would result in an impairment of definite lived
intangible assets.
See Note 6 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
59
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.
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, 2014 and 2013. The deferred tax asset balance is analyzed regularly by
management. This assessment requires significant judgment and considers, among other matters, the nature,
frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of
carryforward periods, and tax planning strategies and/or actions. Based on these analyses, the Company has
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 8 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
As of December 31, 2014, the Company managed 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
Inc.,
Collectibles Insurance Services, LLC, Global Indemnity Insurance Agency, LLC, and J.H. Ferguson &
Associates, LLC, and Reinsurance Operations, which includes the operations of Global Indemnity Reinsurance
Company, Ltd.
Insurance Company, American Insurance Adjustment Agency,
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.
60
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,
2014
2013 (6)
2012 (6)
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$229,978
17,013
$212,965
$232,373
18,668
$213,705
$201,790
23,958
$177,832
Reinsurance Operations premiums written:
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 61,275
1,059
$ 60,216
$ 58,350
71
$ 58,279
$ 42,263
548
$ 41,715
Revenues: (1)
Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$211,785
57,289
$269,074
$202,097
52,416
$254,513
$179,721
58,983
$238,704
Expenses: (2)
Insurance Operations (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$206,569
40,611
$247,180
$204,197
34,445
$238,642
$198,425
50,606
$249,031
Income (loss) from segments:
Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income (loss) from segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5,216
16,678
$ 21,894
$ (2,100) $ (18,704)
8,377
$ (10,327)
17,971
$ 15,871
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55.7
42.1
97.8
34.8
36.0
70.8
51.2
40.8
92.0
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
(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 $1,114, $1,026, and $936 related to cessions from the Company’s Insurance Operations to its
Reinsurance Operations for 2014, 2013, and 2012, 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 and 2012 include
United National Casualty Insurance Company. This was an asset sale which did not have a significant impact on the
Company’s ongoing business operations.
61
Results of Operations
Year Ended December 31, 2014 Compared with the Year Ended December 31, 2013
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)
2014
2013
$
%
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$229,978
$232,373
$ (2,395)
(1.0%)
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$212,965
$213,705
$ (740)
(0.3%)
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$211,165
620
$196,302
5,795
$14,863
(5,175)
7.6%
(89.3%)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$211,785
$202,097
$ 9,688
4.8%
Losses and expenses:
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . .
Acquisition costs and other underwriting expenses (1) . . . . . . . . .
117,586
88,983
116,837
87,360
749
1,623
0.6%
1.9%
Income (loss) from segment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5,216
$ (2,100) $ 7,316
(348.4%)
Underwriting Ratios:
Loss ratio:
Current accident year (“CAY”) . . . . . . . . . . . . . . . . . . . . . . .
Prior accident year (“PAY”) . . . . . . . . . . . . . . . . . . . . . . . . .
Calendar year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property loss ratio excluding the effect of prior accident year (9) (4) . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of prior accident year
Property loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Casualty loss ratio excluding the effect of prior accident year (9) (5) . . .
Effect of prior accident year casualty loss . . . . . . . . . . . . . . . . . . . . . . .
Casualty loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62
(1.8)
(2.0)
(3.8)
(2.4)
(6.2)
61.6
(5.9)
55.7
42.1
97.8
103.7
(5.9)
97.8
104.4
(5.9)
(0.7)
97.8
61.6
(5.9)
55.7
51.8
1.6
53.4
76.2
(17.2)
59.0
63.4
(3.9)
59.5
44.5
104.0
107.9
(3.9)
104.0
107.3
(3.9)
0.6
104.0
63.4
(3.9)
59.5
50.4
(8.0)
42.4
81.5
1.9
83.4
(Dollars in thousands)
Years Ended
December 31,
Increase / (Decrease)
2014
2013
$
%
Expense ratio excluding the effect of premium deficiency (6) (11) . . .
Effect of premium deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42.8
(0.7)
42.1
43.9
0.6
44.5
Net losses and loss adjustment expenses excluding the effects of prior
accident year (7) (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of prior accident year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
130,077
(12,491)
124,470
(7,633)
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . .
117,586
116,837
Acquisition costs and other underwriting expenses excluding the
effects of premium deficiency (8) (11) . . . . . . . . . . . . . . . . . . . . . . .
Effect of premium deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90,314
(1,331)
86,164
1,196
Acquisition cost and other underwriting expenses . . . . . . . . . . . . . . . .
88,983
87,360
(1)
Includes excise tax of $1,114 and $1,026 related to cessions from the Company’s Insurance Operations to its
Reinsurance Operations for 2014 and 2013, 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. The most
directly comparable GAAP measure is the property loss 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 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. 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 U.S. insurance operations may be
obscured by prior accident year adjustments. This non-GAAP ratio or measure should not be considered as a
substitute for its most directly comparable GAAP measure and does not reflect the overall underwriting
profitability of the Company.
(10) The Company believes that this non-GAAP ratio or measure is useful to investors when evaluating the
Company’s underwriting performance as trends in the Company’s U.S. insurance operations may be
obscured by prior accident year adjustments and premium deficiency charges. This non-GAAP ratio or
measure should not be considered as a substitute for its most directly comparable GAAP measure and does
not reflect the overall underwriting profitability of the Company.
(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.
63
Management’s discussion and analysis of financial condition and results of operation references various non-
GAAP measures related to combined ratio, loss ratio, expense ratio, net losses and loss adjustment expenses, and
acquisition cost and other underwriting expenses throughout the discussion and should be read in conjunction
with GAAP measures and the reconciliations of non-GAAP measures listed above.
Premiums
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, 2014
Year Ended December 31, 2013
Gross
Written
Net
Written
Net
Earned
Gross
Written
Net
Written
Net
Earned
Small Business Binding Authority . . . . . .
Property Brokerage . . . . . . . . . . . . . . . . . .
Programs . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$122,387
40,822
61,225
5,544
$116,510
35,100
56,379
4,976
$109,222
33,297
56,114
12,532
$110,412
40,313
60,347
21,301
$103,726
34,469
55,524
19,986
$ 95,070
30,294
53,094
17,844
Total
. . . . . . . . . . . . . . . . . . . . . . . . .
$229,978
$212,965
$211,165
$232,373
$213,705
$196,302
Gross premiums written, which represents the amount received or to be received for insurance policies written
without reduction for reinsurance costs or other deductions, was $230.0 million for 2014, compared with
$232.4 million for 2013, an decrease of $2.4 million or 1.0%. The decrease was due to a reduction in other which
was primarily due to the culling of unprofitable business within the Company’s commercial automobile lines.
Excluding commercial automobile, which is included in the other category in the table above, gross written
premiums increased by $13.1 million or 6.1% due to growth in small business driven by both higher retention
rates and rate increases.
Net premiums written, which equals gross premiums written less ceded premiums written, was $213.0 million for
2014, compared with $213.7 million for 2013, an decrease of $0.7 million or 0.3%. As noted above, the decrease
was primarily due to a reduction in gross premium written for commercial automobile partially offset by an
increase in gross written premiums due to growth in small business.
The ratio of net premiums written to gross premiums written was 92.6% for 2014 and 92.0% for 2013.
Net premiums earned were $211.2 million for 2014, compared with $196.3 million for 2013, an increase of
$14.9 million or 7.6%. The growth in net premiums earned was primarily due to increases in net premiums
written within the previous year. Property net premiums earned for 2014 and 2013 were $126.6 million and
$114.1 million, respectively. Casualty net premiums earned for 2014 and 2013 were $84.5 million and
$82.2 million, respectively.
Other Income
Other income was $0.6 million and $5.8 million for the years ended December 31, 2014 and 2013, respectively.
In 2014, other income is primary comprised of fee income. In 2013, other income is primarily comprised of the
net gain on the asset sale of the Company’s wholly owned subsidiary, United National Casualty Insurance
Company of $5.2 million and fee income.
Net Losses and Loss Adjustment Expenses
The loss ratio for the Company’s Insurance Operations was 55.7% for 2014 compared with 59.5% for 2013. The
loss ratio is a GAAP financial measure that is generally viewed in the insurance industry as an indicator of
underwriting profitability and is calculated by dividing net losses and loss adjustment expenses by net premiums
earned.
64
The current accident year loss ratio decreased 1.8 points to 61.6% in 2014 from 63.4% in 2013.
• The current accident year property loss ratio increased 1.4 points from 50.4% in 2013 to 51.8% in
2014.
• The non-catastrophe loss ratio decreased 0.8 points from 41.6% in 2013 to 40.8% in 2014. Non-
catastrophe losses were $51.7 million and $47.5 million for the years ended December 31, 2014
and 2013, respectively.
• The catastrophe loss ratio increased 2.3 points from 8.7% in 2013 to 11.0% in 2014. Catastrophe
losses were $14.0 million and $10.0 million for the years ended December 31, 2014 and 2013,
respectively.
• The current accident year casualty loss ratio decreased 5.3 points from 81.5% in 2013 to 76.2% in
2014. During the last several years, rates were increased and unprofitable business was not renewed
contributing to this decrease.
In 2014, the Company reduced its prior accident year loss reserves by $12.5 million, which primarily consisted of
the following:
• Property: A $2.1 million increase due to higher than expected emergence on non-catastrophe claims
primarily in accident years 2007, 2012, and 2013.
• General Liability: A $3.1 million reduction due to less than anticipated frequency in accident year
2001 and less than anticipated frequency and severity on claims from accident years 2007 through 2010
partially offset by greater than anticipated loss emergence in accident year 2013.
• Asbestos and Environmental: A $7.1 million increase related to policies written prior to 1990 as a
result of recent severity being higher than expected due to faster erosion of underlying policy limits.
• Professional: A $19.4 million reduction primarily due to expected loss emergence being much less
than anticipated for accident years 2007 through 2011.
• Umbrella: A $2.7 million decrease primarily driven by less than anticipated frequency in accident
years 2002 through 2007.
• Commercial Auto: A $3.6 million increase primarily related to accident years 2011 through 2013.
Larger vehicles were written prior to 2014 and industry loss development factors were used to project
losses.
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.
65
• 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.
Net losses and loss adjustment expenses were $117.6 million for 2014, compared with $116.8 million for 2013,
an increase of $0.7 million or 0.6%. Excluding the impact of prior year adjustments, the current accident year net
losses and loss adjustment expenses were $130.1 million and $124.5 million for the years ended December 31,
2014 and 2013, respectively. This increase is primarily attributable to growth in earned premium volume, as
noted above, as well as an increase in catastrophe losses in 2014.
Acquisition Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were $89.0 million for 2014, compared with $87.4 million for
2013, an increase of $1.6 million or 1.9%. The increase is primarily due to increased commissions as a result of
growth in net premiums earned offset by the impact of the premium deficiency charge recognized in 2013.
Expense and Combined Ratios
The expense ratio for the Company’s Insurance Operations was 42.1% for 2014, compared with 44.5% for 2013.
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 the
growth in earned premium volume as well as the impact of the premium deficiency charge recognized in 2013 as
noted above.
The combined ratio for the Company’s Insurance Operations was 97.8% for 2014, compared with 104.0% for
2013. The combined ratio is a GAAP financial measure and is the sum of the Company’s loss and expense ratios.
Excluding the impact of prior accident year adjustments, the current accident year combined ratio decreased from
107.9% in 2013 to 103.7% in 2014. See discussion of loss ratio included in “Net Losses and Loss Adjustment
Expenses” above and discussion of expense ratio in preceding paragraph above for an explanation of this
decrease.
Income (Loss) from Segment
The factors described above resulted in income from the Company’s Insurance Operations of $5.2 million for
2014, compared with a loss of $2.1 million for 2013, an improvement of $7.3 million.
66
Reinsurance Operations
The components of
underwriting ratios are as follows:
income from the Company’s Reinsurance Operations segment and corresponding
Years Ended
December 31,
Increase / (Decrease)
(Dollars in thousands)
2014
2013
$
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . .
$61,275
$58,350
$ 2,925
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$60,216
$58,279
$ 1,937
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$57,354
(65)
$52,420
(4)
$ 4,934
(61)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$57,289
$52,416
$ 4,873
%
5.0%
3.3%
9.4%
NM
9.3%
Losses and expenses:
Net losses and loss adjustment expenses . . . . . . . . . .
Acquisition costs and other underwriting expenses . .
19,975
20,636
16,154
18,291
3,821
2,345
23.7%
12.8%
Income from segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$16,678
$17,971
$(1,293)
(7.2%)
Underwriting Ratios:
Loss ratio:
Current accident year
Prior accident year
. . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Calendar year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reconciliation of Non-GAAP Measures
Combined ratio excluding the effect of prior accident year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of prior accident year . . . . . . . . . . . . . . . . . . . . . . . .
(1) (5)
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss ratio excluding the effect of prior accident
year (2) (5)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of prior accident year . . . . . . . . . . . . . . . . . . . . . . . .
Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.4
(6.4)
4.0
1.1
5.1
41.7
(6.9)
34.8
36.0
70.8
77.7
(6.9)
70.8
41.7
(6.9)
34.8
31.3
(0.5)
30.8
34.9
65.7
66.2
(0.5)
65.7
31.3
(0.5)
30.8
Net losses and loss adjustment expenses excluding the
effects of prior accident year (3) (5) . . . . . . . . . . . . . . . .
Effect of prior accident year . . . . . . . . . . . . . . . . . . . . . . . .
23,917
(3,942)
16,403
(249)
Net losses and loss adjustment expenses . . . . . . . . . . . . . .
19,975
16,154
Acquisition costs and other underwriting expenses
excluding the effects of premium deficiency (4) (6)
. . . .
Effect of premium deficiency . . . . . . . . . . . . . . . . . . . . . . .
20,653
(17)
18,322
(31)
Acquisition cost and other underwriting expenses . . . . . . .
20,636
18,291
NM—not meaningful
(1) 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.
67
(2) This is a non-GAAP ratio that excludes the impact of prior accident year adjustments. The most directly
comparable GAAP measure is the loss ratio.
(3) This is a non-GAAP measure that excludes the impact of prior accident year adjustments. The most directly
comparable GAAP measure is the net losses and loss adjustment expenses.
(4) 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.
(5) 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.
(6) The Company believes that this non-GAAP ratio or measure is useful to investors when evaluating the
Company’s underwriting performance as trends in the Company’s reinsurance operations may be obscured
by premium deficiency charges. This non-GAAP ratio or measure should not be considered as a substitute
for its most directly comparable GAAP measure and does not reflect the overall underwriting profitability of
the Company.
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 was $61.3 million for 2014, compared $58.4 million for 2013, an increase of
$2.9 million or 5.0%. This increase is mainly due to a change in the Company’s quota share participation on
several property treaties as well as several new professional liability placements.
Net premiums written was $60.2 million for 2014, compared with $58.3 million for 2013, an increase of
$1.9 million or 3.3%. The increase is mainly due to a change in the Company’s quota share participation on
several property treaties as well as several new professional liability placements.
Net premiums earned were $57.4 million for 2014, compared with $52.4 million for 2013, an increase of
$4.9 million or 9.4%. The increase is primarily due to premiums resulting from new treaties written during 2013.
