Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended September 30, 2016

OR

 

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

For the Transition Period from                      to                     

001-34809

Commission File Number

 

 

GLOBAL INDEMNITY PLC

(Exact name of registrant as specified in its charter)

 

 

 

Ireland   98-0664891

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

25/28 NORTH WALL QUAY

DUBLIN 1

IRELAND

(Address of principal executive office, including zip code)

353 (0) 49 4891407

(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  ☒    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  ☒    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  ☒;     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  ☒

As of October 28, 2016, the registrant had outstanding 13,429,780 A Ordinary Shares and 4,133,366 B Ordinary Shares.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  
  PART I – FINANCIAL INFORMATION   
Item 1.   Financial Statements:   
 

Consolidated Balance Sheets
As of September 30, 2016 (Unaudited) and December 31, 2015

     2   
 

Consolidated Statements of Operations
Quarters and Nine Months Ended September 30, 2016 (Unaudited) and September 30, 2015 (Unaudited)

     3   
 

Consolidated Statements of Comprehensive Income
Quarters and Nine Months Ended September 30, 2016 (Unaudited) and September 30, 2015 (Unaudited)

     4   
 

Consolidated Statements of Changes in Shareholders’ Equity
Nine Months Ended September 30, 2016 (Unaudited) and Year Ended December 31, 2015

     5   
 

Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2016 (Unaudited) and September 30, 2015 (Unaudited)

     6   
 

Notes to Consolidated Financial Statements (Unaudited)

     7   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      35   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk      52   
Item 4.   Controls and Procedures      53   
  PART II – OTHER INFORMATION   
Item 1.   Legal Proceedings      53   
Item 1A.   Risk Factors      53   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      53   
Item 3.   Defaults Upon Senior Securities      53   
Item 4.   Mine Safety Disclosures      54   
Item 5.   Other Information      54   
Item 6.   Exhibits      54   
Signature      55   

 

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Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

GLOBAL INDEMNITY PLC

Consolidated Balance Sheets

(In thousands, except share amounts)

 

     (Unaudited)
September 30, 2016
    December 31, 2015  
ASSETS     

Fixed maturities:

    

Available for sale, at fair value (amortized cost: $1,297,465 and $1,308,333)

   $ 1,310,957      $ 1,306,149   

Equity securities:

    

Available for sale, at fair value (cost: $102,899 and $100,157)

     122,779        110,315   

Other invested assets

     32,635        32,592   
  

 

 

   

 

 

 

Total investments

     1,466,371        1,449,056   

Cash and cash equivalents

     63,779        67,037   

Premiums receivable, net

     86,469        89,245   

Reinsurance receivables, net

     108,452        115,594   

Funds held by ceding insurers

     19,356        16,037   

Federal income taxes receivable

     4,656        4,828   

Deferred federal income taxes

     39,337        34,687   

Deferred acquisition costs

     55,141        56,517   

Intangible assets

     23,211        23,607   

Goodwill

     6,521        6,521   

Prepaid reinsurance premiums

     38,401        44,363   

Receivable for securities sold

     —          172   

Other assets

     70,121        49,630   
  

 

 

   

 

 

 

Total assets

   $ 1,981,815      $ 1,957,294   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Liabilities:

    

Unpaid losses and loss adjustment expenses

   $ 664,382      $ 680,047   

Unearned premiums

     278,561        286,285   

Ceded balances payable

     11,718        4,589   

Payable for securities purchased

     1,921        —     

Contingent commissions

     9,392        11,069   

Debt

     173,162        172,034   

Other liabilities

     60,236        53,344   
  

 

 

   

 

 

 

Total liabilities

     1,199,372      $ 1,207,368   
  

 

 

   

 

 

 

Commitments and contingencies (Note 9)

     —          —     

Shareholders’ equity:

    

Ordinary shares, $0.0001 par value, 900,000,000 ordinary shares authorized; A ordinary shares issued: 16,568,674 and 16,424,546, respectively; A ordinary shares outstanding: 13,429,780 and 13,313,751, respectively; B ordinary shares issued and outstanding: 4,133,366 and 4,133,366, respectively

     3        3   

Additional paid-in capital

     532,498        529,872   

Accumulated other comprehensive income, net of taxes

     23,279        4,078   

Retained earnings

     329,911        318,416   

A ordinary shares in treasury, at cost: 3,138,894 and 3,110,795 shares, respectively

     (103,248     (102,443
  

 

 

   

 

 

 

Total shareholders’ equity

     782,443        749,926   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,981,815      $ 1,957,294   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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GLOBAL INDEMNITY PLC

 

Consolidated Statements of Operations

(In thousands, except shares and per share data)

 

     (Unaudited)
Quarters Ended September 30,
    (Unaudited)
Nine Months Ended September 30,
 
     2016     2015     2016     2015  

Revenues:

        

Gross premiums written

   $ 133,569      $ 150,148      $ 429,254      $ 459,532   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 115,051      $ 122,497      $ 357,233      $ 394,606   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 119,553      $ 124,707      $ 358,993      $ 380,921   

Net investment income

     8,795        8,852        25,103        26,234   

Net realized investment gains (losses):

        

Other than temporary impairment losses on investments

     (2,214     (4,641     (4,481     (6,879

Other net realized investment gains (losses)

     4,142        (6,137     (4,576     (337
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized investment gains (losses)

     1,928        (10,778     (9,057     (7,216

Other income

     7,852        1,279        9,603        2,408   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     138,128        124,060        384,642        402,347   

Losses and Expenses:

        

Net losses and loss adjustment expenses

     72,162        77,691        215,057        226,870   

Acquisition costs and other underwriting expenses

     48,129        50,934        148,761        150,118   

Corporate and other operating expenses

     5,006        3,567        13,064        19,441   

Interest expense

     2,233        1,595        6,677        2,635   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     10,598        (9,727     1,083        3,283   

Income tax expense (benefit)

     1,063        (5,981     (10,412     (10,882
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 9,535      $ (3,746   $ 11,495      $ 14,165   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share data:

        

Net income (loss) (1)

        

Basic

   $ 0.55      $ (0.15   $ 0.67      $ 0.56   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.54      $ (0.15   $ 0.66      $ 0.55   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares outstanding

        

Basic

     17,254,843        25,463,994        17,241,040        25,452,991   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     17,540,060        25,463,994        17,515,854        25,684,931   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For the quarter ended September 30, 2015, “diluted” loss per share is the same as “basic” loss per share due to a net loss for the period.

See accompanying notes to consolidated financial statements.

 

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GLOBAL INDEMNITY PLC

 

Consolidated Statements of Comprehensive Income

(In thousands)

 

     (Unaudited)
Quarters Ended September 30,
    (Unaudited)
Nine Months Ended September 30,
 
     2016     2015     2016     2015  

Net income (loss)

   $ 9,535      $ (3,746   $ 11,495      $ 14,165   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Unrealized holding gains (losses)

     2,076        (9,078     22,081        (9,808

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

     (3     (1     (4     (1

Reclassification adjustment for (gains) losses included in net income (loss)

     (781     2,199        (2,474     (517

Unrealized foreign currency translation gains (losses)

     (89     23        (402     187   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     1,203        (6,857     19,201        (10,139
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss), net of tax

   $ 10,738      $ (10,603   $ 30,696      $ 4,026   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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GLOBAL INDEMNITY PLC

 

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except share amounts)

 

     (Unaudited)
Nine Months Ended
September 30, 2016
    Year Ended
December 31, 2015
 

Number of A ordinary shares issued:

    

Number at beginning of period

     16,424,546        16,331,577   

Ordinary shares issued under share incentive plans

     115,712        121,812   

Ordinary shares issued to directors

     28,416        36,321   

B ordinary shares converted to A ordinary shares

     —          7,928,004   

Ordinary shares redeemed

     —          (8,260,870

Ordinary shares issued in connection with American Reliable acquisition

     —          267,702   
  

 

 

   

 

 

 

Number at end of period

     16,568,674        16,424,546   
  

 

 

   

 

 

 

Number of B ordinary shares issued:

    

Number at beginning and end of period

     4,133,366        12,061,370   

B Ordinary shares converted to A ordinary shares

     —          (7,928,004
  

 

 

   

 

 

 

Number at end of period

     4,133,366        4,133,366   
  

 

 

   

 

 

 

Par value of A ordinary shares:

    

Balance at beginning and end of period

   $ 2      $ 2   
  

 

 

   

 

 

 

Par value of B ordinary shares:

    

Balance at beginning and end of period

   $ 1      $ 1   
  

 

 

   

 

 

 

Additional paid-in capital:

    

Balance at beginning of period

   $ 529,872      $ 519,590   

Share compensation plans

     2,499        10,272   

Tax benefit on share-based compensation expense

     127        10   
  

 

 

   

 

 

 

Balance at end of period

   $ 532,498      $ 529,872   
  

 

 

   

 

 

 

Accumulated other comprehensive income, net of deferred income tax:

    

Balance at beginning of period

   $ 4,078      $ 23,384   

Other comprehensive income (loss):

    

Change in unrealized holding gains (losses)

     19,607        (19,436

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

     (4     (10

Unrealized foreign currency translation gains (losses)

     (402     140   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     19,201        (19,306
  

 

 

   

 

 

 

Balance at end of period

   $ 23,279      $ 4,078   
  

 

 

   

 

 

 

Retained earnings:

    

Balance at beginning of period

   $ 318,416      $ 466,717   

Ordinary shares redeemed

     —          (189,770

Net income

     11,495        41,469   
  

 

 

   

 

 

 

Balance at end of period

   $ 329,911      $ 318,416   
  

 

 

   

 

 

 

Number of treasury shares:

    

Number at beginning of period

     3,110,795        3,064,815   

A ordinary shares purchased

     28,099        11,895   

Elimination of shares indirectly owned by subsidiary

     —          34,085   
  

 

 

   

 

 

 

Number at end of period

     3,138,894        3,110,795   
  

 

 

   

 

 

 

Treasury shares, at cost:

    

Balance at beginning of period

   $ (102,443   $ (101,404

A ordinary shares purchased, at cost

     (805     (333

Elimination of shares indirectly owned by subsidiary

     —          (706
  

 

 

   

 

 

 

Balance at end of period

   $ (103,248   $ (102,443
  

 

 

   

 

 

 

Total shareholders’ equity

   $ 782,443      $ 749,926   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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GLOBAL INDEMNITY PLC

 

Consolidated Statements of Cash Flows

(In thousands)

 

     (Unaudited)
Nine Months Ended September 30,
 
     2016     2015  

Cash flows from operating activities:

    

Net income

   $ 11,495      $ 14,165   

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

    

Amortization of the value of business acquired

     —          22,823   

Amortization and depreciation

     4,757        3,761   

Amortization of debt issuance costs

     92        16   

Restricted stock and stock option expense

     2,499        9,671   

Deferred federal income taxes

     (10,847     (8,984

Amortization of bond premium and discount, net

     7,398        10,557   

Net realized investment losses

     9,057        7,216   

Gain on disposition of subsidiary

     (6,872     —     

Equity in the earnings of equity method limited liability investments

     (3,749     (1,448

Changes in:

    

Premiums receivable, net

     2,776        18,971   

Reinsurance receivables, net

     7,142        5,373   

Funds held by ceding insurers

     (3,319     661   

Unpaid losses and loss adjustment expenses

     (15,665     (35,452

Unearned premiums

     (7,724     4,608   

Ceded balances payable

     7,129        (11,909

Other assets and liabilities, net

     (19,348     (13,199

Contingent commissions

     (1,677     (2,909

Federal income tax receivable/payable

     172        (2,048

Deferred acquisition costs, net

     1,376        (32,160

Prepaid reinsurance premiums

     5,962        9,081   
  

 

 

   

 

 

 

Net cash used for operating activities

     (9,346     (1,206
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Cash release from escrow for business acquisition

     —          113,696   

Acquisition of business, net of cash acquired

     —          (92,336

Proceeds from sale of fixed maturities

     279,659        290,580   

Proceeds from sale of equity securities

     34,976        34,161   

Proceeds from sale of preferred stock

     —          1,540   

Proceeds from maturity of fixed maturities

     61,437        146,870   

Proceeds from limited partnership distribution

     6,350        4,287   

Proceeds from disposition of subsidiary, net of cash and cash equivalents disposed of $1,269

     16,937        —     

Amounts paid in connection with derivatives

     (11,527     (7,072

Purchases of fixed maturities

     (344,514     (485,153

Purchases of equity securities

     (34,945     (32,434

Purchases of other invested assets

     (2,643     (2,250
  

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     5,730        (28,111
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net borrowings under margin borrowing facilities

     1,050        21,114   

Proceeds from issuance of subordinated notes

     —          100,000   

Debt issuance cost

     (14     (3,659

Tax benefit on share-based compensation expense

     127        58   

Purchase of A ordinary shares

     (805     (333
  

 

 

   

 

 

 

Net cash provided by financing activities

     358        117,180   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (3,258     87,863   

Cash and cash equivalents at beginning of period

     67,037        58,823   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 63,779      $ 146,686   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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GLOBAL INDEMNITY PLC

 

 

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 in July, 2010. The Company’s A ordinary shares are publicly traded on the NASDAQ Global Select Market under the trading symbol “GBLI.”

