UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2020
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 LIMITED
(Exact name of registrant as specified in its charter)
Cayman Islands
98-1304287
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer Identification No.)
27 HOSPITAL ROAD
GEORGE TOWN, GRAND CAYMAN
KY1-9008
(Address of principal executive office including zip code)
Registrant's telephone number, including area code: (345) 949-0100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files.). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
☐;
Accelerated filer
☒;
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
A Ordinary Shares
GBLI
NASDAQ Global Select Market
7.75% Subordinated Notes due 2045
GBLIZ
7.875% Subordinated Notes due 2047
GBLIL
As of May 1, 2020, the registrant had outstanding 10,185,459 A Ordinary Shares and 4,133,366 B Ordinary Shares.
TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements:
3
Consolidated Balance Sheets As of March 31, 2020 (Unaudited) and December 31, 2019
Consolidated Statements of Operations Quarters Ended March 31, 2020 (Unaudited) and March 31, 2019 (Unaudited)
4
Consolidated Statements of Comprehensive Income Quarters Ended March 31, 2020 (Unaudited) and March 31, 2019 (Unaudited)
5
Consolidated Statements of Changes in Shareholders’ Equity Quarters Ended March 31, 2020 (Unaudited) and March 31, 2019(Unaudited)
6
Consolidated Statements of Cash Flows Quarters Ended March 31, 2020 (Unaudited) and March 31, 2019 (Unaudited)
7
Notes to Consolidated Financial Statements (Unaudited)
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
42
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
62
Item 4.
Controls and Procedures
PART II – OTHER INFORMATION
Legal Proceedings
64
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
65
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
66
Signature
67
2
Item 1. Financial Statements
Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
March 31, 2020
December 31, 2019
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost: $1,252,931 and $1,231,568; net of allowance of: 2020 - $0)
$
1,271,706
1,253,159
Equity securities, at fair value
174,386
263,104
Other invested assets
47,308
47,279
Total investments
1,493,400
1,563,542
Cash and cash equivalents
59,751
44,271
Premiums receivable, net of allowance for expected credit loss of $2,746 at March 31, 2020
115,331
118,035
Reinsurance receivables, net of allowance for expected credit loss of $8,992 at March 31, 2020
83,074
83,938
Funds held by ceding insurers
47,096
48,580
Federal income taxes receivable
5,510
10,989
Deferred federal income taxes
42,117
31,077
Deferred acquisition costs
69,615
70,677
Intangible assets
21,359
21,491
Goodwill
6,521
Prepaid reinsurance premiums
15,512
16,716
Other assets
69,218
60,048
Total assets
2,028,504
2,075,885
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses
639,468
630,181
Unearned premiums
308,301
314,861
Ceded balances payable
23,932
20,404
Payable for securities purchased
2,585
850
Contingent commissions
5,841
11,928
Debt
294,784
296,640
Other liabilities
78,957
74,212
Total liabilities
1,353,868
1,349,076
Commitments and contingencies (Note 11)
—
Shareholders’ equity:
Ordinary shares, $0.0001 par value, 900,000,000 ordinary shares authorized; A ordinary shares issued: 10,305,404 and 10,282,277 respectively; A ordinary shares outstanding: 10,185,459 and 10,167,056, respectively; B ordinary shares issued and outstanding: 4,133,366 and 4,133,366, respectively
Additional paid-in capital
443,641
442,403
Accumulated other comprehensive income, net of taxes
12,560
17,609
Retained earnings
222,549
270,768
A ordinary shares in treasury, at cost: 119,945 and 115,221 shares, respectively
(4,116
)
(3,973
Total shareholders’ equity
674,636
726,809
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
Consolidated Statements of Operations
(In thousands, except shares and per share data)
Quarters Ended March 31,
2020
2019
Revenues:
Gross written premiums
155,724
142,201
Net written premiums
139,112
123,416
Net earned premiums
144,468
122,089
Net investment income
10,129
7,219
Net realized investment gains (losses):
Other than temporary impairment losses on investments
(1,897
Other net realized investment gains (losses)
(68,162
12,287
Total net realized investment gains (losses)
10,390
Other income
165
488
Total revenues
86,600
140,186
Losses and Expenses:
Net losses and loss adjustment expenses
77,647
58,321
Acquisition costs and other underwriting expenses
56,412
49,743
Corporate and other operating expenses
4,223
3,205
Interest expense
4,865
5,023
Income (loss) before income taxes
(56,547
23,894
Income tax expense (benefit)
(11,969
4,294
Net income (loss)
(44,578
19,600
Per share data:
Net income (loss) (1)
Basic
(3.13
1.38
Diluted
1.37
Weighted-average number of shares outstanding
14,249,551
14,153,918
14,315,091
Cash dividends declared per share
0.25
(1)
For the quarter ended March 31, 2020, weighted average shares outstanding – basic was used to calculate diluted earnings per share due to a net loss for the period.
Consolidated Statements of Comprehensive Income
(In thousands)
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss)
(2,032
20,785
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)
(1
Reclassification adjustment for losses included in net income (loss)
(1,714
1,922
Unrealized foreign currency translation gain (loss)
(1,303
194
Other comprehensive income (loss), net of tax
(5,049
22,900
Comprehensive income (loss), net of tax
(49,627
42,500
Consolidated Statements of Changes in Shareholders’ Equity
Number of A ordinary shares issued:
Number at beginning of period
10,282,277
10,171,954
Ordinary shares issued under share incentive plans
36,180
Ordinary shares issued to directors
23,127
15,842
Number at end of period
10,305,404
10,223,976
Number of B ordinary shares issued:
Number at beginning and end of period
4,133,366
Par value of A ordinary shares:
1
Par value of B ordinary shares:
Balance at beginning and end of period
Additional paid-in capital:
Balance at beginning of period
438,182
Share compensation plans
1,238
601
Balance at end of period
438,783
Accumulated other comprehensive income, net of deferred income tax:
(21,231
Other comprehensive income (loss):
Change in unrealized holding gains (losses)
(3,746
22,707
Change in other than temporary impairment losses recognized in other comprehensive income (loss)
Unrealized foreign currency translation gains (losses)
Other comprehensive income (loss)
1,669
Retained earnings:
215,132
Cumulative effect adjustment resulting from adoption of new accounting guidance
(5
Dividends to shareholders ($0.25 per share per quarter in 2020 and 2019)
(3,641
(3,551
231,176
Number of treasury shares:
115,221
76,642
A ordinary shares purchased
4,724
27,028
Retirement of shares
6,779
119,945
110,449
Treasury shares, at cost:
(3,026
A ordinary shares purchased, at cost
(143
(949
(3,975
667,655
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Amortization and depreciation
1,775
1,783
Amortization of debt issuance costs
Restricted stock and stock option expense
4,248
Amortization of bond premium and discount, net
1,399
1,189
Net realized investment (gains) loss
68,162
(10,390
Equity in the earnings of equity method limited liability investments
(710
4,103
Changes in:
Premiums receivable, net
2,704
(4,798
Reinsurance receivables, net
864
12,072
182
4,498
9,287
(34,072
(6,560
(228
3,528
(421
Other assets and liabilities, net
(6,262
(18,147
(6,087
(3,466
Federal income tax receivable/payable
5,479
(203
Deferred acquisition costs, net
1,062
(1,178
1,204
1,553
Net cash provided by (used for) operating activities
20,784
(23,190
Cash flows from investing activities:
Proceeds from sale of fixed maturities
124,070
61,258
Proceeds from sale of equity securities
49,546
15,354
Proceeds from maturity of fixed maturities
13,259
19,352
Proceeds from other invested assets
682
1,445
Amounts paid in connection with derivatives
(20,007
(3,735
Purchases of fixed maturities
(156,424
(112,024
Purchases of equity securities
(10,810
(17,989
Purchases of other invested assets
(3,500
Net cash provided by (used for) investing activities
316
(39,839
Cash flows from financing activities:
Net borrowings (repayments) under margin borrowing facility
(1,922
5,950
Dividends paid to shareholders
(3,555
(3,595
Purchases of A ordinary shares
Net cash provided by (used for) financing activities
(5,620
1,406
Net change in cash and cash equivalents
15,480
(61,623
Cash and cash equivalents at beginning of period
99,497
Cash and cash equivalents at end of period
37,874
1.
Principles of Consolidation and Basis of Presentation
Global Indemnity Limited (“Global Indemnity” or “the Company”) was incorporated on February 9, 2016 and is domiciled in the Cayman Islands. On November 7, 2016, Global Indemnity replaced Global Indemnity plc as the ultimate parent company as a result of a redomestication transaction. The Company’s A ordinary shares are publicly traded on the NASDAQ Global Select Market under the ticker symbol GBLI.
The Company manages its business through four business segments: Commercial Specialty, Specialty Property, Farm, Ranch, & Stable, and Reinsurance Operations. The Company’s Commercial Specialty segment offers specialty property and casualty insurance products in the excess and surplus lines marketplace. The Company manages Commercial Specialty by differentiating them into four product classifications: 1) Penn-America, which markets property and general liability products to small commercial businesses through a select network of wholesale general agents with specific binding authority; 2) United National, which markets insurance products for targeted insured segments, including specialty products, such as property, general liability, and professional lines through program administrators with specific binding authority; 3) Diamond State, which markets property, casualty, and professional lines products, which are developed by the Company’s underwriting department by individuals with expertise in those lines of business, through wholesale brokers and also markets through program administrators having specific binding authority; and 4) Vacant Express, which primarily insures dwellings which are currently vacant, undergoing renovation, or are under construction and is marketed through aggregators, brokers, and retail agents. These product classifications comprise the Company’s Commercial Specialty business segment and are not considered individual business segments because each product has similar economic characteristics, distribution, and coverage. The Company’s Specialty Property segment offers specialty personal lines property and casualty insurance products through general and specialty agents with specific binding authority on an admitted basis. The Company’s Farm, Ranch, & Stable segment provides specialized property and casualty coverage including Commercial Farm Auto and Excess/Umbrella Coverage for the agriculture industry as well as specialized insurance products for the equine mortality and equine major medical industry on an admitted basis. These insurance products are sold through wholesalers and retail agents, with a selected number having specific binding authority. Collectively, the Company’s U.S. insurance subsidiaries are licensed in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The Commercial Specialty, Specialty Property, and Farm, Ranch, & Stable segments comprise the Company’s U.S. Insurance Operations (“Insurance Operations”). The Company’s Reinsurance Operations consist solely of the operations of its Bermuda-based wholly-owned subsidiary, Global Indemnity Reinsurance Company, Ltd. (“Global Indemnity Reinsurance”). Global Indemnity Reinsurance is a treaty reinsurer of specialty property and casualty insurance and reinsurance companies. The Company’s Reinsurance Operations segment provides reinsurance solutions through brokers and primary writers including insurance and reinsurance companies.
The interim consolidated financial statements are unaudited, but have been prepared in conformity with United States of America generally accepted accounting principles (“GAAP”), which differs in certain respects from those principles followed in reports to insurance regulatory authorities. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The unaudited consolidated financial statements include all adjustments that are, in the opinion of management, of a normal recurring nature and are necessary for a fair statement of results for the interim periods. Results of operations for the quarters ended March 31, 2020 and 2019 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 2019 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.
2.
Investments
The Company implemented new accounting guidance on January 1, 2020 related to the measurement of credit losses on financial instruments. For financial assets held at amortized cost basis, the new guidance requires a forward-looking methodology for in-scope financial assets that reflects expected credit losses and requires consideration of a broader range of information for credit loss estimates, including historical experience, current economic conditions and supportable forecasts
that affect the collectability of the financial asset. For available for sale debt securities, credit losses are still measured similar to the old guidance; however, the new guidance requires that credit losses be presented as an allowance rather than as a write-down of the amortized cost basis of the impaired security and allows for the reversal of credit losses in the current period net income. Any impairments related to factors other than credit losses continue to be recorded through other comprehensive income, net of taxes.
The Company elects the practical expedient to exclude accrued interest from both the fair value and the amortized cost basis of the available for sale debt securities for the purposes of identifying and measuring an impairment and to not measure an allowance for credit losses for accrued investment receivables. Accrued interest receivable is written off through net realized investment gains (losses) at the time the issuer of the bond defaults or is expected to default of payment. The Company made an accounting policy election to present the accrued interest receivable balance with other assets on the Company’s consolidated statements of financial position. Accrued interest receivable was $6.6 million and $7.0 million as of March 31, 2020 and December 31, 2019, respectively.
The amortized cost and estimated fair value of the Company’s fixed maturities securities were as follows as of March 31, 2020 and December 31, 2019:
(Dollars in thousands)
Amortized
Cost
Allowance for Credit Losses
Gross
Unrealized
Gains
Losses
Estimated
Fair Value
As of March 31, 2020
U.S. treasury and agency obligations
174,475
15,739
(25
190,189
Obligations of states and political subdivisions
63,878
1,667
(218
65,327
Mortgage-backed securities
377,274
14,551
(3,179
388,646
Asset-backed securities
155,937
375
(9,215
147,097
Commercial mortgage-backed securities
164,211
6,490
(3,739
166,962
Corporate bonds
221,326
5,613
(7,965
218,974
Foreign corporate bonds
95,830
1,075
(2,394
94,511
Total fixed maturities
1,252,931
45,510
(26,735
As of December 31, 2019
153,906
3,580
(797
156,689
63,256
853
(271
63,838
325,448
3,177
(251
328,374
168,020
937
(420
168,537
183,944
4,369
(209
188,104
239,860
8,478
(79
248,259
97,134
2,247
(23
99,358
1,231,568
23,641
(2,050
9
As of March 31, 2020 and December 31, 2019, the Company’s investments in equity securities consist of the following:
Common stock
102,349
135,329
Preferred stock
10,354
11,656
Mutual funds that invest in fixed maturities
38,685
54,648
Mutual funds that invest in common stock
22,998
61,471
Total
As of March 31, 2020 and December 31, 2019, the Company held a Fannie Mae mortgage pool totaling 4.7% and 4.2% of shareholders’ equity, respectively. Excluding the Fannie Mae pool, U.S. treasuries, agency bonds, mutual funds, and limited partnerships, the Company did not hold any debt or equity investments in a single issuer in excess of 3% of shareholders' equity at March 31, 2020 and December 31, 2019.
