Global Indemnity Group, LLC — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company writes specialty property and casualty insurance and reinsurance through four segments: Commercial Specialty, Specialty Property, Farm, Ranch & Stable, and Reinsurance Operations. On August 28, 2020, it completed a redomestication, replacing its Cayman Islands parent with a Delaware LLC.
Key financial results
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenues | $159.9 | $142.2 | $425.3 | $428.6 |
| Net earned premiums | $140.3 | $133.3 | $426.6 | $383.6 |
| Net investment income | $11.7 | $11.3 | $19.5 | $32.4 |
| Net realized investment gains (losses) | $7.3 | $(2.7) | $(22.3) | $11.3 |
| Net income (loss) | $(15.2) | $6.7 | $(22.2) | $41.0 |
| Basic earnings (loss) per share | $(1.06) | $0.47 | $(1.56) | $2.89 |
| Combined ratio | 107.2% | 95.2% | 95.0% | 92.8% |
- Underwriting and premiums: Underwriting result was a $9.5 million loss in Q3, versus $6.6 million income a year earlier; nine-month underwriting income was $22.8 million versus $29.3 million. Gross written premiums declined 8.5% in Q3 and 3.1% year to date. Lower catastrophe-exposed business, reduced or non-renewed reinsurance property catastrophe treaties, and slower new business growth contributed to the decline; Commercial Specialty growth and pricing increases partly offset it.
- Claims and margins: The Q3 loss ratio rose to 69.2% from 55.2%, and the combined ratio exceeded 100%, indicating an underwriting loss before investment and other items. Higher catastrophe losses were a major factor. The company cited Hurricane Laura in Specialty Property and the Midwest Derecho in Farm, Ranch & Stable. Prior-year reserve releases were $11.7 million in Q3 and $31.6 million for the first nine months; these releases benefited reported results.
- Investments: Nine-month net investment income fell 39.8%, and realized investment results swung to a $22.3 million loss from an $11.3 million gain. Management attributed results primarily to market disruption affecting equities and derivatives and weak alternative-investment returns earlier in 2020. Total investment return was $19.4 million, compared with $97.1 million in 2019.
- Cash flow: Operating cash flow was $33.9 million for the first nine months, down from $45.9 million. Investing activities provided $139.5 million and financing activities used $180.5 million. Cash and cash equivalents were $37.2 million at quarter-end, compared with $44.3 million at year-end 2019.
- Balance sheet and debt: At September 30, total assets were $1.940 billion, investments $1.417 billion, total liabilities $1.219 billion, and shareholders’ equity $720.7 million. Debt fell to $126.3 million from $296.6 million at year-end: the company repaid its margin borrowing facility and redeemed $100 million of 7.75% subordinated notes due 2045. The redemption generated a $3.1 million extinguishment loss. Remaining debt is principally $130 million principal amount of 7.875% subordinated notes due 2047.
Material changes and company developments
- Corporate and other operating expenses rose to $21.2 million in Q3 from $3.9 million and to $34.0 million for nine months from $11.7 million. The increase primarily reflected a $10 million redomestication advisory fee and higher legal and professional costs.
- The company issued $4 million of Series A preferred shares to a Fox Paine affiliate. Common shareholders received $0.25 per share in dividends or distributions each quarter; $10.7 million was paid during the first nine months.
- A.M. Best assigned the Insurance Operations and Reinsurance Operations an “A” (Excellent) financial strength rating on September 23, 2020.
- The investment portfolio’s fixed-income holdings had an AA- average rating and a 4.2-year duration. The filing reports no allowance for credit losses on investments at September 30, 2020.
Outlook, risks and contingencies
- No quantified financial guidance is provided. Management said COVID-19 impacts remained difficult to assess and could affect future premium volume, collections, claims, investment values, and portfolio liquidity.
- The company warned that legislation could require coverage of business-interruption claims despite policy terms or virus exclusions. Such a change could increase claims and pressure liquidity.
- Insurance reserves depend on estimates of claim frequency and severity; actual outcomes may differ. Reinsurance recoverables, including amounts involving reinsurers in runoff, are also a risk. Management did not expect currently pending legal proceedings to have a material adverse effect.
- Future funding commitments for alternative investments totaled $31.2 million; management said a capital call was considered unlikely because the investments were in their harvest period. Some limited-partnership interests cannot be sold or redeemed at the company’s discretion.
- The Delaware LLC is generally treated as a partnership for U.S. federal tax purposes if it continues to meet applicable requirements. Common shareholders may owe tax on allocated income whether or not they receive matching cash distributions, and may receive Schedule K-1 tax forms.
- Fox Paine entities held approximately 77.5% of total voting power and control director elections. The company also relies on Fox Paine for management services. The $10 million redomestication advisory fee was approved by the Conflicts Committee.
Most important facts for investors to verify
- Whether catastrophe losses, especially from Hurricane Laura and the Midwest Derecho, and the elevated Q3 combined ratio persist or normalize.
- Whether favorable prior-year reserve development continues, and how actual claim experience compares with management’s reserve assumptions.
- How COVID-19 affects premiums, claims, collections, investment liquidity, and any potential legislation on business-interruption coverage.
- Whether investment losses and reduced investment income continue, including performance and liquidity of alternative investments and derivatives.
- The terms and implications of the redomestication, partnership tax treatment and K-1 reporting, preferred-share rights, and related-party fees and governance control.
- The sustainability of common distributions given cash flow, regulatory limits on insurance-subsidiary dividends, and remaining debt and investment funding commitments.