Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                      to                     

001-34809

Commission File Number

 

 

GLOBAL INDEMNITY PLC

(Exact name of registrant as specified in its charter)

 

 

 

Ireland   98-0664891

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

25/28 NORTH WALL QUAY

DUBLIN 1

IRELAND

(Address of principal executive office, including zip code)

353 (0) 1 649 2000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer ¨; Accelerated filer x; Non-accelerated filer ¨; Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of August 2, 2013, the registrant had outstanding 13,123,261 A Ordinary Shares and 12,061,370 B Ordinary Shares.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  
PART I – FINANCIAL INFORMATION   

Item 1.

 

Financial Statements:

  
 

Consolidated Balance Sheets As of June 30, 2013 (Unaudited) and December 31, 2012

     2   
 

Consolidated Statements of Operations Quarters and Six Months Ended June 30, 2013 (Unaudited) and June 30, 2012 (Unaudited)

     3   
 

Consolidated Statements of Comprehensive Income Quarters and Six Months Ended June 30, 2013 (Unaudited) and June 30, 2012 (Unaudited)

     4   
 

Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2013 (Unaudited) and Year Ended December 31, 2012

     5   
 

Consolidated Statements of Cash Flows Six Months Ended June 30, 2013 (Unaudited) and June 30, 2012 (Unaudited)

     6   
 

Notes to Consolidated Financial Statements (Unaudited)

     7   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     30   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     54   

Item 4.

 

Controls and Procedures

     54   
PART II – OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     56   

Item 1A.

 

Risk Factors

     56   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     56   

Item 3.

 

Defaults Upon Senior Securities

     56   

Item 4.

 

Mine Safety Disclosures

     56   

Item 5.

 

Other Information

     56   

Item 6.

 

Exhibits

     56   

Signature

     58   

 

1


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

GLOBAL INDEMNITY PLC

Consolidated Balance Sheets

(In thousands, except share amounts)

 

     (Unaudited)
June  30,
2013
    December 31,
2012
 
ASSETS     

Fixed maturities:

    

Available for sale, at fair value (amortized cost: $1,163,532 and $1,187,094)

   $ 1,184,738      $ 1,229,322   

Equity securities:

    

Available for sale, at fair value (cost: $174,693 and $167,179)

     222,583        197,075   

Other invested assets:

    

Available for sale, at fair value (cost: $3,059 and $3,049)

     3,226        3,132   
  

 

 

   

 

 

 

Total investments

     1,410,547        1,429,529   

Cash and cash equivalents

     111,440        104,460   

Premiums receivable, net

     74,027        45,162   

Reinsurance receivables, net

     232,645        241,827   

Receivable for securities sold

     5,160        —     

Federal income taxes receivable

     1,393        6,844   

Deferred federal income taxes

     10,445        10,824   

Deferred acquisition costs

     25,980        18,265   

Intangible assets

     18,166        18,343   

Goodwill

     4,820        4,820   

Prepaid reinsurance premiums

     5,248        5,945   

Other assets

     14,951        17,684   
  

 

 

   

 

 

 

Total assets

   $ 1,914,822      $ 1,903,703   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Liabilities:

    

Unpaid losses and loss adjustment expenses

   $ 844,918      $ 879,114   

Unearned premiums

     128,572        94,114   

Ceded balances payable

     4,628        4,201   

Contingent commissions

     7,302        9,911   

Payable for securities purchased

     —          2,634   

Notes and debentures payable

     84,929        84,929   

Other liabilities

     20,523        22,182   
  

 

 

   

 

 

 

Total liabilities

     1,090,872        1,097,085   
  

 

 

   

 

 

 

Commitments and contingencies (Note 9)

     —          —     

Shareholders’ equity:

    

Ordinary shares, $0.0001 par value, 900,000,000 ordinary shares authorized; A ordinary shares issued: 16,164,587 and 16,087,939, respectively; A ordinary shares outstanding: 13,105,826 and 13,030,938, respectively; B ordinary shares issued and outstanding: 12,061,370 and 12,061,370, respectively

     3        3   

Additional paid-in capital

     514,422        512,304   

Accumulated other comprehensive income, net of taxes

     47,574        53,350   

Retained earnings

     363,200        342,171   

A ordinary shares in treasury, at cost: 3,058,761 and 3,057,001 shares, respectively

     (101,249     (101,210
  

 

 

   

 

 

 

Total shareholders’ equity

     823,950        806,618   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,914,822      $ 1,903,703   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

GLOBAL INDEMNITY PLC

Consolidated Statements of Operations

(In thousands, except shares and per share data)

 

     (Unaudited)
Quarters Ended June 30,
    (Unaudited)
Six Months Ended June 30,
 
     2013     2012     2013     2012  

Revenues:

        

Gross premiums written

   $ 84,245      $ 67,632      $ 159,184      $ 125,390   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 78,346      $ 61,135      $ 149,824      $ 111,416   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 58,671      $ 57,859      $ 114,667      $ 122,329   

Net investment income

     9,765        11,071        19,799        22,488   

Net realized investment gains:

        

Other than temporary impairment losses on investments

     (1,010     (1,326     (1,053     (3,619

Other than temporary impairment losses on investments recognized in other comprehensive income

     —          —          —          541   

Other net realized investment gains

     3,816        3,267        9,616        6,780   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized investment gains

     2,806        1,941        8,563        3,702   

Other income (loss)

     247        (40     301        (392
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     71,489        70,831        143,330        148,127   

Losses and Expenses:

        

Net losses and loss adjustment expenses

     34,924        36,158        66,712        78,167   

Acquisition costs and other underwriting expenses

     24,472        23,760        48,949        46,927   

Corporate and other operating expenses

     2,472        2,336        4,817        4,824   

Interest expense

     1,181        1,470        2,354        2,948   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     8,440        7,107        20,498        15,261   

Income tax benefit

     (224     (2,497     (531     (5,205
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 8,664      $ 9,604      $ 21,029      $ 20,466   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share data:

        

Net income

        

Basic

   $ 0.35      $ 0.35      $ 0.84      $ 0.73   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.34      $ 0.35      $ 0.84      $ 0.72   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares outstanding

        

Basic

     25,049,888        27,829,555        25,052,488        28,223,321   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     25,119,035        27,836,453        25,120,897        28,236,562   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

GLOBAL INDEMNITY PLC

Consolidated Statements of Comprehensive Income

(In thousands)

 

     (Unaudited)
Quarters Ended  June 30,
    (Unaudited)
Six Months  Ended June 30,
 
     2013     2012     2013     2012  

Net income

   $ 8,664      $ 9,604      $ 21,029      $ 20,466   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of taxes:

        

Unrealized holding gains (losses)

     (11,407     (6,975     (154     13,075   

Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)

     (3     (4     (4     (539

Recognition of previously unrealized holding gains

     (1,881     (1,450     (5,652     (3,231

Unrealized foreign currency translation gains (losses)

     66        9        34        (38
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of taxes

     (13,225     (8,420     (5,776     9,267   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss), net of taxes

   $ (4,561   $ 1,184      $ 15,253      $ 29,733   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

GLOBAL INDEMNITY PLC

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except share amounts)

 

     (Unaudited)
Six Months  Ended
June 30, 2013
    Year Ended
December 31, 2012
 

Number of A ordinary shares issued:

    

Number at beginning of period

     16,087,939        21,429,683   

Ordinary shares issued under share incentive plans

     66,683        29,675   

Ordinary shares issued to directors

     9,965        —     

Ordinary shares retired

     —          (5,371,419
  

 

 

   

 

 

 

Number at end of period

     16,164,587        16,087,939   
  

 

 

   

 

 

 

Number of B ordinary shares issued:

    

Number at beginning and end of period

     12,061,370        12,061,370   
  

 

 

   

 

 

 

Par value of A ordinary shares:

    

Balance at beginning and end of period

   $ 2      $ 2   
  

 

 

   

 

 

 

Par value of B ordinary shares:

    

Balance at beginning and end of period

   $ 1      $ 1   
  

 

 

   

 

 

 

Additional paid-in capital:

    

Balance at beginning of period

   $ 512,304      $ 621,917   

Share compensation plans

     2,118        2,582   

A ordinary shares retired

     —          (112,195
  

 

 

   

 

 

 

Balance at end of period

   $ 514,422      $ 512,304   
  

 

 

   

 

 

 

Accumulated other comprehensive income, net of deferred income tax:

    

Balance at beginning of period

   $ 53,350      $ 40,174   

Other comprehensive income (loss):

    

Change in unrealized holding gains (losses)

     (5,806     13,218   

Change in other than temporary impairment losses recognized in other comprehensive income

     (4     (14

Unrealized foreign currency translation gains (losses)

     34        (28
  

 

 

   

 

 

 

Other comprehensive income (loss)

     (5,776     13,176   
  

 

 

   

 

 

 

Balance at end of period

   $ 47,574      $ 53,350   
  

 

 

   

 

 

 

Retained earnings:

    

Balance at beginning of period

   $ 342,171      $ 307,414   

Net income

     21,029        34,757   
  

 

 

   

 

 

 

Balance at end of period

   $ 363,200      $ 342,171   
  

 

 

   

 

 

 

Number of Treasury Shares:

    

Number at beginning of period

     3,057,001        4,619,005   

A ordinary shares purchased

     1,760        3,809,415   

A ordinary shares retired

     —          (5,371,419
  

 

 

   

 

 

 

Number at end of period

     3,058,761        3,057,001   
  

 

 

   

 

 

 

