Global Indemnity plc — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The filing is by Global Indemnity plc, an Ireland-domiciled insurance and reinsurance group; interim financial statements are unaudited. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenues | $75.8 million | $74.8 million | $264.8 million | $218.1 million |
| Net premiums earned | $68.0 million | $64.5 million | $201.6 million | $179.1 million |
| Net investment income | $6.5 million | $8.5 million | $22.5 million | $28.3 million |
| Net realized investment gains | $1.2 million | $1.6 million | $40.2 million | $10.2 million |
| Net income | $9.8 million | $6.9 million | $51.8 million | $28.0 million |
| Diluted earnings per share | $0.39 | $0.28 | $2.05 | $1.11 |
| Net cash used in operating activities | Not separately reported | Not separately reported | $7.1 million | $0.9 million |
Nine-month earnings included $40.2 million of realized investment gains, principally $51.8 million of equity-security gains, partly offset by $13.6 million of interest-rate-swap losses. Investment income fell as the company redeemed corporate loans and part of its equity portfolio and reinvested at lower yields. Nine-month total investment return was $19.1 million, down from $45.8 million; Q3 total investment return was negative $4.2 million.
Underwriting and material comparisons
- Consolidated combined ratio: 94.3% in Q3 versus 98.6%; 96.5% for nine months versus 100.0%. Ratios below 100% indicate underwriting profit under the company’s measure.
- Insurance Operations: Q3 combined ratio improved to 97.8% from 105.3%, and the segment moved to $1.3 million income from a $2.5 million loss. Nine-month combined ratio improved to 102.8% from 107.8%, while the segment loss narrowed to $3.8 million from $10.5 million. Lower expense ratios and better casualty experience helped; catastrophe losses were higher year to date.
- Reinsurance Operations: Q3 combined ratio worsened to 81.8% from 73.5%, and segment income fell to $2.8 million from $3.7 million, reflecting higher property losses. Nine-month combined ratio rose to 73.6% from 69.9%, while segment income increased modestly to $11.2 million from $10.9 million.
- Gross premiums written were broadly flat year to date at $227.2 million versus $228.0 million. Net premiums earned increased 12.5%, while net investment income declined 20.5%.
Financial position, liquidity and debt
- At September 30, total assets were $1.880 billion, investments $1.451 billion, cash and cash equivalents $66.6 million, and shareholders’ equity $898.1 million. Equity increased from $873.3 million at year-end 2013, while total assets declined from $1.912 billion.
- Unpaid losses and loss-adjustment expenses were $739.9 million gross and $568.1 million net of reinsurance. Reinsurance receivables were $178.2 million.
- Margin-facility borrowing was $62.3 million, down from $100.0 million at year-end; the facility is due on demand and bears interest at one-week LIBOR plus 90 basis points. Securities of about $79.5 million collateralized it.
- Operating cash flow was negative $7.1 million for the first nine months. Cash declined to $66.6 million from $105.5 million at year-end, including $37.7 million of net repayments on the margin facility. Some assets are pledged, held in trust, or deposited with regulators; the filing reports $716.2 million of securities and cash in these categories.
- U.S. insurance subsidiaries paid a $200 million extraordinary dividend in January 2014 and are restricted from paying further dividends before January 23, 2015 without regulatory approval. Subsidiary dividends are an important source of holding-company liquidity.
Outlook, risks and unusual items
- No specific earnings or premium guidance was provided. Management said the reinsurer was cautiously deploying capital given the pricing environment and reported an A.M. Best “A” financial-strength rating for the reinsurance company and U.S. insurance subsidiaries.
- On October 16, 2014, a subsidiary agreed to acquire American Reliable Insurance Company for $113.7 million cash, subject to adjustments, regulatory approvals, and other closing conditions. The filing’s risk discussion describes a potential price of approximately $120 million including intervening earnings and approximately $280 million of insurance-related liabilities, obligations, and mandates to be assumed. Completion and final terms are not assured.
- The company committed $50 million to a European non-performing-loan investment vehicle; $18.3 million was funded and $31.7 million remained unfunded at quarter-end. This alternative investment is illiquid and had a $34.1 million future funding commitment reported in the investment note.
- Interest-rate swaps had a $7.8 million fair-value liability at September 30, 2014, versus a $1.7 million asset at year-end. The company reported $13.6 million of swap losses in the first nine months and $10.0 million due for margin calls, in addition to $4.8 million of collateral receivable.
- Management identified reserve estimation, claim frequency and severity, catastrophe exposure, reinsurer collectability, investment and interest-rate risk, regulatory dividend limits, and acquisition execution as key risks. It reported ordinary-course litigation and heightened potential disputes with reinsurers in runoff, but did not expect pending matters to have a material adverse effect.
- The company disclosed a prior-period cash-flow classification reclassification of $2.2 million for 2013, with no effect on operating cash flow or other financial metrics; management did not consider it material.
Important facts for investors to verify
- Whether the American Reliable acquisition closed, its final purchase price and funding source, and the effect of assumed liabilities and reserve adjustments.
- Whether operating cash generation improves and how the company meets demand borrowing, collateral, acquisition, and unfunded investment commitments.
- Subsequent reserve development, especially general liability and asbestos exposures, runoff marine treaties, and the sensitivity of loss estimates to claim severity.
- How much of nine-month profit depended on realized equity gains, and the continuing impact of lower investment income and swap losses.
- Regulatory capacity for subsidiary dividends and the availability and collectability of reinsurance receivables.