The amortized cost and estimated fair value of the Company’s fixed maturities portfolio classified as available for sale at March 31, 2020, 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.
Due in one year or less
31,859
32,006
Due in one year through five years
245,462
250,110
Due in five years through ten years
190,598
189,500
Due in ten years through fifteen years
27,834
29,712
Due after fifteen years
59,756
67,673
The following table contains an analysis of the Company’s fixed income securities with gross unrealized losses that are not deemed to have credit losses, categorized by the period that the securities were in a continuous loss position as of March 31, 2020. The fair value amounts reported in the table are estimates that are prepared using the process described in Note 4 of the notes to the consolidated financial statements in Item 1 of Part I of this report:
Less than 12 months
12 months or longer (1)
7,498
6,654
33,010
(3,178
60
33,070
107,158
(7,030
16,820
(2,185
123,978
41,561
34
41,595
75,676
47,548
319,105
(24,549
16,914
(2,186
336,019
Fixed maturities in a gross unrealized loss position are 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.
10
The following table contains an analysis of the Company’s fixed income securities with gross unrealized losses, categorized by the period that the securities were in a continuous loss position as of December 31, 2019. The fair value amounts reported in the table are estimates that are prepared using the process described in Note 4 of the notes to the consolidated financial statements in Item 1 of Part I of this report:
35,633
27,180
93,579
(244
902
(7
94,481
43,402
(167
16,152
(253
59,554
25,698
(196
1,945
(13
27,643
19,407
4,822
(20
2,035
(3
6,857
249,721
(1,774
21,034
(276
270,755
The outbreak of the coronavirus pandemic in the first quarter of 2020 and uncertainty around the extent of its economic impact caused severe declines in financial markets which are reflected in the fair values of our investments.
The Company regularly performs various analytical valuation procedures with respect to its investments, including reviewing each available for sale debt security in an unrealized loss position to assess whether the decline in fair value below amortized cost basis has resulted from a credit loss or other factors. In assessing whether a credit loss exists, the Company compares the present value of the cash flows expected to be collected from the security to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis of the security, a credit loss exists and an allowance for credit losses is recorded. Subsequent changes in the allowances are recorded in the period of change as either credit loss expense or reversal of credit loss expense. Any impairments related to factors other than credit losses are recorded through other comprehensive income, net of taxes.
For fixed maturities, the factors considered in reaching the conclusion that a credit loss exists include, among others, whether:
the extent to which the fair value is less than the amortized cost basis;
(2)
the issuer is in financial distress;
(3)
the investment is secured;
(4)
a significant credit rating action occurred;
(5)
scheduled interest payments were delayed or missed;
(6)
changes in laws or regulations have affected an issuer or industry;
(7)
the investment has an unrealized loss and was identified by the Company’s investment manager as an investment to be sold before recovery or maturity;
(8)
the investment failed cash flow projection testing to determine if anticipated principal and interest payments will be realized; and
(9)
changes in US Treasury rates and/or credit spreads since original purchase to identify whether the unrealized loss is simply due to interest rate movement.
11
According to accounting guidance for debt securities in an unrealized loss position, the Company is required to assess whether it has the intent to sell the debt security or more likely than not will be required to sell the debt security before the anticipated recovery. If either of these conditions is met, any allowance for credit losses is written off and the amortized cost basis is written down to the fair value of the fixed maturity security with any incremental impairment reported in earnings. That new amortized cost basis shall not be adjusted for subsequent recoveries in fair value.
The following is a description, by asset type, of the methodology and significant inputs that the Company used to measure the amount of credit loss recognized in earnings, if any:
U.S. treasury and agency obligations – As of March 31, 2020, gross unrealized losses related to U.S. treasury and agency obligations were $0.025 million. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, macroeconomic and market analysis is conducted in evaluating these securities. Consideration is given to the interest rate environment, duration and yield curve management of the portfolio, sector allocation and security selection. Based on the analysis performed, the Company did not recognize a credit loss on U.S. treasury and agency obligations during the period.
Obligations of states and political subdivisions – As of March 31, 2020, gross unrealized losses related to obligations of states and political subdivisions were $0.218 million. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, elements that may influence the performance of the municipal bond market are considered in evaluating these securities such as investor expectations, supply and demand patterns, and current versus historical yield and spread relationships. The analysis relies on the output of fixed income credit analysts, as well as dedicated municipal bond analysts who perform extensive in-house fundamental analysis on each issuer, regardless of their rating by the major agencies. Based on the analysis performed, the Company did not recognize a credit loss on obligations of states and political subdivisions during the period.
Mortgage-backed securities (“MBS”) – As of March 31, 2020, gross unrealized losses related to mortgage-backed securities were $3.179 million. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, mortgage-backed securities are modeled to project principal losses under downside, base, and upside scenarios for the economy and home prices. The primary assumption that drives the security and loan level modeling is the Home Price Index (“HPI”) projection. These forecasts incorporate not just national macro-economic trends, but also regional impacts to arrive at the most granular and accurate projections. These assumptions are incorporated into the model as a basis to generate delinquency probabilities, default curves, loss severity curves, and voluntary prepayment curves at the loan level within each deal. The model utilizes HPI-adjusted current LTV, payment history, loan terms, loan modification history, and borrower characteristics as inputs to generate expected cash flows and principal loss for each bond under various scenarios. Based on the analysis performed, the Company did not recognize a credit loss on mortgage-backed securities during the period.
Asset backed securities (“ABS”) - As of March 31, 2020, gross unrealized losses related to asset backed securities were $9.215 million. The weighted average credit enhancement for the Company’s asset backed portfolio is 32.3. This represents the percentage of pool losses that can occur before an asset backed security will incur its first dollar of principal losses. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, every ABS transaction is analyzed on a stand-alone basis. This analysis involves a thorough review of the collateral, prepayment, and structural risk in each transaction. Additionally, the analysis includes an in-depth credit analysis of the originator and servicer of the collateral. The analysis projects an expected loss for a deal given a set of assumptions specific to the asset type. These assumptions are used to calculate at what level of losses the deal will incur its first dollar of principal loss. The major assumptions used to calculate this ratio are loss severities, recovery lags, and no advances on principal and interest. Based on the analysis performed, the Company did not recognize a credit loss on asset backed securities during the period.
Commercial mortgage-backed securities (“CMBS”) - As of March 31, 2020, gross unrealized losses related to the CMBS portfolio were $3.739 million. The weighted average credit enhancement for the Company’s CMBS portfolio is 29.8. This represents the percentage of pool losses that can occur before a mortgage-backed security will incur its first dollar of principal loss. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, a loan level analysis is utilized where every underlying CMBS loan is re-underwritten based on a set of assumptions reflecting expectations for the future path of the economy. Each loan is analyzed over time using a series of tests to determine if a credit event will occur during the life of the loan. Inherent in this process are several economic scenarios and their corresponding rent/vacancy and capital market states. The five primary credit events that frame the analysis include loan
12
modifications, term default, balloon default, extension, and ability to pay off at balloon. The resulting output is the expected loss adjusted cash flows for each bond under the base case and distressed scenarios. Based on the analysis performed, the Company did not recognize a credit loss on commercial mortgage-backed securities during the period.
Corporate bonds - As of March 31, 2020, gross unrealized losses related to corporate bonds were $7.965 million. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, analysis for this asset class includes maintaining detailed financial models that include a projection of each issuer’s future financial performance, including prospective debt servicing capabilities, capital structure composition, and the value of the collateral. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, the issuer’s current competitive position, its vulnerability to changes in the competitive and regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood of default as well as potential losses in the event of default. Based on the analysis performed, the Company did not recognize a credit loss on corporate bonds during the period.
Foreign bonds – As of March 31, 2020, gross unrealized losses related to foreign bonds were $2.394 million. To assess whether the decline in fair value below amortized cost has resulted from a credit loss or other factors, detailed financial models are maintained that include a projection of each issuer’s future financial performance, including prospective debt servicing capabilities, capital structure composition, and the value of the collateral. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, the issuer’s current competitive position, its vulnerability to changes in the competitive and regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood of default as well as potential losses in the event of default. Based on the analysis performed, the Company did not recognize a credit loss on foreign bonds during the period.
The Company recorded the following other than temporary impairments (“OTTI”) on its investment portfolio for the quarter ended March 31, 2019:
Quarter Ended March 31,
OTTI losses, gross
Portion of loss recognized in other comprehensive income (pre-tax)
Net impairment losses on fixed maturities recognized in earnings
The following table is an analysis of the credit losses recognized in earnings on fixed maturities held by the Company for the quarter ended March 31, 2019 for which a portion of the OTTI loss was recognized in other comprehensive income.
13
Additions where no OTTI was previously recorded
Additions where an OTTI was previously recorded
Reductions for securities for which the company intends to sell or more likely than not will be required to sell before recovery
Reductions reflecting increases in expected cashflows to be collected
Reductions for securities sold during the period
Accumulated Other Comprehensive Income, Net of Tax
Accumulated other comprehensive income, net of tax, as of March 31, 2020 and December 31, 2019 was as follows:
Net unrealized gains (losses) from:
Fixed maturities
18,775
21,591
Foreign currency fluctuations
(2,335
(1,032
Deferred taxes
(3,880
(2,950
Accumulated other comprehensive income, net of tax
The following tables present the changes in accumulated other comprehensive income, net of tax, by component for the quarters ended March 31, 2020 and 2019:
Quarter Ended March 31, 2020
(Dollars In Thousands)
Unrealized Gains and Losses on Available for Sale Securities
Foreign
Currency
Items
Accumulated Other Comprehensive Income
Beginning balance, net of tax
18,641
Other comprehensive income before reclassification, before tax
(884
(2,187
Amounts reclassified from accumulated other comprehensive (income), before tax
(1,932
Other comprehensive income, before tax
(2,816
(4,119
Income tax (expense)
(930
Ending balance, net of tax
14,895
Quarter Ended March 31, 2019
(19,897
(1,334
23,907
24,101
Amounts reclassified from accumulated other comprehensive income, before tax
2,195
26,102
26,296
Income tax expense
(3,396
2,809
(1,140
14
The reclassifications out of accumulated other comprehensive income for the quarters ended March 31, 2020 and 2019 were as follows:
Amounts Reclassified from
Accumulated Other
Comprehensive Income
Details about Accumulated Other
Comprehensive Income Components
Affected Line Item in the Consolidated
Statements of Operations
Unrealized gains and losses on available for sale securities
Other net realized investment (gains) losses
298
1,897
Total before tax
218
(273
Unrealized gains and losses on available for sale securities, net of tax
Foreign currency items
Foreign currency items, net of tax
Total reclassifications
Total reclassifications, net of tax
Net Realized Investment Gains (Losses)
The components of net realized investment gains (losses) for the quarters ended March 31, 2020 and 2019 were as follows:
Gross realized gains
2,243
26
Gross realized losses
(311
(2,221
Net realized gains (losses)
1,932
(2,195
Equity securities:
1,822
16,685
(51,804
(1,533
(49,982
15,152
Derivatives:
13,623
(33,735
(2,567
Net realized gains (losses) (1)
(20,112
Includes periodic net interest settlements related to the derivatives of $0.6 million and $0.2 million for the quarters ended March 31, 2020 and 2019, respectively.
Net realized investment losses for the quarter ended March 31, 2020 were primarily due to the impact of changes in fair value on equity securities and derivatives due to the recent disruption in the global financial markets as a result of COVID-19.
15
The following table shows the calculation of the portion of realized gains and losses related to equity securities held as of March 31, 2020 and 2019:
Net gains and (losses) recognized during the period on equity securities
Less: Net gains (losses) recognized during the period on equity securities sold during the period
(4,221
2,034
Unrealized gains and (losses) recognized during the reporting period on equity securities still held at the reporting date
(45,761
13,118
The proceeds from sales and redemptions of available for sale and equity securities resulting in net realized investment gains (losses) for the quarters ended March 31, 2020 and 2019 were as follows:
Equity securities
Net Investment Income
The sources of net investment income for the quarters ended March 31, 2020 and 2019 were as follows:
9,041
9,968
1,364
1,137
180
401
533
(3,704
Total investment income
11,118
7,802
Investment expense
(989
(583
The Company’s total investment return on a pre-tax basis for the quarters ended March 31, 2020 and 2019 were as follows:
Net realized investment gains (losses)
Change in unrealized holding gains and losses
Net realized and unrealized investment returns
(72,281
36,686
Total investment return
(62,152
43,905
Total investment return % (1)
(3.9
%)
2.9
%
Average investment portfolio (2)
1,578,765
1,514,292
Not annualized.
Average of total cash and invested assets, net of receivable/payable for securities purchased and sold, as of the beginning and end of the period.
As of March 31, 2020 and December 31, 2019, the Company did not own any fixed maturity securities that were non-income producing for the preceding twelve months.
Insurance Enhanced Asset-Backed and Credit Securities
As of March 31, 2020, the Company held insurance enhanced bonds with a market value of approximately $37.5 million which represented 2.4% of the Company’s total cash and invested assets, net of payable/ receivable for securities purchased and sold.
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The insurance enhanced bonds are comprised of $16.4 million of municipal bonds, $9.9 million of commercial mortgage-backed securities, and $11.2 million of collateralized mortgage obligations. The financial guarantors of the Company’s $37.5 million of insurance enhanced commercial-mortgage-backed, municipal securities, and collateralized mortgage obligations include Municipal Bond Insurance Association ($3.9 million), Assured Guaranty Corporation ($10.3 million), Federal Home Loan Mortgage Corporation ($21.1 million), Ambac Financial Group ($2.2 million), and Federal Deposit Insurance Corporation (less than $0.1 million).
The Company had no direct investments in the entities that have provided financial guarantees or other credit support to any security held by the Company at March 31, 2020.