Treasury Shares, at cost:

    

Balance at beginning of period

   $ (101,210   $ (130,444

A ordinary shares purchased, at cost

     (39     (82,961

A ordinary shares retired

     —          112,195   
  

 

 

   

 

 

 

Balance at end of period

   $ (101,249   $ (101,210
  

 

 

   

 

 

 

Total shareholders’ equity

   $ 823,950      $ 806,618   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

GLOBAL INDEMNITY PLC

Consolidated Statements of Cash Flows

(In thousands)

 

     (Unaudited)
Six Months  Ended June 30,
 
     2013     2012  

Cash flows from operating activities:

    

Net income

   $ 21,029      $ 20,466   

Adjustments to reconcile net income to net cash used for operating activities:

    

Amortization of trust preferred securities issuance costs

     25        33   

Amortization and depreciation

     385        941   

Restricted stock and stock option expense

     2,118        1,287   

Deferred federal income taxes

     (2,215     2,111   

Amortization of bond premium and discount, net

     3,099        3,549   

Net realized investment gains

     (8,563     (3,702

Changes in:

    

Premiums receivable, net

     (28,865     (4,852

Reinsurance receivables, net

     9,182        9,891   

Unpaid losses and loss adjustment expenses

     (34,196     (30,094

Unearned premiums

     34,458        (10,847

Ceded balances payable

     427        (1,244

Other assets and liabilities, net

     599        (3,165

Contingent commissions

     (2,609     (1,242

Federal income tax receivable/payable

     5,451        (7,539

Deferred acquisition costs, net

     (7,715     1,377   

Prepaid reinsurance premiums

     697        (66
  

 

 

   

 

 

 

Net cash used for operating activities

     (6,693     (23,096
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from sale of fixed maturities

     193,642        270,873   

Proceeds from sale of equity securities

     42,551        25,159   

Proceeds from maturity of fixed maturities

     33,530        25,460   

Purchases of fixed maturities

     (214,220     (294,711

Purchases of equity securities

     (41,781     (27,494

Purchases of other invested assets

     (10     (6
  

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     13,712        (719
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Purchase of A ordinary shares

     (39     (74,850

Principal payments of term debt

     —          (71
  

 

 

   

 

 

 

Net cash used for financing activities

     (39     (74,921
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     6,980        (98,736

Cash and cash equivalents at beginning of period

     104,460        175,860   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 111,440      $ 77,124   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 and an Irish tax resident. The Company’s A ordinary shares are publicly traded on the NASDAQ Global Select Market. On July 6, 2010, the Company changed its trading symbol on the NASDAQ Global Select Market from “INDM” to “GBLI.”

The Company manages its business through two business segments: Insurance Operations, which includes the operations of United National Insurance Company, Diamond State Insurance Company, United National Casualty Insurance Company, United National Specialty Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, Penn-Patriot Insurance Company, American Insurance Adjustment Agency, Inc., Collectibles Insurance Services, LLC, Global Indemnity Insurance Agency, LLC, and J.H. Ferguson & Associates, LLC, and Reinsurance Operations, which includes the operations of Wind River Reinsurance Company, Ltd. (“Wind River Reinsurance”)

The interim consolidated financial statements are unaudited, but have been prepared in conformity with United States of America generally accepted accounting principles (“GAAP”), which differs in certain respects from those principles followed in reports to insurance regulatory authorities. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The unaudited consolidated financial statements include all adjustments that are, in the opinion of management, of a normal recurring nature and are necessary for a fair statement of results for the interim periods. Results of operations for the quarters and six months ended June 30, 2013 and 2012 are not necessarily indicative of the results of a full year. The accompanying notes to the unaudited consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements contained in the Company’s 2012 Annual Report on Form 10-K.

The consolidated financial statements include the accounts of Global Indemnity and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The Company’s wholly owned business trust subsidiaries, United National Group Capital Trust I (“UNG Trust I”) and United National Group Capital Statutory Trust II (“UNG Trust II”), are not consolidated pursuant to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification. The Company’s business trust subsidiaries have issued $30.0 million in floating rate capital securities (“Trust Preferred Securities”) and $0.9 million of floating rate common securities. The sole assets of the Company’s business trust subsidiaries are $30.9 million of junior subordinated debentures issued by the Company, which have the same terms with respect to maturity, payments, and distributions as the Trust Preferred Securities and the floating rate common securities.

 

2. Profit Enhancement Initiative

In 2010 and 2011, the Company committed to a Profit Enhancement Initiative in response to the continuing impact of the domestic recession and the competitive landscape within the excess and surplus lines market. The total cost of this initiative was recorded in the Company’s statements of operations during those years. All action items related to this initiative were completed by December 31, 2011.

For further disclosure regarding the Profit Enhancement Initiative, please see Note 5 of the notes to the consolidated financial statements in Item 8 of Part II of the Company’s 2012 Annual Report on Form 10-K.

 

7


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

The following table summarizes charges incurred by expense type and the remaining liability as of June 30, 2013 and December 31, 2012:

 

(Dollars in thousands)    Employee
Termination
    Operating
Leases
    Total  

Liability at January 1, 2012

   $ 785      $ 1,828      $ 2,613   
  

 

 

   

 

 

   

 

 

 

Cash payments

     (773     (690     (1,463

Non-cash adjustments

     —          (267     (267
  

 

 

   

 

 

   

 

 

 

Liability at December 31, 2012

   $ 12      $ 871      $ 883   
  

 

 

   

 

 

   

 

 

 

Cash payments

     (12     (289     (301

Non-cash adjustments

     —          (108     (108
  

 

 

   

 

 

   

 

 

 

Liability at June 30, 2013

   $ —        $ 474      $ 474   
  

 

 

   

 

 

   

 

 

 

There was a reduction in expense of $0.04 million and $0.1 million, respectively, related to the Profit Enhancement Initiative resulting from a revision of expected sub-lease income included in the statement of operations within the “Acquisition costs and other underwriting expenses” line item for the quarter and six months ended June 30, 2013.

There was a reduction in expense of $0.18 million related to the Profit Enhancement Initiative resulting from a revision of expected sub-lease income included in the statement of operations within the “Acquisition costs and other underwriting expenses” line item for the quarter and six months ended June 30, 2012.

 

3. Investments

The amortized cost and estimated fair value of investments were as follows as of June 30, 2013 and December 31, 2012:

 

(Dollars in thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
     Other than
temporary
impairments
recognized
in AOCI (1)
 

As of June 30, 2013

             

Fixed maturities:

             

U.S. treasury and agency obligations

   $ 107,669       $ 4,755       $ (133   $ 112,291       $  —     

Obligations of states and political subdivisions

     191,641         4,948         (1,606     194,983         —     

Mortgage-backed securities

     255,226         4,980         (2,358     257,848         (6

Asset-backed securities

     109,438         1,294         (503     110,229         (21

Commercial mortgage-backed securities

     57,810         5         (980     56,835         —     

Corporate bonds and loans

     391,633         10,401         (930     401,104         —     

Foreign corporate bonds

     50,115         1,333         —          51,448         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     1,163,532         27,716         (6,510     1,184,738         (27

Common stock

     174,693         49,010         (1,120     222,583         —     

Other invested assets

     3,059         167         —          3,226         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,341,284       $ 76,893       $ (7,630   $ 1,410,547       $ (27
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Represents the total amount of other than temporary impairment losses relating to factors other than credit losses recognized in accumulated other comprehensive income (“AOCI”).

 

(Dollars in thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
     Other than
temporary
impairments
recognized in
AOCI (2)
 

As of December 31, 2012

             

Fixed maturities:

             

U.S. treasury and agency obligations

   $ 102,186       $ 6,559       $ (1   $ 108,744       $  —     

Obligations of states and political subdivisions

     194,326         6,883         (132     201,077         —     

Mortgage-backed securities

     247,639         8,492         (189     255,942         (8

Asset-backed securities

     111,289         2,071         (9     113,351         (24

Commercial mortgage-backed securities

     8,070         60         (13     8,117         —     

Corporate bonds and loans

     469,860         16,739         (428     486,171         —     

Foreign corporate bonds

     53,724         2,196         —          55,920         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     1,187,094         43,000         (772     1,229,322         (32

Common stock

     167,179         32,847         (2,951     197,075         —     

Other invested assets

     3,049         83         —          3,132         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,357,322       $ 75,930       $ (3,723   $ 1,429,529       $ (32
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

8


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

(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 3% of shareholders’ equity at June 30, 2013 or December 31, 2012.

