Global Indemnity Group, LLC quarterly report, Q2 FY2022

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Global Indemnity Group, LLC — Q2 2022 Form 10-Q

Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2022, with comparisons to the same 2021 periods. The insurer reports Commercial Specialty, Reinsurance Operations, and Exited Lines. Dollar figures below are in millions unless noted.

Financial performance and condition

  • Premiums and revenue: Q2 gross written premiums rose 12.3% to $196.8 million; net written premiums increased 4.0% to $167.2 million and net earned premiums rose 4.2% to $155.7 million. For the first six months, gross written premiums increased 14.5% to $387.8 million, net written premiums 5.9% to $326.6 million, and net earned premiums 3.9% to $304.6 million. Consolidated total revenues, including investment results, declined 10.1% to $147.9 million in Q2 and 13.6% to $278.3 million for the half year.
  • Profit and underwriting: Q2 net loss was $12.2 million versus net income of $6.4 million a year earlier; six-month net loss was $26.9 million versus net income of $11.9 million. Common-share loss per share was $0.84 for Q2 and $1.87 for the half year. The consolidated combined ratio improved to 98.7% in Q2 from 99.2%, and to 96.9% for six months from 100.2%. Commercial Specialty and Reinsurance Operations reported underwriting income, while Exited Lines remained loss-making.
  • Investment performance and margins: Net investment income fell 81.8% to $1.9 million in Q2 and 58.4% to $8.5 million for six months. Net realized investment losses were $9.9 million and $35.3 million, respectively. The half-year included $26.2 million of impairment losses on securities the company intended to sell. The company reported total investment returns of negative 1.8% for Q2 and negative 4.8% for the first six months. Higher claims severity weighed on Q2 Commercial Specialty loss performance; Reinsurance Operations’ combined ratio improved, while Exited Lines’ ratio remained above 100%.
  • Cash flow: Operating cash flow was $18.5 million for the first half, down from $47.5 million in 2021. Investing activities provided $101.0 million, while financing activities used $137.9 million, including the $130.0 million note redemption. Cash and cash equivalents were $59.8 million at June 30, down from $78.3 million at year-end.
  • Balance sheet and liquidity: Total assets were $1.862 billion, down from $2.013 billion at December 31, 2021. Shareholders’ equity was $641.3 million, down from $706.6 million, including accumulated other comprehensive loss of $26.6 million versus income of $6.4 million at year-end. Unpaid losses and loss adjustment expenses were $804.7 million gross and $710.5 million net. Premium receivables were $162.0 million and reinsurance receivables $104.1 million.
  • Debt: The company redeemed all $130.0 million of its 7.875% subordinated notes on April 15, 2022. It recorded a $3.5 million loss from writing off unamortized issuance costs. No debt was outstanding at June 30; a margin facility remained available but undrawn.

Material changes and management commentary

  • Growth in continuing lines was driven by existing Commercial Specialty programs, pricing increases and new programs, and organic growth in casualty reinsurance treaties. Continuing-line gross written premiums grew 26.1% in Q2 and 28.4% in the first half. Exited Lines gross written premiums declined 20.9% and 17.1%, respectively.
  • The company shortened its fixed-income portfolio duration in response to rising interest rates, selling securities with weighted average lives of five years or more and generally reinvesting proceeds in securities with maturities of two years or less. The portfolio’s average rating was A and reported duration was 1.7 years.
  • The company liquidated its common-stock portfolio and used proceeds, along with subsidiary dividends and private-equity distributions, to help redeem the notes. Management said lower alternative-investment returns and reduced dividend income contributed to the decline in investment income.
  • On August 8, 2022, after quarter-end, the company sold Farm, Ranch & Stable renewal rights for business written from that date. Everett Cash Mutual also agreed to acquire American Reliable Insurance Company for book value, expected to be $10.0 million at closing. Total consideration under the agreements is $40 million; the subsidiary sale was subject to regulatory approval, expected in Q4 2022. The company will retain unearned premium reserves for pre-August 8 business.
  • The company received a $2.7 million employee retention credit in May 2022, contributing to lower corporate and other operating expenses.
  • The board declared common distributions of $0.25 per share in each of the first two quarters, or $0.50 per share for the half year. The filing provides no earnings or financial guidance.

Risks, contingencies, and unusual items

  • Investment and market risk: Rising rates and wider spreads reduced investment values; fixed maturities had $34.0 million of gross unrealized losses at June 30, compared with $7.6 million at year-end. The company said it did not identify an expected credit loss allowance on its investment portfolio, but reported intended-sale impairments and substantial market-related OCI losses.
  • Reserves: Management reduced prior-year reserves by $6.6 million for the first half, including reductions in Reinsurance Operations and Exited Lines, partly offset by a Commercial Specialty increase. Actual claims frequency and severity may differ from estimates; the filing’s sensitivity analysis illustrates potential variability in current accident-year losses.
  • Business transition: Farm, Ranch & Stable was designated non-core in Q2, and renewal rights and American Reliable were subsequently sold under the terms described above. Exited Lines includes businesses in runoff; the segment’s first-half combined ratio was 105.8%.
  • Other exposures: The filing discusses possible COVID-19 effects on premiums, claims, investments and liquidity, including potential legislation or court rulings requiring payment of certain business-interruption claims despite policy exclusions. It also notes possible disputes with reinsurers in runoff, ordinary-course litigation and arbitration, and $31.2 million of unfunded commitments to alternative investments, though management said capital calls were unlikely.
  • Management stated that pending legal proceedings were not expected to have a material adverse effect. The filing reports no material change in risk factors, no off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2022.

Important facts for investors to verify

  1. Whether the $40 million Everett Cash Mutual transaction closes as expected, including regulatory approval, the final book value and proceeds for American Reliable, and the effects of the Farm, Ranch & Stable renewal-rights sale.
  2. How portfolio repositioning, interest-rate and credit-spread movements, and the withdrawal from the $99.6 million Credit Fund investment affect realized results, liquidity and future investment income.
  3. Whether reserve estimates remain adequate, particularly for Commercial Specialty severity trends and runoff claims in Exited Lines and reinsurance.
  4. Whether continuing-line premium growth converts into durable underwriting profitability, given segment loss and expense ratio movements and the elevated Exited Lines combined ratio.
  5. The sustainability of operating cash flow and shareholder distributions following debt repayment, considering insurance-subsidiary dividend restrictions and the company’s remaining commitments.