Bonds Held on Deposit
Certain cash balances, cash equivalents, equity securities, and bonds available for sale were deposited with various governmental authorities in accordance with statutory requirements, were held as collateral, or were held in trust pursuant to intercompany reinsurance agreements. The fair values were as follows as of March 31, 2020 and December 31, 2019:
Estimated Fair Value
On deposit with governmental authorities
27,278
26,431
Intercompany trusts held for the benefit of U.S. policyholders
177,012
179,116
Held in trust pursuant to third party requirements
126,451
133,122
Letter of credit held for third party requirements
1,458
Securities held as collateral
107,258
91,229
439,457
431,356
Variable Interest Entities
A Variable Interest Entity (VIE) refers to an investment in which an investor holds a controlling interest that is not based on the majority of voting rights. Under the VIE model, the party that has the power to exercise significant management influence and maintain a controlling financial interest in the entity’s economics is said to be the primary beneficiary, and is required to consolidate the entity within their results. Other entities that participate in a VIE, for which their financial interests fluctuate with changes in the fair value of the investment entity’s net assets but do not have significant management influence and the ability to direct the VIE’s significant economic activities are said to have a variable interest in the VIE but do not consolidate the VIE in their financial results.
The Company has variable interests in three VIE’s for which it is not the primary beneficiary. These investments are accounted for under the equity method of accounting as their ownership interest exceeds 3% of their respective investments.
The carrying value of one of the Company’s VIE’s, which invests in distressed securities and assets, was $12.5 million and $13.5 million as of March 31, 2020 and December 31, 2019, respectively. The Company’s maximum exposure to loss from this VIE, which factors in future funding commitments, was $26.7 million and $27.7 million at March 31, 2020 and December 31, 2019, respectively. The carrying value of a second VIE that also invests in distressed securities and assets was $24.3 million and $24.0 million at March 31, 2020 and December 31, 2019, respectively. The Company’s maximum exposure to loss from this VIE, which factors in future funding commitments, was $41.3 million and $41.0 million at March 31, 2020 and December 31, 2019, respectively. The carrying value of a third VIE that invests in REIT qualifying assets was $10.5 million and $9.8 million as of March 31, 2020 and December 31, 2019, respectively. The Company’s maximum exposure to loss from this VIE, which factors in future funding commitments, was $11.0 million and $10.3 million at March 31, 2020 and December 31, 2019, respectively. The Company’s investment in VIEs is included in other invested assets on the consolidated balance sheet with changes in carrying value recorded in the consolidated statements of operations.
The limited partnerships typically report results one to three months following the end of the reporting period. As a result, the impact of the recent disruption in markets due to COVID-19 is not reflected in the 1st quarter results. Certain information has come to our attention that these limited partnership investments will have a decline in value which will be reflected in the 2nd quarter.
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3.
Derivative Instruments
Derivatives are used by the Company to reduce risks from changes in interest rates and limit exposure to severe equity market changes. The Company has interest rate swaps with terms to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts as calculated by reference to an agreed notional amount. In 2019, the Company began to utilize exchange-traded futures contracts, which give the holder the right and obligation to participate in market movements at a future date, to allow the Company to react faster to market conditions. The Company posts collateral and settles variation margin in cash on a daily basis equal to the amount of the futures contracts’ change in value scaled by a multiplier.
The Company accounts for the interest rate swaps and futures as non-hedge instruments and recognizes the fair value of the interest rate swaps in other assets or other liabilities on the consolidated balance sheets with the changes in fair value recognized as net realized investment gains or losses in the consolidated statements of operations. The Company is ultimately responsible for the valuation of the interest rate swaps. To aid in determining the estimated fair value of the interest rate swaps, the Company relies on the forward interest rate curve and information obtained from a third party financial institution.
The following table summarizes information on the location and the gross amount of the derivatives on the consolidated balance sheets as of March 31, 2020 and December 31, 2019:
Derivatives Not Designated as
Hedging Instruments under ASC 815
Balance Sheet Location
Notional Amount
Interest rate swap agreements
Other assets/liabilities
200,000
(19,059
(10,275
Futures contracts on bonds (1)
537
16,894
Futures contracts on equities (1)
89,179
57,816
289,716
274,710
Futures are settled daily such that their fair value is not reflected in the consolidated statements of financial position
The following table summarizes the net gains (losses) included in the consolidated statements of operations for changes in the fair value of the derivatives and the periodic net interest settlements under the derivatives for the quarters ended March 31, 2020 and 2019:
Consolidated Statements of Operations Line
(9,423
Futures contracts on bonds
(2,399
Futures contracts on equities
(8,290
As of March 31, 2020 and December 31, 2019, the Company is due $3.7 million and $3.0 million, respectively, for funds it needed to post to execute the swap transaction and $19.0 million and $12.5 million, respectively, for margin calls made in connection with the interest rate swaps. These amounts are included in other assets on the consolidated balance sheets.
As of March 31, 2020 and December 31, 2019, the Company posted initial margin of $10.2 million and $3.0 million, respectively, in securities for trading futures contracts and has a mark-to-market receivable of $1.9 million and $0.3 million, respectively, in connection with the futures contracts. Variation margin is included in other assets on the consolidated balance sheets.
4.
Fair Value Measurements
The accounting standards related to fair value measurements define fair value, establish a framework for measuring fair value, outline a fair value hierarchy based on inputs used to measure fair value, and enhance disclosure requirements for fair value measurements. These standards do not change existing guidance as to whether or not an instrument is carried at fair
18
value. The Company has determined that its fair value measurements are in accordance with the requirements of these accounting standards.
The Company’s invested assets and derivative instruments are carried at their fair value and are categorized based upon a fair value hierarchy:
•
Level 1 – inputs utilize quoted prices (unadjusted) in active markets for identical assets that the Company has the ability to access at the measurement date.
Level 2 – inputs utilize other than quoted prices included in Level 1 that are observable for similar assets, either directly or indirectly.
Level 3 – inputs are unobservable for the asset, and include situations where there is little, if any, market activity for the asset.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.
The following table presents information about the Company’s invested assets and derivative instruments measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
Level 1
Level 2
Level 3
Assets:
1,081,517
164,032
Total assets measured at fair value
354,221
1,091,871
1,446,092
Derivative instruments
19,059
Total liabilities measured at fair value
19
1,096,470
251,448
408,137
1,108,126
1,516,263
10,275
The securities classified as Level 1 in the above table consist of U.S. Treasuries and equity securities actively traded on an exchange.
The securities classified as Level 2 in the above table consist primarily of fixed maturity securities and derivative instruments. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, security prices are derived through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. If there are no recent reported trades, matrix or model processes are used to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Included in the pricing of asset-backed securities, collateralized mortgage obligations, and mortgage-backed securities are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral. The estimated fair value of the derivative instruments, consisting of interest rate swaps, is obtained from a third party financial institution that utilizes observable inputs such as the forward interest rate curve.
For the Company’s material debt arrangements, the current fair value of the Company’s debt at March 31, 2020 and December 31, 2019 was as follows:
Carrying Value
Margin Borrowing Facility
71,707
73,629
7.75% Subordinated Notes due 2045 (1)
96,895
82,214
96,864
100,264
7.875% Subordinated Notes due 2047 (2)
126,182
109,282
126,147
134,462
263,203
308,355
As of March 31, 2020 and December 31, 2019, the carrying value and fair value of the 7.75% Subordinated Notes due 2045 is net of unamortized debt issuance cost of $3.1 million.
As of March 31, 2020 and December 31, 2019, the carrying value and fair value of the 7.875% Subordinated Notes due 2047 are net of unamortized debt issuance cost of $3.8 million and $3.9 million, respectively.
The fair value of the margin borrowing facility approximates its carrying value due to the facility being due on demand. The subordinated notes due 2045 and 2047 are publicly traded instruments and are classified as Level 1 in the fair value hierarchy.
20
Fair Value of Alternative Investments
Other invested assets consist of limited liability partnerships whose carrying value approximates fair value. The following table provides the fair value and future funding commitments related to these investments at March 31, 2020 and December 31, 2019.
Future Funding
Commitment
European Non-Performing Loan Fund, LP (1)
12,510
14,214
13,530
Distressed Debt Fund, LP (2)
24,305
17,000
23,966
Mortgage Debt Fund, LP (3)
10,493
506
9,783
31,720
This limited partnership invests in distressed securities and assets through senior and subordinated, secured and unsecured debt and equity, in both public and private large-cap and middle-market companies. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets.
This limited partnership invests in stressed and distressed securities and structured products. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets.
This limited partnership invests in REIT qualifying assets such as mortgage loans, investor property loans, and commercial mortgage loans. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets.
Limited Partnerships with ownership interest exceeding 3%
The Company uses the equity method to account for investments in limited partnerships where its ownership interest exceeds 3%. The equity method of accounting for an investment in a limited partnership requires that its cost basis be updated to account for the income or loss earned on the investment. The investment income associated with these limited partnerships, which is booked on a one quarter lag, is reflected in the consolidated statements of operations in the amounts of $0.5 million and ($3.7) million for the quarters ended March 31, 2020 and 2019, respectively. The limited partnerships typically report results one to three months following the end of the reporting period. As a result, the impact of the recent disruption in markets due to COVID-19 is not reflected in the 1st quarter results. Certain information has come to our attention that these limited partnership investments will have a decline in value which will be reflected in the 2nd quarter.
Pricing
The Company’s pricing vendors provide prices for all investment categories except for investments in limited partnerships. Two primary vendors are utilized to provide prices for equity and fixed maturity securities.
The following is a description of the valuation methodologies used by the Company’s pricing vendors for investment securities carried at fair value:
Equity security prices are received from primary and secondary exchanges.
Corporate and agency bonds are evaluated by utilizing a spread to a benchmark curve. Bonds with similar characteristics are grouped into specific sectors. Inputs for both asset classes consist of trade prices, broker quotes, the new issue market, and prices on comparable securities.
Data from commercial vendors is aggregated with market information, then converted into an option adjusted spread “OAS” matrix and prepayment model used for commercial mortgage obligations (“CMO”). CMOs are categorized with mortgage-backed securities in the tables listed above. For asset-backed securities, spread data is derived from trade prices, dealer quotations, and research reports. For both asset classes, evaluations utilize standard inputs plus new issue data, and collateral performance. The evaluated pricing models incorporate cash flows, broker quotes, market trades, historical prepayment speeds, and dealer projected speeds.
For obligations of state and political subdivisions, an attribute-based modeling system is used. The pricing model incorporates trades, market clearing yields, market color, and fundamental credit research.
21
U.S. treasuries are evaluated by obtaining feeds from a number of live data sources including primary and secondary dealers as well as inter-dealer brokers.
For mortgage-backed securities, various external analytical products are utilized and purchased from commercial vendors.
The Company performs certain procedures to validate whether the pricing information received from the pricing vendors is reasonable, to ensure that the fair value determination is consistent with accounting guidance, and to ensure that its assets are properly classified in the fair value hierarchy. The Company’s procedures include, but are not limited to:
Reviewing periodic reports provided by the Investment Manager that provides information regarding rating changes and securities placed on watch. This procedure allows the Company to understand why a particular security’s market value may have changed or may potentially change.
Understanding and periodically evaluating the various pricing methods and procedures used by the Company’s pricing vendors to ensure that investments are properly classified within the fair value hierarchy.
On a quarterly basis, the Company corroborates investment security prices received from its pricing vendors by obtaining pricing from a second pricing vendor for a sample of securities.
During the quarters ended March 31, 2020 and 2019, the Company has not adjusted quotes or prices obtained from the pricing vendors.
5.Allowance for Credit Losses - Premiums Receivable and Reinsurance Receivables
The Company implemented new accounting guidance on January 1, 2020 related to the measurement of credit losses on financial instruments. Please see footnote 16 for further discussion on this new accounting guidance.
For premiums receivables, the allowance is based upon the Company’s ongoing review of key aspects of amounts outstanding, including but not limited to, length of collection periods, direct placement with collection agencies, solvency of insured or agent, terminated agents, and other relevant factors.
For reinsurance receivables, the allowance is based upon the Company’s ongoing review of key aspects of amounts outstanding, including but not limited to, length of collection periods, disputes, applicable coverage defenses, insolvent reinsurers, financial strength of solvent reinsurers based on A.M Best Ratings and other relevant factors.
The following table is an analysis of the allowance for credit losses related to the Company's premiums receivable and reinsurance receivables for the quarter ended March 31, 2020:
Premiums
Receivable
Reinsurance Receivables
Beginning balance
2,754
8,992
Current period provision for expected credit losses
162
Write-offs
(170
Recoveries of amounts previously written off
Ending balance
2,746
6.Income Taxes
As of March 31, 2020, the statutory income tax rates of the countries where the Company conducts business are 21% in the United States, 0% in Bermuda, 0% in the Cayman Islands, 19% in the United Kingdom, and 25% on non-trading income, 33% on capital gains and 12.5% on trading income in the Republic of Ireland. The statutory income tax rate of each country is applied against the expected annual taxable income of the Company in each country to estimate the annual income tax expense.
22
The Company’s income (loss) before income taxes from its non-U.S. subsidiaries and U.S. subsidiaries for the quarters ended March 31, 2020 and 2019 were as follows:
Non-U.S.
Subsidiaries
U.S.
Eliminations
17,517
138,207
121,595
23,855
120,613
6,376
7,250
(3,497
Net realized investment losses
(3,710
(64,452
Other income (loss)
(318
483
26,203
63,894
12,562
65,085
8,549
47,863
1,127
3,096
342
8,020
3,623
(60,170
17,549
124,652
17,542
105,874
14,707
107,382
4,370
3,136
(287
(892
11,282
473
18,200
122,273
4,980
53,341
4,995
44,748
1,527
1,678
353
4,957
6,345
The following table summarizes the components of income tax expense (benefit):
Current income tax expense:
46
U.S. Federal
Total current income tax expense
Deferred income tax expense (benefit):
Total deferred income tax expense (benefit)
Total income tax expense (benefit)
The weighted average expected tax provision has been calculated using income (loss) before income taxes in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate.
