Global Indemnity plc — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012, with fourth-quarter results also reported. The supplied filing is for Global Indemnity plc, not an entity named Global Indemnity Group, LLC.
Business context
The company is a specialty property-and-casualty insurer and reinsurer. Its Insurance Operations primarily write U.S. excess-and-surplus and specialty-admitted business; Bermuda-based Wind River Reinsurance writes treaty reinsurance. The filing describes a competitive market with excess underwriting capacity and generally flat rates, although some niches showed moderate increases. Management said Wind River would deploy capital cautiously and target specialty and catastrophe placements meeting its risk and return thresholds.
Key financial results
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenues | $293.0 million | $385.0 million |
| Net premiums earned | $238.9 million | $297.9 million |
| Net income (loss) | $34.8 million | ($38.3 million) |
| Diluted earnings (loss) per share | $1.30 | ($1.27) |
| Consolidated combined ratio | 104.2% | 134.3% |
| Net investment income | $47.6 million | $53.1 million |
| Net cash used in operating activities | $35.0 million | $7.7 million |
All amounts are in U.S. dollars. The 2012 combined ratio remained above 100%, indicating an underwriting loss overall, despite a substantial improvement from 2011. Insurance Operations reported a $18.7 million segment loss and a 110.7% combined ratio; Reinsurance Operations reported $8.4 million segment income and an 84.7% combined ratio. Fourth-quarter 2012 net income was $4.4 million, or $0.17 per diluted share, versus a $23.5 million net loss, or $0.78 per share, in fourth-quarter 2011.
Financial position, liquidity and debt
- At year-end 2012, total assets were $1.904 billion, total liabilities $1.097 billion, and shareholders’ equity $806.6 million.
- Cash and cash equivalents were $104.5 million, down from $175.9 million. Investments and cash totaled about $1.534 billion; fixed maturities were $1.229 billion and equities $197.1 million.
- Debt and debentures totaled $84.9 million, down from $103.0 million. This included $54.0 million of 6.22% senior notes, with required $18.0 million principal repayments in 2013 and 2014 and remaining principal due in 2015, plus $30.9 million of junior subordinated debentures.
- Net operating cash outflow widened to $35.0 million. Investing activities provided $64.6 million; financing activities used $101.0 million, including $83.0 million for share purchases and $18.1 million in debt principal payments.
- Gross unpaid losses and loss-adjustment expenses were $879.1 million; net reserves were $638.5 million. Reinsurance receivables were $241.8 million, with $155.1 million collateral and a $9.0 million allowance for uncollectible amounts.
- U.S. insurance subsidiaries reported statutory capital and surplus of $413.3 million and were above prescribed company-action-level risk-based capital requirements. Regulatory and statutory restrictions constrain dividends to the parent; the company paid no shareholder cash dividends in 2012.
Material changes and unusual items
- Total revenues fell 23.9% year over year, while net premiums earned fell 19.8%. Gross premiums written declined 20.7%, to $244.1 million; the company attributed declines to exiting unprofitable classes and canceling or not renewing unprofitable reinsurance treaties.
- Net income improved by $73.1 million. The consolidated loss ratio fell to 64.3% from 93.5%, partly reflecting fewer catastrophe losses than in 2011 and better current-year results after business exits. The 2012 results also included $6.8 million of realized investment gains, versus $21.5 million in 2011, and a $5.9 million income tax benefit.
- Management estimated Superstorm Sandy’s ultimate loss at approximately $12 million; it cautioned that the estimate was preliminary and could change materially.
- A $1.6 million out-of-period adjustment increased 2012 losses and reduced net income by $1.6 million, or $0.06 per diluted share. It corrected previously overstated profitability on two reinsurance treaties for 2009–2011; prior periods were not restated because management considered the error immaterial to those years.
- The company retrospectively adopted accounting guidance limiting capitalized acquisition costs to direct incremental costs for successful contract acquisitions or renewals. Comparative periods were adjusted. Premium-deficiency charges were $0.5 million in 2012, compared with $13.3 million in 2011.
- Share repurchases totaled $112.2 million in 2011 and 2012 combined. No further repurchase authorization remained at year-end 2012. Shareholders’ equity declined to $806.6 million from $839.1 million.
Outlook, risks and contingencies
- No quantified earnings, premium, or combined-ratio guidance is provided. Management described excess market capacity, low interest rates, competitive pressure, and slow economic recovery; it noted signs of rate increases in selected markets.
- Principal risks include reserve estimation and long-tail claim development, catastrophe losses, investment-market and credit risk, and the ability of reinsurers to pay. Asbestos and environmental net reserves were $20.1 million at year-end; net construction-defect reserves were $74.8 million. Management highlighted uncertainty around asbestos litigation and construction-defect claims.
- A court-confirmed bankruptcy reorganization plan in litigation involving asbestos claims includes a channeling injunction affecting claims involving a company subsidiary. An appeal was filed; a stay was denied. Management said it would monitor developments for possible additional exposure.
- Reinsurance exposure is concentrated: Munich Re represented $36.2 million of unsecured reinsurance receivables exceeding 3% of equity. Separately, Montpelier Reinsurance accounted for 81.8% of Reinsurance Operations’ gross premiums written in 2012.
- Fox Paine beneficially controlled approximately 93% of total voting power. The company paid Fox Paine a $1.5 million annual management fee; related-party governance and potential conflicts are disclosed.
- The company reported effective disclosure controls and internal control over financial reporting, with no material weaknesses. The independent auditor gave an unqualified opinion on the financial statements and internal control.
Most important facts for investors to verify
- Whether improved loss experience and the 104.2% combined ratio can progress to sustained underwriting profitability, excluding prior-year development and catastrophe effects.
- How the $12 million Sandy estimate, asbestos and environmental exposures, construction-defect reserves, and reinsurance treaty development evolve.
- Whether operating cash flow, investment income, and regulated subsidiary dividend capacity can support claims, scheduled debt repayments, and parent-company needs.
- The collectability and collateralization of reinsurance balances, especially concentrated or unsecured exposures, and the effect of Wind River’s reduced third-party premium volume.
- The consequences of the asbestos-related appeal, and the continuing implications of Fox Paine’s voting control and management arrangements.