Global Indemnity Group(GBLI) - 2019 Q4 - Annual Report

Part I Business Global Indemnity Limited is a holding company providing specialty property and casualty insurance and reinsurance products across four segments, distributing through wholesale agents and brokers with a focus on disciplined underwriting and diversified investments Business Segments The company operates through four segments: Commercial Specialty, Specialty Property, Farm, Ranch, & Stable, and Reinsurance Operations, with a recent restructuring in Q1 2019 - In the first quarter of 2019, the Company bifurcated its Personal Lines segment into two new reportable segments: Specialty Property and Farm, Ranch, & Stable, and the Commercial Lines segment was also renamed to Commercial Specialty[17] Gross Written Premiums by Segment (2019 vs 2018) | Segment | 2019 GWP ($M) | 2018 GWP ($M) | Change | | :--- | :--- | :--- | :--- | | Commercial Specialty | $297.3 | $249.9 | +19.0% | | Specialty Property | $163.5 | $170.2 | -3.9% | | Farm, Ranch, & Stable | $87.7 | $79.7 | +10.0% | | Reinsurance Operations (Third Party) | $88.3 | $48.0 | +83.9% | Geographic Concentration The company's gross written premiums are significantly concentrated in a few key states, with California, Texas, and Florida collectively accounting for 24.6% of the total in 2019 Geographic Distribution of Gross Written Premiums | State | 2019 Amount ($ thousands) | 2019 Percent | 2018 Amount ($ thousands) | 2018 Percent | | :--- | :--- | :--- | :--- | :--- | | California | $54,850 | 8.5% | $58,744 | 10.8% | | Texas | $54,381 | 8.5% | $49,544 | 9.1% | | Florida | $48,093 | 7.6% | $42,116 | 7.7% | | New York | $37,288 | 5.9% | $28,718 | 5.2% | | All other states | $237,039 | 37.2% | $214,212 | 39.1% | | Reinsurance Operations | $88,281 | 13.9% | $48,043 | 8.8% | | Total | $636,861 | 100.0% | $547,897 | 100.0% | Marketing and Distribution The company distributes products through wholesale general agents, program administrators, and brokers, with some concentration among its top non-affiliated partners - The company's distribution strategy focuses on maintaining strong relationships with a limited number of high-quality wholesale professional general agents and brokers[40] - In 2019, the top five non-affiliated partners accounted for 35.5% of Commercial Specialty's gross written premiums and 37.9% of Specialty Property's gross written premiums[36][37] - Global Indemnity Reinsurance's 2019 gross written premiums were highly concentrated, with three treaties from three cedants accounting for 91% of the segment's total[39] Reinsurance of Underwriting Risk The company utilizes third-party reinsurance to limit liability and protect against catastrophe losses, with significant receivables from highly-rated reinsurers - Effective June 1, 2019, the company purchased a new property catastrophe treaty providing three layers of coverage for losses of $275 million in excess of $25 million, replacing the previous treaty that provided $250 million in excess of $50 million[59][60] - The Casualty Excess of Loss treaty, effective since January 1, 2018, provides coverage of $10 million per occurrence in excess of a $2 million retention, subject to a $20 million aggregate limit[64] Top Reinsurers by Gross Reinsurance Receivables (as of Dec 31, 2019) | Reinsurer | A.M. Best Rating | Gross Reinsurance Receivables ($M) | Percent of Total | | :--- | :--- | :--- | :--- | | Munich Re America Corp. | A+ | $44.1 | 47.4% | | General Reinsurance Corp. | A++ | $7.5 | 8.0% | | Arch Reinsurance Company | A+ | $5.1 | 5.5% | | Westport Insurance Corporation | A+ | $4.8 | 5.1% | | Subtotal (Top 10) | | $74.6 | 80.0% | Reserves for Unpaid Losses and Loss Adjustment Expenses The company establishes and reviews reserves for unpaid losses and loss adjustment expenses quarterly by in-house actuaries and annually by independent external actuaries, with specific exposure to Asbestos and Environmental claims - The company's reserves are reviewed quarterly by in-house actuarial staff and annually by independent external actuaries, with management responsible for the final determination of loss reserve selections[75][76] Net A&E Loss Reserves (as of Dec 31, 2019) | Exposure Type | Net Loss Reserves ($M) | | :--- | :--- | | Asbestos-related claims | $15.8 | | Environmental claims | $13.2 | Investments The company's $1.61 billion investment