Property net premiums earned for 2014 and 2013 were $55.3 million and $48.8 million, respectively. Casualty
net premiums earned for 2014 and 2013 were $2.1 million and $3.6 million, respectively.
Other Income (Loss)
The Company recognized a loss of less than $0.1 million for both 2014 and 2013. 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 34.8% for 2014 compared with 30.8% for 2013.
The current accident year loss ratio increased 10.4 points from 31.3% for 2013 to 41.7% for 2014 primarily due
to an increase in losses for property lines. The property lines current accident year loss ratio increased to 39.7%
for 2014 from 28.7% for 2013.
There was a decrease in net losses and loss adjustment expenses for prior accident years of $3.9 million in 2014
which decreased the loss ratio by 6.9 points compared to a decrease in net losses and loss adjustment expenses
for prior accident years of $0.3 million in 2013 which decreased the loss ratio by 0.5 points.
68
In 2014, the Company decreased its prior accident year loss reserves for its Reinsurance Operations by
$3.9 million primarily due to better than anticipated loss emergence on property lines partially offset by adverse
development related to commercial auto and higher than anticipated severity on the Company’s marine product.
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.
Net losses and loss adjustment expenses were $20.0 million for 2014, compared with $16.2 million for 2013, an
increase of $3.8 million or 23.7%. Excluding the impact of prior year adjustments, the current accident year net
losses and loss adjustment expenses increased from $16.4 million for 2013 to $23.9 million for 2014. This
increase is primarily attributable to an increase in net premiums earned and an increase in property line losses as
noted above.
Acquisition Costs and Other Underwriting Expenses
Acquisition costs and other underwriting expenses were $20.6 million for 2014, compared with $18.3 million for
2013, an increase of $2.3 million or 12.8%. The increase is primarily due to higher commission expense as a
result of growth in premiums earned in 2014 as well as increased profit commission charges due to a reduction of
prior accident year loss reserves for property. These increases were offset by a reduction in current accident year
contingent commissions as a result of higher losses on one of the property catastrophe contracts.
Expense and Combined Ratios
The expense ratio for the Company’s Reinsurance Operations was 36.0% for 2014, compared with 34.9% for
2013. The increase is mainly related to an increase in profit commission charges as a result of reduction of prior
accident year loss reserves for property offset by a reduction in current accident year contingent commissions due
to higher losses on one of the property catastrophe contracts.
The combined ratio for the Company’s Reinsurance Operations was 70.8% for 2014, compared 65.7% for 2013.
Excluding the impact of prior accident year adjustments, the combined current accident year ratio increased from
to 66.2% in 2013 to 77.7% in 2014. See discussion of loss ratio included in “Net Losses and Loss Adjustment
Expenses” above and discussion of expense ratio in preceding paragraph above for an explanation of this
increase.
Income from Segment
The factors described above resulted in income from the Company’s Reinsurance Operations of $16.7 million in
2014, compared to $18.0 million in 2013, a decrease of $1.3 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)
2014
2013
$
%
Net investment income . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . .
Corporate and other operating expenses . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (expense) benefit . . . . . . . . . . . . . . . . . . .
$ 28,821
35,860
(14,559)
(822)
(8,338)
$ 37,209
27,412
(11,614)
(6,169)
(1,019)
$(8,388)
8,448
2,945
(5,347)
7,319
(22.5%)
30.8%
25.4%
(86.7%)
718.3%
69
Net Investment Income
Net investment income, which is gross investment income less investment expenses, was $28.8 million for 2014,
compared with $37.2 million for 2013, a decrease of $8.4 million or 22.5%.
• Gross investment income, which excludes realized gains and losses, was $32.4 million for 2014,
compared with $41.4 million for 2013, a decrease of $9.0 million or 21.7%. The decrease was
primarily due to the redemption of the Company’s corporate loans portfolio during the first quarter of
2014 and lower reinvestment yields.
•
Investment expenses were $3.6 million for 2014, compared with $4.2 million for 2013, a decrease of
$0.6 million or 13.9%. The decrease is primarily due to the sale of the corporate loan portfolio and a
reduction in trust fees which is partially offset by an increase in internal management fees.
the Company held agency mortgage-backed securities with a book value of
As of December 31, 2014,
$156.3 million. Excluding the agency mortgage-backed securities, the average duration of the Company’s fixed
maturities portfolio was 2.0 years as of December 31, 2014, compared with 1.9 years as of December 31, 2013.
Including cash and short-term investments, the average duration of the Company’s fixed maturities portfolio,
excluding agency mortgage-backed securities was 1.9 years as of December 31, 2014 and December 31, 2013.
Changes in interest rates can cause principal payments on certain investments to extend or shorten which can
impact duration. At December 31, 2014, the Company’s embedded book yield on its fixed maturities, not
including cash, was 2.1% compared with 2.6% at December 31, 2013. As of December 31, 2014, the Company’s
investment portfolio held $69.5 million in tax-free municipal bonds with an embedded book yield of 3.3%
compared with an embedded book yield of 3.0% on $98.7 million in tax-free municipal bonds as of
December 31, 2013.
Net Realized Investment Gains
Net realized investment gains were $35.9 million for 2014, compared with $27.4 million for 2013. The net
realized investment gains for 2014 consist primarily of net gains of $2.2 million related to the Company’s fixed
maturities and $55.0 million related to its equity securities, offset by losses of $20.8 million related to its interest
rate swaps and other than temporary impairment losses of $0.5 million. 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.
See Note 3 of the notes to the consolidated financial statements in Item 8 of Part II of this report for an analysis
of total investment return on a pre-tax basis for the years ended December 31, 2014 and 2013.
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
$14.6 million for 2014, compared with $11.6 million for 2013, an increase of $2.9 million or 25.4%. The increase
is primarily due to incurring cost of approximately $3.4 million in connection with the acquisition of American
Reliable offset by a reduction in salary expense of $0.7 million
Interest Expense
Interest expense was $0.8 million and $6.2 million for 2014 and 2013, respectively. This reduction was primarily
due to the repayment of the Company’s senior notes payable and junior subordinated debentures in 2013. See
Note 10 of the notes to the consolidated financial statements in Item 8 of Part II of this report for details on the
Company’s debt.
70
Income Tax Expense (Benefit)
Income tax expense was $8.3 million and $1.0 million for 2014 and 2013, respectively. See Note 8 of the notes to
the consolidated financial statements in Item 8 of Part II of this report for an analysis of income tax expense
between periods.
Net Income (Loss)
The factors described above resulted in net income of $62.9 million in 2014, compared with net income of
$61.7 million in 2013, an increase of $1.2 million.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
107.9
(3.9)
104.0
107.3
(3.9)
0.6
104.0
63.4
(3.9)
59.5
113.1
(2.4)
110.7
115.3
(2.4)
(2.2)
110.7
68.5
(2.4)
66.1
71
(Dollars in thousands)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
$
%
63.4
(3.9)
—
59.5
50.4
(8.0)
42.4
81.5
1.9
83.4
81.5
1.9
—
83.4
43.9
0.6
44.5
70.4
(2.4)
(1.9)
66.1
65.0
1.0
66.0
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.
72
(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.
(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
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
Gross premiums written 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.
73
Net 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.
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 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 current accident year loss ratio decreased 5.1 points to 63.4% in 2013 from 68.5% in 2012. Net losses for
2012 were lower than they otherwise would have been as a result of premium deficiency charges recorded in
2011. Excluding the impact of the 2011 premium deficiency charges, the current accident year loss ratio was
70.4% for 2012.
• The current accident year property loss ratio decreased 14.6 points from 65.0% in 2012 to 50.4% in
2013.
• The non-catastrophe loss ratio decreased 8.4 points 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 points from 15.0% in 2012 to 8.7% in 2013. Catastrophe
losses were $10.0 million and $14.2 million for the years ended December 31, 2013 and 2012,
respectively.
• The current accident year casualty loss ratio increased 9.0 points 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 points resulting from a decrease of net losses and loss
adjustment expenses for prior accident years of $7.6 million in 2013 compared to a decrease of net losses and
loss adjustment expenses for prior accident years of $4.2 million in 2012. When analyzing loss reserves and prior
year development, the Company considers many factors, including the frequency and severity of claims, loss
credit trends, case reserve settlements that may have resulted in significant development, and any other additional
or pertinent factors that may impact reserve estimates.
74
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.
• 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.
• Commercial Auto: 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.
75
Expense and Combined Ratios
The expense ratio for the Company’s Insurance Operations was 44.5% for 2013, compared with 44.6% for 2012.
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. 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.
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52,420 $59,709 $ (7,289)
722
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(726)
(4)
(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%
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31.3
(0.5)
30.8
34.9
65.7
66.2
(0.5)
65.7
66.2
(0.5)
—
65.7
49.3
9.5
58.8
25.9
84.7
75.2
9.5
84.7
76.5
9.5
(1.3)
84.7
(18.0)
(10.0)
(28.0)
9.0
(19.0)
76
(Dollars in thousands)
Years Ended
December 31,
Increase / (Decrease)
2013
2012
$
%
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
—
34.9
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)
26,456
8,657
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
16,154
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
(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 is 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.
77
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. Global Indemnity Reinsurance treaties written during 2012 and 2013 are
predominantly related to property exposure comprised of property catastrophe business.
Net premiums written, which equals gross premiums written less ceded premiums written, was $58.3 million for
2013, compared with $41.7 million for 2012, an increase of $16.6 million or 39.7%. The increase was primarily
due to the increase in gross premiums written.
Net premiums earned were $52.4 million for 2013, compared with $59.7 million for 2012, a decrease of
$7.3 million or 12.2%. The decrease was primarily due to net earned premiums for 2012 including a premium
increase of $6.0 million related to reinsurance treaties written in 2009 and 2010 which were contractually due as
a result of losses incurred on these treaties. Property net premiums earned for 2013 and 2012 were $48.8 million
and $34.2 million, respectively. Casualty net premiums earned for 2013 and 2012 were $3.6 million and
$25.5 million, respectively.
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 current accident year loss ratio decreased 18.0 points 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 points, compared to an increase in net losses and loss adjustment expenses
for prior accident years of $8.7 million in 2012 which increased the loss ratio by 9.5 points.
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.
78
• Marine: A $2.7 million increase in marine lines primarily related to accident year 2011 primarily due
to higher than expected reported losses.
• Commercial Auto: 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.
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. 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. 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 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.
79
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
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 3 of the notes to the consolidated financial statements in Item 8 of Part II of this report for an analysis
of total investment return on a pre-tax basis for the years ended December 31, 2013 and 2012.
80
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 10 of the notes to the consolidated financial statements in Item 8 of Part II of this report
for details on the Company’s debt.
Income Tax Expense (Benefit)
Income tax expense was $1.0 million for 2013, compared with a benefit of $5.9 million for 2012. See Note 8 of
the notes to the consolidated financial statements in Item 8 of Part II of this report for an analysis of income tax
expense between periods.
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.
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: Global
Indemnity 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
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
81
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 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
82
respective departments of insurance in Pennsylvania, Indiana, Wisconsin, and Virginia. On January 23, 2014, the
U.S. insurance companies paid an aggregate dividend of $200 million to Global Indemnity Group, Inc. See Note
17 of the notes to consolidated financial statements in Item 8 of Part II of this report for the dividend limitations
for 2015.
Global Indemnity Reinsurance is prohibited, without the approval of the BMA, from reducing by 15% or more its
total statutory capital as set out in its previous year’s statutory financial statements, and any application for such
approval must include such information as the BMA may require. Based upon the total statutory capital plus the
statutory surplus as set out in its 2014 statutory financial statements that will be filed in 2015, the Company
believes Global Indemnity Reinsurance could pay a dividend of up to $287.1 million without requesting BMA
approval Global Indemnity Reinsurance did not declare or pay any dividends during 2014. For 2015, the
Company believes that Global Indemnity Reinsurance,
including distributions it could receive from its
subsidiaries, should have sufficient liquidity and solvency to pay dividends.
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 2014, 2013, and 2012 was $12.0 million, $4.9 million and $35.0 million,
respectively.
In 2014, the decrease in operating cash flows of approximately $7.1 million from the prior year was primarily a
net result of the following items:
2014
2013
Change
Net premiums collected . . . . . . . . . . . . . . . . . . . . . . .
Net losses paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting and corporate expenses . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . .
Net federal income taxes recovered (paid) . . . . . . . . .
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 255,053
(169,386)
(121,302)
38,298
(13,861)
(804)
$ 250,987
(188,690)
(111,358)
44,367
7,451
(7,678)
$ 4,066
19,304
(9,944)
(6,069)
(21,312)
6,874
Net cash used for operating activities . . . . . . . .
$ (12,002)
$
(4,921)
$ (7,081)
83
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)
$ 30,092
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,
the Company believes each company in its Insurance Operations and Reinsurance Operations
maintains sufficient liquidity to pay claims through cash generated by operations and liquid investments. The
holding companies also maintain sufficient liquidity to meet their obligations. The Company monitors its
investment portfolios to assure liability and investment durations are closely matched.
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. The fixed income portfolio currently has a duration of 1.95 years which allows
the Company to defensively position itself during the current low interest rate environment.
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 the consolidated financial statements in
Item 8 of Part II of this report for a discussion of the Company’s dividend capacity.
On December 26, 2014, the Company borrowed $102.0 million pursuant to its margin borrowing facilities. These
funds were used to finance the acquisition of American Reliable on January 1, 2015. The borrowing rate is tied to
LIBOR and is currently approximately 1%. Approximately $130.5 million in collateral was deposited to support
the borrowing. The borrowing is subject to a maintenance margin, which is a minimum account balance that must
be maintained. A decline in market conditions could require an additional deposit of collateral. See Note 10 of
the notes to the consolidated financial statements in Item 8 of Part II of this report for details on the terms of the
margin borrowing facilities.
Stop Loss Agreement, Quota Share Arrangements and Intercompany Pooling Arrangement
Global Indemnity’s U.S. insurance companies and Global Indemnity Reinsurance currently participates in a stop
loss agreement that provides protection to the U.S. insurance companies in a loss corridor from 70% to 90%
subject to certain restrictions.
The Company’s U.S. insurance companies participate in quota share reinsurance agreements with Global
Indemnity Reinsurance whereby 50% of the net retained business of the U.S. insurance companies is ceded to
84
Global Indemnity Reinsurance. These agreements exclude named storms. Global Indemnity Reinsurance is an
unauthorized reinsurer. As a result, any losses and unearned premiums that are ceded to Global Indemnity
Reinsurance by the U.S. insurance companies must be collateralized. To satisfy this requirement, Global
Indemnity Reinsurance has set up custodial trust accounts on behalf of the U.S. insurance companies.
In 2015, American Reliable will also participate in a quota share reinsurance agreement with Global Indemnity
Reinsurance whereby 50% of the net retained business of American Reliable is ceded to Global Indemnity
Reinsurance.
Global Indemnity Reinsurance 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 Global Indemnity 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.
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, 2014, there was $1.0 million outstanding on this loan with accrued
interest of $1.8 million. United America Indemnity, Ltd. is dependent on its subsidiaries to pay its dividends and
operating expenses.