The Company manages its business through three business segments: Commercial Lines, Personal Lines, and Reinsurance Operations. The Company’s Commercial Lines, managed in Bala Cynwyd, Pennsylvania, offers specialty property and casualty insurance products in the excess and surplus lines marketplace. The Company manages its Commercial Lines by differentiating them into three product classifications: Penn-America, which markets property and general liability products to small commercial businesses through a select network of wholesale general agents with specific binding authority; United National, which markets insurance products for targeted insured segments, including specialty products, such as property, general liability, and professional lines through program administrators with specific binding authority; and Diamond State, which markets property, casualty, and professional lines products, which are developed by the Company’s underwriting department by individuals with expertise in those lines of business, through wholesale brokers and also markets through program administrators having specific binding authority. These product classifications comprise the Company’s Commercial Lines business segment and are not considered individual business segments because each product has similar economic characteristics, distribution, and coverage. The Company’s Personal Lines segment, via the American Reliable Insurance Company (“American Reliable”) product classification, offers specialty personal lines and agricultural coverage through general and specialty agents with specific binding authority on an admitted basis and is managed in Scottsdale, Arizona. Collectively, the Company’s U.S. insurance subsidiaries are licensed in all 50 states and the District of Columbia. The Company’s Reinsurance Operations consist solely of the operations of its Bermuda-based wholly-owned subsidiary, Global Indemnity Reinsurance Company, Ltd. (“Global Indemnity Reinsurance”). Global Indemnity Reinsurance is a treaty reinsurer of specialty property and casualty insurance and reinsurance companies. The Company’s Reinsurance Operations segment provides reinsurance solutions through brokers and primary writers including insurance and reinsurance companies. The Commercial Lines and Personal Lines segments comprise the Company’s U.S. Insurance Operations (‘Insurance Operations”). See Note 12 for additional information regarding segments.

On September 30, 2016, Diamond State Insurance Company sold all the outstanding shares of capital stock of one of its wholly owned subsidiaries, United National Specialty Insurance Company, to an unrelated party. Diamond State Insurance Company received a one-time payment of $18.7 million and recognized a pretax gain of $6.9 million which is reflected in other income (loss). This transaction will not have an impact on the Company’s ongoing business operations. Going forward, any business previously written by United National Specialty Insurance Company has been and will be written by other companies within the Company’s U.S. Insurance Operations.

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 nine months ended September 30, 2016 and 2015 are not necessarily indicative of the results of a full year. The accompanying notes to the unaudited consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements contained in the Company’s 2015 Annual Report on Form 10-K.

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

 

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GLOBAL INDEMNITY PLC

 

2. Investments

The amortized cost and estimated fair value of investments were as follows as of September 30, 2016 and December 31, 2015:

 

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

As of September 30, 2016

             

Fixed maturities:

             

U.S. treasury and agency obligations

   $ 79,290       $ 1,549       $ —        $ 80,839       $ —     

Obligations of states and political subdivisions

     167,430         3,315         (49     170,696         —     

Mortgage-backed securities

     104,222         2,765         (38     106,949         —     

Asset-backed securities

     250,766         1,731         (297     252,200         (6

Commercial mortgage-backed securities

     175,469         372         (1,188     174,653         —     

Corporate bonds and debt

     391,277         5,073         (695     395,655         —     

Foreign corporate bonds

     129,011         982         (28     129,965         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     1,297,465         15,787         (2,295     1,310,957         (6

Common stock

     102,899         22,225         (2,345     122,779         —     

Other invested assets

     32,635         —           —          32,635         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,432,999       $ 38,012       $ (4,640   $ 1,466,371       $ (6
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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

 

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

As of December 31, 2015

             

Fixed maturities:

             

U.S. treasury and agency obligations

   $ 106,303       $ 1,140       $ (321   $ 107,122       $ —     

Obligations of states and political subdivisions

     203,121         2,576         (457     205,240         —     

Mortgage-backed securities

     157,753         2,113         (743     159,123         —     

Asset-backed securities

     261,008         435         (1,421     260,022         (9

Commercial mortgage-backed securities

     142,742         —           (2,352     140,390         —     

Corporate bonds

     334,720         685         (3,294     332,111         —     

Foreign corporate bonds

     102,686         194         (739     102,141         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     1,308,333         7,143         (9,327     1,306,149         (9

Common stock

     100,157         16,118         (5,960     110,315         —     

Other invested assets

     32,592         —           —          32,592         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,441,082       $ 23,261       $ (15,287   $ 1,449,056       $ (9
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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

Excluding U.S. treasuries and agency bonds, the Company did not hold any debt or equity investments in a single issuer that was in excess of 4% and 5% of shareholders’ equity at September 30, 2016 and December 31, 2015, respectively.

 

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The amortized cost and estimated fair value of the Company’s fixed maturities portfolio classified as available for sale at September 30, 2016, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars in thousands)    Amortized
Cost
     Estimated
Fair Value
 

Due in one year or less

   $ 81,811       $ 82,130   

Due after one year through five years

     633,977         642,829   

Due after five years through ten years

     47,779         48,727   

Due after ten years through fifteen years

     —           —     

Due after fifteen years

     3,441         3,469   

Mortgage-backed securities

     104,222         106,949   

Asset-backed securities

     250,766         252,200   

Commercial mortgage-backed securities

     175,469         174,653   
  

 

 

    

 

 

 

Total

   $ 1,297,465       $ 1,310,957   
  

 

 

    

 

 

 

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 September 30, 2016:

 

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

Fixed maturities:

               

Obligations of states and political subdivisions

   $ 17,372       $ (44   $ 677       $ (5   $ 18,049       $ (49

Mortgage-backed securities

     3,123         (27     309         (11     3,432         (38

Asset-backed securities

     52,109         (185     19,260         (112     71,369         (297

Commercial mortgage-backed securities

     82,291         (571     57,970         (617     140,261         (1,188

Corporate bonds and debt

     43,156         (626     6,507         (69     49,663         (695

Foreign corporate bonds

     19,869         (28     —           —          19,869         (28
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     218,520         (1,481     84,723         (814     303,243         (2,295

Common stock

     24,387         (2,079     2,027         (266     26,414         (2,345
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 242,907       $ (3,560   $ 86,750       $ (1,080   $ 329,657       $ (4,640
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(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, 2015:

 

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

Fixed maturities:

               

U.S. treasury and agency obligations

   $ 79,496       $ (321   $ —         $ —        $ 79,496       $ (321

Obligations of states and political subdivisions

     49,708         (373     7,732         (84     57,440         (457

Mortgage-backed securities

     63,759         (743     —           —          63,759         (743

Asset-backed securities

     203,381         (1,404     4,843         (17     208,224         (1,421

Commercial mortgage-backed securities

     118,813         (2,005     21,577         (347     140,390         (2,352

Corporate bonds

     211,364         (3,269     2,120         (25     213,484         (3,294

Foreign corporate bonds

     63,860         (697     5,129         (42     68,989         (739
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     790,381         (8,812     41,401         (515     831,782         (9,327

Common stock

     36,798         (5,960     —           —          36,798         (5,960
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 827,179       $ (14,772   $ 41,401       $ (515   $ 868,580       $ (15,287
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Fixed maturities in a gross unrealized loss position for twelve months or longer are primarily comprised of non-credit losses on investment grade securities where management does not intend to sell, and it is more likely than not that the Company will not be forced to sell the security before recovery. The Company has analyzed these securities and has determined that they are not other than temporarily impaired.

The Company regularly performs various analytical valuation procedures with respect to its investments, including reviewing

 

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each fixed maturity security in an unrealized loss position to assess whether the security has a credit loss. Specifically, the Company considers credit rating, market price, and issuer specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which the Company determines that a credit loss is likely are subjected to further analysis through discounted cash flow testing to estimate the credit loss to be recognized in earnings, if any. The specific methodologies and significant assumptions used by asset class are discussed below. Upon identification of such securities and periodically thereafter, a detailed review is performed to determine whether the decline is considered other than temporary. This review includes an analysis of several factors, including but not limited to, the credit ratings and cash flows of the securities and the magnitude and length of time that the fair value of such securities is below cost.

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

 

  (1) the issuer is in financial distress;

 

  (2) the investment is secured;

 

  (3) a significant credit rating action occurred;

 

  (4) scheduled interest payments were delayed or missed;

 

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

 

  (6) the investment has an unrealized loss and was identified by the 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 is recorded in other comprehensive income, net of taxes.

For equity securities, management carefully reviews all securities with unrealized losses to determine if a security should be impaired and further focuses on securities that have either:

 

  (1) persisted with unrealized losses for more than twelve consecutive months or

 

  (2) the value of the investment has been 20% or more below cost for six continuous months or more.

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

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

Obligations of states and political subdivisions – As of September 30, 2016, gross unrealized losses related to obligations of states and political subdivisions were $0.049 million. Of this amount, $0.005 million have been in an unrealized loss position for twelve months or greater and are rated A. All factors that influence performance of the municipal bond market are considered in evaluating these securities. The aforementioned factors include investor expectations, supply and demand patterns, and current versus historical yield and spread relationships. The analysis relies on the output of fixed income credit analysts, as well as dedicated municipal bond analysts who perform extensive in-house fundamental analysis on each issuer, regardless of their rating by the major agencies.

Mortgage-backed securities (“MBS”) – As of September 30, 2016, gross unrealized losses related to mortgage-backed

 

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securities were $0.038 million. Of this amount, $0.011 million have been in an unrealized loss position for twelve months or greater and are rated investment grade. Mortgage-backed securities are modeled to project principal losses under downside, base, and upside scenarios for the economy and home prices. The primary assumption that drives the security and loan level modeling is the Home Price Index (“HPI”) projection. The model first projects HPI at the national level, then at the zip-code level based on the historical relationship between the individual zip code HPI and the national HPI. The model utilizes loan level data and borrower characteristics including FICO score, geographic location, original and current loan size, loan age, mortgage rate and type (fixed rate / interest-only / adjustable rate mortgage), issuer / originator, residential type (owner occupied / investor property), dwelling type (single family / multi-family), loan purpose, level of documentation, and delinquency status as inputs. The model also includes the explicit treatment of silent second liens, utilization of loan modification history, and the application of roll rate adjustments.

Asset-backed securities (“ABS”) - As of September 30, 2016, gross unrealized losses related to asset backed securities were $0.297 million. Of this amount, $0.112 million have been in an unrealized loss position for twelve months or greater and are rated AA or better. The weighted average credit enhancement for the Company’s asset backed portfolio is 23.3. This represents the percentage of pool losses that can occur before an asset backed security will incur its first dollar of principal losses. Every ABS transaction is analyzed on a stand-alone basis. This analysis involves a thorough review of the collateral, prepayment, and structural risk in each transaction. Additionally, the analysis includes an in-depth credit analysis of the originator and servicer of the collateral. The analysis projects an expected loss for a deal given a set of assumptions specific to the asset type. These assumptions are used to calculate at what level of losses the deal will incur its first dollar of principal loss. The major assumptions used to calculate this ratio are loss severities, recovery lags, and no advances on principal and interest.

Commercial mortgage-backed securities (“CMBS”) - As of September 30, 2016, gross unrealized losses related to the CMBS portfolio were $1.188 million. Of this amount, $0.617 million have been in an unrealized loss position for twelve months or greater and are rated A+ or better. The weighted average credit enhancement for the Company’s CMBS portfolio is 29.4. This represents the percentage of pool losses that can occur before a mortgage-backed security will incur its first dollar of principal loss. For the Company’s CMBS portfolio, a loan level analysis is utilized where every underlying CMBS loan is re-underwritten based on a set of assumptions reflecting expectations for the future path of the economy. In the analysis, the focus is centered on stressing the significant variables that influence commercial loan defaults and collateral losses in CMBS deals. These variables include: (1) a projected drop in occupancies; (2) capitalization rates that vary by property type and are forecasted to return to more normalized levels as the capital markets repair and capital begins to flow again; and (3) property value stress testing using projected property performance and projected capitalization rates. Term risk is triggered if the projected debt service coverage rate falls below 1x. Balloon risk is triggered if a property’s projected performance does not satisfy new tighter mortgage standards.

Corporate bonds and debt - As of September 30, 2016, gross unrealized losses related to corporate bonds was $0.695 million. Of this amount, $0.069 million have been in an unrealized loss position for twelve months or greater and are rated investment grade. The analysis for this sector includes maintaining detailed financial models that include a projection of each issuer’s future financial performance, including prospective debt servicing capabilities, capital structure composition, and the value of the collateral. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, the issuer’s current competitive position, its vulnerability to changes in the competitive and regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood of default as well as potential losses in the event of default.

Foreign bonds – As of September 30, 2016, gross unrealized losses related to foreign bonds were $0.028 million. All unrealized losses have been in an unrealized loss position for less than twelve months. For this sector, detailed financial models are maintained that include a projection of each issuer’s future financial performance, including prospective debt servicing capabilities, capital structure composition, and the value of the collateral. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, the issuer’s current competitive position, its vulnerability to changes in the competitive and regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood of default as well as potential losses in the event of default.