The amortized cost and estimated fair value of the Company’s fixed maturities portfolio classified as available for sale at June 30, 2013, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars in thousands)    Amortized
Cost
     Fair Value  

Due in one year or less

   $ 105,566       $ 107,190   

Due after one year through five years

     497,413         512,713   

Due after five years through ten years

     108,194         109,354   

Due after ten years through fifteen years

     3,860         4,660   

Due after fifteen years

     26,025         25,909   

Mortgage-backed securities

     255,226         257,848   

Asset-backed securities

     109,438         110,229   

Commercial mortgage-backed securities

     57,810         56,835   
  

 

 

    

 

 

 

Total

   $ 1,163,532       $ 1,184,738   
  

 

 

    

 

 

 

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 June 30, 2013:

 

     Less than 12 months     12 months or longer (1)     Total  
(Dollars in thousands)    Fair Value      Gross
Unrealized
Losses
    Fair Value      Gross
Unrealized
Losses
    Fair Value      Gross
Unrealized
Losses
 

Fixed maturities:

               

U.S. treasury and agency obligations

   $ 6,272       $ (133   $ —         $ —        $ 6,272       $ (133

Obligations of states and political subdivisions

     65,819         (1,543     4,550         (63     70,369         (1,606

Mortgage-backed securities

     117,001         (2,356     188         (2     117,189         (2,358

Asset-backed securities

     40,810         (502     3         (1     40,813         (503

Commercial mortgage-backed securities

     52,096         (980     —           —          52,096         (980

Corporate bonds and loans

     59,032         (829     1,628         (101     60,660         (930
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     341,030         (6,343     6,369         (167     347,399         (6,510

Common stock

     16,046         (881     1,299         (239     17,345         (1,120
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 357,076       $ (7,224   $ 7,668       $ (406   $ 364,744       $ (7,630
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(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, 2012:

 

     Less than 12 months     12 months or longer (2)     Total  
(Dollars in thousands)    Fair Value      Gross
Unrealized
Losses
    Fair Value      Gross
Unrealized
Losses
    Fair Value      Gross
Unrealized
Losses
 

Fixed maturities:

               

U.S. treasury and agency obligations

   $ 2,002       $ (1   $ —         $ —        $ 2,002       $ (1

Obligations of states and political subdivisions

     33,204         (132     —           —          33,204         (132

Mortgage-backed securities

     33,635         (172     640         (17     34,275         (189

Asset-backed securities

     5,722         (3     4,763         (6     10,485         (9

Commercial mortgage-backed securities

     2,839         (13     —           —          2,839         (13

Corporate bonds and loans

     8,202         (274     3,308         (154     11,510         (428
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     85,604         (595     8,711         (177     94,315         (772

Common stock

     30,153         (2,284     3,950         (667     34,103         (2,951
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 115,757       $ (2,879   $ 12,661       $ (844   $ 128,418       $ (3,723
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

9


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

(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.

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 contractually due. Securities for which the Company determines that a credit loss is likely are subjected to further analysis through discounted cash flow testing to estimate the credit loss to be recognized in earnings, if any. The specific methodologies and significant assumptions used by asset class are discussed below. Upon identification of such securities and periodically thereafter, a detailed review is performed to determine whether the decline is considered other than temporary. This review includes an analysis of several factors, including but not limited to, the credit ratings and cash flows of the securities and the magnitude and length of time that the fair value of such securities is below cost.

For fixed maturities, the factors considered in reaching the conclusion that a decline below cost is other than temporary include, among others, whether:

 

  (1) the issuer is in financial distress;

 

  (2) the investment is secured;

 

  (3) a significant credit rating action occurred;

 

  (4) scheduled interest payments were delayed or missed;

 

  (5) changes in laws or regulations have affected an issuer or industry;

 

  (6) the investment has an unrealized loss and was identified by the Company’s investment manager as an investment to be sold before recovery or maturity; and

 

  (7) the investment failed cash flow projection testing to determine if anticipated principal and interest payments will be realized.

According to accounting guidance, for debt securities in an unrealized loss position, the Company is required to assess whether it has the intent to sell the debt security or more likely than not will be required to sell the debt security before the anticipated recovery. If either of these conditions is met the Company must recognize an other than temporary impairment with the entire unrealized loss being recorded through earnings. For debt securities in an unrealized loss position not meeting these conditions, the Company assesses whether the impairment of a security is other than temporary. If the impairment is deemed to be other than temporary, the Company must separate the other than temporary impairment into two components: the amount representing the credit loss and the amount related to all other factors, such as changes in interest rates. The credit loss represents the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. The credit loss component of the other than temporary impairment is recorded through earnings, whereas the amount relating to factors other than credit losses are 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 with a focus 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.

 

10


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

The amount of any write-down, including those that are deemed to be other than temporary, is included in earnings as a realized loss in the period in which the impairment arose.

The following is a description, by asset type, of the methodology and significant inputs that the Company used to measure the amount of credit loss recognized in earnings, if any:

U.S. treasury and agency obligations – As of June 30, 2013, gross unrealized losses related to U.S. treasury and agency obligations were $0.133 million. All unrealized losses have been in an unrealized loss position for less than twelve months. All of these securities are rated AA+. The Company’s investment manager conducts extensive macroeconomic and market analysis which are driven by moderate interest rate anticipation, yield curve management, and security selection.

Obligations of states and political subdivisions – As of June 30, 2013, gross unrealized losses related to obligations of states and political subdivisions were $1.606 million. Of this amount, $0.063 million have been in an unrealized loss position for twelve months or greater. All of these securities are rated AAA. The Company’s investment manager considers all factors that influence performance of the municipal bond market, including investor expectations, supply and demand patterns, and current versus historical yield and spread relationships. The manager relies on the output of its fixed income credit analysts, including dedicated municipal bond analysts. The dedicated municipal analysts perform extensive in-house fundamental analysis on each issuer, regardless of their rating by the major agencies.

Mortgage-backed securities (“MBS”) – As of June 30, 2013, gross unrealized losses related to mortgage-backed securities were $2.358 million. Of this amount, $0.002 million have been in an unrealized loss position for twelve months or greater. All of the securities in an unrealized loss position for twelve months or greater are rated BB or higher. The Company’s investment manager models each mortgage-backed security 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 Company’s investment manager 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, using inputs from its macroeconomic team, mortgage portfolio management team, and structured analyst team. The model utilizes loan level data and borrower characteristics including FICO score, geographic location, original and current loan size, loan age, mortgage rate and type (fixed rate / interest-only / adjustable rate mortgage), issuer / originator, residential type (owner occupied / investor property), dwelling type (single family / multi-family), loan purpose, level of documentation, and delinquency status as inputs. The model also includes the explicit treatment of silent second liens, utilization of loan modification history, and the application of roll rate adjustments.

Asset-backed securities (“ABS”) – As of June 30, 2013, gross unrealized losses related to asset-backed securities were $0.503 million. Of this amount, $0.001 million have been in an unrealized loss position for twelve months or greater. All of these securities are rated A. The weighted average credit enhancement for the Company’s asset-backed portfolio is 30.1. This represents the percentage of pool losses that can occur before an asset-backed security will incur its first dollar of principle losses. The Company’s investment manager analyzes every ABS transaction on a stand-alone basis. This analysis involves a thorough review of the collateral, prepayment, and structural risk in each transaction. Additionally, their analysis includes an in-depth credit analysis of the originator and servicer of the collateral. The Company’s investment manager 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 that the deal will incur a dollar of loss. The major assumptions used to calculate this ratio are loss severities, recovery lags, and no advances on principal and interest.

Commercial mortgage-backed securities (“CMBS”) – As of June 30, 2013, gross unrealized losses related to CMBS were $0.980 million. All unrealized losses have been in an unrealized loss position for less than twelve

 

11


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

months. The weighted average credit enhancement for the Company’s CMBS portfolio is 31.0. This represents the percentage of pool losses that can occur before a mortgage-backed security will incur its first dollar of principle losses. For the Company’s CMBS portfolio, a loan level analysis is utilized where every underlying CMBS loan is re-underwritten based on the Company’s investment manager’s internally generated set of assumptions that reflect their expectation 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) occupancies are projected to drop; (2) capitalization rates 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 was stressed by using projected property performance and projected capitalization rates. Term risk is triggered if projected debt service coverage rate falls below 1x. Balloon risk is triggered if a property’s projected performance does not satisfy new, tighter mortgage standards.

Corporate bonds and loans – As of June 30, 2013, gross unrealized losses related to corporate bonds and loans were $0.930 million. Of this amount, $0.101 million have been in an unrealized loss position for twelve months or greater. The Company’s investment manager’s 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, issuer’s current competitive position, vulnerability to changes in the competitive environment, 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 stocks – As of June 30, 2013, gross unrealized losses related to common stock were $1.120 million. Of this amount, $0.239 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.

The Company recorded the following other than temporary impairments (“OTTI”) on its investment portfolio for the quarters and six months ended June 30, 2013 and 2012:

 

(Dollars in thousands)    Quarters Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Fixed maturities:

        

OTTI losses, gross

   $ (68   $ (164   $ (111   $ (1,059

Portion of loss recognized in other comprehensive income (pre-tax)

     —          —          —          541   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses on fixed maturities recognized in earnings

     (68     (164     (111     (518

Equity securities

     (942     (1,162     (942     (2,560
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (1,010   $ (1,326   $ (1,053   $ (3,078
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table is an analysis of the credit losses recognized in earnings on debt securities held by the Company for the quarters and six months ended June 30, 2013 and 2012 for which a portion of the OTTI loss was recognized in other comprehensive income.

