Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended September 30, 2011

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.)

ARTHUR COX BUILDING

EARLSFORT TERRACE

DUBLIN 2

IRELAND

(Address of principal executive office, including zip code)

353 (0) 1 618 0517

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

As of November 4, 2011, the registrant had outstanding 18,381,059 Class A Ordinary Shares and 12,061,370 Class 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, 2011 (Unaudited) and December 31, 2010

     3   
  

Consolidated Statements of Operations Quarters and Nine Months Ended September 30, 2011 (Unaudited) and September 30, 2010 (Unaudited)

     4   
  

Consolidated Statements of Comprehensive Income Quarters and Nine Months Ended September 30, 2011 (Unaudited) and September 30, 2010 (Unaudited)

     5   
  

Consolidated Statements of Changes in Shareholders’ Equity As of September 30, 2011 (Unaudited) and December 31, 2010

     6   
  

Consolidated Statements of Cash Flows Nine Months Ended September 30, 2011 (Unaudited) and September 30, 2010 (Unaudited)

     7   
  

Notes to Consolidated Financial Statements (Unaudited)

     8   

Item 2.

  

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

     35   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     62   

Item 4.

  

Controls and Procedures

     63   
   PART II – OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     64   

Item 1A.

  

Risk Factors

     64   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     64   

Item 5.

  

Other Information

     64   

Item 6.

  

Exhibits

     64   

Signature

     66   

As used in this quarterly report, unless the context requires otherwise:

 

1) “Global Indemnity” refers to Global Indemnity plc, an exempted company incorporated with limited liability under the laws of Ireland, and its U.S. and Non-U.S. Subsidiaries;

 

2) “we,” “us,” “our,” and the “Company” refer to Global Indemnity and its subsidiaries or, prior to July 2, 2010, to United America Indemnity;

 

3) “ordinary shares” refers to Global Indemnity Class A and Class B ordinary shares, or, prior to July 2, 2010, to United America Indemnity Class A and Class B common shares;

 

4) “United America Indemnity” refers to United America Indemnity, Ltd., a Cayman Islands exempted company that, on July 2, 2010, became a direct, wholly-owned subsidiary of Global Indemnity plc, and its subsidiaries;

 

5) our “U.S. Subsidiaries” refers to Global Indemnity Group, Global Indemnity Group Services, LLC, AIS, Penn-America Group, Inc., and our Insurance Operations;

 

6) our “United States Based Insurance Operations” and “Insurance Operations” refer to the insurance and related operations conducted by the U.S. Insurance Companies, American Insurance Adjustment Agency, Inc., Collectibles Insurance Services, LLC, United America Insurance Services, LLC, and J.H. Ferguson & Associates, LLC;

 

7)

our “U.S. Insurance Companies” refers to the insurance and related operations conducted by United National Insurance

 

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Table of Contents
  Company, Diamond State Insurance Company, United National Casualty Insurance Company, United National Specialty Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company and Penn-Patriot Insurance Company;

 

8) our “Non-U.S. Subsidiaries” refers to Global Indemnity Services Ltd., Global Indemnity (Gibraltar) Ltd., Global Indemnity (Cayman) Ltd., Global Indemnity (Luxembourg) Ltd., Wind River Reinsurance, the Luxembourg Companies, and U.A.I. (Ireland) Ltd.;

 

9) “Wind River Reinsurance” refers to Wind River Reinsurance Company, Ltd.;

 

10) the “Luxembourg Companies” refers to U.A.I. (Luxembourg) I S.à r.l., U.A.I. (Luxembourg) II S.à r.l., U.A.I. (Luxembourg) III S.à r.l., U.A.I. (Luxembourg) IV S.à r.l., U.A.I. (Luxembourg) Investment S.à r.l., and Wind River (Luxembourg) S.à r.l.;

 

11) “AIS” refers to American Insurance Service, Inc.;

 

12) our “Predecessor Insurance Operations” refers to Wind River Investment Corporation, which was dissolved on May 31, 2006, AIS, American Insurance Adjustment Agency, Inc., Emerald Insurance Company, which was dissolved on March 24, 2008, United National Insurance Company, Diamond State Insurance Company, United National Casualty Insurance Company, United National Specialty Insurance Company, and J.H. Ferguson & Associates, LLC;

 

13) our “International Reinsurance Operations” and “Reinsurance Operations” refer to the reinsurance and related operations of Wind River Reinsurance;

 

14) “Global Indemnity Group” refers to Global Indemnity Group, Inc., (formerly known as United America Indemnity Group, Inc.);

 

15) “Penn-America” refers to our product classification that includes property and general liability products for small commercial businesses distributed through a select network of wholesale general agents with specific binding authority;

 

16) “United National” refers to our product classification that includes property, casualty, and professional liability lines products distributed through program administrators with specific binding authority;

 

17) “Diamond State” refers to our product classification that includes property, casualty, and professional liability lines products distributed through wholesale brokers and program administrators with specific binding authority;

 

18) the “Statutory Trusts” refers to United National Group Capital Trust I, United National Group Capital Statutory Trust II, Penn-America Statutory Trust I, whose registration was cancelled effective January 15, 2008, and Penn-America Statutory Trust II, whose registration was cancelled effective February 2, 2009;

 

19) “Fox Paine & Company” refers to Fox Paine & Company, LLC and affiliated investment funds;

 

20) “GAAP” refers to accounting principles generally accepted in the United States of America; and

 

21) “$” or “dollars” refers to U.S. dollars.

 

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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,  2011
    December 31, 2010  
ASSETS     

Fixed maturities:

    

Available for sale, at fair value (amortized cost: $1,370,288 and $1,393,655)

   $ 1,406,342      $ 1,444,392   

Equity securities:

    

Available for sale, at fair value (cost: $154,110 and $121,604)

     146,067        147,526   

Other invested assets

    

Available for sale, at fair value (cost: $14,150 and $4,255)

     16,169        4,268   

Securities classified as trading, at fair value (cost: $0 and $1,112)

     —          1,112   
  

 

 

   

 

 

 

Total investments

     1,568,578        1,597,298   

Cash and cash equivalents

     93,281        119,888   

Premiums receivable, net

     60,268        56,657   

Reinsurance receivables

     303,950        422,844   

Deferred federal income taxes

     20,173        6,926   

Deferred acquisition costs

     28,753        35,344   

Intangible assets

     18,798        19,082   

Goodwill

     4,820        4,820   

Prepaid reinsurance premiums

     7,762        11,104   

Receivable for securities sold

     4,388        —     

Other assets

     22,118        20,720   
  

 

 

   

 

 

 

Total assets

   $ 2,132,889      $ 2,294,683   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Liabilities:

    

Unpaid losses and loss adjustment expenses

   $ 971,222      $ 1,052,743   

Unearned premiums

     135,866        135,872   

Ceded balances payable

     8,539        12,376   

Contingent commissions

     5,693        9,260   

Payable for securities purchased

     —          4,768   

Federal income taxes payable

     1,993        55   

Notes and debentures payable

     103,071        121,285   

Other liabilities

     29,018        29,655   
  

 

 

   

 

 

 

Total liabilities

     1,255,402        1,366,014   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

     —          —     

Shareholders’ equity:

    

Ordinary shares, $0.0001 par value, 900,000,000 ordinary shares authorized; Class A ordinary shares issued: 21,414,007 and 21,340,821, respectively; Class A ordinary shares outstanding: 18,365,802 and 18,300,544, respectively; Class B ordinary shares issued and outstanding: 12,061,370 and 12,061,370, respectively

     3        3   

Additional paid-in capital

     621,442        622,725   

Accumulated other comprehensive income, net of taxes

     23,500        57,211   

Retained earnings

     333,621        349,642   

Class A ordinary shares in treasury, at cost: 3,048,205 and 3,040,277 shares, respectively

     (101,079     (100,912
  

 

 

   

 

 

 

Total shareholders’ equity

     877,487        928,669   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,132,889      $ 2,294,683   
  

 

 

   

 

 

 

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,
 
     2011     2010     2011     2010  

Revenues:

        

Gross premiums written

   $ 73,092      $ 86,235      $ 255,720      $ 271,138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 64,934      $ 73,206      $ 234,449      $ 234,210   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 77,090      $ 70,089      $ 231,114      $ 215,579   

Net investment income

     12,880        14,089        41,224        42,609   

Net realized investment gains:

        

Other-than-temporary impairment losses on investments

     (1,824     (15     (3,730     (467

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

     —          —          —          43   

Other net realized investment gains

     3,112        1,833        25,401        22,043   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized investment gains

     1,288        1,818        21,671        21,619   

Other income

     167        173        11,999        515   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     91,425        86,169        306,008        280,322   

Losses and Expenses:

        

Net losses and loss adjustment expenses

     86,234        29,789        206,329        104,253   

Acquisition costs and other underwriting expenses

     34,597        28,541        94,646        87,697   

Corporate and other operating expenses

     2,862        5,106        10,329        15,065   

Interest expense

     1,525        1,825        5,020        5,397   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (33,793     20,908        (10,316     67,910   

Income tax expense

     454        1,146        5,758        4,706   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in net income (loss) of partnerships

     (34,247     19,762        (16,074     63,204   

Equity in net income (loss) of partnerships, net of taxes

     —          —          53        (29
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (34,247   $ 19,762      $ (16,021   $ 63,175   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share data (1):

        

Net income (loss)

        

Basic

   $ (1.13   $ 0.65      $ (0.53   $ 2.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (1.13   $ 0.65      $ (0.53   $ 2.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares outstanding

        

Basic

     30,338,010        30,273,757        30,320,538        30,222,074   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     30,352,850        30,308,489        30,341,713        30,245,890   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Shares outstanding and per share amounts for 2010 have been retrospectively restated to reflect the 1-for-2 stock exchange effective July 2, 2010 when the Company completed its re-domestication to Ireland.

