Global Indemnity plc — Q2 2016 Form 10-Q
Business context and period: The filing is for the quarter and six months ended June 30, 2016; financial statements are unaudited and prepared under U.S. GAAP. The group writes specialty commercial and personal property and casualty insurance and reinsurance through Commercial Lines, Personal Lines, and Reinsurance Operations. The registrant is Global Indemnity plc; the request metadata’s “LLC” does not match the filing.
Financial results and position
Amounts below are in millions of U.S. dollars unless otherwise noted.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenues | 121.7 | 145.1 | 246.5 | 278.3 |
| Net premiums earned | 117.8 | 128.9 | 239.4 | 256.2 |
| Net investment income | 6.6 | 9.1 | 16.3 | 17.4 |
| Net realized investment gains (losses) | (3.5) | 6.5 | (11.0) | 3.6 |
| Net income (loss) | (5.2) | 11.1 | 2.0 | 17.9 |
| Operating cash flow | Not reported by quarter in the supplied text | 4.0 | 19.2 |
- Underwriting: Consolidated combined ratio was 107.5% in Q2, versus 101.2% a year earlier; for the first half it was 101.7%, versus 96.9%. Ratios above 100% indicate underwriting losses before investment income and unallocated items.
- Balance sheet at June 30: Total assets were $2,006.1 million, investments $1,461.8 million, cash and cash equivalents $70.6 million, total liabilities $1,235.3 million, and shareholders’ equity $770.7 million. At December 31, 2015, assets were $1,957.3 million and equity $749.9 million.
- Debt and liquidity: Debt was $174.2 million, comprising $77.8 million under margin borrowing facilities and $96.4 million carrying value of 7.75% subordinated notes due 2045. Operating cash flow fell to $4.0 million from $19.2 million, primarily reflecting lower net premiums collected, partly offset by lower claim payments and expenses. The company reported $70.6 million of cash at quarter-end.
- Reserves: Gross unpaid losses and loss adjustment expenses were $683.9 million; net reserves were $572.3 million. The company recorded $15.5 million of favorable prior-year reserve development in the first half, compared with $8.7 million in the prior-year period.
Material changes versus comparable periods
- Q2 moved from net income of $11.1 million to a $5.2 million loss; first-half net income declined 89% to $2.0 million. Lower premiums earned, weaker investment income, and a swing in realized investment results were key factors. Q2 realized losses included $4.6 million on interest rate swaps; first-half swap losses were $13.6 million.
- Gross premiums written decreased 7.3% in Q2 to $154.3 million and 4.4% for the first half to $295.7 million. Reinsurance Operations premiums fell 32.8% in Q2 and 34.4% for the first half, partly because a treaty was not renewed to reduce catastrophe exposure. Personal Lines net written premiums declined as the company increased catastrophe reinsurance and introduced a quota-share arrangement.
- Q2 Personal Lines reported a 116.7% combined ratio, up from 108.0%, and a $9.4 million segment loss. The company cited higher catastrophe impact and a large agricultural liability loss, as well as higher expenses.
- Commercial Lines’ Q2 combined ratio was 100.9%, unchanged year over year, but its current-accident-year ratio excluding prior-year development worsened to 114.9% from 108.1%, reflecting higher property and catastrophe losses. Reinsurance Operations’ Q2 combined ratio rose to 80.9% from 68.9%; excluding prior-year development, it was 105.5% versus 80.8%.
- Net investment income declined 28.2% in Q2 and 6.2% for the first half. Investment expenses included $1.5 million of upfront fees for a new middle-market investment commitment. The filing also attributes lower investment income in part to the 2015 share redemption, which reduced portfolio size.
Outlook, commentary, risks, and unusual items
- Guidance: The filing provides no quantified earnings or premium guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Transactions: Shareholders were scheduled to vote on a proposed redomiciliation from Ireland to the Cayman Islands on September 14, 2016, subject to shareholder and court approvals. Management did not expect a material effect on financial results or the global effective tax rate. The company also agreed to sell United National Specialty Insurance Company for $7.4 million plus anticipated capital and surplus of about $10 million; closing was expected by the end of Q3 2016, subject to approvals and other conditions.
- Commitments: At June 30, $22.0 million remained unfunded on a $50 million European non-performing-loan commitment, and $26.3 million remained on a new $40 million middle-market financing and equity commitment. Total future investment funding commitments were $48.3 million.
- Market and investment risks: The company noted possible market volatility from Brexit uncertainty. Its investment-grade fixed-income portfolio had an AA- average rating and 1.87-year duration. A $200 million interest-rate swap position had a fair-value liability of $26.3 million, versus $15.3 million at year-end 2015; swap valuation changes affected reported earnings.
- Insurance and other risks: Reserve estimates depend on actuarial assumptions and may change; management noted that higher or lower claim severity could materially affect reserves and results. Reinsurance recoverability is a risk, particularly where reinsurers dispute claims or are in runoff; the company remains legally responsible if reinsurers do not pay. Ordinary-course litigation was not expected by management to have a material adverse effect. The company reported no off-balance-sheet arrangements and no material change in reported risk factors.
- Governance and controls: Fox Paine beneficially held approximately 84% of voting power and controlled director elections. Management concluded disclosure controls were effective at the reasonable-assurance level as of June 30, 2016; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the worsening current-year underwriting trends—especially Personal Lines’ combined ratio above 100% and rising property losses—continued after Q2.
- How much of reported earnings depended on favorable reserve development, and whether reserve assumptions or subsequent claim emergence changed.
- The sources and volatility of interest-rate-swap losses, collateral or margin requirements, and the company’s capacity to meet investment funding commitments.
- Progress and final terms of the proposed redomiciliation and subsidiary sale, including approvals, timing, and actual financial effects.
- Whether lower cash generation and restrictions on insurance-subsidiary dividends affect parent-company liquidity or debt service; the filing says no U.S. insurance subsidiary dividends were paid in the first half.