 

(Dollars in thousands)    Quarters Ended June 30,     Six Months Ended June 30,  
     2013      2012     2013      2012  

Balance at beginning of period

   $ 86       $ 141      $ 86       $ 86   

Additions where no OTTI was previously recorded

     —           —          —           55   

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

     —           (55     —           (55
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 86       $ 86      $ 86       $ 86   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

12


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

Accumulated Other Comprehensive Income, Net of Tax

Accumulated other comprehensive income as of June 30, 2013 and December 31, 2012 was as follows:

 

(Dollars in thousands)    June 30, 2013     December 31, 2012  

Net unrealized gains (losses) from:

    

Fixed maturities

   $ 21,206      $ 42,228   

Common stock

     47,890        29,896   

Other

     (69     83   

Deferred taxes

     (21,453     (18,857
  

 

 

   

 

 

 

Accumulated other comprehensive income, net of tax

   $ 47,574      $ 53,350   
  

 

 

   

 

 

 

The changes in accumulated other comprehensive income, net of tax, by component for the six months ended June 30, 2013 was as follows:

 

Six Months Ended June 30, 2013

(Dollars in thousands)

   Unrealized Gains
and Losses on
Available for Sale
Securities, Net of
Tax
    Foreign Currency
Items, Net of Tax
    Accumulated Other
Comprehensive
Income, Net of Tax
 

Beginning balance

   $ 53,435      $ (85   $ 53,350   

Other comprehensive income (loss) before reclassification

     30        (154     (124

Amounts reclassified from accumulated other comprehensive income (loss)

     (5,840     188        (5,652
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (5,810     34        (5,776
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 47,625      $ (51   $ 47,574   
  

 

 

   

 

 

   

 

 

 

The reclassifications out of accumulated other comprehensive income for the quarter and six months ended June 30, 2013 were as follows:

 

(Dollars in thousands)    Amount Reclassified from Accumulated Other
Comprehensive Income
     

Details about Accumulated Other Comprehensive
Income Components

   Quarter Ended
June 30, 2013
    Six Months Ended
June 30, 2013
   

Affected Line Item in the Statement

Where Net Income is Presented

Unrealized gains and losses on available for sale securities

   $ (4,018   $ (9,906   Other net realized investment gains
     1,010        1,053      Other than temporary impairment losses on investments
  

 

 

   

 

 

   
     (3,008     (8,853   Total before tax
     1,053        3,013      Income tax (expense) benefit
  

 

 

   

 

 

   
   $ (1,955   $ (5,840  

Net of tax

  

 

 

   

 

 

   

Foreign Currency Items

      
     202        290      Other net realized investment gains
     (71     (102   Income tax (expense) benefit
  

 

 

   

 

 

   
   $ 131      $ 188     

Net of tax

  

 

 

   

 

 

   

Total reclassifications

   $ (1,824   $ (5,652  

Net of tax

  

 

 

   

 

 

   

 

13


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

Net Realized Investment Gains

The components of net realized investment gains for the quarters and six months ended June 30, 2013 and 2012 were as follows:

 

     Quarters Ended June 30,     Six Months Ended June 30,  
(Dollars in thousands)    2013     2012     2013     2012  

Fixed maturities:

        

Gross realized gains

   $ 287      $ 2,026      $ 674      $ 2,758   

Gross realized losses

     (339     (781     (396     (1,603
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains (losses)

     (52     1,245        278        1,155   
  

 

 

   

 

 

   

 

 

   

 

 

 

Common stock:

        

Gross realized gains

     4,532        2,123        10,013        5,390   

Gross realized losses

     (1,674     (1,427     (1,728     (2,843
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains

     2,858        696        8,285        2,547   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized investment gains

   $ 2,806      $ 1,941      $ 8,563      $ 3,702   
  

 

 

   

 

 

   

 

 

   

 

 

 

The proceeds from sales of available-for-sale securities resulting in net realized investment gains for the six months ended June 30, 2013 and 2012 were as follows:

 

     Six Months Ended June 30,  
(Dollars in thousands)    2013      2012  

Fixed maturities

   $ 193,642       $ 270,873   

Equity securities

     42,551         25,159   

Net Investment Income

The sources of net investment income for the quarters and six months ended June 30, 2013 and 2012 were as follows:

 

     Quarters Ended June 30,     Six Months Ended June 30,  
(Dollars in thousands)    2013     2012     2013     2012  

Fixed maturities

   $ 9,039      $ 10,467      $ 18,866      $ 21,826   

Equity securities

     1,660        1,628        2,952        2,711   

Cash and cash equivalents

     31        43        81        86   

Other invested assets

     141        —          141        156   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     10,871        12,138        22,040        24,779   

Investment expense

     (1,106     (1,067     (2,241     (2,291
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 9,765      $ 11,071      $ 19,799      $ 22,488   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s total investment return on a pre-tax basis for the quarters and six months ended June 30, 2013 and 2012 were as follows:

 

     Quarters Ended June 30,     Six Months Ended June 30,  
(Dollars in thousands)    2013     2012     2013     2012  

Net investment income

   $ 9,765      $ 11,071      $ 19,799      $ 22,488   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized investment gains

     2,806        1,941        8,563        3,702   

Net unrealized investment gains (losses)

     (15,391     (11,951     (3,180     11,834   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment return

     (12,585     (10,010     5,383        15,536   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment return

   $ (2,820   $ 1,061      $ 25,182      $ 38,024   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment return % (1)

     (0.2 %)      0.1     1.6     2.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Average investment portfolio (2)

   $ 1,532,639      $ 1,604,406      $ 1,529,251      $ 1,606,186   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

14


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

(1) Not annualized.
(2) Average of total cash and invested assets, net of receivable/payable for securities purchased and sold, as of the beginning and ending of the period.

Insurance Enhanced Municipal Bonds

As of June 30, 2013, the Company held insurance enhanced municipal bonds of approximately $34.6 million, which represented approximately 2.3% 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 $4.6 million of these bonds are pre-refunded with U.S. treasury securities, of which $1.6 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 $30.0 million of insurance enhanced municipal bonds, $15.1 million would have carried a lower credit rating had they not been insured. The following table provides a breakdown of the ratings for these municipal bonds with and without insurance.

 

(Dollars in thousands)

   Ratings
with
Insurance
     Ratings
without
Insurance
 
     
Rating      

AAA

   $ 8,837       $ —     

AA

     —           8,837   

A

     6,277         6,277   
  

 

 

    

 

 

 

Total

   $ 15,114       $ 15,114   
  

 

 

    

 

 

 

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 June 30, 2013, is as follows:

 

     Total      Pre-refunded
Securities
     Government
Guaranteed
Securities
     Exposure Net
of Pre-refunded
& Government
Guaranteed
Securities
 
             
(Dollars in thousands)            
             

Financial Guarantor

           

Ambac Financial Group

   $ 2,333       $ 1,267       $ —         $ 1,066   

Assured Guaranty Corporation

     11,241         —           —           11,241   

Municipal Bond Insurance Association

     7,134         —           —           7,134   

Gov’t National Housing Association

     1,948         285         1,663         —     

Permanent School Fund Guaranty

     8,837         —           8,837         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total backed by financial guarantors

     31,493         1,552         10,500         19,441   

Other credit enhanced municipal bonds

     3,060         3,060         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34,553       $ 4,612       $ 10,500       $ 19,441   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition to the $34.6 million of insurance enhanced municipal bonds, the Company also held insurance enhanced asset-backed and credit securities with a market value of approximately $19.0 million, which represented approximately 1.2% of the Company’s total invested assets net of receivable/payable for securities purchased and sold. The financial guarantors of the Company’s $19.0 million of insurance enhanced asset-backed and credit securities include Municipal Bond Insurance Association ($4.5 million), Ambac ($1.6 million), Assured Guaranty Corporation ($7.7 million), and Other ($5.2 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 June 30, 2013.

 

15


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

Bonds Held on Deposit

Certain cash balances, cash equivalents, equity securities and bonds available for sale were deposited with various governmental authorities in accordance with statutory requirements, were held as collateral pursuant to borrowing arrangements, or were held in trust pursuant to intercompany reinsurance agreements. The fair values were as follows as of June 30, 2013 and December 31, 2012:

 

     Estimated Fair Value  
(Dollars in thousands)    June 30, 2013      December 31, 2012  

On deposit with governmental authorities

   $ 41,931       $ 42,492   

Intercompany trusts held for the benefit of U.S. policyholders

     570,558         553,893   

Held in trust pursuant to third party requirements

     116,969         132,684   

Held in trust pursuant to U.S. regulatory requirements for the benefit of U.S. policyholders

     6,349         6,368   

Securities held as collateral for borrowing arrangements

     41,236         —     
  

 

 

    

 

 

 

Total

   $ 777,043       $ 735,437   
  

 

 

    

 

 

 

 

4. Fair Value Measurements

Unless otherwise noted, the reported value of assets and liabilities approximates their fair value.

The accounting standards related to fair value measurements define fair value, establish a framework for measuring fair value, outline a fair value hierarchy based on inputs used to measure fair value, and enhance disclosure requirements for fair value measurements. These standards do not change existing guidance as to whether or not an instrument is carried at fair value. The Company has determined that its fair value measurements are in accordance with the requirements of these accounting standards.

The Company’s invested assets are carried at their fair value and are categorized based upon a fair value hierarchy:

 

   

Level 1 – inputs utilize quoted prices (unadjusted) in active markets for identical assets that the Company has the ability to access at the measurement date.

 

   

Level 2 – inputs utilize other than quoted prices included in Level 1 that are observable for similar assets, either directly or indirectly.

 

   

Level 3 – inputs are unobservable for the asset, and include situations where there is little, if any, market activity for the asset.

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.