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,
 
     2011     2010     2011     2010  

Net income (loss)

   $ (34,247   $ 19,762      $ (16,021   $ 63,175   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of taxes:

        

Unrealized holding gains (losses) arising during period

     (28,475     19,607        (18,072     29,728   

Portion of other-than-temporary impairment losses (gains) recognized in other comprehensive income (loss), net of taxes

     (16     23        (26     135   

Recognition of previously unrealized holding gains

     (594     (1,272     (15,559     (16,066

Unrealized foreign currency translation gains (losses)

     (54     175        (54     (43
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of taxes

     (29,139     18,533        (33,711     13,754   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss), net of taxes

   $ (63,386   $ 38,295      $ (49,732   $ 76,929   
  

 

 

   

 

 

   

 

 

   

 

 

 

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, 2011
    Year Ended
December 31, 2010
 

Number of Class A ordinary shares issued:

    

Number at beginning of period

     21,340,821        21,243,345   

Ordinary shares issued under share incentive plans

     33,511        20,828   

Ordinary shares issued to directors

     39,675        76,648   
  

 

 

   

 

 

 

Number at end of period

     21,414,007        21,340,821   
  

 

 

   

 

 

 

Number of Class B ordinary shares issued:

    

Number at beginning and end of period

     12,061,370        12,061,370   
  

 

 

   

 

 

 

Par value of Class A ordinary shares:

    

Balance at beginning and end of period

   $ 2      $ 2   
  

 

 

   

 

 

 

Par value of Class B ordinary shares:

    

Balance at beginning and end of period

   $ 1      $ 1   
  

 

 

   

 

 

 

Additional paid-in capital:

    

Balance at beginning of period

   $ 622,725      $ 619,473   

Share compensation plans

     (1,283     3,252   
  

 

 

   

 

 

 

Balance at end of period

   $ 621,442      $ 622,725   
  

 

 

   

 

 

 

Accumulated other comprehensive income, net of deferred income tax:

    

Balance at beginning of period

   $ 57,211      $ 48,481   

Other comprehensive income (loss):

    

Unrealized holding gains (losses) arising during the period

     (33,633     8,703   

Change in other-than-temporary impairment losses (gains) recognized in other comprehensive income (loss), net of taxes

     (24     70   

Unrealized foreign currency translation losses

     (54     (43
  

 

 

   

 

 

 

Other comprehensive income (loss)

     (33,711     8,730   
  

 

 

   

 

 

 

Balance at end of period

   $ 23,500      $ 57,211   
  

 

 

   

 

 

 

Retained earnings:

    

Balance at beginning of period

   $ 349,642      $ 264,739   

Net income (loss)

     (16,021     84,903   
  

 

 

   

 

 

 

Balance at end of period

   $ 333,621      $ 349,642   
  

 

 

   

 

 

 

Number of Treasury Shares:

    

Number at beginning of period

     3,040,277        3,028,106   

Class A ordinary shares purchased

     7,928        12,171   
  

 

 

   

 

 

 

Number at end of period

     3,048,205        3,040,277   
  

 

 

   

 

 

 

Treasury Shares, at cost:

    

Balance at beginning of period

   $ (100,912   $ (100,720

Class A ordinary shares purchased, at cost

     (167     (192
  

 

 

   

 

 

 

Balance at end of period

   $ (101,079   $ (100,912
  

 

 

   

 

 

 

Total shareholders’ equity

   $ 877,487      $ 928,669   
  

 

 

   

 

 

 

Share amounts for 2010 have been retrospectively restated to reflect the 1-for-2 stock exchange effective July 2, 2010 when the Company completed its re-domestication to Ireland.

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,
 
     2011     2010  

Cash flows from operating activities:

    

Net income (loss)

   $ (16,021   $ 63,175   

Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:

    

Amortization of trust preferred securities issuance costs

     59        62   

Amortization and depreciation

     1,556        1,825   

Restricted stock expense

     (1,177     2,713   

Deferred federal income taxes

     (341     3,560   

Amortization of bond premium and discount, net

     4,234        2,579   

Net realized investment gains

     (21,671     (21,619

Equity in net (income) loss of partnerships

     (53     29   

Changes in:

    

Premiums receivable, net

     (3,611     1,111   

Reinsurance receivables

     118,894        80,240   

Unpaid losses and loss adjustment expenses

     (81,521     (137,278

Unearned premiums

     (6     14,151   

Ceded balances payable

     (3,837     (10,834

Other assets and liabilities, net

     (3,370     (8,464

Contingent commissions

     (3,567     (4,449

Federal income taxes payable

     1,939        (4,264

Deferred acquisition costs

     6,591        (2,911

Prepaid reinsurance premiums

     3,342        4,482   
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     1,440        (15,892
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from sale of fixed maturities

     604,606        560,306   

Proceeds from sale of stocks

     78,491        30,442   

Proceeds from maturity of fixed maturities

     37,900        36,245   

Proceeds from sale of other invested assets

     1,348        68   

Purchases of fixed maturities

     (621,350     (595,832

Purchases of stocks

     (100,505     (91,417

Purchases of other invested assets

     (10,050     —     

Acquisition of business, net of cash acquired

     —          (14,970
  

 

 

   

 

 

 

Net cash used for investing activities

     (9,560     (75,158
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Tax expense associated with share-based compensation plans

     (106     (221

Purchases of Class A ordinary shares

     (167     (163

Principal payments of term debt

     (18,214     (213
  

 

 

   

 

 

 

Net cash used for financing activities

     (18,487     (597
  

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

     —          (43
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (26,607     (91,690

Cash and cash equivalents at beginning of period

     119,888        186,087   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 93,281      $ 94,397   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Principles of Consolidation and Basis of Presentation

Global Indemnity plc (“Global Indemnity” or “the Company”) was incorporated on March 9, 2010 and is domiciled in Ireland. Global Indemnity replaced the Company’s predecessor, United America Indemnity, Ltd., as the ultimate parent company as a result of a re-domestication transaction. See Note 3 below for details regarding the re-domestication. United America Indemnity, Ltd. was incorporated on August 26, 2003, and is domiciled in the Cayman Islands. United America Indemnity, Ltd. is now a subsidiary of the Company and an Irish tax resident. The Company’s Class A ordinary shares are publicly traded on the NASDAQ Global Select Market. On July 6, 2010, the Company changed its trading symbol on the NASDAQ Global Select Market from “INDM” to “GBLI.”

The interim consolidated financial statements are unaudited, but have been prepared in conformity with 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, 2011 and 2010 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 2010 Annual Report on Form 10-K.

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

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

 

2. Premium Deficiency

The Company recognizes a premium deficiency if the sum of expected loss and loss adjustment expenses and unamortized acquisition costs exceeds related unearned premium after consideration of investment income. Any future expected loss on the related unearned premium is recorded first by impairing the unamortized acquisition costs on the related unearned premium followed by an increase to loss and loss adjustment expense reserves on additional expected loss in excess of unamortized acquisition costs.

 

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GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

During the quarter and nine months ended September 30, 2011, the Company incurred a pre-tax premium deficiency charge of $10.5 million, or $0.35 per diluted share, and $11.0 million, or $0.36 per diluted share, respectively. There were no premium deficiency charges incurred during the quarter or nine months ended September 30, 2010.

The charge of $10.5 million incurred during the quarter ended September 30, 2011 consisted of $7.6 million charged to our U.S. Insurance Operations and $2.9 million charged to our Reinsurance Operations. The $7.6 million charge to our U.S. Insurance Operations consisted of $3.7 million recorded to acquisition costs and other underwriting expenses and $3.9 million recorded to loss and loss adjustment expenses. The $2.9 million charge to our Reinsurance Operations was recorded to acquisition costs and other underwriting expenses.

The charge of $11.0 million incurred during the nine months ended September 30, 2011 consisted of $7.6 million charged to our U.S. Insurance Operations and $3.3 million charged to our Reinsurance Operations. The $7.6 million charge to our U.S. Insurance Operations consisted of $3.7 million recorded to acquisition costs and other underwriting expenses and $3.9 million recorded to loss and loss adjustment expenses. The $3.3 million charge to our Reinsurance Operations was recorded to acquisition costs and other underwriting expenses.

As a result of these charges, the Company reduced deferred acquisition costs during the quarter and nine months ended September 30, 2011 by $6.6 million and $7.0 million, respectively. Additionally, the Company accrued a premium deficiency reserve of $3.9 million included in loss and loss adjustment expense reserves during the quarter and nine months ended September 30, 2011.

 

3. Redomestication

In February 2010, the Company’s Board of Directors approved a plan for the Company to re-domesticate from the Cayman Islands to Ireland. At a special shareholders meeting held on May 27, 2010, the Company’s shareholders voted in favor of completing the re-domestication proposal pursuant to which all United America Indemnity, Ltd. ordinary shares would be cancelled and all holders of such shares would receive ordinary shares of Global Indemnity plc, a newly formed Irish company that was incorporated on March 9, 2010, on a one-for-two basis (two United America Indemnity, Ltd. shares exchanged for one Global Indemnity plc share). The re-domestication transaction was completed on July 2, 2010, following approval from the Grand Court of the Cayman Islands, at which time Global Indemnity plc replaced United America Indemnity, Ltd. as the ultimate parent company, and United America Indemnity, Ltd. became a wholly-owned subsidiary of Global Indemnity plc. Shares of United America Indemnity, Ltd. previously traded on the NASDAQ Global Select Market under the symbol “INDM.” Shares of the Irish company, Global Indemnity plc, began trading on the NASDAQ Global Select Market on July 6, 2010 under the symbol “GBLI.”

 

4. Profit Enhancement Initiative

On November 2, 2010, we committed to a Profit Enhancement Initiative with respect to our U.S. Insurance Operations. The plan was initiated on November 4, 2010, and is part of our efforts to streamline our operations in response to the continuing impact of the domestic recession as well as the competitive landscape within the excess and surplus lines market. This initiative is intended to enhance profitability and earnings by aligning corporate overhead costs with changes in our business. In the fourth quarter of 2010, the Company reduced its U.S. based census by approximately 25%, closed underperforming U.S. facilities, and supplemented staffing in Bermuda and in Ireland. All action items relating to this initiative were implemented by December 31, 2010.

The total cost of implementing this initiative was recorded in our consolidated statements of operations within our Insurance Operations segment in the fourth quarter of 2010. Components of the initiative included: (1) employee termination and severance charges of $1.71 million; (2) expenses of $1.53 million relating to discontinuing use of leased office space, net of expected sub-lease income; (3) restructuring expenses of $0.63 million for related asset and leasehold improvement impairments; and (4) expenses of $2.91 million relating to the curtailment of our workers’ compensation product initiative, consisting of a minimum ceded premium charge of $1.48 million on our workers’ compensation reinsurance treaty and $1.43 million in asset impairments.

The following table summarizes charges incurred in 2010 by expense type and the remaining liability as of December 31, 2010 and September 30, 2011:

 

(Dollars in thousands)    Employee
Termination
    Operating
Leases
    Asset
Impairments
    Workers’
Compensation
    Total  

Charges incurred in 2010

   $ 1,711      $ 1,532      $ 631      $ 2,907      $ 6,781   

Cash payments for 2010 actions

     (758     —          —          (985     (1,743

Non-cash adjustments

     176        —          (631     (1,430     (1,885
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liability at December 31, 2010

   $ 1,129      $ 1,532      $ —        $ 492      $ 3,153   

Cash payments in 2011 for 2010 actions

     (1,022     (597     —          (492     (2,111

Non-cash adjustments

     —          (64     —          —          (64
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liability at September 30, 2011

   $ 107      $ 871      $ —        $ —        $ 978   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There were charges incurred related to the Profit Enhancement Initiative in our statement of operations for the nine months ending September 30, 2011 of ($0.064) million which was included in the “Corporate and other operating expenses” line item. There were no charges incurred related to the Profit Enhancement Initiative in our statement of operations for the quarter ended September 30, 2011, or the quarter or nine months ending September 30, 2010.

 

5. Investments

The Company’s investments in fixed maturities, preferred stock, and common stock are classified as available for sale and are carried at their fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair values of the Company’s available for sale portfolio, excluding the limited partnership interest, are determined on the basis of quoted market prices where available. If quoted market prices are not available, the Company uses third party pricing services to assist in determining fair value. In many instances, these services examine the pricing of similar instruments to estimate fair value. The Company purchases bonds with the expectation of holding them to their maturity; however, changes to the portfolio are sometimes required to assure it is appropriately matched to liabilities. In addition, changes in financial market conditions and tax considerations may cause the Company to sell an investment before it matures. Corporate loans have stated maturities; however, they generally do not reach their final maturity due to borrowers refinancing. The difference between amortized cost and fair value of the Company’s available for sale investments, excluding the Company’s convertible bond and convertible preferred stock portfolios, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in shareholders’ equity and, accordingly, has no effect on net income other than for the credit loss component of impairments deemed to be other than temporary. The difference between amortized cost and fair value of the convertible bonds and convertible preferred stocks is included in income.

