Global Indemnity Limited — Q1 2017 Form 10-Q
Reporting period: Quarter ended March 31, 2017; unaudited consolidated results, compared with the quarter ended March 31, 2016. The registrant is Global Indemnity Limited, an insurance and reinsurance group with Commercial Lines, Personal Lines, and Reinsurance Operations.
Financial results and position
Unless otherwise noted, amounts below are in millions of dollars. The statements report in thousands.
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Gross premiums written | $123.8 | $141.4 |
| Net premiums written | $111.5 | $116.9 |
| Net premiums earned | $113.1 | $121.6 |
| Total revenues, including investment income and realized gains | $123.9 | $124.8 |
| Income before tax | $9.3 | $2.0 |
| Net income | $12.3 | $7.1 |
| Basic / diluted earnings per share | $0.71 / $0.70 | $0.41 / $0.41 |
| Net investment income | $8.6 | $9.7 |
| Operating cash flow | $(15.3) | $(10.3) |
- Net income rose 72.4%, despite lower earned premiums and investment income. The comparison benefited from a $7.5 million net realized investment loss in Q1 2016, principally related to interest-rate swaps, versus a $0.8 million gain in Q1 2017. Q1 2017 also included a $3.0 million income-tax benefit; the prior-year benefit was $5.2 million.
- Combined ratio was 96.4% versus 96.1%; underwriting income was $5.4 million versus $5.7 million. The overall loss ratio increased to 55.3% from 53.3%, while the expense ratio improved to 41.1% from 42.8%.
- By segment, combined ratios were 87.7% for Commercial Lines (97.9% prior year), 107.8% for Personal Lines (98.9%), and 67.9% for Reinsurance (74.4%). Personal Lines reported a $3.3 million underwriting loss; Commercial Lines earned $5.5 million and Reinsurance $3.1 million.
- At March 31, total assets were $2,072.4 million, cash and cash equivalents $127.5 million, investments $1,502.7 million, total liabilities $1,257.2 million, and shareholders’ equity $815.2 million. At December 31, 2016, these were $1,972.9 million, $75.1 million, $1,426.7 million, $1,175.0 million, and $798.0 million, respectively.
- Debt increased to $296.5 million from $163.1 million, primarily after issuance of $130 million of 7.875% subordinated notes due 2047. The existing $100 million subordinated notes due 2045 bear 7.75%; debt also includes a $74.1 million margin borrowing facility. Interest expense rose 11.4% to $2.5 million.
- Cash increased by $52.4 million during the quarter, as $132.1 million of financing inflows—principally the notes offering—more than offset $15.3 million of operating and $64.4 million of investing cash outflows. The filing attributes negative operating cash flow in part to timing of premiums, claims, and reinsurance settlements.
Changes, commentary, and outlook
- Gross written premiums fell 12.5%; excluding American Reliable business ceded under a 100% quota-share agreement, the decline was 4.1%. Management attributed the reduction to discontinuing an unprofitable Commercial Lines program, reducing catastrophe-exposed Personal Lines business, and lower Reinsurance property writings. Reinsurance gross premiums written nevertheless rose 24.2%, including $4.9 million from a new mortgage insurance treaty expected to earn over eight years.
- Prior-year reserves were reduced by $10.1 million, increasing reported underwriting results: $5.3 million in Commercial Lines, $3.2 million in Personal Lines, and $1.7 million in Reinsurance. Meanwhile, the current-year catastrophe loss ratio in Personal Lines rose to 23.0% from 10.2%, attributed primarily to convective storms and agriculture losses. Reinsurance also reported higher current-year catastrophe activity, including U.S. storms and Cyclone Debbie in Australia.
- Management reported a 55.3% average rating and 2.1-year duration for the investment-grade fixed-income portfolio, and described its credit quality as high. Net unrealized investment gains contributed to comprehensive income of $17.2 million, versus $16.3 million in Q1 2016.
- Effective April 15, 2017, the company entered a treaty ceding 50% of property catastrophe losses for single occurrences above $3 million, subject to a $20 million occurrence limit and $60 million aggregate limit, through June 1, 2018. In April, it also committed $50 million to a stressed- and distressed-debt investment vehicle; $16.5 million was funded by May 5, leaving $33.5 million unfunded.
- Existing limited-partnership funding commitments were $24.8 million at March 31. The filing also identifies a share-redemption right covering up to approximately 3.4 million shares for $78.1 million, subject to a 3% annual increase and expiring December 31, 2019.
- Management said Global Indemnity Reinsurance was expected to have sufficient liquidity and solvency to pay dividends in 2017. U.S. insurance-subsidiary dividends are subject to statutory restrictions and regulatory approval limits. No formal earnings or premium guidance is provided.
Risks, contingencies, and unusual items
- Reserve estimates depend on claim frequency and severity, and actual losses may differ from management’s estimates. Reinsurance recoverability and disputes with reinsurers in runoff are also monitored risks.
- The company’s subordinated notes increase debt-service obligations and may constrain financial flexibility. The new notes are subordinated, do not require specified financial ratios or liquidity levels, and permit additional indebtedness; the filing adds indebtedness as a risk factor.
- Investment risks include interest-rate and market movements, unrealized losses, and illiquidity or funding exposure in alternative investments. The company disclosed maximum loss exposure of $46.0 million and $43.0 million for two variable-interest-entity investments, including future funding commitments.
- The company stated that pending legal proceedings were not expected to have a material adverse effect, while noting ordinary-course litigation and arbitration risks and potential disputes with runoff reinsurers. No off-balance-sheet arrangements were reported.
- Management concluded disclosure controls and procedures were effective as of March 31, 2017; no material change in internal control over financial reporting was reported. The segment composition changed slightly in Q1 2017, and Q1 2016 segment results were revised for comparison.
Important facts for investors to verify
- Whether the favorable $10.1 million prior-year reserve development is sustainable, and how current-year catastrophe and Personal Lines loss experience develops.
- Premium trends by segment, particularly the contraction in Personal Lines and the expected contribution and earning pattern of the new mortgage insurance treaty.
- Debt-service capacity following the $130 million subordinated-note issuance, including the margin facility, and the effect of restricted subsidiary dividends on parent-company liquidity.
- Funding timing and downside exposure for the existing $24.8 million investment commitments and the additional $50 million distressed-debt commitment.
- Investment portfolio performance, unrealized losses, and the valuation, liquidity, and credit risks of alternative and reinsurance-related exposures.