Common stock – As of September 30, 2016, gross unrealized losses related to common stock were $2.345 million. Of this amount, $0.266 million have been in an unrealized loss position for twelve months or greater. To determine if an other than

 

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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 nine months ended September 30, 2016 and 2015:

 

     Quarters Ended
September 30,
     Nine Months Ended
September 30,
 
(Dollars in thousands)    2016      2015      2016      2015  

Fixed maturities:

           

OTTI losses, gross

   $ (108    $ —         $ (201    $ (23

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

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net impairment losses on fixed maturities recognized in earnings

     (108      —           (201      (23

Equity securities

     (2,106      (4,641      (4,280      (6,856
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (2,214    $ (4,641    $ (4,481    $ (6,879
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table is an analysis of the credit losses recognized in earnings on fixed maturities held by the Company for the quarters and nine months ended September 30, 2016 and 2015 for which a portion of the OTTI loss was recognized in other comprehensive income.

 

     Quarters Ended
September 30,
     Nine Months Ended
September 30,
 
(Dollars in thousands)    2016      2015      2016      2015  

Balance at beginning of period

   $ 31       $ 31       $ 31       $ 50   

Additions where no OTTI was previously recorded

     —           —           —           —     

Additions where an OTTI was previously recorded

     —           —           —           —     

Reductions for securities for which the company intends to sell or more likely than not will be required to sell before recovery

     —           —           —           —     

Reductions reflecting increases in expected cash flows to be collected

     —           —           —           —     

Reductions for securities sold during the period

     —           —           —           (19
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 31       $ 31       $ 31       $ 31   
  

 

 

    

 

 

    

 

 

    

 

 

 

Accumulated Other Comprehensive Income, Net of Tax

Accumulated other comprehensive income, net of tax, as of September 30, 2016 and December 31, 2015 was as follows:

 

(Dollars in thousands)    September 30, 2016      December 31, 2015  

Net unrealized gains (losses) from:

     

Fixed maturities

   $ 13,492       $ (2,184

Common stock

     19,880         10,158   

Deferred taxes

     (10,093      (3,896
  

 

 

    

 

 

 

Accumulated other comprehensive income, net of tax

   $ 23,279       $ 4,078   
  

 

 

    

 

 

 

 

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The following tables present the changes in accumulated other comprehensive income, net of tax, by component for the quarters and nine months ended September 30, 2016 and 2015:

 

Quarter Ended September 30, 2016

(Dollars in thousands)

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

Beginning balance

   $ 22,511      $ (435   $ 22,076   

Other comprehensive income (loss) before reclassification

     2,073        (89     1,984   

Amounts reclassified from accumulated other comprehensive (loss)

     (781     —          (781
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     1,292        (89     1,203   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 23,803      $ (524   $ 23,279   
  

 

 

   

 

 

   

 

 

 

Quarter Ended September 30, 2015

(Dollars in thousands)

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

Beginning balance

   $ 20,201      $ (99   $ 20,102   

Other comprehensive (loss) before reclassification

     (9,009     (47     (9,056

Amounts reclassified from accumulated other comprehensive income

     2,129        70        2,199   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (6,880     23        (6,857
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13,321      $ (76   $ 13,245   
  

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2016

(Dollars in thousands)

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

Beginning balance

   $ 4,200      $ (122   $ 4,078   

Other comprehensive income (loss) before reclassification

     22,075        (400     21,675   

Amounts reclassified from accumulated other comprehensive (loss)

     (2,472     (2     (2,474
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     19,603        (402     19,201   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 23,803      $ (524   $ 23,279   
  

 

 

   

 

 

   

 

 

 

 

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Nine Months Ended September 30, 2015

(Dollars in thousands)

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

Beginning balance

   $ 23,647      $ (263   $ 23,384   

Other comprehensive (loss) before reclassification

     (9,413     (209     (9,622

Amounts reclassified from accumulated other comprehensive income (loss)

     (913     396        (517
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (10,326     187        (10,139
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13,321      $ (76   $ 13,245   
  

 

 

   

 

 

   

 

 

 

The reclassifications out of accumulated other comprehensive income for the quarters and nine months ended September 30, 2016 and 2015 were as follows:

 

(Dollars in thousands)         Amounts Reclassified from
Accumulated Other
Comprehensive Income
 
          Quarters Ended September 30,  

Details about Accumulated Other

Comprehensive Income Components

  

Affected Line Item in the

Consolidated Statements of

Operations

   2016     2015  

Unrealized gains and losses on available for sale securities

  

Other net realized investment (gains)

   $ (3,384   $ (2,042
  

Other than temporary impairment losses on investments

     2,214        4,641   
     

 

 

   

 

 

 
  

Total before tax

     (1,170     2,599   
  

Income tax expense (benefit)

     389        (470
     

 

 

   

 

 

 
  

Unrealized gains on available for sale securities, net of tax

   $ (781   $ 2,129   
     

 

 

   

 

 

 

Foreign currency items

  

Other net realized investment losses

   $ —        $ 108   
  

Income tax (benefit)

     —          (38
     

 

 

   

 

 

 
  

Foreign currency items, net of tax

   $ —        $ 70   
     

 

 

   

 

 

 

Total reclassifications

  

Total reclassifications, net of tax

   $ (781   $ 2,199   
     

 

 

   

 

 

 

 

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(Dollars in thousands)        

Amounts Reclassified from
Accumulated Other

Comprehensive Income

 
          Nine Months Ended September 30,  

Details about Accumulated Other

Comprehensive Income Components

  

Affected Line Item in the

Consolidated Statements of

Operations

   2016     2015  

Unrealized gains and losses on available for sale securities

  

Other net realized investment (gains)

   $ (8,214   $ (9,168
  

Other than temporary impairment losses on investments

     4,481        6,879   
     

 

 

   

 

 

 
  

Total before tax

     (3,733     (2,289
  

Income tax expense

     1,261        1,376   
     

 

 

   

 

 

 
  

Unrealized gains and losses on available for sale securities, net of tax

   $ (2,472   $ (913
     

 

 

   

 

 

 

Foreign currency items

  

Other net realized investment (gains) losses

   $ (4   $ 609   
  

Income tax expense (benefit)

     2        (213
     

 

 

   

 

 

 
  

Foreign currency items, net of tax

   $ (2   $ 396   
     

 

 

   

 

 

 

Total reclassifications

  

Total reclassifications, net of tax

   $ (2,474   $ (517
     

 

 

   

 

 

 

Net Realized Investment Gains (Losses)

The components of net realized investment gains (losses) for the quarters and nine months ended September 30, 2016 and 2015 were as follows:

 

     Quarters Ended September 30,      Nine Months Ended September 30,  
(Dollars in thousands)    2016      2015      2016      2015  

Fixed maturities:

           

Gross realized gains

   $ 434       $ 110       $ 1,252       $ 1,589   

Gross realized losses

     (147      (1,451      (291      (1,692
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized gains

     287         (1,341      961         (103
  

 

 

    

 

 

    

 

 

    

 

 

 

Common stock:

           

Gross realized gains

     3,345         3,494         8,068         9,418   

Gross realized losses

     (2,462      (4,860      (5,292      (7,731
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized gains

     883         (1,366      2,776         1,687   
  

 

 

    

 

 

    

 

 

    

 

 

 

Preferred stock:

           

Gross realized gains

     —           —           —           96   

Gross realized losses

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized gains

     —           —           —           96   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives:

           

Gross realized gains

     1,955         —           —           —     

Gross realized losses

     (1,197      (8,071      (12,794      (8,896
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized gains (losses)

     758         (8,071      (12,794      (8,896
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net realized investment gains (losses)

   $ 1,928       $ (10,778    $ (9,057    $ (7,216
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The proceeds from sales of available-for-sale securities resulting in net realized investment gains for the nine months ended September 30, 2016 and 2015 were as follows:

 

     Nine Months Ended September 30,  
(Dollars in thousands)    2016      2015  

Fixed maturities

   $ 279,659       $ 290,580   

Equity securities

   $ 34,976       $ 34,161   

Preferred stock

   $ —         $ 1,540   

Net Investment Income

The sources of net investment income for the quarters and nine months ended September 30, 2016 and 2015 were as follows:

 

     Quarters Ended September 30,      Nine Months Ended September 30,  
(Dollars in thousands)    2016      2015      2016      2015  

Fixed maturities

   $ 8,131       $ 8,673       $ 22,729       $ 24,709   

Equity securities

     698         703         2,647         2,419   

Cash and cash equivalents

     44         32         111         59   

Other invested assets

     909         193         3,806         1,535   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment income

     9,782         9,601         29,293         28,722   

Investment expense (1)

     (987      (749      (4,190      (2,488
  

 

 

    

 

 

    

 

 

    

 

 

 

Net investment income

   $ 8,795       $ 8,852       $ 25,103       $ 26,234   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Investment expense for the nine months ended September 30, 2016 includes $1.5 million in upfront fees necessary to enter into a new investment. See Note 9 for additional information on the Company’s $40 million commitment related to this new investment.

The Company’s total investment return on a pre-tax basis for the quarters and nine months ended September 30, 2016 and 2015 were as follows:

 

     Quarters Ended September 30,     Nine Months Ended September 30,  
(Dollars in thousands)    2016     2015     2016     2015  

Net investment income

   $ 8,795      $ 8,852      $ 25,103      $ 26,234   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized investment gains (losses)

     1,928        (10,778     (9,057     (7,216

Change in unrealized holding gains and (losses)

     2,061        (10,420     25,398        (15,575
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized investment returns

     3,989        (21,198     16,341        (22,791
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment return

   $ 12,784      $ (12,346   $ 41,444      $ 3,443   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment return % (1)

     0.8     (0.7 %)      2.7     0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Average investment portfolio (2)

   $ 1,530,599      $ 1,800,993      $ 1,522,247      $ 1,788,777   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Insurance Enhanced Asset Backed and Credit Securities

As of September 30, 2016, the Company held insurance enhanced asset backed and credit securities with a market value of approximately $33.1 million. Approximately $13.7 million of these securities were tax free municipal bonds, which represented approximately 0.9% 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 “A+.” Approximately $5.4 million of these bonds are pre-refunded with U.S. treasury securities, of which $0.5 million are backed by financial guarantors, meaning that funds have been set aside in escrow to satisfy the future interest and principal obligations of the bond. Of the remaining $8.3 million of tax free insurance enhanced municipal bonds, $0.5 million would have carried a lower credit rating had they not been insured. The following table provides a breakdown of the ratings for these municipal bonds with and without insurance.

 

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(Dollars in thousands)   

Ratings

with

    

Ratings

without

 
Rating    Insurance      Insurance  

AA

   $ 509       $ —     

A

     —           509   
  

 

 

    

 

 

 

Total

   $ 509       $ 509   
  

 

 

    

 

 

 

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 September 30, 2016, is as follows:

 

(Dollars in thousands)

Financial Guarantor

   Total      Pre-refunded
Securities
     Government
Guaranteed
Securities
     Exposure Net
of Pre-refunded
& Government
Guaranteed

Securities
 

Ambac Financial Group

   $ 1,512       $ 455       $ —         $ 1,057   

Assured Guaranty Corporation

     3,500         —           —           3,500   

Municipal Bond Insurance Association

     3,229         —           —           3,229   

Gov’t National Housing Association

     498         —           498         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total backed by financial guarantors

     8,739         455         498         7,786   

Other credit enhanced municipal bonds

     4,923         4,923         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,662       $ 5,378       $ 498       $ 7,786   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition to the tax-free municipal bonds, the Company held $19.4 million of insurance enhanced bonds that are comprised of $18.3 million of taxable municipal bonds and $1.1 million of asset-backed securities, which represented approximately 1.3% of the Company’s total invested assets, net of receivable/payable for securities purchased and sold. The financial guarantors of the Company’s $19.4 million of insurance enhanced asset-backed and taxable municipal securities include Municipal Bond Insurance Association ($3.8 million), Ambac Financial Group ($0.9 million), Assured Guaranty Corporation ($14.6 million), and Financial Guaranty Insurance Group ($0.1 million).

The Company had no direct investments in the entities that have provided financial guarantees or other credit support to any security held by the Company at September 30, 2016.

Bonds Held on Deposit

Certain cash balances, cash equivalents, equity securities, and bonds available for sale were deposited with various governmental authorities in accordance with statutory requirements, were held as collateral pursuant to borrowing arrangements, or were held in trust pursuant to intercompany reinsurance agreements. The fair values were as follows as of September 30, 2016 and December 31, 2015:

 

     Estimated Fair Value  
(Dollars in thousands)    September 30, 2016      December 31, 2015  

On deposit with governmental authorities

   $ 26,203       $ 38,815   

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

     601,052         643,216   

Held in trust pursuant to third party requirements

     67,924         66,544   

Letter of credit held for third party requirements

     4,292         5,598   

Securities held as collateral for borrowing arrangements (1)

     97,638         95,647   
  

 

 

    

 

 

 

Total

   $ 797,109       $ 849,820   
  

 

 

    

 

 

 

 

(1) Amount required to collateralize margin borrowing facilities.

Variable Interest Entities

A Variable Interest Entity (VIE) refers to an investment in which an investor holds a controlling interest that is not based on the majority of voting rights. Under the VIE model, the party that has the power to exercise significant management

 

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influence and maintain a controlling financial interest in the entity’s economics is said to be the primary beneficiary, and is required to consolidate the entity within their results. Other entities that participate in a VIE, for which their financial interests fluctuate with changes in the fair value of the investment entity’s net assets but do not have significant management influence and the ability to direct the VIE’s significant economic activities are said to have a variable interest in the VIE but do not consolidate the VIE in their financial results.

