Global Indemnity plc — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter filing. Global Indemnity plc is the registrant named in the filing.
Business context and reporting period
The specialty property and casualty insurer reported three segments: Commercial Lines, Personal Lines, and Bermuda-based Reinsurance Operations. Personal Lines was added following the January 1, 2015 acquisition of American Reliable, whose results are included from the acquisition date. Consequently, reported year-over-year growth is substantially affected by the acquisition.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Gross premiums written | $590.2 million | $291.3 million |
| Net premiums written | $501.2 million | $273.2 million |
| Net premiums earned | $504.1 million | $268.5 million |
| Total revenues | $538.8 million | $333.8 million |
| Net income | $41.5 million | $62.9 million |
| Diluted earnings per share | $1.69 | $2.48 |
| Combined ratio | 94.5% | 92.0% |
| Net cash from operating activities | $3.8 million | $(12.0) million |
The 2015 combined ratio includes favorable prior-year reserve development of $34.7 million and catastrophe losses of $45.0 million. The Personal Lines combined ratio was 104.0% (underwriting loss); Commercial Lines was 90.6%; and Reinsurance Operations was 63.5%. Excluding favorable prior-year development, segment ratios were 103.5% for Commercial Lines and 81.0% for Reinsurance Operations.
Net investment income rose to $34.6 million from $28.8 million, while net realized investment results swung to a $3.4 million loss from a $35.9 million gain. The company reported a $7.3 million investment impairment charge, primarily related to equities. Income tax benefit was $8.7 million, versus $8.3 million of tax expense in 2014.
At year-end, total assets were $1.96 billion, shareholders’ equity $749.9 million, and investments and cash $1.52 billion, including $67.0 million cash and equivalents. Unpaid losses and loss adjustment expenses were $680.0 million gross and $571.9 million net of reinsurance. Debt totaled $172.0 million: $96.4 million carrying value of 7.75% subordinated notes due 2045 and $75.6 million in demand margin borrowings. The filing reports no cash dividends in 2015 or 2014.
Material changes versus the prior comparable period
- Acquired American Reliable for an estimated purchase price of approximately $99.8 million; the transaction included $113.7 million cash paid at closing and assumed insurance-related liabilities. American Reliable contributed $259.0 million revenue and a $4.2 million pretax loss in 2015. The purchase price remains subject to specified accounting and loss-development adjustments.
- Net income fell $21.4 million despite substantially higher reported premiums and revenue. The comparison reflects the acquisition, the reversal from large investment gains to a realized investment loss, higher corporate and acquisition costs, and higher interest expense.
- Commercial Lines gross premiums written declined 6.9% to $214.2 million, reflecting underwriting actions; its segment income improved to $19.2 million, aided by $25.6 million favorable prior-year reserve development. Reinsurance gross premiums written declined 18.8% to $49.7 million amid intense catastrophe-market competition; segment income increased to $18.9 million, including $9.1 million favorable prior-year development.
- American Reliable Personal Lines recorded a $7.2 million segment loss. Wildfire-related catastrophe losses rose to $34.0 million from $16.2 million in the comparable pro forma comparison cited by management.
- Issued $100 million principal amount of 7.75% subordinated notes in August 2015. Separately, agreed to redeem 8.26 million ordinary shares for $190 million and obtained rights to redeem an additional 3.40 million shares for $78.1 million, subject to a 3% annual increase. The company sold $279.9 million of investments in connection with the transaction and used $102 million to repay margin debt.
- Shareholders’ equity decreased from $908.3 million to $749.9 million, reflecting the share redemption and a $19.3 million decline in other comprehensive income, among other items.
Outlook, commentary, risks, and unusual items
- Management provided no specific earnings or premium guidance. It said Reinsurance Operations premiums could continue to decline in 2016 given excess market capacity and falling property catastrophe rates; one treaty was not renewed to reduce catastrophe exposure.
- Key risks include reserve-estimation uncertainty and potentially adverse claims development; catastrophe losses; reinsurance recoverability; competitive pricing and availability of reinsurance; investment, interest-rate, credit, equity and liquidity risks; and dependence on regulated subsidiary distributions to fund holding-company needs.
- At year-end, net asbestos and environmental reserves were $15.8 million and $14.7 million, respectively, in the business discussion; the notes also report combined net A&E reserves of $30.5 million. A prior asbestos settlement covering approximately 3,900 claims had no remaining obligations at year-end. The filing highlights uncertainty in long-tail, construction-defect, asbestos and environmental claims.
- Reinsurance receivables net of collateral were $109.2 million; the allowance for uncollectible reinsurance was $9.7 million. Munich Re accounted for $53.4 million of gross reinsurance receivables, creating notable counterparty concentration.
- Fox Paine affiliates held approximately 84% of voting power and retained control after the share redemption. The company also has a $1.9 million annual management fee arrangement with Fox Paine; acquisition-related fees and expenses contributed to higher 2015 corporate costs.
- Operating cash flow was positive $3.8 million; management noted it was reduced by $23.8 million from a reinsurance policy commutation that had no net-income impact. The company stated it believed liquidity was sufficient, but holding-company liquidity depends on subsidiary distributions and regulatory limits.
- The company reported that a material weakness in loss-reserve estimation controls identified at year-end 2014 was remediated by March 31, 2015. Management and the auditor concluded internal control over financial reporting was effective at December 31, 2015; the financial-statement audit opinion was unqualified.
Most important facts for an investor to verify
- How much of reported premium growth and earnings reflects American Reliable, and whether its underwriting performance improves from its 104.0% combined ratio.
- Whether favorable prior-year reserve releases—$34.7 million in 2015—are repeatable, and how long-tail, construction-defect and A&E reserves develop.
- The effect of catastrophe experience, especially wildfire losses, and the adequacy, cost and renewal terms of reinsurance protection.
- Reinsurance collectability and concentration, including the $53.4 million Munich Re receivable and the $9.7 million allowance for uncollectible balances.
- Cash generation, debt service and collateral exposure on demand margin facilities, alongside the 7.75% notes and the remaining share-redemption rights.
- Investment portfolio valuation, liquidity and interest-rate sensitivity; reported fixed maturities included a $2.2 million pretax unrealized loss at year-end.
- Subsidiary dividend capacity and the implications of Fox Paine’s voting control and related-party arrangements.