Global Indemnity Limited — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The filing is by Global Indemnity Limited, then a Cayman Islands company; it describes a proposed redomestication under which Global Indemnity Group, LLC would become the publicly listed parent. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net earned premiums | $141.8 | $128.2 | $286.3 | $250.3 |
| Total revenues | $178.8 | $146.1 | $265.4 | $286.3 |
| Net income (loss) | $37.6 | $14.7 | $(7.0) | $34.3 |
| Net income (loss) per diluted share | $2.61 | $1.02 | $(0.49) | $2.39 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $52.4 | $(3.1) |
Q2 total revenue and earnings benefited from $38.5 million of net realized investment gains, compared with $3.6 million a year earlier. Net investment income was a loss of $2.4 million, including a $12.0 million loss from alternative investments. For the first half, net realized investment losses were $29.7 million and net investment income was $7.8 million.
Underwriting improved: the consolidated combined ratio was 85.2% in Q2 versus 94.0% in Q2 2019, and 89.0% for the first half versus 91.4%. Underwriting income was $21.7 million in Q2 and $32.3 million in the first half. These results include favorable prior-year reserve development; see material items below.
At June 30, 2020, total assets were $2,113.1 million, investments $1,535.8 million, cash and cash equivalents $76.4 million, total liabilities $1,378.0 million and shareholders’ equity $735.2 million. Debt was $297.7 million, including a $74.6 million margin borrowing facility and subordinated notes due 2045 and 2047. The filing reports $400.2 million of assets on deposit, held in trust or pledged as collateral.
Changes versus comparable periods
- Q2 gross written premiums fell 8.2% to $164.5 million; first-half gross written premiums were nearly flat at $320.3 million, down 0.4%. First-half net written premiums rose 1.4%, while net earned premiums increased 14.4%.
- Premium trends varied by segment: first-half Commercial Specialty gross written premiums rose 19.0%; Specialty Property fell 15.0%; Farm, Ranch & Stable rose 2.0%; and Reinsurance Operations fell 32.3%. Management attributed declines mainly to reducing catastrophe-exposed or inadequately profitable business and not renewing property catastrophe treaties, partly offset by Commercial Specialty growth, pricing and new programs.
- First-half net income shifted to a $7.0 million loss from $34.3 million profit, chiefly reflecting investment losses. Q2 net income increased year over year, helped by realized investment gains.
- Cash increased to $76.4 million from $44.3 million at year-end 2019. Shareholders’ equity increased to $735.2 million from $726.8 million, including higher accumulated other comprehensive income.
Outlook, management commentary and risks
- COVID-19: Management said effects were difficult to evaluate and could continue indefinitely. Risks include reduced premium volume, delayed or unpaid premiums, increased claims, investment-market volatility, realized losses and reduced investment liquidity. Legislation requiring business-interruption coverage notwithstanding policy terms or virus exclusions could increase exposure. No quantified COVID-19 loss estimate or formal earnings guidance is provided.
- Reserves and catastrophe experience: The company recorded $19.9 million of favorable prior-accident-year reserve development in the first half, primarily in Commercial Specialty and Specialty Property. Current-year catastrophe losses were higher than in the prior-year period; the consolidated first-half current accident-year loss ratio rose to 50.6% from 51.3% overall only after favorable development lowered the calendar-year ratio. Reserve estimates remain sensitive to claim frequency and severity.
- Segment performance: Farm, Ranch & Stable reported a 110.6% Q2 combined ratio and a 101.5% first-half ratio, despite improvement year over year. Commercial Specialty’s Q2 combined ratio improved to 79.4%, in part reflecting favorable reserve development. Reinsurance’s premium mix shifted toward casualty business, which management said has a higher expected loss ratio than property.
- Investments: Management cited disruption in global markets as a driver of realized gains and losses and alternative-investment volatility. The fixed-income portfolio had an AA- average rating and 4.2-year duration; its embedded book yield was 2.5%, down from 3.0% a year earlier. No credit-loss allowance was recorded on available-for-sale fixed maturities at June 30.
- Capital actions: In July, the company elected to redeem the full $100 million principal amount of its 7.75% subordinated notes due 2045 on August 15, 2020, plus accrued interest. It also planned to pay the $74.6 million margin facility balance down to zero in August. The board declared $0.25 per share dividends in each of Q1 and Q2; $7.1 million was paid in the first half.
- Redomestication: The proposed move to the United States required shareholder and regulatory approval; the company anticipated closing around August 28, 2020 if approved and expected no material financial-position impact. The filing notes increased corporate legal and professional expenses associated with the proposal. Fox Paine, the controlling shareholder group, held about 77.5% of voting power; any redomestication advisory fee would be accrued upon consummation, with no amount specified in this filing.
- Other exposures: The company had $31.2 million in future funding commitments to alternative investments. It described ordinary-course litigation and greater potential for disputes with reinsurers in runoff, but did not expect currently pending proceedings to have a material adverse effect. U.S. insurer dividends are subject to regulatory limits; the U.S. insurance subsidiaries paid no dividends in the first half. The company reported no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether the Q2 profit is sustainable apart from investment gains, given the first-half investment loss and volatile alternative-investment results.
- COVID-19-related claim, premium-collection and investment impacts, including any business-interruption legislation or disputes over policy exclusions.
- Whether favorable reserve development continues and how current-year catastrophe experience affects ultimate losses and combined ratios.
- Completion and funding of the planned $100 million note redemption and margin-facility repayment, and resulting cash, debt and liquidity levels.
- Shareholder and regulatory approval and completion of the proposed redomestication, including any advisory fee and the effects of moving the reinsurance business into U.S. subsidiaries.
- Progress on the $31.2 million alternative-investment funding commitments and potential losses or liquidity constraints in those investments.