On November 12, 2007, Global Indemnity Reinsurance issued a $50.0 million demand line of credit to
United America Indemnity, Ltd. which bore 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, Global Indemnity 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. In May, 2014, United America Indemnity,
Ltd. repaid $20 million of the outstanding balance due under this note. As of December 31, 2014, there was
$33.0 million outstanding on the note payable.
U.A.I. (Luxembourg) Investment S.à.r.l. holds two promissory notes in the amounts of $175.0 million and
$110.0 million and a loan in the amount of $125.0 million from Global Indemnity Group, Inc. The $175.0 million
and $110.0 million notes bear interest at a rate of 6.64% and 6.20%, respectively, and mature in 2018 and 2020,
respectively. The $125.0 million loan bears interest at 5.78% and matures in 2024. Interest on these agreements
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 and loan is dependent
on dividends that it receives from its subsidiaries or using other assets it holds.
85
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, 2014, Global Indemnity plc owed
Global Indemnity (Cayman) Ltd. $108.0 million under this arrangement, with accrued interest of $3.5 million,
and Global Indemnity (Cayman) Ltd. had $102.5 million outstanding on the line of credit, with accrued interest
of $3.4 million.
In November, 2012, American Insurance Service, Inc. (“AIS”) issued a $35.0 million loan to Global Indemnity
Reinsurance, bearing interest at the six month London Interbank Offered Rate (“LIBOR”) plus 3.5%. The
proceeds of the loan were used to fund trust accounts in the normal course of 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, 2014, there was $5.0 million outstanding on the
note payable, with accrued interest of $0.2 million payable to AIS and $0.6 million payable to Global Indemnity
Group, Inc.
The Company has available two margin borrowing facilities. The borrowing rate is tied to LIBOR and is
currently approximately 1%. These facilities are due on demand. The borrowings are 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, 2014, approximately $222.8 million in collateral
was deposited to support the borrowings. The amount borrowed against the margin accounts may fluctuate as
routine investment transactions, such as dividends received, investment income received, maturities and pay-
downs, impact cash balances. The margin facilities contains customary events of default, including, without
insolvency, failure to make required payments, failure to comply with any representations or
limitation,
warranties, failure to adequately assure future performance, and failure of a guarantor to perform under its
guarantee.
On May 12, 2014, Global Indemnity Group, Inc. entered into an agreement to loan $200 million to Global
Indemnity (Cayman) Limited which bears interest at 0.28% and matures in 2017. In December, 2014, Global
Indemnity (Cayman) Limited repaid $125.0 million of the outstanding principal. As of December 31, 2014,
Global Indemnity (Cayman) Limited owed $75.0 million under this loan agreement with accrued interest of $0.4
million.
In December, 2014, Global Indemnity Group, Inc. declared and paid a dividend of $125 million to U.A.I.
(Luxembourg) Investment S.à.r.l. and U.A.I. (Luxembourg) Investment S.à.r.l. declared and paid a dividend of
$125 million to U.A.I. (Luxembourg) IV S.à.r.l. In accordance with the Luxembourg Treaty, the $125 million
dividend from Global Indemnity Group, Inc. to U.A.I. (Luxembourg) Investment S.à.r.l. was subject to a 5% U.S.
withholding tax amounting to $6.3 million.
The Company entered into two $100 million derivative instruments. Due to declines in interest rates, the
Company has paid $20.6 million and $5.4 million in connection with these derivative instruments for the years
ended December 31, 2014 and 2013, respectively.
86
Contractual Obligations
The Company has commitments in the form of operating leases, commitments to fund limited partnerships, and
unpaid losses and loss expense obligations. As of December 31, 2014, contractual obligations related to Global
Indemnity’s commitments, including any principal and interest payments, were as follows:
(Dollars in thousands)
Operating leases (2) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments to fund limited partnerships . . . . . . . . .
Unpaid losses and loss adjustment expenses
Payment Due by Period (1)
Total
2015
2016 and
2017
2018 and
2019
Thereafter
$ 11,360
22,500
$
2,374
22,500
$
$
4,513
—
$
4,359
—
114
—
obligations (3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
675,472
231,534
227,003
106,426
110,509
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$709,332
$256,408
$231,516
$110,785
$110,623
(1) The above table does not reflect contractual obligations assumed in connection with the American Reliable
Acquisition.
(2) The Company leases office space and equipment as part of its normal operations. The amounts shown above
represent future commitments under such operating leases.
(3) 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.
The Company has no off balance sheet arrangements.
Off Balance Sheet Arrangements
Inflation
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.
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.
87
The Company’s business and operations are and will be subject to a variety of risks, uncertainties and other
factors. Consequently, actual results and experience may materially differ from those contained in any forward-
looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to
differ from those projected include, but are not
limited to, the following: (1) the ineffectiveness of the
Company’s business strategy due to changes in current or future market conditions; (2) the effects of
competitors’ pricing policies, and of changes in laws and regulations on competition,
including industry
consolidation and development of competing financial products; (3) greater frequency or severity of claims and
loss activity than the Company’s underwriting, reserving or investment practices have anticipated; (4) decreased
level of demand for the Company’s insurance products or increased competition due to an increase in capacity of
property and casualty insurers; (5) risks inherent in establishing loss and loss adjustment expense reserves;
(6) uncertainties relating to the financial ratings of the Company’s insurance subsidiaries; (7) uncertainties
arising from the cyclical nature of the Company’s business; (8) changes in the Company’s relationships with, and
the capacity of, its general agents, brokers, insurance companies and reinsurance companies from which the
Company derives its business; (9) the risk that the Company’s reinsurers may not be able to fulfill obligations;
(10) investment performance and credit risk; (11) new tax legislation or interpretations that could lead to an
increase in the Company’s tax burden; (12) uncertainties relating to governmental and regulatory policies, both
domestically and internationally; (13) foreign currency fluctuations; (14) the impact of catastrophic events;
(15) the Company’s subsidiaries’ ability to pay dividends; (16) deterioration of debt and equity markets;
(17)
future litigation matters; and
(19) uncertainties and risks related to the acquisition of American Reliable.
relating to ongoing or
(18) uncertainties
rate changes;
interest
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.
88
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, 2014, 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
$1,309,363
1,304,128
1,283,475
1,258,328
1,233,677
$
$ 25,888
20,653
—
(25,147)
(49,798)
%
2.0%
1.6%
0.0%
(2.0%)
(3.9%)
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.
89
As of December 31, 2014, 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
$(51,231)
(31,572)
(13,675)
2,622
17,467
Credit Risk
Change in Market
Value and Impact to
Consolidated
Statement of Income
$(37,556)
(17,897)
—
16,297
31,142
The Company’s investment policy requires that its investments in debt instruments are of high credit quality
issuers and limit the amount of credit exposure to any one issuer based upon the rating of the security.
As of December 31, 2014, the Company had approximately $38.7 million worth of investment exposure to
subprime and Alt-A investments. As of December 31, 2014, approximately $38.1 million of those investments
have been rated BBB+ to AAA by Standard & Poor’s and $0.6 million were rated below investment grade. 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. There were no
impairments recognized on these investments during the years ended December 31, 2014 or 2013.
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 2014, 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.
The Company compares the results of the Company’s equity portfolio to a customized benchmark which is the
S&P 500 Value excluding financials. 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
2014, the Company’s common stock portfolio had a return of 7.8%, not including investment advisor fees,
compared to the benchmark return of 11.2%.
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
90
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 4.6% 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, 2014, 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)
$ 97,638
109,843
122,048
134,253
146,458
(1.7%)
(0.9%)
—
0.9%
1.7%
(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 Global
Indemnity 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.
91
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
93
94
95
96
97
98
99
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
92
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Global Indemnity plc
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 at December 31, 2014 and 2013, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our opinion, 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 did not maintain, in all
material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in
Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) because a material weakness in internal control over financial reporting related to inadequate design of
controls over management’s estimation process for unpaid losses and loss adjustment expenses existed as of that date. A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or
detected on a timely basis. The material weakness referred to above is described in Management’s Report on Internal Control
over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing,
and extent of audit tests applied in our audit of the 2014 consolidated financial statements, and our opinion regarding the
effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated
financial statements. 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 referred to above. 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 limitations, 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.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 16, 2015
93
GLOBAL INDEMNITY PLC
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31,
2014
December 31,
2013
Fixed maturities:
ASSETS
Available for sale, at fair value (amortized cost: $1,272,948 and $1,187,685) . . .
$1,283,475
$1,204,364
Equity securities:
Available for sale, at fair value (cost: $99,297 and $191,425) . . . . . . . . . . . . . . .
122,048
254,070
Other invested assets:
Available for sale, at fair value (cost: $33,174 and $3,065) . . . . . . . . . . . . . . . . .
33,663
3,489
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,439,186
58,823
113,696
56,586
125,718
25,176
3,139
20,250
25,238
17,636
4,820
4,725
60
34,980
$1,930,033
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
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded balances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingent commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Margin borrowing facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 675,472
120,815
—
2,800
12,985
174,673
34,998
$ 779,466
116,629
1,595
5,177
12,677
100,000
22,955
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,021,743
1,038,499
Commitments and contingencies (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity:
Ordinary shares, $0.0001 par value, 900,000,000 ordinary shares authorized; A
ordinary shares issued: 16,331,577 and 16,200,406, respectively; A ordinary
shares outstanding: 13,266,762 and 13,141,035, 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: 3,064,815 and 3,059,371 shares,
—
—
3
519,590
23,384
466,717
3
516,653
54,028
403,861
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(101,404)
(101,265)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
908,290
873,280
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,930,033
$1,911,779
See accompanying notes to consolidated financial statements.
94
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,
2014
2013
2012
$
$
$
291,253
273,181
268,519
28,821
$
$
$
290,723
271,984
248,722
37,209
$
$
$
244,053
219,547
238,862
47,557
(501)
(1,239)
(5,914)
—
36,361
35,860
555
—
28,651
27,412
5,791
541
12,128
6,755
(158)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
333,755
319,134
293,016
Losses and Expenses:
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . .
Acquisition costs and other underwriting expenses . . . . . . . . . . . . . .
Corporate and other operating expenses . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit)
137,561
109,619
14,559
822
71,194
8,338
132,991
105,651
11,614
6,169
62,709
1,019
153,628
95,403
9,691
5,393
28,901
(5,856)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
62,856
$
61,690
$
34,757
Per share data:
Net income
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2.50
2.48
$
$
2.46
2.45
$
$
1.30
1.30
Weighted-average number of shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,131,811
25,072,712
26,722,772
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,331,420
25,174,015
26,748,833
See accompanying notes to consolidated financial statements.
95
GLOBAL INDEMNITY PLC
Consolidated Statements of Comprehensive Income
(In thousands)
Years Ended December 31,
2014
2013
2012
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 62,856
$ 61,690
$34,757
Other comprehensive income (loss), net of tax:
Unrealized holding gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portion of other than temporary impairment losses recognized in other
6,878
17,466
8,295
comprehensive income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for (gains) losses included in net income . . . . .
Unrealized foreign currency translation gains (losses) . . . . . . . . . . . . . . . . .
(4)
(37,177)
(341)
—
(16,951)
163
(538)
5,448
(29)
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
(30,644)
678
13,176
Comprehensive income, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 32,212
$ 62,368
$47,933
See accompanying notes to consolidated financial statements.
96
GLOBAL INDEMNITY PLC
Consolidated Statements of Changes in Shareholders’ Equity
(In thousands, except share amounts)
Years Ended December 31,
2014
2013
2012
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,200,406
94,563
36,608
—
16,087,939
74,400
38,067
—
21,429,683
29,675
—
(5,371,419)
Number at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,331,577
16,200,406
16,087,939
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit on share-based compensation expense . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
Number of treasury shares:
2
1
516,653
2,900
37
—
519,590
54,028
(30,299)
(4)
(341)
(30,644)
23,384
403,861
62,856
466,717
$
$
$
$
$
$
$
$
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
307,414
34,757
342,171
Number at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A ordinary shares purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A ordinary shares retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,059,371
5,444
—
3,057,001
2,370
—
4,619,005
3,809,415
(5,371,419)
Number at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,064,815
3,059,371
3,057,001
Treasury shares, at cost:
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A ordinary shares purchased, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A ordinary shares retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (101,265) $ (101,210) $ (130,444)
(82,961)
112,195
(139)
—
(55)
—
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (101,404) $ (101,265) $ (101,210)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
908,290
$
873,280
$
806,618
See accompanying notes to consolidated financial statements.
97
GLOBAL INDEMNITY PLC
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income 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 . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash deposited in escrow for purchase of American Reliable . . . . . . . .
Amount paid 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,
2014
2013
2012
$ 62,856
$ 61,690
$ 34,757
—
3,466
2,900
(828)
9,103
(35,860)
—
(6,698)
72,169
(6,514)
(103,994)
4,186
(2,377)
(3,398)
308
(4,734)
(3,061)
474
(12,002)
415,739
191,765
108,556
12
—
(113,696)
(20,550)
(615,867)
(45,077)
(30,120)
(109,238)
77
3,807
4,349
(3)
6,696
(27,412)
(5,166)
(12,136)
43,940
(11,252)
(99,639)
22,515
976
(1,436)
2,766
8,473
(3,912)
746
(4,921)
59
2,282
2,625
(1,463)
6,981
(6,755)
—
8,594
46,159
(5,912)
(92,263)
(19,927)
(4,686)
(7,190)
2,438
(4,621)
3,299
610
(35,013)
292,200
101,379
143,034
—
25,885
—
(5,421)
(465,318)
(100,806)
(16)
(9,063)
454,655
50,176
73,370
1,114
—
—
—
(457,150)
(57,509)
(13)
64,643
Cash flows from financing activities:
Borrowings under margin borrowing facilities . . . . . . . . . . . . . . . . . . .
Purchases of A ordinary shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit on share-based compensation expense . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . .
74,673
(139)
37
—
—
74,571
(46,669)
105,492
$ 58,823
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
See accompanying notes to consolidated financial statements.
98
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.”
As of December 31, 2014, the Company managed 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
Inc.,
Collectibles Insurance Services, LLC, Global Indemnity Insurance Agency, LLC, and J.H. Ferguson &
Associates, LLC, and Reinsurance Operations, which includes the operations of Global Indemnity Reinsurance.
Insurance Company, American Insurance Adjustment Agency,
including specialty products, such as property, general liability, and professional
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. As of December 31, 2014, the
Company managed 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
lines through
segments,
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 subsidiary, Global Indemnity
Reinsurance. Global Indemnity Reinsurance is a 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.
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.
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 Consolidated Statement of Cash Flows for the years ended December 31, 2013 and 2012 that were included
in the Form 10-K for the annual periods ended December 31, 2013 and 2012 classified $3.0 million and
$0.4 million, respectively, as “Other assets and liabilities, net” within the “Cash flows from operating activities”
99
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
section. These amounts were properly reclassified to the line item “Amortization and depreciation” in the
Consolidated Statement of Cash Flows for the years ended December 31, 2013 and 2012 as included in this Form
10-K for the annual period ended December 31, 2014 (“the December 31, 2014 10K”). These reclassifications do
not impact “Net cash flows used for operating activities” nor does it impact any other financial metric or
disclosure within the December 31, 2014 10K. The Company does not believe that these adjustments are material
to the current or to any prior years’ consolidated financial statements.