 

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GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

The Company’s investments in other invested assets are comprised of limited liability partnership interests and a mutual fund. Partnership interests where we owned more than 3% at any time are carried at their fair value. The change in the difference between amortized cost and fair value of partnership interests of 3% ownership or greater, net of the effect of deferred income taxes, is reflected in income. The mutual fund and partnership interests of less than 3% ownership are carried at their fair value. The change in the difference between amortized cost and the fair value of the mutual fund and partnership interests of less than 3% ownership, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in shareholders’ equity and, accordingly, has no effect on net income other than for impairments deemed to be other than temporary.

The amortized cost and estimated fair value of investments were as follows as of September 30, 2011 and December 31, 2010:

 

(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, 2011

             

Fixed maturities:

             

U.S. treasury and agency obligations

   $ 123,210       $ 8,261       $ (3   $ 131,468       $ —     

Obligations of states and political subdivisions

     210,532         8,158         (75     218,615         —     

Mortgage-backed securities

     288,698         9,851         (337     298,212         (15

Asset-backed securities

     100,368         2,426         (39     102,755         (33

Commercial mortgage-backed securities

     34,677         38         (144     34,571         —     

Corporate bonds and loans

     559,339         14,537         (7,937     565,939         (134

Foreign corporate bonds

     53,464         1,450         (132     54,782         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     1,370,288         44,721         (8,667     1,406,342         (182

Common stock

     154,110         7,739         (15,782     146,067         —     

Other invested assets

     14,150         3,071         (1,052     16,169         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,538,548       $ 55,531       $ (25,501   $ 1,568,578       $ (182
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(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, 2010

             

Fixed maturities:

             

U.S. treasury and agency obligations

   $ 192,746       $ 9,948       $ (4   $ 202,690       $ —     

Obligations of states and political subdivisions

     239,872         5,756         (616     245,012         —     

Mortgage-backed securities

     239,265         9,864         (49     249,080         (19

Asset-backed securities

     112,626         2,548         (75     115,099         (41

Commercial mortgage-backed securities

     38,963         9         (239     38,733         —     

Corporate bonds and loans

     511,754         21,594         (564     532,784         (134

Foreign corporate bonds

     58,429         2,570         (5     60,994         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     1,393,655         52,289         (1,552     1,444,392         (194

Common stock

     120,674         25,300         (700     145,274         —     

Preferred stock

     930         1,322         —          2,252         —     

Other invested assets

     5,367         13         —          5,380         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,520,626       $ 78,924       $ (2,252   $ 1,597,298       $ (194
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(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”).

The Company held a mortgage-backed security (“MBS”) issued by Government National Mortgage Association (“GNMA”) which represented approximately 3% and 8% of shareholders’ equity as of September 30, 2011 and December 31, 2010, respectively. Excluding U.S. treasuries, agency bonds, and the MBS issued by GNMA, the Company did not hold any debt or equity investments in a single issuer that was in excess of 4% and 2% of shareholders’ equity at September 30, 2011 and December 31, 2010, respectively.

 

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GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

The amortized cost and estimated fair value of the Company’s fixed maturities portfolio classified as available for sale at September 30, 2011, 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

   $ 70,950       $ 71,837   

Due after one year through five years

     650,117         671,162   

Due after five years through ten years

     182,007         182,367   

Due after ten years through fifteen years

     10,221         11,641   

Due after fifteen years

     33,250         33,797   

Mortgaged-backed securities

     288,698         298,212   

Asset-backed securities

     100,368         102,755   

Commercial mortgage-backed securities

     34,677         34,571   
  

 

 

    

 

 

 
   $ 1,370,288       $ 1,406,342   
  

 

 

    

 

 

 

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, 2011:

 

     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

   $ 2,244       $ (3   $ —         $ —        $ 2,244       $ (3

Obligations of states and political subdivisions

     1,792         (9     6,845         (66     8,637         (75

Mortgage-backed securities

     27,856         (319     521         (18     28,377         (337

Asset-backed securities

     2,009         (6     707         (33     2,716         (39

Commercial mortgage-backed securities

     20,731         (69     10,071         (75     30,802         (144

Corporate bonds and loans

     221,625         (7,919     830         (18     222,455         (7,937

Foreign corporate bonds

     7,488         (132     —           —          7,488         (132
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     283,745         (8,457     18,974         (210     302,719         (8,667

Common stock

     125,505         (15,423     932         (359     126,437         (15,782

Other invested assets

     8,948         (1,052     —           —          8,948         (1,052
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 418,198       $ (24,932   $ 19,906       $ (569   $ 438,104       $ (25,501
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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

The following table contains an analysis of the Company’s securities with gross unrealized losses, categorized by the period that the securities were in a continuous loss position as of December 31, 2010:

 

     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

   $ 1,015       $ (4   $ —         $ —        $ 1,015       $ (4

Obligations of states and political subdivisions

     38,601         (553     1,651         (63     40,252         (616

Mortgage-backed securities

     2,298         (29     561         (20     2,859         (49

Asset-backed securities

     7,021         (17     880         (58     7,901         (75

Commercial mortgage-backed securities

     32,889         (239     —           —          32,889         (239

Corporate bonds and loans

     35,063         (559     1,014         (5     36,077         (564

Foreign corporate bonds

     1,990         (5     —           —          1,990         (5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     118,877         (1,406     4,106         (146     122,983         (1,552

Common stock

     12,580         (700     —           —          12,580         (700
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 131,457       $ (2,106   $ 4,106       $ (146   $ 135,563       $ (2,252
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Fixed maturities in a gross unrealized loss position for twelve months or longer are primarily comprised of non-credit losses on investment grade

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

  securities where management does not intend to sell, and it is more likely than not that the Company will not be forced to sell the security before recovery. The Company has analyzed these securities and has determined that they are not impaired.

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

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

 

  (1) the issuer is in financial distress;

 

  (2) the investment is secured;

 

  (3) a significant credit rating action occurred;

 

  (4) scheduled interest payments were delayed or missed;

 

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

 

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

 

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

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

For equity securities, management carefully reviews all securities with unrealized losses and further focuses on securities that have either:

 

  (1) persisted 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 to determine if the security should be impaired.

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:

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

U.S. treasury and agency obligations – As of September 30, 2011, gross unrealized losses related to U.S. treasury and agency obligations were $0.003 million. All unrealized losses have been in an unrealized loss position for less than twelve months. All of these securities are rated AA+. The Company’s investment manager’s analysis for this sector includes on-site visits and meetings with officials in addition to the standard rigorous analysis that determines the financial condition of the issuer.

Obligations of states and political subdivisions – As of September 30, 2011, gross unrealized losses related to obligations of states and political subdivisions were $0.075 million. Of this amount, $0.066 million has been in an unrealized loss position for twelve months or greater. These securities are rated A- or higher. The Company’s investment manager’s analysis for this sector includes on-site visits and meetings with officials in addition to the standard rigorous analysis that determines the financial condition of the issuer.

Mortgage-backed securities – As of September 30, 2011, gross unrealized losses related to mortgage-backed securities were $0.337 million. Of this amount, $0.018 million has been in an unrealized loss position for twelve months or greater. All of the securities in an unrealized loss position for twelve months or greater are rated AA+. The Company’s investment manager models each mortgage-backed security to project principal losses under downside, base, and upside scenarios for the economy and home prices. The primary assumption that drives the security and loan level modeling is the Home Price Index (“HPI”) projection. The Company’s investment manager first projects HPI at the national level, then at the Metropolitan Statistical Area (“MSA”) level based on the historical relationship between the individual MSA HPI and the national HPI, using inputs from its macroeconomic team, mortgage portfolio management team, and structured analyst team. The model utilizes loan level data and borrower characteristics including FICO score, geographic location, original and content 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.

Asset-backed securities (“ABS”) – As of September 30, 2011, gross unrealized losses related to asset-backed securities were $0.039 million. Of this amount, $0.033 million has been in an unrealized loss position for twelve months or greater. These securities are rated A- or higher. The weighted average credit enhancement for the Company’s asset-backed portfolio is 34.9. The Company’s investment manager analyzes every ABS transaction on a stand-alone basis. This analysis involves a thorough review of the collateral, prepayment, and structural risk in each transaction. Additionally, their analysis includes an in-depth credit analysis of the originator and servicer of the collateral. The Company’s investment manager projects an expected loss for a deal given a set of assumptions specific to the asset type. These assumptions are used to calculate at what level of losses that the deal will incur a dollar of loss. The major assumptions used to calculate this ratio are loss severities, recovery lags, and no advances on principal and interest.

Commercial mortgage-backed securities (“CMBS”) – As of September 30, 2011, gross unrealized losses related to CMBS were $0.144 million. Of this amount, $0.075 million has been in an unrealized loss position for twelve months or greater. All of the securities in an unrealized loss position for twelve months or greater are rated AAA. The weighted average credit enhancement for the Company’s CMBS portfolio is 27.2. This represents the percentage of pool losses that can occur before a mortgage-backed security will incur its first dollar of principle losses. For the Company’s CMBS portfolio, a loan level analysis is utilized where every underlying CMBS loan is re-underwritten based on the Company’s investment manager’s internally generated set of assumptions that reflect their expectation for the future path of the economy. In the analysis, the focus is centered on stressing the significant variables that influence commercial loan defaults and collateral losses in CMBS deals. These variables include: (1) occupancies are projected to drop; (2) capitalization rates vary by property type and are forecasted to return to more normalized levels as the capital markets repair and capital begins to flow again; and (3) property value was stressed by using projected property performance and projected capitalization rates. Term risk is triggered if projected debt service coverage rate falls below 1x. Balloon risk is triggered if a property’s projected performance does not satisfy new, tighter mortgage standards.

Corporate bonds and loans – As of September 30, 2011, gross unrealized losses related to corporate bonds and loans were $7.937 million. Of this amount, $0.018 million has been in an unrealized loss position for twelve months

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

or greater. All of the securities in an unrealized loss position for twelve months or greater are rated below investment grade. The Company’s investment manager’s analysis for this sector includes maintaining detailed financial models that include a projection of each issuer’s future financial performance, including prospective debt servicing capabilities, capital structure composition, and the value of the collateral. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, issuer’s current competitive position, vulnerability to changes in the competitive environment, regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood of default as well as potential losses in the event of default.

Foreign bonds – As of September 30, 2011, gross unrealized losses related to foreign bonds were $0.132 million. All unrealized losses have been in an unrealized loss position for less than twelve months. These securities are rated A- or higher. The Company’s investment manager maintains financial models for the Company’s bond issuers. These models include a projection of each issuer’s future financial performance including prospective debt servicing capabilities and capital structure composition. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, issuer’s current competitive position, vulnerability to changes in the competitive environment, regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection.

Common stocks – As of September 30, 2011, gross unrealized losses related to common stock were $15.782 million. Of this amount, $0.359 million has been in an unrealized loss position for twelve months or greater. To determine if an other than temporary impairment of an equity security has occurred, the Company considers, among other things, the severity and duration of the decline in fair value of the equity security. The Company also examines other factors to determine if the equity security could recover its value in a reasonable period of time.

