Global Indemnity Group, LLC — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; compared with the same periods in 2022. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Global Indemnity is a property and casualty insurance and reinsurance holding company. Its continuing businesses are Commercial Specialty and Reinsurance Operations; exited businesses are in runoff. The company completed a restructuring in Q1 2023, focusing on Package Specialty and Targeted Specialty and exiting four brokerage divisions: Professional Liability, Excess Casualty, Environmental, and Middle Market Property.
Financial results and key metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net earned premiums | $111.7 | $153.6 | $380.9 | $458.2 |
| Net investment income | $14.2 | $8.4 | $39.4 | $16.9 |
| Net realized investment gains (losses) | $(0.1) | $2.2 | $(2.4) | $(33.1) |
| Net income (loss) | $7.7 | $23.7 | $19.5 | $(3.2) |
| Diluted earnings (loss) per share | $0.55 | $1.60 | $1.39 | $(0.24) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $36.8 | $41.7 |
| Combined ratio | 99.7% | 97.2% | 99.2% | 97.0% |
Q3 GAAP total revenues were $126.1 million, including investment income and realized investment losses. The filing’s MD&A revenue comparison, which excludes investment income and certain other items, reports $112.0 million for Q3 2023 versus $154.0 million for Q3 2022.
- Underwriting: Continuing Lines’ accident-year combined ratio, a non-GAAP measure excluding prior-year adjustments, was 97.8% for Q3 and 97.6% for the nine months. The corresponding GAAP Continuing Lines ratios were 109.2% and 103.2%. Consolidated GAAP combined ratios were 99.7% and 99.2%, respectively.
- Balance sheet at September 30: Assets were $1.768 billion; investments were $1.341 billion; cash and equivalents were $46.5 million; shareholders’ equity was $630.7 million; book value per common share was $46.27.
- Reserves: Gross unpaid losses and loss adjustment expenses were $861.8 million, including $786.8 million net of ceded reinsurance.
- Debt and liquidity: Management reported no third-party debt. The company generated $36.8 million of operating cash in the first nine months, ended the period with $46.5 million of cash, and reported $13.5 million in lease liabilities.
- Shareholder returns: Common distributions declared were $0.25 per share per quarter. During the first nine months, the company repurchased 450,000 shares for approximately $12.1 million and paid $7.5 million in common distributions.
Material changes versus the prior comparable periods
- Gross written premiums fell 43.7% in Q3 and 41.1% for the first nine months. Net earned premiums declined 27.3% and 16.9%, respectively. Management attributed the contraction to the runoff of exited lines, non-renewal of a casualty reinsurance treaty and restaurant business, and deliberate non-renewals of underperforming Commercial Specialty business. Commercial Specialty pricing increases partly offset the decline.
- Net income fell to $7.7 million from $23.7 million in Q3 2022. The prior-year quarter included $30.0 million of proceeds from selling Farm, Ranch & Stable renewal rights. For the first nine months, net income improved to $19.5 million from a $3.2 million loss; the 2022 period included substantial investment losses and sale-related items.
- Investment income rose 69.3% in Q3 and 133.1% for the nine months, reflecting higher portfolio yields and alternative investment returns. Fixed-income book yield was 4.0%, versus 3.1% at September 30, 2022 and 2.2% at December 31, 2021.
- Commercial Specialty recorded $14.5 million of prior-year reserve strengthening in Q3, mainly related to General Liability claims severity in restaurant and other non-renewed business. Nine-month prior-year reserve adjustments netted to zero overall, comprising a $21.0 million increase in Commercial Specialty, a $1.7 million decrease in Reinsurance Operations, and a $19.3 million decrease in Exited Lines.
- Operating cash flow was $5.0 million lower than in the first nine months of 2022. The company redeemed its $130 million subordinated notes in 2022; it reported no third-party debt at the current period end.
Outlook, management commentary, risks and unusual items
- Management expects approximately $16.0 million of recurring annual expense savings following completion of the restructuring. No specific earnings or premium guidance is provided.
- The company intends to reduce Reinsurance Operations’ share of its business and support growth in Commercial Specialty. A $135 million share repurchase authorization remains in place through December 31, 2027; future purchases depend on market conditions and other factors.
- The company requested a full withdrawal from Global Debt Fund, LP in July 2023; proceeds from its $23.7 million carrying value are expected to begin arriving in 2024. A separate alternative-investment funding commitment of $14.2 million remains, with management expecting minimal future capital calls.
- Investment portfolio risks include interest-rate and spread volatility. Fixed-income investments had an A+ average rating and 1.2-year duration. At quarter end, fixed maturities had $47.3 million of gross unrealized losses, which management attributed to factors other than credit losses; no investment allowance for expected credit losses was recorded.
- Insurance risks include uncertainty in loss-reserve estimates, claims severity and catastrophe experience, and collection or disputes involving reinsurers, particularly reinsurers in runoff. Management stated that it did not expect pending legal proceedings to have a material adverse effect, while noting that litigation and arbitration are ordinary-course risks.
- Unusual comparative items include the 2022 $30.0 million renewal-rights sale, related impairment and transaction expenses, and $26.2 million of investment impairment losses associated with securities identified for sale. The company incurred $2.1 million of restructuring costs during the first nine months of 2023.
Important facts for investors to verify
- Whether premium reductions and the planned shift away from reinsurance are improving underwriting quality and profitability as intended.
- Further development in Commercial Specialty prior-year reserves, particularly General Liability severity and the non-renewed restaurant book.
- Whether the stated $16.0 million of annual restructuring savings is realized and when the savings affect reported expenses.
- Timing and amount of proceeds from the Global Debt Fund withdrawal, and any calls against the remaining $14.2 million investment commitment.
- Ability of insurance subsidiaries to generate and distribute funds to the holding company, given regulatory dividend restrictions, alongside ongoing buybacks and distributions.
- Performance and liquidity of the investment portfolio, including interest-rate sensitivity and the unrealized-loss position.