Certain other prior period amounts have been reclassified to conform to the current period presentation.
2.
Summary of Significant Accounting Policies
Restricted Cash
At December 31, 2014, the Company had $113.7 million of cash in escrow to fund the acquisition of American
Reliable on January 1, 2015.
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. The difference between amortized cost and fair value of the Company’s
available for sale investments, net of the effect of deferred income taxes, is reflected in accumulated other
comprehensive income in shareholders’ equity and, accordingly, has no effect on net income other than for the
credit loss component of impairments deemed to be other than temporary.
The Company’s investments in other invested assets 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 $33.7 million and $3.5 million as of
December 31, 2014 and 2013, respectively. Both of these amounts relate to investments in limited partnerships.
The Company does not have access to daily valuations, therefore; the estimated fair value of the limited
partnerships are measured utilizing net asset value as a practical expedient for the limited partnerships.
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
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
100
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 2014, 2013,
and 2012, please see Note 3 below.
101
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, 2014, the Company had approximately $39.1 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 $1.5 million and $1.8 million as of December 31, 2014 and 2013, 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 reporting unit, including goodwill, exceeds the fair value of the reporting unit. The
amount of the impairment loss would be equal to the excess carrying value of the goodwill over the implied fair
value of the reporting unit goodwill. Based on the qualitative assessment performed in 2014, there was no
impairment of goodwill as of December 31, 2014.
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 2014, there
were no impairments of indefinite lived intangible assets as of December 31, 2014.
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, 2014, 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
102
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
reinsurers. Amounts receivable from reinsurers are estimated in a manner consistent with the reinsured policy
and the reinsurance contract.
The Company regularly reviews the collectability of reinsurance receivables. An allowance for uncollectible
reinsurance receivable is recognized based on the financial strength of the reinsurers and the length of time any
balances are past due. Any changes in the allowance resulting from this review are included in income during the
period in which the determination is made. The allowance for uncollectible reinsurance was $9.4 million and
$9.0 million as of December 31, 2014 and 2013, respectively.
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. The deferred tax asset balance is analyzed regularly by management. This assessment requires
significant judgment and considers, among other matters, the nature, frequency and severity of current and
cumulative losses, forecasts of future profitability, the duration of carryforward periods, and tax planning
strategies and/or actions. Management believes that it is more likely than not that the results of future operations
will generate sufficient taxable income to realize the remaining deferred income tax assets, and accordingly, the
Company has not established any valuation allowances.
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, 2014, 2013, and 2012 was
$57.1 million, $53.8 million, and $48.9 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
103
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 2014, 2013, and 2012,
the total premium deficiency charges were
$0.4 million, $1.7 million, and $0.5 million, respectively, comprised solely of reductions to unamortized deferred
acquisition costs within the commercial automobile lines in Insurance Operations. The 2013 premium deficiency
charge of $1.7 million was recorded as of September 30, 2013. Based on the Company’s analysis, the Company
expensed acquisition cost as incurred for the remainder of 2013 and 2014 for the commercial automobile lines in
Insurance Operations. The 2012 premium deficiency charge was recorded as of December 31, 2012. As the
charges were a reduction of unamortized deferred acquisition costs in each respective period, no premium
deficiency reserve exists as of December 31, 2014 or 2013.
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 and the periodic net interest settlements under
the derivatives instruments are recognized as net realized investment gains on the consolidated statement of
operations.
Margin Borrowing Facilities
The carrying amounts reported in the balance sheet represent the outstanding borrowings. The outstanding
borrowings are due on demand; therefore, the cash receipts and cash payments related to the margin borrowing
facilities are shown net in the consolidated statement of cash flows.
Notes and Debentures Payable
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 management’s
judgment. In some cases, significant periods of time, up to several years or more, may elapse between the
occurrence of an insured loss and the reporting of that loss to the Company. To establish this liability, the
Company regularly reviews and updates the methods of making such estimates and establishing the resulting
liabilities. Any resulting adjustments are recorded in income during the period in which the determination is
made.
104
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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
predetermined thresholds. Similarly, in some circumstances, companies that cede business to the Reinsurance
Operations are paid profit commissions based on the profitability of the ceded portfolio. These commissions are
charged to other underwriting expenses when incurred. The liability for the unpaid portion of these commissions,
which is stated separately on the face of the consolidated balance sheet as contingent commissions, was
$13.0 million and $12.7 million as of December 31, 2014 and 2013, respectively.
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 14 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 and other equity awards. See
Note 16 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 $0.5 million and $0.3 million for the years ended December 31,
2014 and 2013, respectively. 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
105
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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
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 did not have a
significant impact on the ongoing business operations of the Company.
3.
Investments
The amortized cost and estimated fair value of investments were as follows as of December 31, 2014 and 2013:
(Dollars in thousands)
As of December 31, 2014
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 . . . . . . . . . . . . . . . . . . . . . .
Foreign corporate bonds . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . .
1,272,948
99,297
33,174
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Other than
temporary
impairments
recognized
in AOCI (1)
$
78,569
$ 2,281
$
(83) $
80,767
$ —
188,452
205,814
177,853
133,984
380,704
107,572
3,718
3,709
713
21
3,421
625
14,488
25,689
489
(697)
(764)
(303)
(847)
(709)
(558)
191,473
208,759
178,263
133,158
383,416
107,639
(3,961)
(2,938)
—
1,283,475
122,048
33,663
—
(4)
(13)
—
—
—
(17)
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,405,419
$40,666
$(6,899) $1,439,186
$ (17)
(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”).
106
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(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 (2)
$
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)
(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% of shareholders’ equity at December 31, 2014 or 2013, respectively.
The amortized cost and estimated fair value of the Company’s fixed maturities portfolio classified as available
for sale at December 31, 2014, by contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties.
(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
$ 133,140
546,653
41,831
11,228
22,445
205,814
177,853
133,984
$ 134,722
552,135
42,469
11,316
22,653
208,759
178,263
133,158
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,272,948
$1,283,475
107
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, 2014:
(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 . . . . . . . . . . . . . . . . . . .
$ 11,728
$
(9) $
3,343
$
(74) $ 15,071
$
(83)
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . .
Asset-backed securities . . . . . . . . . . .
Commercial mortgage-backed
securities . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . .
Foreign corporate bonds . . . . . . . . . .
Total fixed maturities . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . .
28,684
2,818
92,123
92,664
144,505
60,518
433,040
20,002
(314)
(7)
(283)
(525)
(656)
(558)
28,061
51,203
1,683
26,280
3,216
—
(383)
(757)
(20)
(322)
(53)
—
(2,352)
(2,808)
113,786
1,577
(1,609)
(130)
56,745
54,021
93,806
118,944
147,721
60,518
546,826
21,579
(697)
(764)
(303)
(847)
(709)
(558)
(3,961)
(2,938)
Total . . . . . . . . . . . . . . . . . . . . . .
$453,042
$(5,160) $115,363
$(1,739) $568,405
$(6,899)
(1) Fixed maturities in a gross unrealized loss position for twelve months or longer are primarily comprised of
non-credit losses on investment grade securities where management does not intend to sell, and it is more
likely than not that the Company will not be forced to sell the security before recovery. The Company has
analyzed these securities and has determined that they are not other than temporarily impaired.
The following table contains an analysis of the 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)
108
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 other than temporarily impaired.
Subject to the risks and uncertainties in evaluating the potential impairment of a security’s value, the impairment
evaluation conducted by the Company as of December 31, 2014 concluded the unrealized losses discussed above
are not other than temporary impairments. The impairment evaluation process is discussed in the “Investment”
section of Note 2 (“Summary of Significant Accounting Policies”).
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, 2014, gross unrealized losses related to U.S.
treasury and agency obligations were $0.083 million. Of this amount, $0.074 million have been in an unrealized
loss position for twelve months or greater and are rated AA+ or better. 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, 2014, gross unrealized losses related to
obligations of states and political subdivisions were $0.697 million. Of this amount, $0.383 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, 2014, gross unrealized losses related to mortgage-
backed securities were $0.764 million. Of this amount, $0.757 million have been in an unrealized loss position
for twelve months or greater and are rated AA+. Mortgage-backed securities are modeled to project principal
losses under downside, base, and upside scenarios for the economy and home prices. The primary assumption
that drives the security and loan level modeling is the Home Price Index (“HPI”) projection. The model first
projects HPI at the national level, then at the zip-code level based on the historical relationship between the
individual zip code HPI and the national HPI. The model utilizes loan level data and borrower characteristics
including FICO score, geographic location, original and current loan size, loan age, mortgage rate and type (fixed
rate / interest-only / adjustable rate mortgage), issuer / originator, residential type (owner occupied / investor
property), dwelling type (single family / multi-family), loan purpose, level of documentation, and delinquency
status as inputs. The model also includes the explicit treatment of silent second liens, utilization of loan
modification history, and the application of roll rate adjustments.
Asset backed securities (“ABS”)—As of December 31, 2014, gross unrealized losses related to asset backed
securities were $0.303 million. Of this amount, $0.020 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 20.5. 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
109
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
analysis projects an expected loss for a deal given a set of assumptions specific to the asset type. These
assumptions are used to calculate at what level of losses the deal will incur its first dollar of principal loss. The
major assumptions used to calculate this ratio are loss severities, recovery lags, and no advances on principal and
interest.
Commercial mortgage-backed securities (“CMBS”)—As of December 31, 2014, gross unrealized losses
related to the CMBS portfolio were $0.847 million. Of this amount, $0.322 million have been in an unrealized
loss position for twelve months or greater and are rated AA or better. The weighted average credit enhancement
for the Company’s CMBS portfolio is 33.5. 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—As of December 31, 2014, gross unrealized losses related to corporate bonds were
$0.709 million. Of this amount, $0.053 million have been in an unrealized loss position for twelve months or
greater and are rated A+ or better. 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, 2014, gross unrealized losses related to foreign bonds were $0.558 million.
All unrealized losses have been in an unrealized loss position for less than twelve months. 96.2% of the securities
in an unrealized loss position are rated investment grade. 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, 2014, gross unrealized losses related to common stock were
$2.938 million. Of this amount, $0.130 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.
110
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, 2014, 2013, and 2012:
(Dollars in thousands)
Fixed maturities:
Years Ended December 31,
2014
2013
2012
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
$ (31) $ (280) $(1,258)
541
—
(717)
(280)
(31)
(4,656)
(959)
(470)
$(501) $(1,239) $(5,373)
The following table is an analysis of the credit losses recognized in earnings on fixed maturities held by the
Company as of December 31, 2014, 2013, and 2012 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,
2014
$ 54
—
—
—
—
(4)
2013
$ 86
—
—
—
—
(32)
2012
$ 86
55
—
—
—
(55)
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 50
$ 54
$ 86
Accumulated Other Comprehensive Income, Net of Tax
Accumulated other comprehensive income, net of tax, as of December 31, 2014 and 2013 was as follows:
(Dollars in thousands)
Net unrealized gains from:
December 31,
2014
2013
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,527
22,751
369
(10,263)
$ 16,679
62,645
184
(25,480)
Accumulated other comprehensive income, net of tax . . . . . . . . . . .
$ 23,384
$ 54,028
111
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following tables present the changes in accumulated other comprehensive income, net of tax, by component
for the years ended December 31, 2014 and 2013:
Year Ended December 31, 2014
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 53,950
Other comprehensive income (loss) before
reclassification . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,820
Amounts reclassified from accumulated other
comprehensive income (loss) . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(37,123)
(30,303)
$ 23,647
$ 78
(287)
(54)
(341)
$(263)
$ 54,028
6,533
(37,177)
(30,644)
$ 23,384
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
Other comprehensive income (loss) before
reclassification . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,630
Amounts reclassified from accumulated other
comprehensive income (loss) . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(17,115)
515
$ 53,950
$ (85)
(1)
164
163
$ 78
$ 53,350
17,629
(16,951)
678
$ 54,028
The reclassifications out of accumulated other comprehensive income for the years ended December 31, 2014
and 2013 were as follows:
Amounts Reclassified
from Accumulated
Other Comprehensive
Income
Years Ended
December 31,
(Dollars in thousands)
Details about Accumulated Other
Comprehensive Income Components
Unrealized gains and losses on available for sale
Affected Line Item in the
Consolidated Statements of Operations
2014
2013
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other net realized investment gains
$(57,114) $(27,476)
Other than temporary impairment
losses on investments
Total before tax
Income tax expense
Net of tax
501
(56,613)
19,490
1,239
(26,237)
9,122
$(37,123) $(17,115)
Foreign Currency Items . . . . . . . . . . . . . . . . . . . . . Other net realized investment (gains)
losses
Income tax expense (benefit)
Net of tax
Total reclassifications . . . . . . . . . . . . . . . . . . . . . . . Net of tax
112
$
(83)
29
(54) $
252
(88)
164
$
$(37,177) $(16,951)
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, 2014, 2013, and 2012 were
as follows:
(Dollars in thousands)
Fixed maturities:
Years Ended December 31,
2014
2013
2012
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,843
(703)
$ 1,857
(691)
$ 4,100
(1,800)
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,140
1,166
2,300
Common stock:
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . .
55,907
(1,351)
27,302
(2,483)
10,630
(6,175)
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54,556
24,819
4,455
Derivatives:
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . .
—
(20,836)
Net realized gains (losses)
. . . . . . . . . . . . . . . . . . . . . . . .
(20,836)
1,668
(241)
1,427
—
—
—
Total net realized investment gains . . . . . . . . . . . . . . . . .
$ 35,860
$27,412
$ 6,755
The proceeds from sales of available for sale securities resulting in net realized investment gains for the years
ended December 31, 2014, 2013, and 2012 were as follows:
(Dollars in thousands)
Years Ended December 31,
2014
2013
2012
Fixed maturities . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . .
$415,739
191,765
—
$292,200
101,379
—
$454,655
50,176
1,114
Net Investment Income
The sources of net investment income for the years ended December 31, 2014, 2013, and 2012 were as follows:
(Dollars in thousands)
Years Ended December 31,
2014
2013
2012
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . .
$26,788
5,484
61
87
$35,669
5,452
126
141
$41,969
5,132
111
4,802
Total investment income . . . . . . . . . . . . . .
Investment expense . . . . . . . . . . . . . . . . . . . . . .
32,420
(3,599)
41,388
(4,179)
52,014
(4,457)
Net investment income . . . . . . . . . . . . . . . .
$28,821
$37,209
$47,557
113
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company’s total investment return on a pre-tax basis for the years ended December 31, 2014, 2013, and
2012 were as follows:
(Dollars in thousands)
Years Ended December 31,
2014
2013
2012
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
28,821
$
37,209
$
47,557
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized investment gains (losses) . . . . . . . . .
Net realized and unrealized investment returns . . . . . . . . .