The Company has variable interests in several VIE’s for which it is not the primary beneficiary. These investments are accounted for under the equity method of accounting as their ownership interest exceeds 3% of their respective investments.    

The fair value of one of the Company’s variable interest VIE’s was $29.1 million and $32.6 million as of September 30, 2016 and December 31, 2015, respectively. The Company’s maximum exposure to loss from this variable interest VIE, which factors in future funding commitments, was $51.1 million at September 30, 2016 and $52.6 million at December 31, 2015. The fair value of the remaining three variable interest VIE’s, which were acquired in 2016, were $3.6 million at September 30, 2016. The Company is not able to accurately estimate future funding requirements for the remaining three variable interest VIE’s due to related debt components of the underlying investments that are not considered variable interest VIE’s. If the entire future funding commitments of these three investments were considered variable interest VIE’s, the Company’s maximum exposure to loss from the remaining VIE’s at September 30, 2016 would be $24.6 million. The Company’s investment in variable interest VIE’s is included in other invested assets on the consolidated balance sheet with changes in fair value recorded in the statement of operations.

 

3. Derivative Instruments

Interest rate swaps are used by the Company primarily to reduce risks from changes in interest rates. Under the terms of the interest rate swaps, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts as calculated by reference to an agreed notional amount.

The Company accounts for the interest rate swaps as non-hedge instruments and recognizes the fair value of the interest rate swaps in other assets or other liabilities on the consolidated balance sheets with the changes in fair value recognized as net realized investment gains (losses) in the consolidated statement of operations. The Company is ultimately responsible for the valuation of the interest rate swaps. To aid in determining the estimated fair value of the interest rate swaps, the Company relies on the forward interest rate curve and information obtained from a third party financial institution.

The following table summarizes information on the location and the gross amount of the derivatives’ fair value on the consolidated balance sheets as of September 30, 2016 and December 31, 2015:

 

(Dollars in thousands)         September 30, 2016      December 31, 2015  

Derivatives Not Designated as Hedging

Instruments under ASC 815

  

Balance Sheet

Location

   Notional
Amount
     Fair Value      Notional
Amount
     Fair Value  

Interest rate swap agreements

  

Other liabilities

   $ 200,000       $ (24,388    $ 200,000       $ (15,256

The following table summarizes the net gains (losses) included in the consolidated statement of operations for changes in the fair value of the derivatives and the periodic net interest settlements under the derivatives for the quarters and nine months ended September 30, 2016 and 2015:

 

          Quarters Ended September 30,     Nine Months Ended September 30,  
(Dollars in thousands)   

Statement of Operations Line

   2016      2015     2016     2015  

Interest rate swap agreements

  

Net realized investment gains (losses)

   $ 758       $ (8,071   $ (12,794   $ (8,896

As of September 30, 2016 and December 31, 2015, the Company is due $4.4 million and $4.5 million, respectively, for funds it needed to post to execute the swap transaction and $25.2 million and $17.3 million, respectively, for margin calls made in connection with the interest rate swaps. These amounts are included in other assets on the consolidated balance sheets.

 

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4. Fair Value Measurements

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

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

 

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

 

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

 

    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.

The following table presents information about the Company’s invested assets and derivative instruments measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

 

As of September 30, 2016    Fair Value Measurements  
(Dollars in thousands)    Level 1      Level 2      Level 3      Total  

Assets:

           

Fixed maturities:

           

U.S. treasury and agency obligations

   $ 79,325       $ 1,514       $ —         $ 80,839   

Obligations of states and political subdivisions

     —           170,696         —           170,696   

Mortgage-backed securities

     —           106,949         —           106,949   

Commercial mortgage-backed securities

     —           174,653         —           174,653   

Asset-backed securities

     —           252,200         —           252,200   

Corporate bonds and debt

     —           378,795         16,860         395,655   

Foreign corporate bonds

     —           129,965         —           129,965   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     79,325         1,214,772         16,860         1,310,957   

Common stock

     122,779         —           —           122,799   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value (1)

   $ 202,104       $ 1,214,772       $ 16,860       $ 1,433,736   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative instruments

   $ —         $ 24,388       $ —         $ 24,388   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value

   $ —         $ 24,388       $ —         $ 24,388   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excluded from the table above are limited liability companies and limited partnerships of $32.6 million at September 30, 2016 whose fair value is based on net asset value as a practical expedient.

 

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As of December 31, 2015    Fair Value Measurements  
(Dollars in thousands)    Level 1      Level 2      Level 3      Total  

Assets:

           

Fixed maturities:

           

U.S. treasury and agency obligations

   $ 101,264       $ 5,858       $ —         $ 107,122   

Obligations of states and political subdivisions

     —           205,240         —           205,240   

Mortgage-backed securities

     —           159,123         —           159,123   

Commercial mortgage-backed securities

     —           140,390         —           140,390   

Asset-backed securities

     —           260,022         —           260,022   

Corporate bonds

     —           332,111         —           332,111   

Foreign corporate bonds

     —           102,141         —           102,141   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     101,264         1,204,885         —           1,306,149   

Common stock

     110,315         —           —           110,315   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value (1)

   $ 211,579       $ 1,204,885       $ —         $ 1,416,464   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative instruments

   $ —         $ 15,256       $ —         $ 15,256   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value

   $ —         $ 15,256       $ —         $ 15,256   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excluded from the table above are limited partnerships of $32.6 million at December 31, 2015 whose fair value is based on net asset value as a practical expedient.

The securities classified as Level 1 in the above table consist of U.S. Treasuries and equity securities actively traded on an exchange.

The securities classified as Level 2 in the above table consist primarily of fixed maturity securities and derivative instruments. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, security prices are derived through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. If there are no recent reported trades, matrix or model processes are used to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Included in the pricing of asset-backed securities, collateralized mortgage obligations, and mortgage-backed securities are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral. The estimated fair value of the interest rate swaps is obtained from a third party financial institution who utilizes observable inputs such as the forward interest rate curve.

For the Company’s material debt arrangements, the current fair value of the Company’s debt at September 30, 2016 and December 31, 2015 was as follows:

 

     September 30, 2016      December 31, 2015  
(Dollars in thousands)    Carrying Value      Fair Value      Carrying Value      Fair Value  

Margin Borrowing Facilities

   $ 76,696       $ 76,696       $ 75,646       $ 75,646   

7.75% Subordinated Notes due 2045 (1)

     96,466         99,706         96,388         91,748   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 173,162       $ 176,402       $ 172,034       $ 167,394   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) As of September 30, 2016 and December 31, 2015, the carrying value and fair value of the 7.75% Subordinated Notes due 2045 are net of unamortized debt issuance cost of $3.5 million.

The fair value of the margin borrowing facilities approximates its carrying value due to the facilities being due on demand. The 7.75% subordinated notes due 2045 are publicly traded instruments and are classified as Level 1 in the fair value hierarchy.

There were no transfers between Level 1 and Level 2 during the quarters ended September 30, 2016 or 2015.

 

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The following table presents changes in Level 3 investments measured at fair value on a recurring basis for the quarters and nine months ended September 30, 2016 and 2015:

 

     Quarters Ended September 30,      Nine Months Ended September 30,  
(Dollars in thousands)    2016      2015      2016      2015  

Beginning balance

   $ 11,220       $ —         $ —         $ —     

Total gains (realized / unrealized):

           

Amortization of bond premium and discount, net

     27         —           30         —     

Included in accumulated other comprehensive income

     534         —           531         —     

Purchases

     5,079         —           16,299         —     

Distributions

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 16,860       $ —         $ 16,860       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The investments classified as Level 3 in the above table consist of privately placed securities with unobservable inputs. The Company does not have access to daily valuations; therefore, market trades, performance of the underlying assets, and key risks are considered in order to estimate fair values of these middle market corporate debt instruments.

Fair Value of Alternative Investments

Other invested assets consist of limited liability companies and limited partnerships whose fair value is based on the net asset value per share practical expedient. The following table provides the fair value and future funding commitments related to these investments at September 30, 2016 and December 31, 2015.

 

     September 30, 2016      December 31, 2015  
(Dollars in thousands)    Fair Value      Future
Funding
Commitment
     Fair Value      Future
Funding
Commitment
 

Real Estate Fund, LP (1)

   $ —         $ —         $ —         $ —     

European Non-Performing Loan Fund, LP (2)

     29,073         22,014         32,592         20,014   

Private Middle Market Loans, LLC (3)

     3,562         21,058         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,635       $ 43,072       $ 32,592       $ 20,014   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) This limited partnership invests in real estate assets through a combination of direct or indirect investments in partnerships, limited liability companies, mortgage loans, and lines of credit. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company continues to hold an investment in this limited partnership and has written the fair value down to zero.
(2) This limited partnership invests in distressed securities and assets through senior and subordinated, secured and unsecured debt and equity, in both public and private large-cap and middle-market companies. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets. Based on the terms of the partnership agreement, the Company anticipates its interest in this partnership to be redeemed in 2020.
(3) This interest consists of three separate equity investments in limited liability companies whereby the Company is also a lender via separate loan agreements. Typical financing is used for growth, acquisitions, or buyouts. The Company classifies their portion of the middle market corporate debt as fixed maturities. The Company has committed $40 million to this investment strategy, including both the equity and financing provisions. While the Company is not able to estimate the proportion of future funding commitments between equity and financing, the total remaining commitment is $21.1 million. Based on the terms of the investment management agreement, the Company anticipates its interest to be redeemed no later than 2024.

Limited Liability Companies and Limited Partnerships with ownership interest exceeding 3%

The Company uses the equity method to account for investments in limited liability companies and limited partnerships where its ownership interest exceeds 3%. The equity method of accounting for an investment in a limited liability company and limited partnership requires that its cost basis be updated to account for the income or loss earned on the investment. The investment income associated with these limited liability companies or limited partnerships, which is reflected in the statement of operations, was $0.9 million and $0.1 million during the quarters ended September 30, 2016 and 2015, respectively, and $3.7 million and $1.4 million during the nine months ended September 30, 2016 and 2015, respectively.

 

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Pricing

The Company’s pricing vendors provide prices for all investment categories except for investments in limited liability companies and limited partnerships whose fair value is based on net asset values as a practical expedient. Two vendors provide prices for equity and fixed maturity securities.

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

 

    Common stock prices are received from all primary and secondary exchanges.

 

    Corporate and agency bonds are evaluated by utilizing a multi-dimensional relational model. For bonds with early redemption options, an option adjusted spread model is utilized. Both asset classes use standard inputs and incorporate security set up, defined sector breakdown, benchmark yields, apply base spreads, yield to maturity, and adjust for corporate actions.

 

    Data from commercial vendors is aggregated with market information, then converted into a prepayment/spread/LIBOR curve model used for commercial mortgage obligations (“CMO”). CMOs are categorized with mortgage-backed securities in the tables listed above. For asset-backed securities, data derived from market information along with trustee and servicer reports is converted into spreads to interpolated swap yield curve. For both asset classes, evaluations utilize standard inputs plus new issue data, monthly payment information, and collateral performance. The evaluated pricing models incorporate discount rates, loan level information, prepayment speeds, treasury benchmarks, and LIBOR and swap curves.

 

    For obligations of state and political subdivisions, a multi-dimensional relational model is used to evaluate securities. The pricing models incorporate security set-up, benchmark yields, apply base spreads, yield to worst or market convention, ratings updates, prepayment schedules and adjustments for material events notices.

 

    U.S. treasuries are evaluated by obtaining feeds from a number of live data sources including active market makers and inter-dealer brokers.    

 

    For mortgage-backed securities, a matrix model correlation to TBA (a forward MBS trade) or benchmarking is utilized to value a security.

The Company performs certain procedures to validate whether the pricing information received from the pricing vendors is reasonable, to ensure that the fair value determination is consistent with accounting guidance, and to ensure that its assets are properly classified in the fair value hierarchy. The 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 or may potentially change.

 

    Understanding and periodically evaluating the various pricing methods and procedures used by the Company’s pricing vendors to ensure that investments are properly classified within the fair value hierarchy.

 

    On a quarterly basis, the Company corroborates investment security prices received from its pricing vendors by obtaining pricing from a second pricing vendor for a sample of securities.

During the quarters and nine months ended September 30, 2016 and 2015, the Company has not adjusted quotes or prices obtained from the pricing vendors.

 

5. Income Taxes

The statutory income tax rates of the countries where the Company does business are 35% in the United States, 0% in Bermuda, 0% in the Cayman Islands, 0% in Gibraltar, 29.22% in the Duchy of Luxembourg, and 25% on non-trading income, 33% on capital gains and 12.5% on trading income in the Republic of Ireland. The statutory income tax rate of each

 

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country is applied against the expected annual taxable income of the Company in each country to estimate the annual income tax expense. Generally, during interim periods, the Company will divide total estimated annual income tax expense by total estimated annual pre-tax income to determine the expected annual income tax rate used to compute the income tax provision. The expected annual income tax rate is then applied against interim pre-tax income, excluding net realized gains and losses and distributions from limited liability companies and limited partnerships, and that amount is then added to the actual income taxes on net realized gains and losses, discrete items and distributions from limited liability companies and limited partnerships. However, when there is significant volatility in the expected effective tax rate, the Company records its actual income tax provision in lieu of the estimated effective income tax rate.