23
The following table summarizes the differences between the tax provision for financial statement purposes and the expected tax provision at the weighted average tax rate:
Amount
% of Pre-
Tax Income
Expected tax provision at weighted average tax rate
(12,635
22.3
3,732
15.6
Adjustments:
Tax exempt interest
Dividend exclusion
(71
0.1
(77
(0.3
Non-deductible interest
679
(1.1
680
2.8
Other
59
(0.1
(40
Effective income tax expense (benefit)
21.2
18.0
The effective income tax benefit rate for the quarter ended March 31, 2020 was 21.2%, compared with an effective income tax expense rate of 18.0% for the quarter ended March 31, 2019. The income tax benefit rate for the quarter ended March 31, 2020 was primarily the result of investment losses incurred by the Company’s U.S. Subsidiaries.
The Company has a net operating loss (“NOL”) carryforward of $22.9 million as of March 31, 2020, which begins to expire in 2036 based on when the original NOL was generated. The Company’s NOL carryforward as of December 31, 2019 was $21.9 million.
The Company has a Section 163(j) (“163(j)”) carryforward of $9.0 million as of March 31, 2020 and December 31, 2019, which can be carried forward indefinitely. The 163(j) carryforward relates to the limitation on the deduction for business interest expense paid or accrued.
The Company has an alternative minimum tax (“AMT”) credit carryforward of $5.5 million and $11.0 million as of March 31, 2020 and December 31, 2019, respectively. The Company received $5.5 million of the AMT credit carryforward during the quarter ended March 31, 2020. Under provisions of the CARES Act, the Company filed a request for a full refund of the remaining $5.5 million in 2020.
7.Liability for Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:
680,031
Less: Ceded reinsurance receivables
76,273
109,342
Net balance at beginning of period
553,908
570,689
Incurred losses and loss adjustment expenses related to:
Current year
78,247
66,251
Prior years
(600
(7,930
Total incurred losses and loss adjustment expenses
Paid losses and loss adjustment expenses related to:
22,034
18,340
48,806
61,776
Total paid losses and loss adjustment expenses
70,840
80,116
Net balance at end of period
560,715
548,894
Plus: Ceded reinsurance receivables
78,753
97,065
645,959
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.
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During the first quarter of 2020, the Company reduced its prior accident year loss reserves by $0.6 million. This reduction consisted of increases and decreases in prior accident year loss reserves in all segments with the primary impact being a $0.6 million decrease related to Reinsurance Operations.
The increases and decreases in prior accident year loss reserves related to Commercial Specialty primarily consisted of the following:
General Liability: An increase of less than $0.3 million primarily in the 2016 through 2018 accident years reflects higher than anticipated claims severity. These increases were mostly offset by decreases mainly in the 2012 through 2015 and 2019 accident years due to lower than expected claims severity.
Workers Compensation: A $0.2 million reduction primarily in loss adjustment expense reserves in the 2012 accident year and accident years prior to 2005.
Property: A decrease of less than $0.1 million is mainly due to decreases in the 2018 and 2019 accident years primarily recognizing lower than expected claims severity, offset by an increase in the 2016 accident year due to higher than anticipated claims severity.
The increases and decreases in prior accident year loss reserves related to Specialty Property primarily consisted of the following:
General Liability: A $0.4 million decrease primarily recognizes lower than expected claims severity in the 2015, 2016 and 2019 accident years.
Property: A $0.4 million increase mainly reflects higher than anticipated claims severity in the 2019 accident year, partially offset by a decrease in the 2018 accident year due to lower than expected claims severity.
Farm, Ranch, & Stable had immaterial increases and decreases in prior accident year loss reserves.
The $0.6 million reduction of prior accident year loss reserves related to Reinsurance Operations was from the property lines. Decreases were primarily in the 2014 through 2017 accident years based on a review of the experience reported from cedants, partially offset by an increase in the 2018 accident year mainly due to development on Typhoons Jebi and Trami and an increase in attritional losses in the 2019 accident year.
During the first quarter of 2019, the Company reduced its prior accident year loss reserves by $7.9 million, which consisted of a $6.7 million decrease related to Commercial Specialty, a $0.9 million increase related to Specialty Property, a $2.1 million decrease related to Farm, Ranch, & Stable, and a $0.1 million decrease related to Reinsurance Operations.
The $6.7 million reduction of prior accident year loss reserves related to Commercial Specialty primarily consisted of the following:
General Liability: A $5.0 million reduction in aggregate with $0.5 million of favorable development in the construction defect reserve category and $4.5 million of favorable development in the other general liability reserve categories. The decreases in the construction defect reserve category recognize lower than anticipated claims frequency and severity that led to reductions in the 2004 through 2009 and 2011 through 2018 accident years, partially offset by an increase in the 2010 accident year. For the other general liability reserve categories, lower than expected claims severity was the primary driver of the favorable development mainly in accident years 2005 through 2014 and the 2016 and 2017 accident years, partially offset by an increase in the 2015 accident year.
Commercial Auto Liability: A $0.8 million decrease in total primarily in the 2000 through 2002, 2010, 2012 and 2013 accident years. The decreases recognize lower than anticipated claims severity.
Property: A $1.0 million decrease in aggregate recognizes lower than anticipated claims severity primarily in the 2012 through 2016 and 2018 accident years partially offset by increases in the 2010 and 2017 accident years.
25
The $0.9 million increase of prior accident year loss reserves related to Specialty Property primarily consisted of the following:
Property: A $0.8 million increase recognizes higher than expected claims severity in the 2018 accident year partially offset by decreases in the 2015 through 2017 accident years.
The $2.1 million reduction of prior accident year loss reserves related to Farm, Ranch, & Stable primarily consisted of the following:
Property: A $0.4 million decrease in total reflects lower than expected case incurred emergence in the 2018 accident year partially offset by an increase in the 2017 accident year.
Liability: A $1.7 million decrease in total, recognizes lower than anticipated claims severity in the 2016 and 2017 accident years partially offset by increases in the 2013 through 2015 accident years.
The $0.1 million reduction of prior accident year loss reserves related to Reinsurance Operations was from the property lines. Decreases were primarily in the 2013 and 2015 through 2017 accident years, mostly offset by an increase in the 2018 accident year. The accident year change was based on a review of the experience reported from cedants.
8. Leases
Effective January 1, 2019, the Company adopted new accounting guidance which increased transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company adopted this new accounting guidance using the optional transition method. Under this method, the Company applied the new leases standard at the adoption date and recognized a cumulative effect adjustment of less than $0.1 million to the opening balance sheet of retained earnings. The Company elected the package of practical expedients permitted under the transition guidance within the new standard. In addition, the Company elected the hindsight practical expedient to determine the lease term for existing leases.
The Company determines if an arrangement is a lease at inception. Leases with a term of 12 months or less are not recorded on the consolidated balance sheets. For leases with a term of greater than 12 months, lease right-of-use assets (“ROU”) are included in other assets on the consolidated balance sheets and lease liabilities are included in other liabilities on the consolidated balance sheets.
Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The Company’s leases do not provide an implicit rate; therefore, the Company uses its incremental borrowing rate at the commencement date in determining the present value of future payments. The ROU assets are calculated using the initial lease liability amount, plus any lease payments made at or before the commencement date, minus any lease incentives received, plus any initial direct costs incurred.
The Company’s lease agreements may contain both lease and non-lease components which are accounted separately. The Company elected the practical expedient on not separating lease components from non-lease components for its equipment leases.
The Company leases office space and equipment under various operating lease arrangements. The Company’s leases have remaining lease terms ranging from 5 months to 10 years. Some building leases have options to extend, terminate, or retract the leased area. The Company did not factor in term extension, terminations, or space retractions into the lease terms used to calculate the right-of-use assets and lease liabilities since it was uncertain as to whether these options would be executed.
The Company is also party to certain service contracts. These agreements will continue to be accounted for as service contracts and expensed in the period the services have been provided. As contracts are signed, renewed, or renegotiated, they will be evaluated using the criteria set forth in the new lease guidance to determine if these contracts contain a lease and will be accounted for properly depending upon the terms and language in the contract.
Lease expenses for minimum lease payments are recognized on a straight-line basis over the lease term.
The components of lease expenses were as follows:
Operating lease expenses
748
819
Short-term lease expenses
Total lease expenses
750
822
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of liabilities:
Operating leases
395
574
Right-of-use assets obtained in exchange for new lease obligations:
14,897
Supplemental balance sheet information related to leases was as follows:
The table below presents the lease-related assets and liabilities recorded on the consolidated balance sheets.
Classification on the consolidated balance sheets
Operating lease assets
22,071
22,761
Operating lease liabilities
23,345
23,539
Weighted-average remaining lease term:
9.5 years
10.2 years
Weighted-average discount rate:
Operating leases (1)
2.7
Represents the Company’s incremental borrowing rate
At March 31, 2020, future minimum lease payments under non-cancelable operating leases were as follows:
2020 (1)
1,579
2021
2,779
2022
2,659
2023
2,702
2024
Thereafter
14,142
Total future minimum lease payments
26,607
Less: amount representing interest
3,262
Present value of minimum lease payments
(1)Excludes the quarter ended March 31, 2020
27
9.Shareholders’ Equity
The following table provides information with respect to the A ordinary shares that were surrendered or repurchased during the quarter ended March 31, 2020:
Period (1)
Total Number
of Shares
Purchased
Average
Price Paid
Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan or Program
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 1-31, 2020
3,124
29.63
February 1-29, 2020
1,600
31.13
30.14
Based on settlement date.
Surrendered by employees as payment of taxes withheld on the vesting of restricted stock.
The following table provides information with respect to the A ordinary shares that were surrendered or repurchased during the quarter ended March 31, 2019:
January 1-31, 2019
7,945
36.23
February 1-28, 2019
19,083
34.59
35.07
There were no B ordinary shares that were surrendered or repurchased during the quarters ended March 31, 2020 or 2019.
As of March 31, 2020, the Company’s A ordinary shares were held by approximately 215 shareholders of record. There were four holders of record of the Company’s B ordinary shares, all of whom are affiliated investment funds of Fox Paine & Company, LLC or an affiliate of an investment fund, as of March 31, 2020.
Please see Note 12 of the notes to the consolidated financial statements in Item 8 Part II of the Company’s 2019 Annual Report on Form 10-K for more information on the Company’s repurchase program.
Dividends
Dividend payments of $0.25 per ordinary share were declared during the quarter ended March 31, 2020 as follows:
Approval Date
Record Date
Payment Date
Total Dividends Declared
February 9, 2020
March 24, 2020
3,539
Various (1)
Various
102
3,641
Represents dividends declared on unvested shares, net of forfeitures.
28
Dividend payments of $0.25 per ordinary share were declared during the quarter ended March 31, 2019 as follows:
February 10, 2019
March 22, 2019
March 29, 2019
3,521
30
3,551
As of March 31, 2020 and December 31, 2019, accrued dividends on unvested shares, which were included in other liabilities on the consolidated balance sheets, were $0.4 million and $0.1 million, respectively.
Please see Note 12 of the notes to the consolidated financial statements in Item 8 Part II of the Company’s 2019 Annual Report on Form 10-K for more information on the Company’s dividend program.
10.
Related Party Transactions
Fox Paine Entities
As of March 31, 2020, U.N. Co-Investment Fund III (Cayman), L.P. and Fox Paine Capital Fund II International, L.P. (collectively, the “Fox Paine Funds”), which are investment funds managed by Fox Paine & Company, LLC, beneficially own approximately 80.3% of the Company’s total voting power. As of March 31, 2020, Fox Mercury Investments, L.P. and certain of its affiliates (collectively, the “FM Entities”) separately beneficially own approximately 2.1% of the Company’s total voting power. The Fox Paine Funds have the right to appoint a number of the Company’s Directors equal in aggregate to the pro rata percentage of the voting shares of the Company beneficially held by the Fox Paine Funds, FM Entities and Fox Paine & Company, LLC (collectively, “Fox Paine Entities”) so long as the Fox Paine Entities beneficially own shares representing an aggregate 25% or more of the voting power in the Company. The Fox Paine Funds control the election of all of the Company’s Directors due to its controlling share ownership. The Company’s Chairman is the chief executive and founder of Fox Paine & Company, LLC.
The Company relies on Fox Paine & Company, LLC to provide management services and other services related to the operations of the Company. Starting in 2014, the management fee is adjusted annually to reflect the percentage change in the CPI-U. Management fee expense of $0.5 million was incurred during each of the quarters ended March 31, 2020 and 2019. Prepaid management fees, which were included in other assets on the consolidated balance sheets, were $0.9 million and $1.4 million as of March 31, 2020 and December 31, 2019, respectively.
In addition, Fox Paine & Company, LLC may also propose and negotiate transaction fees with the Company subject to the provisions of the Company’s related party transaction policies, including approval of the Company’s Audit Committee of the Board of Directors, for those services from time to time. Each of the Company’s transactions with Fox Paine & Company, LLC described below was reviewed and approved by the Company’s Audit Committee, which is composed of independent directors, and the Board of Directors (other than Saul A. Fox, Chairman of the Board of Directors of the Company and Chief Executive of Fox Paine & Company, LLC, who is not a member of the Audit Committee and recused himself from the Board of Directors’ deliberations).
Illiquid Investment Fund Divestiture Fee
On December 21, 2018, Global Indemnity Group, LLC exited an investment in a private credit fund pursuant to a sale of Global Indemnity Group, LLC’s investment to third parties at par plus accrued interest. Fox Paine & Company, LLC provided services to Global Indemnity Group, LLC in connection with the sale, including conducting due diligence to evaluate the private fund, recommending that Global Indemnity Group, LLC withdraw from the private fund, and conducting extended negotiations with the private fund to secure Global Indemnity Group, LLC’s withdrawal from the private fund on favorable terms. Fox Paine & Company, LLC’s services for Global Indemnity Group, LLC in connection with the sale were performed during the second, third, and fourth quarters of 2018. The total fee for these services was $2.0 million which was paid in May 2019.
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11.Commitments and Contingencies
The Company is, from time to time, involved in various legal proceedings in the ordinary course of business. The Company maintains insurance and reinsurance coverage for such risks in amounts that it considers adequate. However, there can be no assurance that the insurance and reinsurance coverage that the Company maintains is sufficient or will be available in adequate amounts or at a reasonable cost. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on its business, results of operations, cash flows, or financial condition.
