Global Indemnity Limited — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited, consolidated U.S. GAAP results. Amounts below are in millions unless stated otherwise. The filing identifies the registrant as Global Indemnity Limited.
Business context
The company writes specialty property and casualty insurance and reinsurance through Commercial Lines, Personal Lines, and Reinsurance Operations. It earns revenue mainly from premiums and investment income. Hurricanes Harvey, Irma, and Maria affected the quarter.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Gross premiums written | $126.1 | $133.6 | $393.7 | $429.3 |
| Net premiums earned | $108.6 | $119.6 | $328.8 | $359.0 |
| Net investment income | $10.1 | $8.8 | $27.6 | $25.1 |
| Net income (loss) | $(8.9) | $9.5 | $13.4 | $11.5 |
| Basic earnings (loss) per share | $(0.51) | $0.55 | $0.78 | $0.67 |
| Combined ratio | 117.3% | 100.6% | 102.7% | 101.3% |
- Q3 GAAP total revenue was $120.1 million, down from $138.1 million; nine-month revenue was $361.0 million versus $384.6 million.
- Q3 pretax loss was $16.8 million, compared with pretax income of $10.6 million a year earlier. A $7.9 million tax benefit reduced the reported net loss. Nine-month pretax income was only $0.3 million, while a $13.2 million tax benefit contributed to net income of $13.4 million.
- Q3 underwriting loss was $16.5 million; nine-month underwriting loss was $3.4 million. The combined ratio above 100% indicates underwriting losses before investment results and other items.
- At September 30, total assets were $2,130.7 million, investments $1,567.2 million, cash and equivalents $60.1 million, total liabilities $1,306.8 million, debt $298.9 million, and shareholders’ equity $823.9 million. At December 31, 2016, debt was $163.1 million and cash was $75.1 million.
- Operating cash flow was negative $13.6 million for the nine months, versus negative $9.3 million in 2016. Investing cash flow was negative $135.9 million; financing cash flow was positive $134.5 million, including $130.0 million of subordinated-note proceeds.
Material changes and segment trends
- Gross premiums written declined 5.6% in Q3 and 8.3% for the nine months. Personal Lines premiums fell 17.9% and 19.3%, respectively; Commercial Lines grew 7.3% in Q3 and was nearly flat year to date; Reinsurance grew 22.3% and 29.9%.
- Management attributed premium contraction to reductions in catastrophe-exposed Personal Lines business, underwriting actions, and discontinuation of an unprofitable Commercial Lines program. New Commercial Lines programs and a mortgage reinsurance treaty partly offset declines.
- Q3 segment combined ratios were 124.8% for Personal Lines, 83.4% for Commercial Lines, and 214.7% for Reinsurance Operations. Reinsurance’s sharply higher loss ratio reflected third-quarter catastrophe activity.
- Prior-year reserve releases were $9.4 million in Q3 and $34.8 million for the nine months, compared with $9.4 million and $24.9 million in the respective 2016 periods. Releases benefited reported underwriting results; the filing attributes them mainly to lower-than-expected claim frequency or severity.
- Interest expense increased to $4.8 million in Q3 and $12.1 million year to date, principally following the March 2017 issuance of $130 million of 7.875% subordinated notes due 2047. Total debt rose accordingly.
Outlook, risks, contingencies, and unusual items
- The company estimated net losses of approximately $30.6 million from Hurricanes Harvey, Irma, and Maria: $12.9 million in U.S. Insurance Operations and $17.7 million in Reinsurance Operations. Management cautioned that the estimate could change materially as loss data develops.
- Effective April 15, 2017, a catastrophe quota-share treaty covers 50% of property catastrophe losses per occurrence above $3 million, up to $40 million, subject to a $60 million aggregate limit; it expires June 1, 2018.
- Unfunded investment commitments totaled $59.5 million at quarter-end. The filing also reports a $78.1 million right to redeem additional shares, with the redemption price subject to a 3% annual increase through 2019.
- Subordinated notes carry annual coupons of 7.75% (2045 notes) and 7.875% (2047 notes). The 2047 notes are unsecured and subordinated, and permit additional indebtedness; the margin borrowing facility is due on demand and collateralized by securities.
- Cash generation depends on premium collections, claims payments, and reinsurance settlements. Insurance-subsidiary dividends are subject to regulatory limits; U.S. insurers paid specified dividends during the first nine months, while the Bermuda reinsurer paid none.
- Management said pending legal proceedings were not expected to have a material adverse effect, but noted potential disputes with reinsurers in runoff. It reported no material change in risk factors from prior filings and no off-balance-sheet arrangements. No formal financial guidance was provided.
- Fox Paine beneficially controlled approximately 84% of voting power and controlled director elections. The company incurred $1.6 million in management fees to Fox Paine during the first nine months of 2017.
Investor facts to verify
- Whether the $30.6 million hurricane-loss estimate proves adequate as claims develop, and how catastrophe losses affect reinsurance recoveries.
- Whether Personal Lines underwriting actions and the new catastrophe treaty improve results without unduly reducing earned premiums.
- Reserve adequacy and the sustainability of favorable prior-year reserve development, particularly in Commercial Lines.
- Liquidity available after the $59.5 million of investment funding commitments, collateral requirements, debt service, and potential share redemptions.
- The durability of reported nine-month earnings given minimal pretax income and the material contribution from tax benefits.
- Debt terms, related-party governance and fees, and the effect of Fox Paine’s voting control.