Global Indemnity plc — FY2011 Form 10-K
Entity and period: The supplied filing is Global Indemnity plc’s annual report for the year ended December 31, 2011, not a filing by an entity identified as Global Indemnity Group, LLC. The company is a specialty property and casualty insurer and Bermuda-based reinsurer, with Insurance Operations and Reinsurance Operations.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $384.6 million | $370.5 million |
| Net premiums earned | $297.9 million | $286.8 million |
| Net income (loss) | $(39.6) million | $84.9 million |
| Basic and diluted earnings (loss) per share | $(1.31) | $2.81 basic; $2.80 diluted |
| Operating cash flow | $(7.7) million | $(1.0) million |
| Investments and cash equivalents, year-end | $1,647.7 million | $1,717.2 million |
| Total assets | $2,075.5 million | $2,294.7 million |
| Total debt | $103.0 million | $121.3 million |
| Shareholders’ equity | $841.7 million | $928.7 million |
- Underwriting and margins: The consolidated combined ratio rose to 135.0% from 86.6% (above 100% indicates underwriting losses). The loss ratio was 93.5%, versus 45.4%; the expense ratio was 41.5%, versus 41.2%.
- Segments: Insurance Operations reported a $56.3 million underwriting loss and a 131.5% combined ratio; Reinsurance Operations reported a $35.8 million underwriting loss and a 144.1% combined ratio. Segment underwriting results exclude investment income, realized gains, corporate expenses, and interest.
- Premiums: Gross premiums written declined 11.0% to $307.9 million. Insurance Operations’ gross premiums fell 6.7% to $229.1 million; Reinsurance Operations’ fell 21.5% to $78.8 million. Net premiums earned increased 3.9%.
- Quarterly result: In fourth-quarter 2011, net premiums earned were $66.7 million and net loss was $23.6 million, compared with fourth-quarter 2010 net premiums earned of $71.2 million and net income of $21.7 million.
- Investment income and gains: Net investment income decreased 6.2% to $53.1 million. Net realized investment gains were $21.5 million, including $6.6 million of other-than-temporary impairment losses. The filing reports $38.4 million of pre-tax unrealized gains on available-for-sale fixed maturities at year-end.
- Liquidity and debt: Cash and cash equivalents were $175.9 million. Operating activities used $7.7 million of cash; investing activities provided $111.7 million and financing activities used $47.9 million. Debt included $72.0 million of senior notes, $30.9 million of junior subordinated debentures, and $0.1 million of loans payable. The senior notes require $18.0 million annual principal prepayments from 2012 through 2014, with remaining principal due in 2015.
Changes versus prior year
- Net income swung from $84.9 million profit to a $39.6 million loss. The principal operating shift was higher claims and catastrophe losses: net losses and loss adjustment expenses rose to $278.7 million from $130.4 million.
- Prior-year reserve development moved from a $54.1 million reduction in losses in 2010 to a $3.4 million increase in 2011. The 2011 Insurance Operations result also included $20.6 million of catastrophe losses; Reinsurance Operations incurred losses from events including the Japan and New Zealand earthquakes, Australian floods, Hurricane Irene, and Tropical Storm Lee.
- Net premiums written decreased 5.4%, while net premiums earned increased. Insurance Operations retained more property risk after changing its reinsurance structure, contributing to higher net premiums written relative to gross premiums.
- Investment holdings and cash equivalents decreased $69.5 million; shareholders’ equity declined $87.0 million. Senior notes were reduced by an $18.0 million payment.
Outlook, commentary, risks, and unusual items
- Management described the market as having excess underwriting capacity and continued competitive pricing, though rate declines began to flatten near year-end. It emphasized disciplined underwriting, exiting selected unprofitable or volatile classes, and cautious, measured reinsurance growth. The filing gives no specific earnings or revenue guidance.
- The company recorded $13.3 million of premium-deficiency charges in 2011, reducing acquisition costs and increasing loss reserves. Management said the net impact on results was $8.9 million, or $0.24 per diluted share.
- Other income included $11.5 million, net of attorney fees, from a settlement with AON; this was non-recurring. The settlement generated approximately $7.5 million after taxes and attorney fees.
- Claims-reserve estimates remain a key uncertainty, particularly for long-tail casualty, construction-defect, asbestos, and environmental claims. Net construction-defect reserves were $68.8 million. Net asbestos and environmental reserves were $21.8 million and $8.0 million, respectively, as reported in the business discussion; the notes separately report combined net A&E reserves of $29.8 million.
- Reinsurance receivables were $288.0 million before collateral, purchase-accounting adjustment, and allowance; collateral held was $169.0 million. Management cautioned that reinsurers may dispute or fail to pay claims. Munich Re represented 49.8% of reported total reinsurance assets in the reinsurer table.
- Investment risks include low interest rates, credit/default exposure in below-investment-grade corporate loans, equity-market volatility, and liquidity risk. The $195.9 million corporate-loan portfolio is primarily below investment grade. The company reported $2.3 million of subprime and Alt-A exposure, with no impairments on those holdings in 2011.
- Capital distributions are constrained by insurance regulation. The company paid no shareholder dividends in 2011 or 2010. It authorized up to $100 million in share repurchases and had repurchased 1,945,023 shares for $36.7 million through March 14, 2012. Fox Paine beneficially held approximately 90.5% of voting power.
- Management expected sufficient liquidity to pay claims in 2012 and said Wind River Reinsurance could pay up to $192.6 million in dividends without BMA approval, subject to subsidiary distributions and statutory solvency and liquidity limits. These statements are not a guarantee of future distributions.
- A new accounting rule for acquisition costs, to be adopted retrospectively in 2012, was expected to reduce equity by approximately $3 million to $4 million in the first quarter.
Investor verification priorities
- Assess reserve adequacy and subsequent development, especially casualty, construction-defect, asbestos, and environmental exposures.
- Reconcile catastrophe losses, premium-deficiency charges, and prior-year reserve development to the deterioration in combined ratios and earnings.
- Review recoverability and collateral for reinsurance receivables, including concentration among major reinsurers.
- Verify holding-company liquidity, scheduled debt repayments, subsidiary dividend capacity, and the funding and pace of share repurchases.
- Evaluate investment-portfolio credit quality, realized and impairment losses, interest-rate sensitivity, and the sustainability of investment income.
The independent auditor gave an unqualified opinion on the consolidated financial statements and concluded that internal control over financial reporting was effective as of December 31, 2011.