There is a greater potential for disputes with reinsurers who are in runoff. Some of the Company’s reinsurers’ have operations that are in runoff, and therefore, the Company closely monitors those relationships. The Company anticipates that, similar to the rest of the insurance and reinsurance industry, it will continue to be subject to litigation and arbitration proceedings in the ordinary course of business.
Commitments
In 2014, the Company entered into a $50 million commitment to purchase an alternative investment vehicle which is comprised of European non-performing loans. As of March 31, 2020, the Company has funded $35.8 million of this commitment leaving $14.2 million as unfunded.
In 2017, the Company entered into a $50 million commitment to purchase an alternative investment vehicle comprised of stressed and distressed securities and structured products. As of March 31, 2020, the Company has funded $33.0 million of this commitment leaving $17.0 million as unfunded.
In 2019, the Company entered into a $10 million commitment to purchase an alternative investment vehicle which is comprised of mortgage loans and other real-estate related investments. As of March 31, 2020, the Company has funded $9.5 million of this commitment leaving $0.5 million as unfunded.
Other Commitments
The Company is party to a Management Agreement, as amended, with Fox Paine & Company, LLC, whereby in connection with certain management services provided to it by Fox Paine & Company, LLC, the Company agreed to pay an annual management fee to Fox Paine & Company, LLC. See Note 10 above for additional information pertaining to this management agreement.
COVID-19
There is risk that legislation could be passed which would require the Company to cover business interruption claims regardless of terms, exclusions including the virus exclusions contained within the Company’s Commercial Specialty and Farm, Ranch & Stable policies, or other conditions included in policies that would otherwise preclude coverage.
12.
Share-Based Compensation Plans
Options
No stock options were awarded during the quarters ended March 31, 2020 and 2019. No unvested stock options were forfeited during the quarters ended March 31, 2020 or 2019.
Restricted Shares / Restricted Stock Units
There were no restricted A ordinary shares granted to key employees during the quarter ended March 31, 2020.
During the quarter ended March 31, 2019, the Company granted 36,180 restricted A ordinary shares, with a weighted average grant date value of $35.82 per share, to key employees under the Plan. 9,063 of these shares vested immediately. The remainder will vest as follows:
16.5% vested on January 1, 2020. 16.5% and 17.0% of the restricted stock will vest on January 1, 2021 and January 1, 2022, respectively.
Subject to Board approval, 50% of restricted stock will vest 100%, no later than March 15, 2022, following a re-measurement of 2018 results as of December 31, 2021.
During the quarter ended March 31, 2020, the Company granted 94,281 restricted stock units, with a weighted average grant date value of $29.63 per share, to key employees under the Plan. 3,375 of these restricted stock units will vest evenly over the next three years. One third of these restricted stock units will vest on January 1, 2021, January 1, 2022 and January 1, 2023. The remaining 90,906 restricted stock units will vest as follows:
16.5%, 16.5%, and 17.0% of the restricted stock units will vest on January 1, 2021, January 1, 2022, and January 1, 2023, respectively.
Subject to Board approval, 50% of restricted stock units will vest 100%, no later than March 15, 2023, following a re-measurement of 2019 results as of December 31, 2022.
There were no restricted stock units granted to key employees during the quarter ended March 31, 2019.
During the quarters ended March 31, 2020 and 2019, the Company granted 23,127 and 15,842 A ordinary shares, respectively, at a weighted average grant date value of $29.19 and $30.38 per share, respectively, to non-employee directors of the Company under the Plan. All of the shares granted to non-employee directors of the Company in 2020 and 2019 were fully vested but are subject to certain restrictions.
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.
The following table sets forth the computation of basic and diluted earnings per share:
(Dollars in thousands, except share and per share data)
Basic earnings per share:
Weighted average shares outstanding – basic
Net income (loss) per share
Diluted earnings per share:
Weighted average shares outstanding – diluted (1)
31
A reconciliation of weighted average shares for basic earnings per share to weighted average shares for diluted earnings per share is as follows:
Weighted average shares for basic earnings per share
Non-vested restricted stock
14,723
146,450
Weighted average shares for diluted earnings per share
If the Company had not incurred a loss in the quarter ended March 31, 2020, 14,417,506 weighted average shares would have been used to compute the diluted loss per share calculation. In addition to the basic shares, weighted average shares for the diluted calculation would have included 16,298 shares of non-vested restricted stock, 29,261 shares of non-vested restricted stock units, and 122,396 share equivalents for options.
The weighted average shares outstanding used to determine dilutive earnings per share does not include 500,000 options for the quarters ended March 31, 2020 and 2019 which were deemed to be anti-dilutive.
14.
Segment Information
The Company manages its business through four business segments. Commercial Specialty offers specialty property and casualty products designed for product lines such as Small Business Binding Authority, Property Brokerage, and Programs. Specialty Property offers specialty personal lines property and casualty insurance products. Farm, Ranch, & Stable offers specialized property and casualty coverage including Commercial Farm Auto and Excess/Umbrella Coverage for the agriculture industry as well as specialized insurance products for the equine mortality and equine major medical industry. Reinsurance Operations provides reinsurance solutions through brokers and primary writers including insurance and reinsurance companies.
32
The following are tabulations of business segment information for the quarters ended March 31, 2020 and 2019:
Commercial
Specialty
Specialty Property
Farm, Ranch, & Stable
Reinsurance
Operations
80,831
35,243
22,133
72,483
30,007
19,105
67,714
34,216
18,683
427
36
(295
168
34,643
18,719
23,560
144,636
37,435
17,498
9,610
13,104
25,993
14,232
7,638
Income from segments
4,286
2,913
1,471
1,907
10,577
Unallocated Items:
Net realized investment loss
(4,223
(4,865
Loss before income taxes
Income tax benefit
11,969
Net loss
Segment assets
730,202
209,758
135,731
276,640
1,352,331
Corporate assets
676,173
Includes business ceded to the Company’s Reinsurance Operations. This quota share agreement was cancelled effective January 1, 2018.
External business only, excluding business assumed from affiliates.
33
64,213
39,674
20,765
55,170
33,212
17,492
55,641
34,619
17,122
443
35,062
17,152
14,722
122,577
21,651
20,503
8,138
8,029
22,812
14,653
7,282
4,996
Income (loss) from segments
11,178
(94
1,732
1,697
14,513
Net realized investment gain
(3,205
(5,023
Income before income taxes
(4,294
Net income
684,497
242,519
135,727
313,815
1,376,558
608,350
1,984,908
15.
Condensed Consolidating Financial Information Provided in Connection with Outstanding Debt of Subsidiaries
The following tables present condensed consolidating balance sheets at March 31, 2020 and December 31, 2019, condensed consolidating statements of operations, condensed consolidating statements of comprehensive income, and condensed consolidating statements of cash flows for the quarters ended March 31, 2020 and 2019. Global Indemnity Group, LLC is a 100% owned subsidiary of the Company. See Note 10 of the notes to the consolidated financial statements in Item 8 Part II of the Company’s 2019 Annual Report on Form 10-K for information on the Company’s debt obligations.
Condensed Consolidating Balance Sheets
at March 31, 2020 (Dollars in thousands)
Global Indemnity Limited (Parent co-
obligor)
Global Indemnity Group, LLC (Subsidiary co-obligor)
Other Global Indemnity Limited Subsidiaries and Eliminations (non-co-obligor subsidiaries) (1)
Consolidating Adjustments (2)
Global Indemnity
Limited
Consolidated
32,865
209,656
1,250,879
635
10,697
48,419
Investments in subsidiaries
1,175,117
368,560
392,126
(1,935,803
Due from subsidiaries and affiliates
559
(27,056
26,497
Notes receivable – affiliate
80,049
445,498
(525,547
Interest receivable – affiliate
5,290
17,259
(22,549
7,064
(1,554
43,334
(1,217
Receivable for securities sold
48
(48
8,598
22,243
45,300
(6,923
1,217,774
719,885
2,581,667
(2,490,822
301,707
Notes payable – affiliates
520,498
5,049
Accrued interest payable – affiliates
20,554
1,995
2,086
26,052
50,819
543,138
327,759
1,037,990
(555,019
Shareholders’ equity
1,543,677
Includes all other subsidiaries of Global Indemnity Limited and eliminations
Includes Parent co-obligor and subsidiary co-obligor consolidating adjustments
35
at December 31, 2019 (Dollars in thousands)
Global Indemnity Limited (Parent co-obligor)
Other Global Indemnity Limited Subsidiaries and Eliminations
(non-co-obligor subsidiaries) (1)
Global Indemnity Limited Consolidated
44,468
257,317
1,261,757
977
2,663
40,631
1,218,491
355,777
434,278
(2,008,546
(3,612
(3,965
7,577
5,014
17,258
(22,272
14,197
(3,208
31,833
(756
9,394
12,622
45,021
(6,989
1,269,718
755,507
2,614,014
(2,563,354
303,629
20,343
1,929
2,068
17,600
54,544
542,909
321,229
1,039,746
(554,808
1,574,268
Condensed Consolidating Statements of Operations
for the Quarter Ended March 31, 2020 (Dollars in thousands)
(202
2,071
8,537
(277
(4,603
(64,191
632
146
(4,805
(62,101
153,783
1,173
2,954
96
276
4,799
Income (loss) before equity in net income (loss) of subsidiaries and income taxes
(6,254
(69,854
19,561
Equity in net income (loss) of subsidiaries
(38,324
10,138
(45,653
73,839
(59,716
(26,092
(14,063
2,094
(28,186
for the Quarter Ended March 31, 2019 (Dollars in thousands)
642
(2,075
8,939
12,076
(1,679
460
10,029
129,809
1,329
1,566
310
274
79
Income (loss) before equity in net income of subsidiaries and income taxes
(968
3,506
21,356
Equity in net income of subsidiaries
20,568
7,893
10,059
(38,520
11,399
31,415
1,340
Net Income
28,461
37
Condensed Consolidating Statements of
Comprehensive Income for the Quarter Ended March 31, 2020 (Dollars in thousands)
Other comprehensive income, net of tax:
Unrealized holding gains (losses)
856
(2,888
Equity in other comprehensive income of unconsolidated subsidiaries
2,645
3,501
(1,097
Portion of other-than-temporary impairment losses recognized in other comprehensive income
Reclassification adjustment for gains included in net income
Unrealized foreign currency translation gains
Other comprehensive income, net of tax
(2,404
(42,152
(30,590
72,742
Comprehensive Income for the Quarter Ended March 31, 2019 (Dollars in thousands)
Unrealized holding gains
659
2,047
18,079
22,234
10,325
12,774
(45,333
Reclassification adjustment for losses included in net income
402
1,513
32,559
Comprehensive income, net of tax
22,833
61,020
(83,853
38
Cash Flows for the Quarter Ended March 31, 2020
(3,644
24,655
(227
3,007
121,063
7,566
41,980
1,020
(338
(30,117
(126,307
(1,586
(9,224
7,000
(14,699
8,015
Net borrowings under margin borrowing facility
Purchase of A ordinary shares
Net cash used for financing activities
(3,698
(342
8,034
7,788
39
Cash Flows for the Quarter Ended March 31, 2019
Global
Indemnity
Limited (Parent
co-obligor)
Group, LLC
(Subsidiary
2,225
(10,514
(14,901
9,567
12,200
39,491
(10,548
(23,149
(78,327
464
(20,819
(19,484
(4,544
(1,855
(25,383
(34,385
2,221
26,039
71,237
366
656
36,852
16.
New Accounting Pronouncements
Accounting Standards Adopted in 2020
In March, 2020, the FASB issued new accounting guidance that affected a variety of topics in the Codification. The amendments in this update are meant to make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarification. This guidance is effective for all fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2020. The adoption of this new accounting guidance did not have a material impact on the Company’s financial condition, results of operations, or cash flows.
In August, 2018, the FASB issued new accounting guidance which removed, modified, and added certain disclosures related to Topic 820, Fair Value. The affected disclosures are related to transfers between fair value levels, level 3 assets, and investments in certain entities that calculate net asset value. This guidance is effective for all fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2020. The adoption of this new accounting guidance did not have a material impact on the Company’s financial condition, results of operations, or cash flows.
40
In January, 2017, the FASB issued updated guidance that simplifies how an entity is required to test goodwill for impairment by eliminating the requirement to calculate the implied fair value of goodwill (i.e. Step 2 of the current goodwill impairment test). Under the new amendments, an entity may still first assess qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized, if any. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. This guidance is effective for public business entities’ annual or interim goodwill impairment testing in fiscal years beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020. The adoption of this new accounting guidance did not have a material impact on the Company’s financial condition, results of operations, or cash flows.
In June, 2016, the FASB issued new accounting guidance addressing the measurement of credit losses on financial instruments. The new guidance requires financial assets measured at amortized cost, which includes but are not limited to premiums receivable and reinsurance receivables, to be presented at the net amount expected to be collected over the life of the asset using an allowance for credit losses. Changes in the allowance are charged to earnings. The measurement of expected credit losses should consider relevant information about past events, including historical experience, current information, as well as reasonable and supportable forecasts that affect the collectability of the financial assets. For available for sale debt securities, credit losses should be measured similar to the old guidance; however, the new guidance requires that credit losses be presented as an allowance rather than as a write-down of the amortized cost basis of the impaired securities and allows for the reversal of credit losses in the current period net income. In addition, the Company made certain accounting policy elections related to accrued interest receivables which are described in Note 2. The Company adopted this new accounting guidance on January 1, 2020 using a modified-retrospective approach. The adoption of this new accounting guidance and the impact on the Company’s financial condition, results of operations, and cash flows is described primarily within Note 2 and 5.
Please see Note 22 of the notes to the consolidated financial statements in Item 8 Part II of the Company’s 2019 Annual Report on Form 10-K for more information on accounting pronouncements issued but not yet adopted.
