Global Indemnity Group, LLC — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter earnings report. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context
Global Indemnity is a publicly traded partnership and specialty property-and-casualty insurer. Its reportable segments are Commercial Specialty, Reinsurance Operations, and Exited Lines. The company is shifting resources toward Wholesale Commercial and InsurTech products, while placing selected businesses in runoff and reducing reinsurance writings.
Financial results and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Gross written premiums | $727.6 million (+6.7%) | $682.1 million |
| Net written premiums | $591.3 million (+1.9%) | $580.1 million |
| Net earned premiums | $602.5 million (+1.2%) | $595.6 million |
| Total revenue | $628.5 million | $678.3 million |
| Net income (loss) | $(0.9) million; $(0.09) per share | $29.4 million; $2.00 per share |
| Underwriting income (loss) | $8.3 million | $(10.4) million |
| Combined ratio | 98.8% | 102.1% |
| Net cash from operating activities | $44.2 million | $90.8 million |
The underwriting result improved to a profit, but investment performance drove the overall loss: net realized investment losses were $32.9 million, versus gains of $15.9 million in 2021, and net investment income fell 25.4% to $27.6 million. Total investment return was a loss of $66.9 million, compared with a gain of $18.5 million in 2021. The company recorded $26.2 million of impairment losses on fixed maturities it intended to sell while shortening portfolio duration.
At year-end, total assets were $1.801 billion, shareholders’ equity was $626.2 million, and cash and investments totaled $1.343 billion. Fixed maturities had a $53.5 million pretax net unrealized loss, reflected in accumulated other comprehensive loss. The company redeemed its $130 million of 7.875% subordinated notes in April 2022 and reported no third-party debt at year-end; there were also no margin-facility borrowings. Operating cash flow declined by $46.6 million, principally reflecting lower premium collections and investment income.
Gross unpaid losses and loss-adjustment expense reserves were $832.4 million ($759.4 million net of reinsurance). Statutory capital and surplus of the insurance subsidiaries was $367.3 million, compared with $359.5 million in 2021; the company reported that subsidiary capital exceeded prescribed risk-based capital requirements. Management said it believed liquidity was sufficient, while noting that insurer dividends are subject to state regulatory limits.
Material changes versus 2021
- Commercial Specialty gross written premiums rose 7.4% to $401.0 million; segment underwriting income was $12.1 million and its combined ratio was 97.0%.
- Reinsurance Operations gross written premiums increased 53.1% to $158.7 million, but management decided to reduce future writings. One treaty represented 93.7% of the segment’s 2022 gross written premiums and at least 10% of consolidated revenue.
- Exited Lines gross written premiums fell 18.1% to $167.9 million and net earned premiums fell 55.6% to $83.2 million. The segment had a $7.9 million underwriting loss and a 110.1% combined ratio.
- The consolidated loss ratio improved to 59.6% from 64.7%, while the expense ratio rose to 39.2% from 37.4%. Current-year casualty losses increased, with management citing inflation and other severity factors in Commercial Specialty.
- Cash and investments declined to $1.343 billion from $1.533 billion. The investment portfolio was repositioned toward shorter-duration fixed income; weighted-average duration was 1.7 years versus 3.2 years, and embedded fixed-maturity book yield rose to 3.5% from 2.2%.
- Shareholders’ equity fell to $626.2 million from $706.6 million, including the effect of investment-related unrealized losses and share repurchases.
Outlook, management commentary, risks and unusual items
- Restructuring: The company is exiting Professional Liability, Excess Casualty, Environmental, and Middle Market Property brokerage divisions; new business ceases and renewals run off. It reported $3.4 million of 2022 restructuring charges and a further $2.1 million in the first quarter of 2023, and expects $16.0 million of recurring annual expense savings beginning in 2023. The filing gives no broader earnings or premium guidance. The workforce was reduced by 53 employees in the first quarter of 2023.
- Disposals: Farm, Ranch & Stable renewal rights were sold for $30.0 million in August 2022. American Reliable Insurance Company was sold to Everett Cash Mutual at book value of $10.0 million on December 31, 2022. The company also recognized impairment and disposition-related costs, including $10.5 million of Exited Lines impairments and expenses in 2022.
- Capital returns: The company paid $1.00 per common share in 2022 distributions and anticipates a $0.25 quarterly distribution, subject to board discretion and available funds. It repurchased 907,082 shares for $21.9 million during 2022. The authorization was increased to $60 million in January 2023; by March 15, 2023, cumulative repurchases under the program were 1,157,082 shares for $28.4 million.
- Other unusual items: A $5.5 million CARES Act employee retention credit was received in 2022, primarily recorded as a reduction in compensation expense. The company changed its segment presentation and revised prior-year segment results accordingly.
- Key risks: Reserve estimates are judgmental, particularly for long-tail liability, construction-defect, asbestos and environmental claims; adverse development could reduce earnings and statutory surplus. Reinsurance recoverables are exposed to counterparty and collection risk; the allowance for expected credit losses was $9.0 million. Other material exposures include catastrophe losses, inflation, investment-rate and credit risk, concentration in a major reinsurance treaty, execution of restructuring, regulatory limits on subsidiary dividends, and reliance on distribution partners.
- Tax structure: Global Indemnity Group, LLC is generally treated as a partnership for U.S. federal income-tax purposes. Shareholders may owe tax on allocated taxable income whether or not they receive cash distributions, and receive Schedule K-1 reporting.
Important facts for investors to verify
- Whether the restructuring delivers the forecast $16.0 million in annual savings, and how much runoff, severance, and other transition cost remains.
- Reserve adequacy and development by segment, especially for long-tail casualty, construction-defect, asbestos and environmental exposures; the filing identifies reserve valuation as a critical audit matter.
- Exposure and collectability of reinsurance balances, including the $9.0 million expected-credit-loss allowance and the large Munich Re receivable.
- Whether the concentrated reinsurance treaty renews on acceptable terms and how planned reductions affect premiums, earnings, and capital.
- Investment portfolio performance, including the ability to reinvest at higher yields and the impact of unrealized losses, realized losses, and alternative-investment results.
- Availability of cash at the holding company to support distributions and repurchases, given statutory dividend restrictions and the company’s ongoing insurance and runoff obligations.
- The effects of the controlling shareholder’s voting power, related-party management fee, and partnership tax reporting on public shareholders.
Ernst & Young issued an unqualified opinion on the consolidated financial statements and on internal control over financial reporting; management reported no material weaknesses as of December 31, 2022.