Global Indemnity Group, LLC quarterly report, Q3 FY2018

Global Indemnity Limited — 2018 Q3 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2018; comparative periods are the same periods in 2017. The filing identifies the registrant as Global Indemnity Limited, not Global Indemnity Group, LLC. The company writes specialty commercial and personal property-and-casualty insurance and reinsurance.

Financial performance and position

MetricQ3 2018Q3 2017Nine months 2018Nine months 2017
Gross premiums written$135.6 million$126.1 million$418.7 million$393.7 million
Net premiums earned$120.5 million$108.6 million$342.4 million$328.8 million
GAAP total revenues$138.0 million$120.1 million$385.7 million$361.0 million
Income before income taxes$0.4 million$(16.8) million$10.7 million$0.3 million
Net income (loss)$3.7 million$(8.9) million$16.6 million$13.4 million
Net investment income$11.8 million$10.1 million$34.1 million$27.6 million
Net cash from operating activitiesNot presented by quarterNot presented by quarter$45.9 million$(11.2) million

Amounts are in U.S. dollars. Q3 net margin was approximately 2.7% of GAAP revenue; nine-month net margin was approximately 4.3%. The consolidated combined ratio was 107.2% in Q3 versus 117.3% a year earlier, and 98.3% for nine months versus 102.7%. A ratio above 100% indicates underwriting losses before investment results and other items.

At September 30, 2018, total assets were $1.958 billion, shareholders’ equity $702.3 million, cash and equivalents $40.6 million, investments $1.497 billion, and debt $282.1 million. Debt comprised $59.4 million under a margin borrowing facility and subordinated notes due 2045 and 2047. Cash declined from $74.4 million at year-end 2017. The company reported $45.9 million of operating cash generation for the nine months, including a $41.5 million recovery related to the American Reliable purchase indemnification. Investing used $54.5 million and financing used $25.1 million.

Changes versus comparable periods

  • Q3 gross premiums written rose 7.6%; net premiums earned rose 11.0%. For nine months, the respective increases were 6.3% and 4.1%.
  • Commercial Lines drove premium growth: gross written premiums increased 18.9% in Q3 and 20.0% year to date, principally from rate increases, new programs and greater agent activity. Personal Lines earned premiums fell 2.7% in Q3 and 7.8% year to date; Reinsurance written premiums declined, including following a treaty non-renewal.
  • Q3 net income improved from a prior-year loss. Nine-month net income rose 23.6%, while pre-tax income increased to $10.7 million from $0.3 million.
  • Favorable prior-year reserve development was $12.0 million in Q3 2018 and $27.5 million in the first nine months, compared with $9.4 million and $34.8 million in the respective 2017 periods. This development supported reported loss ratios.
  • Net realized investment gains were $5.3 million in Q3 and $7.8 million year to date, versus a Q3 loss of $1.0 million and a nine-month loss of $0.9 million in 2017. Nine-month investment results also included $25.8 million of pre-tax unrealized losses; comprehensive income was negative $6.2 million.
  • Corporate and other operating expense increased to $23.7 million for nine months from $11.0 million, primarily due to a $12.5 million advisory fee paid to Fox Paine for the subordinated-note co-obligor transaction. Interest expense rose 22.0% year to date, principally reflecting the 2017 debt offering.

Management commentary, outlook and risks

  • No quantitative earnings or premium guidance is provided. Management describes growth opportunities in specialty insurance and selective reinsurance but states results depend on market conditions, underwriting experience and investment performance.
  • Q3 catastrophe experience included California wildfire, Arizona monsoon and Hurricane Florence losses in Personal Lines. Management reported lower catastrophe losses than the prior-year period in Commercial Lines; prior-year reinsurance results had been affected by Hurricanes Harvey, Irma and Maria.
  • Gross unpaid losses and loss adjustment expenses were $608.6 million, with net reserves of $522.3 million. Reserve estimates depend on actuarial assumptions and actual claims frequency and severity; management’s sensitivity analysis shows that changes in either can materially affect estimated current-year losses.
  • At quarter-end, fixed maturities had $26.9 million of gross unrealized losses, compared with $6.2 million at December 31, 2017. Management attributed most long-standing losses to non-credit factors and said it did not expect to be forced to sell affected securities before recovery; this assessment remains subject to market and credit risk.
  • Investment liquidity includes restrictions: $406.3 million of securities and cash were on deposit, in trusts, or held as collateral. The company also had approximately $39.9 million in future investment funding commitments. Subsidiary dividends are subject to insurance-regulatory limits.
  • Legal proceedings arise in the ordinary course; management does not expect currently pending matters to have a material adverse effect. The filing notes potential disputes with reinsurers in runoff. It reports no material change to the risk factors in the 2017 Form 10-K and no off-balance-sheet arrangements.
  • Fox Paine beneficially owned approximately 82% of voting power and controlled director elections. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Other notable items: The company adopted accounting guidance requiring fair-value changes in most equity investments to be recognized in earnings; adoption included a $10.0 million net-of-tax transfer from accumulated other comprehensive income to retained earnings. The board approved dividends of $0.25 per share each quarter; the September dividend was paid October 1, 2018. The reported nine-month tax benefit reflects the U.S. statutory rate reduction to 21%, and tax estimates related to the Tax Cuts and Jobs Act were provisional.

Important facts for investors to verify

  • How much of earnings and underwriting improvement is repeatable without favorable prior-year reserve releases, realized investment gains, or the American Reliable indemnification cash recovery?
  • Whether catastrophe losses, particularly in Personal Lines, and future reserve development align with current assumptions and the disclosed reserve sensitivity.
  • The credit quality, liquidity and valuation exposure of the investment portfolio, including unrealized fixed-income losses, alternative investments and funding commitments.
  • How the $12.5 million related-party advisory fee and Fox Paine’s controlling voting position affect governance, costs and capital allocation.
  • The ability of subsidiaries to upstream dividends, meet claims and funding needs, and service debt, given regulatory restrictions, collateral requirements and the decline in cash.