Business Context and Reporting Period
Company: Global Indemnity plc (formerly United America Indemnity, Ltd.)
Filing Type: Form 10-K
Reporting Period: Fiscal Year Ended December 31, 2010
Business Overview: Global Indemnity is a specialty property and casualty insurer operating in two segments: Insurance Operations (excess and surplus lines in the U.S.) and Reinsurance Operations (Wind River Reinsurance in Bermuda). The company completed a re-domestication from the Cayman Islands to Ireland on July 2, 2010.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Gross Premiums Written | $345.8 million | $341.0 million |
| Net Premiums Written | $296.5 million | $291.0 million |
| Net Premiums Earned | $286.8 million | $301.7 million |
| Total Revenues | $370.5 million | $387.8 million |
| Net Income | $84.9 million | $75.4 million |
| Net Investment Income | $56.6 million | $70.2 million |
| Net Realized Investment Gains | $26.4 million | $15.9 million |
| Combined Ratio | 86.6% | 96.0% |
| Total Assets | $2,294.7 million | $2,445.8 million |
| Total Shareholders' Equity | $928.7 million | $832.0 million |
| Unpaid Losses & LAE (Gross) | $1,052.7 million | $1,257.7 million |
| Reinsurance Receivables (Net) | $423.0 million | $543.4 million |
Material Changes vs. Prior Period
- Profitability Improvement: Net income increased 12.6% to $84.9 million, driven by a significant improvement in the combined ratio (86.6% vs. 96.0%) and higher net realized investment gains.
- Reserve Releases: The loss ratio improved significantly due to a $53.9 million reduction in prior accident year loss reserves, primarily in general liability lines ($43.7 million) and umbrella lines ($5.4 million).
- Premium Volume: Gross premiums written increased slightly (1.4%), but Net premiums written increased 1.9%. Insurance Operations premiums declined 8.4% due to price decreases and program exits, while Reinsurance Operations premiums grew 37.4% due to new treaties.
- Investment Performance: Net investment income decreased 19.4% due to lower interest rates and the absence of limited partnership liquidation income seen in 2009. However, net realized gains increased 66.7% to $26.4 million.
- Restructuring: The company incurred $6.8 million in charges related to a "Profit Enhancement Initiative" in Q4 2010, including severance, lease terminations, and asset impairments.
Guidance, Outlook, and Risks
- Outlook: Management expects the restructuring initiative to yield annual pre-tax savings of $9 million to $11 million starting in 2011. The company anticipates sufficient liquidity to pay dividends from Wind River Reinsurance in 2011.
- Market Conditions: The company operates in a period of excess underwriting capacity with competitive pricing pressure. Renewal pricing decreased approximately 3.0% in 2010.
- Recent Catastrophes: Post-filing events include estimated losses of $5.1 million from the February 2011 New Zealand earthquake. The company is still evaluating exposure to the March 2011 Japan earthquake and tsunami.
- Legal Proceedings: In January 2011, the company settled a lawsuit against AON Corp. for $16.3 million, realizing approximately $7.5 million net of taxes and fees.
- Key Risks:
- Reserve Adequacy: Significant uncertainty remains regarding ultimate liability for asbestos and environmental claims ($20.4 million and $9.9 million net reserves, respectively).
- Reinsurance Credit Risk: $423.0 million in reinsurance receivables, with $289.3 million collateralized. Concentration risk exists with the top two reinsurers representing ~67% of receivables.
- Regulatory: Subject to Dodd-Frank Act provisions and potential designation as "systemically important," which could increase regulatory burdens.
- Controlling Shareholder: Fox Paine & Company holds approximately 89.6% of voting power, controlling board elections and major corporate decisions.
Investor Verification Checklist
- Reserve Development: Verify the sustainability of the $53.9 million prior year reserve release and monitor future development on general liability and umbrella lines.
- Reinsurance Exposure: Assess the creditworthiness of top reinsurers (Munich Re, Westport) and the adequacy of collateral held ($289.3 million) against total receivables.
- Investment Portfolio: Review the $204.0 million corporate loan portfolio (below investment grade) and $3.0 million subprime/Alt-A exposure for credit deterioration.
- Restructuring Savings: Monitor Q1 2011 results to confirm realization of the projected $9-$11 million annual savings from the Profit Enhancement Initiative.
- Catastrophe Impact: Track final loss estimates for the New Zealand and Japan earthquakes to ensure they do not materially impact 2011 underwriting results.