The Company’s income before income taxes from its non-U.S. subsidiaries and U.S. subsidiaries, including the results of the quota share and stop-loss agreements between Global Indemnity Reinsurance and the Insurance Operations, for the quarters and nine months ended September 30, 2016 and 2015 were as follows:

 

Quarter Ended September 30, 2016:

(Dollars in thousands)

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

Revenues:

           

Gross premiums written

   $ 51,900       $ 123,770       $ (42,101    $ 133,569   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net premiums written

   $ 51,900       $ 63,151       $ —         $ 115,051   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net premiums earned

   $ 54,155       $ 65,398       $ —         $ 119,553   

Net investment income

     11,556         5,828         (8,589      8,795   

Net realized investment gains (losses)

     58         1,870         —           1,928   

Other income (loss)

     (10      7,862         —           7,852   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     65,759         80,958         (8,589      138,128   

Losses and Expenses:

           

Net losses and loss adjustment expenses

     27,932         44,230         —           72,162   

Acquisition costs and other underwriting expenses

     24,651         23,478         —           48,129   

Corporate and other operating expenses

     2,906         2,100         —           5,006   

Interest expense

     2,081         8,741         (8,589      2,233   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income taxes

   $ 8,189       $ 2,409       $ —         $ 10,598   
  

 

 

    

 

 

    

 

 

    

 

 

 

Quarter Ended September 30, 2015:

(Dollars in thousands)

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

Revenues:

           

Gross premiums written

   $ 67,543       $ 140,268       $ (57,663    $ 150,148   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net premiums written

   $ 67,534       $ 54,963       $ —         $ 122,497   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net premiums earned

   $ 70,532       $ 54,175       $ —         $ 124,707   

Net investment income

     10,644         4,783         (6,575      8,852   

Net realized investment gains (losses)

     (1,256      (9,522      —           (10,778

Other income (loss)

     (11      1,290         —           1,279   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     79,909         50,726         (6,575      124,060   

Losses and Expenses:

           

Net losses and loss adjustment expenses

     39,849         37,842         —           77,691   

Acquisition costs and other underwriting expenses

     30,504         20,430         —           50,934   

Corporate and other operating expenses

     1,648         1,919         —           3,567   

Interest expense

     1,501         6,669         (6,575      1,595   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income taxes

   $ 6,407       $ (16,134    $ —         $ (9,727
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Nine Months Ended September 30, 2016:

(Dollars in thousands)

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

Revenues:

           

Gross premiums written

   $ 141,297       $ 394,312       $ (106,355    $ 429,254   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net premiums written

   $ 141,283       $ 215,950       $ —         $ 357,233   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net premiums earned

   $ 162,594       $ 196,399       $ —         $ 358,993   

Net investment income

     36,791         13,888         (25,576      25,103   

Net realized investment gains (losses)

     128         (9,185      —           (9,057

Other income (loss)

     17         9,586         —           9,603   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     199,530         210,688         (25,576      384,642   

Losses and Expenses:

           

Net losses and loss adjustment expenses

     84,154         130,903         —           215,057   

Acquisition costs and other underwriting expenses

     71,758         77,003         —           148,761   

Corporate and other operating expenses

     7,181         5,883         —           13,064   

Interest expense

     6,233         26,020         (25,576      6,677   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income taxes

   $ 30,204       $ (29,121    $ —         $ 1,083   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nine Months Ended September 30, 2015:

(Dollars in thousands)

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

Revenues:

           

Gross premiums written

   $ 289,940       $ 411,310       $ (241,718    $ 459,532   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net premiums written

   $ 289,892       $ 104,714       $ —         $ 394,606   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net premiums earned

   $ 214,667       $ 166,254       $ —         $ 380,921   

Net investment income

     32,146         13,594         (19,506      26,234   

Net realized investment gains (losses)

     (1,643      (5,573      —           (7,216

Other income (loss)

     (77      2,485         —           2,408   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     245,093         176,760         (19,506      402,347   

Losses and Expenses:

           

Net losses and loss adjustment expenses

     115,654         111,216         —           226,870   

Acquisition costs and other underwriting expenses

     92,368         57,750         —           150,118   

Corporate and other operating expenses

     3,395         16,046         —           19,441   

Interest expense

     2,325         19,816         (19,506      2,635   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income taxes

   $ 31,351       $ (28,068    $ —         $ 3,283   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the components of income tax expense (benefit):

 

     Quarters Ended September 30,      Nine Months Ended September 30,  
(Dollars in thousands)    2016      2015      2016      2015  

Current income tax expense (benefit):

           

Foreign

   $ 84       $ 67       $ 289       $ 228   

U.S. Federal

     146         (579      146         (2,126
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current income tax expense (benefit)

     230         (512      435         (1,898
  

 

 

    

 

 

    

 

 

    

 

 

 

Deferred income tax expense (benefit):

           

U.S. Federal

     833         (5,469      (10,847      (8,984
  

 

 

    

 

 

    

 

 

    

 

 

 

Total deferred income tax expense (benefit)

     833         (5,469      (10,847      (8,984
  

 

 

    

 

 

    

 

 

    

 

 

 

Total income tax expense (benefit)

   $ 1,063       $ (5,981    $ (10,412    $ (10,882
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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The following table summarizes the differences between the tax provision for financial statement purposes and the expected tax provision at the weighted average tax rate:

 

     Quarters Ended September 30,  
     2016     2015  
(Dollars in thousands)    Amount      % of Pre-
Tax Income
    Amount      % of Pre-
Tax Income
 

Expected tax provision at weighted average rate

   $ 933         8.8   $ (5,580      (57.4 %) 

Adjustments:

          

Tax exempt interest

     (101      (1.0     (107      (1.1

Dividend exclusion

     (3      0.0        (175      (1.8

Other

     234         2.2        (119      (1.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Actual tax on continuing operations

   $ 1,063         10.0   $ (5,981      (61.5 %) 
  

 

 

    

 

 

   

 

 

    

 

 

 

The effective income tax rate for the quarter ended September 30, 2016 was 10.0%, compared to an effective income tax benefit rate of 61.5% for the quarter ended September 30, 2015. The increase is primarily due to capital gains and the gain on the sale of United National Specialty Insurance Company during the quarter ended September 30, 2016. Taxes were computed using a discrete period computation because a reliable estimate of an effective tax rate could not be made.

 

     Nine Months Ended September 30,  
     2016     2015  
(Dollars in thousands)    Amount      % of Pre-
Tax Income
    Amount      % of Pre-
Tax Income
 

Expected tax provision at weighted average rate

   $ (9,896      (913.8 %)    $ (9,595      (292.3 %) 

Adjustments:

          

Tax exempt interest

     (304      (28.1     (326      (9.9

Dividend exclusion

     (480      (44.3     (588      (17.9

Other

     268         24.8        (373      (11.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Actual tax on continuing operations

   $ (10,412      (961.4 %)      (10,882      (331.5 %) 
  

 

 

    

 

 

   

 

 

    

 

 

 

The effective income tax benefit rate for the nine months ended September 30, 2016 was 961.4%, compared to an effective income tax benefit rate of 331.5% for the nine months ended September 30, 2015. The increase is primarily due to losses incurred in the Company’s U.S. operations. Taxes were computed using a discrete period computation because a reliable estimate of an effective tax rate could not be made.

The Company has an alternative minimum tax (“AMT”) credit carryforward of $11.0 million and $10.9 million as of September 30, 2016 and December 31, 2015, respectively, which can be carried forward indefinitely. The Company has a net operating loss (“NOL”) carryforward of $10.1 million and $1.9 million as of September 30, 2016 and December 31, 2015, respectively, which will expire in 2036 and 2035, respectively. The Company has a Section 163(j) (“163(j)”) carryforward of $3.9 million and $3.1 million as of September 30, 2016 and December 31, 2015, respectively, which can be carried forward indefinitely. The 163(j) carryforward is for disqualified interest paid or accrued to a related entity that is not subject to U.S. tax.

 

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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 September 30,     Nine Months Ended September 30,  
(Dollars in thousands)    2016     2015     2016     2015  

Balance at beginning of period

   $ 683,850      $ 769,299      $ 680,047      $ 675,472   

Less: Ceded reinsurance receivables

     111,579        138,497        108,130        123,201   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net balance at beginning of period

     572,271        630,802        571,917        552,271   

Purchased reserves, gross

     1,410        1,119        1,410        89,489   

Less: Purchased reserves ceded

     (641     1,119        (641     12,800   
  

 

 

   

 

 

   

 

 

   

 

 

 

Purchased reserves, net

     2,051        —          2,051        76,689   
  

 

 

   

 

 

   

 

 

   

 

 

 

Incurred losses and loss adjustment expenses related to:

        

Current year

     81,579        86,203        239,991        244,041   

Prior years

     (9,417     (8,512     (24,934     (17,171
  

 

 

   

 

 

   

 

 

   

 

 

 

Total incurred losses and loss adjustment expenses

     72,162        77,691        215,057        226,870   
  

 

 

   

 

 

   

 

 

   

 

 

 

Paid losses and loss adjustment expenses related to:

        

Current year

     49,704        53,512        113,090        113,573   

Prior years

     35,147        56,385        114,302        143,661   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total paid losses and loss adjustment expenses

     84,851        109,897        227,392        257,234   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net balance at end of period

     561,633        598,596        561,633        598,596   

Plus: Ceded reinsurance receivables

     102,749        130,913        102,749        130,913   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 664,382      $ 729,509      $ 664,382      $ 729,509   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 third quarter of 2016, the Company reduced its prior accident year loss reserves by $9.4 million, which consisted of a $6.5 million decrease related to Commercial Lines and a $2.9 million decrease related to Reinsurance Operations.

The $6.5 million reduction of prior accident year loss reserves related to Commercial Lines primarily consisted of the following:

 

    General Liability: A $9.0 million reduction in aggregate with $3.2 million of favorable development in the construction defect reserve category and $6.0 million of favorable development in the other general liability reserve categories. The favorable development in the construction defect reserve category reflects the lower than expected claims frequency and severity which led to a reduction in the 2005 through 2015 accident years. For the other general liability reserve categories, lower than anticipated claims severity was the driver of the favorable development mainly in accident years 2004 through 2012.

 

    Property: A $2.1 million increase was due to higher than expected case incurred emergence in the property brokerage segment excluding catastrophe experience in the 2011 through 2015 accident years.

The $2.9 million reduction related to Reinsurance Operations was from the property lines. Ultimate losses were lowered in the 2014 and 2015 accident years based on a review of the experience reported from cedants.

In the third quarter of 2015, the Company decreased its prior accident year loss reserves by $8.5 million, which consisted of a $7.3 million decrease related to Commercial Lines and a $1.2 million decrease related to Reinsurance Operations.

The $7.3 million decrease related to Commercial Lines primarily consisted of the following:

 

    Professional: A $3.5 million decrease in aggregate primarily related to better than anticipated loss emergence in accident years 2006 through 2012.

 

    General Liability: A $3.8 million decrease in aggregate primarily related to accident years 1999 through 2013 primarily due to better than anticipated frequency and severity in construction defect.

 

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The $1.2 million decrease in aggregate related to Reinsurance Operations was primarily due to lower than expected emergence on property catastrophe contracts for accident years 2009 to 2013.

In the first nine months of 2016, the Company decreased its prior accident year loss reserves by $24.9 million, which consisted of an $18.8 million decrease related to Commercial Lines and a $6.1 million decrease related to Reinsurance Operations.

The $18.8 million decrease related to Commercial Lines primarily consisted of the following:

 

    General Liability: A $21.1 million reduction in aggregate with $4.8 million of favorable development in the construction defect reserve category and $16.3 million of favorable development in the other general liability reserve categories. The favorable development in the construction defect reserve category reflects the lower than expected claims frequency and severity which led to a reduction in the 2005 through 2015 accident years. For the other general liability reserve categories, lower than anticipated claims severity was the driver of the favorable development mainly in accident years 2004 through 2012.

 

    Property: A $0.8 million increase in aggregate with a $0.5 million increase in the non-catastrophe segments and a $0.3 million increase in the catastrophe segments. The increases reflect higher than expected case incurred emergence primarily in the 2012 through 2015 accident years.

The $6.1 million reduction related to Reinsurance Operations was from the property lines. Ultimate losses were lowered for the 2013 through 2015 accident years due to lower than expected emergence of catastrophe losses.

In the first nine months of 2015, the Company decreased its prior accident year loss reserves by $17.2 million, which consisted of a $12.9 million decrease related to Commercial Lines and a $4.3 million decrease related to Reinsurance Operations.

The $12.9 million decrease related to Commercial Lines primarily consisted of the following:

 

    Property: A $0.8 million decrease in aggregate primary related to better than anticipated loss emergence in the 2011 through 2014 accident years.

 

    Umbrella: $0.3 million decrease primarily related to accident years 2003 through 2005 as a result of better than anticipated loss emergence.

 

    Professional: $6.4 million decrease in aggregate primarily related to better than anticipated frequency in accident years 2006 through 2012.

 

    General Liability: A $5.7 million decrease in aggregate primarily related to accident years prior to 2013 due to better than anticipated frequency and severity in construction defect.

The $4.3 million decrease in aggregate related to Reinsurance Operations was primarily due to improved results reported by the Company’s cedants on property contracts for accident years 2009 through 2014.