Other Investments – As of September 30, 2011, gross unrealized losses related to other investments were $1.052 million. All unrealized losses have been in an unrealized loss position for less than twelve months.

The Company recorded the following other than temporary impairments (“OTTI”) on its investment portfolio for the quarters and nine months ended September 30, 2011 and 2010:

 

(Dollars in thousands)    Quarters Ended
September  30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Fixed maturities:

           

OTTI losses, gross

   $ 1,002       $ 15       $ 1,002       $ 121   

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

     —           —           —           (43
  

 

 

    

 

 

    

 

 

    

 

 

 

Net impairment losses on fixed maturities recognized in earnings

     1,002         15         1,002         78   

Common stock

     822         —           2,728         346   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,824       $ 15       $ 3,730       $ 424   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table is an analysis of the credit losses recognized in earnings on debt securities held by the Company for the quarters and nine months ended September 30, 2011 and 2010 for which a portion of the OTTI loss was recognized in other comprehensive income.

 

(Dollars in thousands)    Quarters Ended
September  30,
     Nine Months Ended
September 30,
 
     2011      2010      2011     2010  

Balance at beginning of period

   $ 86       $ 113       $ 115      $ 50   

Additions where no OTTI was previously recorded

     —           —           —          47   

Additions where an OTTI was previously recorded

     —           15         —          31   

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

     —           —           (29     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Balance at end of period

   $ 86       $ 128       $ 86      $ 128   
  

 

 

    

 

 

    

 

 

   

 

 

 

Accumulated Other Comprehensive Income

 

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GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

Accumulated other comprehensive income as of September 30, 2011 and December 31, 2010 was as follows:

 

(Dollars in thousands)    September 30, 2011     December 31, 2010  

Net unrealized gains (losses) from:

    

Fixed maturities

   $ 36,054      $ 50,737   

Preferred stock

     —          1,322   

Common stock

     (8,043     24,600   

Mutual Fund

     (1,052     —     

Partnerships < 3% owned

     3,071        13   

Deferred federal income taxes

     (6,530     (19,461
  

 

 

   

 

 

 

Accumulated other comprehensive income

   $ 23,500      $ 57,211   
  

 

 

   

 

 

 

Net Realized Investment Gains

The components of net realized investment gains for the quarters and nine months ended September 30, 2011 and 2010 were as follows:

 

     Quarters Ended
September  30,
     Nine Months  Ended
September 30,
 
(Dollars in thousands)    2011      2010      2011      2010  

Fixed maturities

   $ 562       $ 846       $ 11,178       $ 16,225   

Convertibles

     —           —           —           3   

Common stock

     726         972         8,947         5,391   

Preferred stock

     —           —           1,546         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,288       $ 1,818       $ 21,671       $ 21,619   
  

 

 

    

 

 

    

 

 

    

 

 

 

The proceeds from sales of available-for-sale securities resulting in net realized investment gains for the nine months ended September 30, 2011 and 2010 were as follows:

 

     Nine Months  Ended
September 30,
 

(Dollars in thousands)

   2011      2010  

Fixed maturities

   $ 604,606       $ 560,306   

Equity securities

     78,491         30,442   

Net Investment Income

The sources of net investment income for the quarters and nine months ended September 30, 2011 and 2010 were as follows:

 

     Quarters Ended
September 30,
    Nine Months Ended
September 30,
 
(Dollars in thousands)    2011     2010     2011     2010  

Fixed maturities

   $ 13,153      $ 14,885      $ 42,031      $ 45,597   

Preferred and common stocks

     914        613        2,645        1,419   

Cash and cash equivalents

     10        32        56        141   

Other invested assets

     —          —          —          4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     14,077        15,530        44,732        47,161   

Investment expense

     (1,197     (1,441     (3,508     (4,552
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 12,880      $ 14,089      $ 41,224      $ 42,609   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s total investment return on an after-tax basis for the quarters and nine months ended September 30, 2011 and 2010 were as follows:

 

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GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

     Quarters Ended
September 30,
    Nine Months Ended
September 30,
 
(Dollars in thousands)    2011     2010     2011     2010  

Net investment income

   $ 11,106      $ 12,039      $ 35,749      $ 36,109   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized investment gains

     594        1,272        15,559        16,066   

Net equity in net income (loss) of partnership

     —          —          53        (29

Net unrealized investment gains (losses)

     (29,139     18,358        (33,711     13,797   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment gains (losses)

     (28,545     19,630        (18,099     29,834   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment return

   $ (17,439   $ 31,669      $ 17,650      $ 65,943   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment return % (1)

     (1.0 %)      1.9     1.0     3.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Average investment portfolio (2)

   $ 1,698,039      $ 1,686,638      $ 1,689,333      $ 1,696,376   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Insurance Enhanced Municipal Bonds

As of September 30, 2011, the Company held insurance enhanced municipal bonds of approximately $89.3 million, which represented approximately 5.4% of the Company’s total cash and invested assets. These securities had an average rating of “AA.” Approximately $36.3 million of these bonds are pre-refunded with U.S. treasury securities, of which $25.1 million are backed by financial guarantors, meaning that funds have been set aside in escrow to satisfy the future interest and principal obligations of the bond. Of the remaining $53.0 million of insurance enhanced municipal bonds, $21.2 million would have carried a lower credit rating had they not been insured. The following table provides a breakdown of the ratings for these municipal bonds with and without insurance.

 

(Dollars in thousands)   

Ratings

with

    

Ratings

without

 
Rating    Insurance      Insurance  

AA

   $ 11,075       $ 812   

A

     10,115         19,353   

BBB

     —           1,025   
  

 

 

    

 

 

 

Total

   $ 21,190       $ 21,190   
  

 

 

    

 

 

 

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, 2011, is as follows:

 

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GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

(Dollars in thousands)

Financial Guarantor

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

Securities
 

Ambac Financial Group

   $ 7,017       $ 3,015       $ —         $ 4,002   

Financial Guaranty Insurance Company

     1,231         1,231         —           —     

Assured Guaranty Insurance Group

     34,354         11,958         —           22,396   

Municipal Bond Insurance Association

     30,983         8,315         —           22,668   

Federal Housing Association

     513         —           513         —     

Government National Housing Association

     2,962         620         2,342         —     

Permanent School Fund Guaranty

     1,151         —           1,151         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total backed by financial guarantors

     78,211         25,139         4,006         49,066   

Other credit enhanced municipal bonds

     11,111         11,111         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 89,322       $ 36,250       $ 4,006       $ 49,066   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition to the $89.3 million of insurance enhanced municipal bonds, the Company also held insurance enhanced asset-backed and credit securities with a market value of approximately $31.0 million, which represented approximately 1.9% of the Company’s total cash and invested assets. The financial guarantors of the Company’s $31.0 million of insurance enhanced asset-backed and credit securities include Financial Guaranty Insurance Company ($0.7 million), Municipal Bond Insurance Association ($12.5 million), Ambac ($2.5 million), Assured Guaranty Insurance Group ($10.1 million), and Other ($5.2 million).

The Company had no direct investments in the entities that have provided financial guarantees or other credit support to any security held by the Company at September 30, 2011.

Bonds Held on Deposit

Certain cash balances, cash equivalents, and bonds available for sale were deposited with various governmental authorities in accordance with statutory requirements or were held in trust pursuant to intercompany reinsurance agreements. The estimated fair values of cash, cash equivalents, and bonds available for sale and on deposit or held in trust were as follows as of September 30, 2011 and December 31, 2010:

 

     Estimated Fair Value  
(Dollars in thousands)    September 30, 2011      December 31, 2010  

On deposit with governmental authorities

   $ 44,164       $ 43,656   

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

     541,668         609,242   

Held in trust pursuant to third party requirements

     98,122         68,900   

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

     6,055         5,871   
  

 

 

    

 

 

 

Total

   $ 690,009       $ 727,669   
  

 

 

    

 

 

 

 

6. Fair Value Measurements

The Company elected to apply the fair value option within its limited partnership investment portfolio to an investment where the Company previously owned more than a 3% interest. The fair value of this investment was $1.1 million as of December 31, 2010. In February, 2011, the Company liquidated its remaining interest in this limited partnership.

During the quarters and nine months ended September 30, 2011 and 2010, the Company recognized the following gains (losses), net of taxes, due to changes in the value of these investments.

 

     Quarter Ended
September  30,
     Nine Months  Ended
September 30,
 
(Dollars in thousands)    2011      2010      2011      2010  

Limited partnership > 3% ownership

   $ —         $ —         $ 53       $ (29

These gains (losses) are reflected on the consolidated statement of operations as equity in net income (loss) of partnerships, net of taxes.

 

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GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

The fair value option was not elected for the Company’s investments in limited partnerships with less than a 3% ownership interest.

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

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

 

   

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

 

   

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

 

   

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

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.

Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains and losses for invested assets within the Level 3 category presented in the tables below may include changes in fair value that are attributed to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

The following tables present information about the Company’s invested assets measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

 

$0,000,000 $0,000,000 $0,000,000 $0,000,000
As of September 30, 2011    Fair Value Measurements  
(Dollars in thousands)    Level 1      Level 2      Level 3      Total  

Fixed maturities:

           

U.S. treasury and agency obligations

   $ 90,579       $ 40,889       $ —         $ 131,468   

Obligations of states and political subdivisions

     —           218,615         —           218,615   

Mortgage-backed securities

     —           298,212         —           298,212   

Commercial mortgage-backed securities

     —           34,571         —           34,571   

Asset-backed securities

     —           102,755         —           102,755   

Corporate bonds and loans

     —           565,939         —           565,939   

Foreign corporate bonds

     —           54,782         —           54,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     90,579         1,315,763         —           1,406,342   

Common shares

     146,067         —           —           146,067   

Other invested assets

     —           —           16,169         16,169   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total invested assets

   $ 236,646       $ 1,315,763       $ 16,169       $ 1,568,578   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

$0,000,000 $0,000,000 $0,000,000 $0,000,000
As of December 31, 2010    Fair Value Measurements  
(Dollars in thousands)    Level 1      Level 2      Level 3      Total  

Fixed maturities:

           

U.S. treasury and agency obligations

   $   89,187       $ 113,503       $   —         $ 202,690   

Obligations of states and political subdivisions

     —           245,012         —           245,012   

 

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GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

$0,000,000 $0,000,000 $0,000,000 $0,000,000

Mortgage-backed securities

     —           249,080         —           249,080   

Commercial mortgage-backed securities

     —           38,733         —           38,733   

Asset-backed securities

     —           115,099         —           115,099   

Corporate bonds and loans

     —           532,784         —           532,784   

Foreign corporate bonds

     —           60,994         —           60,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     89,187         1,355,205         —           1,444,392   

Preferred shares

     —           2,252         —           2,252   

Common shares

     145,274         —           —           145,274   

Other invested assets

     —           —           5,380         5,380   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total invested assets

   $ 234,461       $ 1,357,457       $   5,380       $ 1,597,298   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

The securities classified as Level 2 in the above table consist primarily of fixed maturity securities. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, security prices are derived through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. If there are no recent reported trades, matrix or model processes are used to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Included in the pricing of asset-backed securities, collateralized mortgage obligations, and mortgage-backed securities are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral. For corporate loans, price quotes from multiple dealers along with recent reported trades for identical or similar securities are used to develop prices.

