Global Indemnity plc — Form 10-Q for the quarter ended September 30, 2013
Entity note: The supplied filing is for Global Indemnity plc, not Global Indemnity Group, LLC. It reports unaudited U.S. GAAP results for the three and nine months ended September 30, 2013, with comparisons to 2012.
Business context
The company operates through Insurance Operations, primarily a U.S. property and casualty insurer focused on excess and surplus lines, and Reinsurance Operations, conducted by Bermuda-based Wind River Reinsurance. Revenue is derived principally from premiums and investment income.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and ratios; figures are rounded.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenues | $74.8 | $73.4 | $218.1 | $221.5 |
| Net premiums written | $64.0 | $51.5 | $213.9 | $162.9 |
| Net premiums earned | $64.5 | $55.3 | $179.1 | $177.7 |
| Net investment income | $8.5 | $14.8 | $28.3 | $37.3 |
| Net realized investment gains | $1.6 | $3.2 | $10.2 | $6.9 |
| Income before income taxes | $5.1 | $11.5 | $25.6 | $26.7 |
| Net income | $6.9 | $9.9 | $28.0 | $30.4 |
| Diluted earnings per share | $0.28 | $0.39 | $1.11 | $1.11 |
At September 30, 2013, total assets were $1,918.4 million, total liabilities $1,079.5 million, and shareholders’ equity $838.9 million. Cash and cash equivalents were $116.0 million; investments were $1,433.0 million. Unpaid losses and loss adjustment expenses were $823.1 million gross, or $603.4 million net of reinsurance.
Nine-month operating cash flow was negative $0.9 million, versus negative $25.9 million in 2012. Investing activities provided $11.8 million and financing activities provided $0.7 million; cash rose $11.5 million to $116.0 million.
Reported debt was $85.6 million at quarter-end: $65.0 million under a new margin borrowing facility and $20.6 million of junior subordinated debentures. The company had repaid $54.0 million of senior notes during July and redeemed $10.3 million of junior subordinated notes on September 30. Its margin facility was payable on demand, currently priced at one-week LIBOR plus 65 basis points, and secured by approximately $77.4 million of securities.
Material changes versus comparable periods
- Q3 net income declined 29.9% year over year, despite total revenue increasing 1.9%. Lower investment income and realized gains, higher interest expense, and higher underwriting expenses were important factors.
- Nine-month net income declined 7.9%, while total revenue decreased 1.6%. Net premiums written grew substantially, but net investment income fell 24.1%.
- Consolidated combined ratio improved to 98.6% in Q3 from 106.0%; for nine months it improved to 100.0% from 103.4%. Insurance Operations remained unprofitable on underwriting measures, with combined ratios of 105.3% for Q3 and 107.8% for nine months. Reinsurance Operations reported ratios of 73.5% and 69.9%, respectively.
- Insurance Operations’ premium growth was driven by small-business binding authority and property brokerage, alongside new business and pricing increases. Reinsurance written premiums increased with new treaties, while nine-month earned premiums fell as previously discontinued casualty treaties ran off.
- Prior-year loss reserves were reduced by $1.6 million in Q3 and $5.0 million over nine months. Favorable property and general-liability development was partly offset by increases, notably asbestos and environmental reserves.
- Investment income was lower partly because 2012 included limited-partnership distributions absent or substantially smaller in 2013, as well as a smaller fixed-income portfolio and lower reinvestment yields. A $2.9 million make-whole payment on early senior-note repayment contributed to increased interest expense.
Outlook, commentary, risks and unusual items
- No numerical earnings, premium, or underwriting guidance is provided. Management described Wind River as cautiously deploying capital in the current reinsurance pricing environment and seeking niche opportunities consistent with its risk and return thresholds.
- The company recorded a $1.7 million premium-deficiency charge in commercial automobile lines, reducing deferred acquisition costs and increasing underwriting expense. Management reported no such charge in the comparable 2012 period.
- Investment-market risk includes potential losses from market-value changes and credit deterioration. The fixed-income portfolio had an AA- average rating and 2.27-year duration. Management cited interest-rate, credit, catastrophe, foreign-currency, and investment-performance risks.
- The margin facility creates liquidity and market exposure: falling collateral values may prompt a margin call, require additional collateral, or force securities sales at a loss; variable-rate borrowing costs may rise if LIBOR increases.
- Loss reserves involve substantial estimation uncertainty, particularly for long-tail claims and asbestos/environmental exposures. The filing discusses ongoing asbestos-related litigation and new claims; management said it was monitoring potential additional exposure. It also noted potential disputes with reinsurers in runoff and that reinsurers’ failure to pay would not remove the company’s obligation to policyholders.
- Fox Paine beneficially held approximately 93% of total voting power. An October 31, 2013 amendment to its management agreement raised the annual service fee from $1.5 million to $1.9 million, adjusted for CPI, and provided for deferral of fees beginning in September 2014 in exchange for an investment-return-based adjustment. Change-of-control fees were changed from fixed amounts to amounts to be agreed, plus expenses.
- After quarter-end, on October 29, the company redeemed $20.6 million of UNG Trust II junior subordinated notes, funded primarily by $20.2 million of margin-facility borrowing. Thus, the reported September 30 debt balance does not include this subsequent borrowing.
- Management stated that disclosure controls were effective at the reasonable-assurance level and that no material changes in internal control over financial reporting occurred during the quarter. The filing reports no pending legal proceeding expected by management to have a material adverse effect and no defaults upon senior securities.
Important facts for investors to verify
- Whether premium growth can translate into sustained underwriting profitability, particularly in Insurance Operations and commercial automobile lines.
- Reserve adequacy and future development, including asbestos/environmental claims, casualty emergence, catastrophe losses, and reinsurance recoverability.
- Post-quarter debt and liquidity after the October redemption, including margin-facility balance, collateral requirements, and sensitivity to market declines and higher LIBOR.
- Durability of investment income and realized gains given lower reinvestment yields, portfolio changes, and market-value exposure.
- Terms and potential cost of the amended Fox Paine management agreement, including deferred fees, adjustments, and change-of-control payments, alongside the controlling shareholder’s influence.