 

16


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

The following table presents information about the Company’s invested assets measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

 

As of June 30, 2013    Fair Value Measurements  
(Dollars in thousands)    Level 1      Level 2      Level 3      Total  

Fixed maturities:

           

U.S. treasury and agency obligations

   $ 100,098       $ 12,193       $  —         $ 112,291   

Obligations of states and political subdivisions

     —           194,983         —           194,983   

Mortgage-backed securities

     —           257,848         —           257,848   

Commercial mortgage-backed securities

     —           56,835         —           56,835   

Asset-backed securities

     —           110,229         —           110,229   

Corporate bonds and loans

     —           401,104         —           401,104   

Foreign corporate bonds

     —           51,448         —           51,448   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     100,098         1,084,640         —           1,184,738   

Common stock

     222,583         —           —           222,583   

Other invested assets

     —           —           3,226         3,226   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total invested assets

   $ 322,681       $ 1,084,640       $ 3,226       $ 1,410,547   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

As of December 31, 2012    Fair Value Measurements  
(Dollars in thousands)    Level 1      Level 2      Level 3      Total  

Fixed maturities:

           

U.S. treasury and agency obligations

   $ 89,981       $ 18,763       $  —         $ 108,744   

Obligations of states and political subdivisions

     —           201,077         —           201,077   

Mortgage-backed securities

     —           255,942         —           255,942   

Commercial mortgage-backed securities

     —           8,117         —           8,117   

Asset-backed securities

     —           113,351         —           113,351   

Corporate bonds and loans

     —           486,171         —           486,171   

Foreign corporate bonds

     —           55,920         —           55,920   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     89,981         1,139,341         —           1,229,322   

Common stock

     197,075         —           —           197,075   

Other invested assets

     —           —           3,132         3,132   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total invested assets

   $ 287,056       $ 1,139,341       $ 3,132       $ 1,429,529   
  

 

 

    

 

 

    

 

 

    

 

 

 

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. 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.

There were no transfers between Level 1 and Level 2 during the quarters and six months ended June 30, 2013 or 2012.

The following table presents changes in Level 3 investments measured at fair value on a recurring basis for the quarters and six months ended June 30, 2013 and 2012:

 

     Other Invested Assets  
(Dollars in thousands)    Quarters Ended     Six Months Ended  
     June 30, 2013      June 30, 2012     June 30, 2013      June 30, 2012  

Beginning balance

   $ 3,105       $ 8,632      $ 3,132       $ 6,617   

Total gains (losses) (realized / unrealized):

          

Included in accumulated other comprehensive income (loss)

     121         (42     84         1,967   

Purchases

     —           —          10         6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance

   $ 3,226       $ 8,590      $ 3,226       $ 8,590   
  

 

 

    

 

 

   

 

 

    

 

 

 

Losses included in earnings of the period attributable to the change in unrealized losses related to assets still held at the end of the period

   $ —         $ —        $ —         $ —     
  

 

 

    

 

 

   

 

 

    

 

 

 

 

17


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

The investments classified as Level 3 in the above table relate to investments in limited partnerships that have invested primarily in publicly traded companies. However, not all of the partnerships’ investments are publicly traded, nor does the Company have access to daily valuations, therefore the estimated fair values of these limited partnerships are measured utilizing net asset value as a practical expedient for the limited partnerships. Material assumptions and factors utilized in pricing these investments include future cash flows, constant default rates, recovery rates, and any market clearing activity that may have occurred since the previous pricing period.

Fair Value of Alternative Investments

Included in “Other invested assets” in the fair value hierarchy at June 30, 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 June 30, 2013.

 

(Dollars in thousands)    Fair Value      Future
Funding
Commitments
 

Equity Fund, LP (1)

   $ 3,226       $ 2,497   

Real Estate Fund, LP (2)

     —           —     
  

 

 

    

 

 

 

Total

   $ 3,226       $ 2,497   
  

 

 

    

 

 

 

 

(1) This limited partnership invests in companies from various business sectors whereby the partnership has acquired control of the operating business as a lead or organizing investor. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner.
(2) This limited partnership invests in real estate assets through a combination of direct or indirect investments in partnerships, limited liability companies, mortgage loans, and lines of credit. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company continues to hold an investment in this limited partnership and has written the fair value down to zero.

Pricing

The Company’s pricing vendors provide prices for all investment categories except for investments in limited partnerships. One vendor provides prices for equity securities and all fixed maturity categories except for corporate loans. A second vendor provides prices for the corporate loan securities.

The following is a description of the valuation methodologies used by the Company’s pricing vendors for investment securities carried at fair value:

 

   

Equity prices are received from all primary and secondary exchanges.

 

   

Corporate and agency bonds are evaluated by utilizing a multi-dimensional relational model. For bonds with early redemption options, the pricing vendor utilizes an option adjusted spread model. 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.

 

18


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

   

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, the pricing vendor utilizes a matrix model correlation to TBA (a forward MBS trade) or benchmarking to value a security.

 

   

Corporate loans are priced using averages of bids and offers obtained from the broker/dealer community involved in trading such loans.

The Company performs certain procedures to validate whether the pricing information received from the pricing vendors is reasonable, to ensure that the fair value determination is consistent with accounting guidance, and to ensure that its assets are properly classified in the fair value hierarchy. The Company’s procedures include, but are not limited to:

 

   

Reviewing periodic reports provided by the Investment Manager that 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.

During the three and six months ending June 30, 2013, the Company has not adjusted quotes or prices obtained from the pricing vendors.

 

5. Income Taxes

The statutory income tax rates of the countries where the Company does business are 35.0% in the United States, 0.0% in Bermuda, 0.0% in the Cayman Islands, 0.0% in Gibraltar, 28.8% in the Duchy of Luxembourg, and 25.0% on non-trading income, 30.0% 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 expected annual taxable income of the Company in each country to estimate the annual income tax expense. Total estimated annual income tax expense is divided by total estimated annual pre-tax income to determine the expected annual income tax rate used to compute the income tax provision. On an interim basis, the expected annual income tax rate is applied against interim pre-tax income, excluding net realized gains and losses and discrete items such as limited partnership distributions, and then that amount is added to income taxes on net realized gains and losses, discrete items and limited partnership distributions. The Company’s income before income taxes from its non-U.S. subsidiaries and U.S. subsidiaries, including the results of the quota share and stop-loss agreements between Wind River Reinsurance and the Insurance Operations, for the quarters and six months ended June 30, 2013 and 2012 were as follows:

 

Quarter Ended June 30, 2013:

(Dollars in thousands)

   Non-U.S.
Subsidiaries
    U.S.
Subsidiaries
    Eliminations     Total  

Revenues:

        

Gross premiums written

   $ 51,615      $ 61,879      $ (29,249   $ 84,245   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 51,208      $ 27,138      $ —        $ 78,346   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 36,268      $ 22,403      $ —        $ 58,671   

Net investment income

     9,126        5,545        (4,906     9,765   

Net realized investment gains (losses)

     (1     2,807        —          2,806   

Other income (loss)

     (2     249        —          247   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     45,391        31,004        (4,906     71,489   

Losses and Expenses:

        

Net losses and loss adjustment expenses

     17,059        17,865        —          34,924   

Acquisition costs and other underwriting expenses

     14,443        10,029        —          24,472   

Corporate and other operating expenses

     1,329        1,143        —          2,472   

Interest expense

     309        5,778        (4,906     1,181   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ 12,251      $ (3,811   $ —        $ 8,440   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

Quarter Ended June 30, 2012:

(Dollars in thousands)

   Non-U.S.
Subsidiaries
    U.S.
Subsidiaries
    Eliminations     Total  

Revenues:

        

Gross premiums written

   $ 39,177      $ 52,371      $ (23,916   $ 67,632   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 39,177      $ 21,958      $ —        $ 61,135   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 37,086      $ 20,773      $ —        $ 57,859   

Net investment income

     9,271        6,385        (4,585     11,071   

Net realized investment gains

     539        1,402        —          1,941   

Other income (loss)

     (199     159        —          (40
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     46,697        28,719        (4,585     70,831   

Losses and Expenses:

        

Net losses and loss adjustment expenses

     23,239        12,919        —          36,158   

Acquisition costs and other underwriting expenses

     14,126        9,634        —          23,760   

Corporate and other operating expenses

     1,764        572        —          2,336   

Interest expense

     —          6,055        (4,585     1,470   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ 7,568      $ (461   $ —        $ 7,107   
  

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2013:

(Dollars in thousands)

   Non-U.S.
Subsidiaries
    U.S.
Subsidiaries
    Eliminations     Total  

Revenues:

        

Gross premiums written

   $ 100,298      $ 112,967      $ (54,081   $ 159,184   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 99,890      $ 49,934      $ —        $ 149,824   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 70,662      $ 44,005      $ —        $ 114,667   

Net investment income

     18,774        10,795        (9,770     19,799   

Net realized investment gains

     246        8,317        —          8,563   

Other income (loss)

     (28     329        —          301   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     89,654        63,446        (9,770     143,330   

Losses and Expenses:

        

Net losses and loss adjustment expenses

     33,409        33,303        —          66,712   

Acquisition costs and other underwriting expenses

     29,591        19,358        —          48,949   

Corporate and other operating expenses

     2,605        2,212        —          4,817   

Interest expense

     626        11,498        (9,770     2,354   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ 23,423      $ (2,925   $ —        $ 20,498   
  

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2012:

(Dollars in thousands)

   Non-U.S.
Subsidiaries
    U.S.
Subsidiaries
    Eliminations     Total  

Revenues:

        

Gross premiums written

   $ 70,588      $ 100,205      $ (45,403   $ 125,390   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 70,040      $ 41,376      $ —        $ 111,416   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 78,841      $ 43,488      $ —        $ 122,329   

Net investment income

     19,059        12,599        (9,170     22,488   

Net realized investment gains

     331        3,371        —          3,702   

Other income (loss)

     (705     313        —          (392
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     97,526        59,771        (9,170     148,127   

Losses and Expenses:

        

Net losses and loss adjustment expenses

     50,283        27,884        —          78,167   

Acquisition costs and other underwriting expenses

     29,575        17,352        —          46,927   

Corporate and other operating expenses

     4,385        439        —          4,824   

Interest expense

     —          12,118        (9,170     2,948   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 13,283      $ 1,978      $ —        $ 15,261   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

The following table summarizes the components of income tax benefit:

 

     Quarters Ended June 30,     Six Months Ended June 30,  
(Dollars in thousands)    2013     2012     2013     2012  

Current income tax expense (benefit):

        

Foreign

   $ 37      $ 45      $ 74      $ (629

U.S. Federal

     2,248        (2,185     1,610        (6,687
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current income tax expense (benefit)

     2,285        (2,140     1,684        (7,316
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred income tax expense (benefit):

        

U.S. Federal

     (2,509     (357     (2,215     2,111   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total deferred income tax expense (benefit)

     (2,509     (357     (2,215     2,111   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income tax benefit

   $ (224   $ (2,497   $ (531   $ (5,205
  

 

 

   

 

 

   

 

 

   

 

 

 

The weighted average expected tax provision has been calculated using income before income taxes in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate.