17.Subsequent Events
On January 30, 2020, the World Health Organization declared the recent coronavirus disease 2019 (“COVID-19”) outbreak a global health emergency and was elevated to “pandemic” status on March 11, 2020. Following these events, numerous jurisdictions issued shelter in place orders requesting or requiring residents to remain at home. The Company can experience increased risk of loss any time unforeseen infectious diseases impact large portions of certain populations. Specifically, the Company’s business could experience losses resulting from COVID-19 related impacts as a result of complete or partial closure of the Company’s or its policyholders’ facilities, labor shortages, disruptions in public and private infrastructure, increased cybersecurity risk as well as unforeseen perils. The Company may experience reductions in premium volume, delays in collection of premiums, and increases in COVID-19 related claims. As a result of a pandemic and other geopolitical factors, the Company could also experience losses in its investment portfolio as a result of volatile markets. Management is taking actions it considers prudent to minimize the impact on the Company’s operations. However, given the ongoing uncertainty surrounding the duration, magnitude and geographic reach of COVID-19, the Company continues to evaluate the impact of COVID-19 on its business and operations.
Management Agreement
On May 6, 2020, the Company and Fox Paine & Company, LLC entered into the Second Amended and Restated Management Agreement effective as of September 5, 2019 (the “Agreement”) to: (i) eliminate the Company’s obligation to reimburse Fox Paine & Company, LLC for its travel, lodging, meals, and other items relating to attendance at regularly scheduled meetings of the Board of Directors, which have averaged approximately $550,000 per year (since execution of the Agreement in 2013) and (ii) increase Fox Paine & Company, LLC’s base Annual Service Fee by $550,000 per year.
41
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes of Global Indemnity included elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to the Company’s plans and strategy, constitutes forward-looking statements that involve risks and uncertainties. Please see "Cautionary Note Regarding Forward-Looking Statements" at the end of this Item 2 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein. For more information regarding the Company’s business and operations, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Recent Developments
The global outbreak of COVID-19 presents significant risks to the Company which the Company is not able to fully evaluate at the current time. During the quarter ended March 31, 2020, the value of the Company’s portfolio declined as a result of changes in fair value of the Company’s equity securities and derivative instruments due to the recent disruption in global financial markets due to COVID-19. The Company expects that the COVID-19 pandemic will affect the Company’s operations in the second quarter and may continue to do so indefinitely, thereafter. The Company may experience reductions in premium volume, delays in the collection of premiums, and increases in COVID-19 related claims. The disruption in the global financial markets may continue to negatively impact the market value of the Company’s investment portfolio and result in additional net realized investment losses as well as a decline in the liquidity of the investment portfolio. All of these factors may have far reaching impacts on the Company’s business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the health of the Company’s management and employees, distribution, marketing, customers and agents, and on the overall economy. The scope and nature of these impacts, most of which are beyond the Company’s control, continue to evolve and such effects could exist for an extended period of time even after the pandemic ends.
Dividend
On February 9, 2020, the Board of Directors approved a dividend payment of $0.25 per ordinary share to all shareholders of record on the close of business on March 24, 2020. Dividends paid were $3.6 million during the quarter ended March 31, 2020.
Overview
The Company’s Commercial Specialty segment sells its property and casualty insurance products through a group of approximately 180 professional general agencies that have limited quoting and binding authority, as well as a number of wholesale insurance brokers who in turn sell the Company’s insurance products to insureds through retail insurance brokers. Commercial Specialty operates predominantly in the excess and surplus lines marketplace. The Company manages its Commercial Specialty segment via product classifications. These product classifications are: 1) Penn-America, which includes property and general liability products for small commercial businesses sold through a select network of wholesale general agents with specific binding authority; 2) United National, which includes property, general liability, and professional lines products sold through program administrators with specific binding authority; 3) Diamond State, which includes property, casualty, and professional lines products sold through wholesale brokers and program administrators with specific binding authority; and 4) Vacant Express, which primarily insures dwellings which are currently vacant, undergoing renovation, or are under construction and is sold through aggregators, brokers, and retail agents.
The Company’s Specialty Property segment, via American Reliable, offers specialty personal lines property and casualty insurance products through a group of approximately 240 agents, primarily comprised of wholesale general agents, with specific binding authority in the admitted marketplace.
The Company’s Farm, Ranch, & Stable segment, via American Reliable, provides specialized property and casualty coverage including Commercial Farm Auto and Excess/Umbrella Coverage for the agriculture industry as well as specialized insurance products for the equine mortality and equine major medical industry on an admitted basis. These insurance products are sold
through a group of approximately 210 agents, primarily comprised of wholesalers and retail agents, with a selected number having specific binding authority.
The Company’s Reinsurance Operations, consisting solely of the operations of Global Indemnity Reinsurance, currently provides reinsurance solutions through brokers and on a direct basis. Global Indemnity Reinsurance is a Bermuda based treaty reinsurer for specialty property and casualty insurance and reinsurance companies. Global Indemnity Reinsurance conducts business in Bermuda and is focused on using its capital capacity to write niche and specialty-focused treaties and business which meet the Company’s risk tolerance and return thresholds.
The Company derives its revenues primarily from premiums paid on insurance policies that it writes and from income generated by its investment portfolio, net of fees paid for investment management services. The amount of insurance premiums that the Company receives is a function of the amount and type of policies it writes, as well as prevailing market prices.
The Company’s expenses include losses and loss adjustment expenses, acquisition costs and other underwriting expenses, corporate and other operating expenses, interest, investment expenses, and income taxes. Losses and loss adjustment expenses are estimated by management and reflect the Company’s best estimate of ultimate losses and costs arising during the reporting period and revisions of prior period estimates. The Company records its best estimate of losses and loss adjustment expenses considering both internal and external actuarial analyses of the estimated losses the Company expects to incur on the insurance policies it writes. The ultimate losses and loss adjustment expenses will depend on the actual costs to resolve claims. Acquisition costs consist principally of commissions and premium taxes that are typically a percentage of the premiums on the insurance policies the Company writes, net of ceding commissions earned from reinsurers. Other underwriting expenses consist primarily of personnel expenses and general operating expenses related to underwriting activities. Corporate and other operating expenses are comprised primarily of outside legal fees, other professional and accounting fees, directors’ fees, management fees & advisory fees, and salaries and benefits for company personnel whose services relate to the support of corporate activities. Interest expense is primarily comprised of amounts due on outstanding debt.
Critical Accounting Estimates and Policies
The Company’s consolidated financial statements are prepared in conformity with GAAP, which require it to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
The most critical accounting policies involve significant estimates and include those used in determining the liability for unpaid losses and loss adjustment expenses, recoverability of reinsurance receivables, investments, fair value measurements, goodwill and intangible assets, deferred acquisition costs, and taxation. For a detailed discussion on each of these policies, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes to any of these policies or underlying methodologies during the current year except for the following.
Effective January 1, 2020, the Company adopted new accounting guidance related to the measurement of credit losses on financial instruments. In conjunction with implementing this new guidance, the Company modified its impairment process as well as made certain accounting policy elections related to accrued interest receivables. Please see Note 2 of the notes to the consolidated financial statements in Item 1 of Part I of this report for a discussion on the Company’s impairment process and accounting policy elections related to accrued interest receivable. Please see Note 5 for a discussion on the Company’s policies related to the evaluation process when estimating expected credit losses for premiums receivable and reinsurance receivables.
43
Results of Operations
The following table summarizes the Company’s results for the quarters ended March 31, 2020 and 2019:
Change
9.5
12.7
18.3
(66.2
144,633
Losses and expenses:
33.1
13.4
Underwriting income
10,574
(27.1
40.3
NM
31.8
(3.1
Underwriting Ratios:
Loss ratio (1):
53.7
47.8
Expense ratio (2)
39.0
40.7
Combined ratio (3)
92.7
88.5
NM – not meaningful
The loss ratio is a GAAP financial measure that is generally viewed in the insurance industry as an indicator of underwriting profitability and is calculated by dividing net losses and loss adjustment expenses by net earned premiums.
The expense ratio is a GAAP financial measure that is calculated by dividing the sum of acquisition costs and other underwriting expenses by net earned premiums.
The combined ratio is a GAAP financial measure and is the sum of the Company’s loss and expense ratios.
44
The following table summarizes the change in premium volume by business segment:
% Change
Gross written premiums (1)
Commercial Specialty (3)
25.9
Specialty Property (3)
(11.2
Farm, Ranch, & Stable (3)
6.6
Reinsurance (4)
(0.2
Total gross written premiums
Ceded written premiums
8,348
9,043
(7.7
5,236
6,462
(19.0
3,028
3,273
(7.5
(100.0
Total ceded written premiums
16,612
18,785
(11.6
Net written premiums (2)
31.4
(9.7
9.2
Total net written premiums
21.7
(1.2
9.1
62.2
Total net earned premiums
Gross written premiums represent the amount received or to be received for insurance policies written without reduction for reinsurance costs, ceded premiums, or other deductions.
Net written premiums equal gross written premiums less ceded written premiums.
Includes business ceded to the Company’s Reinsurance Operations under a quota share agreement. This quota share agreement was cancelled effective January 1, 2018.
Gross written premiums increased by 9.5% for the quarter ended March 31, 2020 as compared to same period in 2019. The increase is mainly due to organic growth from existing agents, increased pricing, and several new programs within Commercial Specialty, rate increases and new agent appointments within Farm, Ranch, & Stable, and growth of the new casualty treaty entered into by Reinsurance Operations in 2019. This growth in premiums was partially offset by a continued reduction of catastrophe exposed business and a reduction in business not providing an adequate return on capital within Specialty Property. In addition, the growth in premium was also partially offset by the Reinsurance Operations’ non-renewal of its property catastrophe treaties.
45
Net Retention
The ratio of net written premiums to gross written premiums is referred to as the Company’s net premium retention. The Company’s net premium retention is summarized by segments as follows:
Point
Commercial Specialty
89.7
85.9
3.8
85.1
83.7
1.4
86.3
84.2
2.1
100.0
89.3
86.8
2.5
The net premium retention for the quarter ended March 31, 2020 increased by 2.5 points as compared to the same period in 2019. This increase in retention is primarily driven by the restructuring of the Company’s catastrophe reinsurance treaties as well as a change in the mix of business.
Net Earned Premiums
Net earned premiums within the Commercial Specialty segment increased by 21.7% for the quarter ended March 31, 2020 as compared to the same period in 2019. The increase in net earned premiums was primarily due to a growth in premiums written as a result of organic growth from existing agents, pricing increases, and several new programs. Property net earned premiums were $30.5 million and $28.1 million for the quarters ended March 31, 2020 and 2019, respectively. Casualty net earned premiums were $37.2 million and $27.6 million for the quarters ended March 31, 2020 and 2019, respectively.
Net earned premiums within the Specialty Property segment decreased by 1.2% for the quarter ended March 31, 2020 as compared to the same period in 2019 primarily due to a continued reduction of catastrophe exposed business and a reduction in business not providing an adequate return on capital. Property net earned premiums were $31.7 million and $31.9 million for the quarters ended March 31, 2020 and 2019, respectively. Casualty net earned premiums were $2.6 million and $2.7 million for the quarters ended March 31, 2020 and 2019, respectively.
Net earned premiums within the Farm, Ranch, & Stable segment increased by 9.1% for the quarter ended March 31, 2020 as compared to the same period in 2019. The increase in net earned premiums was primarily due to a growth in premiums written as a result of rate increases and new agent appointments. Property net earned premiums were $13.4 million and $12.3 million for the quarters ended March 31, 2020 and 2019, respectively. Casualty net earned premiums were $5.3 million and $4.8 million for the quarters ended March 31, 2020 and 2019, respectively.
Net earned premiums within the Reinsurance Operations segment increased by 62.2% for the quarter ended March 31, 2020 as compared to the same period in 2019 primarily due to the new casualty treaty entered into during 2019. Property net earned premiums were $10.0 million and $12.4 million for the quarters ended March 31, 2020 and 2019, respectively. Casualty net earned premiums were $13.9 million and $2.3 million for the quarters ended March 31, 2020 and 2019.
Reserves
Management’s best estimate at March 31, 2020 was recorded as the loss reserve. Management’s best estimate is as of a particular point in time and is based upon known facts, the Company’s actuarial analyses, current law, and the Company’s judgment. This resulted in carried gross and net reserves of $639.5 million and $560.7 million, respectively, as of March 31, 2020. A breakout of the Company’s gross and net reserves, as of March 31, 2020, is as follows:
Gross Reserves
Case
IBNR (1)
111,119
286,279
397,398
14,939
34,605
49,544
11,272
36,164
47,436
Reinsurance Operations
57,237
87,853
145,090
194,567
444,901
Net Reserves (2)
89,222
248,336
337,558
9,621
29,351
38,972
10,002
29,094
39,096
87,852
145,089
166,082
394,633
Losses incurred but not reported, including the expected future emergence of case reserves.
Does not include reinsurance receivable on paid losses.
Each reserve category has an implicit frequency and severity for each accident year as a result of the various assumptions made. If the actual levels of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s best estimate. For most of its reserve categories, the Company believes that frequency can be predicted with greater accuracy than severity. Therefore, the Company believes management’s best estimate is more likely influenced by changes in severity than frequency. The following table, which the Company believes reflects a reasonable range of variability around its best estimate based on historical loss experience and management’s judgment, reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity on the Company’s current accident year net loss estimate of $78.2 million for claims occurring during the quarter ended March 31, 2020:
Severity Change
-10%
-5%
0%
5%
10%
Frequency Change
(11,339
(7,625
(3,910
3,519
-3%
(9,931
(6,139
(2,346
1,447
5,239
-2%
(9,228
(5,396
(1,564
2,268
6,100
-1%
(8,524
(4,653
(782
3,089
6,960
(7,820
3,910
7,820
1%
(7,116
(3,167
782
4,731
8,680
2%
(6,412
(2,424
1,564
5,552
9,540
3%
(5,709
(1,681
2,346
6,373
10,401
(4,301
8,016
12,121
The Company’s net reserves for losses and loss adjustment expenses of $560.7 million as of March 31, 2020 relate to multiple accident years. Therefore, the impact of changes in frequency and severity for more than one accident year could be higher or lower than the amounts reflected above.
