Global Indemnity Group, LLC — 2022 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement figures are converted to millions unless stated otherwise.
Business context
The company provides specialty property and casualty insurance and reinsurance. Its reportable segments are Commercial Specialty, Reinsurance Operations, and Exited Lines, which includes runoff and discontinued lines. The company sold Farm, Ranch & Stable renewal rights in August 2022 and is also pursuing the sale of American Reliable Insurance Company.
Financial and operating results
- Third quarter: Net earned premiums were $153.6 million, down 2.5% year over year. Total reported revenue was $194.6 million, including $30.0 million of Farm, Ranch & Stable renewal-rights proceeds recorded in other income. Net income was $23.7 million, or $1.62 per basic share, versus a $7.7 million net loss, or $0.54 per share, in Q3 2021.
- First nine months: Net earned premiums were $458.2 million, up 1.7%; total reported revenue was $472.9 million, down 3.3%. The company recorded a $3.2 million net loss, or $0.24 per share, compared with $4.2 million net income, or $0.27 per share, in 2021.
- Premium trends: Nine-month gross written premiums rose 9.8% to $563.6 million, while net written premiums were essentially flat at $469.5 million. Continuing-line gross premiums increased 23.0%, with growth in Commercial Specialty and Reinsurance Operations; Exited Lines gross premiums fell 21.8%. Higher ceded premiums, particularly for Exited Lines, reduced retention.
- Underwriting: The consolidated combined ratio improved to 97.2% in Q3 from 106.9%, and to 97.0% for nine months from 102.5%. A ratio below 100% indicates underwriting profit. Nine-month segment combined ratios were 96.0% for Commercial Specialty, 95.6% for Reinsurance Operations, and 103.9% for Exited Lines.
- Investment results: Net investment income was $8.4 million in Q3, down 10.2%, and $16.9 million for nine months, down 43.3%. Nine-month net realized investment losses were $33.1 million, including $26.2 million of impairments on securities identified for sale. Total pre-tax investment return was negative $80.5 million for nine months, versus positive $13.4 million in 2021. Rising rates drove substantial unrealized losses: accumulated other comprehensive loss was $45.3 million at September 30, compared with $6.4 million of income at year-end 2021.
- Cash flow and liquidity: Operating cash flow was $41.7 million for nine months, down from $66.1 million. Cash and equivalents were $18.9 million, versus $78.3 million at year-end 2021; total investments were $1.337 billion. The company reported $1.879 billion of assets and $643.6 million of shareholders’ equity.
- Debt: The company redeemed its $130 million 7.875% subordinated notes in April 2022. Debt was zero at September 30; the redemption generated a $3.5 million extinguishment loss and reduced interest expense.
- Reserves: Gross unpaid losses and loss adjustment expenses were $825.6 million; net reserves were $729.7 million. Prior-year reserve development was favorable by $9.6 million for the first nine months. Management estimated Hurricane Ian losses at $1.5 million for the quarter and nine-month period.
Material changes, outlook, and risks
- In August, the company sold Farm, Ranch & Stable renewal rights for $30 million and retained unearned premium reserves on pre-sale business. Everett Cash Mutual is also expected to acquire American Reliable for book value, estimated at $10 million; that part of the transaction was subject to regulatory approval, expected in Q4 2022. The company recorded $9.2 million of related impairments and transaction expenses.
- Management shortened fixed-income portfolio duration in response to rising interest rates, identifying securities with weighted-average lives of five years or more for sale and reinvesting most proceeds in securities maturing within two years. The portfolio’s average rating was A+ and duration 1.7 years at quarter-end. The company also received $99.6 million from withdrawal of its Credit Fund investment and reinvested the proceeds in shorter-term fixed income.
- No specific financial guidance was provided. Management cited premium growth in continuing businesses, pricing increases, new programs, and organic casualty treaty growth. It also described underwriting actions to avoid underperforming Commercial Specialty business and continued runoff of exited lines.
- Subsequent to quarter-end, the CEO and COO departed and Joseph W. Brown was appointed CEO. The company estimated reversal of approximately $4 million in accrued compensation expense in Q4. The board authorized repurchases of up to $32 million of Class A shares, beginning in Q4; the authorization does not require purchases.
- Key exposures include uncertainty in loss-reserve estimates and claims severity, catastrophe losses, reinsurance recoverability and disputes with reinsurers in runoff, interest-rate and investment-market volatility, and possible COVID-related business-interruption coverage obligations. Insurer dividends are subject to regulatory limits; the parent depends on subsidiary distributions for liquidity. The filing reported no material expected adverse effect from pending legal proceedings and stated disclosure controls were effective.
Important facts for investors to verify
- Whether regulatory approval and closing of the American Reliable sale occurred, and whether the expected $10 million book-value consideration was realized.
- How reserve estimates develop, especially catastrophe and casualty claims, and whether the $1.5 million Hurricane Ian estimate changes.
- Whether investment losses and unrealized marks stabilize, and how shorter portfolio duration affects future investment income and liquidity.
- Whether cash, permitted subsidiary dividends, and operating cash flows are sufficient to support claims, distributions, and any share repurchases.
- Execution and costs of the Farm, Ranch & Stable runoff, including the recorded impairments and expected compensation reversal following leadership changes.