The following tables summarize the differences between the tax provisions under accounting guidance applicable to interim financial statement periods and the expected tax provision at the weighted average tax rate:

 

     Quarters Ended June 30,  
(Dollars in thousands)    2013     2012  
     Amount     % of Pre-
Tax Income
    Amount     % of Pre-
Tax  Income
 

Expected tax provision at weighted average rate

   $ (1,297     (15.4 %)    $ (256     (3.6 %) 

Adjustments:

        

Tax exempt interest

     (261     (3.1     (372     (5.2

Dividend exclusion

     (336     (4.0     (297     (4.2

Effective tax rate adjustment

     1,641        19.4        (1,588     (22.3

Other

     29        0.4        16        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit

   $ (224     (2.7 %)    $ (2,497     (35.1 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

The effective income tax benefit rate for the quarter ended June 30, 2013 was 2.7%, compared to an effective income tax benefit rate of 35.1% for the quarter ended June 30, 2012. The decrease in the effective tax benefit rate is primarily due to an increase in projected income in 2013 compared to 2012. Any difference between the actual tax rate on an interim basis compared to the expected annual tax rate is reflected in the effective tax rate adjustment. The effective income tax benefit rate of 2.7% differed from the weighted average expected income tax benefit rate of 15.4% for the quarter ended June 30, 2013 due to the fact that the Company records income tax expense on an interim basis using the projected annual effective tax rate, net of tax-exempt interest and dividends. The effective income tax benefit rate of 35.1% differed from the weighted average expected income tax benefit rate of 3.6% for the quarter ended June 30, 2012 due to the fact that the Company records income tax expense using an expected annual effective tax rate, net of tax-exempt interest and dividends.

 

     Six Months Ended June 30,  
(Dollars in thousands)    2013     2012  
     Amount     % of Pre-
Tax Income
    Amount     % of Pre-
Tax Income
 

Expected tax provision at weighted average rate

   $ (950     (4.6 %)    $ 279        1.8

Adjustments:

        

Tax exempt interest

     (556     (2.7     (779     (5.1

Dividend exclusion

     (588     (2.9     (532     (3.5

Effective tax rate adjustment

     1,532        7.5        (4,175     (27.3

Other

     31        0.1        2        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit

   $ (531     (2.6 %)    $ (5,205     (34.1 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

The effective income tax benefit rate for the six months ended June 30, 2013 was 2.6%, compared to an effective income tax benefit rate of 34.1% for the six months ended June 30, 2012. The decrease in the effective tax benefit rate is primarily due to an increase in projected income in 2013 compared to 2012. Any difference between the actual tax rate on an interim basis compared to the expected annual tax rate is reflected in the effective tax rate adjustment. The effective income tax benefit rate of 2.6% differed from the weighted average expected income tax benefit rate of 4.6% for the six months ended ended June 30, 2013 due to the fact that the Company records income tax expense on an interim basis using the projected annual effective tax rate, net of tax-exempt interest and dividends. The effective income tax benefit rate of 34.1% differed from the weighted average expected income tax expense rate of 1.8% for the six months ended June 30, 2012 due to the fact that the Company records income tax expense using an expected annual effective tax rate, net of tax-exempt interest and dividends.

The Company had an alternative minimum tax credit carry forward of $9.2 million as of June 30, 2013 and December 31, 2012, respectively, and $6.0 million as of June 30, 2012, which can be carried forward indefinitely.

 

6. Liability for Unpaid Losses and Loss Adjustment Expenses

Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:

 

     Quarters Ended June 30,     Six Months Ended June 30,  
(Dollars in thousands)    2013     2012     2013     2012  

Balance at beginning of period

   $ 864,167      $ 960,924      $ 879,114      $ 971,377   

Less: Ceded reinsurance receivables

     237,960        279,341        240,546        283,652   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net balance at beginning of period

     626,207        681,583        638,568        687,725   

Incurred losses and loss adjustment expenses related to:

        

Current year

     35,629        36,776        70,087        80,285   

Prior years

     (705     (618     (3,375     (2,118
  

 

 

   

 

 

   

 

 

   

 

 

 

Total incurred losses and loss adjustment expenses

     34,924        36,158        66,712        78,167   
  

 

 

   

 

 

   

 

 

   

 

 

 

Paid losses and loss adjustment expenses related to:

        

Current year

     14,131        12,936        19,264        19,252   

Prior years

     31,898        37,700        70,913        79,534   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total paid losses and loss adjustment expenses

     46,029        50,636        90,177        98,786   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net balance at end of period

     615,103        667,105        615,103        667,105   

Plus: Ceded reinsurance receivables

     229,815        274,178        229,815        274,178   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 844,918      $ 941,283      $ 844,918      $ 941,283   
  

 

 

   

 

 

   

 

 

   

 

 

 

When analyzing loss reserves and prior year development, the Company considers many factors, including the frequency and severity of claims, loss trends, case reserve settlements that may have resulted in significant development, and any other additional or pertinent factors that may impact reserve estimates.

In the second quarter of 2013, the Company reduced its prior accident year loss reserves by $0.7 million, which consisted of a $0.4 million decrease related to Insurance Operations and a $0.3 million decrease related to Reinsurance Operations.

The $0.4 million decrease related to Insurance Operations primarily consisted of the following:

 

   

Property: A $2.2 million reduction primarily driven by $1.1 million of better than expected development from accident year 2012 catastrophes as well as lower than expected non-catastrophe severity from accident years 2010 and 2012.

 

22


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

   

General liability: A $1.8 million reduction primarily due to better than expected emergence from accident years 2007 through 2011 partially offset by an increase to accident year 2012 due to higher than anticipated loss emergence.

 

   

Asbestos: A $3.5 million increase primary related to policies written prior to 1990.

In the second quarter of 2012, the Company reduced its prior accident year loss reserves by $0.6 million, which consisted of a $0.7 million decrease related to Insurance Operations and a $0.1 million increase related to Reinsurance Operations.

The $0.7 million decrease related to Insurance Operations primarily consisted of the following:

 

   

General liability: A $0.6 million reduction primarily consisting of net reductions of $2.9 million in accident years 2008 and prior due to continued favorable emergence in small business packages. The Company also decreased its reinsurance allowance by $0.2 million in this line due to changes in its reinsurance exposure on specifically identified claims and general decreases in ceded reserves. Offsetting these decreases were increases of $2.5 million in accident years 2009 to 2011 primarily driven by loss emergence on certain construction defect claims.

 

   

Professional liability: A $0.4 million reduction primarily related to recent favorable development on lawyer and real estate exposures.

 

   

Marine: A $0.4 million increase primarily driven by unexpected loss emergence in protection and indemnity coverage in accident year 2011.

In the first six months of 2013, the Company reduced its prior accident year loss reserves by $3.4 million, which consisted of a $3.2 million decrease related to Insurance Operations and a $0.2 million decrease related to Reinsurance Operations.

The $3.2 million decrease related to Insurance Operations primarily consisted of the following:

 

   

Property: A $5.0 million reduction primarily driven by better than expected development from accident year 2012 catastrophes as well as lower than expected non-catastrophe severity from accident years 2008 through 2012.

 

   

General liability: A $1.8 million reduction primarily due to better than expected emergence from accident years 2007 through 2011 partially offset by an increase to accident year 2012 due higher than anticipated loss emergence.

 

   

Asbestos: A $3.5 million increase primary related to policies written prior to 1990.

In the first six months of 2012, the Company reduced its prior accident year loss reserves by $2.1 million, which was primarily related to Insurance Operations and primarily consisted of the following:

 

   

General liability: A $3.1 million reduction primarily consisting of net reductions of $5.5 million in accident years 2008 and prior due to continued favorable emergence. Incurred losses for these years have developed at a rate lower than the Company’s historical averages. The Company also decreased its reinsurance allowance by $0.2 million in this line due to changes in its reinsurance exposure on specifically identified claims and general decreases in ceded reserves. Offsetting these decreases were increases of $2.6 million in accident years 2009 through 2011 primarily driven by loss emergence on certain construction defect claims.

 

   

Marine: A $0.9 million increase primarily related to accident year 2011 due to greater than expected loss emergence on hull claims and protection and indemnity claims.

 

   

Property: A $0.5 million increase primarily related to accident year 2011 due to greater than expected loss emergence on a large sinkhole claim.