 

7. Shareholders’ Equity

Repurchases of the Company’s A ordinary shares

No shares were repurchased during the quarters ended September 30, 2016 and 2015. During the nine months ended September 30, 2016 and 2015, the Company repurchased 28,099 shares and 11,895 shares, respectively, with an average price paid of $28.64 per share and $ 28.03 per share, respectively.

Please see Note 12 of the notes to the consolidated financial statements in Item 8 Part II of the Company’s 2015 Annual Report on Form 10-K for more information on the Company’s repurchase program.

 

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8. Related Party Transactions

Fox Paine & Company

As of September 30, 2016, Fox Paine beneficially owned shares having approximately 84% of the Company’s total outstanding voting power. Fox Paine has the right to appoint a number of the Company’s Directors equal in aggregate to the pro rata percentage of the voting shares of the Company beneficially held by Fox Paine for so long as Fox Paine holds an aggregate of 25% or more of the voting power in the Company. Fox Paine controls the election of all of the Company’s Directors due to its controlling share ownership. The Company’s Chairman is a member of Fox Paine. The Company relies on Fox Paine to provide management services and other services related to the operations of the Company.

Global Indemnity Reinsurance was a limited partner in Fox Paine Capital Fund, II, which was managed by Fox Paine & Company. This investment was originally made by United National Insurance Company in June 2000 and pre-dates the September 5, 2003 acquisition by Fox Paine of Wind River Investment Corporation, which was the predecessor holding company for United National Insurance Company. In connection with the Company’s share redemption in 2015, Global Indemnity Reinsurance elected to redeem its shares in Fox Paine Capital Fund II, and as a result, the Company no longer held an interest in Fox Paine Capital Fund II as of November 10, 2015. All of Global Indemnity Reinsurance’s allocable Global Indemnity plc shares that were held by Fox Paine Capital Fund, II were transferred into a new unrelated liquidating partnership.

There were no distributions received from Fox Paine Capital Fund II during the quarters ended September 30, 2016 or 2015. During the nine months ended September 30, 2015, the Company received a distribution of $0.8 million from Fox Paine Capital Fund II. The Company did not receive any distributions from Fox Paine Capital Fund II during the nine months ended September 30, 2016.

The Company relies on Fox Paine to provide management services and other services related to the operations of the Company. The Company incurred management fees of $0.5 million and $0.4 million during the quarters ended September 30, 2016 and 2015, respectively, and $1.5 million and $1.4 million during the nine months ended September 30, 2016 and 2015, respectively, as part of the annual management fee paid to Fox Paine. As of September 30, 2016 and December 31, 2015, unpaid management fees, which were included in other liabilities on the consolidated balance sheets, were $4.1 million and $2.6 million, respectively.

In connection with the acquisition of American Reliable, the Company agreed to pay to Fox Paine an investment banking fee of 3% of the amount paid plus the additional capital required to operate American Reliable on a standalone basis and a $1.5 million investment advisory fee, which in the aggregate, totaled $6.5 million. This amount is included in corporate and other operating expenses on the Company’s Consolidated Statements of Operations during the nine months ended September 30, 2015. As payment for these fees, 267,702 A ordinary shares of Global Indemnity were issued under the Global Indemnity plc Share Incentive Plan (the “Plan”) in May, 2015. These shares cannot be sold until the earlier of five years after January 1, 2015 or a change of control.

Cozen O’Connor

The Company incurred $0.2 million and $0.6 million for legal services rendered by Cozen O’Connor during the quarter and nine months ended September 30, 2015, respectively. Stephen A. Cozen, the chairman of Cozen O’Connor, was a member of the Company’s Board of Directors until he resigned effective December 31, 2015.

Crystal & Company

The Company incurred brokerage fees with Crystal & Company, an insurance broker, of $0.1 million during each of the quarters ended September 30, 2016 and 2015 and $0.2 million during each of the nine months ended September 30, 2016 and 2015. James W. Crystal, the chairman and chief executive officer of Crystal & Company, was a member of the Company’s Board of Directors until he resigned effective July 24, 2016.

Hiscox Insurance Company (Bermuda) Ltd.

Global Indemnity Reinsurance is a participant in two reinsurance agreements with Hiscox Insurance Company (Bermuda)

 

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Ltd. (“Hiscox Bermuda”) while Steve Green, the President of Global Indemnity Reinsurance, was a member of Hiscox Bermuda’s Board of Directors. Steve Green was a member of the Hiscox Bermuda’s Board of Directors until May, 2014. The Company estimated that the following earned premium and incurred losses related to these agreements have been assumed by Global Indemnity Reinsurance from Hiscox Bermuda:

 

     Quarters Ended September 30,  
(Dollars in thousands)    2016      2015  

Assumed earned premium

   $ (2    $ 47   

Assumed losses and loss adjustment expenses

     (209      (167
     Nine Months Ended September 30,  
(Dollars in thousands)    2016      2015  

Assumed earned premium

   $ 51       $ 2,294   

Assumed losses and loss adjustment expenses

     (419      476   

Net balances due to Global Indemnity Reinsurance under this agreement are as follows:

 

(Dollars in thousands)    September 30,
2016
     December 31,
2015
 

Net payable balance

   $ (114    $ (110

 

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.

Commitments

During 2014, the Company entered into a $50 million commitment to purchase an alternative investment vehicle which is comprised of European non-performing loans. As of September 30, 2016, the Company has funded $28.0 million of this commitment leaving $22.0 million as unfunded.

In June, 2016, the Company entered into a $40 million commitment with an investment manager that provides financing for middle market companies. Typical financing arrangements are used for growth, acquisitions, or buyouts. This investment vehicle targets companies with $10 - $50 million in earnings before interest, taxes, depreciation, and amortization. As of September 30, 2016, the Company has funded $18.9 million of this commitment leaving $21.1 million as unfunded. Of the $18.9 million funded, $16.3 million and $2.6 million, respectively, was invested in middle market corporate debt and three separate equity investments in limited liability companies.

 

10. Share-Based Compensation Plans

Options

No stock options were awarded during the quarters ended September 30, 2016 and 2015. No unvested stock options were forfeited during the quarters ended September 30, 2016 and 2015.

 

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The Company did not award any stock options during the nine months ended September 30, 2016. During the nine months ended September 30, 2015, the Company awarded 200,000 stock options with a strike price of $28.37 which were subsequently forfeited during the nine months ended September 30, 2016. No unvested stock options were forfeited during the nine months ended September 30, 2015.

Restricted Shares

No restricted shares were issued to employees during the quarters ended September 30, 2016 and 2015.

During the nine months ended September 30, 2016, the Company granted 121,346 A ordinary shares, with a weighted average grant date value of $28.97 per share, to key employees under the Plan. Of the shares granted during the nine months ended September 30, 2016, 11,199 were granted to the Company’s Chief Executive Officer and vest 33 1/3 on each subsequent anniversary date of the grant for a period of three years subject to a true-up of bonus year underwriting results as of the third anniversary of the grant. 5,309 were granted to another key employee and vest 100% on February 7, 2019. 8,253 were issued to other key employees and vest 33% on the first and second anniversary of the grant and vest 34% on the third anniversary of the grant contingent on meeting certain performance objectives and subject to Board approval. The remaining 96,585 shares were granted to key employees and will vest as follows:

 

    16.5%, 16.5%, and 17.0% of the granted stock vest on the first, second, and third anniversary of the grant, respectively.

 

    50% of granted stock vests 100% on the third anniversary of the grant subject to a true-up of bonus year underwriting results and are subject to Board approval.

During the nine months ended September 30, 2015, the Company issued 138,507 A ordinary shares, with a weighted average grant date value of $28.37 per share, to key employees under the Plan.

Of the shares granted during the nine months ended September 30, 2015, 10,574 were granted to the Company’s Chief Executive Officer and vest 33 1/3 on each subsequent anniversary date of the grant for a period of three years subject to an accident year true-up of bonus year underwriting results as of the third anniversary of the grant and an additional 44,058 were granted to the Company’s Chief Executive Officer and other key employees which vest 100% on January 1, 2018. The remaining 83,875 shares were granted to key employees and will vest as follows:

 

    16.5%, 16.5%, and 17.0% of the granted stock vest on the first, second, and third anniversary of the grant, respectively.

 

    50% of granted stock vests 100% on the third anniversary of the grant subject to a true-up of bonus year underwriting results and are subject to Board approval.

During the quarters ended September 30, 2016 and 2015, the Company issued 8,802 and 9,392 A ordinary shares, respectively, at a weighted average grant date value of $29.70 and $26.17 per share, respectively, to non-employee directors of the Company under the Plan. During the nine months ended September 30, 2016 and 2015, the Company issued 28,416 and 27,437 A ordinary shares, respectively, at a weighted average grant date value of $29.40 and $27.31 per share, respectively, to non-employee directors of the Company under the Plan. All of the shares issued to non-employee directors of the Company in 2016 and 2015 were fully vested but subject to certain restrictions.

 

11. Earnings Per Share

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

 

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

 

(Dollars in thousands,    Quarters Ended September 30,     Nine Months Ended September 30,  
except share and per share data)    2016      2015     2016      2015  

Net income (loss)

   $ 9,535       $ (3,746   $ 11,495       $ 14,165   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic earnings per share:

          

Weighted average shares outstanding – basic

     17,254,843         25,463,994        17,241,040         25,452,991   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) per share

   $ 0.55       $ (0.15   $ 0.67       $ 0.56   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted earnings per share:

          

Weighted average shares outstanding – diluted (1)

     17,540,060         25,463,994        17,515,854         25,684,931   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) per share

   $ 0.54       $ (0.15   $ 0 .66       $ 0.55   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) For the quarter ended September 30, 2015, “weighted average shares outstanding – basic” was used to calculate “diluted earnings per share” due to a net loss for the period.

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 September 30,      Nine Months Ended September 30,  
     2016      2015      2016      2015  

Weighted average shares for basic earnings per share

     17,254,843         25,463,994         17,241,040         25,452,991   

Non-vested restricted stock

     176,087         —           165,011         128,942   

Options

     109,130         —           109,803         102,998   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares for diluted earnings per share

     17,540,060         25,463,994         17,515,854         25,684,931   
  

 

 

    

 

 

    

 

 

    

 

 

 

If the Company had not incurred a loss in the quarter ended September 30, 2015, 25,704,931 weighted average shares would have been used to compute the diluted loss per share calculation. In addition to the basic shares, weighted average shares for the diluted calculation would have included 138,261 shares of non-vested restricted stock and 102,676 share equivalents for options.

The weighted average shares outstanding used to determine dilutive earnings per share for the quarters ended September 30, 2016 and 2015 do not include 300,000 and 512,500 options, respectively, which were deemed to be anti-dilutive. The weighted average shares outstanding used to determine dilutive earnings per share for the nine months ended September 30, 2016 and 2015 do not include 300,000 and 512,500 options, respectively, which were deemed to be anti-dilutive.

The following table summarizes options which are deemed to be anti-dilutive at September 30, 2016:

 

Grant Date

  

Expiration Date

   Outstanding
Options
     Strike Price  

February 9, 2014

  

February 10, 2024

     300,000       $ 32.38   
     

 

 

    
        300,000      
     

 

 

    

 

12. Segment Information

The Company manages its business through three business segments: Commercial Lines, managed in Bala Cynwyd, Pennsylvania, offers specialty property and casualty products designed for product lines such as Small Business Binding Authority, Property Brokerage, and Programs. Personal Lines, managed in Scottsdale, Arizona, offers specialty personal lines and agricultural coverage. Reinsurance Operations, managed in Bermuda, provides reinsurance solutions through brokers and primary writers including insurance and reinsurance companies.

On September 30, 2016, Diamond State Insurance Company sold all the outstanding shares of capital stock of one of its wholly owned subsidiaries, United National Specialty Insurance Company, to an unrelated party. Diamond State Insurance Company received a one-time payment of $18.7 million and recognized a pretax gain of $6.9 million which is reflected in other income (loss). This transaction will not have an impact on the Company’s ongoing business operations.

 

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Going forward, any business previously written by United National Specialty Insurance Company has been and will be written by other companies within the Company’s U.S. Insurance Operations.

The following are tabulations of business segment information for the quarters and nine months ended September 30, 2016 and 2015.

 

Quarter Ended September 30, 2016:

(Dollars in thousands)

   Commercial
Lines (1)
    Personal
Lines (1)
    Reinsurance
Operations (2)
    Total  

Revenues:

        

Gross premiums written

   $ 50,214      $ 73,557 (6)    $ 9,798      $ 133,569   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 45,754      $ 59,499      $ 9,798      $ 115,051   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 48,179      $ 60,816      $ 10,558      $ 119,553   

Other income (loss)

     7,031        832        (11     7,852   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     55,210        61,648        10,547        127,405   
  

 

 

   

 

 

   

 

 

   

 

 

 

Losses and Expenses:

        

Net losses and loss adjustment expenses

     23,887        42,888        5,387        72,162   

Acquisition costs and other underwriting expenses

     19,362 (3)      25,097 (4)      3,670        48,129   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from segments

   $ 11,961      $ (6,337   $ 1,490      $ 7,114   
  

 

 

   

 

 

   

 

 

   

Unallocated Items:

        

Net investment income

           8,795   

Net realized investment gains

           1,928   

Corporate and other operating expenses

           (5,006

Interest expense

           (2,233
        

 

 

 

Income before income taxes

           10,598   

Income tax expense

           (1,063
        

 

 

 

Net income

           9,535   
        

 

 

 

Total assets

   $ 757,267      $ 512,190      $ 712,358 (5)    $ 1,981,815   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 $132 relating to cessions from Commercial Lines to Reinsurance Operations.
(4) Includes federal excise tax of $304 relating to cessions from Personal Lines to Reinsurance Operations.
(5) Comprised of Global Indemnity Reinsurance’s total assets less its investment in subsidiaries.
(6) Includes $7,328 of business written by American Reliable that is ceded to insurance companies owned by Assurant under a 100% quota share reinsurance agreement.

