Global Indemnity Limited — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; audited financial statements cover 2015–2017. The supplied filing is for Global Indemnity Limited, the Cayman Islands parent, rather than an entity named Global Indemnity Group, LLC.
Business context
The company writes specialty property and casualty insurance through Commercial Lines and Personal Lines, and treaty reinsurance through its Bermuda-based Reinsurance Operations. Its A ordinary shares trade on Nasdaq as GBLI.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Gross premiums written | $516.3 million | $565.8 million |
| Net premiums earned | $438.0 million | $468.5 million |
| Total revenues | $485.5 million | $534.5 million |
| Net income (loss) | ($9.6 million) | $49.9 million |
| Net investment income | $39.3 million | $34.0 million |
| Net realized investment gains | $1.6 million | $21.7 million |
| Operating cash flow | ($23.7 million) | ($24.4 million) |
| Investments and cash | $1,533.9 million | $1,501.8 million |
| Total assets | $2,001.7 million | $1,972.9 million |
| Total shareholders’ equity | $718.4 million | $798.0 million |
| Total debt | $294.7 million | $163.1 million |
| Book value per share | $50.57 | $45.42 |
Gross written premiums fell 8.7% and net premiums earned fell 6.5%. The company moved from a $18.2 million underwriting profit to an $8.3 million underwriting loss. Its combined ratio rose to 103.4% from 98.4% (above 100% indicates an underwriting loss); the loss ratio increased to 61.5% from 56.4%, while the expense ratio was broadly flat at 41.9%.
Cash and cash equivalents were $74.4 million at year-end. Investing cash flow was negative $24.2 million and financing cash flow was positive $47.2 million. Management said operating companies and holding companies maintained sufficient liquidity, while noting that the holding company relies on subsidiary distributions and that insurance dividends face regulatory limits.
Changes versus the prior year
- Net loss was driven by weaker underwriting, higher interest expense ($16.9 million versus $8.9 million), lower realized investment gains, and corporate costs that included an $11.0 million advisory fee associated with the share redemption. Net investment income increased 15.7%.
- Personal Lines gross premiums fell 17.6% to $249.8 million; segment underwriting loss widened to $36.6 million, with a 119.8% combined ratio. Commercial Lines gross premiums increased 4.7% to $212.7 million; underwriting income was $40.1 million and the combined ratio was 77.7%. Reinsurance gross premiums fell 9.9% to $53.9 million; underwriting loss was $11.7 million and the combined ratio was 127.6%.
- Prior-year reserve development was favorable by $53.9 million, compared with $57.3 million in 2016. Commercial Lines contributed $39.4 million of the 2017 release; Personal Lines, $6.6 million; and Reinsurance, $7.9 million.
- Shareholders’ equity declined despite an improvement in accumulated other comprehensive income, reflecting the net loss and the $83.0 million share redemption. Debt increased following the March 2017 issuance of $130 million of 7.875% subordinated notes due 2047.
Outlook, risks and unusual items
- Catastrophes: Management estimated $58.7 million of net losses from Hurricanes Harvey, Irma and Maria and California wildfires; it cautioned that actual losses could differ materially. Insurance Operations reported $61.1 million of current-accident-year catastrophe losses. The filing provides no earnings guidance.
- Reinsurance and tax: The company agreed to terminate its intercompany quota-share arrangement effective January 1, 2018 because premiums ceded could be subject to the new 10% base erosion minimum tax (BEAT); regulatory approval was pending. Termination could increase U.S. subsidiaries’ capital needs. The company was still assessing the broader effects of the Tax Cuts and Jobs Act (TCJA).
- Tax charge: The TCJA reduced the U.S. corporate rate and resulted in a provisional $17.5 million deferred-tax expense; a $18.4 million tax benefit, primarily related to increased U.S. operating losses, more than offset it in the reported tax result. Estimates could be revised as guidance became available.
- Reserves: Net loss reserves were $537.4 million. Estimates are inherently uncertain, particularly for long-tail liability, construction-defect, asbestos and environmental claims. Net asbestos and environmental reserves were $15.8 million and $14.3 million, respectively.
- Investments and commitments: Investments included $140.2 million of common stock and $77.8 million in less-liquid partnerships. Future partnership funding commitments totaled $57.7 million. Investment values, interest rates, credit quality and liquidity may affect results.
- Capital returns and related parties: The company announced an anticipated dividend of $0.25 per share quarterly, subject to Board approval and available funds. A $0.25 dividend was approved after year-end for payment in March 2018. Fox Paine beneficially controlled approximately 83% of voting power; the company also paid it the $11.0 million advisory fee and incurred management fees.
- Subsequent settlement: In March 2018, the company finalized the American Reliable purchase-price and reserve calculation, with $41.5 million due to Global Indemnity Group, Inc.; the filing says the amounts were recorded in year-end other assets.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls; management reported no material weakness in internal control over financial reporting at year-end.
Important facts for investors to verify
- Whether 2017 catastrophe estimates and reserve releases prove adequate as claims mature, especially for long-tail and construction-defect exposures.
- Approval and financial effects of the quota-share termination, including resulting statutory capital requirements and any BEAT exposure.
- Cash generation, debt-service capacity, and the ability of regulated subsidiaries to fund the announced dividend and other holding-company needs.
- Realizability and liquidity of partnership investments, remaining funding commitments, and exposure to reinsurer nonpayment.
- The final accounting and cash receipt for the $41.5 million American Reliable settlement, and the terms and governance of Fox Paine-related fees and control.