Global Indemnity plc — Q1 2016 Form 10-Q
Reporting period: Quarter ended March 31, 2016; comparisons are with the quarter ended March 31, 2015 unless otherwise noted. The filing registrant is Global Indemnity plc, an Irish-domiciled specialty property and casualty insurer and reinsurer. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial results and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenues | $124.8 million | $133.2 million |
| Net premiums earned | $121.6 million | $127.3 million |
| Net investment income | $9.7 million | $8.2 million |
| Net realized investment losses | $(7.5) million | $(3.0) million |
| Income before income taxes | $2.0 million | $3.2 million |
| Income tax benefit | $5.2 million | $3.6 million |
| Net income | $7.1 million | $6.8 million |
| Diluted earnings per share | $0.41 | $0.26 |
| Operating cash flow | $(10.3) million | $5.7 million |
| Cash and cash equivalents | $47.3 million | $67.0 million at Dec. 31, 2015 |
| Total investments | $1,458.9 million | $1,449.1 million at Dec. 31, 2015 |
| Debt | $166.7 million | $172.0 million at Dec. 31, 2015 |
| Total shareholders’ equity | $766.1 million | $749.9 million at Dec. 31, 2015 |
The consolidated combined ratio was 96.1%, compared with 92.6%; the loss ratio improved to 53.3% from 54.7%, while the expense ratio increased to 42.8% from 37.9%. A combined ratio below 100% indicates underwriting profit on the measure presented.
Changes and operating performance
- Gross premiums written declined 1.1% to $141.4 million; net premiums written fell 7.3% to $116.9 million. Net premiums earned decreased 4.5%.
- Personal Lines gross written premiums rose 8.6%, but segment income fell to $0.5 million from $5.2 million. Its combined ratio worsened to 100.4% from 92.5%, driven principally by higher acquisition and underwriting expenses; catastrophe losses also increased.
- Commercial Lines segment income rose to $2.0 million from $0.7 million, and its reported combined ratio improved to 96.0% from 99.1%. Favorable prior-year reserve development helped: excluding prior-year effects, its combined ratio was 107.8% versus 103.1%. Current-year property results included two large fire losses.
- Reinsurance Operations segment income declined to $3.2 million from $4.1 million. Written premiums fell about 36%, largely after a treaty was not renewed to reduce catastrophe exposure and amid competitive property catastrophe pricing. Its combined ratio increased to 74.4% from 68.1%.
- Prior-year loss reserves were reduced by $6.6 million, mainly in Commercial Lines ($5.6 million) and Reinsurance Operations ($1.0 million), versus $3.5 million of favorable development in Q1 2015.
- Net income increased 4.9%, but diluted EPS also reflects a substantially lower weighted-average share count: 17.4 million versus 25.6 million. The company’s 2015 share redemption materially affects comparability.
Cash, debt, investments, and unusual items
- Operating cash flow was negative $10.3 million, a $16.0 million deterioration year over year. Management attributed the decline principally to $30.1 million less in net premium collections, including the settlement of a terminated American Reliable quota-share agreement; lower expenses and claim payments partly offset this.
- Debt comprised $70.3 million under margin borrowing facilities and $96.4 million carrying value of 7.75% subordinated notes due 2045. Interest expense rose to $2.2 million from $0.5 million, primarily reflecting the $100 million debt offering in August 2015. Margin facilities are due on demand and secured by investments.
- Net realized investment losses included $9.0 million of interest-rate-swap losses and $1.1 million of other-than-temporary impairment losses. The swap liability fair value increased to $23.0 million from $15.3 million; the filing says the effective tax benefit rate of 264.8% was primarily due to increased derivative-related capital losses.
- Investment portfolio fair value increased during the quarter, and other comprehensive income was $9.2 million. Management reported an AA- average rating and 1.9-year duration for the investment-grade fixed-income portfolio. It reported no material change in liquidity or capital resources during the quarter.
- The company had a $22.0 million unfunded commitment to a European non-performing-loan partnership. Its maximum exposure to loss from a separate limited partnership was $54.6 million, including unfunded commitments.
Outlook, risks, and contingencies
- The filing gives no quantified earnings or premium guidance. Management noted that Reinsurance Operations was reducing catastrophe exposure and described continued competition and rate declines in property catastrophe reinsurance.
- Management emphasizes uncertainty in loss-reserve estimates; actual claim frequency, severity, inflation, judicial decisions, and reporting lags may differ from assumptions. Net unpaid losses and loss-adjustment expenses were $569.3 million. Reinsurer disputes or inability to pay could leave the company responsible for losses; some reinsurers are in runoff.
- Ordinary-course legal proceedings are not expected by management to have a material adverse effect, individually or in aggregate. The filing notes that insurance and reinsurance coverage may not be sufficient or available at reasonable cost.
- U.S. insurance subsidiaries did not pay dividends in Q1; dividends are subject to regulatory limits. The parent’s liquidity depends in part on subsidiary distributions. The company also disclosed rights to redeem an additional 3,397,031 ordinary shares for $78.1 million, exercisable through 2019 and subject to an annual 3% increase.
- Subsequent events: an officer resigned on April 1, 2016 and forfeited 133,333 unvested options. Effective May 1, 2016, U.S. insurance subsidiaries entered a 50% quota-share agreement on approximately $20 million of subject premium.
- Fox Paine beneficially owned approximately 84% of total voting power and controlled director elections. The company reported disclosure controls effective at the reasonable-assurance level and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether premium trends, particularly the decline in reinsurance and commercial net written premiums, and the new quota-share arrangements meet management’s risk and profitability objectives.
- Whether Personal Lines expense levels and Commercial Lines current-year underwriting results improve; distinguish reported combined ratios from ratios excluding favorable prior-year reserve development.
- The sustainability of reserve releases and the sensitivity of loss reserves to changes in claim severity and frequency.
- The drivers and potential cash, earnings, and collateral effects of interest-rate-swap losses and margin requirements.
- Near-term liquidity, subsidiary dividend capacity, debt service, and the potential share redemption obligation; the filing states no material liquidity change but reports negative operating cash flow and lower cash.
- The remaining partnership funding commitment, investment valuation and credit risks, and collectability of reinsurance receivables.