 

23


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

7. Shareholders’ Equity

Repurchases of the Company’s A ordinary shares

The following table provides information with respect to the A ordinary shares that were surrendered or repurchased during the quarter ended June 30, 2013:

 

Period(1)

   Total Number
of Shares
Purchased
    Average
Price Paid
Per Share
     Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plan or
Program
     Approximate
Dollar Value

of Shares
That May Yet
Be Purchased
Under the

Plan or
Program(2)
 

April 1 – 30, 2013

     —        $ —           —         $ 16,857,963   

May 1 – 31, 2013

     —        $ —           —         $ 16,857,963   

June 1 – 30, 2013

     507 (3)    $ 23.03         —         $ 16,857,963   
  

 

 

      

 

 

    

Total

     507      $ 23.03         —        
  

 

 

      

 

 

    

 

(1) Based on settlement date.
(2) Approximate dollar value of shares that may yet be purchased is as of the last date of the applicable month.
(3) Surrendered by employees as payment of taxes withheld on the vesting of restricted stock.

The following table provides information with respect to the A ordinary shares that were surrendered or repurchased during the quarter ended June 30, 2012:

 

Period(1)

   Total Number
of Shares
Purchased
    Average
Price Paid
Per Share
     Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plan or
Program
     Approximate
Dollar Value
of Shares
That May Yet
Be Purchased
Under the
Plan or
Program(2)
 

April 1 – 30, 2012

     54,419 (3), (5)    $ 18.83         54,334       $ 60,902,382   

May 1 – 31, 2012

     —          —           —         $ 60,902,382   

June 1 – 30, 2012

     2,913,959 (4), (5)    $ 21.75         2,913,464       $ —     
  

 

 

      

 

 

    

Total

     2,968,378      $ 21.70         2,967,798      
  

 

 

      

 

 

    

 

(1) Based on settlement date.
(2) Approximate dollar value of shares that may yet be purchased is as of the last date of the applicable month.
(3) Includes 85 shares surrendered by employees as payment of taxes withheld on the vesting of restricted stock.
(4) Includes 495 shares surrendered by employees as payment of taxes withheld on the vesting of restricted stock.
(5) Purchased as part of the repurchase authorization announced in September 2011.

 

8. Related Party Transactions

Fox Paine & Company

As of June 30, 2013, Fox Paine & Company, LLC (“Fox Paine”) beneficially owned shares having approximately 93% 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 beneficially held by Fox Paine of the Company, for so long as Fox Paine holds an aggregate of 25% or more of the voting power in the Company. Fox Paine 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.

As of June 30, 2013 and December 31, 2012, Wind River Reinsurance was a limited partner in Fox Paine Capital Fund, II, which is managed by Fox Paine. This investment was originally made by United National Insurance Company in June 2000 and pre-dates the September 5, 2003 acquisition by Fox Paine of Wind River Investment Corporation, which was the predecessor holding company for United National Insurance Company. The Company’s investment in this limited partnership was valued at $3.2 million and $3.1 million at June 30, 2013 and December 31, 2012, respectively. At June 30, 2013, the Company had an unfunded capital commitment of $2.5 million to the partnership. There were no distributions received from the limited partnership during the second quarter of 2013 or 2012.

 

24


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

The Company incurred management fees of $0.4 million in each of the quarters ended June 30, 2013 and 2012 and $0.8 million in each of the six months ended June 30, 2013 and 2012 as part of the annual management fee that is paid to Fox Paine.

Cozen O’Connor

The Company did not incur any fees for legal services rendered by Cozen O’Connor during the quarters ended June 30, 2013 and 2012, respectively. The Company incurred $0.02 million and $0.2 million for legal services rendered by Cozen O’Connor during the six months ended June 30, 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 quarters and six months ended June 30, 2013 and 2012, the Company incurred $0.1 million in brokerage fees to Crystal & Company, an insurance broker. Prior to October 15, 2012, Crystal & Company was known as Frank Crystal & Company. James W. Crystal, the chairman and chief executive officer of Crystal & Company, is a member of the Company’s Board of Directors.

Hiscox Insurance Company (Bermuda) Ltd.

Wind River Reinsurance is a participant in a reinsurance agreement with Hiscox Insurance Company (Bermuda) Ltd. (“Hiscox Bermuda”) effective January 1, 2013. Steve Green, the President of Wind River Reinsurance, is a member of Hiscox Bermuda’s Board of Directors. The Company estimated that the following earned premium and incurred losses related to the agreement have been assumed by Wind River Reinsurance from Hiscox Bermuda:

 

(Dollars in thousands)    Quarter Ended
June 30, 2013
     Six Months Ended
June 30, 2013
 

Assumed earned premium

   $ 654       $ 1,008   

Assumed losses and loss adjustment expenses

     289         378   

Net balances due to Wind River Reinsurance under this agreement are as follows:

 

(Dollars in thousands)    As of June  30,
2013
 

Net balance receivable

   $ 3,228   

 

9. Commitments and Contingencies

Legal Proceedings

The Company is, from time to time, involved in various legal proceedings in the ordinary course of business. The Company maintains insurance and reinsurance coverage for such risks in amounts that it considers adequate. However, there can be no assurance that the insurance and reinsurance coverage that the Company maintains is sufficient or will be available in adequate amounts or at a reasonable cost. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on its business, results of operations, cash flows, or financial condition.

There is a greater potential for disputes with reinsurers who are in runoff. Some of the 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.

 

25


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

10. Share-Based Compensation Plans

During the six months ended June 30, 2013, the Company issued 88,162 A ordinary shares at a weighted average grant date value of $21.97 per share to key employees and a former employee of the Company under the Global Indemnity plc Share Incentive Plan (the “Plan”). Of the shares issued in 2013, 81,587 were subject to certain restrictions and 6,575 were issued as a result of a former employee exercising previously granted options with a strike price of $20.00 per share. During the six months ended June 30, 2012, the Company issued 29,675 A ordinary shares at a weighted average grant date value of $18.60 per share to key employees under the Plan. All of the shares issued in 2012 were subject to certain restrictions.

During the quarter ended June 30, 2013, the Company issued 6,575 A ordinary shares as a result of a former employee exercising previously granted options with a strike price of $20.00 per share. The Company did not issue any shares to key employees during the quarter ended June 30, 2012.

During the six months ended June 30, 2013 and 2012, the Company granted an aggregate of 21,865 and 28,135 fully vested A ordinary shares, respectively, subject to certain restrictions, at a weighted average grant date value of $22.62 and $19.66 per share, respectively, to non-employee directors of the Company under the Plan.

During the quarters ended June 30, 2013 and 2012, the Company granted an aggregate of 9,965 and 13,750 fully vested A ordinary shares, respectively, subject to certain restrictions, at a weighted average grant date value of $23.20 and $19.49 per share, respectively, to non-employee directors of the Company under the Plan.

 

11. Earnings Per Share

Earnings per share have been computed using the weighted average number of ordinary shares and ordinary share equivalents outstanding during the period.

The following table sets forth the computation of basic and diluted earnings per share:

 

(Dollars in thousands,    Quarters Ended June 30,      Six Months Ended June 30,  
except share and per share data)    2013      2012      2013      2012  

Net income

   $ 8,664       $ 9,604       $ 21,029       $ 20,466   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share:

           

Weighted average shares outstanding - basic

     25,049,888         27,829,555         25,052,488         28,223,321   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share

   $ 0.35       $ 0.35       $ 0.84       $ 0.73   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share:

           

Weighted average shares outstanding - diluted

     25,119,035         27,836,453         25,120,897         28,236,562   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share

   $ 0.34       $ 0.35       $ 0.84       $ 0.72   
  

 

 

    

 

 

    

 

 

    

 

 

 

A reconciliation of weighted average shares for basic earnings per share to weighted average shares for diluted earnings per share is as follows:

 

     Quarters Ended June 30,      Six Months Ended June 30,  
     2013      2012      2013      2012  

Weighted average shares for basic earnings per share

     25,049,888         27,829,555         25,052,488         28,223,321   

Non-vested restricted stock

     33,178         6,880         38,759         13,223   

Options

     35,969         18         29,650         18   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares for diluted earnings per share

     25,119,035         27,836,453         25,120,897         28,236,562   
  

 

 

    

 

 

    

 

 

    

 

 

 

The weighted average shares outstanding used to determine dilutive earnings per share for the quarters ended June 30, 2013 and 2012 do not include 145,450 and 565,775 shares, respectively, which were deemed to be anti-dilutive. The weighted average shares outstanding used to determine dilutive earnings per share for the six months ended June 30, 2013 and 2012 do not include 145,450 and 565,775 shares, respectively, which were deemed to be anti-dilutive.

 

26


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

12. Segment Information

The following are tabulations of business segment information for the quarters and six months ended June 30, 2013 and 2012.

