Global Indemnity Limited — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; includes fourth-quarter results. The filing registrant is Global Indemnity Limited, notwithstanding the company name in the request metadata. The company writes specialty commercial and personal property-and-casualty insurance and treaty reinsurance.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Gross premiums written | $547.9 million | $516.3 million |
| Net premiums written | $472.5 million | $450.2 million |
| Net premiums earned | $467.8 million | $438.0 million |
| Total revenues | $498.9 million | $485.5 million |
| Net income (loss) | $(56.7) million | $(9.6) million |
| Net income (loss) per diluted share | $(4.02) | $(0.55) |
| Net cash from operating activities | $42.1 million | $(18.9) million |
| Total assets | $1.960 billion | $2.002 billion |
| Shareholders’ equity | $629.1 million | $718.4 million |
- Underwriting: Consolidated loss ratio was 71.5%, expense ratio 40.8%, and combined ratio 112.3%, versus 61.5%, 41.9%, and 103.4% in 2017. A combined ratio above 100% indicates an underwriting loss. The 2018 loss ratio included $28.8 million of favorable prior-year reserve development; 2017 included $53.9 million.
- Investment performance: Net investment income rose 17.8% to $46.3 million, while net realized investment losses were $16.9 million, compared with $1.6 million of gains in 2017. The fixed-maturity portfolio had a $22.7 million pretax unrealized loss at year-end. Adoption of new equity-investment accounting contributed a $22.0 million loss from fair-value changes in equity securities.
- Liquidity and capital: Investments and cash totaled $1.510 billion, including $99.5 million of cash and cash equivalents. Net reinsurance receivables were $114.4 million before collateral; net of collateral, they were $103.1 million. The company reported $288.6 million of debt carrying value: $65.8 million under a demand, variable-rate margin facility and $230 million principal of subordinated notes bearing 7.75% and 7.875% interest. Book value was $44.21 per share.
- Cash flow: Operating cash flow improved by about $61.0 million year over year, including a $41.5 million recovery tied to the American Reliable acquisition’s loss indemnification settlement. This recovery is a notable contributor to 2018 cash generation.
Material changes versus 2017
- Gross premiums written increased 6.1%, led by Commercial Lines growth of 17.5%; Personal Lines gross premiums were essentially flat, while Reinsurance Operations premiums declined 10.8%.
- The underwriting loss widened to $55.9 million from $8.3 million. Net losses and loss adjustment expenses increased 24.3% to $334.6 million, and the combined ratio deteriorated 8.9 percentage points.
- Personal Lines recorded a 125.9% combined ratio, versus 119.8%; Reinsurance Operations recorded 144.2%, versus 127.6%. Commercial Lines remained profitable on underwriting, with a 92.4% combined ratio, but that ratio worsened from 77.7%.
- Catastrophe claims affected Personal Lines and Reinsurance Operations, including the California Carr and Camp wildfires and Hurricane Michael, as well as other 2018 events. Management said it was taking steps to reduce California property exposure.
- The company terminated its 40% affiliated quota-share arrangement between Reinsurance Operations and U.S. insurance subsidiaries effective January 1, 2018, citing potential base-erosion tax exposure under the Tax Cuts and Jobs Act. This changed premium retention and statutory capital requirements.
- Shareholders’ equity declined by $89.3 million. The company began paying quarterly dividends of $0.25 per share in 2018, totaling $1.00 per share for the year.
Outlook, risks, and unusual items
- The filing provides no quantified earnings or premium guidance. Management described liquidity as sufficient to meet capital needs and anticipated a $0.25 quarterly dividend, subject to Board decisions; a March 2019 quarterly dividend was subsequently approved.
- Key risks include catastrophe severity and concentration, uncertainty in long-tail and prior-year loss reserves, reinsurance collectability and availability, investment-market and interest-rate volatility, and limited liquidity in certain partnership investments. The company had $34.7 million in future investment-funding commitments.
- Net reserves for asbestos and environmental claims were $29.5 million at year-end; construction-defect net reserves were $39.3 million. Management noted significant estimation uncertainty for these exposures and other long-tail claims.
- The demand margin facility is secured by securities and carries a variable rate; a market decline could trigger a collateral call. The subordinated notes are long-dated and structurally subordinated to liabilities of subsidiaries.
- Dividend capacity depends on regulated subsidiaries. U.S. insurance subsidiaries’ statutory capital and surplus fell to $225.6 million from $274.6 million, though the filing says they remained above prescribed risk-based capital requirements. Certain regulatory ratios were outside usual ranges, attributed principally to catastrophe losses, the quota-share termination, and affiliate transactions.
- Fox Paine-affiliated funds controlled approximately 81% of voting power. Related-party fees included a $12.5 million 2018 advisory fee for the co-obligor transaction and an annual management fee; review the related-party disclosures and governance implications.
- Fourth-quarter 2018 net loss was $73.3 million, versus a $23.0 million loss in fourth-quarter 2017. Fourth-quarter realized investment losses were $24.7 million, and losses and loss adjustment expenses were $139.2 million.
- Ernst & Young issued an unqualified opinion on the financial statements and internal control over financial reporting; management reported no material weaknesses.
Important facts for investors to verify
- How much of the 2018 loss and deterioration in combined ratio reflects catastrophe claims versus underlying non-catastrophe trends, particularly in Personal Lines and Reinsurance Operations.
- Whether favorable prior-year reserve development continues to moderate, and how reserve estimates compare with later claims experience and independent actuarial analyses.
- The collectability, collateralization, and concentration of reinsurance receivables, including the exposure to Munich Re and the adequacy of the $8.0 million allowance.
- The company’s post-quota-share risk retention, statutory capital position, and ability to upstream dividends while maintaining regulatory requirements.
- The sustainability of operating cash flow excluding the $41.5 million American Reliable indemnification recovery, and the funding of investment commitments and shareholder dividends.
- The sensitivity of earnings, equity, and liquidity to further equity-market declines, higher interest rates, and potential margin calls.