International General Insurance Holdings Ltd. annual report, Q4 FY2021

International General Insurance Holdings Ltd. — FY2021 Form 20-F Summary

Business context and reporting period

Annual report on Form 20-F for the fiscal year ended December 31, 2021, filed April 1, 2022. IGI is a Bermuda holding company and global specialty insurance and reinsurance group operating in more than 200 countries and territories. Its principal segments are Specialty Long-tail, Specialty Short-tail and Reinsurance. Financial statements are prepared under IFRS as issued by the IASB.

IGI acquired its Malta insurance subsidiary in June 2021 to preserve access to European Economic Area business following Brexit. Management also states that the Group intends to transition from IFRS to U.S. GAAP effective January 1, 2023.

Key financial metrics

Metric	2021	2020	Change
Gross written premiums	$545.6 million	$467.3 million	+16.8%
Net written premiums	$382.6 million	$338.4 million	+13.1%
Net premiums earned	$345.2 million	$283.5 million	+21.8%
Net underwriting results	$105.8 million	$77.4 million	+36.7%
Profit before tax	$45.4 million	$29.3 million	+54.8%
Net profit	$43.7 million	$27.3 million	+60.3%
Basic and diluted EPS	$0.89	$0.59	+50.8%
Shareholders’ equity	$401.9 million	$381.0 million	+5.5%

Net claims and claim adjustment expenses were $176.2 million, with a 51.0% claims ratio versus 53.5% in 2020.
Net policy acquisition expenses were $63.2 million, representing an 18.3% ratio versus 19.2% in 2020. The implied underwriting expense ratio was approximately 69.3%, and the implied underwriting margin was approximately 30.7% of net premiums earned.
Favorable prior-year reserve development was $16.1 million, compared with $6.1 million in 2020. Current accident-year catastrophe losses increased to $28.9 million, or 8.4 points, from $13.5 million, or 4.8 points.
Core operating income, a non-IFRS measure, was $53.2 million versus $35.6 million. Core operating return on average equity was 13.6% versus 10.3%; reported return on average equity was 11.2% versus 7.9%.
Total investment income, net, increased to $14.1 million from $11.5 million. The investment yield was 1.7%, compared with 1.7% in 2020 on the primary measure disclosed by management.
Cash and cash equivalents were $242.1 million and term deposits were $180.0 million. The fair value of the investments, cash and cash equivalents portfolio was $914.3 million, including $420.9 million of fixed-income securities.
Fixed-income holdings were primarily corporate securities; 58.1% had an S&P rating of A or higher. The portfolio’s average maturity was 4.7 years.
Net cash from operating activities after tax was $129.8 million, compared with an outflow of $90.5 million in 2020. Net cash used in investing activities was $2.5 million, and net cash used in financing activities was $16.9 million, primarily dividends.
IGI reports that it has not historically incurred debt. Lease liabilities were $3.8 million at year-end. Letters of credit totaled $6.6 million, and a rent-related letter of guarantee totaled $0.3 million.

Material changes versus the prior comparable period

Premium growth was broad-based: Specialty Long-tail GWP increased 13.8% to $239.6 million; Specialty Short-tail increased 18.7% to $282.0 million; and Reinsurance increased 24.4% to $24.0 million.
Casualty GWP increased 20.6% to $190.0 million, while construction and engineering increased 73.7% to $31.1 million. Marine cargo increased to $5.1 million from $0.8 million, and contingency was introduced with $3.5 million of GWP.
Outward reinsurance premiums increased to $163.0 million from $128.9 million. The increase reflected a new quota-share treaty for professional indemnity and directors’ and officers’ business and greater facultative purchases in energy and property.
Specialty Long-tail underwriting results increased to $50.8 million from $25.6 million. Specialty Short-tail results increased to $52.6 million from $42.3 million, while Reinsurance results declined to $2.4 million from $9.5 million.
General and administrative expenses increased 25.6% to $58.9 million due to hiring, technology investment and legal and professional fees related partly to reinsurance arbitration.
The share of loss from associates increased to $7.3 million from $1.5 million, primarily due to fair-value declines in Lebanese investment properties amid hyperinflation and deteriorating local conditions.
Insurance receivable impairment increased to $5.2 million from $2.9 million. Foreign-exchange losses were $4.9 million, compared with a $2.5 million gain in 2020.
Warrants remain classified as derivative liabilities at fair value. The liability declined to $12.9 million from $13.6 million, producing a $0.7 million gain in 2021 versus a $4.4 million loss in 2020.
Management concluded that the material weakness relating to accounting for public and private warrants had been remediated as of December 31, 2021. Internal control over financial reporting was assessed as effective, although the company remains exempt from auditor attestation as an emerging growth company.
IGI Europe contributed $9.8 million of GWP from its acquisition date and generated a $1.2 million loss before tax. Acquisition-related goodwill of $41,000 was fully impaired.

