Global Indemnity Group, LLC — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in millions of dollars unless stated otherwise. The company is a specialty property-and-casualty insurer, with Commercial Specialty, Specialty Property, Farm, Ranch & Stable, and Reinsurance Operations segments.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Gross written premiums | $175.2 | $164.5 | $338.8 | $320.3 |
| Net written premiums | $160.7 | $147.3 | $308.3 | $286.4 |
| Net earned premiums | $149.4 | $141.8 | $293.1 | $286.3 |
| Total revenues | $164.4 | $178.8 | $322.1 | $265.4 |
| Net income (loss) | $6.4 | $37.6 | $11.9 | $(7.0) |
| Net income (loss) available to common shareholders | $6.3 | $37.6 | $11.7 | $(7.0) |
| Diluted earnings (loss) per share | $0.43 | $2.61 | $0.80 | $(0.49) |
Q2 underwriting income was $1.8 million, compared with $21.7 million a year earlier; first-half underwriting income was $0.3 million versus $32.3 million. The consolidated combined ratio was 99.2% in Q2 versus 85.2%, and 100.2% for the first half versus 89.0% (above 100% indicates an underwriting loss). The loss ratio rose to 60.9% in Q2 from 47.4%, and to 62.0% for the first half from 50.6%; the expense ratio was 38.3% and 38.2%, respectively.
Investment results materially affected comparisons. Q2 net realized investment gains were $3.8 million versus $38.5 million in 2020; first-half gains were $7.7 million versus a $29.7 million loss. Net investment income was $10.6 million in Q2 versus a $2.4 million loss, and $20.5 million for the first half versus $7.8 million. Thus, the year-over-year decline in Q2 net income reflects both weaker underwriting and much lower realized gains, while the first-half improvement in net income also reflects investment results and the prior-year loss.
Financial position, cash flow, and capital
- At June 30, total assets were $1,937.3 million, total liabilities $1,227.8 million, and shareholders’ equity $709.6 million. Equity declined from $718.3 million at December 31, 2020, including a reduction in accumulated other comprehensive income from $34.3 million to $19.0 million.
- Cash and cash equivalents were $49.1 million, down from $67.4 million at year-end. Total investments were $1,430.8 million, up from $1,387.2 million. Available-for-sale fixed maturities had a fair value of $1,174.1 million; the filing reported no expected-credit-loss allowance on that portfolio.
- For the first half, operating cash flow was $47.5 million, versus $52.4 million in 2020; investing cash flow was $(57.8) million versus $(14.0) million; financing cash flow was $(7.9) million versus $(6.3) million. Cash declined by $18.3 million during the period.
- Debt was $126.4 million, consisting of 7.875% subordinated notes due 2047; carrying value was broadly unchanged from year-end. The notes’ disclosed fair value was $133.6 million. Lease liabilities were $21.6 million.
- Common distributions declared were $0.25 per share per quarter, or $0.50 per share for the first half; $7.2 million was paid to common shareholders and $0.2 million to the preferred shareholder. Insurance subsidiaries declared or paid no dividends in the period, and their ability to upstream dividends is subject to regulatory limits.
Changes and management commentary
- Premium growth was led by Commercial Specialty and Reinsurance Operations. First-half gross written premiums rose 5.8%; Commercial Specialty grew 9.4% and Reinsurance Operations 38.7%. Specialty Property fell 9.4% and Farm, Ranch & Stable fell 7.7%, reflecting continued reductions in catastrophe-exposed or inadequately remunerative business. The company also did not renew property catastrophe treaties in Reinsurance Operations.
- Prior-year reserve development was adverse by $5.5 million in Q2 and $2.1 million for the first half, versus favorable development of $19.3 million and $19.9 million in the comparable 2020 periods. Commercial Specialty accounted for most of the 2021 adverse development, including higher estimated severity and a Hurricane Michael claim emergence in the 2018 accident year.
- Management cited continued growth in existing programs, pricing increases, and new programs as premium-growth drivers. Reinsurance growth included casualty treaty business; its casualty share of earned premium rose, contributing to a higher current-year loss ratio.
- Alternative investments increased to $166.0 million from $97.0 million at year-end, including a new $25.0 million global debt fund investment and an increase in the Credit Fund investment from $60.0 million to $105.7 million. Future funding commitments were $31.2 million, which management said were unlikely to be called materially because the relevant funds were in harvest periods.
- The fixed-income portfolio had an A+ average rating and a 4.5-year duration. Management reported purchases focused on U.S. Treasuries, mortgage-backed securities, and investment-grade credit. The company uses interest-rate swaps and other derivatives to manage investment risks.
- David S. Charlton was appointed chief executive of the insurance operations and principal executive officer in April 2021; Reiner R. Mauer was named chief operating officer in May. AM Best affirmed an “A” (Excellent) financial-strength rating for the U.S. operating subsidiaries in April.
Outlook, risks, and contingencies
The filing provides no quantified earnings or premium guidance. Management said COVID-19 could continue to affect premium volume and collections, claims, investment values, and liquidity; the scale and duration of effects remain uncertain. Legislation or court decisions could require coverage of business-interruption claims despite policy terms or virus exclusions. Management said it was monitoring liquidity and taking steps it considered prudent.
Key exposures include the estimation of loss reserves and claim severity, catastrophe losses, the collectability of reinsurance receivables, investment-market and interest-rate movements, and the liquidity and valuation of alternative investments. The company disclosed potential disputes with reinsurers in runoff and ordinary-course litigation and arbitration; it did not expect currently pending proceedings to have a material adverse effect. It also identified possible materially adverse foreign taxes relating to historic non-U.S. subsidiaries while statutes of limitation remain open in certain jurisdictions. The filing states there are no off-balance-sheet arrangements.
Governance and related-party considerations include Fox Paine entities’ approximately 82.9% of voting power, control over director appointments, and management fees paid to Fox Paine & Company. The filing says related-party transactions are reviewed and approved by the relevant committee and board, with the affiliated chairman recused from specified deliberations.
Important facts for investors to verify
- Whether reserve assumptions remain adequate, particularly for Commercial Specialty property claims and the Hurricane Michael development, and how the $5.5 million first-half adverse prior-year development evolves.
- Whether underwriting performance improves: the first-half combined ratio was 100.2%, with segment-level pressures and changing catastrophe and casualty loss trends.
- The sustainability and liquidity of investment returns, especially the enlarged alternative-investment exposure, one-quarter reporting lags for most limited partnerships, and the $31.2 million in unfunded commitments.
- Cash availability at the parent and subsidiaries, given lower cash, regulatory limits on subsidiary dividends, and continuing shareholder distributions.
- Potential effects of COVID-19 business-interruption litigation or legislation, and any adverse foreign-tax developments involving historic non-U.S. operations.