47
Underwriting Results
The components of income from the Company’s Commercial Specialty segment and corresponding underwriting ratios are as follows:
2019 (1)
72.9
13.9
(61.7
Loss ratio:
Current accident year
55.3
50.9
4.4
Prior accident year
(12.0
12.0
Calendar year loss ratio
38.9
16.4
Expense ratio
38.4
41.0
(2.6
Combined ratio
93.7
79.9
13.8
Reconciliation of non-GAAP financial measures and ratios
The table below reconciles the non-GAAP measures or ratios, which excludes the impact of prior accident year adjustments, to its most directly comparable GAAP measure or ratio. The Company believes the non-GAAP measures or ratios are useful to investors when evaluating the Company's underwriting performance as trends within Commercial Specialty may be obscured by prior accident year adjustments. These non-GAAP measures or ratios should not be considered as a substitute for its most directly comparable GAAP measure or ratio and does not reflect the overall underwriting profitability of the Company.
Losses $
Loss
Ratio
Property
Non catastrophe property losses and ratio excluding the effect of prior accident year (1)
12,249
40.1
10,731
38.2
Effect of prior accident year
(359
(1,113
(4.0
Non catastrophe property losses and ratio (2)
11,890
9,618
34.2
Catastrophe losses and ratio excluding the effect of prior accident year (1)
3,713
12.2
1,466
5.2
338
1.1
147
0.5
Catastrophe losses and ratio (2)
4,051
13.3
1,613
5.7
Total property losses and ratio excluding the effect of prior accident year (1)
15,962
52.3
12,197
43.4
(21
(966
(3.5
Total property losses and ratio (2)
15,941
52.2
11,231
39.9
Casualty
Total Casualty losses and ratio excluding the effect of prior accident year (1)
21,473
57.7
16,120
58.5
(5,700
(20.7
Total Casualty losses and ratio (2)
21,494
57.8
10,420
37.8
Total net losses and loss adjustment expense and total loss ratio excluding the effect of prior accident year (1)
28,317
(6,666
Total net losses and loss adjustment expense and total loss ratio (2)
Non-GAAP measure / ratio
Most directly comparable GAAP measure / ratio
See “Result of Operations” above for a discussion on consolidated premiums.
49
Loss Ratio
The current accident year losses and loss ratio is summarized as follows:
Property losses
Non-catastrophe
14.1
Catastrophe
153.3
30.9
Casualty losses
33.2
Total accident year losses
32.2
Current accident year loss ratio:
1.9
7.0
Property loss ratio
8.9
Casualty loss ratio
(0.8
Total accident year loss ratio
The current accident year non-catastrophe property loss ratio increased by 1.9 points during the quarter ended March 31, 2020 as compared to the same period in 2019 reflecting a slightly higher claims frequency and severity for the first accident quarter compared to last year.
The current accident year catastrophe loss ratio increased by 7.0 points during the quarter ended March 31, 2020 as compared to the same period in 2019 due to a much higher claims severity for the first accident quarter compared to last year.
The current accident year casualty loss ratio improved by 0.8 points during the quarter ended March 31, 2020 as compared to the same period in 2019 due to a lower claims frequency for the first accident quarter compared to last year.
The calendar year loss ratio for the quarter ended March 31, 2020 includes a net decrease of zero related to reserve development on prior accident years. The calendar year loss ratio for the quarter ended March 31, 2019 includes a decrease of $6.7 million, or 12.0 percentage points related to reserve development on prior accident years. Please see Note 7 of the notes to the consolidated financial statements in Item 1 of Part I of this report for further discussion on prior accident year development.
Expense Ratios
The expense ratio for the Company’s Commercial Specialty segment improved by 2.6 points from 41.0% for the quarter ended March 31, 2019 to 38.4% for the quarter ended March 31, 2020. The improvement in the expense ratio is primarily due to an increase in the net earned premiums as discussed above.
COVID-19 could result in declines in business, non-payment of premiums, and increases in claims that could adversely affect Commercial Specialty’s business, financial condition, and results of operation.
There is risk that legislation could be passed which would require the Company to cover business interruption claims regardless of terms, exclusions including the virus exclusions contained within the Company’s Commercial Specialty policies, or other conditions included in these policies that would otherwise preclude coverage.
50
The components of income and loss from the Company’s Specialty Property segment and corresponding underwriting ratios are as follows:
(3.6
(14.7
(2.9
Underwriting income (loss)
51.1
56.6
(5.5
2.6
59.2
(8.1
41.6
42.3
(0.7
101.5
(8.8
51
The table below reconciles the non-GAAP measures or ratios, which excludes the impact of prior accident year adjustments, to its most directly comparable GAAP measure or ratio. The Company believes the non-GAAP measures or ratios are useful to investors when evaluating the Company's underwriting performance as trends within Specialty Property may be obscured by prior accident year adjustments. These non-GAAP measures or ratios should not be considered as a substitute for its most directly comparable GAAP measure or ratio and does not reflect the overall underwriting profitability of the Company.
14,393
45.5
16,739
52.5
(56
14,731
46.6
16,683
2,079
1,690
5.3
849
2,110
6.7
2,539
8.0
16,472
52.1
18,429
369
1.2
793
16,841
53.3
19,222
60.3
1,026
40.0
1,170
43.3
(369
(14.4
111
4.1
657
25.6
1,281
47.4
19,599
904
Other Income
Other income was $0.4 million for each of the quarters ended March 31, 2020 and 2019. Other income is primarily comprised of fee income.
52
(14.0
23.0
(10.6
(12.3
(10.7
(7.0
1.3
(5.7
(3.3
The current accident year non-catastrophe property loss ratio improved by 7.0 points during the quarter ended March 31, 2020 as compared to the same period in 2019 reflecting a lower claims frequency in the first accident quarter compared to last year.
The current accident year catastrophe loss ratio increased by 1.3 points during the quarter ended March 31, 2020 as compared to the same period in 2019 due to a higher claims frequency and severity for the first accident quarter compared to last year.
The current accident year casualty loss ratio improved by 3.3 points during the quarter ended March 31, 2020 as compared to the same period in 2019 reflecting a lower claims frequency and severity in the first accident quarter compared to last year.
The calendar year loss ratio for the quarter ended March 31, 2020 includes a net decrease of zero related to reserve development on prior accident years. The calendar year loss ratio for the quarter ended March 31, 2019 includes an increase of $0.9 million, or 2.6 percentage points, related to reserve development on prior accident years. Please see Note 7 of the notes to the consolidated financial statements in Item 1 of Part I of this report for further discussion on prior accident year development.
The expense ratio for the Company’s Specialty Property segment improved 0.7 points from 42.3% for the quarter ended March 31, 2019 to 41.6% for the quarter ended March 31, 2020 primarily due to lower operating expenses.
COVID-19 could result in declines in business and non-payment of premiums that could adversely affect Specialty Property’s business, financial condition, and results of operation.
53
The components of income and loss from the Company’s Farm, Ranch, & Stable segment and corresponding underwriting ratios are as follows:
20.0
18.1
4.9
(15.1
51.4
59.6
(8.2
(12.1
12.1
47.5
3.9
40.9
42.5
(1.6
92.3
90.0
2.3
Includes business ceded to the Company’s Reinsurance Operations under a quote share agreement. The quota share agreement was terminated effective January 1, 2018.
54
The table below reconciles the non-GAAP measures or ratios, which excludes the impact of prior accident year adjustments, to its most directly comparable GAAP measure or ratio. The Company believes the non-GAAP measures or ratios are useful to investors when evaluating the Company's underwriting performance as trends within Farm, Ranch, & Stable may be obscured by prior accident year adjustments. These non-GAAP measures or ratios should not be considered as a substitute for its most directly comparable GAAP measure or ratio and does not reflect the overall underwriting profitability of the Company.
5,077
37.9
6,750
54.9
(558
(4.2
(131
4,519
33.7
6,619
53.8
1,401
10.5
926
7.5
550
(286
(2.3
1,951
14.6
640
6,478
48.4
7,676
62.4
(8
(417
(3.4
6,470
48.3
7,259
59.0
3,132
2,528
0.2
(1,649
(34.1
3,140
59.4
879
18.2
10,204
(2,066
Other income was less than $0.1 million for each of the quarters ended March 31, 2020 and 2019. Other income is primarily comprised of fee income.
55
(24.8
51.3
(15.6
23.9
(5.8
(17.0
3.0
6.9
The current accident year non-catastrophe property loss ratio improved by 17.0 points during the quarter ended March 31, 2020 as compared to the same period in 2019 due to a lower claims frequency and severity for the first accident quarter compared to last year.
The current accident year catastrophe loss ratio increased by 3.0 points during the quarter ended March 31, 2020 as compared to the same period in 2019 reflecting a slightly higher claims frequency and much higher claims severity for the first accident quarter compared to last year.
The current accident year casualty loss ratio increased by 6.9 points during the quarter ended March 31, 2020 as compared to the same period in 2019 primarily due to a higher claims severity for the first accident quarter compared to last year.
The calendar year loss ratio for the quarter ended March 31, 2020 includes a net decrease of zero related to reserve development on prior accident years. The calendar year loss ratio for the quarter ended March 31, 2019 includes a decrease of $2.1 million, or 12.1 percentage points, related to reserve development on prior accident years. Please see Note 7 of the notes to the consolidated financial statements in Item 1 of Part I of this report for further discussion on prior accident year development.
The expense ratio for the Company’s Farm, Ranch, & Stable Segment improved 1.6 points from 42.5% for the quarter ended March 31, 2019 to 40.9% for the quarter ended March 31, 2020. The improvement in the expense ratio is primarily due to an increase in the net earned premiums as discussed above.
There is risk that legislation could be passed which would require the Company to cover business interruption claims regardless of terms, exclusions including the virus exclusions contained within the Company’s Farm, Ranch & Stable policies, or other conditions included in these policies that would otherwise preclude coverage.
COVID-19 could result in declines in business, non-payment of premiums, and increases in claims that could adversely affect Farm, Ranch, & Stable’s business, financial condition, and results of operation.
56
The components of income from the Company’s Reinsurance Operations segment and corresponding underwriting ratios are as follows:
60.0
63.2
71.1
12.4
Current accident year (2)
57.4
(2.5
(1.8
Calendar year loss ratio (3)
54.6
0.3
35.8
34.0
1.8
90.7
88.6
External business only, excluding business assumed from affiliates
Non-GAAP ratio
Most directly comparable GAAP ratio
The table above includes a reconciliation of the current accident year loss ratio, which is a non-GAAP ratio, to its calendar year loss ratio, which is its most directly comparable GAAP ratio. The Company believes the non-GAAP ratio is useful to investors when evaluating the Company's underwriting performance as trends in the Company's Reinsurance Operations may be obscured by prior accident year adjustments. This non-GAAP ratio should not be considered as a substitute for its most directly comparable GAAP ratio and does not reflect the overall underwriting profitability of the Company.
See “Result of Operations” above for a discussion on premiums.
The Company recognized a loss of $0.3 million and a gain of less than $0.01 million for the quarters ended March 31, 2020 and 2019, respectively. Other income is comprised of foreign exchange gains and losses.
The current accident year loss ratio increased by 2.1 points during the quarter ended March 31, 2020 as compared to the same period in 2019. The current accident year loss ratio decreased for both property and casualty lines compared to the same
57
period last year but the total loss ratio increased reflecting the mix of business shift to more casualty premium which has a higher expected loss ratio than property.
The calendar year loss ratio for the quarter ended March 31, 2020 includes a decrease of $0.6 million, or 2.5 percentage points, related to reserve development on prior accident years. The calendar year loss ratio for the quarter ended March 31, 2019 includes a decrease of $0.1 million, or 0.7 percentage points, related to reserve development on prior accident years. Please see Note 7 of the notes to the consolidated financial statements in Item 1 of Part I of this report for further discussion on prior accident year development.
Expense Ratio
The expense ratio for the Company’s Reinsurance Operations increased by 1.8 points from 34.0% for the quarter ended March 31, 2019 to 35.8% for the quarter ended March 31, 2020 primarily due to an increase in commission expense.
COVID-19 could result in declines in business, non-payment of premiums, and increases in claims that could adversely affect the Reinsurance Operations’ business, financial condition, and results of operation.
Unallocated Corporate Items
The Company’s fixed income portfolio, excluding cash, continues to maintain high quality with an AA- average rating and a duration of 4.0 years.
Gross investment income (1)
Investment expenses
69.6
Excludes realized gains and losses
Gross investment income increased by 42.5% for the quarter ended March 31, 2020 as compared to the same period in 2019. The increase for the quarter ended was primarily due to increased returns from alternative investments which are booked on a one quarter lag due to the limited partnerships typically not reporting results until one to three months following the end of the reporting period.
Investment expenses increased by 69.6% for the quarter ended March 31, 2020 as compared to the same period in 2019. The increase was primarily due to increased investment management expenses resulting from hiring new investment managers during 2019.
At March 31, 2020, the Company held agency mortgage-backed securities with a market value of $236.9 million. Excluding the agency mortgage-backed securities, the average duration of the Company’s fixed maturities portfolio was 4.5 years as of March 31, 2020, compared with 3.1 years as of March 31, 2019. Including cash and short-term investments, the average duration of the Company’s fixed maturities portfolio, excluding agency mortgage-backed securities, was 4.2 years as of March 31, 2020, compared with 3.0 years as of March 31, 2019. Changes in interest rates can cause principal payments on certain investments to extend or shorten which can impact duration. The Company’s embedded book yield on its fixed maturities, not including cash, was 2.9% as of March 31, 2020, compared to 3.2% as of March 31, 2019. The embedded book yield on the $65.3 million of municipal bonds in the Company’s portfolio, which includes $64.9 million of taxable municipal bonds, was 3.1% at March 31, 2020, compared to an embedded book yield of 3.4% on the Company’s municipal bond portfolio of $75.1 million at March 31, 2019.
58
(298
Derivatives
Other than temporary impairment losses
See Note 2 of the notes to the consolidated financial statements in Item 1 of Part I of this report for an analysis of total investment return on a pre-tax basis for the quarters ended March 31, 2020 and 2019.