35,860
(45,861)
(10,001)
27,412
7,301
34,713
6,755
18,417
25,172
Total investment return . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
18,820
$
71,922
$
72,729
Total investment return % . . . . . . . . . . . . . . . . . . . . . . . . . .
1.2%
4.6%
4.6%
Average investment portfolio (1) . . . . . . . . . . . . . . . . . . . .
$1,533,104
$1,549,747
$1,590,281
(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 Asset-Backed and Credit Securities
As of December 31, 2014, the Company held insurance enhanced asset-backed and credit securities with a
market value of approximately $35.8 million. Approximately $16.4 million of these securities were tax-free
municipal bonds, which represented approximately 1.1% of the Company’s total cash and invested assets, net of
payable/ receivable for securities purchased and sold. These securities had an average rating of “AA-.”
Approximately $6.1 million of these bonds are pre-refunded with U.S. treasury securities, of which $0.1 million
are backed by financial guarantors, meaning that funds have been set aside in escrow to satisfy the future interest
and principal obligations of the bond. Of the remaining $10.3 million of insurance enhanced municipal bonds,
$1.3 million would have carried a lower credit rating had they not been insured. The following table provides a
breakdown of the ratings for these municipal bonds with and without insurance.
(Dollars in thousands)
Rating
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratings
with
Insurance
$1,251
—
—
$1,251
Ratings
without
Insurance
$ —
1,251
—
$1,251
114
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, 2014, is
as follows:
Pre-refunded
Securities
Government
Guaranteed
Securities
Exposure Net
of Pre-refunded
& Government
Guaranteed
Securities
(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 . . . . . . . . . . . . . . . .
Total
$ 1,259
3,757
3,614
599
1,251
10,480
5,926
$ 141
0
0
0
0
141
5,926
$
0
0
0
599
1,251
1,850
0
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$16,406
$6,067
$1,850
$1,118
3,757
3,614
0
0
8,489
0
$8,489
In addition to the tax-free municipal bonds, the Company held $19.4 million of asset-backed and taxable
municipal bonds, which represented approximately 1.3% of the Company’s total
invested assets, net of
receivable/payable for securities purchased and sold. The financial guarantors of the Company’s $19.4 million of
insurance enhanced asset-backed and taxable municipal securities include Municipal Bond Insurance Association
($11.2 million), Ambac ($1.0 million) and Assured Guaranty Corporation ($7.2 million).
The Company had no direct investments in the entities that have provided financial guarantees or other credit
support to any security held by the Company at December 31, 2014.
Bonds Held on Deposit
Certain cash balances, cash equivalents, equity securities, and bonds available for sale were deposited with
various governmental authorities in accordance with statutory requirements, were held as collateral pursuant to
borrowing arrangements, or were held in trust pursuant to intercompany reinsurance agreements. The fair values
were as follows as of December 31, 2014 and 2013:
(Dollars in thousands)
Estimated Fair Value
December 31,
2014
December 31,
2013
On deposit with governmental authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany trusts held for the benefit of U.S. policyholders . . . . . . . . . . . . . . . . . . .
Held in trust pursuant to third party requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Letter of credit held for third party requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held as collateral for borrowing arrangements (1) . . . . . . . . . . . . . . . . . . . .
$ 32,790
495,301
95,828
9,340
222,809
$ 36,176
584,683
129,339
7,068
120,937
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$856,068
$878,203
(1) Amount required to collateralize margin borrowing facilities.
115
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4. Derivative Instruments
Interest rate swaps are used by the Company primarily to reduce risks from changes in interest rates. Under the
terms of the interest rate swaps, the Company agrees with another party to exchange, at specified intervals, the
difference between fixed rate and floating rate interest amounts as calculated by reference to an agreed notional
amount.
The Company accounts for the interest rate swaps as non-hedge instruments and recognizes the fair value of the
interest rate swaps in other assets or other liabilities on the consolidated balance sheets with the changes in fair
value recognized as net realized investment gains in the consolidated statement of operations. The estimated fair
value of the interest rate swaps, which is primarily derived from the forward interest rate curve, is based on the
valuation received from a third party financial institution.
The following table summarizes information on the location and the gross amount of the derivatives’ fair value
on the consolidated balance sheets as of December 31, 2014 and 2013:
(Dollars in thousands)
Derivatives Not Designated as Hedging
Instruments under ASC 815
Interest rate swap agreements . . . . . . . . . . . . . . . Other liabilities
Interest rate swap agreements . . . . . . . . . . . . . . . Other assets
Balance Sheet
Location
December 31, 2014
December 31, 2013
Notional
Amount
Fair
Value
Notional
Amount
Fair Value
$200,000
$ — $ — $200,000
$(13,675) $ — $ —
$1,668
The following table summarizes the net gains (losses) included in the consolidated statement of operations for
changes in the fair value of the derivatives and the periodic net interest settlements under the derivatives for the
years ended December 31, 2014, 2013, and 2012:
(Dollars in thousands)
Interest rate swap agreements . . . . . . . . . . . . . . . . . . Net realized investment gains
Statement of Operations Line
Years Ended December 31,
2014
2013
2012
$(20,836) $1,427
$—
As of December 31, 2014, the Company is due receivables of $5.4 million for collateral posted and $15.3 million
for margin calls made in connection with the interest rate swaps. These amounts are included in other assets on
the consolidated balance sheets.
5.
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
its fair value
whether or not an instrument
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 and derivative instruments 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.
116
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
• Level 3—inputs are unobservable for the asset, and include situations where there is little, if any,
market activity for the asset.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In
such cases, the level in the fair value hierarchy within which the fair value measurement falls has been
determined based on the lowest level input that is significant to the fair value measurement in its entirety. The
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 and derivative instruments
measured at fair value on a recurring basis as of December 31, 2014 and 2013, and indicates the fair value
hierarchy of the valuation techniques utilized by the Company to determine such fair value.
As of December 31, 2014
(Dollars in thousands)
Assets:
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 74,765
0
0
0
0
0
0
74,765
122,048
0
$
$
6,002
191,473
208,759
133,158
178,263
383,416
107,639
0
0
0
0
0
0
0
$
80,767
191,473
208,759
133,158
178,263
383,416
107,639
1,208,710
0
0
0
0
33,663
1,283,475
122,048
33,663
Total assets measured at fair value . . . . . . . . . . . . . . . . . . .
$196,813
$1,208,710
$33,663
$1,439,186
Liabilities:
Derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $
13,675
$ — $
13,675
Total liabilities measured at fair value . . . . . . . . . . . . . . . .
$ — $
13,675
$ — $
13,675
117
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 2013
(Dollars in thousands)
Assets:
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
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, 2014, 2013, and
2012.
118
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following tables present the changes in Level 3 investments measured at fair value on a recurring basis for
2014, 2013, and 2012:
(Dollars in thousands)
Other Invested Assets
Years Ended December 31,
2014
2013
2012
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,489
$3,132
$ 6,617
Total gains (losses) (realized / unrealized):
Included in accumulated other comprehensive income (loss) . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65
30,121
341
16
(12) —
(2,384)
13
(1,114)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33,663
$3,489
$ 3,132
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.
Fair Value of Alternative Investments
Included in “Other invested assets” in the fair value hierarchy at December 31, 2014 and 2013 are limited
liability partnerships measured at fair value. The following table provides the fair value and future funding
commitments related to these investments at December 31, 2014 and 2013.
December 31, 2014
December 31, 2013
(Dollars in thousands)
Fair
Value
Future
Funding
Commitment
Equity Fund, LP (1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate Fund, LP (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
European Non-Performing Loan Fund, LP (3) . . . . . . . . . . . . . . . .
$ 3,401
—
30,262
$ 2,436
—
20,064
Fair
Value
$3,489
—
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33,663
$22,500
$3,489
Future
Funding
Commitment
$2,490
—
—
$2,490
(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.
(3) This limited partnership invests in distressed securities and assets through senior and subordinated, secured
and unsecured debt and equity, in both public and private large-cap and middle-market companies. The
Company does not have the 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.
119
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Pricing
The Company’s pricing vendors provide prices for all investment categories except for investments in limited
partnerships which are measured utilizing net assets values as a practical expedient. One vendor provides prices
for equity securities and all fixed maturity categories.
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
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.
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 provides 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 2014 or 2013, the Company has not adjusted quotes or prices obtained from the pricing vendors.
120
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. Goodwill and Intangible Assets
Goodwill and intangible assets relate to Insurance Operations.
Goodwill
As of December 31, 2014 and 2013, 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 2014 and 2013 did not result in impairment of the goodwill acquired.
Intangible assets
The following table presents details of the Company’s intangible assets as of December 31, 2014:
(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
15years
2years
$ 4,800
4,200
5,000
5,300
50
$19,350
$ —
—
—
1,664
50
$1,714
$ 4,800
4,200
5,000
3,636
—
$17,636
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
15years
2years
$ 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
Amortization related to the Company’s definite lived intangible assets was $0.4 million in each of the years
ended December 31, 2014, 2013 and 2012.
The Company expects that amortization expense for the next five years related to the 2010 acquisition will be as
follows:
(Dollars in thousands)
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(353)
(353)
(353)
(353)
(353)
121
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Intangible assets with indefinite lives
As of December 31, 2014 and 2013, indefinite lived intangible assets, which are comprised of trade names,
trademarks, and state insurance licenses, were $14.0 million. The Company reviewed internal business unit
results, the growth of competitors and the overall property and casualty insurance market for indicators of
impairment of its indefinite lived intangible assets. Impairment testing performed in 2014 and 2013 indicated that
there was no impairment of these assets.
Intangible assets with definite lives
As of December 31, 2014 and 2013, definite lived intangible assets were $3.6 million and $4.0 million, net of
accumulated amortization, and were comprised of customer relationships and non-compete agreements. The
Company reviewed internal business unit results, the growth of competitors and the overall property and casualty
insurance market for indicators of impairment of its definite lived intangible assets. There was no impairment of
these assets in 2014 or 2013.
7. 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, and 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, 2014 and 2013:
(Dollars in thousands)
December 31,
2014
December 31,
2013
Reinsurance receivables, net
. . . . . . . . . . . . . . . . . . . . .
Collateral securing reinsurance receivables . . . . . . . . . .
$125,718
(8,701)
$197,887
(9,436)
Reinsurance receivables, net of collateral
. . . . . . . . .
$117,017
$188,451
Allowance for uncollectible reinsurance receivables . .
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . .
$
9,350
4,725
$
9,010
5,199
The reinsurance receivables above are net of a purchase accounting adjustment related to discounting acquired
loss reserves to their present value and applying a risk margin to the discounted reserves. This adjustment was
$4.0 million and $6.0 million at December 31, 2014 and 2013, respectively.
As of December 31, 2014, the Company had one aggregate unsecured reinsurance receivable that exceeded 3%
of shareholders’ equity from the following reinsurer. Unsecured reinsurance receivables include amounts
receivable for paid and unpaid losses and loss adjustment expenses, less amounts secured by collateral.
(Dollars in thousands)
A.M. Best
Ratings
(As of
December 31,
2014)
Reinsurance
Receivables
Munich Re America Corporation . . . . . . . . . . . . . . . . . . . . . . . .
$67,429
A+
122
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, 2014:
Written
Earned
Direct business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$229,978
61,275
(18,072)
$228,652
58,414
(18,547)
Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$273,181
$268,519
For the year ended December 31, 2013:
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
8.
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 Global Indemnity Reinsurance and the Insurance
Operations, for the years ended December 31, 2014, 2013, and 2012 were as follows:
Year Ended December 31, 2014:
(Dollars in thousands)
Non-U.S.
Subsidiaries
U.S.
Subsidiaries Eliminations
Total
Revenues:
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$173,563
$229,979
$(112,289) $291,253
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$172,504
$100,677
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$168,743
31,420
926
(65)
$ 99,776
16,715
34,934
620
$
$
— $273,181
— $268,519
28,821
35,860
555
(19,314)
—
—
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
201,024
152,045
(19,314)
333,755
Losses and Expenses:
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . . .
Acquisition costs and other underwriting expenses . . . . . . . . .
Corporate and other operating expenses . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62,669
70,479
5,243
852
74,892
39,140
9,316
19,284
—
—
—
(19,314)
137,561
109,619
14,559
822
Income (loss) before income taxes . . . . . . . . . . . . . . . . . .
$ 61,781
$
9,413
$
— $ 71,194
123
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . .
$153,283
42,012
995
(726)
195,564
$ 85,579
23,985
5,760
568
115,892
$ — $238,862
47,557
(18,440)
6,755
—
(158)
—
293,016
(18,440)
93,044
59,046
4,753
—
$ 38,721
60,584
36,357
4,938
23,833
$ (9,820)
153,628
—
95,403
—
9,691
—
5,393
(18,440)
$ — $ 28,901
124
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the components of income tax expense (benefit):
(Dollars in thousands)
Current income tax expense (benefit):
Non-resident withholding
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Federal
Years Ended December 31,
2014
2013
2012
$6,250
129
2,787
$ —
163
859
$ —
(628)
(3,765)
(4,393)
Total current income tax expense benefit . . . . . . . . . . . . . .
9,166
1,022
Deferred income tax benefit:
U.S. Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income tax benefit . . . . . . . . . . . . . . . . . . . .
(828)
(828)
(3)
(3)
(1,463)
(1,463)
Total income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . .
$8,338
$1,019
$(5,856)
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,
2014
2013
2012
Amount
% of Pre-
Tax Income Amount
% of Pre-
Tax Income Amount
% of Pre-
Tax Income
average . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,465
4.9% $ 2,954
4.7% $(3,283)
(11.4%)
Adjustments:
Non-resident withholding . . . . . . . . . . .
Tax exempt interest . . . . . . . . . . . . . . . .
Dividend exclusion . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,250
(472)
(1,340)
435
8.8
(0.7)
(1.9)
0.6
—
(1,009)
(1,135)
209
—
(1.6)
(1.8)
0.3
—
(1,445)
(1,060)
(68)
—
(5.0)
(3.7)
(0.2)
Actual taxes on continuing operations . . . . .
$ 8,338
11.7% $ 1,019
1.6% $(5,856)
(20.3%)
The effective income tax rate for 2014 was 11.7%, compared with an effective income tax rate of 1.6% for 2013
and an effective income tax benefit rate of 20.3% for 2012. The increase in the effective income tax rate in 2014
compared with 2013 is primarily due to an increase in capital gains in 2014 and a $6.3 million withholding tax
paid in connection with the $125 million dividend from Global Indemnity Group Inc. to U.A.I. Luxembourg
S.à.r.l. 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.
125
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, 2014 and 2013 are presented below:
(Dollars in thousands)
Deferred tax assets:
2014
2013
Discounted unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alternative minimum tax credit carryover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partnership K1 basis differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital gain on derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stat-to-GAAP reinsurance reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,492
3,409
10,473
145
4,786
379
2,048
187
1,424
1,919
3,050
$ 9,459
3,346
9,947
178
—
852
1,526
789
1,359
4,605
2,563
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,312
34,624
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
10,263
692
16
871
25,480
400
355
963
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,062
30,418
Total net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,250
$ 4,206
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, 2014 and 2013.