portfolio, managed by third-party advisors, is primarily composed of high-quality fixed maturities and equity securities Investment Portfolio Summary (as of Dec 31, 2019) | Asset Class | Estimated Fair Value ($ thousands) | Percent of Total | | :--- | :--- | :--- | | Total fixed maturities | $1,253,159 | 77.9% | | Equity securities | $263,104 | 16.4% | | Other invested assets | $47,279 | 2.9% | | Cash and cash equivalents | $44,271 | 2.8% | | Total | $1,607,813 | 100.0% | - As of December 31, 2019, 94.9% of the company's fixed income securities are investment grade, with 12.7% rated AAA[92][93] - Net realized investment gains were $35.3 million in 2019, a significant increase from $16.9 million in 2018 and $1.6 million in 2017[96] Regulation The company is subject to extensive regulation by state insurance departments in the U.S. and the Bermuda Monetary Authority for its reinsurance subsidiary, covering solvency, investments, and capital requirements - The company's U.S. insurance subsidiaries are subject to state insurance holding company laws, which regulate transactions among affiliates and require prior approval for any acquisition of control (presumed at 10% or more of voting securities)[106][109] - The U.S. subsidiaries' capital and surplus levels were above the prescribed risk-based capital requirements in their 2019 statutory filings[114] - Global Indemnity Reinsurance is registered as a Class 3B insurer in Bermuda and is regulated by the BMA, whose regulatory framework has been granted full "Solvency II equivalence" by the European Commission[126][130] Risk Factors The company faces numerous material risks, including potential for claims to exceed reserves, catastrophic losses, operational failures, rating downgrades, reinsurer credit risk, investment volatility, competitive pressures, distribution partner dependence, and adverse tax law changes - The company's success is highly dependent on accurately assessing risks and establishing adequate loss reserves, as an underestimation could materially harm financial condition and results[172] - A decline in the "A" (Excellent) rating from A.M. Best for its insurance or reinsurance subsidiaries could significantly harm the company's competitive position and reduce premium volume[187] - The Tax Cuts and Jobs Act of 2017 (TCJA) introduced changes, including a Base Erosion Minimum Tax (BEAT), that could materially affect the tax treatment of U.S. subsidiaries and reduce the benefits of being a non-U.S. company[239] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[258] Properties The company leases office space for its principal executive offices in Pennsylvania and additional offices in Arizona, Nebraska, Bermuda, and Ireland, having closed field offices in California and Georgia in Q1 2020 - The company's principal executive offices are in leased space in Bala Cynwyd, Pennsylvania, and it also leases offices in Arizona, Nebraska, Bermuda, and Ireland to support its various segments[259] Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, but management does not expect a material adverse effect on its financial condition or operations - The company does not expect any currently pending legal proceedings to have a material adverse effect on its business or financial condition[260] Mine Safety Disclosures The company reports no mine safety disclosures - None[262] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's A ordinary shares trade on NASDAQ, and it adopted a dividend program in 2017, paying $0.25 per share quarterly in 2019 and 2018, while also repurchasing shares for tax withholding purposes - The company's A ordinary shares are traded on the NASDAQ under the symbol "GBLI", with no public market for its B ordinary shares[265][266] Annual Dividends Paid | Year | Dividend per Share | Total Dividends Paid ($M) | | :--- | :--- | :--- | | 2019 | $1.00 | $14.2 | | 2018 | $1.00 | $14.0 | | 2017 | $0.00 | $0.0 | - In 2019, the company purchased 27,028 of its A ordinary shares from employees for $0.9 million to cover tax liabilities upon the vesting of restricted stock[271] Selected Financial Data The company's financial performance in 2019 showed a strong recovery with net income of $70.0 million and a combined ratio of 92.2%, indicating a return to underwriting profitability and growth in gross written premiums Selected Consolidated Financial Data (2017-2019) | Metric (in thousands, except per share data) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Gross written premiums | $636,861 | $547,897 | $516,334 | | Total revenues | $604,472 | $498,938 | $485,515 | | Net income (loss) | $70,015 | $(56,696) | $(9,551) | | Diluted EPS | $4.88 | $(4.02) | $(0.55) | | Total assets | $2,075,885 | $1,960,266 | $2,001,669 | | Total shareholders' equity | $726,809 | $629,059 | $718,394 | | Book value per share | $50.82 | $44.21 | $50.57 | Consolidated Insurance Operating Ratios (2017-2019) | Ratio | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Loss ratio | 52.5% | 71.5% | 61.5% | | Expense ratio | 39.7% | 40.8% | 41.9% | | Combined ratio | 92.2% | 112.3% | 103.4% | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, Global Indemnity achieved a significant turnaround with net income of $70.0 million, driven by a 16.2% increase in gross written premiums and a substantial improvement in underwriting results due to lower catastrophe losses and favorable prior year reserve development Critical Accounting Estimates and Policies The company's most critical accounting estimates involve significant judgment, particularly the liability for unpaid losses and loss adjustment expenses, along with other key estimates like reinsurance recoverability, investment fair value, and impairment testing - The liability for unpaid losses and loss adjustment expenses is considered the most significant accounting estimate, requiring complex actuarial analysis and management judgment[306] Gross and Net Loss Reserves by Segment (as of Dec 31, 2019) | Segment (in thousands) | Gross Reserves | Net Reserves | | :--- | :--- | :--- | | Commercial Specialty | $390,148 | $330,944 | | Specialty Property | $50,334 | $40,245 | | Farm, Ranch, & Stable | $45,601 | $38,621 | | Reinsurance Operations | $144,098 | $144,098 | | Total | $630,181 | $553,908 | - A hypothetical 5% increase in both frequency and severity for the current accident year would increase net losses by approximately $31.6 million[330] Results of Operations The company's 2019 results showed a strong recovery with underwriting income of $43.3 million, driven by a 16.2% increase in gross written premiums and a significant improvement in the loss ratio due to lower catastrophe losses and favorable prior year development Consolidated Results Summary (2019 vs 2018) | Metric (in thousands) | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Gross written premiums | $636,861 | $547,897 | 16.2% | | Net earned premiums | $525,262 | $467,775 | 12.3% | | Underwriting income (loss) | $43,273 | $(55,900) | NM | | Net income (loss) | $70,015 | $(56,696) | NM | Underwriting Ratios (2019 vs 2018) | Ratio | 2019 | 2018 | | :--- | :--- | :--- | | Loss ratio | 52.5% | 71.5% | | Expense ratio | 39.7% | 40.8% | | Combined ratio | 92.2% | 112.3% | Liquidity and Capital Resources The company's primary funds come from underwriting and investment income, with net cash from operations at $32.4 million in 2019, and its subsidiaries maintain capital levels exceeding regulatory requirements despite dividend limitations - Net cash provided by operating activities was $32.4 million in 2019, compared to $42.1 million in 2018[446] - The company's U.S. insurance subsidiaries have a maximum dividend capacity of approximately $29.6 million in 2020 without prior regulatory approval[438][439][441][442] Contractual Obligations (as of Dec 31, 2019) | Obligation (in thousands) | Total | Less than 1 year | 1 – 3 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | | Operating leases | $26,959 | $1,931 | $5,438 | $14,142 | | Subordinated notes due 2045 | $299,563 | $7,750 | $15,500 | $260,813 | | Subordinated notes due 2047 | $411,531 | $10,238 | $20,475 | $360,343 | | Unpaid losses & loss adjustment expenses | $630,181 | $273,499 | $207,960 | $64,909 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rate risk, credit risk, and equity price risk, with a hypothetical 100 basis point increase in interest rates decreasing the fixed income portfolio's market value by 4.4% and a 10% decrease in equity prices reducing shareholders' equity by 2.3% Interest Rate Sensitivity of Fixed Income Portfolio (as of Dec 31, 2019) | Basis Point Change | Change in Market Value ($ thousands) | % Change | | :--- | :--- | :--- | | (100) | $55,711 | 4.4% | | 100 | $(55,716) | (4.4%) | | 