Global Indemnity Group, LLC — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparison is Q1 2020. The company provides specialty property and casualty insurance and reinsurance through four segments: Commercial Specialty, Specialty Property, Farm, Ranch & Stable, and Reinsurance Operations. Dollar figures below are in millions unless otherwise stated.
Financial results and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Gross written premiums | $163.6 | $155.7 (+5.0%) |
| Net written premiums | $147.7 | $139.1 (+6.2%) |
| Net earned premiums | $143.7 | $144.5 (-0.5%) |
| Total revenues, including investment income and realized gains | $157.7 | $86.6 |
| Net investment income | $9.8 | $10.1 |
| Net realized investment gains (losses) | $3.8 | $(68.2) |
| Net income (loss) | $5.5 | $(44.6) |
| Basic / diluted EPS | $0.38 / $0.37 | $(3.13) / $(3.13) |
| Operating cash flow | $11.4 | $20.8 |
| Cash and cash equivalents | $47.5 | $67.4 at Dec. 31, 2020 |
| Total investments | $1,393.6 | $1,387.2 at Dec. 31, 2020 |
| Debt | $126.3 | $126.3 at Dec. 31, 2020 |
| Shareholders’ equity | $696.5 | $718.3 at Dec. 31, 2020 |
The company’s underwriting results, which exclude investment income and realized gains, were weaker: underwriting loss was $1.4 million versus income of $10.6 million, and the combined ratio rose to 101.2% from 92.7% (above 100% indicates an underwriting loss). The loss ratio increased to 63.1% from 53.7%; the expense ratio improved to 38.1% from 39.0%. Consolidated total revenue in the table above includes investment items; the MD&A’s $144.1 million revenue figure is insurance-segment revenue before investment income and realized gains.
Operating cash flow fell $9.4 million year over year, mainly reflecting higher loss payments, lower investment income, and no comparable federal tax recovery. Investing activities used $27.2 million, and financing activities used $4.0 million. The company declared a $0.25-per-common-share distribution for the quarter. Its debt consists principally of 7.875% subordinated notes due 2047; carrying value was $126.3 million and disclosed fair value was $132.3 million.
Material changes and segment performance
- Premium growth was concentrated in Commercial Specialty (gross written premiums +8.0%) and Reinsurance Operations (+24.8%). Specialty Property and Farm, Ranch & Stable gross written premiums declined 5.3% and 5.1%, respectively. Management cited growth in existing programs, rate increases, and new programs, partly offset by deliberate reductions in catastrophe-exposed and lower-return business.
- Commercial Specialty reported a $5.3 million underwriting loss and a 106.9% combined ratio, versus $4.3 million income and 93.7%. Current-year property losses, including catastrophe claims, increased substantially.
- Specialty Property earned premiums declined 10.6%, but underwriting income improved to $3.5 million from $2.9 million; its combined ratio improved to 89.9% from 92.7%, helped by $1.6 million of favorable prior-year reserve development.
- Farm, Ranch & Stable had a $0.6 million underwriting loss versus $1.5 million income, with its combined ratio worsening to 103.6% from 92.3%. Management cited higher current-year property losses, including catastrophe claims.
- Reinsurance Operations underwriting income declined to $0.9 million from $1.9 million; the combined ratio increased to 94.8% from 90.7%. Earned premiums fell 21.1%, including lower property catastrophe treaty premiums, partly offset by casualty growth.
- Prior-year loss reserves developed favorably by $3.4 million, compared with $0.6 million in Q1 2020. Gross unpaid losses and loss adjustment expenses were $675.9 million; net reserves were $596.5 million.
The improvement in reported net income largely reflects the comparison with Q1 2020’s $68.2 million realized investment loss, which included substantial equity and derivative losses during COVID-19 market disruption. In Q1 2021, realized investment gains were $3.8 million. However, other comprehensive income was a loss of $24.5 million, largely from unrealized investment losses, reducing accumulated other comprehensive income to $9.9 million from $34.3 million at year-end.
Outlook, risks, and notable items
- No quantified earnings or premium guidance was provided. Management describes COVID-19 as an ongoing risk to premium volume, collections, claims, investment values, and portfolio liquidity. Potential legislation or court decisions requiring coverage of business interruption claims despite policy terms or virus exclusions could increase exposure.
- The filing attributes elevated catastrophe losses to February Texas winter storms and identifies “PCS Catastrophe Event 2117.” Investors should verify the event’s date and attribution: the filing’s descriptions include a February 16–20 date stated as 2020, although the discussion concerns Q1 2021 results.
- Interest-rate and market movements affected the investment portfolio. Fixed-income holdings had an A+ average rating and 4.7-year duration; the company reported no allowance for expected credit losses on its fixed-maturity portfolio. Investment liquidity may nevertheless be affected by market disruption.
- Future funding commitments for investments totaled $56.2 million, including a new $25 million commitment; management said capital calls were unlikely for investments in their harvest period. Some alternative investments are illiquid and subject to funding commitments.
- Insurance subsidiaries’ dividends are subject to regulatory limits. The company said no insurance-subsidiary dividends were declared or paid in Q1. Ordinary-course legal proceedings were not expected by management to have a material adverse effect, but disputes with reinsurers in runoff remain a stated risk. No off-balance-sheet arrangements were reported.
- After quarter-end, David S. Charlton was appointed chief executive of insurance operations and principal executive officer, effective April 19, 2021. His agreement includes performance-linked book-value appreciation rights; an amendment on May 7 increased the grant to 2.5 million rights, with an initial notional value of approximately 5% of Penn-Patriot’s book value. AM Best affirmed an “A” (Excellent) financial strength rating for the U.S. operating subsidiaries on April 21.
- Fox Paine entities beneficially held approximately 83.9% of voting power at March 31, 2021, and related-party management fees were $0.7 million for the quarter.
Important facts for investors to verify
- Whether the sharp deterioration in the combined ratio is temporary or persists, especially the Commercial Specialty and Farm, Ranch & Stable catastrophe and property-loss trends.
- The underlying assumptions and sensitivity of the $596.5 million net loss reserve, including how claims severity and catastrophe experience develop.
- The date and reported impact of PCS Catastrophe Event 2117; the filing’s stated storm date appears inconsistent with the 2021 reporting period.
- Potential COVID-19 business interruption claim exposure, premium collection trends, and the effect of market conditions on liquidity and investment values.
- Available holding-company liquidity, regulatory limits on subsidiary dividends, and the timing and amount of potential calls on the $56.2 million investment commitments.
- The terms, performance hurdles, and potential economic cost of the CEO’s amended book-value appreciation rights, as well as related-party governance and fees.