The Company has an alternative minimum tax (“AMT”) credit carryforward of $10.5 million and $9.9 million as
of December 31, 2014 and 2013, respectively, which can be carried forward indefinitely. The Company no
longer has a net operating loss (“NOL”) carryforward as of December 31, 2014. The NOL carryforward was
$1.2 million at December 31, 2013.
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. In December, 2014, Global Indemnity
Group, Inc. paid a dividend of $125 million to U.A.I. (Luxembourg) S.à.r.l. and accrued for a 5% withholding tax
amounting to $6.3 million.
126
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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
taxing authorities. The Company had no unrecognized tax benefits during 2014 or 2013.
The Company classifies all interest and penalties related to uncertain tax positions as income tax expense. The
Company did not incur any interest and penalties related to uncertain tax positions during the years ended
December 31, 2014, 2013 and 2012. As of December 31, 2014, the Company did not record any liabilities for
tax-related interest and penalties on its consolidated balance sheets.
9. 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,
2014
2013
2012
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Ceded reinsurance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$779,466
192,491
$879,114
240,566
$971,377
283,652
Net balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
586,975
638,548
687,725
Incurred losses and loss adjustment expenses related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
153,994
(16,433)
140,873
(7,882)
149,183
4,445
Total incurred losses and loss adjustment expenses . . . . . . . . . . . . .
137,561
132,991
153,628
Paid losses and loss adjustment expenses related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55,485
116,780
50,732
133,832
52,164
150,641
Total paid losses and loss adjustment expenses . . . . . . . . . . . . . . . . .
172,265
184,564
202,805
Net balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: Ceded reinsurance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
552,271
123,201
586,975
192,491
638,548
240,566
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$675,472
$779,466
$879,114
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 2014, the Company reduced its prior accident year loss reserves by $16.4 million, which consisted of a
$12.5 million decrease related to Insurance Operations and a $3.9 million decrease related to Reinsurance
Operations.
The $12.5 million reduction of prior accident year loss reserves related to Insurance Operations primarily
consisted of the following:
• Property: A $2.1 million increase due to higher than expected emergence on non-catastrophe claims
primarily in accident years 2007, 2012, and 2013.
• General Liability: A $3.1 million reduction due to less than anticipated frequency in accident year
2001 and less than anticipated frequency and severity on claims from accident years 2007 through 2010
partially offset by greater than anticipated loss emergence in accident year 2013.
127
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
• Asbestos and Environmental: A $7.1 million increase related to policies written prior to 1990 as a
result of recent severity being higher than expected due to faster erosion of underlying policy limits.
• Professional: A $19.4 million reduction primarily due to expected loss emergence being much less
than anticipated for accident years 2007 through 2011.
• Umbrella: A $2.7 million decrease primarily driven by less than anticipated frequency in accident
years 2002 through 2007.
• Commercial Auto: A $3.6 million increase primarily related to accident years 2011 through 2013.
Larger vehicles were written prior to 2014 and industry loss development factors were used to project
losses.
The $3.9 million reduction of prior accident year loss reserves related to Reinsurance Operations was primarily
due to better than anticipated loss emergence on property lines partially offset by adverse development related to
commercial auto and higher than anticipated severity on the Company’s marine product.
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.
The $7.6 million reduction of prior accident year loss reserves related to Insurance Operations 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.
• 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.
The $0.3 million reduction of prior accident year loss reserves related to Reinsurance Operations was 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 an $8.7 million increase related to Reinsurance
Operations.
128
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The $4.2 million reduction of prior accident year loss reserves 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.
• Commercial Auto: A $1.2 million increase primarily driven by continued loss emergence on casualty
brokerage exposures.
The $8.7 million increase in prior accident year loss reserves 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.
• Commercial Auto: 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.
Prior to 2001, the Company underwrote multi-peril business insuring general contractors, developers, and sub-
contractors primarily involved in residential construction that has resulted in significant exposure to construction
defect (“CD”) claims. The Company’s reserves for CD claims ($69.8 million and $70.5 million as of
December 31, 2014 and 2013, net of reinsurance, respectively) are established based upon management’s best
estimate in consideration of known facts, existing case law and generally accepted actuarial methodologies.
However, due to the inherent uncertainty concerning this type of business, the ultimate exposure for these claims
may vary significantly from the amounts currently recorded.
The Company has exposure to asbestos & environmental (“A&E”) claims. The asbestos exposure primarily
arises from the sale of product liability insurance, and the environmental exposure arises from the sale of general
liability and commercial multi-peril insurance. In establishing the liability for unpaid losses and loss adjustment
expenses related to A&E exposures, management considers facts currently known and the current state of the law
and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when
sufficient information has been developed to indicate the involvement of a specific insurance policy, and
management can reasonably estimate its liability. In addition, liabilities have been established to cover additional
exposures on both known and unasserted claims. Estimates of the liabilities are reviewed and updated regularly.
129
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Case law continues to evolve for such claims, and uncertainty exists about the outcome of coverage litigation and
whether past claim experience will be representative of future claim experience. Included in net unpaid losses
and loss adjustment expenses as of December 31, 2014, 2013, and 2012 were IBNR reserves of $26.4 million,
$18.2 million, and $14.6 million, respectively, and case reserves of approximately $4.8 million, $4.8 million, and
$5.5 million, respectively, for known A&E-related claims.
The following table shows the Company’s gross reserves for A&E losses:
(Dollars in thousands)
Years Ended December 31,
2014
2013
2012
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$50,155
4,333
7,340
5,293
$44,767
2,154
5,961
2,727
$50,601
7,687
(5,860)
7,661
Gross reserves for A&E losses and loss adjustment expenses—end of period . . . .
$56,535
$50,155
$44,767
The following table shows the Company’s net reserves for A&E losses:
(Dollars in thousands)
Years Ended December 31,
2014
2013
2012
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$23,038
2,754
8,241
2,848
$20,134
1,351
3,506
1,953
$25,285
6,934
(5,683)
6,402
Net reserves for A&E losses and loss adjustment expenses—end of period . . . . . .
$31,185
$23,038
$20,134
Establishing reserves for A&E and other mass tort claims involves more judgment than other types of claims due
to, among other things, inconsistent court decisions, an increase in bankruptcy filings as a result of asbestos-
related liabilities, and judicial interpretations that often expand theories of recovery and broaden the scope of
coverage. 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 entered into a settlement agreement to resolve asbestos
related coverage litigation related to approximately 3,900 existing asbestos-related bodily injury claims and
future claims. The settlement was approved by the Court and a final order was issued in September 2014.
As of December 31, 2014, 2013, and 2012, the survival ratio on a gross basis for the Company’s open A&E
claims was 10.8 years, 11.3 years, and 11.3 years, respectively. As of December 31, 2014, 2013, and 2012, the
survival ratio on a net basis for the Company’s open A&E claims was 8.4 years, 6.7 years, and 7.0 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.
130
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
10. Debt
Margin Borrowing Facilities
The Company has available two margin borrowing facilities. The borrowing rate for each facility is tied to
LIBOR and is currently approximately 1%. These facilities are due on demand. The borrowings are 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, 2014, approximately
$222.8 million in collateral was deposited to support borrowings. The amount borrowed against the margin
accounts may fluctuate as routine investment transactions, such as dividends received, investment income
received, maturities and pay-downs, impact cash balances. The margin facilities contain 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. The amount outstanding on the Company’s margin borrowing facilities was
$174.7 million and $100.0 million as of December 31, 2014 and 2013, respectively.
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 facilities.
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 facilities.
On October 29, 2013, the Company redeemed the entire outstanding principal amount on its UNG Trust II junior
subordinated notes. The payment of $20.8 million consisted of principal of $20.6 million and interest of $0.2 million.
This payment was funded by borrowing $20.2 million pursuant to the Company’s margin borrowing facilities.
11. Shareholders’ Equity
Dividends
The ability of Global Indemnity plc to pay dividends is subject to Irish regulations. Under Irish law, dividends
and distributions may only be made from distributable reserves. As of December 31, 2014, the Company’s
distributable reserves were $931.5 million.
Since the Company is a holding company and has no direct operations, its ability to pay dividends depends, in
part, on the ability of its subsidiaries to pay dividends. Global Indemnity Reinsurance and the U.S. insurance
subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends.
See Note 17 for additional information regarding dividend limitations imposed on Global Indemnity Reinsurance
and the U.S. insurance subsidiaries.
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 2014, 2013, and 2012, the
131
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Company purchased an aggregate of 5,444, 2,370 and 4,997, respectively, of surrendered A ordinary shares from
its employees for $0.1 million, $0.1 million and $0.1 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, 2014. The excess cost of
the repurchased shares over their par value was classified to additional paid-in capital.
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.
The following table provides information with respect to the A ordinary shares that were surrendered or
repurchased in 2014:
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
January 1 – 31, 2014 . . . . . . . . . . . . . . . .
February 1 – 28, 2014 . . . . . . . . . . . . . . .
March 1 – 31, 2014 . . . . . . . . . . . . . . . . .
3,644(2)
362(2)
1,438(2)
Total
. . . . . . . . . . . . . . . . . . . . . . . .
5,444
$25.30
$24.00
$26.23
$25.46
—
—
—
—
(1) Based on settlement date.
(2) Surrendered by employees as payment of taxes withheld on the vesting of restricted stock.
The following table provides information with respect to the A ordinary shares that were surrendered 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
February 1 – 28, 2013 . . . . . . . . . . . . . . .
March 1 – 31, 2013 . . . . . . . . . . . . . . . . .
June 1 – 30, 2013 . . . . . . . . . . . . . . . . . .
December 1 – 31, 2013 . . . . . . . . . . . . . .
362(2)
891(2)
507(2)
610(2)
Total
. . . . . . . . . . . . . . . . . . . . . . . .
2,370
$20.25
$22.78
$23.03
$26.07
$23.29
—
—
—
—
—
(1) Based on settlement date.
(2) Surrendered by employees as payment of taxes withheld on the vesting of restricted stock.
132
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
12. Related Party Transactions
Fox Paine & Company
As of December 31, 2014, Fox Paine & Company LLC (“Fox Paine”) beneficially owned shares having
approximately 92.9% of the Company’s total outstanding voting power. Fox Paine has the right to appoint a
number of the Company’s Directors equal in aggregate to the pro rata percentage of the voting shares of the
Company beneficially held by Fox Paine for so long as Fox Paine holds an aggregate of 25% or more of the
voting power in the Company. Fox Paine controls the election of all of the 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, 2014 and 2013, Global Indemnity 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 $3.4 million and $3.5 million at December 31,
2014 and 2013, respectively. At December 31, 2014, the Company had an unfunded capital commitment of
$2.4 million to the partnership. There were no distributions received from the limited partnership during 2014
and 2013. 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.
The Company relies on Fox Paine to provide management services and other services related to the operations of
the Company. Starting in 2014, this fee will be adjusted annually to reflect the percentage change in the CPI-U.
In addition, the payment of the annual management fee will be deferred until a change of control or September,
2018, whichever occurs first, and is subject to an annual adjustment equal to the rate of return the Company earns
on its investment portfolio. Management fee expense of $1.9 million, $1.9 million and $1.5 million was incurred
during the years ended December 31, 2014, 2013, and 2012, respectively. As of December 31, 2014, unpaid
management fees, which were included in other liabilities on the consolidated balance sheets, were $0.6 million.
As of December 31, 2013, prepaid management fees, which were included in other assets on the consolidated
balance sheets, were $1.3 million.
Cozen O’Connor
The Company incurred $0.2 million, $0.02 million, and $0.2 million for legal services rendered by Cozen
O’Connor during the years ended December 31, 2014, 2013, and 2012, respectively. Stephen A. Cozen, the
chairman of Cozen O’Connor, is a member of the Company’s Board of Directors.
Crystal & Company
During each of the years ended December 31, 2014, 2013 and 2012, the Company incurred $0.2 million in
brokerage fees to Crystal & Company, an insurance broker. Prior to October 15, 2012, Crystal & Company was
known as Frank Crystal & Company. James W. Crystal, the chairman and chief executive officer of Crystal &
Company, is a member of the Company’s Board of Directors.
Hiscox Insurance Company (Bermuda) Ltd.
Global Indemnity 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 Global Indemnity
Reinsurance, was a member of Hiscox Bermuda’s Board of Directors until May, 2014. The Company estimated
133
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
that the following earned premium and incurred losses related to the agreement have been assumed by Global
Indemnity Reinsurance from Hiscox Bermuda:
(Dollars in thousands)
Years Ended
December 31,
2014
2013
Assumed earned premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed losses and loss adjustment expenses . . . . . . . . . . . . .
$6,383
763
$3,053
987
Net balances due to Global Indemnity Reinsurance under this agreement are as follows:
(Dollars in thousands)
As of December 31.
2014
2013
Net receivable balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,897
$3,337
13. Commitments and Contingencies
Commitments
The Company entered into a $50 million commitment to purchase an alternative investment vehicle which is
comprised of European non-performing loans. As of December 31, 2014, the Company has funded $29.9 million
of this commitment leaving $20.1 million as unfunded.
Lease Commitments
Total rental expense under operating leases for the years ended December 31, 2014, 2013, and 2012 were $2.6
million, $2.4 million, and $2.2 million, respectively. At December 31, 2014, future minimum cash payments
under non-cancelable operating leases were as follows:
(Dollars in thousands)
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,374
2,279
2,234
2,237
2,236
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,360
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.
134
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other Commitments
As mentioned in Note 12 above, the Company has a remaining commitment of $2.4 million to the Fox Paine
Capital Fund, II.
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
to Fox Paine & Company. See Note 12 above for additional information pertaining to this management
agreement.
14. 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. The tax benefit
resulting from stock-based compensation deductions in excess of amounts reported for financial reporting purposes
was $0.04 million for the year ended December 31, 2014. There was no tax benefit resulting from stock-based
compensation deductions in excess of amounts reported for financial reporting purposes during 2013 and 2012.
Share Incentive Plan
On June 11, 2014, the Company’s Shareholders approved the Global Indemnity plc Share Incentive Plan (the
“Plan”). The previous share incentive plan, which became effective in 2003, expired per its terms on
September 5, 2013. 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. Under the Plan, the Company may grant up to 2.0 million A ordinary shares
pursuant to grants under the Plan.
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, 2012 . . . . . . . . . . . . . . . .
Options issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options purchased by the Company . . . . . . . . . . . . . . .
Options outstanding at December 31, 2012 . . . . . . . . . . . . .
Options issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options purchased by the Company . . . . . . . . . . . . . . .
Options outstanding at December 31, 2013 . . . . . . . . . . . . .
Options issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options purchased by the Company . . . . . . . . . . . . . . .
565,981
—
(96,238)
(5,000)
—
—
464,743
—
(5,000)
(14,292)
(32,951)
—
412,500
325,000
(125,000)
—
—
—
Options outstanding at December 31, 2014 . . . . . . . . . . . . .
612,500
Options exercisable at December 31, 2014 . . . . . . . . . . . . . .
