Global Indemnity plc — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2011. The filing identifies the registrant as Global Indemnity plc; “Global Indemnity Group” is a subsidiary name used in the filing.
Business context
The company writes specialty property and casualty insurance through its U.S. Insurance Operations and treaty reinsurance through Wind River Reinsurance. Its shares trade on Nasdaq as GBLI. Financial statements are unaudited and stated in U.S. dollars.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenues | $91.4m | $86.2m | $306.0m | $280.3m |
| Net premiums earned | $77.1m | $70.1m | $231.1m | $215.6m |
| Net income (loss) | $(34.2)m | $19.8m | $(16.0)m | $63.2m |
| Net income (loss) per diluted share | $(1.13) | $0.65 | $(0.53) | $2.09 |
| Net cash from operating activities | Not stated quarterly | $1.4m | $(15.9)m |
Underwriting deteriorated materially: consolidated combined ratios were 156.7% for Q3 and 130.3% for the nine-month period, versus 83.2% and 89.1%, respectively, in 2010. Both insurance and reinsurance operations reported segment losses for the 2011 periods. Net investment income was $12.9m for Q3 and $41.2m year to date; nine-month realized investment gains were $21.7m. Comprehensive loss was $63.4m for Q3 and $49.7m year to date, including investment-related other comprehensive losses.
Balance sheet, debt and liquidity
- At September 30, 2011, total assets were $2.13bn, total liabilities $1.26bn, and shareholders’ equity $877.5m, compared with $2.29bn, $1.37bn and $928.7m at December 31, 2010.
- Cash and cash equivalents were $93.3m, down from $119.9m; investments totaled $1.57bn. The filing notes that substantial assets are deposited or held in trust for regulatory, policyholder or other requirements.
- Notes and debentures payable were $103.1m, down from $121.3m. The company paid $18.0m of principal on its Guaranteed Senior Notes in July; it expects further annual $18.0m prepayments through 2015, with remaining principal due then.
- Operating cash flow was positive $1.4m, while investing and financing activities used $9.6m and $18.5m, respectively. Cash declined by $26.6m during the nine months.
- Gross unpaid losses and loss adjustment expenses were $971.2m; net reserves were $676.8m. Reinsurance receivables were $304.0m, with a $9.7m allowance for uncollectible amounts.
Material changes and management commentary
- Q3 net loss of $34.2m reversed the $19.8m profit a year earlier. For nine months, the company moved from $63.2m profit to a $16.0m loss.
- Catastrophe claims contributed to higher losses, including Hurricane Irene and Tropical Storm Lee in Q3, and Japan and New Zealand earthquakes, Australian floods, U.S. tornadoes and other events year to date. Management also cited increased severity, adverse loss emergence in certain liability business and premium deficiency charges.
- Q3 prior-year reserve development was an $0.8m net reduction in Insurance Operations but a $3.4m increase in Reinsurance Operations. For nine months, insurance prior-year reserves decreased $18.6m, while reinsurance prior-year reserves increased $10.6m. Reserve estimates remain judgmental and subject to revision.
- Premium deficiency charges were $10.5m in Q3 and $11.0m for nine months, with no comparable charges in 2010. The charges reduced deferred acquisition costs and included a $3.9m reserve addition.
- The $11.5m AON settlement amount, net of attorney fees, was included in nine-month Insurance Operations other income; management described it as non-recurring. The settlement followed a prior jury verdict and appeal.
- Gross premiums written fell 15.2% overall in Q3 to $73.1m and 5.7% for nine months to $255.7m. Reinsurance Operations premiums declined as treaties were not renewed or failed return hurdles; U.S. insurance Q3 premiums also declined after program and product terminations.
- On September 15, the board chose to continue as an independent specialty insurer and reinsurer after reviewing strategic alternatives, appointed Cynthia Valko CEO effective September 19, and authorized up to $100m in Class A share repurchases. No repurchases under the authorization had occurred by the filing date.
- The company reported no formal earnings or premium guidance. Management said it was exiting certain unprofitable general and professional liability classes and focusing on business meeting return thresholds. It also cited cost savings from its 2010 Profit Enhancement Initiative.
Risks, contingencies and other matters
- Key exposures include catastrophe severity, reserve estimation and long-tail claims, underwriting and pricing conditions, investment and credit risk, and reinsurer collectability. Ceded reinsurance does not remove the company’s primary obligation to policyholders.
- Insurance subsidiaries’ dividends are subject to regulatory limits. The company said approximately $63.8m could be distributed by U.S. insurers in 2011 without prior approval; $63.7m in dividends had been declared for payment in Q4. Wind River Reinsurance distributions are subject to Bermuda requirements.
- Fox Paine beneficially held approximately 89.5% of outstanding voting power and controlled director elections. The company also disclosed management fees and a $2.5m unfunded commitment to a Fox Paine-managed partnership.
- Management considered disclosure controls effective as of September 30, 2011; no material change in internal control over financial reporting was reported. The filing states pending legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether catastrophe losses and adverse current-year liability experience continue, and how they affect underwriting ratios and future results.
- Reserve development by line and accident year, including construction-defect assumptions, non-standard auto treaties and professional liability classes being exited.
- The amount, timing and recoverability of reinsurance balances, including collateral and reinsurer credit quality.
- The non-recurring AON settlement’s effect on reported earnings and the company’s results excluding that item and investment gains.
- Cash available for debt payments, declared subsidiary dividends and any share repurchases, considering regulatory restrictions and policyholder-related trusts.
- The investment portfolio’s exposure to market-value declines, credit losses and fair-value estimates, particularly given the reduction in accumulated other comprehensive income.