Global Indemnity plc — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011; comparisons are with the same 2010 periods. The filing’s registrant is Global Indemnity plc, an Irish holding company with U.S. insurance and Bermuda reinsurance operations.
Business context and financial performance
The company writes specialty property and casualty insurance, primarily in the excess and surplus lines market, and treaty reinsurance. Unless stated otherwise, amounts below are in U.S. dollars and millions.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenues | $100.5 | $94.6 | $214.6 | $194.2 |
| Net premiums earned | $78.1 | $74.7 | $154.0 | $145.5 |
| Net investment income | $13.9 | $13.9 | $28.3 | $28.5 |
| Net realized investment gains | $8.4 | $5.6 | $20.4 | $19.8 |
| Income (loss) before income taxes | $2.2 | $26.0 | $23.5 | $47.0 |
| Net income | $4.4 | $24.5 | $18.2 | $43.4 |
| Diluted earnings per share | $0.15 | $0.81 | $0.60 | $1.44 |
- Premiums: Q2 gross premiums written rose 3.2% to $95.0 million and net premiums written rose 8.7% to $86.4 million. For the six months, gross premiums written declined 1.2% to $182.6 million, while net premiums written increased 5.3% to $169.5 million. Higher insurance premiums and changes to property reinsurance arrangements supported net premium growth.
- Underwriting: The consolidated combined ratio was 117.9% in Q2 versus 82.5% a year earlier, and 117.0% for the first half versus 91.9%. Ratios above 100% indicate underwriting losses. Insurance Operations reported segment losses of $11.0 million for Q2 and $2.5 million for the first half; Reinsurance Operations lost $2.8 million and $11.8 million, respectively.
- Investment and other income: Q2 net investment income was essentially flat year over year; first-half income edged down. Management attributed lower gross investment income to reduced fixed-maturity yields. First-half other income included approximately $11.5 million from the AON settlement, a non-recurring item.
Financial position, cash flow, and debt
- At June 30, total assets were $2.239 billion, including $1.628 billion of investments and $106.3 million of cash and cash equivalents. Total liabilities were $1.295 billion and shareholders’ equity was $943.2 million.
- Notes and debentures payable were $121.1 million at June 30. On July 20, the company made an $18.0 million principal payment on its $90.0 million Guaranteed Senior Notes; required annual $18.0 million prepayments continue through 2015, with any remaining principal due then.
- Operating cash flow for the six months was positive $6.5 million, compared with negative $15.0 million in 2010. Investing activities used $19.6 million and financing activities used $0.4 million; cash declined $13.5 million to $106.3 million.
- Reinsurance receivables were $332.2 million, with $184.6 million of collateral and a $10.6 million allowance for uncollectible amounts. The filing notes that the insurer remains liable to policyholders if reinsurers do not pay.
- Cash and securities on deposit or held in trust totaled $745.6 million, including assets held for policyholders and under regulatory or contractual requirements. Dividend capacity of insurance subsidiaries is subject to regulatory limits.
Material changes and unusual items
- Claims and catastrophe losses: Insurance Operations’ Q2 loss ratio increased to 78.3% from 33.4%; its first-half ratio rose to 69.3% from 46.7%. The filing cites severe weather and tornadoes, higher fire losses, casualty loss emergence, and a professional-lines loss. Reinsurance Operations’ first-half loss ratio increased to 100.7% from 60.5%, primarily reflecting catastrophe losses from Japan, New Zealand, Australia, and Alabama, as well as adverse prior-year development.
- Reserve development: Insurance Operations reduced prior-year reserves by $9.1 million in Q2 and $17.8 million in the first half, mainly on favorable general-liability experience, partly offset by professional-liability increases. Reinsurance Operations increased prior-year reserves by $3.8 million in Q2 and $7.2 million in the first half, including marine, catastrophe-treaty, and auto-related developments. Reserve estimates are subject to substantial uncertainty.
- AON settlement: The company settled its litigation with AON for $16.3 million in January 2011 after a prior jury verdict. Approximately $11.5 million, net of attorney fees, was reported in first-half other income; the company said it realized approximately $7.5 million net of income taxes and attorney fees.
- Operations and reinsurance: The 2010 Profit Enhancement Initiative reduced U.S. headcount by approximately 25% and closed underperforming facilities; management attributed lower corporate costs partly to the initiative. The property quota-share treaty was not renewed, increasing the share of premiums retained. Certain professional-liability classes were exited. Reinsurance premium volume declined after non-renewals and a counterparty’s post-acquisition decision not to renew.
- Investment exposure: The portfolio included $2.8 million of subprime and Alt-A investments, with $2.3 million rated below investment grade, and $101.2 million of insured municipal bonds. The filing reports no first-half impairment on the subprime and Alt-A holdings.
Outlook, risks, and other disclosures
The filing provides no specific earnings or premium guidance. Management describes its focus as improving profitability through underwriting controls, selective business, and expense alignment. It also notes that interim results are not necessarily indicative of full-year results.
- Key risks include catastrophe frequency and severity, reserve estimation uncertainty, reinsurance collectability and disputes, investment and credit performance, competitive pricing and market cycles, regulatory or tax changes, and the ability of subsidiaries to pay dividends.
- Management reported effective disclosure controls as of June 30, 2011 and no material change in internal controls over financial reporting during the quarter. It stated that pending legal proceedings were not expected to have a material adverse effect, while noting ordinary-course litigation and potential reinsurer disputes.
- Fox Paine beneficially held approximately 89.5% of total voting power and controlled the election of directors. The company paid Fox Paine management fees of $0.8 million for the first half and reported a $2.5 million unfunded commitment to a Fox Paine-managed partnership.
Most important facts for investors to verify
- Whether elevated catastrophe losses and adverse reinsurance development persist, and how they affect combined ratios and future underwriting profitability.
- The adequacy and sensitivity of loss reserves, particularly for long-tail liability lines and the casualty brokerage business.
- Reinsurer credit quality, collateral sufficiency, and recoverability of the $332.2 million in reinsurance receivables.
- Underlying earnings excluding the non-recurring AON settlement and investment gains, and the contribution of underwriting versus investment results.
- Cash and regulatory capital after the July 2011 debt payment, future scheduled note repayments, and restrictions on subsidiary dividends.
- Exposure to investment impairments, including lower-rated subprime and Alt-A assets, insured municipal securities, and Level 3 investments.