Business context and reporting period
Global Indemnity Limited filed this unaudited Form 10-Q for the quarter ended March 31, 2019. The insurer and reinsurer operates through Commercial Specialty, Specialty Property, Farm, Ranch, & Stable, and Reinsurance Operations, offering property and casualty coverage in the U.S. and specialty reinsurance through its Bermuda subsidiary.
In Q1 2019, the company split its former Personal Lines segment into Specialty Property and Farm, Ranch, & Stable, and renamed Commercial Lines as Commercial Specialty. Prior-period segment results were recast.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Gross premiums written | $142.2 million | $124.2 million |
| Net premiums written | $123.4 million | $107.9 million |
| Net premiums earned | $122.1 million | $108.0 million |
| Total GAAP revenues | $140.2 million | $119.6 million |
| Net investment income | $7.2 million | $11.4 million |
| Net realized investment gains (losses) | $10.4 million | ($0.3 million) |
| Income before tax | $23.9 million | $4.4 million |
| Net income | $19.6 million | $5.7 million |
| Diluted earnings per share | $1.37 | $0.40 |
| Operating cash flow | ($23.2 million) | $41.2 million |
Net income increased 243.8%. Premium growth and improved underwriting, realized equity gains, and lower corporate expenses contributed; lower investment income and higher tax expense partly offset these gains. GAAP total revenue includes investment income and realized gains; premiums earned plus other income were $122.6 million in Q1 2019 versus $108.6 million in Q1 2018.
The consolidated loss ratio improved to 47.8% from 51.9%, the expense ratio to 40.7% from 41.7%, and the combined ratio to 88.5% from 93.6%. Underwriting income rose to $14.5 million from $7.5 million. Results included $7.9 million of favorable prior-year reserve development, compared with $5.9 million in Q1 2018.
By segment, underwriting income was $11.2 million for Commercial Specialty, a $0.1 million loss for Specialty Property, $1.7 million for Farm, Ranch, & Stable, and $1.7 million for Reinsurance Operations. The Specialty Property combined ratio remained above break-even at 101.5%; Farm, Ranch, & Stable’s worsened to 90.0% from 82.2%, and Reinsurance Operations’ to 88.6% from 70.2%.
At March 31, 2019, total assets were $1.985 billion, investments $1.486 billion, cash and cash equivalents $37.9 million, total liabilities $1.317 billion, shareholders’ equity $667.7 million, and debt $294.6 million. Debt comprised a $71.8 million margin borrowing facility and subordinated notes due 2045 and 2047. The board-approved quarterly dividend was $0.25 per share; $3.5 million was paid.
Material changes versus the prior comparable period
- Gross premiums written rose 14.5%; growth reflected new Commercial Specialty programs, rate increases and a watercraft product in Specialty Property, new Farm, Ranch, & Stable agents, and increased reinsurance business. A new casualty treaty added $4.2 million of gross premiums written.
- Net investment income fell 36.7%, primarily because returns from alternative investments declined. Equity-method investments generated a $3.7 million loss versus $2.3 million of income a year earlier.
- Net realized investment results improved to a $10.4 million gain, including $15.2 million of net common-stock gains, partly offset by derivative losses and $1.9 million of fixed-maturity impairment losses. Investment return was 2.9%, not annualized, versus negative 0.4%.
- Corporate and other operating expenses fell to $3.2 million from $9.3 million, mainly because Q1 2018 included a $6.3 million advisory fee for the reorganization. Interest expense increased 3.3%; the company attributed this primarily to higher margin-facility rates.
- Operating cash flow shifted to a $23.2 million use from $41.2 million provided. The comparison benefited from a $41.5 million net American Reliable loss-indemnification recovery received in Q1 2018; Q1 2019 also had higher loss payments and lower investment income received.
- Unrealized investment gains lifted other comprehensive income by $22.9 million and moved accumulated other comprehensive income from a $21.2 million loss at year-end to $1.7 million of income.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or premium guidance. Management stated that Global Indemnity Reinsurance, including potential subsidiary distributions, should have sufficient liquidity and solvency to pay dividends in 2019. It reported no material changes in consolidated liquidity or capital resources during the quarter.
- Liquidity depends in part on subsidiary distributions, which are subject to insurance-regulatory limits. Neither the U.S. insurance companies nor Global Indemnity Reinsurance paid dividends in Q1 2019. The company had $31.2 million of future investment funding commitments.
- Operating cash flow is affected by the timing of premiums, claims, and reinsurance settlements. Cash declined to $37.9 million from $99.5 million at year-end; investing activities used $39.8 million and financing provided $1.4 million during the quarter.
- Loss reserves are estimates subject to changes in claim frequency and severity. Gross reserves were $646.0 million and net reserves $548.9 million. Management disclosed sensitivity of current-quarter net accident-year loss estimates to changes in frequency and severity.
- Investment risks include market-value and credit changes, alternative-investment performance, and valuation assumptions. Fixed maturities had $5.5 million of gross unrealized losses at quarter-end; the company recorded $1.9 million of investment impairment losses. The interest-rate swaps had a $6.4 million fair-value liability and $200 million notional amount.
- Two distressed-asset variable-interest investments had combined fair values of about $48.7 million; disclosed maximum exposures, including future funding commitments, totaled $80.0 million. Additional alternative-investment commitments were $31.2 million.
- Legal proceedings are described as ordinary-course matters that management does not expect to have a material adverse effect. The company notes potential disputes with reinsurers in runoff. It reported no material change in its previously disclosed risk factors and no off-balance-sheet arrangements.
- Governance and related-party items merit attention: Fox Paine entities held approximately 80% of voting power and could appoint seven of eight directors. Fox Paine received $0.5 million in quarterly management fees; a $2.0 million fee for a 2018 investment divestiture remained in liabilities.
Important facts for investors to verify
- Whether premium growth and favorable underwriting results persist, particularly in light of segment-level combined-ratio deterioration in Farm, Ranch, & Stable and Reinsurance Operations.
- How much of the earnings increase reflects recurring underwriting performance versus realized investment gains, favorable reserve development, and lower one-time corporate costs.
- Whether the negative operating cash flow and reduced cash balance are temporary timing effects, and how subsidiary dividend restrictions affect holding-company liquidity and debt service.
- Future loss-reserve development, including the assumptions behind the $548.9 million net reserve balance and the concentration of favorable prior-year development.
- Performance, liquidity, and funding needs of alternative investments, as well as the company’s ability to manage swap collateral and investment-market exposure.
- The terms and servicing capacity of the margin borrowing facility and subordinated notes, and the implications of concentrated voting control and related-party arrangements.