Global Indemnity plc — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2014. The filing identifies the registrant as Global Indemnity plc, rather than Global Indemnity Group, LLC. Financial amounts below are in U.S. dollars; millions unless noted.
Business context and financial results
The company operates Insurance Operations, principally U.S. specialty property and casualty insurance, and Reinsurance Operations through Bermuda-based Wind River Reinsurance. Results are unaudited and prepared under U.S. GAAP.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $75.2 million | $71.8 million | +4.7% |
| Net premiums earned | $67.5 million | $56.0 million | +20.6% |
| Net investment income | $8.3 million | $10.0 million | -17.4% |
| Net realized investment gains (losses) | ($0.8) million | $5.8 million | Declined $6.6 million |
| Income before taxes | $7.0 million | $12.1 million | -42.2% |
| Net income | $8.8 million | $12.4 million | -28.6% |
| Diluted earnings per share | $0.35 | $0.49 | -28.6% |
| Operating cash flow | ($10.7) million | ($10.4) million | Cash used in both periods |
Net income as a share of revenue was approximately 11.7%, versus 17.2% a year earlier. The company reported a $1.8 million income tax benefit, compared with a $0.3 million benefit in Q1 2013.
Underwriting, balance sheet and liquidity
- Underwriting: Consolidated combined ratio improved to 96.3% from 100.5%. Insurance Operations remained unprofitable on a segment basis, with a $1.8 million loss and a 103.8% combined ratio (versus a $3.8 million loss and 108.6%). Reinsurance Operations earned $4.5 million, up from $3.6 million; its combined ratio was 68.5%, versus 66.1%.
- Premiums: Gross written premiums were $77.2 million, up 3.0%; net written premiums were $72.9 million, up 1.9%. Insurance growth was attributed principally to small-business retention, rate increases and vacant-property business. Reinsurance earned premiums grew mainly from treaties written in 2013.
- Assets and equity: At March 31, total assets were $1.924 billion, investments $1.460 billion, cash and equivalents $99.2 million, and shareholders’ equity $880.8 million. Total liabilities were $1.043 billion.
- Debt and liquidity: The balance sheet included a $100 million margin borrowing facility, unchanged from year-end; securities of $120.4 million were held as collateral. Interest expense fell to $0.2 million from $1.2 million, primarily following repayment of senior notes and junior subordinated debentures in 2013. Operating cash use was $10.7 million; quarter-end cash was $99.2 million, down from $105.5 million at year-end.
- Investment return: Total pre-tax investment return was $4.9 million (0.3%, not annualized), versus $28.6 million (1.9%) in Q1 2013. Fixed-income portfolio average rating was AA- and duration was 2.0 years, excluding agency mortgage-backed securities.
Material changes, outlook and risks
- The company exited its corporate loan portfolio and committed $50 million to an alternative investment vehicle of European non-performing loans. It had funded $2.0 million by quarter-end, leaving $48.0 million unfunded.
- Interest-rate swaps produced a $6.3 million realized loss in Q1 2014; the filing says this was the principal reason realized investment results shifted from gains to losses. The swaps were non-hedging instruments, and the company posted $4.9 million of collateral.
- Prior accident-year reserves were reduced by $2.1 million, mainly reflecting favorable general-liability and professional-liability experience, partly offset by strengthening in other discontinued lines. Gross unpaid loss reserves were $779.0 million and net reserves $583.5 million. Management cautions that reserve estimates are uncertain and may change.
- On January 23, U.S. insurance subsidiaries paid an extraordinary $200 million dividend to Global Indemnity Group, Inc. The filing also reports that in May 2014 Global Indemnity Group, Inc. agreed to loan $200 million to Global Indemnity Cayman Limited.
- There is no specific earnings guidance in the provided filing text. Management said Wind River Reinsurance would continue to deploy capital cautiously given pricing conditions. Insurance-subsidiary dividends are subject to regulatory limits, and the parent’s liquidity depends on distributions from subsidiaries.
- Risks include claims frequency and severity, reserve estimation, catastrophe exposure, reinsurer collectability and disputes, investment and interest-rate risk, and limits on subsidiary dividends. The filing reports ordinary-course litigation and says pending matters are not expected to have a material adverse effect. It also describes asbestos-related litigation and a bankruptcy-plan injunction that could face appeal; management is monitoring possible additional exposure.
- Fox Paine beneficially held approximately 93% of voting power and controlled director elections. The filing says risk factors had not materially changed and disclosure controls were effective as of March 31, 2014.
Important facts for investors to verify
- Whether the $6.3 million swap loss and associated collateral requirements have ongoing effects on investment results or liquidity.
- Performance, valuation and funding obligations of the European non-performing-loan investment, including the remaining $48.0 million commitment.
- Changes in loss reserves, especially long-tail, environmental and asbestos-related exposures, and the collectability of reinsurance receivables.
- The terms and cash-flow implications of the $100 million margin facility, the extraordinary subsidiary dividend, and the May 2014 intercompany loan.
- Whether the improvement in the Insurance Operations combined ratio is sustainable; the reported 103.8% ratio still indicates underwriting losses for that segment.