Global Indemnity plc — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing also provides unaudited fourth-quarter results. The supplied metadata names Global Indemnity Group, LLC, but the filing’s registrant is Global Indemnity plc.
Business context and reporting period
Global Indemnity is a specialty property-and-casualty insurer and reinsurer. Its two segments are U.S.-focused Insurance Operations, predominantly in excess and surplus lines, and Bermuda-based Reinsurance Operations. The filing was signed March 14, 2014.
Financial performance and position
- Premiums and revenue: Gross premiums written rose 19.1% to $290.7 million from $244.1 million; net premiums earned increased 4.1% to $248.7 million. Total revenues were $319.1 million versus $293.0 million.
- Profit: Net income was $61.7 million, or $2.45 diluted EPS, compared with $34.8 million, or $1.30 per diluted share. Fourth-quarter net income was $33.7 million ($1.34 diluted EPS), versus $4.4 million ($0.17) in fourth-quarter 2012.
- Underwriting and margins: Consolidated combined ratio improved to 96.0% from 104.2%. Insurance Operations remained unprofitable on underwriting, with a 104.0% combined ratio and $2.1 million segment loss; Reinsurance Operations reported a 65.7% combined ratio and $18.0 million segment income.
- Investment results: Net investment income declined 21.8% to $37.2 million. Net realized investment gains increased to $27.4 million from $6.8 million, including $24.8 million net gains on common stocks and $1.4 million on derivatives. Fixed-maturity book yield fell to 3.00% from 3.43%.
- Cash flow and liquidity: Operating cash flow was negative $4.9 million, improving from negative $35.0 million. Year-end cash and cash equivalents were $105.5 million; investments plus cash totaled $1.567 billion. Total assets were $1.912 billion and shareholders’ equity was $873.3 million.
- Debt: Year-end debt was $100 million under a demand margin borrowing facility, compared with $84.9 million of notes and debentures in 2012. During 2013 the company repaid its senior notes and junior subordinated debentures, funding much of the repayment with margin borrowing. The facility was variable-rate and secured by approximately $120.9 million of collateral.
Material changes versus prior period
- Insurance gross premiums written grew 15.2%, driven by small-business binding authority, property brokerage, programs, new business and pricing. Higher retention reduced ceded premiums.
- Reinsurance gross premiums written rose 38.1% on new treaties, but earned premiums fell 12.2%, partly because 2012 included $6.0 million of contractually due premium tied to prior treaty losses.
- Improved underwriting results reflected lower property losses and no major property catastrophe affecting Reinsurance Operations in 2013. Insurance casualty performance weakened, particularly commercial auto.
- Net investment income fell, while equity-related realized gains lifted earnings. The 2013 gain also included a $5.2 million pretax gain on the sale of United National Casualty Insurance Company, for which the company received $26.6 million.
- U.S. insurance subsidiaries declared a $200 million extraordinary dividend in December 2013; regulators approved it in January 2014 and it was paid to Global Indemnity Group, Inc. on January 23, 2014.
Outlook, commentary, risks and unusual items
- Management gave no specific earnings or premium guidance. It described the reinsurance market as highly competitive, with excess capacity and declining catastrophe pricing, and said Wind River would deploy capital cautiously toward placements meeting its risk and return thresholds.
- Loss reserves are a material estimate: year-end gross unpaid losses and adjustment expenses were $779.5 million and net reserves were $587.0 million. Prior-year reserve development reduced 2013 losses by $7.9 million. Management cautioned that actual claims, especially long-tail, construction-defect, asbestos and environmental claims, may differ materially from estimates.
- Net asbestos and environmental reserves were $23.0 million at year-end ($11.1 million asbestos and $12.0 million environmental, as separately described in the filing). A court’s February 2014 confirmation of a revised asbestos-trust plan included a channeling injunction; the ruling could be appealed and management continued to monitor potential exposure.
- Net reinsurance receivables after collateral were $188.5 million; Munich Re represented approximately 52.9% of gross reinsurance receivables. Reinsurer nonpayment or disputes could leave the company liable for claims.
- Investment risks include interest-rate, equity-market, credit and liquidity exposure. Equities rose to $254.1 million, 16.2% of the investment-and-cash portfolio; 94.8% of fixed-income securities were investment grade. The company exited corporate loans in the first quarter of 2014.
- Other notable items: a $2.9 million make-whole payment on early senior-note repayment; a $1.7 million premium-deficiency charge, mainly commercial auto; and a $1.6 million out-of-period adjustment recorded in 2012 for earlier reinsurance losses. No cash dividends were paid to ordinary shareholders in 2013 or 2012.
- Fox Paine beneficially controlled approximately 93% of voting power. The filing also identifies holding-company dependence on regulated subsidiary dividends, catastrophe exposure, pricing competition, regulatory constraints and potential U.S. tax treatment of non-U.S. entities as risks.
Important facts for investors to verify
- How much of the earnings increase is repeatable underwriting performance versus realized investment gains and the subsidiary-sale gain.
- Whether the 96.0% consolidated combined ratio and improving segment results persist, especially given Insurance Operations’ above-100% ratio and commercial-auto weakness.
- Reserve adequacy and subsequent development, including construction defect, asbestos/environmental and other long-tail claims.
- Collectability and collateral coverage of reinsurance receivables, particularly concentrated exposures to major reinsurers.
- Liquidity and refinancing risk from the demand, variable-rate margin facility, and the effect of the $200 million subsidiary dividend on statutory capital and future dividend capacity.
- Fourth-quarter earnings quality: the quarter included $17.2 million of realized investment gains; assess performance excluding these gains and other unusual items.