GBLI

Business Context and Reporting Period

Company: Global Indemnity plc (formerly United America Indemnity, Ltd.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2010
Key Corporate Event: The Company completed its redomestication from the Cayman Islands to Ireland on July 2, 2010. Shares began trading on the NASDAQ under the symbol "GBLI" on July 6, 2010.
Operations: The Company operates through two segments: United States Based Insurance Operations (excess and surplus lines) and International Reinsurance Operations (Wind River Reinsurance).

Key Financial Metrics

Underwriting Performance (Nine Months 2010):
- Insurance Operations Combined Ratio: 86.9% (Loss Ratio: 40.7%; Expense Ratio: 46.2%)
- Reinsurance Operations Combined Ratio: 93.6% (Loss Ratio: 64.6%; Expense Ratio: 29.0%)
- Consolidated Combined Ratio: 89.1%

Material Changes vs. Prior Period

• Net Income: Increased 24.5% to $63.2 million for the nine months ended September 30, 2010, compared to $50.8 million in the prior year period. This was driven by significant favorable prior-year loss reserve development and higher net realized investment gains.
• Premiums: Net premiums written increased 3.2% to $234.2 million. However, Net premiums earned decreased 4.7% to $215.6 million due to timing differences and the cut-off of a quota share treaty.
• Investment Income: Net investment income decreased 21.2% to $42.6 million, primarily due to lower yields on fixed maturities and the liquidation of limited partnership investments that generated significant income in 2009.
• Realized Gains: Net realized investment gains surged 533.1% to $21.6 million, compared to $3.4 million in the prior year, driven by sales of fixed maturities and equities.
• Loss Reserves: The Company recorded a $33.7 million favorable development (reduction) in prior accident year loss reserves for the nine months ended September 30, 2010, compared to a $4.2 million reduction in the prior year. This significantly improved the loss ratio.

Guidance, Outlook, Risks, and Unusual Items

• Restructuring Plan (Subsequent Event): On November 2, 2010, the Company committed to a restructuring plan for its U.S. insurance operations. The plan aims to reduce the U.S. census by approximately 25% and close underperforming facilities.
  • Estimated Cost: $5.4 million to $8.6 million (pre-tax), to be recognized in Q4 2010.
  • Projected Savings: $9 million to $11 million annually starting in 2011.
• Legal Proceedings: A federal jury returned a $24.0 million verdict in favor of a subsidiary against AON Corp. in 2008, later increased to $32.2 million with interest. AON has appealed; oral arguments were heard in October 2010. The Company does not believe the outcome will have a material adverse effect.
• Investment Portfolio: The Company holds approximately $123.8 million in insurance-enhanced municipal bonds. While the portfolio is high quality, there is exposure to financial guarantors. The Company also holds $2.9 million in subprime and Alt-A investments.
• Redomestication Risks: Risks associated with the move to Ireland include potential difficulties in moving jurisdictions, tax expectations not materializing, and changes in corporate governance requirements.

Investor Verification Checklist

• Loss Reserve Adequacy: Verify the sustainability of the $33.7 million favorable prior-year loss development, particularly in General Liability lines, to ensure it does not reverse in future periods.
• Restructuring Execution: Monitor the implementation of the November 2010 restructuring plan and the realization of the projected $9-$11 million in annual savings.
• Investment Yield Trends: Assess the impact of the declining embedded book yield (3.96% on fixed maturities) on future investment income, given the reduction in limited partnership income.
• Reinsurance Concentration: Review the exposure to financial guarantors within the $123.8 million insurance-enhanced municipal bond portfolio.
• Legal Outcome: Track the status of the AON Corp. appeal regarding the $32.2 million verdict.