Business context and reporting period
Global Indemnity Limited filed this unaudited Form 10-Q for the quarter ended March 31, 2018. It writes specialty commercial and personal property and casualty insurance and provides reinsurance through three segments: Commercial Lines, Personal Lines, and Reinsurance Operations. The company’s A ordinary shares trade on Nasdaq as GBLI.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Gross premiums written | $124.2 | $123.8; up 0.4% |
| Net premiums written | $107.9 | $111.5; down 3.3% |
| Net premiums earned | $108.0 | $113.1; down 4.5% |
| Total GAAP revenues | $119.6 | $123.9; down 3.4% |
| Net investment income | $11.4 | $8.6; up 31.9% |
| Net realized investment loss | $(0.3) | $0.8 gain |
| Income before taxes | $4.4 | $9.3 |
| Net income | $5.7; diluted EPS $0.40 | $12.3; diluted EPS $0.70 |
| Operating cash flow | $41.2 | Cash flow statement: $(13.6), restated |
The company recorded a $1.3 million income tax benefit, making net income greater than pretax income. Underwriting income improved to $7.5 million from $5.4 million. The consolidated loss ratio was 51.9%, expense ratio 41.7%, and combined ratio 93.6%, compared with 55.3%, 41.1%, and 96.4%, respectively, in Q1 2017.
At March 31, 2018, total assets were $1.964 billion, total liabilities $1.260 billion, and shareholders’ equity $703.8 million. Cash and cash equivalents were $73.5 million; total investments were $1.479 billion. Debt was $286.6 million, comprising a $64.0 million margin facility and subordinated notes due 2045 and 2047. The filing reports $48.7 million of future investment funding commitments. Cash flow from operations included $45.0 million related to the American Reliable loss-indemnification settlement.
Material changes versus the prior comparable period
- Net income fell 53.6%, with lower earned premiums, higher corporate expenses and interest costs, and a net investment loss. Corporate and other operating expenses rose to $9.3 million from $3.1 million; the increase primarily reflected a $6.25 million accrued Fox Paine advisory fee related to the subsequent co-obligor transaction. Interest expense rose 97% to $4.9 million, primarily reflecting the 2017 debt issuance.
- Net investment income rose 31.9%, but the quarter’s total investment return was negative $6.5 million versus positive $16.4 million a year earlier. Unrealized investment losses were $17.6 million; equity investments contributed a $4.9 million fair-value loss under newly adopted accounting guidance.
- Commercial Lines gross premiums written grew 17.1% and net premiums earned grew 5.3%; underwriting income declined 43.6% to $3.1 million as losses rose. Its combined ratio was 93.4%, versus 87.7%.
- Personal Lines net premiums earned fell 13.7%, but underwriting income improved to $1.3 million from a $3.3 million loss. Its combined ratio improved to 98.4% from 107.8%, helped by lower current-year losses; the expense ratio increased to 43.8%.
- Reinsurance gross premiums written declined 34.8%, in part following cancellation of an affiliated quota-share treaty effective January 1, 2018; net premiums earned increased 5.9%. Its combined ratio was 70.2%, compared with 67.9%.
- The company paid a $0.25-per-share dividend totaling $3.5 million. It received $41.5 million in the final American Reliable reserve settlement. Shareholders’ equity decreased from $718.4 million at year-end, including a $25.5 million decline in accumulated other comprehensive income, partly reflecting investment-market movements and accounting adjustments.
Outlook, commentary, risks, and unusual items
- The filing provides no numerical earnings, premium, or underwriting guidance. Management said Commercial Lines growth reflected rate increases following prior-year catastrophes, new programs, and increased agent engagement. It attributed weaker Personal Lines earned premiums partly to the property-catastrophe quota-share treaty effective April 15, 2017.
- On January 1, 2018, the company adopted guidance requiring most equity investments to be measured at fair value through net income. Adoption shifted $10.0 million, net of tax, from accumulated other comprehensive income to retained earnings. The company also adopted other accounting guidance, including cash-flow classification guidance; the 2017 cash-flow comparison was retrospectively restated.
- On April 25, 2018, an indirect subsidiary became a subordinated co-obligor on the 2045 and 2047 notes. In connection with the transaction, the company issued the subsidiary a $230 million promissory note at 7.825% due in 2047; the subsidiary assigned it against debt owed to U.A.I. (Luxembourg) Investment S.à.r.l. The filing records a $12.5 million estimated Fox Paine advisory fee, with $6.25 million accrued in Q1 and the remainder expected to be recorded in Q2.
- Fox Paine beneficially controlled approximately 82% of voting power and controlled director elections. The company incurred $0.5 million in management fees to Fox Paine during the quarter; unpaid fees were $7.3 million at March 31.
- Key risks include estimation uncertainty in loss reserves and reinsurance recoverables, investment price and interest-rate exposure, and reliance on subsidiary dividends subject to regulatory restrictions. Gross unpaid loss and adjustment expense reserves were $615.1 million, including $434.2 million of IBNR. Q1 favorable prior-year reserve development was $5.9 million, versus $10.1 million in Q1 2017; management cautions actual losses may differ from estimates.
- Fixed maturities had $20.7 million of gross unrealized losses at quarter-end; management stated it did not consider the securities other-than-temporarily impaired. Alternative-investment funding commitments totaled $48.7 million, including $14.2 million for a European non-performing-loan fund and $29.3 million for a distressed-debt fund. The company disclosed potential disputes with reinsurers in runoff; it did not expect pending legal proceedings to have a material adverse effect. Reported risk factors were unchanged from the 2017 Form 10-K.
Important facts for investors to verify
- Cash-flow comparison: The cash flow statement reports Q1 2017 operating cash flow of $(13.6) million, while MD&A cites $(15.3) million and a $56.5 million year-over-year improvement. The filing says the 2017 statement was retrospectively restated for accounting guidance; confirm which comparison is appropriate.
- Earnings drivers: Assess whether premium trends, underwriting results, and investment income can offset the higher corporate and interest costs; distinguish recurring costs from the Q1 advisory accrual.
- Reserve adequacy: Review reserve development by segment and the sensitivity of ultimate claims to frequency and severity assumptions.
- Liquidity and capital: Monitor restricted subsidiary dividends, the margin facility and collateral needs, unfunded investment commitments, and the effects of the co-obligor and intercompany note arrangements.
- Governance and related parties: Review Fox Paine’s voting control, management and advisory fees, and related-party approval and oversight disclosures.