Global Indemnity Limited — 2019 Form 10-K
Business context and reporting period. The filing reports the fiscal year ended December 31, 2019; fourth-quarter figures are also provided. Global Indemnity is a Cayman Islands holding company whose insurance and reinsurance businesses operate through four segments: Commercial Specialty, Specialty Property, Farm, Ranch, & Stable, and Reinsurance Operations. The filing identifies Global Indemnity Group, LLC as a subsidiary and co-obligor on the subordinated notes.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Gross written premiums | $636.9 million | $547.9 million |
| Net written premiums | $562.1 million | $472.5 million |
| Net earned premiums | $525.3 million | $467.8 million |
| Net income (loss) | $70.0 million | ($56.7 million) |
| Diluted earnings (loss) per share | $4.88 | ($4.02) |
| Net investment income | $42.1 million | $46.3 million |
| Net realized investment gains (losses) | $35.3 million | ($16.9 million) |
| Operating cash flow | $32.4 million | $42.1 million |
| Combined ratio | 92.2% | 112.3% |
Written premiums increased 16.2% gross and 18.9% net. The company reported $604.5 million of total revenue including realized investment gains; net earned premiums plus other income were $527.1 million. Underwriting income was $43.3 million, versus an underwriting loss of $55.9 million in 2018. The 2019 loss ratio was 52.5% and expense ratio 39.7%. Favorable prior-year reserve development reduced losses by $32.8 million; current-year catastrophe losses in Insurance Operations were $30.4 million.
Fourth quarter: net earned premiums were $141.7 million, net income was $29.0 million, and diluted EPS was $2.02. In Q4 2018, net earned premiums were $125.3 million and net loss was $73.3 million (diluted loss per share $5.20). Q4 2019 included $24.1 million of realized investment gains, compared with $24.7 million of realized losses in Q4 2018.
At year-end, total assets were $2.076 billion, shareholders’ equity $726.8 million, and book value per share $50.82. Investments and cash totaled $1.608 billion, including $44.3 million of cash and cash equivalents. Unpaid losses and loss adjustment expenses were $630.2 million gross and $553.9 million net. Debt was $296.6 million: $223.0 million net carrying value of subordinated notes and $73.6 million drawn under a demand margin facility. Operating cash flow was positive, but cash fell $55.2 million during the year; investing and financing cash flows were uses of $80.2 million and $7.4 million, respectively.
The investment portfolio included $1.253 billion of fixed maturities and $263.1 million of equity securities. Fixed maturities were 94.9% investment grade; their overall weighted-average duration was 4.2 years. Net unrealized gains on available-for-sale fixed maturities were $21.6 million before tax.
Material changes versus prior periods
- Compared with 2018, net income improved by $126.7 million and the combined ratio improved 20.1 percentage points. Results benefited from lower catastrophe-related losses, favorable prior-year reserve development, and $52.2 million of improved realized investment results. Net investment income declined 9.3%.
- Segment gross premiums grew 19.0% in Commercial Specialty, 10.0% in Farm, Ranch, & Stable, and 83.8% in Reinsurance Operations; Specialty Property declined 3.9%. Reinsurance growth included $26.9 million from a new casualty treaty.
- During 2019, the company split its former Personal Lines segment into Specialty Property and Farm, Ranch, & Stable, and renamed Commercial Lines as Commercial Specialty; comparative segment data was revised.
- The company renewed its catastrophe quota-share treaty effective June 1, 2019 with lower occurrence and aggregate limits. It also restructured intercompany financing and adopted lease accounting, recording $25.3 million of right-of-use assets and $25.4 million of lease liabilities at adoption.
Outlook, commentary, risks, and unusual items
- Outlook: No specific earnings or premium guidance is provided. Management said it believed the company and its operating subsidiaries had sufficient liquidity to meet obligations. The company anticipated a quarterly dividend of $0.25 per share, subject to Board discretion; a $0.25 dividend for March 2020 was approved after year-end.
- Underwriting and reserves: Management emphasized uncertainty in loss estimates, particularly for long-tail liability claims, construction defect, asbestos, and environmental claims. Net asbestos and environmental reserves were $15.8 million and $13.2 million, respectively. The filing reports $29.0 million of net A&E reserves in its detailed reserve reconciliation; verify the differing figures and definitions in the notes.
- Catastrophe and reinsurance exposure: Catastrophes may exceed reinsurance protection, while the company remains liable to policyholders if reinsurers fail to pay. Net reinsurance receivables were $80.1 million after collateral; the allowance for uncollectible reinsurance was $9.0 million. Munich Re accounted for $44.1 million of gross reinsurance receivables.
- Liquidity and capital constraints: The holding company depends on subsidiary distributions, which are restricted by insurance regulation. U.S. insurance subsidiaries paid no dividends in 2019; their stated aggregate ordinary dividend capacity for 2020 was limited. The margin facility is due on demand, variable-rate, and secured by securities; a market decline could trigger additional collateral requirements.
- Other risks and items: Key risks include reserve inadequacy, catastrophe losses, investment and interest-rate volatility, reinsurance collectability, regulation and tax changes, cyber/privacy incidents, and dependence on distribution partners. The company has $31.7 million of unfunded investment commitments. Ordinary-course litigation was not expected by management to have a material adverse effect. Fox Paine-affiliated funds held about 80.3% of voting power; related-party management fees and the $12.5 million 2018 reorganization advisory fee are disclosed. The auditor issued unqualified opinions on the financial statements and internal control; management reported effective controls and no material weaknesses.
Most important facts for investors to verify
- How much of the return to profitability reflects sustainable underwriting improvement versus $32.8 million of favorable reserve development and $35.3 million of realized investment gains.
- Whether recent accident-year loss trends, especially in Farm, Ranch, & Stable and long-tail casualty lines, support the recorded reserves and combined ratio.
- The sustainability and risk profile of rapid premium growth in Reinsurance Operations, including the new casualty treaty and concentration in three cedants.
- Liquidity available at the parent after regulatory dividend restrictions, debt service, dividends, and the $31.7 million investment commitments; confirm exposure to margin calls on the demand facility and swaps.
- The detailed A&E reserve disclosures and the distinction between segment-level, net, and gross reserve figures.
- Investment portfolio sensitivity, alternative-investment valuations and liquidity, and the effect of realized gains and derivatives on reported earnings.