There were no significant transfers between Level 1 and Level 2 during the quarters or nine months ended September 30, 2011 or 2010.

The following tables present changes in Level 3 investments measured at fair value on a recurring basis for the quarter and nine months ended September 30, 2011:

 

Quarter Ended September 30, 2011

(Dollars in thousands)

   Other
Invested
Assets
 

Beginning balance at July 1, 2011

   $ 17,579   

Total losses (realized / unrealized):

  

Included in accumulated other comprehensive income

     (1,434

Purchases

     24   
  

 

 

 

Ending balance at September 30, 2011

   $ 16,169   
  

 

 

 

Net unrealized losses included in net income for the period related to assets still held at September 30, 2011

   $ —     
  

 

 

 

Nine Months Ended September 30, 2011

(Dollars in thousands)

   Other
Invested
Assets
 

Beginning balance at January 1, 2011

   $ 5,380   

Total losses (realized / unrealized):

  

Included in equity in net income of partnership

     81   

Included in accumulated other comprehensive income

     2,006   

Purchases

     10,049   

Sales

     (1,347
  

 

 

 

Ending balance at September 30, 2011

   $ 16,169   
  

 

 

 

Net unrealized losses included in net income for the period related to assets still held at September 30, 2011

   $ —     
  

 

 

 

 

19


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GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

The $16.2 million is comprised of $7.2 million related to investments in limited partnerships and $9.0 million related to an investment in a mutual fund. The $7.2 million related to investments in limited partnerships was comprised of securities for which the Company does not have the ability to see the underlying valuations. The estimated fair value of these limited partnerships is measured utilizing the Company’s net asset value as a practical expedient for each limited partnership. Material assumptions and factors utilized in pricing these securities include future cash flows, constant default rates, recovery rates, and any market clearing activity that may have occurred since the prior month-end pricing period. The Company’s investment in a mutual fund of $9.0 million is measured utilizing the fund’s net asset value. The net asset value of the fund is based on the actual market price of the assets of the portfolio, including accrued income less liabilities and provisions for accrued expenses. The fund is comprised primarily of foreign equities. However, since the Company does not have the ability to see the invested asset composition of the mutual fund on a daily basis, this investment has been classified within the Level 3 category.

The following tables present changes in Level 3 investments measured at fair value on a recurring basis for the quarter and nine months ended September 30, 2010:

 

Quarter Ended September 30, 2010

(Dollars in thousands)

   Other
Invested
Assets
 

Beginning balance at July 1, 2010

   $ 6,490   

Total losses (realized / unrealized):

  

Included in accumulated other comprehensive income

     (1,275
  

 

 

 

Ending balance at September 30, 2010

   $ 5,215   
  

 

 

 

Net unrealized losses included in net income for the period related to assets still held at September 30, 2010

   $ —     
  

 

 

 

 

Nine Months Ended September 30, 2010

(Dollars in thousands)

   Other
Invested
Assets
 

Beginning balance at January 1, 2010

   $ 7,999   

Total losses (realized / unrealized):

  

Included in equity in net loss of partnership

     (44

Included in accumulated other comprehensive income

     (2,672

Distribution

     (68
  

 

 

 

Ending balance at September 30, 2010

   $ 5,215   
  

 

 

 

Net unrealized losses included in net income for the period related to assets still held at September 30, 2010

   $ (44
  

 

 

 

The $5.2 million is related to investments in limited partnerships. Of the investments in limited partnerships, $4.1 million was comprised of securities for which the Company does not have the ability to see the underlying valuations. The estimated fair value of these limited partnerships is measured utilizing the Company’s net asset value as a practical expedient for each limited partnership. Material assumptions and factors utilized in pricing these securities include future cash flows, constant default rates, recovery rates, and any market clearing activity that may have occurred since the prior month-end pricing period. Of our investments in limited partnerships, $1.1 million was related to a limited partnership which holds convertible preferred securities of a privately held company. In February, 2011, the Company’s remaining interest of $1.1 million was liquidated.

Fair Value of Alternative Investments

Included in “Other invested assets” in the fair value hierarchy at September 30, 2011 are limited liability partnerships and a mutual fund measured at fair value. The following table provides the fair value and future funding commitments related to these investments at September 30, 2011.

 

20


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GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

(Dollars in thousands)    Fair Value      Future
Funding
Commitments
 

Equity Fund, LP (1)

   $ 7,221       $ 2,520   

Real Estate Fund, LP (2)

     —           —     

Mutual Fund (3)

     8,948         —     
  

 

 

    

 

 

 

Total

   $ 16,169       $ 2,520   
  

 

 

    

 

 

 

 

(1) This limited partnership invests in companies, from various business sectors, whereby the partnership has acquired control of the operating business as a lead or organizing investor. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner.
(2) This limited partnership invests in real estate assets through a combination of direct or indirect investments in partnerships, limited liability companies, mortgage loans, and lines of credit. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company continues to hold an investment in this limited partnership and has written the fair value down to zero in 2010.
(3) This is an open-ended unincorporated mutual investment fund which seeks to generate attractive long term total returns by investing in companies which benefit from increasing levels of domestic consumption expenditure in the Asia ex Japan region. Investments will primarily be in equity securities within the consumer staples, consumer discretionary and healthcare sectors in the Asia ex Japan region; however, the approach is unconstrained and may opportunistically invest in any sector. The Company may request to redeem units of the portfolio. However, depending on the size of the redemption request, certain restrictions may apply.

Pricing

The Company’s pricing vendors provide prices for all investment categories except for investments in limited partnerships. One vendor provides prices for equity securities and select fixed maturity categories including: corporate loans, commercial mortgage backed securities, high yield, investment grade, short term securities, and international fixed income securities, if any. A second vendor provides prices for other fixed maturity categories including: asset backed securities (“ABS”), collateralized mortgage obligations (“CMO”), and municipals. A third vendor provides prices for the remaining fixed maturity categories including mortgage backed securities (“MBS”) and treasuries.

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

 

   

Equity prices are received from all primary and secondary exchanges.

 

   

Corporate bonds are individually evaluated on a nominal spread or an option adjusted spread basis depending on how the market trades a security or sector. Spreads are updated each day and compared with those from the broker/dealer community and contributing firms. Issues are generally benchmarked off of the U.S. treasuries or LIBOR.

 

   

For CMOs, which are categorized with mortgage-backed securities in the tables listed above, a volatility-driven, multi-dimensional single cash flow stream model or option-adjusted spread model is used. For ABSs, a single expected cash flow stream model is utilized. For both asset classes, evaluations utilize standard inputs plus new issue data, monthly payment information, and collateral performance. The evaluated pricing models incorporate security set-up, prepayment speeds, cash flows, treasury, swap curves and spread adjustments.

 

   

For municipals, a series of matrices are used to evaluate securities within this asset class. The evaluated pricing models for this asset class incorporate security set-up, sector curves, yield to worst, ratings updates, and adjustments for material events notices.

 

   

U.S. Treasuries are priced on the bid side by a market maker.

 

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GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

   

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

 

   

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

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

 

   

Reviewing periodic reports provided by the Investment Manager that provides information regarding rating changes and securities placed on watch. This procedure allows the Company to understand why a particular security’s market value may have changed.

 

   

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

During the quarter and nine months ended September 30, 2011, the Company did not consider it necessary to adjust quotes or prices obtained from the pricing vendors.

 

7. Reinsurance

The Company cedes risk to unrelated reinsurers on a pro rata (“quota share”) and excess of loss basis in the ordinary course of business to limit its net loss exposure on insurance contracts. Reinsurance ceded arrangements do not discharge the Company of primary liability. Moreover, reinsurers may fail to pay the Company due to a lack of reinsurer liquidity, perceived improper underwriting, losses for risks that are excluded from reinsurance coverage, and other similar factors, all of which could adversely affect the Company’s financial results.

The Company had the following reinsurance balances as of September 30, 2011 and December 31, 2010:

 

(Dollars in thousands)    September 30, 2011     December 31, 2010  

Reinsurance receivables

   $ 303,950      $ 422,844   

Collateral securing reinsurance receivables

     (178,916     (289,284
  

 

 

   

 

 

 

Reinsurance receivables, net of collateral

   $ 125,034      $ 133,560   
  

 

 

   

 

 

 

Allowance for uncollectible reinsurance receivables

   $ 9,693      $ 12,742   

Prepaid reinsurance premiums

     7,762        11,104   

The Company regularly evaluates retention levels and reinsurance limits to ensure that net retained losses are aligned with corporate risk tolerance and capital levels. The Company’s U.S. Insurance Operations’ primary reinsurance treaties are as follows:

Property Catastrophe Excess of Loss – The Company’s current property writings create exposure to catastrophic events. To protect against these exposures, the Company purchases a property catastrophe treaty. Effective June 1, 2011, the Company renewed its property catastrophe excess of loss treaty which provides occurrence coverage for losses of $80.0 million in excess of $20.0 million. This treaty provides for one full reinstatement of coverage at 100% additional premium as to time and pro rata as to amount of limit reinstated. This replaces the treaty that expired on May 31, 2011, which provided occurrence coverage for losses of $75.0 million in excess of $15.0 million.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

Property Per Risk Excess of Loss – Effective January 1, 2011, the Company renewed its property per risk excess of loss treaty which provides coverage of $13.0 million per risk in excess of $2.0 million per risk. This replaces the treaty that expired December 31, 2010, which provided coverage of $14.0 million per risk in excess of $1.0 million per risk. The renewal treaty provides coverage in two layers: $3.0 million per risk in excess of $2.0 million per risk, and $10.0 million per risk in excess of $5.0 million per risk. The first layer is split into two sections, each subject to a $3.0 million limit of liability for all risks involved in one loss occurrence, and the second layer is subject to a $10.0 million limit for all risks involved in one loss occurrence.

Professional Liability Excess of Loss – Effective April 30, 2011, the Company’s professional liability excess of loss treaty was terminated. This treaty provided coverage of $4.0 million per policy/occurrence in excess of $1.0 million per policy/occurrence. Effective May 1, 2011, the professional liability exposure was added to the casualty excess of loss treaty.

Casualty and Professional Liability Excess of Loss – Effective May 1, 2011, the Company renewed its casualty excess of loss treaty and added the professional liability exposure as a separate section to the treaty. The casualty section provides coverage for $2.0 million per occurrence in excess of $1.0 million per occurrence for general liability and auto liability. Allocated loss adjustment expenses are included within limits. The stand-alone casualty treaty that expired April 30, 2011 provided identical coverage. The professional liability section provides coverage of $4.0 million per policy/occurrence in excess of $1.0 million per policy/occurrence.

Casualty Clash Excess of Loss – Effective January 1, 2011, the Company renewed its casualty clash excess of loss treaty which provides coverage of $10.0 million per occurrence in excess of $3.0 million per occurrence, subject to a $20.0 million limit for all loss occurrences. This replaces the treaty that expired December 31, 2010, which provided identical coverage.

Property Quota Share – Effective January 1, 2010, the Company renewed its 40% quota share treaty related to the Penn-America property line of business. This treaty covers premiums earned in 2010 on policies written in 2009 and 2010. During 2010, the Company ceded $14.1 million of earned premium. This treaty expired on December 31, 2010 and was not renewed.

