GBLI

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2010, for Global Indemnity plc (formerly United America Indemnity, Ltd.). The company operates in the excess and surplus lines marketplace through two primary segments: United States Based Insurance Operations and International Reinsurance Operations (Wind River Reinsurance). A significant corporate event occurred on July 2, 2010, when the company completed its redomestication from the Cayman Islands to Ireland, exchanging shares on a two-for-one basis. The financial statements have been adjusted to reflect this transaction.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Surge: Net income for the quarter increased 50% to $24.5 million, driven primarily by favorable prior-year loss reserve development and strong investment gains.
• Loss Reserve Releases: The company recorded a significant reduction in prior accident year loss reserves of $15.8 million in Q2 2010 (compared to $2.1 million in Q2 2009). This favorable development reduced the Insurance Operations loss ratio by 32.4 points.
• Investment Performance: Net realized investment gains were $5.6 million in Q2 2010, a marked improvement from the $3.2 million net loss in the same period in 2009. This was driven by gains in fixed maturities and equity portfolios.
• Premium Volume: Gross premiums written for U.S. Insurance Operations decreased 15.3% due to terminated programs and soft market conditions. Conversely, International Reinsurance Operations saw a 62.4% increase in gross premiums written due to new treaties.
• Cash Flow: Net cash used for operating activities improved to $15.0 million in the first six months of 2010, compared to $33.4 million used in the prior year period, largely due to lower net losses paid.

Guidance, Outlook, and Risks

• Redomestication: The company completed its move to Ireland on July 2, 2010, to gain strategic flexibility. Management does not expect a material impact on financial results from this reorganization.
• Underwriting Outlook: The U.S. Insurance Operations combined ratio improved to 79.4% in Q2 2010 (from 103.7% in 2009), though excluding prior-year reserve releases, the ratio would be 111.8%. The Reinsurance Operations combined ratio was 88.5%.
• Investment Strategy: The portfolio strategy focuses on liquid, high-quality assets with a defensive interest rate posture. The fixed income portfolio maintains an AA average rating with a low duration of 2.7 years.
• Key Risks:
  • Reserve Uncertainty: Estimates for unpaid losses are subject to significant judgment; actual losses could differ materially.
  • Reinsurance Counterparty Risk: The company relies on reinsurers to pay ceded losses; failure of reinsurers could adversely affect results.
  • Legal Proceedings: A $32.2 million verdict against AON Corp. is pending appeal; the company will not recognize this gain until resolved.
  • Currency Fluctuations: Foreign exchange risk exists due to non-U.S. subsidiaries and reinsurance operations.

Investor Verification Checklist

• Reserve Adequacy: Verify the sustainability of the $15.8 million favorable prior-year loss reserve release in Q2 2010 and its impact on the reported combined ratio.
• Investment Portfolio Quality: Review the composition of the $1.58 billion investment portfolio, specifically the exposure to insurance-enhanced municipal bonds ($127.1 million) and subprime/Alt-A assets ($2.8 million).
• Redomestication Impact: Confirm the tax implications and regulatory approvals associated with the July 2010 redomestication to Ireland.
• Legal Contingency: Monitor the status of the appeal regarding the $32.2 million verdict against AON Corp.
• Liquidity Constraints: Assess the dividend restrictions on U.S. Insurance Companies, which limit distributions to approximately $50.3 million for 2010 without regulatory approval.