Global Indemnity Group, LLC quarterly report, Q2 FY2013

Business context and reporting period

Global Indemnity plc filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The filing identifies the registrant as Global Indemnity plc (not Global Indemnity Group, LLC). The company operates in property and casualty insurance and reinsurance, primarily in the excess and surplus lines market.

Financial results and position

Amounts below are in millions of dollars unless noted.

• Premiums: Gross premiums written increased 24.6% to $84.2 million in Q2 and 27.0% to $159.2 million for the six months. Net premiums written rose 28.2% to $78.3 million and 34.5% to $149.8 million, respectively. Six-month net premiums earned fell 6.3%, reflecting lower reinsurance earned premiums after exits from unprofitable treaties.
• Underwriting: Consolidated combined ratio improved to 101.2% in Q2 from 103.6%, and to 100.9% for the six months from 102.3%. Insurance Operations remained unprofitable on underwriting, with combined ratios of 109.4% for Q2 and 109.0% year to date. Reinsurance Operations reported ratios of 69.0% and 67.8%.
• Investment results: Net investment income declined 11.8% in Q2 to $9.8 million and 12.0% for the six months to $19.8 million. Net realized investment gains increased to $2.8 million in Q2 and $8.6 million year to date. Total investment return was negative $2.8 million in Q2, versus positive $1.1 million a year earlier; six-month return was $25.2 million versus $38.0 million.
• Balance sheet at June 30: Total assets were $1.915 billion, investments $1.411 billion, cash and cash equivalents $111.4 million, and shareholders’ equity $824.0 million. Total liabilities were $1.091 billion. Unpaid losses and loss adjustment expenses were $844.9 million gross, with net reserves of approximately $615.1 million.
• Debt: Notes and debentures payable were $84.9 million at June 30. On July 19, the company paid $54.0 million of guaranteed senior-note principal, plus $4.6 million interest including a $2.9 million make-whole payment. It funded the payment with a $60.0 million margin-facility borrowing at a rate then below 1%, secured by approximately $75.0 million of collateral.

Material changes versus prior comparable periods

• Q2 net income declined 9.8%, while six-month net income increased 2.8%. The six-month improvement came despite lower total revenue, supported by lower losses and higher realized investment gains; the income tax benefit was substantially smaller than in 2012.
• Insurance premiums written grew, aided by small-business growth, pricing increases, and higher retention of direct business. Insurance Operations’ six-month combined ratio improved, though it remained above 100%.
• Reinsurance premiums written rose sharply, largely from new treaties, while earned premiums fell as the company continued to run off discontinued casualty treaties. Management said current reinsurance activity was focused mainly on property treaties.
• Net investment income weakened amid a smaller fixed-income portfolio and lower reinvestment yields. During Q2, rising interest rates contributed to unrealized investment losses; accumulated other comprehensive income declined to $47.6 million from $53.4 million at year-end 2012.
• Prior-year reserves were released by $3.4 million in the first half of 2013, compared with $2.1 million in the first half of 2012. Favorable property and general-liability development was partly offset by a $3.5 million increase for asbestos exposures.

Outlook, commentary, risks, and unusual items

• The filing gives no specific earnings or premium guidance. Management described the reinsurance market as a setting for cautious capital deployment, with business selected to meet risk and return thresholds.
• Management cited lower reinvestment yields and a reduction in fixed-income assets as reasons for lower investment income. The investment portfolio’s average rating was AA- and its reported duration was 2.4 years. The 10-year U.S. Treasury yield rose 64 basis points during Q2 to 2.49%.
• Reserve estimates are inherently uncertain and depend on claim frequency, severity, inflation, judicial decisions, and reporting lags. The company highlighted long-tail claims and asbestos exposures, including litigation involving a bankruptcy-related channeling injunction under appeal and two new claims reported on a 1985 excess policy.
• Other principal risks include catastrophe losses, reinsurance collectability and disputes, competition and pricing, investment and credit risk, regulatory and tax changes, foreign currency movements, and the ability of subsidiaries to pay dividends. The company said pending ordinary-course legal proceedings were not expected to have a material adverse effect, while noting that coverage may not always be sufficient or available at reasonable cost.
• The margin facility is subject to maintenance-margin requirements; adverse market movements could require additional collateral. The company reported no material change in liquidity during Q2. Operating cash flow remained negative in the first half, although less negative than in 2012.
• Fox Paine beneficially held approximately 93% of the company’s voting power at June 30. The company also disclosed related-party management fees and an investment in a Fox Paine-managed partnership with a $2.5 million unfunded commitment.

Most important facts for investors to verify

• Whether premium growth, especially new reinsurance business, converts into sustainable earned-premium growth and underwriting profitability.
• Whether reserve releases and favorable development persist, particularly given the asbestos and long-tail claim exposures.
• The impact of market rates and investment performance on recurring income, unrealized gains or losses, and capital.
• The margin borrowing’s collateral requirements, variable balance, and refinancing implications following repayment of the senior notes.
• Reinsurer credit quality and collectability, and any developments in the asbestos-related litigation and appeal.
• The scope and governance implications of Fox Paine’s voting control and the disclosed related-party arrangements.