Marine Excess of Loss – Effective May 24, 2010, the Company entered into a marine excess of loss treaty which provides coverage in three layers for $13.0 million per occurrence in excess of $2.0 million per occurrence. The first layer of $3.0 million in excess of $2.0 million, and the second layer of $5.0 million in excess of $5.0 million, provides for two full reinstatements of coverage at 100% additional premium. The third layer of $5.0 million in excess of $10.0 million provides for one full reinstatement of coverage at 100% additional premium. This treaty will expire on November 30, 2011.

There were no other significant changes to any of the Company’s other reinsurance treaties during the quarter and nine months ended September 30, 2011. To the extent that there may be an increase or decrease in catastrophe or casualty clash exposure in the future, the Company may increase or decrease its reinsurance protection for these exposures commensurately.

 

8. Income Taxes

The statutory income tax rates of the countries where the Company does business are 35.0% in the United States, 0.0% in Bermuda, 0.0% in the Cayman Islands, 0.0% in Gibraltar, 28.59% in the Grand Duchy of Luxembourg, and 25.0% on non-trading income and 12.5% on trading income in the Republic of Ireland. For 2010, on an interim basis, the statutory income tax rate of each country is applied against the expected annual taxable income of the Company in each country to estimate the annual income tax expense. Total estimated annual income tax expense was divided 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 was applied against interim pre-tax income, excluding net realized gains and losses and limited partnership distributions, and then adding that amount to actual income taxes on net realized gains and losses, discrete items and limited partnership distributions. For the quarter and nine months ended September 30, 2011, the Company recorded the actual income tax provision in lieu of using the estimated effective income tax rate due to wide variability in the expected annual effective income tax rate

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

across several similar pre-tax income scenarios. The Company’s income before income taxes from the Non-U.S. Subsidiaries and U.S. Subsidiaries, including the results of the quota share agreement between Wind River Reinsurance and the Insurance Operations, for the quarters and nine months ended September 30, 2011 and 2010 were as follows:

 

$000000000 $000000000 $000000000 $000000000

Quarter Ended September 30, 2011:

(Dollars in thousands)

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

Revenues:

         

Gross premiums written

   $ 42,603      $ 55,262       $ (24,773   $ 73,092   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net premiums written

   $ 42,603      $ 22,331       $ —        $ 64,934   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net premiums earned

   $ 51,075      $ 26,015       $ —        $ 77,090   

Net investment income

     10,602        6,926         (4,648     12,880   

Net realized investment gains (losses)

     (762     2,050         —          1,288   

Other income

     —          167         —          167   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     60,915        35,158         (4,648     91,425   

Losses and Expenses:

         

Net losses and loss adjustment expenses

     76,539        9,695         —          86,234   

Acquisition costs and other underwriting expenses

     21,812        12,785         —          34,597   

Corporate and other operating expenses

     1,585        1,277         —          2,862   

Interest expense

     —          6,173         (4,648     1,525   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

   $ (39,021   $ 5,228       $ —        $ (33,793
  

 

 

   

 

 

    

 

 

   

 

 

 

 

$000000000 $000000000 $000000000 $000000000

Quarter Ended September 30, 2010:

(Dollars in thousands)

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

Revenues:

          

Gross premiums written

   $ 47,586       $ 66,213       $ (27,564   $ 86,235   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net premiums written

   $ 47,586       $ 25,620       $ —        $ 73,206   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net premiums earned

   $ 47,225       $ 22,864       $ —        $ 70,089   

Net investment income

     11,089         7,648         (4,648     14,089   

Net realized investment gains

     258         1,560         —          1,818   

Other income

     —           173         —          173   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     58,572         32,245         (4,648     86,169   

Losses and Expenses:

          

Net losses and loss adjustment expenses

     24,412         5,377         —          29,789   

Acquisition costs and other underwriting expenses

     17,243         11,298         —          28,541   

Corporate and other operating expenses

     2,802         2,304         —          5,106   

Interest expense

     —           6,473         (4,648     1,825   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

   $ 14,115       $ 6,793       $ —        $ 20,908   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

$000000000 $000000000 $000000000 $000000000

Nine Months Ended September 30, 2011:

(Dollars in thousands)

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

Revenues:

         

Gross premiums written

   $ 158,058      $ 182,102       $ (84,440   $ 255,720   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net premiums written

   $ 157,556      $ 76,893       $ —        $ 234,449   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net premiums earned

   $ 151,538      $ 79,576       $ —        $ 231,114   

Net investment income

     33,548        21,469         (13,793     41,224   

Net realized investment gains

     5,024        16,647         —          21,671   

Other income

     —          11,999         —          11,999   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     190,110        129,691         (13,793     306,008   

Losses and Expenses:

         

Net losses and loss adjustment expenses

     156,075        50,254         —          206,329   

Acquisition costs and other underwriting expenses

     60,562        34,084         —          94,646   

Corporate and other operating expenses

     7,035        3,294         —          10,329   

Interest expense

     —          18,813         (13,793     5,020   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

   $ (33,562   $ 23,246       $ —        $ (10,316
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

$000000000 $000000000 $000000000 $000000000

Nine Months Ended September 30, 2010:

(Dollars in thousands)

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

Revenues:

          

Gross premiums written

   $ 165,372       $ 181,815       $ (76,049   $ 271,138   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net premiums written

   $ 164,588       $ 69,622       $ —        $ 234,210   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net premiums earned

   $ 145,724       $ 69,855       $ —        $ 215,579   

Net investment income

     32,760         23,641         (13,792     42,609   

Net realized investment gains

     5,754         15,865         —          21,619   

Other income

     —           515         —          515   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     184,238         109,876         (13,792     280,322   

Losses and Expenses:

          

Net losses and loss adjustment expenses

     76,485         27,768         —          104,253   

Acquisition costs and other underwriting expenses

     56,292         31,405         —          87,697   

Corporate and other operating expenses

     7,795         7,270         —          15,065   

Interest expense

     —           19,189         (13,792     5,397   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

   $ 43,666       $ 24,244       $ —        $ 67,910   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

 

     Quarters Ended September 30,  
(Dollars in thousands)    2011     2010  
     Amount     % of Pre-
Tax  Income
    Amount     % of Pre-
Tax  Income
 

Expected tax provision at weighted average rate

   $ 1,845        (5.5 %)    $ 2,379        11.4

Adjustments:

        

Tax exempt interest

     (478     1.4        (504     (2.4

Dividend exclusion

     (173     0.5        (123     (0.6

Effective tax rate adjustment

     —          —          150        0.7   

Other

     (740     2.3        (756     (3.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

   $ 454        (1.3 %)    $ 1,146        5.5
  

 

 

   

 

 

   

 

 

   

 

 

 

The effective income tax rate for the quarter ended September 30, 2011 was (1.3%), compared to an effective income tax rate of 5.5% for the quarter ended September 30, 2010. Due to potential volatility in the 2011 expected effective tax rate, the Company recorded its actual year-to-date tax provision during the quarter ended September 30, 2011 as compared with an estimated annual effective rate during the quarter ended September 30, 2010. The effective rate differed from the weighted average expected income tax expense rate of (5.5%) for the quarter ended September 30, 2011 due to the fact that the Company records income tax expense net of tax-exempt interest and dividends. The effective rate differed from the weighted average expected income tax expense rate of 11.4% for the quarter ended September 30, 2010 primarily due to the fact that the Company recorded income tax expense during interim periods using an expected annual effective tax rate, net of tax-exempt interest and dividends.

 

     Nine Months Ended September 30,  
(Dollars in thousands)    2011     2010  
     Amount     % of Pre-
Tax  Income
    Amount     % of Pre-
Tax  Income
 

Expected tax provision at weighted average rate

   $ 8,481        (82.2 %)    $ 8,564        12.6

Adjustments:

        

Tax exempt interest

     (1,498     14.5        (1,488     (2.2

Dividend exclusion

     (540     5.2        (286     (0.4

Effective tax rate adjustment

     —          —          (1,376     (2.0

Other

     (685     6.7        (708     (1.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

   $ 5,758        (55.8 %)    $ 4,706        6.9
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

The weighted average expected tax provision was $8.5 million and $8.6 million for the nine months ended September 30, 2011 and 2010, respectively. Although the Company incurred a pre-tax loss in 2011, our U.S. Insurance Operations segment recognized $23.2 million of income. U.S. Insurance Operations income includes $16.6 million of realized gains and $11.5 million related to a litigation settlement with AON. The income generated in the U.S. is the primary driver of the weighted average expected income tax expense of $8.5 million. The effective rate differed from the weighted average expected tax provision in 2011 and 2010 primarily due to the impact of tax-exempt interest and dividends.

The Company and some of its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations by tax authorities for tax years before 2008.

The alternative minimum tax credit carryforward was $5.6 million as of September 30, 2011 and $6.5 million as of December 31, 2010, respectively.

The Company applies a more-likely-than-not recognition threshold for all tax uncertainties whereby it only recognizes those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities. The Company’s unrecognized tax benefits were $0.3 million as of September 30, 2011 and $0.7 million as of December 31, 2010. If recognized, the gross unrecognized tax benefits could lower the effective income tax rate in any future period.

The Company classifies all interest and penalties related to uncertain tax positions as income tax expense. As of September 30, 2011, the Company has recorded $0.03 million in liabilities for tax-related interest and penalties on its consolidated balance sheet.

 

9. Liability for Unpaid Losses and Loss Adjustment Expenses

The liability for unpaid losses and loss adjustment expenses reflects the Company’s best estimate for future amounts needed to pay claims and related settlement expenses and the impact of the Company’s reinsurance coverage with respect to insured events. Estimating the ultimate claims liability of the Company is a complex and judgmental process because the amounts are based on management’s informed estimates and judgments using data currently available. In some cases, significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of such to the Company. The method for determining the Company’s liability for unpaid losses and loss adjustment expenses includes, but is not limited to, reviewing past loss experience and considering other factors such as industry data and legal, social, and economic developments. As additional experience and data become available, the Company’s estimate for the liability for unpaid losses and loss adjustment expenses is revised accordingly. If the Company’s ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded with respect to unpaid losses and loss adjustment expenses at September 30, 2011, the related adjustments could have a material impact on the Company’s future results of operations.

