Global Indemnity Limited — Q1 2020 Form 10-Q
Reporting period: Quarter ended March 31, 2020. The filing is by Global Indemnity Limited; Global Indemnity Group, LLC is its wholly owned subsidiary and a debt co-obligor. Amounts below are in U.S. dollars unless noted.
Business context and financial results
The company writes specialty property and casualty insurance and reinsurance through Commercial Specialty, Specialty Property, Farm, Ranch & Stable, and Reinsurance Operations. Results were sharply affected by COVID-19-related market declines in the investment portfolio.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Gross written premiums | $155.7 million | $142.2 million |
| Net written premiums | $139.1 million | $123.4 million |
| Net earned premiums | $144.5 million | $122.1 million |
| Net investment income | $10.1 million | $7.2 million |
| Net realized investment gains (losses) | $(68.2) million | $10.4 million |
| GAAP total revenues | $86.6 million | $140.2 million |
| Underwriting income | $10.6 million | $14.5 million |
| Income (loss) before taxes | $(56.5) million | $23.9 million |
| Net income (loss) | $(44.6) million | $19.6 million |
| Diluted earnings (loss) per share | $(3.13) | $1.37 |
| Operating cash flow | $20.8 million | $(23.2) million |
The consolidated loss ratio was 53.7%, expense ratio 39.0%, and combined ratio 92.7%, compared with 47.8%, 40.7%, and 88.5%, respectively, a year earlier. The quarter’s underwriting result remained positive, but was lower year over year.
Financial position, liquidity and debt
- At March 31, 2020, total assets were $2.03 billion, total liabilities $1.35 billion, and shareholders’ equity $674.6 million, down from $726.8 million at year-end 2019. Cash and cash equivalents were $59.8 million.
- Investments totaled $1.49 billion, down from $1.56 billion at year-end. Equity securities declined to $174.4 million from $263.1 million. The fixed-maturity portfolio had a fair value of $1.27 billion and an AA- average credit rating.
- Total debt was $294.8 million: $71.7 million under the margin borrowing facility and $223.1 million carrying value of subordinated notes due 2045 and 2047. Debt fair value was $263.2 million. Interest expense was $4.9 million.
- Operating cash flow was positive compared with an outflow in Q1 2019, largely reflecting higher net premiums collected, lower net loss payments, and federal tax recoveries. Investing cash flow was approximately $0.3 million; financing cash outflow was $5.6 million, including $3.6 million of dividends.
- Future funding commitments for alternative investments totaled $31.7 million. U.S. insurance subsidiaries did not pay dividends during the quarter; the Bermuda reinsurance subsidiary’s board approved a dividend of up to $50 million by September 30, 2020, subject to applicable requirements.
Changes versus the prior comparable period
- Gross written premiums rose 9.5% and net earned premiums rose 18.3%. Commercial Specialty gross written premiums increased 25.9%; Specialty Property declined 11.2% as the company reduced catastrophe-exposed and lower-return business. Farm, Ranch & Stable rose 6.6%; Reinsurance gross written premiums were nearly flat.
- Loss and loss adjustment expenses increased 33.1% to $77.6 million. Current-year catastrophe losses were higher in Commercial Specialty, Specialty Property, and Farm, Ranch & Stable, although segment experience varied.
- Prior-year reserve development was a favorable $0.6 million, versus favorable development of $7.9 million in Q1 2019. The prior-year benefit in 2019 materially aided the comparison of underwriting results.
- The $68.2 million realized investment loss, versus a $10.4 million gain in Q1 2019, drove the swing to a net loss. The company attributed 2020 losses primarily to fair-value declines in equities and derivatives amid COVID-19 market disruption. Total pre-tax investment return was negative $62.2 million, compared with positive $43.9 million.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or premium guidance. Management expected COVID-19 to affect second-quarter operations and potentially continue indefinitely, with possible premium declines, collection delays, increased claims, further investment losses, and reduced investment liquidity.
- Management said limited-partnership results are reported on a one-to-three-month lag: the first-quarter financials do not reflect the pandemic’s subsequent effect on those investments, and the company expected declines to appear in Q2.
- The company warned that legislation could require coverage of business-interruption claims despite policy terms or virus exclusions, creating potential claims and liquidity exposure.
- Available-for-sale fixed maturities had $26.7 million of gross unrealized losses at quarter-end, compared with $2.1 million at year-end. Management reported no recognized credit losses on those securities during Q1; it attributed the market declines largely to non-credit factors.
- Interest-rate swaps and futures produced $20.1 million of realized losses. The swap liability’s fair value was $19.1 million, versus $10.3 million at year-end; margin requirements and collateral movements are relevant liquidity exposures.
- On May 6, 2020, the company amended its Fox Paine management agreement: it eliminated reimbursement of certain meeting-related expenses that had averaged about $550,000 annually and increased the annual base service fee by $550,000.
- The company adopted new credit-loss accounting guidance on January 1, 2020. It reported no material impact from adoption on financial condition, results, or cash flows.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter premiums, collections, claims, investment values, and portfolio liquidity.
- Whether expected Q2 declines in limited-partnership values were realized, and the resulting effect on investment income and capital.
- Actual business-interruption claims and any legislative or regulatory changes affecting policy coverage or exclusions.
- Development of loss reserves, particularly current-year claim severity and catastrophe losses, and the sustainability of underwriting margins.
- Debt and margin-facility availability, derivative collateral requirements, subsidiary dividend capacity, and the timing of the $31.7 million investment commitments.
- The financial effect of the amended Fox Paine management fee and the company’s continuing dividend policy.