Global Indemnity plc — Q1 2012 Form 10-Q
Reporting period: Quarter ended March 31, 2012; unaudited consolidated results under U.S. GAAP. The filing identifies the registrant as Global Indemnity plc, an Irish-domiciled insurer and reinsurer. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenues | $77.3 | $114.2 | -32.3% |
| Net premiums earned | $64.5 | $76.0 | -15.1% |
| Net investment income | $11.4 | $14.4 | -20.8% |
| Net realized investment gains | $1.8 | $12.0 | -85.3% |
| Income before income taxes | $8.2 | $21.8 | -62.6% |
| Net income | $10.9 | $14.3 | -24.1% |
| Diluted earnings per share | $0.38 | $0.47 | -19.1% |
Q1 2012 income included a $2.7 million income tax benefit, compared with $7.5 million of tax expense in Q1 2011. The prior-year quarter included $11.5 million of nonrecurring AON settlement income, net of attorney fees, within Insurance Operations’ other income. The filing attributes lower investment income partly to a smaller fixed-income portfolio, following share repurchases, debt repayment and negative operating cash flow.
Underwriting and segment trends
- Premium volume contracted: Gross premiums written were $57.8 million versus $87.7 million (-34.1%); net premiums written were $50.3 million versus $83.1 million (-39.5%). Management cited exiting certain unprofitable business, cancellation of reinsurance treaties, and reduced reinsurance writings.
- Insurance Operations: Net premiums earned fell 13.3% to $47.5 million. The segment recorded a $4.9 million underwriting loss, versus $8.9 million income a year earlier. Its combined ratio worsened to 110.6% from 105.0% (above 100% indicates an underwriting loss). Lower expenses and a lower current-accident-year loss ratio were outweighed by reduced premiums and less favorable prior-year reserve releases.
- Reinsurance Operations: Net premiums earned decreased 19.9% to $17.0 million, while the segment earned $3.9 million versus an $8.9 million loss. Its combined ratio improved to 74.3% from 142.7%, primarily because Q1 2011 included major earthquake and flood catastrophe losses; Q1 2012 had no significant reinsurance catastrophe activity.
- Consolidated combined ratio: 101.1%, compared with 115.5%. The 2012 ratio remained above 100%, indicating an overall underwriting loss before investment and other income.
Cash, balance sheet and capital
- Operating cash flow was negative $18.5 million, versus positive $7.2 million in Q1 2011. Cash and cash equivalents declined $75.3 million during the quarter to $100.5 million; investing activities used $48.0 million and financing activities used $8.9 million.
- At March 31, total assets were $2.081 billion, total liabilities $1.221 billion, and shareholders’ equity $859.4 million. Investments totaled $1.566 billion. Unpaid losses and loss adjustment expenses were $960.9 million; notes and debentures payable were $102.9 million.
- Reinsurance receivables were $282.9 million gross, with $164.8 million of collateral; net of collateral, receivables were $118.2 million. The recorded allowance for uncollectible reinsurance receivables was $10.0 million.
- Equity increased to $859.4 million from $839.1 million, including $17.7 million of other comprehensive income, largely reflecting unrealized investment gains. The company repurchased 454,267 A ordinary shares during the quarter for an average $19.48 per share.
Outlook, notable items and risks
- Outlook: No specific earnings or premium guidance is provided. Management said capital resources should be sufficient for anticipated cash needs for at least the next 12 months. It described Wind River Reinsurance as cautiously deploying capital given the pricing environment.
- Capital returns: The existing authorization permitted up to $100 million of share repurchases. On May 9, 2012, after quarter-end, the company announced a modified Dutch auction tender offer for up to $61 million of A ordinary shares, at $19.25–$22.00 per share, expiring June 8 unless extended or withdrawn.
- Reserves: The company reduced prior-accident-year reserves by $1.5 million in Q1 2012, versus a $5.3 million reduction in Q1 2011. Favorable general-liability development was partly offset by adverse property and marine development. Management cautioned that reserve estimates are judgmental and actual ultimate losses may materially differ.
- Claims and contingencies: A March 2012 bankruptcy-court opinion confirmed a plan involving a proposed asbestos-related channeling injunction affecting United National; further court confirmation and appeals remained possible, and a settlement payment is conditional on plan confirmation. Management did not expect currently pending proceedings, individually or together, to have a material adverse effect.
- Other risks: Key exposures include catastrophe losses, loss-reserve uncertainty, reinsurance counterparty collectability, investment and interest-rate risk, competition and pricing, foreign-currency movements, and restrictions on subsidiary dividends. U.S. insurance subsidiaries paid no dividends in Q1. Fox Paine beneficially controlled approximately 90.8% of voting power at March 31.
- Accounting change: New acquisition-cost guidance was adopted retrospectively from January 1, 2012. It reduced December 31, 2011 deferred acquisition costs by $4.0 million and shareholders’ equity by $2.6 million; the filing restated the comparative quarter accordingly.
Most important facts for investors to verify
- Whether premium contraction reflects deliberate portfolio pruning or is weakening the company’s sustainable revenue base, especially in Reinsurance Operations.
- Reserve adequacy, including the effect of construction-defect and asbestos claims and subsequent developments in the bankruptcy plan and injunction proceedings.
- Cash generation, subsidiary dividend capacity, and the funding and impact of the announced tender offer on investment income and liquidity.
- Quality and collectability of reinsurance recoverables, collateral sufficiency, and exposure to reinsurers in runoff.
- Investment portfolio credit quality, unrealized gains and losses, and the sensitivity of results and capital to market movements.