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

 

$0,000 $0,000 $0,000 $0,000
     Quarters Ended
September  30,
    Nine Months  Ended
September 30,
 
(Dollars in thousands)    2011      2010     2011     2010  

Balance at beginning of period

   $ 975,192       $ 1,168,759      $ 1,052,743      $ 1,257,744   

Less: Ceded reinsurance receivables

     320,127         466,955        407,197        514,467   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net balance at beginning of period

     655,065         701,804        645,546        743,277   

Incurred losses and loss adjustment expenses related to:

         

Current year

     83,665         44,852        214,403        137,972   

Prior years

     2,569         (15,063     (8,074     (33,719
  

 

 

    

 

 

   

 

 

   

 

 

 

Total incurred losses and loss adjustment expenses

     86,234         29,789        206,329        104,253   
  

 

 

    

 

 

   

 

 

   

 

 

 

Paid losses and loss adjustment expenses related to:

         

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

$0,000 $0,000 $0,000 $0,000

Current year

     26,124         14,664         53,145         29,877   

Prior years

     38,367         41,650         121,922         142,366   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total paid losses and loss adjustment expenses

     64,491         56,314         175,067         172,243   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net balance at end of period

     676,808         675,287         676,808         675,287   

Plus: Ceded reinsurance receivables

     294,414         445,175         294,414         445,175   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 971,222       $ 1,120,462       $ 971,222       $ 1,120,462   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 2011, the Company increased its prior accident year loss reserves by $2.6 million, which consisted mainly of a $3.3 million increase in auto liability lines, a $0.5 million increase in professional liability lines, and a $0.3 million increase in all other lines, offset partially by a $1.1 million reduction in general liability lines and a $0.5 million reduction in property lines:

 

   

Auto liability: The $3.3 million increase primarily related to increases in our Reinsurance Operations. This consisted of a $3.8 million increase to accident year 2010 resulting from further unexpected development on non-standard auto treaties which were not renewed in 2011. This was partially offset by a $1.2 million decrease in accident year 2009. Our Insurance Operations also saw an increase of $0.7 million in accident years 2009 and 2010 due to recent unfavorable development on a few large claims.

 

   

Professional liability: The $0.5 million increase consisted of increases of $2.5 million primarily related to accident years 2009 and 2010 primarily due to unfavorable development in certain product classes. We are addressing profitability concerns by exiting certain classes of business which have proven to be unprofitable. This was offset by a decrease of $2.0 million related to all other prior accident years.

 

   

General liability: The $1.1 million reduction primarily consisted of reductions of $2.1 million related to our Insurance Operations. This amount included an $8.2 million reduction in accident years 2008 and prior due to continued favorable emergence. Incurred losses in these years have developed at a rate lower than the Company’s historical averages. We also decreased our reinsurance allowance by $0.9 million in this line due to changes in our reinsurance exposure on specifically identified claims and general decreases in ceded reserves. Offsetting these decreases were increases of $6.9 million in accident years 2009 and 2010 related to loss emergence in one of our classes of business as well as revised exposure estimates for construction defect liability. Increased estimates for construction defect were the result of a methodology change in the quarter, and were not driven by claim frequency or severity trends. We are addressing profitability concerns by exiting certain classes of business that have proven to be unprofitable. At our Reinsurance Operations we increased our general liability reserves by $1.1 million, which primarily related to accident years 2009 and 2010. These changes related to higher than expected loss emergence.

 

   

Property: The $0.5 million reduction primarily related to accident year 2010 and is primarily related to favorable loss emergence on a worldwide catastrophe treaty in our Reinsurance Operations.

In the third quarter of 2010, the Company reduced its prior accident year loss reserves by $15.1 million, which consisted of a $14.2 million reduction in general liability lines, a $1.6 million reduction in property lines, and a $1.3 million reduction in umbrella lines, offset by a $1.7 million increase in commercial auto lines and a $0.1 million increase in professional liability lines:

 

   

General liability: The $14.2 million reduction primarily consisted of reductions of $16.3 million related to accident years 2004 through 2009 due to lower than anticipated frequency and severity. Incurred losses for these segments have developed at a rate lower than the Company’s historical averages. This reduction was offset by a net increase of $2.1 million related to accident years 2003 and prior primarily due to increases in expected unallocated loss adjustment expenses, as well as, higher than expected claim frequency and severity.

 

   

Property: The $1.6 million reduction primarily consisted of net reductions of $1.7 million related to

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

 

 

accident years 2009, 2008, and 2006 and prior due to decreases in expected unallocated loss adjustment expenses and lower than anticipated severity. This reduction was offset by an increase of $0.1 million related to accident year 2007.

 

   

Umbrella: The $1.3 million reduction primarily consisted of net reductions of $1.5 million related to accident years 2009 and 2007 and prior due to lower than anticipated severity. As these accident years have matured, more weight has been given to experience based methods which continue to develop favorably compared to the Company’s initial indications. This reduction was offset by an increase of $0.2 million related to accident year 2008 due to an increase in severity.

 

   

Commercial auto: The $1.7 million increase consisted of an increase of $1.9 million related to accident year 2009 due to increased frequency on two non-standard auto treaties. This increase was offset by net reductions of $0.2 million related to accident years 2008 and prior. Programs related to these accident years are in run-off, and loss severity has been lower than the Company’s prior projections.

 

   

Professional liability: The $0.1 million increase primarily consisted of an increase of $1.9 million related to accident years 2007 and 2009 where the Company experienced higher than expected claim frequency and severity. This increase was offset by a reduction of $1.8 million related to accident years 2008 and 2006 and prior driven by lower than expected paid and incurred activity during the quarter.

In the nine months ended September 30, 2011, the Company reduced its prior accident year loss reserves by $8.1 million, which consisted mainly of a $15.9 million reduction in general liability lines, a $1.1 million reduction in umbrella lines, and a $1.0 million reduction in property lines, offset by a $4.7 million increase in auto liability lines, a $4.4 million increase in professional liability lines and a $0.9 million increase in workers’ compensation lines:

 

   

General liability: The $15.9 million reduction primarily consisted of reductions of $21.3 million related to our Insurance Operations. This amount included a $31.0 million reduction in accident years 2008 and prior due to continued favorable emergence. Incurred losses have developed at a rate lower than the Company’s historical averages. We also decreased our reinsurance allowance by $3.1 million in this line due to changes in our reinsurance exposure on specifically identified claims and general decreases in ceded reserves. Offsetting these decreases were increases of $12.8 million in accident years 2009 and 2010 primarily driven by loss emergence in one of our classes of business as well as revised exposure estimates for construction defect liability. Increased estimates for construction defect were the result of a methodology change in the quarter, and were not driven by claim frequency or severity trends. We are addressing profitability concerns by exiting certain classes of business that have proven to be unprofitable. At our Reinsurance Operations we increased our general liability reserves by $5.5 million in accident years 2009 and 2010 due to loss emergence that was greater than expected.

 

   

Umbrella: The $1.1 million reduction primarily related to accident years 2010 and prior in our Insurance Operations primarily due to continued favorable emergence. Umbrella coverage typically attaches to other coverage lines, so these net decreases follow the decreases in general liability above.

 

   

Property: The $1.0 million reduction primarily related to a $1.8 million decrease in our Insurance Operations primarily related to accident years 2009 and 2010 related to anticipated subrogation on a large equine mortality claim as well as favorable development on prior year catastrophe claims. This was offset by a $0.7 million increase related to accident year 2010 in our Reinsurance Operations due to loss emergence on a worldwide catastrophe treaty.

 

   

Auto liability: The $4.7 million increase primarily consisted of an increase of $1.2 million in our Insurance Operations related to accident years 2009 and 2010 due to higher than expected severity. There was also a $3.5 million increase in our Reinsurance Operations primarily related to a $4.0 million increase to accident year 2010 resulting from greater severity on non-standard auto treaties which were not renewed in 2011. This was offset by a decrease of $0.5 million in accident year 2009.

 

   

Professional liability: The $4.4 million increase was primarily related to our Insurance Operations and primarily consisted of increases of $15.1 million related to accident years 1998, 2009 and 2010, offset partially by decreases of $10.8 million related to all other accident years. In 2011, we exited certain classes of business where the volume of premium was low and loss volatility was high. We are focused on writing business where we expect to realize profit that meets our return on investment thresholds.

 

   

Workers’ compensation: The $0.9 million increase primarily related to accident years 2009 and 2010 in

 

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our Reinsurance Operations and is the result of expected losses recorded on adjustment premiums recorded in 2011.

In the nine months ended September 30, 2010, the Company reduced its prior accident year loss reserves by $33.7 million, which consisted of a $26.9 million reduction in general liability lines, a $3.7 million reduction in umbrella lines, a $2.9 million reduction in professional liability lines, and a $1.9 million reduction in property lines, offset by a $1.5 million increase in commercial auto lines:

 

   

General liability: The $26.9 million reduction primarily consisted of net reductions of $30.2 million related to accident years 2002 through 2009 due to severity that was lower than originally anticipated. Incurred losses for these years have developed at a rate lower than the Company’s historical averages. This reduction was partially offset by a net increase of $3.3 million related to accident years 2001 and prior where the Company experienced higher than expected claim frequency and severity.

 

   

Umbrella: The $3.7 million reduction primarily consisted of net reductions related to accident years 2009 and prior primarily due to lower than anticipated severity. As these accident years have matured, more weight has been given to experience based methods which continue to develop favorably compared to the Company’s initial indications.

 

   

Professional liability: The $2.9 million reduction primarily consisted of net reductions of $6.1 million related to accident years 2008 and prior due to severity that was lower than originally anticipated, partially offset by an increase of $3.2 million related to accident year 2009 where the Company experienced higher than expected claim frequency and severity.

 

   

Property: The $1.9 million reduction primarily consisted of net reductions of $2.4 million related to accident years 2008 and prior primarily due to lower than anticipated severity. This reduction was offset by an increase of $0.5 million to accident year 2009 that was driven by higher than expected claim frequency and severity.

 

   

Commercial auto: The $1.5 million increase primarily consisted of a net increase of $2.1 million related to accident years 2008 and 2009 where losses were higher than anticipated. This increase was offset by net reductions of $0.6 million related to accident years 2007 and prior. Programs related to these accident years are in run-off, and loss severity has been lower than the Company’s prior projections.

 

10. Related Party Transactions

Fox Paine & Company

As of September 30, 2011, Fox Paine & Company beneficially owned shares having approximately 89.5% of the Company’s total outstanding voting power. Fox Paine & Company can nominate a certain number of Directors, dependent on Fox Paine & Company’s percentage ownership of voting shares in the Company, for so long as Fox Paine & Company hold an aggregate of 25% or more of the voting power in the Company. Fox Paine & Company controls the election of all of our Directors due to its controlling share ownership. The Company’s Chairman is a member of Fox Paine & Company. The Company relies on Fox Paine & Company to provide management services and other services related to the operations of the Company.

The Company incurred management fees of $0.3 million in each of the quarters ended September 30, 2011 and 2010 and $1.1 million in each of the nine months ended September 30, 2011 and 2010 as part of the annual management fee that is paid to Fox Paine & Company.

At September 30, 2011 and December 31, 2010, Wind River Reinsurance was a limited partner in Fox Paine Capital Fund, II, which is 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 & Company of Wind River Investment Corporation, the holding company for the Company’s Predecessor Insurance Operations. The Company’s investment in this limited partnership was valued at $7.2 million and $4.3 million at September 30, 2011 and December 31, 2010, respectively. At September 30, 2011, the Company had an unfunded capital commitment of $2.5 million to the partnership. Distributions of $0.15 million and $0.07 million were received from the limited partnership during the nine months ended September 30, 2011 and 2010, respectively. There were no

 

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(Unaudited)

 

distributions received from the limited partnership during the quarters ended September 30, 2011 and 2010.

