Global Indemnity plc — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. The filing is by Global Indemnity plc, an Ireland-domiciled specialty property and casualty insurer and reinsurer. Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless stated otherwise.
Business context and reporting period
From 2015, the company reported Commercial Lines, Personal Lines, and Reinsurance Operations. Personal Lines includes American Reliable, acquired January 1, 2015 for an estimated purchase price of $99.8 million. The acquisition expanded specialty personal and agricultural coverage and materially affects comparisons with 2014; American Reliable contributed $196.1 million of revenue and an $8.5 million pretax loss in the first nine months of 2015.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Gross premiums written | $150.1m | $67.1m | $459.5m | $227.2m |
| Net premiums earned | $124.7m | $68.0m | $380.9m | $201.6m |
| Total revenues | $124.1m | $75.8m | $402.3m | $264.8m |
| Net income (loss) | ($3.7m) | $9.8m | $14.2m | $51.8m |
| Diluted earnings (loss) per share | ($0.15) | $0.39 | $0.55 | $2.05 |
| Net cash from operating activities | Not stated by quarter | ($1.2m) | ($7.1m) |
Investment income was $8.9 million for Q3 and $26.2 million for the nine months, up from $6.5 million and $22.5 million, respectively. Net realized investment losses were $10.8 million for Q3 and $7.2 million year to date, versus a $40.2 million gain in the prior-year nine-month period. The 2015 year-to-date result included $8.9 million of interest-rate-swap losses and $6.9 million of investment impairment losses; the 2014 comparison benefited from substantial equity-sale gains.
Consolidated combined ratios were 103.1% for Q3 and 99.0% year to date, compared with 94.3% and 96.5%. A ratio above 100% indicates underwriting losses before investment income and unallocated items. Segment combined ratios for Q3 / nine months were: Personal Lines 120.2% / 106.9%; Commercial Lines 89.0% / 96.3%; and Reinsurance Operations 76.3% / 71.1%.
At September 30, total assets were $2.319 billion, investments $1.689 billion, cash and cash equivalents $146.7 million, and shareholders’ equity $921.7 million. Debt was $292.1 million, up from $174.7 million at year-end 2014; this comprised $195.8 million of margin borrowings and $96.4 million carrying value for newly issued subordinated notes. Operating cash flow was negative despite the reported profit. Financing provided $117.2 million during the nine months, including $100 million of note proceeds; investing used $28.1 million.
Material changes versus comparable periods
- Reported premium and revenue growth largely reflects American Reliable, which was not consolidated in the 2014 reported results. On a pro forma basis assuming the acquisition occurred January 1, 2014, nine-month 2015 revenue was $402.3 million versus $462.2 million in 2014, and net income was $19.6 million versus $57.2 million.
- Q3 net loss compared with prior-year profit, primarily amid weaker investment results and a Personal Lines underwriting loss. The Q3 consolidated combined ratio worsened 8.8 points.
- Commercial Lines and Reinsurance Operations reported favorable prior-year reserve development of $7.3 million and $1.2 million, respectively, in Q3. Total favorable prior-year development was $17.2 million for the first nine months. Personal Lines had no prior-year reserve adjustment reported for these periods.
- Personal Lines Q3 catastrophe losses were $13.7 million, mainly from California wildfires; Reinsurance Operations cited the Tianjin, China explosion as increasing its Q3 current-year loss ratio by 8.9 points. Commercial Lines cited a large Florida fire loss.
- Investment balances grew with the acquisition, while accumulated other comprehensive income declined to $13.2 million from $23.4 million at year-end, reflecting investment valuation changes.
Outlook, commentary, risks and unusual items
- No formal earnings or premium guidance is provided. Management described intense competition and excess capital pressuring property-catastrophe reinsurance pricing; Commercial Lines also cited competition and underwriting actions to improve profitability.
- American Reliable purchase accounting remained provisional. The company and seller disputed the acquisition-date loss reserve carrying value, with contractual resolution and potential indemnification payments tied to development of pre-2015 accident-year reserves. The agreement includes 5% compounded semiannual interest on any settlement variance.
- Loss reserve estimation is a significant judgment area. Gross and net unpaid losses and loss adjustment expenses were $729.5 million and $598.6 million. The company cautions that actual claim frequency, severity, legal developments, and reinsurance recoveries may differ from estimates.
- Margin facilities are due on demand, currently carry a rate of approximately 1%, and are subject to collateral maintenance requirements; $248.5 million of securities were pledged. The 7.75% subordinated notes mature in 2045 and are redeemable beginning in 2020.
- On October 29, 2015, after quarter-end, the company agreed to redeem 8,260,870 shares from Fox Paine affiliates for $190 million and obtained rights to redeem another 3,376,561 shares for $77.7 million, with the latter amount subject to a 3% annual increase. It was discussing rights covering a further 1,146,716 shares. The company sold $279.9 million of securities; $102.0 million repaid margin debt and the remainder funded part of the redemption. Fox Paine affiliates would retain majority voting control after the disclosed redemptions.
- Management said ordinary-course legal matters were not expected to have a material adverse effect, but noted potential disputes with reinsurers in runoff. The company’s risk disclosures include catastrophe exposure, reserve uncertainty, investment and interest-rate risks, reinsurer collectability, regulatory constraints on subsidiary dividends, and acquisition integration risks.
- A material weakness in loss-reserve estimation controls identified at year-end 2014 was reported as remediated by March 31, 2015. Management concluded disclosure controls were effective as of September 30, 2015.
Important facts for investors to verify
- Track American Reliable’s underwriting results, catastrophe exposure, integration, and final purchase-price and reserve-dispute outcomes.
- Assess reserve adequacy and the sustainability of favorable prior-year development, especially against current accident-year combined ratios.
- Reconcile reported 2015 earnings with investment impairments, swap losses, tax benefits, and acquisition-related expenses; compare with pro forma 2014 results.
- Review liquidity and capital after the post-quarter share redemption, including remaining margin debt, collateral requirements, and any exercise of additional redemption rights.
- Monitor subsidiary dividend capacity, reinsurance recoverability, market competition, and whether the remediated reserve-control weakness remains resolved.