Global Indemnity Limited — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. The filing identifies the registrant as Global Indemnity Limited, a Cayman Islands-domiciled specialty insurer and reinsurer. It operates Commercial Lines, Personal Lines and Reinsurance Operations. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Gross premiums written | $158.8 | $143.9 | $283.1 | $267.6 |
| Net premiums earned | $113.9 | $107.1 | $221.9 | $220.2 |
| Total revenues | $128.0 | $117.0 | $247.7 | $240.9 |
| Net investment income | $11.0 | $8.8 | $22.4 | $17.5 |
| Net income | $7.2 | $10.1 | $12.9 | $22.4 |
| Diluted earnings per share | $0.50 | $0.57 | $0.90 | $1.27 |
| Combined ratio | 93.4% | 94.5% | 93.5% | 95.5% |
At June 30, 2018, total assets were $1,981.8 million, total liabilities $1,279.4 million and shareholders’ equity $702.4 million. Cash and cash equivalents were $47.1 million, down from $74.4 million at year-end 2017. Total debt was $287.3 million, compared with $294.7 million at year-end; it comprised a $64.7 million margin borrowing facility and subordinated notes due 2045 and 2047.
Six-month operating cash flow was $59.0 million, versus cash used of $3.4 million in 2017. The 2018 amount included a $41.5 million net recovery from the final American Reliable loss-indemnification settlement. Investing activities used $69.9 million and financing activities used $16.3 million; cash declined by $27.3 million over the period. Dividends of $0.25 per ordinary share were declared and paid in each of Q1 and Q2, totaling $7.0 million in cash.
Other notable balance-sheet and investment measures: unpaid losses and loss adjustment expenses were $613.7 million gross and $522.3 million net; unearned premiums were $304.2 million. Fixed maturities had a fair value of $1,283.9 million versus amortized cost of $1,308.7 million. Accumulated other comprehensive loss was $22.5 million, compared with income of $9.0 million at year-end 2017.
Material changes versus the prior comparable period
- Q2 gross premiums written rose 10.4%; six-month premiums rose 5.8%. Commercial Lines drove growth, while Personal Lines premiums declined and Reinsurance premiums were lower for the six-month period.
- Net income fell 28.7% in Q2 and 42.4% for the six-month period. Six-month net premiums earned were nearly flat, while corporate and other operating expenses increased to $20.2 million from $6.4 million, and interest expense rose to $9.8 million from $7.2 million.
- Q2 and six-month combined ratios improved to 93.4% and 93.5%, respectively. Favorable prior-year reserve development helped results, but was less than in 2017: $9.6 million in Q2 2018 versus $15.3 million in Q2 2017; $15.5 million for the first half versus $25.4 million.
- Commercial Lines gross premiums grew 23.3% in Q2 and 20.5% for the half. Personal Lines net premiums earned fell 6.2% and 10.1%, respectively, in part because of catastrophe quota-share reinsurance. Reinsurance net premiums earned increased 13.5% in Q2 and 9.9% for the half.
- Net investment income increased, but six-month total investment return was only $0.6 million, compared with $26.7 million in 2017, reflecting $24.3 million of unrealized investment losses. The company recorded $21.4 million of other comprehensive loss for the first half.
Outlook, management commentary, risks and unusual items
- The filing provides no quantified earnings, premium or combined-ratio guidance. Management attributed Commercial Lines growth to rate increases following prior-year catastrophe activity, new programs and increased agent interaction. Reinsurance growth included property catastrophe treaties and professional liability, partly offset by a treaty non-renewal.
- Q2 2018 included a $6.25 million related-party advisory fee, and the six-month period included $12.5 million, for the subsidiary co-obligor transaction on the subordinated notes. Fox Paine beneficially held approximately 82% of voting power; the filing reports $7.8 million of unpaid management fees at quarter-end.
- On January 1, 2018, new accounting guidance required fair-value changes in most equity securities to flow through net income. Adoption increased retained earnings and reduced accumulated other comprehensive income by a net $10.0 million; the first-half results included a $4.2 million loss on equity investments still held at period-end.
- The company said its 2018 tax figures included provisional estimates related to the Tax Cuts and Jobs Act and could be adjusted as further guidance became available. The effective tax benefit rate was 25.9% for the first half, versus 31.3% in 2017.
- Investment and underwriting risks include market and interest-rate movements, catastrophe and claims severity/frequency, reserve-estimation uncertainty, reinsurance recoverability and disputes with reinsurers in runoff. The filing notes $45.2 million of future investment funding commitments and identifies maximum loss exposures for three unconsolidated VIE investments. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
- Management reported disclosure controls were effective as of June 30, 2018 and no material change in internal control over financial reporting during the quarter. No off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Whether premium growth and improved combined ratios persist, especially given Personal Lines contraction and the smaller amount of favorable reserve development versus 2017.
- The quality and sensitivity of reserves, including assumptions behind the $522.3 million net loss reserve and future claims severity and frequency.
- How recurring corporate expenses compare with the unusual $12.5 million related-party advisory fee, and the approval and terms of related-party arrangements.
- Investment portfolio performance, unrealized losses, interest-rate exposure and the liquidity and funding terms of alternative investments and VIE commitments.
- Cash generation excluding the $41.5 million American Reliable indemnification recovery, debt service needs, and regulatory limits on subsidiary dividends that support holding-company liquidity.