On July 2, 2010, United America Indemnity, Ltd. entered into an agreement to indemnify the affected indirect owners of the affiliates of Fox Paine & Company that were shareholders of United America Indemnity, Ltd. immediately prior to the effective date of our re-domestication to Ireland (See Note 3 for details). The agreement indemnifies them for any tax cost (including interest on tax and penalties, if any) of any triggering event and such affected indirect owners will pay us an amount equal to any tax benefits, if any, realized by them as a result of a triggering event for which they were indemnified, provided that the indirect owners will not be required to pay any amount of tax benefits in excess of the tax costs for which we have indemnified them. A sale or other disposition by these indirect owners of our ordinary shares will not constitute a triggering event for this purpose. In addition, the indemnification agreement provides that, under certain circumstances, in the event the conversion of Global Indemnity plc’s Class B ordinary shares to Class A ordinary shares or a sale or other disposition of Global Indemnity plc’s Class B ordinary shares is subject to Irish stamp duty, we will indemnify such affiliates of Fox Paine & Company and their transferees against such Irish stamp duty.

Cozen O’Connor

During the quarter and nine months ended September 30, 2010, the Company incurred $0.1 million and $0.2 million, respectively, for legal services rendered by Cozen O’Connor. Stephen A. Cozen, the chairman of Cozen O’Connor, was a member of the Company’s Board of Directors until his retirement effective December 31, 2010.

Validus Reinsurance, Ltd.

Validus is a participant in a quota share retrocession agreement with Wind River Reinsurance. The Company estimated that the following written premium and losses related to the quota share retrocession agreement have been assumed by Validus from Wind River Reinsurance:

 

     Quarter Ended
September  30,
     Nine Months  Ended
September 30,
 
(Dollars in thousands)    2011      2010      2011     2010  

Ceded written premium

   $ —         $ —         $ (76   $ (2,401

Ceded losses

     —           —           54        644   

Edward J. Noonan, the chairman and chief executive officer of Validus, was a member of the Company’s Board of Directors until June 1, 2007, when he resigned from the Company’s Board. Validus remains a related party since the current quota share retrocession agreement between Validus and Wind River Reinsurance was put in place during the period when Mr. Noonan was a member of the Company’s Board of Directors.

Frank Crystal & Company

During each of the quarter and nine months ended September 30, 2011 and 2010, the Company paid $0.1 million and $0.2 million, respectively, in brokerage fees to Frank Crystal & Company, an insurance broker. James W. Crystal, the chairman and chief executive officer of Frank Crystal & Company, became a member of the Company’s Board of Directors effective July 6, 2010.

 

11. 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 purchases insurance and reinsurance policies covering such risks in amounts that it considers adequate. However, there can be no assurance that the insurance and reinsurance coverage that the Company maintains is sufficient or will be available in adequate amounts or at a reasonable cost. The Company does not believe that the

 

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(Unaudited)

 

resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on the Company’s business, results of operations, cash flows, or financial condition.

There is a greater potential for disputes with reinsurers who are in a runoff of their reinsurance operations. Some of the Company’s reinsurers’ reinsurance operations are in runoff, and therefore, the Company closely monitors those relationships. The Company anticipates that, similar to the rest of the insurance and reinsurance industry, it will continue to be subject to litigation and arbitration proceedings in the ordinary course of business.

On December 4, 2008, a federal jury in the U.S. District Court for the Eastern District of Pennsylvania (Philadelphia) returned a $24.0 million verdict in favor of United National Insurance Company (“United National”), an indirect wholly owned subsidiary of the Company, against AON Corp., an insurance and reinsurance broker. On July 24, 2009, a federal judge from the U.S. District Court for the Eastern District of Pennsylvania (Philadelphia) upheld that jury verdict. In doing so, the U.S. District Judge increased the verdict to $32.2 million by adding more than $8.2 million in prejudgment interest. AON filed its Notice of Appeal and a Bond in the amount of $33.0 million. Oral arguments were heard by the Appellate Court on October 26, 2010. In January, 2011, we settled with AON for $16.3 million. We realized approximately $7.5 million, net of income taxes and attorney’s fees.

 

12. Share-Based Compensation Plans

During the nine months ended September 30, 2011, the Company granted 65,481 Class A ordinary shares at a weighted average grant date value of $21.44 per share, to key employees of the Company under the Global Indemnity plc Share Incentive Plan (the “Plan”). Of those shares, 54,233 were subject to certain restrictions and 11,248 vested immediately. The Company did not grant any shares to employees during the quarter ended September 30, 2011.

During the quarter and nine months ended September 30, 2011, the Company granted an aggregate of 12,864 and 39,675 fully vested Class A ordinary shares, respectively, subject to certain restrictions, at a weighted average grant date value of $22.31 and $21.52 per share, respectively, to non-employee directors of the Company under the Plan.

During the quarter and nine months ended September 30, 2011, the Company granted 300,000 Time-Based Options under the Plan. The Time-Based Options vest in 33% increments over a three-year period and expire ten years after the grant date.

 

13. 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. All share counts and corresponding per share market prices for 2010 have been adjusted to reflect the one-for-two stock exchange of Global Indemnity plc shares for United America Indemnity, Ltd. shares as part of the re-domestication to Ireland. See Note 3 above for more information regarding the re-domestication.

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

 

(Dollars in thousands, except per share data)    Quarters Ended
September  30,
     Nine Months  Ended
September 30,
 
   2011     2010      2011     2010  

Net income (loss)

   $ (34,247   $ 19,762       $ (16,021   $ 63,175   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic earnings per share:

         

Weighted average shares outstanding - basic

     30,338,010        30,273,757         30,320,538        30,222,074   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss) per share

   $ (1.13   $ 0.65       $ (0.53   $ 2.09   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted earnings per share:

         

Weighted average shares outstanding - diluted

     30,352,850        30,308,489         30,341,713        30,245,890   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss) per share

   $ (1.13   $ 0.65       $ (0.53   $ 2.09   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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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,
 
     2011      2010      2011      2010  

Weighted average shares for basic earnings per share

     30,338,010         30,273,757         30,320,538         30,222,074   

Non-vested restricted stock

     14,824         34,732         12,399         23,816   

Options

     16         —           8,776         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares for diluted earnings per share

     30,352,850         30,308,489         30,341,713         30,245,890   
  

 

 

    

 

 

    

 

 

    

 

 

 

The weighted average shares outstanding used to determine dilutive earnings per share for the quarters ended September 30, 2011 and 2010 do not include 465,775 and 341,809 shares, 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, 2011 and 2010 do not include 450,232 and 352,309 shares, respectively, which were deemed to be anti-dilutive.

 

14. Segment Information

The Company manages its business through two business segments: Insurance Operations, which includes the operations of the U.S. Insurance Companies, and Reinsurance Operations, which includes the operations of Wind River Reinsurance.

The Insurance Operations segment and the Reinsurance Operations segment follow the same accounting policies used for the Company’s consolidated financial statements. For further disclosure regarding the Company’s accounting policies, please see Note 4 of the notes to the consolidated financial statements in Item 8 of Part II of the Company’s 2010 Annual Report on Form 10-K.

The following are tabulations of business segment information for the quarters and nine months ended September 30, 2011 and 2010.

 

Quarter Ended September 30, 2011:

(Dollars in thousands)

   Insurance
Operations  (1)
    Reinsurance
Operations (2)
    Total  

Revenues:

      

Gross premiums written

   $ 55,260      $ 17,832      $ 73,092   
  

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 47,102      $ 17,832      $ 64,934   
  

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 54,063      $ 23,027      $ 77,090   

Other income

     167        —          167   
  

 

 

   

 

 

   

 

 

 

Total revenues

     54,230        23,027        77,257   

Losses and Expenses:

      

Net losses and loss adjustment expenses

     58,174        28,060        86,234   

Acquisition costs and other underwriting expenses

     24,998  (3)      9,599        34,597   
  

 

 

   

 

 

   

 

 

 

Loss from segments

   $ (28,942   $ (14,632     (43.574
  

 

 

   

 

 

   

Unallocated Items:

      

Net investment income

         12,880   

Net realized investment gains

         1,288   

Corporate and other operating expenses

         (2,862

Interest expense

         (1,525
      

 

 

 

Loss before income taxes

         (33,793

Income tax expense

         454   
      

 

 

 

Net loss

       $ (34,247
      

 

 

 

Total assets

   $ 1,474,174      $ 658,715  (4)    $ 2,132,889   
  

 

 

   

 

 

   

 

 

 

 

(1) Includes business ceded to Reinsurance Operations.

 

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(2) External business only, excluding business assumed from Insurance Operations.
(3) Includes federal excise tax of $281 relating to cessions from Insurance Operations to Reinsurance Operations.
(4) Comprised of Wind River Reinsurance’s total assets less its investment in subsidiaries.

 

Quarter Ended September 30, 2010:

(Dollars in thousands)

   Insurance
Operations  (1)
    Reinsurance
Operations (2)
    Total  

Revenues:

      

Gross premiums written

   $ 66,213      $ 20,022      $ 86,235   
  

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 53,185      $ 20,021      $ 73,206   
  

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 47,932      $ 22,157      $ 70,089   

Other income

     173        —          173   
  

 

 

   

 

 

   

 

 

 

Total revenues

     48,105        22,157        70,262   

Losses and Expenses:

      

Net losses and loss adjustment expenses

     13,584        16,205        29,789   

Acquisition costs and other underwriting expenses

     22,556  (3)      5,985        28,541   
  

 

 

   

 

 

   

 

 

 

Income (loss) from segments

   $ 11,965      $ (33     11,932   
  

 

 

   

 

 

   

Unallocated Items:

      

Net investment income

         14,089   

Net realized investment gains

         1,818   

Corporate and other operating expenses

         (5,106

Interest expense

         (1,825
      

 

 

 

Income before income taxes

         20,908   

Income tax expense

         1,146   
      

 

 

 

Net income

       $ 19,762   
      

 

 

 

Total assets

   $ 1,698,557      $ 654,472  (4)    $ 2,353,029   
  

 

 

   

 

 

   

 

 

 

 

(1) Includes business ceded to Reinsurance Operations.
(2) External business only, excluding business assumed from Insurance Operations.
(3) Includes federal excise tax of $251 relating to cessions from Insurance Operations to Reinsurance Operations.
(4) Comprised of Wind River Reinsurance’s total assets less its investment in subsidiaries.

 

Nine Months Ended September 30, 2011:

(Dollars in thousands)

   Insurance
Operations  (1)
    Reinsurance
Operations (2)
    Total  

Revenues:

      

Gross premiums written

   $ 182,102      $ 73,618      $ 255,720   
  

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 161,333      $ 73,116      $ 234,449   
  

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 165,354      $ 65,760      $ 231,114   

Other income

     11,999        —          11,999   
  

 

 

   

 

 

   

 

 

 

Total revenues

     177,353        65,760        243,113   

Losses and Expenses:

      

Net losses and loss adjustment expenses

     135,217        71,112        206,329   

Acquisition costs and other underwriting expenses

     73,581  (3)      21,065        94,646   
  

 

 

   

 

 

   

 

 

 

Loss from segments

   $ (31,445   $ (26,417     (57,862
  

 

 

   

 

 

   

Unallocated Items:

      

Net investment income

         41,224   

Net realized investment gains

         21,671   

Corporate and other operating expenses

         (10,329

Interest expense

         (5,020
      

 

 

 

Loss before income taxes

         (10,316

Income tax expense

         5,758   
      

 

 

 

Loss before equity in net income of partnership

         (16,074

Equity in net income of partnership, net of tax

         53   
      

 

 

 

Net loss

       $ (16,021
      

 

 

 

Total assets

   $ 1,474,174  &