Global Indemnity plc — Second-Quarter 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; filed August 4, 2015. The filing is by Global Indemnity plc. Unless noted, amounts below are in U.S. dollars; financial statement amounts are in millions.
Business context
The insurer reports Commercial Lines, Personal Lines, and Reinsurance Operations. Personal Lines was established as a separate segment following the January 1, 2015 acquisition of American Reliable Insurance Company. This makes reported comparisons with 2014 substantially affected by the acquisition; the company also presents pro forma comparisons.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Gross premiums written | $166.5 | $82.9 | $309.4 | $160.1 |
| Net premiums written | $146.0 | $76.4 | $272.1 | $149.2 |
| Net premiums earned | $128.9 | $66.0 | $256.2 | $133.6 |
| Total revenues | $145.1 | $113.7 | $278.3 | $188.9 |
| Net investment income | $9.1 | $7.7 | $17.4 | $16.0 |
| Net realized investment gains | $6.5 | $39.9 | $3.6 | $39.1 |
| Net income | $11.1 | $33.2 | $17.9 | $42.0 |
| Diluted earnings per share | $0.43 | $1.31 | $0.70 | $1.66 |
| Combined ratio | 101.2% | 99.2% | 96.9% | 97.7% |
Revenue and premiums grew sharply as American Reliable was included from the start of 2015. Net income fell 66.5% in Q2 and 57.4% for the half year, chiefly reflecting much lower realized investment gains than in 2014, which included substantial equity gains. Q2 included $1.9 million of investment impairment losses; first-half impairment losses were $2.2 million.
- Underwriting: The consolidated combined ratio was above 100% in Q2, indicating an underwriting loss before investment income and unallocated items; it was below 100% for the first half. Commercial Lines’ Q2/half-year ratios were 100.9%/99.9%; Personal Lines’ were 108.0%/100.4%; Reinsurance Operations’ were 68.9%/68.5%.
- Cash flow: First-half operating cash flow was $19.2 million, versus cash used of $13.5 million in 2014. Investing activities used $24.2 million and financing activities provided $12.5 million. Cash and cash equivalents ended June at $66.3 million.
- Balance sheet and liquidity: At June 30, total assets were $2.260 billion, investments $1.703 billion, total liabilities $1.329 billion, and shareholders’ equity $931.3 million. Margin borrowings were $187.4 million, up from $174.7 million at year-end, carried at about 1% and due on demand. Securities of $238.3 million collateralized the facilities.
- Reserves: Gross unpaid losses and loss adjustment expenses were $769.3 million; net reserves were $630.8 million. Prior-year reserve releases totaled $8.7 million in the first half, including $5.6 million in Commercial Lines and $3.1 million in Reinsurance Operations.
Material changes and management commentary
- American Reliable was acquired for an estimated purchase price of approximately $105.8 million; the company paid $113.7 million in cash and assumed about $283.4 million of insurance-related liabilities and obligations. Purchase-price allocation remained provisional. American Reliable contributed $67.3 million of Q2 revenue and a $4.0 million pretax loss; first-half revenue was $132.6 million and pretax income $2.7 million.
- Reported Q2 net premiums earned nearly doubled year over year, while the combined ratio worsened to 101.2% from 99.2%. Personal Lines’ Q2 catastrophe loss ratio rose to 20.3% from 11.2%; Commercial Lines’ catastrophe losses were lower than a year earlier.
- Commercial Lines premiums declined amid tighter underwriting, competition, and efforts to reduce unprofitable auto business. Reinsurance Operations premiums also declined, which management attributed mainly to intense property-catastrophe competition and excess market capacity.
- Acquisition-related costs and expenses contributed to corporate and other operating expenses of $15.9 million for the half year, up from $6.1 million. Management identified approximately $8.3 million of acquisition costs in the period.
- The company reported no material change in liquidity. It filed a shelf registration statement on July 2, 2015, permitting potential offerings of up to $500 million; issuance is not assured. No dividends were declared or paid in the first half.
Outlook, risks, and unusual items
The filing provides no quantitative earnings or premium guidance. Management described the investment-grade fixed-income portfolio as high quality, with an AA- average rating and 2.2-year duration. A.M. Best affirmed an “A” (Excellent) financial strength rating for the reinsurance company and U.S. insurance subsidiaries. Management cautioned that results are exposed to reserve-estimation uncertainty, catastrophe severity, competition and pricing, investment and credit performance, interest rates, reinsurer collectability, regulation and subsidiary dividend limits, litigation, and risks from integrating American Reliable. Pending legal proceedings were not expected by management to have a material adverse effect, though reinsurer disputes and ordinary-course litigation remain risks.
Management said a material weakness in loss-reserve estimation controls identified at December 31, 2014 was remediated as of March 31, 2015. American Reliable’s controls were excluded from the June 30 control assessment under the permitted acquisition-period relief; integration and review were ongoing. Management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- How much of premium growth and reported earnings reflects the American Reliable acquisition, and how do results compare on the company’s pro forma basis?
- Whether Personal Lines’ catastrophe experience and combined ratio improve, and whether commercial underwriting gains persist without favorable prior-year reserve releases.
- The adequacy and development of loss reserves, including the American Reliable purchase accounting estimate and the company’s exposure to long-tail, asbestos, and environmental claims.
- Investment return quality and repeatability: first-half realized gains were far below 2014, and the portfolio includes fair-value and credit risks, limited partnerships, and securities pledged as collateral.
- Availability of subsidiary dividends and liquidity under demand borrowing facilities, including collateral requirements and any use of the new $500 million shelf registration.
- Progress integrating American Reliable and remediation of its controls, noting that acquired-business controls were excluded from the period-end effectiveness assessment.