312,500
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
565,981
—
(96,238)
(5,000)
—
—
464,743
—
(5,000)
(14,292)
(32,951)
—
412,500
325,000
(125,000)
—
—
—
612,500
312,500
$20.59
—
$24.09
$20.00
—
—
$19.87
—
$29.24
$20.00
$34.00
—
$18.62
31.74
19.60
—
—
—
25.38
18.66
During the year ended December 31, 2014, the Company granted 325,000 Time-Based Options under the Plan.
Of these options, 25,000 were forfeited during 2014. The remaining 300,000 stock options were issued to the
Company’s Chief Executive Officer. See below for vesting schedule related to this stock award.
The Company recorded $0.3 million, $1.2 million, and $1.2 million of compensation expense for stock options
outstanding under the Plan in each of the years ended December 31, 2014, 2013, and 2012, respectively.
The Company did not receive any proceeds from the exercise of options during 2014 under the Plan. In 2013, the
Company received $0.3 million from the issuance of 14,292 A ordinary shares at a weighted average grant date
value of $20.00 per share exercised by a former employee of the Company under the previous share incentive
plan. In 2012, the Company received $0.1 million from the issuance of 5,000 A ordinary shares at a weighted
average grant date value of $20.00 per share exercised by a former employee of the Company under the previous
share incentive plan.
Amortization expense related to options outstanding is anticipated to be $0.3 million in 2015, 2016, and 2017.
136
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Option intrinsic values, which are the differences between the fair value of $28.37 at December 31, 2014 and the
strike price of the option, are as follows:
Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercisable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
of Shares
612,500
312,500
—
Weighted
Average
Strike Price
$25.38
$18.66
N/A
Intrinsic
Value
$3.2 million
$3.2 million
N/A
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, 2014 include the following:
Option Price
Number of options
exercisable
$17.87 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$37.70 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercisable at December 31, 2014 . . . . . . . . .
300,000
12,500
312,500
The weighted average fair value of options granted under the Plan was $7.92 in 2014 using a Black-Scholes
option-pricing model and the following weighted average assumptions. There were no options granted under the
Plan in 2013 or 2012.
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected option life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
0.0%
37.70%
1.7%
6.9years
The following tables summarize the range of exercise prices of options outstanding at December 31, 2014, 2013,
and 2012:
Ranges of
Exercise Prices
Outstanding at
December 31, 2014
Weighted Average Per
Share Exercise Price
Weighted Average
Remaining Life
$17.87 – $19.99 . . . . . . . . . . . .
$20.00 – $29.99 . . . . . . . . . . . .
$30.00 – $37.70 . . . . . . . . . . . .
300,000
—
312,500(1)
$17.87
—
$32.59
6.7 years
N/A
8.8 years
Total
. . . . . . . . . . . . . . . .
612,500
(1)—the weighted average per share exercise price on 300,000 of these shares outstanding is variable. See note
below under Chief Executive Officer for additional information.
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 – $37.70 . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . .
400,000
12,500
412,500
$18.03
$37.70
7.8 years
1.8 years
137
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 – $37.70 . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . .
400,000
19,293
45,450
464,743
$18.03
$22.39
$35.02
8.8 years
0.9 years
1.5 years
Restricted Shares
In addition to stock option grants, the Plan also provides for the granting of restricted shares to employees and
non-employee Directors. The Company recognized compensation expense for restricted stock of $2.6 million,
$2.1 million and $1.8 million for 2014, 2013, and 2012, respectively. The total unrecognized compensation
expense for the non-vested restricted stock is $3.7 million at December 31, 2014, which will be recognized over a
weighted average life of 1.7 years.
The following table summarizes the restricted stock grants since the 2003 inception of the previous share
incentive plan.
Year
Restricted Stock Awards
Employees
Directors
Total
Inception through 2011 . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
599,806
29,675
81,587
95,694
303,974
50,885
50,421
36,608
903,780
80,560
132,008
132,302
806,762
441,888
1,248,650
The following table summarizes the non-vested restricted shares activity for the years ended December 31, 2014,
2013, and 2012:
Non-vested Restricted Shares at January 1, 2012 . . . . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested Restricted Shares at December 31, 2012 . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested Restricted Shares at December 31, 2013 . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Shares
26,016
80,560
(68,649)
(3,423)
34,504
132,008
(67,937)
(454)
98,121
132,302
(57,017)
(1,131)
Non-vested Restricted Shares at December 31, 2014 . . . . .
172,275
Weighted
Average
Price
Per Share
$18.29
$19.67
$19.99
$20.87
$17.87
$22.78
$22.17
$22.13
$21.48
$25.67
$24.29
$22.13
$23.76
138
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Based on the terms of the Restricted Share grants, all forfeited shares revert back to the Company.
During 2012, the Company granted an aggregate of 29,675 A ordinary shares to key employees at a weighted
average grant date fair value of $18.60 per share which vest 33 1/3% on each subsequent anniversary date of the
grant for a period of three years. During 2012, the Company granted an aggregate of 50,885 A ordinary shares, at
a weighted average grant date fair value of $20.29 per share to non-employee Directors under the previous share
incentive plan. The fully vested director restricted shares were granted from shares previously forfeited.
During 2013, the Company granted an aggregate of 81,587 A ordinary shares to key employees at a weighted
average grant date fair value of $22.13 per share. Of the A ordinary shares granted in 2013, 11,296 were granted
to the Company’s Chief Executive Officer and vest 33 1/3% on each subsequent anniversary date of the grant for
a period of three years subject to an accident year true-up of bonus year underwriting results as of the third
anniversary of the grant. The remaining 70,291 shares were granted to key employees and will vests as follows:
•
•
16.5%, 16.5%, and 17.0% of the granted stock vest on the first, second, and third anniversary of the
grant, respectively.
50.0% of granted stock vests 100% on the anniversary of the third year subject to accident year true-up
of bonus year underwriting results and are subject to Board approval.
During 2013, the Company granted an aggregate of 50,421 A ordinary shares, at a weighted average grant date
fair value of $23.83 per share, to non-employee directors under the previous share incentive plan.
Included in the 50,421A ordinary shares 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. As of
December 31, 2013, these shares were not granted but were considered issued and outstanding for purposes of
the financial statement and were subject to shareholder approval of the Plan at the Company’s June 11, 2014
annual shareholder meeting. The shareholders approved the plan at the June 11, 2014 annual shareholder
meeting.
During 2014, the Company granted an aggregate of 95,694 A ordinary shares to key employees at a weighted
average grant date fair value of $25.37 per share under the Plan. Of the shares granted in 2014, 5,671 were
granted to a key employee and vest 33 1/3% on each subsequent anniversary date of the award for a period of
three years and 11,857 were granted to the Company’s Chief Executive Officer and vest 33 1/3% on each
subsequent anniversary date of the grant for a period of three years subject to an accident year true-up of bonus
year underwriting results as of the third anniversary of the grant. The remaining 78,166 shares were granted to
key employees and will vest as follows:
•
•
16.5%, 16.5%, and 17.0% of the granted stock vest on the first, second, and third anniversary of the
grant, respectively.
50% of granted stock vests 100% on the anniversary of the third year subject to accident year true-up
of bonus year underwriting results and are subject to Board approval.
During 2014, the Company granted 36,608 A ordinary shares, at a weighted average grant date fair value of
$26.46 per share, to non-employee directors of the Company under the Plan. An additional 18,838 A ordinary
shares were issued to non-employee directors on June 12, 2014. These shares were earned by non-employee
directors prior to January 1, 2014 and were conditioned on shareholders’ approval of the Plan at the Company’s
June 11, 2014 annual shareholder meeting. The shareholders approved the plan at the June 11, 2014 annual
shareholder meeting.
139
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
All of the shares granted to non-employee directors in 2014, 2013, and 2012 were fully vested but subject to
certain restrictions.
Chief Executive Officer
Effective September 19, 2011, Cynthia Y. Valko was hired as the Company’s Chief Executive Officer.
Ms. Valko’s terms of employment included two equity components including the granting of 300,000 stock options
with a strike price equal to the closing price of the Company’s shares on the trading day preceding the start date, or
$17.87 per share, and an annual bonus opportunity of which 50% shall be paid in restricted shares based on the
market value of the Company’s shares as of December 31 of the subject bonus year. The stock options vested 33
1/3% on December 31, 2012, 2013, and 2014 pending Board approval at the time of vesting. The restricted shares
vest 33 1/3% on each anniversary of the subject bonus year. All equity components based on performance are
subject to accident year true-up of bonus year underwriting results and are subject to Board approval.
In 2014, Ms. Valko was awarded an additional 300,000 stock options. The stock options vest as follows: 20% on
December 31, 2015, 30% on December 31, 2016, and the remaining 50% on December 31, 2017 and are based
on achieving underwriting income, premium volume, and underwriting profitability targets, subject to an
accident year true up on the 3rd anniversary of each such year. Vesting of the stock options is subject to
continued employment. The exercise price applicable to the Stock Options is $25.00 subject to adjustment based
on the Company’s average year-end tangible book value per share, the average interest rate of certain Treasury
bonds and the time period elapsed between January 1, 2014 and the date the stock options are exercised. The
stock options were granted under and are subject to the terms of the Plan, as amended, subject to shareholder
approval of such plan to the extent required to affect such grant under the plan.
15. 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, $1.2 million, and $1.1 million for the
years ended December 31, 2014, 2013, and 2012, respectively.
16. Earnings Per Share
Earnings per share have been computed using the weighted average number of ordinary shares and ordinary
share equivalents outstanding during the period.
The following table sets forth the computation of basic and diluted earnings per share.
(Dollars in thousands, except share and per share data)
Years Ended December 31,
2014
2013
2012
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
62,856
$
61,690
$
34,757
Basic earnings per share:
Weighted average shares outstanding—basic . . . . . . . . . . . . . . . . . . .
25,131,811
25,072,712
26,722,772
Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2.50
$
2.46
$
1.30
Diluted earnings per share:
Weighted average shares outstanding—diluted . . . . . . . . . . . . . . . . .
25,331,420
25,174,015
26,748,833
Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2.48
$
2.45
$
1.30
140
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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,
2014
2013
2012
Weighted average shares for basic earnings per share . . . . . . . . . . . . . . .
Non-vested restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,131,811
100,546
99,063
25,072,712
53,876
47,427
26,722,772
17,474
8,587
Weighted average shares for diluted earnings per share . . . . . . . . . . . . . .
25,331,420
25,174,015
26,748,833
The weighted average shares outstanding used to determine dilutive earnings per share for the years ended
December 31, 2014, 2013 and 2012 do not include 312,500, 12,500 and 452,450 shares, respectively, which were
deemed to be anti-dilutive.
17. 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;
141
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(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, 2014, 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 $35.1 million and $8.4 million, respectively.
The Penn-America insurance companies limitation includes $2.8 million that would be distributed to
United National Insurance Company or its subsidiary Penn Independent Corporation based on the December 31,
2014 ownership percentages.
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 2014 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,
2014
2013
2012
Statutory capital and surplus, as of end of period . . . .
Statutory net income (loss) . . . . . . . . . . . . . . . . . . . . . .
$253,362
36,003
$251,464(a) $413,303
10,813
31,781
(a)
Includes extraordinary dividend declared in 2013 for an aggregate of $200 million.
142
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Global Indemnity 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 Global Indemnity 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.
• 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, Global Indemnity 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. Global Indemnity 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 2014 statutory
financial statements that will be filed in 2015, Global Indemnity Reinsurance could pay a dividend of up to
$287.1 million without requesting BMA approval. Global Indemnity Reinsurance is dependent on receiving
distributions from its subsidiaries in order to pay the full dividend.
The following is selected information for Global Indemnity Reinsurance, net of intercompany eliminations,
where applicable, as determined in accordance with the Bermuda Insurance Act 1978:
(Dollars in thousands)
Years Ended December 31,
2014
2013
2012
Statutory capital and surplus, as of end of period . . . .
Statutory net income (loss) . . . . . . . . . . . . . . . . . . . . . .
$928,720
44,594
$913,401
31,697
$844,696
21,955
18. Segment Information
As of December 31, 2014, the Company managed 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
Inc.,
Collectibles Insurance Services, LLC, Global Indemnity Insurance Agency, LLC, and J.H. Ferguson &
Associates, LLC, and Reinsurance Operations, which includes the operations of Global Indemnity Reinsurance
Company, Ltd.
Insurance Company, American Insurance Adjustment Agency,
143
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 and 2012 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 did 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 2.
The following are tabulations of business segment information for the years ended December 31, 2014, 2013, and
2012. Corporate information is included to reconcile segment data to the consolidated financial statements.
2014:
(Dollars in thousands)
Insurance
Operations (1)
Reinsurance
Operations (2)
Total
Revenues:
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 229,978
$ 61,275
$ 291,253
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 212,965
$ 60,216
$ 273,181
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 211,165
620
$ 57,354
(65)
$ 268,519
555
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
211,785
57,289
269,074
Losses and Expenses:
Net losses and loss adjustment expenses . . . . . . . . . . . . .
Acquisition costs and other underwriting expenses . . . .
117,586
88,983(3)
Income from segments . . . . . . . . . . . . . . . . . . . . . . .
5,216
19,975
20,636
16,678
Unallocated items:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . .
Corporate and other operating expenses . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
137,561
109,619
21,894
28,821
35,860
14,559
822
71,194
8,338
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
62,856
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,288,763
$641,270(4) $1,930,033
(1)
Includes business ceded to the Company’s Reinsurance Operations.
(2) External business only, excluding business assumed from affiliates.
(3)
(4) Comprised of Global Indemnity Reinsurance’s total assets less its investment in subsidiaries.
Includes excise tax of $1,114 related to cessions from Insurance Operations to Reinsurance Operations.
144
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 Global Indemnity Reinsurance’s total assets less its investment in subsidiaries.
Includes excise tax of $1,026 related to cessions from Insurance Operations to Reinsurance Operations.
145
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 Global Indemnity Reinsurance’s total assets less its investment in subsidiaries.
Includes excise tax of $936 related to cessions from Insurance Operations to Reinsurance Operations.
19. Supplemental Cash Flow Information
Taxes and Interest Paid
The Company paid the following net federal income taxes and cash interest for 2014, 2013, and 2012:
(Dollars in thousands)
Years Ended December 31,
2014
2013
2012
Federal income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal income taxes recovered . . . . . . . . . . . . . . . . . . . . . . .
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$13,997
136
804
$ 162
7,613
7,678
$ 265
38
5,895
20. 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)
21. Summary of Quarterly Financial Information (Unaudited)
An unaudited summary of the Company’s 2014 and 2013 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 before income taxes . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per share data—Diluted:
Year Ended December 31, 2014
First
Quarter
$67,544
8,284
(813)
38,572
26,485
6,974
8,823
Second
Quarter
$66,017
7,677
39,881
38,270
27,171
44,798
33,208
Third
Quarter
$68,028
6,527
1,158
36,654
27,458
8,128
9,761
Fourth
Quarter
$66,930
6,333
(4,366)
24,065
28,505
11,294
11,064
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.35
$
1.31
$
0.39
$
0.44
(Dollars in thousands, except per share data)
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . .
Net losses and loss adjustment expenses . . . . . . . . . . . .
Acquisition costs and other underwriting expenses . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.49
$
0.34
$
0.28
$
1.34
22. Subsequent Events
On January 1, 2015, Global Indemnity Group, Inc., a subsidiary of the Company, acquired 100% of the voting
equity interest of American Reliable from American Bankers Insurance Group, Inc. by paying $113.7 million in
cash and assuming approximately $322.9 million in customary insurance related liabilities, obligations, and
mandates. The ultimate purchase price is subject to accounting procedures that are expected to be completed by
June 30, 2015. The most recent estimate of the purchase price, based on available financial information, is
approximately $117.9 million. This purchase price is subject to adjustment based on GAAP book value of the
business as of the date of the closing of the transaction and the future development of loss reserves as specified in
the American Reliable SPA. American Reliable’s results of operations will be included in the Company’s results
of operations subsequent to the date of acquisition.
The purchase of American Reliable expands Global Indemnity’s product offerings. American Reliable is a
specialty company that distributes personal lines products written on an admitted basis that are unusual and
harder to place. It complements Global Indemnity’s existing US Insurance Operations that primarily distribute
commercial lines products on an excess and surplus lines basis.
In accordance with GAAP, the total purchase price has been provisionally allocated to the tangible and intangible
net assets acquired based on management’s preliminary estimates of their fair value and may change as
several months. Accordingly, approximately
additional
information becomes available over
the next
147
GLOBAL INDEMNITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
$87.7 million was allocated to tangible net assets, approximately $27.5 million was allocated to intangible assets,
primarily the value of business acquired (“VOBA”), and $2.7 million was allocated to goodwill. Under the
purchase method of accounting, goodwill is not amortized but is tested for impairment at least annually. Pursuant
to the Company’s 338(h)(10) election, goodwill is expected to be tax deductible and will be amortized over a
period of 15 years.
Goodwill of $2.7 million consists largely of the synergies and economies of scales expected from combining the
operations of Global Indemnity and American Reliable. The Company has not yet determined the amount of
goodwill to be assigned to each reportable segment.
In connection with the acquisition, the Company has agreed to pay to Fox Paine an investment banking fee of 3%
of the amount paid plus the capital required to operate American Reliable on a standalone basis and a $1.5
million investment advisory fee. 267,702 A ordinary shares of Global Indemnity will be issued to pay these fees.
These shares will be registered but cannot be sold until the earlier of five years or a change of control.
148
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 filed or submitted 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, 2014. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31,
2014, the design and operation of the Company’s disclosure controls and procedures were not effective because
of the material weakness in our internal control over financial reporting described below.
In light of the material weakness described below, the Company performed additional procedures that did not
result in any material changes to the consolidated financial statements, and have allowed the Company to
conclude that, notwithstanding the material weakness in the Company’s internal control over financial reporting,
the consolidated financial statements included in this report fairly present, in all material respects, the Company’s
financial position, results of operations and cash flows for the periods presented in conformity with accounting
principles generally accepted in the United States of America.
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, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal
control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer
and Chief Financial Officer and effected by the Company’s board of directors, management and other personnel to
provide reasonable assurances regarding the reliability of financial reporting and the preparation of the consolidated
financial statements of the Company in accordance with 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 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 Company’s 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,
149
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2014. In making this assessment, management used the criteria described in Internal Control—
Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission in
2013.
Based upon its assessment, management has concluded that the Company’s internal control over financial
reporting was not effective at December 31, 2014 because of the material weakness in the Company’s internal
control over financial reporting described below.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim
financial statements will not be prevented or detected on a timely basis.
The Company determined that a material weakness existed in its internal control over financial reporting related
to an element of the design of its estimation process for Unpaid Losses and Loss Adjustment Expenses as of
December 31, 2014. Specifically, the design of the Company’s control relating to Unpaid Losses and Loss
Adjustment Expenses that exceeded the central estimates of both the internal and external actuaries in the process
of establishing management’s final determination of loss reserve selections was not adequate. This deficiency did
not result in a material misstatement in the consolidated financial statements; however, this deficiency could have
resulted in a material misstatement of the aforementioned accounts and disclosures of the annual or interim
consolidated financial statements that would not have been prevented or detected.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 has been
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their
report, “Report of Independent Registered Public Accounting Firm”, appearing on page 93.
Remediation Steps to Address the Material Weakness
Management is implementing controls to improve documentation of its assessments and conclusions of its
reserve meetings, as well as supporting analyses for the difference between carried reserves and the internal and
external actuaries’ best estimates as a result of the communications among its actuarial, underwriting, financial,
and claims personnel involved on the loss reserve committee. The Company believes these measures will
remediate the control deficiency identified above and will strengthen the Company’s internal control over
financial reporting. The Company expects to complete the implementation of the control enhancements in the
first quarter of 2015. The Company will test the ongoing operating effectiveness of the new controls subsequent
to implementation, and consider the material weakness remediated after the applicable remedial controls operate
effectively for a sufficient period of time.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting that occurred during the
quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, the
Company’s internal controls over financial reporting.
Item 9B. OTHER INFORMATION
None.
150
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 2015 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 2015 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 2015 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 2015Annual 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 2015 Annual Meeting of Shareholders.
151
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 92 are filed as part of this report.
(2) The Financial Statement Schedules listed in the accompanying index on page 92 are filed as part of this
report.
Exhibit No.
Description
2.1
3.1
3.2
10.1*
10.2*
10.3*
10.4*
10.5*
Stock Purchase Agreement dated as of October 16, 2014 (incorporated by reference to Exhibit 2.1
of the Company’s Current Report on Form 8-K dated October 21, 2014 (File No. 001-34809)).
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., Global
Indemnity 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)).
152
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*
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., Global Indemnity 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 dated as of February 9, 2014 (incorporated herein by
reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated June 12, 2014
(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 Form 10-K/A for the
fiscal year ended December 31, 2011 dated September 5, 2012 (File No. 001-34809)).
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)).
153
Exhibit No.
10.18*
Description
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)).
10.19*
Description of Employment Arrangement with Cynthia Y. Valko, dated December 10, 2014
(incorporated herein by reference to exhibit 10.1 of the Company’s Current Report on Form 8-K
dated December 12, 2014 (File No. 001-34809)).
10.20*+
Executive Employment Term Sheet with Stephen Green, dated February 18, 2015.
10.21
Amended and Restated Institutional Account Agreement dated 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)).
10.22+
Amended and Restated Institutional Account Agreement dated as of May 28, 2014.
21.1+
23.1+
31.1+
31.2+
32.1+
32.2+
101.1+
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, 2014 formatted in XBRL: (i) Consolidated Balance Sheets for the
years ended December 31, 2014 and 2013; (ii) Consolidated Statements of Operations for the
years ended December 31, 2014, 2013 and 2012; (iii) Consolidated Statements of Comprehensive
Income for the years ended December 31, 2014, 2013 and 2012; (iv) Consolidated Statements of
Changes in Shareholders’ Equity for the years ended December 31, 2014, 2013 and 2012; (v)
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012;
(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.
154
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 16, 2015
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 16, 2015.
SIGNATURE
/s/ Saul A. Fox
Saul A. Fox
/s/ Cynthia Y. Valko
Cynthia Y. Valko
TITLE
Chairman and Director
Chief Executive Officer and Director
/s/ Thomas M. McGeehan
Chief Financial Officer (Principal Financial and
Thomas M. McGeehan
Accounting Officer)
/s/
James W. Crystal
James W. Crystal
/s/ Seth J. Gersch
Seth J. Gersch
/s/ Stephen A. Cozen
Stephen A. Cozen
/s/ Chad A. Leat
Chad A. Leat
/s/
John H. Howes
John H. Howes
Director
Director
Director
Director
Director
155
[THIS PAGE INTENTIONALLY LEFT BLANK]
GLOBAL INDEMNITY PLC
SCHEDULE I—SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS
IN RELATED PARTIES
(In thousands)
As of December 31, 2014
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
78,569
188,452
517,651
19,060
469,216
$
80,767
191,473
520,180
19,447
471,608
$
80,767
191,473
520,180
19,447
471,608
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,272,948
1,283,475
1,283,475
Equity securities:
Common stocks:
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial and miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,520
95,777
99,297
30,009
4,906
117,142
122,048
30,262
4,906
117,142
122,048
30,262
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,402,254
$1,435,785
$1,435,785
* 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)
Years Ended December 31,
2014
2013
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in unconsolidated subsidiaries (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
46
1,017,710
705
$
1,746
982,396
683
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,018,461
$ 984,825
Liabilities:
LIABILITIES AND SHAREHOLDERS’ EQUITY
Intercompany notes payable (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to affiliates (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 108,000
938
1,178
$ 108,000
2,382
1,108
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
110,116
111,490
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity:
—
—
Ordinary shares, $0.0001 par value, 900,000,000 ordinary shares authorized; A
ordinary shares issued: 16,331,577 and 16,200,406, respectively; A ordinary
shares outstanding: 13,266,762 and 13,141,035 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: 3,064,815 and 3,059,371 shares,
3
55
3
55
—
519,590
23,384
466,717
—
516,653
54,028
403,861
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(101,404)
(101,265)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
908,345
873,335
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,018,461
$ 984,825
(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)
Years Ended December 31,
2014
2013
2012
Revenues:
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses:
Intercompany interest expense (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $ —
1,296
4,484
1,296
3,848
918
4,169
Loss before equity in earnings of unconsolidated subsidiaries . . . . . . . . . . . .
Equity in earnings of unconsolidated subsidiaries (1) . . . . . . . . . . . . . . . . . . . . . .
(5,780)
68,636
(5,144)
66,834
(5,087)
39,844
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62,856
61,690
34,757
Other comprehensive income, net of tax:
Equity in other comprehensive income (loss) of unconsolidated
subsidiaries (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(30,644)
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . .
(30,644)
678
678
13,176
13,176
Comprehensive income, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 32,212
$62,368
$47,933
(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)
Years Ended December 31,
2014
2013
2012
Net cash provided by (used for) operating activities . . . . . . . . . . . . . . . . . . . . . . . . .
$(1,598) $
57
$ 6,011
Cash flows from financing activities:
Purchases of A ordinary shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit on share-based compensation expense . . . . . . . . . . . . . . . . . . . . . .
Issuance of intercompany note payable (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used for financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(139)
37
—
(102)
(55)
—
—
(82,959)
—
68,900
(55)
(14,059)
Net change in cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,700)
1,746
2
1,744
(8,048)
9,792
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
46
$1,746
$ 1,744
(1) This item has been eliminated in the Company’s Consolidated Financial Statements.
Supplemental Non-Cash Disclosure:
During the years ended December 31, 2014 and 2013, the Company received a non-cash dividend of $2.7 million
and $19.1 million, respectively, 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, 2014:
Insurance Operations . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . .
At December 31, 2013:
Insurance Operations . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . .
At December 31, 2012:
Insurance Operations . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . .
Segment
Deferred Policy
Acquisition Costs
Future
Policy Benefits,
Losses, Claims And
Loss Expenses
Unearned
Premiums
Other Policy and
Benefits Payable
$21,249
3,989
$19,036
3,141
$16,235
2,030
$579,621
95,851
$678,381
101,085
$764,737
114,377
$102,118
18,697
$100,791
15,838
$ 84,130
9,984
$—
—
$—
—
$—
—
Benefits, Claims,
Losses And
Settlement
Expenses
Premium
Revenue
Amortization of
Deferred Policy
Acquisition Costs
Net
Written
Premium
For the year ended December 31, 2014:
Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Operations . . . . . . . . . . . . . . . . . . . . . . . . .
$211,165
57,354
$117,586
19,975
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$268,519
$137,561
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
Unallocated Corporate Items
For the year ended December 31, 2014 . . . . . . . . . . . . . . .
For the year ended December 31, 2013 . . . . . . . . . . . . . . .
For the year ended December 31, 2012 . . . . . . . . . . . . . . .
Net
Investment
Income
$28,821
$37,209
$47,557
$212,965
60,216
$273,181
$213,705
58,279
$271,984
$177,832
41,715
$219,547
$45,015
12,036
$57,051
$44,115
9,672
$53,787
$38,177
10,675
$48,852
Corporate
and Other
Operating
Expenses
$14,559
$11,614
$ 9,691
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, 2014:
Property & Liability Insurance . . . . . . . . . . . . $228,652
For the year ended December 31, 2013:
Property & Liability Insurance . . . . . . . . . . . . $215,713
For the year ended December 31, 2012:
Property & Liability Insurance . . . . . . . . . . . . $203,587
$18,547
$58,414
$268,519
21.8%
$19,485
$52,494
$248,722
21.1%
$25,118
$60,393
$238,862
25.3%
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
$—
—
$—
—
—
$—
—
$—
—
—
$—
—
$—
—
—
$—
—
$—
—
—
$—
—
$—
—
—
$—
—
$—
—
—
$ —
—
$1,518
—
9,350
$ —
—
$1,782
—
9,010
$ —
—
$1,338
—
9,010
Description
For the year ended December 31,
2014:
Investment asset valuation reserves:
Mortgage loans . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts:
Premiums, accounts and notes
$ —
—
$ —
—
receivable . . . . . . . . . . . . . . .
$ 1,782
$ (264)
Deferred tax asset valuation
allowance . . . . . . . . . . . . . . .
Reinsurance receivables . . . . . .
For the year ended December 31,
2013:
Investment asset valuation reserves:
Mortgage loans . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts:
Premiums, accounts and notes
—
9,010
—
340
$ —
—
$ —
—
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)
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, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . .
$25,238
22,177
18,265
$675,472
779,466
879,114
$4,000
6,000
8,000
$120,815
116,629
94,114
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, 2014 . . . $268,519 $28,821
$153,994
$(16,433)
$57,051
$172,265 $273,181
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
Note: All of the Company’s insurance subsidiaries are 100% owned and consolidated.
S-8
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[THIS PAGE INTENTIONALLY LEFT BLANK]
One Company. One Focus.
Global Indemnity
ANNUAL REPORT 2014
Global Indemnity plc (NASDAQ: GBLI) is a national
and international niche supplier of excess and surplus
lines, specialty property and casualty insurance, and
reinsurance. Global Indemnity offers underwriting,
claims, and actuarial support to its multi-distribution
field operations. The company’s products and services
are marketed through several direct and indirect wholly
owned subsidiary insurance and reinsurance companies.
More than 450 employees are responsible for
maintaining “A” (Excellent) A.M. Best ratings for each
of Global Indemnity’s seven operating units.
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
e 2015 Annual Meeting is
scheduled for 1:00 p.m., Bermuda Time,
on Wednesday, May 27, 2015, at
Seon Place, 141 Front Street,
Hamilton, HM 19, Bermuda.
Global Indemnity
ANNUAL REPORT 2014
Registered Office
25/28 North Wall Quay
Dublin 1
Ireland
www.GlobalIndemnity.ie
info@GlobalIndemnity.ie
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