Global Indemnity Limited — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The filing identifies the registrant as Global Indemnity Limited, not Global Indemnity Group, LLC. It is a specialty property and casualty insurer and reinsurer operating through Commercial Specialty, Specialty Property, Farm, Ranch & Stable, and Reinsurance Operations. Unless noted otherwise, dollar amounts below are in millions.
Financial performance
- Q2 revenue and earnings: Total revenues were $146.1, up 14.1% from $128.0. Net income was $14.7, up 104% from $7.2; diluted EPS was $1.02 versus $0.50. Pretax income rose to $15.8 from $5.8.
- First-half performance: Total revenues were $286.3, up 15.6% from $247.7. Net income was $34.3, up 166% from $12.9; diluted EPS was $2.39 versus $0.90.
- Premiums: Q2 gross written premiums increased 12.9% to $179.3; net written premiums rose 16.6% to $159.1; net earned premiums increased 12.5% to $128.2. First-half net earned premiums rose 12.8% to $250.3.
- Underwriting: Consolidated Q2 loss ratio was 54.6%, expense ratio 39.4%, and combined ratio 94.0%, compared with 51.7%, 41.7%, and 93.4%, respectively, a year earlier. First-half combined ratio improved to 91.4% from 93.5%. Underwriting income was $8.1 in Q2 and $22.6 for the first half.
- Investment results: Q2 net investment income was $13.8, up 26.2%; first-half income was $21.0, down 5.9%. Realized investment gains were $3.6 in Q2 and $14.0 in the first half. First-half gains included $19.3 of equity-security gains, partly offset by $7.2 of losses on interest-rate swaps and $1.9 of investment impairment losses.
- Cash flow and liquidity: Operating cash flow was negative $3.1 for the first half, versus positive $59.0 in 2018. Cash and equivalents were $56.2 at June 30, down from $99.5 at year-end; total investments were $1,509.8, and total assets were $2,015.5. Management attributed the operating cash-flow decline largely to higher claim payments and the absence of the prior-year $45.0 loss-indemnification recovery.
- Capital and debt: Shareholders’ equity was $694.5, up from $629.1 at year-end. Debt was $292.1, comprising the margin borrowing facility ($69.2) and subordinated notes due 2045 and 2047. Interest expense was $5.0 in Q2 and $10.1 for the first half. The company declared dividends of $0.25 per share each quarter; $7.1 was paid during the first half.
Changes and significant developments
- Premium growth reflected new Commercial Specialty programs, Specialty Property rate increases and a new watercraft product, additional Farm, Ranch & Stable agents, and growth in catastrophe reinsurance. A new casualty treaty contributed $7.5 of Q2 and $11.8 of first-half gross written premiums.
- Q2 segment underwriting results were mixed: Specialty Property earned $10.0, while Commercial Specialty earned $1.1, Farm, Ranch & Stable recorded a $3.1 loss, and Reinsurance Operations earned $0.1. Reinsurance underwriting income fell from $3.6 in Q2 2018 to $0.1, with the segment’s combined ratio rising to 99.5% from 67.7%.
- Prior-year reserves developed favorably by $8.2 in Q2 and $16.1 in the first half, compared with $9.6 and $15.5, respectively, in 2018. Q2 Specialty Property favorable development included $8.3 from sale of subrogation rights related to the 2018 California Camp wildfire. Reinsurance prior-year reserves increased $3.0 in Q2, including a $6.5 increase for Typhoon Jebi.
- Investment-market changes boosted accumulated other comprehensive income to $16.5 from a loss of $21.2 at year-end, primarily reflecting unrealized fixed-maturity gains. The equity-securities balance increased to $262.0 from $124.7, while available-for-sale fixed maturities were $1,196.3.
- Beginning in 2019, the company separated Personal Lines into Specialty Property and Farm, Ranch & Stable reportable segments and renamed Commercial Lines as Commercial Specialty; prior-year segment figures were revised for comparison.
Outlook, risks, and unusual items
- The filing provides no specific earnings, premium, or combined-ratio guidance. Management says it expects Global Indemnity Reinsurance, including potential subsidiary distributions, to have sufficient liquidity and solvency to pay dividends; actual distributions remain subject to regulatory restrictions. U.S. insurance subsidiaries paid no dividends during the first half.
- Key uncertainties include reserve-estimation variability, catastrophe losses, reinsurance recoverability and disputes with reinsurers in runoff, investment valuation and market risk, and restricted access to subsidiary cash. Management states pending legal proceedings are not expected to have a material adverse effect, while noting coverage may not be sufficient or available at reasonable cost.
- Unfunded commitments for alternative investments totaled $31.2 at June 30. Two distressed-investment VIEs had maximum exposures to loss, including future funding, of $29.8 and $52.9. The company also reported a $10.9 fair-value liability on $200.0 notional interest-rate swaps; Q2 swap losses were $4.7.
- Corporate expenses fell year over year because 2018 included $12.5 of advisory fees for a reorganization. A separate $2.0 fee for a 2018 investment-fund divestiture was paid in May 2019. The company adopted lease accounting in 2019, recording lease assets of $24.1 and liabilities of $24.6 at June 30.
- Fox Paine-affiliated entities held approximately 82% of voting power and the Fox Paine Funds had the right to appoint seven of eight directors. The company also paid Fox Paine an annual management fee; related-party transactions are subject to board and audit committee review.
- Management reported disclosure controls effective as of June 30, 2019, no material change in internal control over financial reporting during the quarter, and no material change in the risk factors disclosed in the 2018 Form 10-K.
Important facts for investors to verify
- Whether favorable reserve development, particularly wildfire subrogation proceeds, is repeatable and how the Typhoon Jebi reserve increase develops.
- Underlying current-year loss trends and whether the sharp deterioration in Reinsurance Operations’ Q2 combined ratio persists as the new casualty treaty seasons.
- Drivers of negative first-half operating cash flow, future claim-payment timing, and the capacity of subsidiaries to upstream dividends under regulatory limits.
- Exposure and liquidity implications of the $31.2 unfunded alternative-investment commitments, distressed-investment exposures, and margin requirements on derivatives.
- How much reported earnings growth depends on realized investment gains and other non-underwriting factors; first-half realized gains were substantially above the prior-year period.