 

Quarter Ended June 30, 2013:

(Dollars in thousands)

   Insurance
Operations(1)
    Reinsurance
Operations(2)
    Total  

Revenues:

      

Gross premiums written

   $ 61,879      $ 22,366      $ 84,245   
  

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 56,387      $ 21,959      $ 78,346   
  

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 46,916      $ 11,755      $ 58,671   

Other income (loss)

     248        (1     247   
  

 

 

   

 

 

   

 

 

 

Total revenues

     47,164        11,754        58,918   

Losses and Expenses:

      

Net losses and loss adjustment expenses

     30,608        4,316        34,924   

Acquisition costs and other underwriting expenses

     20,686 (3)      3,786        24,472   
  

 

 

   

 

 

   

 

 

 

Income (loss) from segments

   $ (4,130   $ 3,652        (478
  

 

 

   

 

 

   

Unallocated Items:

      

Net investment income

         9,765   

Net realized investment gains

         2,806   

Corporate and other operating expenses

         (2,472

Interest expense

         (1,181
      

 

 

 

Income before income taxes

         8,440   

Income tax benefit

         (224
      

 

 

 

Net income

       $ 8,664   
      

 

 

 

Total assets

   $ 1,245,274      $ 669,548 (4)    $ 1,914,822   
  

 

 

   

 

 

   

 

 

 

 

(1) Includes business ceded to the Company’s Reinsurance Operations.
(2) External business only, excluding business assumed from affiliates.
(3) Includes federal excise tax of $246 relating to cessions from Insurance Operations to Reinsurance Operations.
(4) Comprised of Wind River Reinsurance’s total assets less its investment in subsidiaries.

 

Quarter Ended June 30, 2012:

(Dollars in thousands)

   Insurance
Operations(1)
    Reinsurance
Operations(2)
    Total  

Revenues:

      

Gross premiums written

   $ 52,371      $ 15,261      $ 67,632   
  

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 45,874      $ 15,261      $ 61,135   
  

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 43,503      $ 14,356      $ 57,859   

Other income (loss)

     159        (199     (40
  

 

 

   

 

 

   

 

 

 

Total revenues

     43,662        14,157        57,819   

Losses and Expenses:

      

Net losses and loss adjustment expenses

     29,871        6,287        36,158   

Acquisition costs and other underwriting expenses

     19,599 (3)      4,161        23,760   
  

 

 

   

 

 

   

 

 

 

Income (loss) from segments

   $ (5,808   $ 3,709        (2,099
  

 

 

   

 

 

   

Unallocated Items:

      

Net investment income

         11,071   

Net realized investment gains

         1,941   

Corporate and other operating expenses

         (2,336

Interest expense

         (1,470
      

 

 

 

Income before income taxes

         7,107   

Income tax benefit

         (2,497
      

 

 

 

Net income

       $ 9,604   
      

 

 

 

Total assets

   $ 1,364,643      $ 626,980 (4)    $ 1,991,623   
  

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

(1) Includes business ceded to the Company’s Reinsurance Operations.
(2) External business only, excluding business assumed from affiliates.
(3) Includes federal excise tax of $227 relating to cessions from Insurance Operations to Reinsurance Operations.
(4) Comprised of Wind River Reinsurance’s total assets less its investment in subsidiaries.

 

Six Months Ended June 30, 2013:

(Dollars in thousands)

   Insurance
Operations(1)
    Reinsurance
Operations(2)
    Total  

Revenues:

      

Gross premiums written

   $ 112,967      $ 46,217      $ 159,184   
  

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 104,015      $ 45,809      $ 149,824   
  

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 92,157      $ 22,510      $ 114,667   

Other income (loss)

     329        (28     301   
  

 

 

   

 

 

   

 

 

 

Total revenues

     92,486        22,482        114,968   

Losses and Expenses:

      

Net losses and loss adjustment expenses

     59,350        7,362        66,712   

Acquisition costs and other underwriting expenses

     41,081 (3)      7,868        48,949   
  

 

 

   

 

 

   

 

 

 

Income (loss) from segments

   $ (7,945   $ 7,252        (693
  

 

 

   

 

 

   

Unallocated Items:

      

Net investment income

         19,799   

Net realized investment gains

         8,563   

Corporate and other operating expenses

         (4,817

Interest expense

         (2,354
      

 

 

 

Income before income taxes

         20,498   

Income tax benefit

         (531
      

 

 

 

Net income

       $ 21,029   
      

 

 

 

Total assets

   $ 1,245,274      $ 669,548 (4)    $ 1,914,822   
  

 

 

   

 

 

   

 

 

 

 

(1) Includes business ceded to the Company’s Reinsurance Operations.
(2) External business only, excluding business assumed from affiliates.
(3) Includes federal excise tax of $482 relating to cessions from Insurance Operations to Reinsurance Operations.
(4) Comprised of Wind River Reinsurance’s total assets less its investment in subsidiaries.

 

Six Months Ended June 30, 2012:

(Dollars in thousands)

   Insurance
Operations(1)
    Reinsurance
Operations(2)
    Total  

Revenues:

      

Gross premiums written

   $ 100,205      $ 25,185      $ 125,390   
  

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 86,780      $ 24,636      $ 111,416   
  

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 91,004      $ 31,325      $ 122,329   

Other income (loss)

     313        (705     (392
  

 

 

   

 

 

   

 

 

 

Total revenues

     91,317        30,620        121,937   

Losses and Expenses:

      

Net losses and loss adjustment expenses

     63,022        15,145        78,167   

Acquisition costs and other underwriting expenses

     39,018 (3)      7,909        46,927   
  

 

 

   

 

 

   

 

 

 

Income (loss) from segments

   $ (10,723   $ 7,566        (3,157
  

 

 

   

 

 

   

Unallocated Items:

      

Net investment income

         22,488   

Net realized investment gains

         3,702   

Corporate and other operating expenses

         (4,824

Interest expense

         (2,948
      

 

 

 

Income before income taxes

         15,261   

Income tax benefit

         (5,205
      

 

 

 

Net income

       $ 20,466   
      

 

 

 

Total assets

   $ 1,364,643      $ 626,980 (4)    $ 1,991,623   
  

 

 

   

 

 

   

 

 

 

 

(1) Includes business ceded to the Company’s Reinsurance Operations.
(2) External business only, excluding business assumed from affiliates.
(3) Includes federal excise tax of $475 relating to cessions from Insurance Operations to Reinsurance Operations.
(4) Comprised of Wind River Reinsurance’s total assets less its investment in subsidiaries.

 

28


Table of Contents

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

13. Subsequent Events

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 a daily credit margin borrowing facility with a borrowing rate that is tied to LIBOR and is currently less than 1%. Approximately $75.0 million in collateral was deposited to support the borrowing. The amount borrowed against the margin account may fluctuate as routine investment transactions, such as dividends received, investment income received, maturities and pay-downs, impact cash balances. The borrowing is subject to maintenance margin, which is a minimum account balance that must be maintained. A decline in market conditions could require an additional deposit of collateral. The margin facility contains customary events of default, including, without limitation, insolvency, failure to make required payments, failure to comply with any representations or warranties, failure to adequately assure future performance, and failure of a guarantor to perform under its guarantee.

 

29


Table of Contents

GLOBAL INDEMNITY PLC

Item 2. 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 2 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein. For more information regarding the Company’s business and operations, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Recent Developments

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 a daily credit margin borrowing facility with a borrowing rate that is tied to LIBOR and is currently less than 1%. Approximately $75.0 million in collateral was deposited to support the borrowing. The amount borrowed against the margin account may fluctuate as routine investment transactions, such as dividends received, investment income received, maturities and pay-downs, impact cash balances. The borrowing is subject to maintenance margin, which is a minimum account balance that must be maintained. A decline in market conditions could require an additional deposit of collateral. The margin facility contains customary events of default, including, without limitation, insolvency, failure to make required payments, failure to comply with any representations or warranties, failure to adequately assure future performance, and failure of a guarantor to perform under its guarantee.

On June 14, 2013, A.M. Best affirmed the financial strength rating of “A” (Excellent) for Wind River Reinsurance and its U.S. insurance subsidiaries. Wind River 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.

Overview

The Company’s Insurance Operations distribute property and casualty insurance products through a group of approximately 100 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.

The Company’s Reinsurance Operations segment provides reinsurance solutions through brokers, program managers and primary writers, including regional insurance companies, and consists solely of the operations of Wind River Reinsurance. Wind River Reinsurance is a Bermuda based treaty reinsurer of excess and surplus lines carriers, specialty property and casualty insurance companies and U.S. regional insurance writers. Wind River Reinsurance conducts business in Bermuda and is focused on using its capital capacity to write catastrophe-oriented placements and other niche or specialty-focused treaties meeting the Company’s risk tolerance and return thresholds. Given the current pricing environment, Wind River Reinsurance continues to cautiously deploy and manage its capital while seeking to position itself as a niche reinsurance solution provider.

The Company derives its revenues primarily from premiums paid on insurance policies that it writes and from income generated by its investment portfolio, net of fees paid for investment management services. The amount of insurance premiums that the Company receives is a function of the amount and type of policies it writes, as well as of prevailing market prices.

 

30


Table of Contents

GLOBAL INDEMNITY PLC

 

The Company’s expenses include losses and loss adjustment expenses, acquisition costs and other underwriting expenses, corporate and other operating expenses, interest, investment expenses, and income taxes. Losses and loss adjustment expenses are estimated by management and reflect the Company’s best estimate of ultimate losses and costs arising during the reporting period and revisions of prior period estimates. The Company records losses and loss adjustment expenses based on an actuarial analysis of the estimated losses the Company expects to incur on the insurance policies it writes. The ultimate losses and loss adjustment expenses will depend on the actual costs to resolve claims. Acquisition costs consist principally of commissions and premium taxes that are typically a percentage of the premiums on the insurance policies the Company writes, net of ceding commissions earned from reinsurers. Other underwriting expenses consist primarily of personnel expenses and general operating expenses. Corporate and other operating expenses are comprised primarily of outside legal fees, other professional and accounting fees, directors’ fees, management fees, salaries and benefits for company personnel whose services relate to the support of corporate activities, and capital duty taxes incurred. Interest expense consists primarily of interest on senior notes payable, junior subordinate