Guidance, outlook, risks and unusual items

Management did not provide numerical earnings or premium guidance. It expects operating cash flows to meet long-term liquidity requirements for at least the next 12 months and targets a solvency ratio above 120% of the group capital requirement. Management’s COVID-19 stress analysis indicated that the Group should remain within its capital-management targets without mitigating actions; COVID-19-specific reserves were not considered significant at year-end.

Catastrophe exposure remains material. 2021 net catastrophe losses included European floods, South Africa riots, Hurricane Ida and other events; the political violence claims ratio reached 273.7%, and the reinsurance segment claims ratio increased to 73.4%.
Net outstanding claims increased to $393.7 million from $304.8 million, including net IBNR and unallocated loss adjustment expenses of $207.0 million versus $152.8 million. A 7.5% adverse gross reserve sensitivity would reduce profit before tax by approximately $30.1 million.
Reinsurance recoverables are a significant counterparty exposure. Reinsurance recoverables on unpaid losses were $182.3 million, of which 91.6% were due from carriers rated A- or better by A.M. Best. The filing identifies ongoing risks from disputes, insolvency and delayed recoveries.
The company’s ratings were A (Excellent)/Stable from A.M. Best and A-/Stable from S&P. Downgrades could increase collateral requirements, reduce business retention and raise reinsurance costs.
Investment risks include interest-rate increases, credit-spread widening, defaults, equity-market volatility and illiquidity. A 50-basis-point decrease in interest rates was estimated to reduce 2021 profit before tax by $3.2 million.
IGI holds a 32.7% interest in Lebanese associates. Their carrying value declined to $5.7 million from $11.6 million, and management warns that local property valuations are uncertain.
The February 2022 Russia-Ukraine invasion is a subsequent event. Management stated that the financial impact was too early to estimate and continues to monitor energy prices, markets, sanctions and potential balance-sheet exposures. The filing identifies a Russian bond whose fair value later declined to $0.9 million and whose rating was downgraded from BBB to B in March 2022.
The company is dependent on brokers; its top five international brokers generated 59% of 2021 premiums. It also faces concentration in casualty business, which represented approximately 35% of GWP.
Dividend capacity is subject to board discretion, regulatory capital requirements and restrictions applicable to insurance subsidiaries. The company declared dividends of $0.17 per share in March 2021 and $0.16 per share in August 2021.
A legally non-binding $1.25 million charitable commitment was made, of which $0.25 million had been paid at year-end; the remaining $1.0 million is scheduled for 2022 through 2025.

Most important facts for investors to verify

Reconcile the strong reported profit and core operating results with the $16.1 million favorable prior-year reserve development and the $30.1 million adverse 7.5% reserve sensitivity.
Review the quality, maturity and credit concentration of the $420.9 million fixed-income portfolio, including exposure to Russia, China, Qatar, the UAE and other markets.
Assess the collectability and timing of the $182.3 million of reinsurance recoverables and the status of previously disputed reinsurance matters.
Confirm regulatory capital and solvency margins for IGI Bermuda, IGI UK and IGI Europe, including the reported 161% Bermuda BSCR ratio and statutory surplus headroom.
Evaluate the impact of the planned transition to U.S. GAAP in 2023, including comparability with IFRS results and potential accounting changes.
Monitor the warrant liability, potential dilution from 17.25 million warrants, earnout shares and restricted shares, and the associated fair-value volatility.
Assess the effect of catastrophe activity, political violence losses, inflation and claims development on future underwriting margins.
Review ownership concentration and governance implications: Wasef Jabsheh beneficially owned approximately 34.2% and former IGI Dubai shareholders collectively held a controlling stake.