Global Indemnity Limited — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited consolidated U.S. GAAP results. The company writes specialty property and casualty insurance and reinsurance through Commercial Lines, Personal Lines, and Reinsurance Operations.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Gross premiums written | $143.9m | $154.3m | $267.6m | $295.7m |
| Net premiums earned | $107.1m | $117.8m | $220.2m | $239.4m |
| Total revenues | $117.0m | $121.7m | $240.9m | $246.5m |
| Net income (loss) | $10.1m | $(5.2)m | $22.4m | $2.0m |
| Diluted earnings (loss) per share | $0.57 | $(0.30) | $1.27 | $0.11 |
| Combined ratio | 94.5% | 107.5% | 95.5% | 101.7% |
| Net investment income | $8.8m | $6.6m | $17.5m | $16.3m |
Amounts are rounded. The combined ratio improved year over year, indicating underwriting profitability overall. The Q2 loss ratio was 53.9% versus 66.3%, and the expense ratio was 40.6% versus 41.2%. Q2 underwriting income was $7.7m, compared with an $8.1m underwriting loss in 2016.
Balance sheet, debt and cash flow
- At June 30, total assets were $2.104bn, total liabilities $1.277bn, and shareholders’ equity $827.7m. Investments were $1.542bn and cash and cash equivalents $96.5m.
- Debt was $296.2m, up from $163.1m at December 31, 2016, mainly reflecting the March issuance of $130m of 7.875% subordinated notes due 2047. Existing subordinated notes carry a 7.75% coupon and mature in 2045; the margin borrowing facility was $73.9m. Six-month interest expense increased to $7.2m from $4.4m.
- Six-month operating cash flow was negative $5.2m, versus positive $4.0m in 2016. Investing activities used $105.3m; financing activities provided $131.8m. Cash increased $21.4m to $96.5m.
- Gross unpaid losses and loss adjustment expenses were $615.8m; net reserves were $511.5m. The company reported $60.9m in future funding commitments for limited partnership investments.
Changes and business drivers
- Six-month gross premiums written fell 9.5%; net premiums earned fell 8.0%. Management attributed lower premium volume principally to discontinuing an unprofitable Commercial Lines program, reducing catastrophe-exposed Personal Lines business, and underwriting actions to improve Personal Lines profitability. A new Commercial Lines program and a new Reinsurance mortgage treaty partly offset declines.
- Personal Lines remained unprofitable: its combined ratio was 115.1% for Q2 and 111.4% for the six months. Commercial Lines’ combined ratio improved to 74.3% for Q2 and 81.1% for the six months; Reinsurance Operations recorded 73.5% and 70.7%, respectively.
- Prior-year reserve releases materially benefited results: $15.3m in Q2 and $25.4m for the first six months of 2017, primarily in Commercial Lines, with additional releases in Personal Lines and Reinsurance. Current-year loss costs differed by segment: Personal Lines’ six-month loss ratio worsened, while Commercial Lines’ and Reinsurance results reflected different catastrophe experience and business mix.
- Net realized investment losses were $0.7m in Q2, versus $3.5m in Q2 2016; the six-month period recorded a $0.1m gain versus an $11.0m loss in 2016, when derivative losses were substantially higher. Q2 net investment income benefited from higher fixed-maturity yields and lower investment expenses, including the absence of $1.5m of prior-year upfront investment fees.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or premium guidance. Management stated that Global Indemnity Reinsurance, including potential subsidiary distributions, should have sufficient liquidity and solvency to pay dividends in 2017.
- Effective April 15, 2017, the company began ceding 50% of covered property catastrophe losses above $3m up to $40m per occurrence, subject to a $60m aggregate limit; the treaty expires June 1, 2018.
- Liquidity depends partly on subsidiary dividends, which are subject to insurance-regulatory restrictions. Certain subsidiary dividends had been declared but not paid at quarter-end. The company also had a potential share-redemption right acquired in 2015 for $78.1m, subject to a 3% annual increase and expiring December 31, 2019.
- Investment-related risks include $72.3m in limited partnerships, $60.9m of associated unfunded commitments, and maximum stated exposure of $50.0m to the new distressed-debt VIE, including future funding. Investments are also exposed to market, interest-rate, credit, and liquidity risk; interest-rate swaps had a $11.2m fair-value liability.
- Management highlighted uncertainty in reserve estimates, especially loss severity, and recoverability of reinsurance. It reported monitoring reinsurers in runoff; ordinary-course litigation is expected, but management did not expect pending proceedings to have a material adverse effect. Risk factors were reported as not materially changed from prior filings.
- Fox Paine beneficially held approximately 84% of voting power and controlled director elections. The company also disclosed August 8, 2017 executive agreement amendments providing for vesting of specified unvested shares upon a qualifying change in control.
Most important facts for investors to verify
- How sustainable are the favorable prior-year reserve releases, and how sensitive are current reserves to claims frequency and severity?
- Can Personal Lines improve from its combined ratio above 100%, while premium volume is being reduced through underwriting actions?
- How do the new catastrophe quota-share treaty and other reinsurance arrangements affect retained losses, premiums, and future results?
- What are the timing and liquidity implications of the $60.9m investment commitments, share-redemption right, debt service, and restricted subsidiary dividends?
- Are investment valuations and potential losses in limited partnerships and VIEs consistent with the stated exposure limits and assumptions?