200 | $(111,444) | (8.9%) | Equity Price Risk Sensitivity (as of Dec 31, 2019) | Hypothetical Price Change | Hypothetical % Change in Shareholders' Equity | | :--- | :--- | | (20%) | (4.5%) | | (10%) | (2.3%) | | 10% | 2.3% | | 20% | 4.5% | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the fiscal year ended December 31, 2019, including balance sheets, statements of operations, comprehensive income, changes in shareholders' equity, and cash flows, along with accompanying notes and supplementary schedules Consolidated Financial Statements The consolidated financial statements show Global Indemnity Limited's financial position and performance, with total assets of $2.08 billion, total liabilities of $1.35 billion, total shareholders' equity of $726.8 million, total revenues of $604.5 million, and net income of $70.0 million for 2019 Consolidated Balance Sheet Highlights (as of Dec 31, 2019) | Account (in thousands) | Amount | | :--- | :--- | | Total investments | $1,563,542 | | Total assets | $2,075,885 | | Unpaid losses and loss adjustment expenses | $630,181 | | Total liabilities | $1,349,076 | | Total shareholders' equity | $726,809 | Consolidated Statement of Operations Highlights (Year Ended Dec 31, 2019) | Account (in thousands) | Amount | | :--- | :--- | | Net earned premiums | $525,262 | | Total revenues | $604,472 | | Net losses and loss adjustment expenses | $275,402 | | Net income | $70,015 | Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial statement line items, covering investments, reinsurance, income taxes, loss reserves, debt, shareholders' equity, related party transactions, share-based compensation, statutory information, and segment details - Note 9 details the activity in the liability for unpaid losses, showing a net favorable prior year development of $32.8 million in 2019, primarily from the Commercial Specialty, Specialty Property, and Farm, Ranch, & Stable segments[658][659] - Note 10 describes the company's outstanding debt, including $100.0 million of 7.75% Subordinated Notes due 2045, $130.0 million of 7.875% Subordinated Notes due 2047, and a $73.6 million balance on a margin borrowing facility as of year-end 2019[714] - Note 13 discloses transactions with Fox Paine Entities, including an annual management fee of $2.1 million in 2019 and a $12.5 million advisory fee paid in 2018 related to a corporate reorganization[754][757] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[846] Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2019, with an unqualified opinion from Ernst & Young LLP - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[846] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019, with no material weaknesses identified[850] Other Information The company reports no other information - None[860] Part III Directors, Executive Officers, and Corporate Governance Information regarding directors, executive officers, and corporate governance practices is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Shareholders - Information is incorporated by reference from the Registrant's Proxy Statement for the 2020 Annual Meeting of Shareholders[863] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Shareholders - Information is incorporated by reference from the Registrant's Proxy Statement for the 2020 Annual Meeting of Shareholders[864] Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters Information concerning security ownership of certain beneficial owners, management, and related stockholder matters is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Shareholders - Information is incorporated by reference from the Registrant's Proxy Statement for the 2020 Annual Meeting of Shareholders[865] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Shareholders - Information is incorporated by reference from the Registrant's Proxy Statement for the 2020 Annual Meeting of Shareholders[866] Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Shareholders - Information is incorporated by reference from the Registrant's Proxy Statement for the 2020 Annual Meeting of Shareholders[867] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report, including consents and certifications - This section contains a list of all financial statements, schedules, and exhibits filed with the Form 10-K[871] Form 10-K Summary The company reports no Form 10-K summary - None[875]