Global Indemnity plc — Q1 2013 Form 10-Q
Reporting period: Quarter ended March 31, 2013; unaudited, U.S. GAAP. The registrant in the filing is Global Indemnity plc, which operates Insurance and Reinsurance segments. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $71.8 | $77.3 |
| Net premiums earned | $56.0 | $64.5 |
| Net premiums written | $71.5 | $50.3 |
| Net investment income | $10.0 | $11.4 |
| Net realized investment gains | $5.8 | $1.8 |
| Income before tax | $12.1 | $8.2 |
| Net income | $12.4 | $10.9 |
| Diluted EPS | $0.49 | $0.38 |
| Operating cash flow | $(10.4) | $(18.5) |
- Gross premiums written increased 29.7% to $74.9 million. Net premiums written rose 42.2%, while net premiums earned declined 13.1%.
- Net income increased 13.8%. Higher realized investment gains and lower losses more than offset reduced earned premiums and investment income. The income tax benefit was $0.3 million, versus $2.7 million a year earlier.
- Consolidated combined ratio was 100.5%, compared with 101.1%. Insurance Operations’ ratio was 108.6% (110.6%); Reinsurance Operations’ was 66.1% (74.3%). Ratios are non-GAAP underwriting measures; Insurance Operations remained above 100%.
Financial position and liquidity
- At March 31, total assets were $1,917.7 million, total liabilities $1,090.0 million, and shareholders’ equity $827.6 million. Investments totaled $1,470.1 million; cash and cash equivalents were $69.3 million, down from $104.5 million at year-end 2012.
- Notes and debentures payable were $84.9 million, unchanged from December 31, 2012. Interest expense declined to $1.2 million, partly reflecting an $18 million senior-note principal payment in July 2012.
- Operating cash outflow improved by $8.0 million year over year but remained negative. Investing activities used $24.7 million; financing activities used $0.006 million. Cash fell by $35.1 million during the quarter.
- Management reported no material change in liquidity. U.S. insurers’ dividends are subject to regulatory limits; no U.S. insurance or Wind River Reinsurance dividends were paid in the quarter. The company’s brokerage margin account was unfunded and unused; expected borrowing rates were below 1%.
Changes, outlook, and risks
- Insurance: Gross written premiums grew 6.8%, led by small-business and commercial-auto growth. Net premiums written rose 16.4%, partly because the company retained more direct business. Earned premiums fell 4.8%. The calendar-year loss ratio improved, mainly on better property experience, but the expense ratio rose to 45.1% from 40.9%; the segment recorded a $3.8 million loss.
- Reinsurance: Gross written premiums increased to $23.9 million from $9.9 million, primarily due to new treaties. Earned premiums fell 36.6%, reflecting prior-period writings and runoff of discontinued casualty treaties. Segment income was $3.6 million, slightly below the prior-year $3.9 million. Management said it continued to deploy capital cautiously, pursuing niche business meeting its risk and return thresholds.
- Prior-year loss reserve development was favorable by $2.7 million, mainly from better-than-expected property emergence in Insurance Operations; Reinsurance Operations had $0.1 million of unfavorable development. Gross and net loss reserves were $864.2 million and $626.2 million, respectively. Reserve outcomes remain sensitive to claim frequency, severity, inflation, litigation, and actuarial assumptions.
- Management cited lower fixed-income portfolio size and reinvestment yields as factors in lower investment income. The fixed-income portfolio’s average rating was AA-; reported duration was 2.3 years. The filing highlights investment credit and market risks, catastrophe losses, competition, reserve uncertainty, reinsurer collectability, regulation, and subsidiary dividend capacity.
- Ordinary-course litigation was not expected by management to have a material adverse effect. The filing describes an appeal involving an asbestos-related bankruptcy injunction; management said it would monitor developments for possible additional exposure. The company also notes greater dispute potential with reinsurers in runoff.
- No specific financial guidance or quantified full-year outlook is provided. Management cautions that quarterly results are not necessarily indicative of full-year results.
Investor verification priorities
- Assess whether premium growth, especially the sharp Reinsurance increase, translates into sustainable earned premiums and acceptable underwriting returns.
- Review the quality and durability of reserve releases and the sensitivity of reserves to adverse loss frequency or severity changes.
- Check cash generation, investment-income trends, debt terms and scheduled payments, and the availability of dividends from regulated subsidiaries.
- Monitor insurer and reinsurer credit exposure, including reinsurance receivables, runoff counterparties, and the asbestos-related appeal.
- Separate recurring earnings from realized investment gains and the quarter’s income-tax benefit when evaluating earnings quality.