 

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Quarter Ended September 30, 2015:

(Dollars in thousands)

   Commercial
Lines (1)
    Personal
Lines (1)
    Reinsurance
Operations (2)
    Total  

Revenues:

        

Gross premiums written

   $ 52,920      $ 87,349 (6)    $ 9,879      $ 150,148   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 49,325      $ 63,302      $ 9,870      $ 122,497   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 48,916      $ 62,132      $ 13,659      $ 124,707   

Other income (loss)

     102        1,188        (11     1,279   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     49,018        63,320        13,648        125,986   
  

 

 

   

 

 

   

 

 

   

 

 

 

Losses and Expenses:

        

Net losses and loss adjustment expenses

     22,832        48,899        5,960        77,691   

Acquisition costs and other underwriting expenses

     20,686 (3)      25,779 (4)      4,469        50,934   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from segments

   $ 5,500      $ (11,358   $ 3,219      $ (2,639
  

 

 

   

 

 

   

 

 

   

Unallocated Items:

        

Net investment income

           8,852   

Net realized investment losses

           (10,778

Corporate and other operating expenses

           (3,567

Interest expense

           (1,595
        

 

 

 

Loss before income taxes

           (9,727

Income tax benefit

           5,981   
        

 

 

 

Net loss

           (3,746
        

 

 

 

Total assets

   $ 1,005,435      $ 572,807      $ 740,377 (5)    $ 2,318,619   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 $258 relating to cessions from Commercial Lines to Reinsurance Operations.
(4) Includes federal excise tax of $310 relating to cessions from Personal Lines to Reinsurance Operations.
(5) Comprised of Global Indemnity Reinsurance’s total assets less its investment in subsidiaries
(6) Includes $18,749 of business written by American Reliable that is ceded to insurance companies owned by Assurant under a 100% quota share reinsurance agreement.

 

Nine Months Ended September 30, 2016:

(Dollars in thousands)

   Commercial
Lines (1)
    Personal
Lines (1)
    Reinsurance
Operations (2)
    Total  

Revenues:

        

Gross premiums written

   $ 157,335      $ 236,978 (6)    $ 34,941      $ 429,254   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 141,764      $ 180,542      $ 34,927      $ 357,233   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 143,699      $ 183,631      $ 31,663      $ 358,993   

Other income

     7,354        2,232        17        9,603   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     151,053        185,863        31,680        368,596   
  

 

 

   

 

 

   

 

 

   

 

 

 

Losses and Expenses:

        

Net losses and loss adjustment expenses

     78,605        122,748        13,704        215,057   

Acquisition costs and other underwriting expenses

     58,752 (3)      78,381 (4)      11,628        148,761   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from segments

   $ 13,696      $ (15,266   $ 6,348      $ 4,778   
  

 

 

   

 

 

   

 

 

   

Unallocated Items:

        

Net investment income

           25,103   

Net realized investment losses

           (9,057

Corporate and other operating expenses

           (13,064

Interest expense

           (6,677
        

 

 

 

Income before income taxes

           1,083   

Income tax benefit

           10,412   
        

 

 

 

Net income

           11,495   
        

 

 

 

Total assets

   $ 757,267      $ 512,190      $ 712,358 (5)    $ 1,981,815   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 $391 relating to cessions from Commercial Lines to Reinsurance Operations.
(4) Includes federal excise tax of $918 relating to cessions from Personal Lines to Reinsurance Operations.
(5) Comprised of Global Indemnity Reinsurance’s total assets less its investment in subsidiaries.
(6) Includes $30,910 of business written by American Reliable that is ceded to insurance companies owned by Assurant under a 100% quota share reinsurance agreement.

 

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Nine Months Ended September 30, 2015:

(Dollars in thousands)

   Commercial
Lines (1)
    Personal
Lines (1)
    Reinsurance
Operations (2)
    Total  

Revenues:

        

Gross premiums written

   $ 161,746      $ 249,564 (6)    $ 48,222      $ 459,532   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 149,647      $ 196,785      $ 48,174      $ 394,606   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 149,244      $ 191,472      $ 40,205      $ 380,921   

Other income (loss)

     420        2,065        (77     2,408   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     149,664        193,537        40,128        383,329   
  

 

 

   

 

 

   

 

 

   

 

 

 

Losses and Expenses:

        

Net losses and loss adjustment expenses

     82,474        129,997        14,399        226,870   

Acquisition costs and other underwriting expenses

     61,317 (3)      74,590 (4)      14,211        150,118   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from segments

   $ 5,873      $ (11,050   $ 11,518      $ 6,341   
  

 

 

   

 

 

   

 

 

   

Unallocated Items:

        

Net investment income

           26,234   

Net realized investment losses

           (7,216

Corporate and other operating expenses

           (19,441

Interest expense

           (2,635
        

 

 

 

Income before income taxes

           3,283   

Income tax benefit

           10,882   
        

 

 

 

Net income

           14,165   
        

 

 

 

Total assets

   $ 1,005,435      $ 572,807      $ 740,377 (5)    $ 2,318,619   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 $787 relating to cessions from Commercial Lines to Reinsurance Operations.
(4) Includes federal excise tax of $957 relating to cessions from Personal Lines to Reinsurance Operations.
(5) Comprised of Global Indemnity Reinsurance’s total assets less its investment in subsidiaries
(6) Includes $41,749 of business written by American Reliable that is ceded to insurance companies owned by Assurant under a 100% quota share reinsurance agreement.

 

13. New Accounting Pronouncements

The following are new accounting guidance issued in 2016 which have not yet been adopted.

In August 2016, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance regarding the classification of certain cash receipts and cash payments within the statement of cash flows. The new guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This guidance is effective for public business entities for fiscal periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Although the Company is still evaluating the impact of this new guidance, the Company does not anticipate it will have a material impact on its financial condition, results of operations, or cash flows.

In June, 2016, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance surrounding the measurement of credit losses on financial instruments. For assets held at amortized cost basis, the new guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of information for credit loss estimates. For available for sale debt securities, credit losses should be measured similar to current GAAP; however, the new guidance requires that credit losses be presented as an allowance rather than as a write-down. This guidance is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application of this new guidance is permitted as of the fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. The Company is still evaluating the impact of this guidance on its financial condition, results of operations, and cash flows.

In March, 2016, the FASB issued new accounting guidance surrounding stock compensation. The new guidance simplifies several aspects of the accounting for share-based payment, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for public entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. Although the Company is still evaluating the impact of this new guidance, the Company does not anticipate it will have a material impact on its financial condition, results of operations, or cash flows.

 

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In February, 2016, the FASB issued new accounting guidance regarding leases. The new guidance increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Although the Company is still evaluating the impact of this new guidance, the Company does not anticipate it will have a material impact on its financial condition, results of operations, or cash flows.

In January, 2016, the FASB issued new accounting guidance surrounding the accounting for financial instruments. The new guidance addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. In particular, the guidance requires equity investments, except for those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with the changes in fair value recognized in net income. It also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. This guidance is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application of this new guidance is permitted as of the beginning of the fiscal year of adoption. The Company is still evaluating the impact of this guidance on its financial condition, results of operations, and cash flows.

In 2016, the FASB issued several new accounting pronouncements which provided clarification to existing guidance surrounding revenue from contracts with customers. Long and short duration insurance contracts, which comprise the majority of the Company’s revenues, are excluded from this accounting guidance. This guidance is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Although the Company is still evaluating the impact of this new guidance, the Company does not anticipate it will have a material impact on its financial condition, results of operations, or cash flows.

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, 2015.

Recent Developments

On September 30, 2016, Diamond State Insurance Company sold all the outstanding shares of capital stock of one of its wholly owned subsidiaries, United National Specialty Insurance Company, to an unrelated party. Diamond State Insurance Company received a one-time payment of $18.7 million and recognized a pretax gain of $6.9 million which is reflected in other income (loss). This transaction will not have an impact on the Company’s ongoing business operations. Going forward, any business previously written by United National Specialty Insurance Company has been and will be written by other companies within the Company’s U.S. Insurance Operations.

James W. Crystal and Larry N. Port resigned from the Company’s Board of Directors effective July 24, 2016 and July 28, 2016, respectively.

On June 20, 2016, the Company announced that its Board of Directors has unanimously approved a plan to re-domicile from Ireland to the Cayman Islands. On September 14, 2016, the Company held a special meeting of the holders of its A ordinary shares and B ordinary shares and an extraordinary general meeting of its shareholders. The proposals submitted to a vote of the shareholders at the meetings are described in detail in the Company’s proxy statement filed on July 15, 2016. All resolutions required to effectuate the re-domestication were approved by the requisite shareholder vote. On October 21,

 

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2016, the High Court of Ireland sanctioned Global Indemnity plc’s scheme of arrangement related to the re-domestication from Ireland to Cayman Islands. A Cayman Islands exempted company, Global Indemnity Limited, will replace Global Indemnity plc as the ultimate holding company of the Global Indemnity group of companies. The Company does not expect the re-domestication will have any material impact on its financial results, including the Company’s global effective tax rate. The Company expects to complete the re-domestication during the week of November 7, 2016.

The Company believes that the Cayman Islands offers a business friendly regulatory environment and a predictable legal framework that simultaneously provides both corporate certainty and shareholder protections, presents a flexible and stable legal and corporate governance framework, which allows a company’s Board of Directors latitude to exercise its judgment in what it deems to be in the best interests of the company and offers a beneficial tax regime.

Upon implementation of the move to the Cayman Islands, each Company A ordinary share will be cancelled and replaced with one A ordinary share of Global Indemnity Limited and each Company B ordinary share will be cancelled and replaced with one B ordinary share of Global Indemnity Limited. The Company intends that the Global Indemnity Limited A ordinary shares will trade on the NASDAQ Global Select Market (“NASDAQ”) under the ticker symbol GBLI, the same symbol under which the Company’s A ordinary shares are currently listed. The Company intends that Global Indemnity Limited will be subject to U.S. Securities and Exchange Commission reporting requirements, the mandates of the U.S. Sarbanes-Oxley Act and the corporate governance rules of NASDAQ. The Company will report its consolidated financial results in U.S. dollars and under U.S. generally accepted accounting principles.

For additional information on the proposed re-domestication, see the Company’s definitive proxy statement on Schedule 14A filed with the SEC on July 15, 2016.

In June, 2016, the Company entered into a $40 million commitment with an investment manager that provides financing for middle market companies. Typical financing arrangements are used for growth, acquisitions, or buyouts. This investment vehicle targets companies with $10 - $50 million in earnings before interest, taxes, depreciation, and amortization. As of September 30, 2016, the Company has funded $18.9 million of this commitment leaving $21.1 million as unfunded. Of the $18.9 million funded, $16.3 million and $2.6 million, respectively, was invested in middle market corporate debt and three separate equity investments in limited liability companies.

Overview

The Company’s Commercial Lines segment distribute property and casualty insurance products through a group of approximately 120 professional general agencies that have limited quoting and binding authority, as well as a number of wholesale insurance brokers who in turn sell the Company’s insurance products to insureds through retail insurance brokers. Commercial Lines operates predominantly in the excess and surplus lines marketplace. The Company manages its Commercial Lines segment via product classifications. These product classifications are: 1) Penn-America, which includes property and general liability products for small commercial businesses distributed through a select network of wholesale general agents with specific binding authority; 2) United National, which includes property, general liability, and professional lines products distributed through program administrators with specific binding authority; and 3) Diamond State, which includes property, casualty, and professional lines products distributed through wholesale brokers and program administrators with specific binding authority.

The Company’s Personal Lines segment, via American Reliable, offers specialty personal lines and agricultural coverage through a group of approximately 285 agents, primarily comprised of wholesale general agents, with specific binding authority in the admitted marketplace.

The Company’s Reinsurance Operations consisting solely of the operations of Global Indemnity Reinsurance, provides reinsurance solutions through brokers and on a direct basis. Global Indemnity Reinsurance is a Bermuda based treaty reinsurer for specialty property and casualty insurance and reinsurance companies. Global Indemnity Reinsurance conducts business in Bermuda and is focused on using its capital capacity to write catastrophe-oriented placements and other niche or specialty-focused treaties meeting the Company’s risk tolerance and return thresholds.