Corporate and Other Operating Expenses
Corporate and other operating expenses consist of outside legal fees, other professional fees, directors’ fees, management fees & advisory fees, salaries and benefits for holding company personnel, development costs for new products, and taxes incurred which are not directly related to operations. Corporate and other operating expenses were $4.2 million and $3.2 million during the quarters ended March 31, 2020 and 2019, respectively. The increase in corporate expenses is primarily due to an increase in legal and compensation expenses.
Interest Expense
Interest expense decreased 3.1% during the quarter ended March 31, 2020 as compared to the same period in 2019 primarily due to a reduction in the Fed Funds effective interest rate in March, 2020.
Income Tax Expense / Benefit
Income tax benefit was $12.0 million for the quarter ended March 31, 2020 compared with an income tax expense of $4.3 million for the quarter ended March 31, 2019. The increase in the income tax benefit is primarily due to investment losses incurred by the Company’s U.S. subsidiaries during the quarter ended March 31, 2020.
See Note 6 of the notes to the consolidated financial statements in Item 1 of Part I of this report for a comparison of income tax between periods.
The factors described above resulted in a net loss of $44.6 million and net income of $19.6 million for the quarters ended March 31, 2020 and 2019, respectively.
Liquidity and Capital Resources
Sources and Uses of Funds
Global Indemnity is a holding company. Its principal asset is its ownership of the shares of its direct and indirect subsidiaries, including those of its U.S. insurance companies: United National Insurance Company, Diamond State Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, Penn-Patriot Insurance Company, and American Reliable Insurance Company; and its Reinsurance Operations: Global Indemnity Reinsurance.
Global Indemnity’s short term and long term liquidity needs include but are not limited to the payment of corporate expenses, debt service payments, dividend payments to shareholders, and share repurchases. In order to meet their short term and long term needs, the Company’s principal sources of cash includes dividends from subsidiaries, other permitted disbursements
from its direct and indirect subsidiaries, reimbursement for equity awards granted to employees and intercompany borrowings. The principal sources of funds at these direct and indirect subsidiaries include underwriting operations, investment income, proceeds from sales and redemptions of investments, capital contributions, intercompany borrowings, and dividends from subsidiaries. Funds are used principally by these operating subsidiaries to pay claims and operating expenses, to make debt payments, fund margin requirements on interest rate swap agreements, to purchase investments, and to make dividend payments. In addition, the Company periodically reviews opportunities related to business acquisitions and as a result, liquidity may be needed in the future.
As of March 31, 2020, the Company also had future funding commitments of $31.7 million related to investments. The timing of commitments related to investments is uncertain.
The future liquidity of Global Indemnity is dependent on the ability of its subsidiaries to pay dividends. Global Indemnity’s U.S. insurance companies are restricted by statute as to the amount of dividends that they may pay without the prior approval of regulatory authorities. The dividend limitations imposed by state laws are based on the statutory financial results of each insurance company within the Insurance Operations that are determined by using statutory accounting practices that differ in various respects from accounting principles used in financial statements prepared in conformity with GAAP. See “Regulation - Statutory Accounting Principles” in Item 1 of Part I of the Company’s 2019 Annual Report on Form 10-K. Key differences relate to, among other items, deferred acquisition costs, limitations on deferred income taxes, reserve calculation assumptions and surplus notes. See Note 18 of the notes to the consolidated financial statements in Item 8 of Part II of the Company’s 2019 Annual Report on Form 10-K for further information on dividend limitations related to the U.S. Insurance Companies. The U.S. Insurance Companies did not declare or pay any dividends during the quarter ended March 31, 2020.
For 2020, the Company believes that Global Indemnity Reinsurance, including distributions it could receive from its subsidiaries, should have sufficient liquidity and solvency to pay dividends. Global Indemnity Reinsurance is prohibited, without the approval of the Bermuda Monetary Authority (“BMA”), from reducing by 15% or more its total statutory capital or 25% or more of its total statutory capital and surplus as set out in its previous year’s statutory financial statements, and any application for such approval must include such information as the BMA may require. See “Regulation—Bermuda Insurance Regulation” in Item 1 of Part I of the Company’s 2019 Annual Report on Form 10-K. The Board of Directors of Global Indemnity Reinsurance approved a dividend up to $50 million may be declared and paid to the Company on or before September 30, 2020.
Cash Flows
Sources of operating funds consist primarily of net written premiums and investment income. Funds are used primarily to pay claims and operating expenses and to purchase investments. As a result of the dividend policy established in 2017, funds may also be used in the future to pay dividends to shareholders of Global Indemnity Limited.
The Company’s reconciliation of net income to net cash provided by (used for) operations is generally influenced by the following:
the fact that the Company collects premiums, net of commissions, in advance of losses paid;
the timing of the Company’s settlements with its reinsurers; and
the timing of the Company’s loss payments.
Net cash provided by (used for) operating activities was $20.8 million and ($23.2) million for the quarters ended March 31, 2020 and 2019, respectively. The increase in operating cash flows of approximately $44.0 million from the prior year was primarily a net result of the following items:
Net premiums collected
147,119
123,872
23,247
Net losses paid
(67,496
(90,221
22,725
Underwriting and corporate expenses
(70,827
(64,423
(6,404
11,313
12,769
(1,456
Net federal income taxes recovered (paid)
(247
5,726
Interest paid
(4,804
(4,940
136
43,974
See the consolidated statements of cash flows in the consolidated financial statements in Item 1 of Part I of this report for details concerning the Company’s investing and financing activities.
Liquidity
The Company’s liquidity could be negatively impacted by the cancellation, delays, or non-payment of premiums. There is risk that legislation could be passed which would require the Company to cover business interruption claims regardless of terms, exclusions including the virus exclusions contained within the Company’s Commercial Specialty and Farm, Ranch & Stable policies, or other conditions included in policies that would otherwise preclude coverage which would negatively impact liquidity. In addition, the liquidity of the Company’s investment portfolio could be negatively impacted by the disruption experienced in the global financial markets. The COVID-19 pandemic negatively impacted the value of the investment portfolio during the quarter ended March 31, 2020. In particular, the Company experienced significant declines in the fair value of the Company’s equity securities and derivative instruments. Management is taking actions it considers prudent to minimize the impact on the Company’s liquidity. However, given the ongoing uncertainty surrounding the duration, magnitude and geographic reach of COVID-19, the Company is regularly evaluating the impact of COVID-19 on its liquidity.
Other than the items discussed in the preceding paragraphs, there have been no material changes to the Company’s liquidity during the quarter ended March 31, 2020. Please see Item 7 of Part II in the Company’s 2019 Annual Report on Form 10-K for information regarding the Company’s liquidity.
Capital Resources
The outbreak of the COVID-19 pandemic in the first quarter of 2020 and uncertainty around the extent of its economic impact caused severe declines in global financial markets which are reflected in the fair value of the Company’s investment portfolio. In particular, the Company experienced significant declines in the fair value of the Company’s equity securities and derivative instruments.
Other than the item discussed in the preceding paragraph, there have been no material changes to the Company’s capital resources during the quarter ended March 31, 2020. Please see Item 7 of Part II in the Company’s 2019 Annual Report on Form 10-K for information regarding the Company’s capital resources.
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Off Balance Sheet Arrangements
The Company has no off balance sheet arrangements.
Cautionary Note Regarding Forward-Looking Statements
Some of the statements under “Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report may include forward-looking statements within the meaning of Section 21E of the Security Exchange Act of 1934, as amended, that reflect the Company’s current views with respect to future events and financial performance. Forward-looking statements are statements that are not historical facts. These statements can be identified by the use of forward-looking terminology such as "believe," "expect," "may," "will," "should," "project," "plan," "seek," "intend," or "anticipate" or the negative thereof or comparable terminology, and include discussions of strategy, financial projections and estimates and their underlying assumptions, statements regarding plans, objectives, expectations or consequences of identified transactions or natural disasters, and statements about the future performance, operations, products and services of the companies.
The Company’s business and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. See “Risk Factors” in Item 1A of Part I in the Company’s 2019 Annual Report on Form 10-K for risks, uncertainties and other factors that could cause actual results and experience to differ from those projected. The Company’s forward-looking statements speak only as of the date of this report or as of the date they were made. The Company undertakes no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the quarter ending March 31, 2020, globed equities declined 20.2% as the COVID-19 health crisis continued to escalate globally, prompting governments to announce aggressive monetary and fiscal stimulus measures. US equities fell 12.4% during a month characterized by volatility, which saw both the fastest sell-off on record and the largest weekly percentage gain since 2009.
The U.S. fixed income market was very volatile during the quarter ended March 31, 2020 due to periods of panicked selling and zero liquidity. Markets have begun to improve as policy responses gain traction and confidence builds that authorities will do all that is necessary to stave off the severest of predictions. The shuttering of activity around the globe is weakening economies, negatively impacting nearly all markets and prompting unprecedented action from fiscal and monetary authorities. As the timeline for a return to normal is pushed further out, the economic impact will be more severe.
The Company’s investment grade fixed income portfolio continues to maintain high quality with an AA- average rating and a duration of 4.0 years. Portfolio purchases were focused within US Treasuries and MBS securities. These purchases were funded primarily through cash inflows, sales of US Treasuries and investment grade credit, as well as maturities and paydowns. During the first quarter, the portfolio’s allocation to MBS and US Treasuries increased, while our exposure to investment grade credit decreased. There have been no other material changes to the Company’s market risk since December 31, 2019. Please see Item 7A of Part II in the Company’s 2019 Annual Report on Form 10-K for information regarding the Company’s market risk.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2020. Based upon that evaluation, and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2020, the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
63
PART II-OTHER INFORMATION
The Company is, from time to time, involved in various legal proceedings in the ordinary course of business. The Company maintains insurance and reinsurance coverage for risks in amounts that it considers adequate. However, there can be no assurance that the insurance and reinsurance coverage that the Company maintains is sufficient or will be available in adequate amounts or at a reasonable cost. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on its business, results of operations, cash flows, or financial condition.
The Company’s results of operations and financial condition are subject to numerous risks and uncertainties described in Item 1A of Part I in the Company’s 2019 Annual Report on Form 10-K, filed with the SEC on March 6, 2020. The risk factors identified therein have not materially changed except as follows:
The occurrence of natural or man-made disasters, including the recent COVID-19 outbreak, could result in declines in business and increases in claims that could adversely affect the Company’s business, financial condition and results of operations.
The Company is exposed to various risks arising out of natural disasters, including earthquakes, hurricanes, fires, floods, landslides, tornadoes, typhoons, tsunamis, hailstorms, explosions, climate events or weather patterns and public health crises, illness, epidemics or pandemic health events, as well as man-made disasters, including acts of terrorism, military actions, cyber-terrorism, explosions and biological, chemical or radiological events. The continued threat of terrorism and ongoing military actions may cause significant volatility in global financial markets, and a natural or man-made disaster could trigger an economic downturn in the areas directly or indirectly affected by the disaster. These consequences could, among other things, result in a decline in business and increased claims from those areas. They could also result in reduced underwriting capacity making it more difficult for our agents to place business. Disasters also could disrupt public and private infrastructure, including communications and financial services, which could disrupt the Company’s ordinary business operations.
A natural or man-made disaster also could disrupt the operations of the Company’s counterparties or result in increased prices for the products and services they provide to the Company. Finally, a natural or man-made disaster could increase the incidence or severity of E&O claims against the Company.
In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the United States, and has been declared a pandemic by the World Health Organization. The global outbreak of COVID-19 continues to rapidly evolve. The extent to which COVID-19 impacts the Company’s business will depend on future developments in the United States and other countries, which are highly uncertain and cannot be predicted with confidence, including:
• the ultimate geographic spread and severity of COVID-19;
• the duration of the outbreak;
• business closures, travel restrictions, social distancing and other actions taken to contain the threat of COVID-19; and
• the effectiveness of actions taken in the United States and other countries to contain and treat the virus.
As the COVID-19 outbreak and any associated protective or preventative measures continue to spread in the United States and around the world, we may experience disruptions to our business, including but not limited to:
clients choosing to limit purchases of insurance due to declining business conditions, which would inhibit the Company’s ability to generate earned premium;
travel restrictions and quarantines leading to a lack of in-person meetings, which would hinder the Company’s ability to establish relationships or originate new business;
cancellation, delays, or non-payment of premium could negatively impact the Company’s liquidity;
risk that legislation could be passed which would require the Company to cover business interruption claims regardless of terms, exclusions or other conditions included in policies that would otherwise preclude coverage.
alternative working arrangements, including colleagues working remotely, which could negatively impact the Company’s business should such arrangements remain for an extended period of time; and
significant volatility in financial markets affecting the market value and liquidity of the Company’s investment portfolio;
These and other disruptions related to COVID-19 could materially and adversely affect the Company’s business, financial condition and results of operations.
The Company’s Share Incentive Plan allows employees to surrender the Company’s A ordinary shares as payment for the tax liability incurred upon the vesting of restricted stock. There were 4,724 shares surrendered by the Company’s employees during the quarter ended March 31, 2020. All A ordinary shares surrendered by the employees by the Company are held as treasury stock and recorded at cost until formally retired.
Defaults upon Senior Securities
None.
None
10.1+
Second Amended and Restated Management Agreement, dated May 6, 2020, by and among Global Indemnity Limited and Fox Paine & Company, LLC.
31.1+
Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+
Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2+
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.1+
The following financial information from Global Indemnity Limited’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 formatted in XBRL: (i) Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019; (ii) Consolidated Statements of Operations for the quarters ended March 31, 2020 and 2019; (iii) Consolidated Statements of Comprehensive Income for the quarters ended March 31, 2020 and 2019; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the quarters ended March 31, 2020 and 2019; (v) Consolidated Statements of Cash Flows for the quarters ended March 31, 2020 and 2019; and (vi) Notes to Consolidated Financial Statements.
+
Filed or furnished herewith, as applicable.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Registrant
May 8, 2020
By:
/s/ Thomas M. McGeehan
Date: May 8, 2020
Thomas M. McGeehan
Chief Financial Officer
(Authorized Signatory and Principal Financial and Accounting Officer)