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

 

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The Company’s expenses include losses and loss adjustment expenses, acquisition costs and other underwriting expenses, corporate and other operating expenses, interest, investment expenses, and income taxes. Losses and loss adjustment expenses are estimated by management and reflect the Company’s best estimate of ultimate losses and costs arising during the reporting period and revisions of prior period estimates. The Company records its best estimate of losses and loss adjustment expenses considering both internal and external actuarial analyses of the estimated losses the Company expects to incur on the insurance policies it writes. The ultimate losses and loss adjustment expenses will depend on the actual costs to resolve claims. Acquisition costs consist principally of commissions and premium taxes that are typically a percentage of the premiums on the insurance policies the Company writes, net of ceding commissions earned from reinsurers. Other underwriting expenses consist primarily of personnel expenses and general operating expenses related to underwriting activities. Corporate and other operating expenses are comprised primarily of outside legal fees, other professional and accounting fees, directors’ fees, management fees and salaries and benefits for company personnel whose services relate to the support of corporate activities. Interest expense is primarily comprised of amounts due on outstanding debt.

Critical Accounting Estimates and Policies

The Company’s consolidated financial statements are prepared in conformity with GAAP, which require it to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.

The most critical accounting policies involve significant estimates and include those used in determining the liability for unpaid losses and loss adjustment expenses, recoverability of reinsurance receivables, investments, fair value measurements, goodwill and intangible assets, deferred acquisition costs, and taxation. For a detailed discussion on each of these policies, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. There have been no significant changes to any of these policies during the current year.

 

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Results of Operations

The following table summarizes the Company’s results for the three and nine months ended September 30, 2016 and 2015:

 

     Quarters Ended
September 30,
    %     Nine Months Ended
September 30,
    %  
(Dollars in thousands)    2016     2015     Change     2016     2015     Change  

Gross premiums written

   $ 133,569      $ 150,148        (11.0 %)    $ 429,254      $ 459,532        (6.6 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 115,051      $ 122,497        (6.1 %)    $ 357,233      $ 394,606        (9.5 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 119,553      $ 124,707        (4.1 %)    $ 358,993      $ 380,921        (5.8 %) 

Other income

     7,852        1,279        513.9     9,603        2,408        298.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     127,405        125,986        1.1     368,596        383,329        (3.8 %) 

Losses and expenses:

            

Net losses and loss adjustment expenses

     72,162        77,691        (7.1 %)      215,057        226,870        (5.2 %) 

Acquisition costs and other underwriting expenses

     48,129        50,934        (5.5 %)      148,761        150,118        (0.9 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting income (loss)

     7,114        (2,639     369.6     4,778        6,341        (24.6 %) 

Net investment income

     8,795        8,852        (0.6 %)      25,103        26,234        (4.3 %) 

Net realized investment gains (losses)

     1,928        (10,778     117.9     (9,057     (7,216     (25.5 %) 

Corporate and other operating expenses

     (5,006     (3,567     40.3     (13,064     (19,441     (32.8 %) 

Interest expense

     (2,233     (1,595     40.0     (6,677     (2,635     153.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     10,598        (9,727     209.0     1,083        3,283        (67.0 %) 

Income tax (expense) benefit

     (1,063     5,981        (117.8 %)      10,412        10,882        4.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 9,535      $ (3,746     354.5   $ 11,495      $ 14,165        (18.8 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting Ratios:

            

Loss ratio (1):

     60.3     62.3       59.9     59.6  

Expense ratio (2)

     40.3     40.8       41.4     39.4  
  

 

 

   

 

 

     

 

 

   

 

 

   

Combined ratio (3)

     100.6     103.1       101.3     99.0  
  

 

 

   

 

 

     

 

 

   

 

 

   

 

(1) The loss ratio is a GAAP financial measure that is generally viewed in the insurance industry as an indicator of underwriting profitability and is calculated by dividing net losses and loss adjustment expenses by net premiums earned.
(2) The expense ratio is a GAAP financial measure that is calculated by dividing the sum of acquisition costs and other underwriting expenses by net premiums earned.
(3) The combined ratio is a GAAP financial measure and is the sum of the Company’s loss and expense ratios.

 

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Premiums

The following table summarizes the change in premium volume by business segment:

 

     Quarters Ended
September 30,
     %     Nine Months Ended
September 30,
     %  
(Dollars in thousands)    2016      2015      Change     2016      2015      Change  

Gross premiums written (1)

                

Personal Lines (3) (4)

   $ 73,557       $ 87,349         (15.8 %)    $ 236,978       $ 249,564         (5.0 %) 

Commercial Lines (4)

     50,214         52,920         (5.1 %)      157,335         161,746         (2.7 %) 

Reinsurance (5)

     9,798         9,879         (0.8 %)      34,941         48,222         (27.5 %) 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total gross premiums written

   $ 133,569       $ 150,148         (11.0 %)    $ 429,254       $ 459,532         (6.6 %) 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Ceded premiums written

                

Personal Lines (4)

   $ 14,058       $ 24,047         (41.5 %)    $ 56,436       $ 52,779         6.9

Commercial Lines (4)

     4,460         3,595         24.1     15,571         12,099         28.7

Reinsurance (5)

     —           9         (100.0 %)      14         48         (70.8 %) 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total ceded premiums written

   $ 18,518       $ 27,651         (33.0 %)    $ 72,021       $ 64,926         10.9
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net premiums written (2)

                

Personal Lines (4)

   $ 59,499       $ 63,302         (6.0 %)    $ 180,542       $ 196,785         (8.3 %) 

Commercial Lines (4)

     45,754         49,325         (7.2 %)      141,764         149,647         (5.3 %) 

Reinsurance (5)

     9,798         9,870         (0.7 %)      34,927         48,174         (27.5 %) 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total net premiums written

   $ 115,051       $ 122,497         (6.1 %)    $ 357,233       $ 394,606         (9.5 %) 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net premiums earned

                

Personal Lines (4)

   $ 60,816       $ 62,132         (2.1 %)    $ 183,631       $ 191,472         (4.1 %) 

Commercial Lines (4)

     48,179         48,916         (1.5 %)      143,699         149,244         (3.7 %) 

Reinsurance (5)

     10,558         13,659         (22.7 %)      31,663         40,205         (21.2 %) 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total net premiums earned

   $ 119,553       $ 124,707         (4.1 %)    $ 358,993       $ 380,921         (5.8 %) 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Gross premiums written represent the amount received or to be received for insurance policies written without reduction for reinsurance costs or other deductions.
(2) Net premiums written equal gross premiums written less ceded premiums written
(3) Includes business written by American Reliable that is ceded to insurance companies owned by Assurant under a 100% quota share reinsurance agreement of $7,328 and $18,749 during the quarters ended September 30, 2016 and 2015, respectively, and $30,910 and $41,749 during the nine months ended September 30, 2016 and 2015, respectively.
(4) Includes business ceded to the Company’s Reinsurance Operations.
(5) External business only, excluding business assumed from affiliates.

Gross premiums written decreased by 11.0% and 6.6% for the quarter and nine months ended September 30, 2016, respectively, as compared to same periods in 2015. Gross premiums written include business written by American Reliable that is ceded to insurance entities owned by Assurant under a 100% quota share reinsurance agreement in the amount of $7.3 million and $18.7 million for the quarters ended September 30, 2016 and 2015, respectively and $30.9 million and $41.7 million for the nine months ended September 30, 2016 and 2015, respectively. Excluding the business that is ceded 100% to insurance entities owned by Assurant, gross premiums written decreased by 3.9% and 4.7% for the quarter and nine months ended September 30, 2016, respectively, as compared to same periods in 2015. The decline is mainly due to one of the treaties within the Reinsurance Operations being non-renewed in 2016 in an effort to reduce catastrophe exposure. In addition, there was some slight reduction of premiums within both Commercial Lines and Personal Line primarily due to non-renewing unprofitable business and limiting catastrophe exposure in certain areas.

 

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Net Retention

The ratio of net premiums written to gross premiums written is referred to as the Company’s net premium retention. The Company’s net premium retention is summarized by segments as follows:

 

     Quarters Ended
September 30,
          Nine Months Ended
September 30,
       
(Dollars in thousands)    2016     2015     Change     2016     2015     Change  

Personal Lines (1)

     89.8     92.3     (2.5     87.6     94.7     (7.1

Commercial Lines

     91.1     93.2     (2.1     90.1     92.5     (2.4

Reinsurance

     100.0     99.9     0.1        100.0     99.9     0.1   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total (1)

     91.1     93.2     (2.1     89.7     94.5     (4.8
  

 

 

   

 

 

     

 

 

   

 

 

   

 

(1) Excludes business written by American Reliable that is ceded to insurance companies owned by Assurant under a 100% quota share reinsurance agreement of $7.3 million and $18.7 million during the quarters ended September 30, 2016 and 2015, respectively, and $30.9 million and $41.7 million during the nine months ended September 30, 2016 and 2015, respectively.

The net premium retention for the Personal Lines segment for the quarter and nine months ended September 30, 2016 decreased by 2.5 points and 7.1 points, respectively, as compared to the same period in 2015. The reduction in the Personal Lines’ retention rate for the quarter was primarily due to the quota share arrangement that was put in place during the second quarter of 2016. The reduction in the Personal Lines’ retention rate for the nine months ended September 30, 2016 was primarily due to an increase in catastrophe reinsurance as well as the quota share arrangement that was put in place during the second quarter of 2016.

The net premium retention for the Commercial Lines segment for the quarter and nine months ended September 30, 2016 decreased by 2.1 points and 2.4 points, respectively, as compared to the same period in 2015 primarily due to ceding more premiums in an effort to reduce exposure to catastrophes and large losses.    

Net Premiums earned

Net premiums earned within the Personal Lines segment decreased by 2.1% and 4.1% for the quarter and nine months ended September 30, 2016, respectively, as compared to the same period in 2015. Property net premiums earned were $50.6 million and $52.7 million for the quarter ended September 30, 2016 and 2015, respectively, and $153.8 million and $164.0 million for the nine months ended September 30, 2016 and 2015, respectively. Casualty net premiums earned were $10.2 million and $9.4 million for the quarter ended September 30, 2016 and 2015, respectively, and $29.8 million and $27.5 million for the nine months ended September 30, 2016 and 2015, respectively.

Net premiums earned within the Commercial Lines segment decreased by 1.5% and 3.7% for the quarter and nine months ended September 30, 2016, respectively, as compared to the same period in 2015. The decline in net premiums earned was primarily due to decreasing the Company’s property retention, additional property excess of loss reinsurance was purchased, and a slight reduction in gross premiums written. Property net premiums earned were $27.4 million and $28.5 million for the quarter ended September 30, 2016 and 2015, respectively, and $82.9 million and $89.7 million for the nine months ended September 30, 2016 and 2015, respectively. Casualty net premiums earned were $20.8 million and $20.4 million for the quarter ended September 30, 2016 and 2015, respectively, and $60.8 million and $59.6 million for the nine months ended September 30, 2016 and 2015, respectively.

Net premiums earned within the Reinsurance Operations segment decreased by 22.7% and 21.2% for the quarter and nine months ended September 30, 2016, respectively, as compared to the same period in 2015. The decline in net premiums earned was primarily due to one treaty being non-renewed in 2016 in an effort to reduce catastrophe exposure. Property net premiums earned were $9.5 million and $12.5 million for the quarter ended September 30, 2016 and 2015, respectively, and $28.9 million and $38.3 million for the nine months ended September 30, 2016 and 2015, respectively. Casualty net premiums earned were $1.0 million and $1.1 million for the quarter ended September 30, 2016 and 2015, respectively, and $2.8 million and $1.9 million for the nine months ended September 30, 2016 and 2015, respectively.

 

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Reserves

Management’s best estimate at September 30, 2016 was recorded as the loss reserve. Management’s best estimate is as of a particular point in time and is based upon known facts, the Company’s actuarial analyses, current law, and the Company’s judgment. This resulted in carried gross and net reserves of $664.4 million and $561.6 million, respectively, as of September 30, 2016. A breakout of the Company’s gross and net reserves, excluding the effects of the Company’s intercompany pooling arrangements and intercompany stop loss and quota share reinsurance agreements, as of September 30, 2016 is as follows:

 

     Gross Reserves  
(Dollars in thousands)    Case      IBNR (1)      Total  

Commercial Lines

   $ 130,965       $ 362,678       $ 493,643   

Personal Lines

     36,359         66,398         102,757   

Reinsurance Operations

     18,139         49,843         67,982   
  

 

 

    

 

 

    

 

 

 

Total

   $ 185,463       $ 478,919       $ 664,382   
  

 

 

    

 

 

    

 

 

 
     Net Reserves (2)  
(Dollars in thousands)    Case      IBNR (1)      Total  

Commercial Lines

   $ 102,594       $ 301,873       $ 404,467   

Personal Lines

     32,030         57,445         89,475   

Reinsurance Operations

     18,139         49,552         67,691   
  

 

 

    

 

 

    

 

 

 

Total

   $ 152,763       $ 408,870       $ 561,633   
  

 

 

    

 

 

    

 

 

 

 

(1) Losses incurred but not reported, including the expected future emergence of case reserves.
(2) Does not include reinsurance receivable on paid losses.

Each reserve category has an implicit frequency and severity for each accident year as a result of the various assumptions made. If the actual levels of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s best estimate. For most of its reserve categories, the Company believes that frequency can be predicted with greater accuracy than severity. Therefore, the Company believes management’s best estimate is more likely influenced by changes in severity than frequency. The following table, which the Company believes reflects a reasonable range of variability around its best estimate based on historical loss experience and management’s judgment, reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity on the Company’s current accident year net loss estimate of $240.0 million for claims occurring during the nine months ended September 30, 2016: