Item 2. Management’s Discussion and Analysis
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes of the Company included elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to the Company’s plans and strategy, constitutes forward-looking statements that involve risks and uncertainties. Please see "Cautionary Note Regarding Forward-Looking Statements" at the end of this Item 2 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein. For more information regarding the Company’s business and operations, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Recent Developments
Sale of Renewal Rights related to Farm, Ranch & Stable and Sale of American Reliable Insurance Company.
On August 8, 2022 , the Company sold the renewal rights related to all business lines within its Farm, Ranch & Stable segment for business written on or after August 8, 2022 to Everett Cash Mutual Insurance Company. The Company will retain the unearned premium reserves for business written prior to August 8, 2022.
Everett Cash Mutual Insurance Company is also acquiring the Company’s wholly owned subsidiary, American Reliable Insurance Company, for book value which is expected to be $10.0 million at the time of closing. The transaction is subject to receiving regulatory approval which is expected to be received during the 4 th quarter of 2022. Under the agreements, total consideration to be paid by Everett Cash Mutual Insurance Company is $40 million.
Distributions
The Board of Directors approved a distribution payment of $0.25 per common share to all shareholders of record on the close of business on March 21, 2022 and June 20, 2022. Distributions paid to common shareholders were $7.3 million during the six months ended June 30, 2022. In addition, distributions of $0.2 million were paid to Global Indemnity Group, LLC’s preferred shareholder during the six months ended June 30, 2022.
AM Best Rating
AM Best has seven Rating Categories in the AM Best Financial Strength Rating Scale. The categories ranging from best to worst are Superior, Excellent, Good, Fair, Marginal, Weak and Poor. Within each rating category, there are rating notches of plus or minus to show additional gradation of the ratings. On May 19, 2022, AM Best affirmed the financial strength rating of "A" (Excellent) for the U.S. operating subsidiaries of Global Indemnity Group, LLC.
Redemption of Debt
On April 15, 2022, the Company redeemed the entire $130 million in aggregate principal amount of the outstanding 2047 Notes plus accrued and unpaid interest on the 2047 Notes redeemed to, but not including the Redemption Date of April 15, 2022.
COVID-19
The global outbreak of COVID-19 continues to present significant risks to the Company. The COVID-19 pandemic may affect the Company’s operations indefinitely. The Company may experience reductions in premium volume, delays in the collection of premiums, and increases in COVID-19 related claims. Any resulting volatility in the global financial markets may negatively impact the market value of the Company’s investment portfolio and may result in net realized investment losses as well as a decline in the liquidity of the investment portfolio. All of these factors may have far reaching impacts on the Company’s business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the health of the Company’s management and employees, distribution, marketing, customers and agents, and on the overall economy. The scope and nature of these impacts, most of which are beyond the Company’s control, continue to evolve and such effects could exist for an extended period of time even after the pandemic ends.
38
GLOBAL INDEMNITY GROUP, LLC
Overview
The Company’s Commercial Specialty segment sells its property and casualty insurance products through a group of approximately 205 professional general agencies that have limited quoting and binding authority, as well as a number of wholesale insurance brokers who in turn sell the Company’s insurance products to insureds through retail insurance brokers. Commercial Specialty operates predominantly in the excess and surplus lines marketplace. Commercial Specialty also offers several specialty admitted property and casualty products. The Company manages its Commercial Specialty segment via product classifications. These product classifications are: 1) Penn-America, which includes property and general liability products for small commercial businesses sold through a select network of wholesale general agents with specific binding authority; 2) United National, which includes property, general liability, and professional lines products sold through program administrators with specific binding authority; 3) Diamond State, which includes property, casualty, and professional lines products sold through wholesale brokers and program administrators with specific binding authority; and 4) Vacant Express, which primarily insures dwellings which are currently vacant, undergoing renovation, or are under construction and is sold through aggregators, brokers, and retail agents. The Company has also created several start-up business lines which distribute professional, environmental, and excess casualty products.
The Company’s Reinsurance Operations provides reinsurance solutions through brokers and primary writers including insurance and reinsurance companies. It uses its capital capacity to write niche and casualty-focused treaties and business which meet the Company’s risk tolerance and return thresholds.
The Company’s Exited Lines segment represents lines of business that are no longer being written or are in runoff. Exited Lines includes specialty personal lines property and casualty products such as manufactured home, dwelling, motorcycle, watercraft and certain homeowners business, certain business within Property Brokerage, property and catastrophe reinsurance treaties, Farm, Ranch, & Stable business, and specialized insurance products for the equine mortality and equine major medical industry. These insurance products were distributed through wholesale general agents, wholesale insurance brokers, program administrators, and retail agents.
The Company derives its revenues primarily from premiums paid on insurance policies that it writes and from income generated by its investment portfolio, net of fees paid for investment management services. The amount of insurance premiums that the Company receives is a function of the amount and type of policies it writes, as well as prevailing market prices.
The Company’s expenses include losses and loss adjustment expenses, acquisition costs and other underwriting expenses, corporate and other operating expenses, interest, investment expenses, and income taxes. Losses and loss adjustment expenses are estimated by management and reflect the Company’s best estimate of ultimate losses and costs arising during the reporting period and revisions of prior period estimates. The Company records its best estimate of losses and loss adjustment expenses considering both internal and external actuarial analyses of the estimated losses the Company expects to incur on the insurance policies it writes. The ultimate losses and loss adjustment expenses will depend on the actual costs to resolve claims. Acquisition costs consist principally of commissions and premium taxes that are typically a percentage of the premiums on the insurance policies the Company writes, net of ceding commissions earned from reinsurers. Other underwriting expenses consist primarily of personnel expenses and general operating expenses related to underwriting activities. Corporate and other operating expenses are comprised primarily of outside legal fees, other professional and accounting fees, directors’ fees, management fees & advisory fees, and salaries and benefits for company personnel whose services relate to the support of corporate activities. Interest expense is primarily comprised of amounts due on outstanding debt.
Critical Accounting Estimates and Policies
The Company’s consolidated financial statements are prepared in conformity with GAAP, which require it to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
The most critical accounting policies involve significant estimates and include those used in determining the liability for unpaid losses and loss adjustment expenses, recoverability of reinsurance receivables, investments, fair value measurements, goodwill and intangible assets, deferred acquisition costs, and taxation. For a detailed discussion on each of these policies,
39
GLOBAL INDEMNITY GROUP, LLC
please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 . There have been no significant changes to any of these policies or underlying methodologies during the curre n t year .
Results of Operations
The following table summarizes the Company’s results for the quarters and six months ended June 30, 2022 and 2021:
Quarters Ended
June 30,
%
Six Months Ended
June 30,
%
(Dollars in thousands)
2022
2021
Change
2022
2021
Change
Gross written premiums
$
196,823
$
175,236
12.3
%
$
387,806
$
338,794
14.5
%
Net written premiums
$
167,158
$
160,653
4.0
%
$
326,640
$
308,336
5.9
%
Net earned premiums
$
155,749
$
149,408
4.2
%
$
304,572
$
293,108
3.9
%
Other income
174
512
(66.0
%)
613
920
(33.4
%)
Total revenues
155,923
149,920
4.0
%
305,185
294,028
3.8
%
Losses and expenses:
Net losses and loss adjustment expenses
92,618
90,938
1.8
%
177,313
181,721
(2.4
%)
Acquisition costs and other underwriting expenses
61,098
57,213
6.8
%
117,790
111,977
5.2
%
Underwriting income
2,207
1,769
24.8
%
10,082
330
NM
Net investment income
1,930
10,633
(81.8
%)
8,522
20,469
(58.4
%)
Net realized investment gains (losses)
(9,916
)
3,833
NM
(35,301
)
7,652
NM
Other income (loss)
(77
)
9
NM
(90
)
(22
)
NM
Corporate and other operating expenses
(2,993
)
(6,329
)
(52.7
%)
(7,653
)
(10,605
)
(27.8
%)
Interest expense
(410
)
(2,696
)
(84.8
%)
(3,005
)
(5,291
)
(43.2
%)
Loss on extinguishment of debt
(3,529
)
—
NM
(3,529
)
—
NM
Income (loss) before income taxes
(12,788
)
7,219
NM
(30,974
)
12,533
NM
Income tax expense (benefit)
(626
)
844
(174.2
%)
(4,039
)
641
NM
Net income (loss)
$
(12,162
)
$
6,375
NM
$
(26,935
)
$
11,892
NM
Underwriting Ratios:
Loss ratio (1) :
59.5
%
60.9
%
58.2
%
62.0
%
Expense ratio (2)
39.2
%
38.3
%
38.7
%
38.2
%
Combined ratio (3)
98.7
%
99.2
%
96.9
%
100.2
%
NM – not meaningful
(1)
The loss ratio is a GAAP financial measure that is generally viewed in the insurance industry as an indicator of underwriting profitability and is calculated by dividing net losses and loss adjustment expenses by net earned premiums.
(2)
The expense ratio is a GAAP financial measure that is calculated by dividing the sum of acquisition costs and other underwriting expenses by net earned premiums.
(3)
The combined ratio is a GAAP financial measure and is the sum of the Company’s loss and expense ratios.
40
GLOBAL INDEMNITY GROUP, LLC
Premiums
The following table summarizes the change in premium volume by business segment:
Quarters Ended
June 30,
Six Months Ended
June 30,
(Dollars in thousands)
2022
2021
% Change
2022
2021
% Change
Gross written premiums (1)
Commercial Specialty
$
109,797
$
99,406
10.5
%
$
214,063
$
188,740
13.4
%
Reinsurance Operations (3)
46,394
24,487
89.5
%
87,839
46,438
89.2
%
Continuing Lines
156,191
123,893
26.1
%
301,902
235,178
28.4
%
Exited Lines
40,632
51,343
(20.9
%)
85,904
103,616
(17.1
%)
Total gross written premiums
$
196,823
$
175,236
12.3
%
$
387,806
$
338,794
14.5
%
Ceded written premiums
Commercial Specialty
$
8,626
$
7,759
11.2
%
$
14,579
$
14,921
(2.3
%)
Reinsurance Operations (3)
—
—
—
—
—
—
Continuing Lines
8,626
7,759
11.2
%
14,579
14,921
(2.3
%)
Exited Lines
21,039
6,824
NM
46,587
15,537
199.8
%
Total ceded written premiums
$
29,665
$
14,583
103.4
%
$
61,166
$
30,458
100.8
%
Net written premiums (2)
Commercial Specialty
$
101,171
$
91,647
10.4
%
$
199,484
$
173,819
14.8
%
Reinsurance Operations (3)
46,394
24,487
89.5
%
87,839
46,438
89.2
%
Continuing Lines
147,565
116,134
27.1
%
287,323
220,257
30.4
%
Exited Lines
19,593
44,519
(56.0
%)
39,317
88,079
(55.4
%)
Total net written premiums
$
167,158
$
160,653
4.0
%
$
326,640
$
308,336
5.9
%
Net earned premiums
Commercial Specialty
$
95,172
$
81,965
16.1
%
$
186,935
$
160,657
16.4
%
Reinsurance Operations (3)
38,596
18,061
113.7
%
73,559
34,859
111.0
%
Continuing Lines
133,768
100,026
33.7
%
260,494
195,516
33.2
%
Exited Lines
21,981
49,382
(55.5
%)
44,078
97,592
(54.8
%)
Total net earned premiums
$
155,749
$
149,408
4.2
%
$
304,572
$
293,108
3.9
%
NM – not meaningful
(1)
Gross written premiums represent the amount received or to be received for insurance policies written without reduction for reinsurance costs, ceded premiums, or other deductions.
(2)
Net written premiums equal gross written premiums less ceded written premiums.
(3)
External business only, excluding business assumed from affiliates.
Gross written premiums increased by 12.3% and 14.5% for the quarter and six months ended June 30, 2022, respectively, as compared to same periods in 2021. The increase in gross written premiums is mainly due to the continued growth of existing programs, increased pricing, and several new programs within Commercial Specialty, the organic growth of existing casualty treaties within Reinsurance Operations, partially offset by a reduction in premiums within Exited Lines.
41
GLOBAL INDEMNITY GROUP, LLC
Underwriting Ratios
Quarters Ended
June 30,
Point
Six Months Ended
June 30,
Point
2022
2021
Change
2022
2021
Change
Loss ratio
Commercial Specialty
58.9
%
52.1
%
6.8
57.8
%
57.6
%
0.2
Reinsurance Operations
58.3
%
64.2
%
(5.9
)
59.7
%
64.4
%
(4.7
)
Continuing Lines
58.7
%
54.3
%
4.4
58.4
%
58.8
%
(0.4
)
Exited Lines
64.1
%
74.2
%
(10.1
)
57.4
%
68.4
%
(11.0
)
Total loss ratio
59.5
%
60.9
%
(1.4
)
58.2
%
62.0
%
(3.8
)
Expense ratio
Commercial Specialty
38.1
%
37.3
%
0.8
37.4
%
37.1
%
0.3
Reinsurance Operations
37.2
%
34.3
%
2.9
36.1
%
34.4
%
1.7
Continuing Lines
37.8
%
36.8
%
1.0
37.0
%
36.6
%
0.4
Exited Lines
47.8
%
41.4
%
6.4
48.4
%
41.4
%
7.0
Total expense ratio
39.2
%
38.3
%
0.9
38.7
%
38.2
%
0.5
Combined ratio
Commercial Specialty
97.0
%
89.4
%
7.6
95.2
%
94.7
%
0.5
Reinsurance Operations
95.5
%
98.5
%
(3.0
)
95.8
%
98.8
%
(3.0
)
Continuing Lines
96.5
%
91.1
%
5.4
95.4
%
95.4
%
(0.0
)
Exited Lines
111.9
%
115.6
%
(3.7
)
105.8
%
109.8
%
(4.0
)
Total combined ratio
98.7
%
99.2
%
(0.5
)
96.9
%
100.2
%
(3.3
)
Net Retention
The ratio of net written premiums to gross written premiums is referred to as the Company’s net premium retention. The Company’s net premium retention is summarized by segments as follows:
Quarters Ended
June 30,
Point
Six Months Ended
June 30,
Point
(Dollars in thousands)
2022
2021
Change
2022
2021
Change
Commercial Specialty
92.1
%
92.2
%
(0.1
)
93.2
%
92.1
%
1.1
Reinsurance Operations
100.0
%
100.0
%
—
100.0
%
100.0
%
—
Continuing Lines
94.5
%
93.7
%
0.8
95.2
%
93.7
%
1.5
Exited Lines
48.2
%
86.7
%
(38.5
)
45.8
%
100.0
%
(54.2
)
Total
84.9
%
91.7
%
(6.8
)
84.2
%
91.0
%
(6.8
)
The net premium retention for both the quarter and six months ended June 30, 2022 decreased by 6.8 points as compared to the same periods in 2021. The reduction in retention is primarily driven by the Company entering into an agreement effective November 30, 2021 where American Family Mutual Insurance Company agreed to reinsure 100% of the Company’s unearned premium reserves of the same types as the policies included in the sale of the renewal rights of the Company’s manufactured and dwelling homes products that were in force as of November 30, 2021. See Note 3 of the notes to the consolidated financial statements in Item 8 Part II of the Company’s 2021 Annual Report on Form 10-K for additional information on this reinsurance agreement as well as the sale of renewal rights related to the Company’s manufactured and dwelling home products.
Net Earned Premiums
Net earned premiums within the Commercial Specialty segment increased by 16.1% and 16.4% for the quarter and six months ended June 30, 2022, respectively, as compared to the same periods in 2021. The increase in net earned premiums was primarily due to a growth in premiums written as a result of organic growth from existing agents, pricing increases, and several new programs. Property net earned premiums were $36.8 million and $34.7 million for the quarters ended June 30, 2022 and 2021, respectively, and $72.3 million and $71.9 million for the six months ended June 30, 2022 and 2021,
42
GLOBAL INDEMNITY GROUP, LLC
respectively . Casualty net earned premiums were $ 5 8.3 million and $ 4 7.2 million for the quarters ended June 30, 2022 and 2021 , respectively , and $ 114.6 million and $ 88. 8 million for the six months ended June 30, 2022 and 2021 , respectively .
Net earned premiums within the Reinsurance Operations segment increased by 113.7% and 111.0% for the quarter and six months ended June 30, 2022, respectively, as compared to the same periods in 2021 primarily due to organic growth of existing casualty treaties. There was no property net earned premiums for the quarters and six months ended June 30, 2022 and 2021. Casualty net earned premiums were $38.6 million and $18.1 million for the quarters ended June 30, 2022 and 2021, respectively, and $73.6 million and $34.9 million for the six months ended June 30, 2022 and 2021, respectively.
Net earned premiums within the Exited Lines segment decreased by 55.5% and 54.8% for the quarter and six months ended June 30, 2022, respectively, as compared to the same periods in 2021 primarily due to the sale of the renewal rights related to the Company’s manufactured and dwelling home products on October 26, 2021. The decrease in net earned premiums is also due to exiting lines of business unrelated to the company’s continuing businesses. Property net earned premiums were $16.6 million and $43.1 million for the quarters ended June 30, 2022 and 2021, respectively, and $34.2 million and $85.0 million for the six months ended June 30, 2022 and 2021, respectively. Casualty net earned premiums were $5.4 million and $6.2 million for the quarters ended June 30, 2022 and 2021, respectively, and $9.8 million and $12.6 million for the six months ended June 30, 2022 and 2021, respectively.
Reserves
Management’s best estimate at June 30, 2022 was recorded as the loss reserve. Management’s best estimate is as of a particular point in time and is based upon known facts, the Company’s actuarial analyses, current law, and the Company’s judgment. This resulted in carried gross and net reserves of $804.7 million and $710.5 million, respectively, as of June 30, 2022. A breakout of the Company’s gross and net reserves, as of June 30, 2022, is as follows:
Gross Reserves
(Dollars in thousands)
Case
IBNR (1)
Total
Commercial Specialty
$
163,650
$
316,635
$
480,285
Reinsurance Operations
6,249
138,272
144,521
Continuing Lines
169,899
454,907
624,806
Exited Lines
83,667
96,188
179,855
Total
$
253,566
$
551,095
$
804,661
Net Reserves (2)
(Dollars in thousands)
Case
IBNR (1)
Total
Commercial Specialty
$
140,566
$
284,090
$
424,656
Reinsurance Operations
6,249
138,272
144,521
Continuing Lines
146,815
422,362
569,177
Exited Lines
63,867
77,432
141,299
Total
$
210,682
$
499,794
$
710,476
(1)
Losses incurred but not reported, including the expected future emergence of case reserves.
(2)
Does not include reinsurance receivable on paid losses.
Each reserve category has an implicit frequency and severity for each accident year as a result of the various assumptions made. If the actual levels of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s best estimate. For most of its reserve categories, the Company believes that frequency can be predicted with greater accuracy than severity. Therefore, the Company believes management’s best estimate is more likely influenced by changes in severity than frequency. The following table, which the Company believes reflects a reasonable range of variability around its best estimate based on historical loss experience and management’s judgment, reflects the
43
GLOBAL INDEMNITY GROUP, LLC
impact of changes (which could be favorable or unfavorable) in frequency and severity on the Company’s current accident year net loss estimate of $183.9 million for claims occurring during the six months ended June 30, 2022 :
Severity Change
(Dollars in thousands)
-10%
-5%
0%
5%
10%
Frequency Change
-5%
(26,672
)
(17,935
)
(9,197
)
(460
)
8,278
-3%
(23,361
)
(14,440
)
(5,518
)
3,403
12,324
-2%
(21,706
)
(12,692
)
(3,679
)
5,334
14,348
-1%
(20,050
)
(10,945
)
(1,839
)
7,266
16,371
0%
(18,395
)
(9,197
)
—
9,197
18,395
1%
(16,739
)
(7,450
)
1,839
11,129
20,418
2%
(15,084
)
(5,702
)
3,679
13,060
22,442
3%
(13,428
)
(3,955
)
5,518
14,992
24,465
5%
(10,117
)
(460
)
9,197
18,855
28,512
The Company’s net reserves for losses and loss adjustment expenses of $710.5 million as of June 30, 2022 relate to multiple accident years. Therefore, the impact of changes in frequency and severity for more than one accident year could be higher or lower than the amounts reflected above.
Underwriting Results
Commercial Specialty
The components of income from the Company’s Commercial Specialty segment and corresponding underwriting ratios are as follows:
Quarters Ended
June 30,
%
Six Months Ended
June 30,
%
(Dollars in thousands)
2022
2021
Change
2022
2021
Change
Gross written premiums
$
109,797
$
99,406
10.5
%
$
214,063
$
188,740
13.4
%
Net written premiums
$
101,171
$
91,647
10.4
%
$
199,484
$
173,819
14.8
%
Net earned premiums
$
95,172
$
81,965
16.1
%
$
186,935
$
160,657
16.4
%
Other income
260
$
208
25.0
%
$
519
$
452
14.8
%
Total revenues
95,432
82,173
16.1
%
187,454
161,109
16.4
%
Losses and expenses:
Net losses and loss adjustment expenses
56,042
42,669
31.3
%
108,095
92,459
16.9
%
Acquisition costs and other underwriting expenses
36,222
30,577
18.5
%
69,911
59,629
17.2
%
Underwriting income
$
3,168
$
8,927
(64.5
%)
$
9,448
$
9,021
4.7
%
Quarters Ended
June 30,
Point
Six Months Ended
June 30,
Point
2022
2021
Change
2022
2021
Change
Underwriting Ratios:
Loss ratio:
Current accident year
58.6
%
52.7
%
5.9
57.5
%
59.5
%
(2.0
)
Prior accident year
0.3
%
(0.6
%)
0.9
0.3
%
(1.9
%)
2.2
Calendar year loss ratio
58.9
%
52.1
%
6.8
57.8
%
57.6
%
0.2
Expense ratio
38.1
%
37.3
%
0.8
37.4
%
37.1
%
0.3
Combined ratio
97.0
%
89.4
%
7.6
95.2
%
94.7
%
0.5
44
GLOBAL INDEMNITY GROUP, LLC
Reconciliation of non-GAAP financial measures and ratios
The table below reconciles the non-GAAP measures or ratios, which excludes the impact of prior accident year adjustments, to its most directly comparable GAAP measure or ratio. The Company believes the non-GAAP measures or ratios are useful to investors when evaluating the Company's underwriting performance as trends within Commercial Specialty may be obscured by prior accident year adjustments. These non-GAAP measures or ratios should not be considered as a substitute for its most directly comparable GAAP measure or ratio and does not reflect the overall underwriting profitability of the Company.
Quarters Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(Dollars in thousands)
Losses
Loss
Ratio
Losses
Loss
Ratio
Losses
Loss
Ratio
Losses
Loss
Ratio
Property
Non catastrophe property losses and ratio excluding the effect of prior accident year (1)
$
18,125
49.2
%
$
13,218
38.0
%
$
35,707
49.4
%
$
33,790
47.0
%
Effect of prior accident year
383
1.0
%
(6
)
(0.0
%)
(374
)
(0.5
%)
(1,534
)
(2.1
%)
Non catastrophe property losses and ratio (2)
$
18,508
50.2
%
$
13,212
38.0
%
$
35,333
48.9
%
$
32,256
44.9
%
Catastrophe losses and ratio excluding the effect of prior accident year (1)
$
3,189
8.7
%
$
2,855
8.2
%
$
5,423
7.5
%
$
11,573
16.1
%
Effect of prior accident year
(1,334
)
(3.6
%)
514
1.5
%
(353
)
(0.5
%)
(392
)
(0.6
%)
Catastrophe losses and ratio (2)
$
1,855
5.1
%
$
3,369
9.7
%
$
5,070
7.0
%
$
11,181
15.5
%
Total property losses and ratio excluding the effect of prior accident year (1)
$
21,314
57.9
%
$
16,073
46.2
%
$
41,130
56.9
%
$
45,363
63.1
%
Effect of prior accident year
(951
)
(2.6
%)
508
1.5
%
(727
)
(1.0
%)
(1,926
)
(2.7
%)
Total property losses and ratio (2)
$
20,363
55.3
%
$
16,581
47.7
%
$
40,403
55.9
%
$
43,437
60.4
%
Casualty
Total casualty losses and ratio excluding the effect of prior accident year (1)
$
34,460
59.1
%
$
27,126
57.4
%
$
66,420
58.0
%
$
50,220
56.6
%
Effect of prior accident year
1,219
2.1
%
(1,038
)
(2.2
%)
1,272
1.1
%
(1,198
)
(1.3
%)
Total casualty losses and ratio (2)
$
35,679
61.2
%
$
26,088
55.2
%
$
67,692
59.1
%
$
49,022
55.3
%
Total
Total net losses and loss adjustment expense and total loss ratio excluding the effect of prior accident year (1)
$
55,774
58.6
%
$
43,199
52.7
%
$
107,550
57.5
%
$
95,583
59.5
%
Effect of prior accident year
268
0.3
%
(530
)
(0.6
%)
545
0.3
%
(3,124
)
(1.9
%)
Total net losses and loss adjustment expense and total loss ratio (2)
$
56,042
58.9
%
$
42,669
52.1
%
$
108,095
57.8
%
$
92,459
57.6
%
(1)
Non-GAAP measure / ratio
(2)
Most directly comparable GAAP measure / ratio
Premiums
See “Result of Operations” above for a discussion on consolidated premiums.
Other Income
Other income was $0.3 million and $0.2 million for the quarters ended June 30, 2022 and 2021, respectively, and $0.5 million and $0.5 million for the six months ended June 30, 2022 and 2021, respectively. Other income is primarily comprised of fee income.
45
GLOBAL INDEMNITY GROUP, LLC
Loss Ratio
The current accident year losses and loss ratio is summarized as follows:
Quarters Ended
June 30,
%
Six Months Ended
June 30,
%
(Dollars in thousands)
2022
2021
Change
2022
2021
Change
Property losses
Non-catastrophe
$
18,125
$
13,218
37.1
%
$
35,707
$
33,790
5.7
%
Catastrophe
3,189
2,855
11.7
%
5,423
11,573
(53.1
%)
Property losses
21,314
16,073
32.6
%
41,130
45,363
(9.3
%)
Casualty losses
34,460
27,126
27.0
%
66,420
50,220
32.3
%
Total accident year losses
$
55,774
$
43,199
29.1
%
$
107,550
$
95,583
12.5
%
Quarters Ended
June 30,
Point
Six Months Ended
June 30,
Point
2022
2021
Change
2022
2021
Change
Current accident year loss ratio:
Property
Non-catastrophe
49.2
%
38.0
%
11.2
49.4
%
47.0
%
2.4
Catastrophe
8.7
%
8.2
%
0.5
7.5
%
16.1
%
(8.6
)
Property loss ratio
57.9
%
46.2
%
11.7
56.9
%
63.1
%
(6.2
)
Casualty loss ratio
59.1
%
57.4
%
1.7
58.0
%
56.6
%
1.4
Total accident year loss ratio
58.6
%
52.7
%
5.9
57.5
%
59.5
%
(2.0
)
The current accident year non-catastrophe property loss ratio increased by 11.2 points during the quarter ended June 30, 2022 as compared to the same period in 2021 reflecting higher claims severity in the second accident quarter compared to last year.
The current accident year non-catastrophe property loss ratio increased by 2.4 points during the six months ended June 30, 2022 as compared to the same period in 2021 due to higher claims severity in the first six months compared to last year.
The current accident year catastrophe loss ratio increased by 0.5 points during the quarter ended June 30, 2022 as compared to the same period in 2021 recognizing higher claims frequency in the calendar quarter compared to last year.
The current accident year catastrophe loss ratio improved by 8.6 points during the six months ended June 30, 2022 as compared to the same period in 2021 due to lower claims frequency and severity in the first six months compared to last year.
The current accident year casualty loss ratio increased by 1.7 points during the quarter ended June 30, 2022 as compared to the same period in 2021 reflecting higher claims severity in the calendar quarter compared to last year.
The current accident year casualty loss ratio increased by 1.4 points during the six months ended June 30, 2022 as compared to the same period in 2021 due to higher claims severity in the first six months compared to last year.
The calendar year loss ratio for the quarter and six months ended June 30, 2022 includes a increase of $0.3 million, or 0.3 percentage points, and a increase of $0.5 million, or 0.3 percentage points, respectively, related to reserve development on prior accident years. The calendar year loss ratio for the quarter and six months ended June 30, 2021 includes a decrease of $0.5 million, or 0.6 percentage points, and a decrease of $3.1 million, or 1.9 percentage points, respectively, related to reserve development on prior accident years. Please see Note 7 of the notes to the consolidated financial statements in Item 1 of Part I of this report for further discussion on prior accident year development.
Expense Ratios
The expense ratio for the Company’s Commercial Specialty segment increased by 0.8 points from 37.3% for the quarter ended June 30, 2021 to 38.1% for the quarter ended June 30, 2022 and increased by 0.3 points from 37.1% for the six months ended June 30, 2021 to 37.4% for the six months ended June 30, 2022. The increase in the expense ratio is primarily due to higher compensation cost resulting from the start-up business lines partially offset by a reduction in the expense ratio due to growth in net earned premiums.
46
GLOBAL INDEMNITY GROUP, LLC
COVID-19
COVID-19’s lasting impacts could result in declines in business, non-payment of premiums, and increases in claims that could adversely affect Commercial Specialty’s business, financial condition, and results of operation.
There is continued risk that legislation could be passed or there could be a court ruling which would require the Company to cover business interruption claims regardless of terms, exclusions including the virus exclusions contained within the Company’s Commercial Specialty policies, or other conditions included in these policies that would otherwise preclude coverage.
Reinsurance Operations
The components of income from the Company’s Reinsurance Operations segment and corresponding underwriting ratios are as follows:
Quarters Ended
June 30,
%
Six Months Ended
June 30,
%
(Dollars in thousands)
2022 (1)
2021 (1)
Change
2022 (1)
2021 (1)
Change
Gross written premiums
$
46,394
$
24,487
89.5
%
$
87,839
$
46,438
89.2
%
Net written premiums
$
46,394
$
24,487
89.5
%
$
87,839
$
46,438
89.2
%
Net earned premiums
$
38,596
$
18,061
113.7
%
$
73,559
$
34,859
111.0
%
Other income (loss)
(61
)
14
NM
(81
)
(42
)
92.9
%
Total revenues
38,535
18,075
113.2
%
73,478
34,817
111.0
%
Losses and expenses:
Net losses and loss adjustment expenses
22,481
11,600
93.8
%
43,938
22,475
95.5
%
Acquisition costs and other underwriting expenses
14,369
6,198
131.8
%
26,546
11,977
121.6
%
Underwriting income
$
1,685
$
277
NM
$
2,994
$
365
NM
Quarters Ended
June 30,
Point
Six Months Ended
June 30,
Point
2022
2021
Change
2022
2021
Change
Underwriting Ratios:
Loss ratio:
Current accident year (2)
61.4
%
64.3
%
(2.9
)
61.3
%
64.5
%
(3.2
)
Prior accident year
(3.1
%)
(0.1
%)
(3.0
)
(1.6
%)
(0.1
%)
(1.5
)
Calendar year loss ratio (3)
58.3
%
64.2
%
(5.9
)
59.7
%
64.4
%
(4.7
)
Expense ratio
37.2
%
34.3
%
2.9
36.1
%
34.4
%
1.7
Combined ratio
95.5
%
98.5
%
(3.0
)
95.8
%
98.8
%
(3.0
)
(1)
External business only, excluding business assumed from affiliates
(2)
Non-GAAP ratio
(3)
Most directly comparable GAAP ratio
NM – not meaningful
47
GLOBAL INDEMNITY GROUP, LLC
Reconciliation of non-GAAP financial ratios
The table above reconciles the non-GAAP ratios, which excludes the impact of prior accident year adjustments, to its most directly comparable GAAP ratio. The Company believes the non-GAAP ratios are useful to investors when evaluating the Company's underwriting performance as trends within Reinsurance Operations may be obscured by prior accident year adjustments. These non-GAAP ratios should not be considered as a substitute for its most directly comparable GAAP ratio and does not reflect the overall underwriting profitability of the Company.
Premiums
See “Result of Operations” above for a discussion on consolidated premiums.
Other Income (Loss)
The Company recognized a loss of $0.1 million for each of the quarters ended June 30, 2022 and 2021 and recognized income of less than $0.1 million and a loss of less than $0.1 million for the six months ended June 30, 2022 and 2021, respectively. Other income (loss) is primarily comprised of foreign exchange gains and losses.
Loss Ratio
The current accident year loss ratio improved by 2.9 points during the quarter ended June 30, 2022 as compared to the same period in 2021 reflecting a mix of business change and growth in a treaty that has a lower expected loss ratio than last year.
The current accident year loss ratio improved by 3.2 points during six months ended June 30, 2022 as compared to the same period in 2021 reflecting a mix of business change and growth in a treaty that has a lower expected loss ratio than last year.
The calendar year loss ratios for the quarter and six months ended June 30, 2022 includes a decrease of $1.2 million or 3.1 percentage points, and a decrease of $1.2 million, or 1.6 percentage points, respectively, related to reserve development on prior accident years. The calendar year loss ratios for both the quarter and six months ended June 30, 2021 includes a decrease of less than $0.1 million or 0.1 percentage point, related to reserve development on prior accident years. Please see Note 7 of the notes to the consolidated financial statements in Item 1 of Part I of this report for further discussion on prior accident year development.
Expense Ratios
The expense ratio for the Company’s Reinsurance Operations segment increased 2.9 points from 34.3% for the quarter ended June 30, 2021 to 37.2% for the quarter ended June 30, 2022 and increased 1.7 points from 34.4% for the six months ended June 30, 2021 to 36.1% for the six months ended June 30, 2022. This increase in the expense ratio was primarily due to an increase in commission expense which was partially offset by a reduction in the expense ratio as a result of a growth in net earned premiums.
COVID-19
COVID-19’s lasting impacts could result in declines in business, non-payment of premiums, and increases in claims that could adversely affect Reinsurance Operations’ business, financial condition, and results of operation.
48
GLOBAL INDEMNITY GROUP, LLC
Exited Lines
The components of loss from the Company’s Exited Lines segment and corresponding underwriting ratios are as follows:
Quarters Ended
June 30,
%
Six Months Ended
June 30,
%
(Dollars in thousands)
2022
2021
Change
2022
2021
Change
Gross written premiums
$
40,632
$
51,343
(20.9
%)
$
85,904
$
103,616
(17.1
%)
Net written premiums
$
19,593
$
44,519
(56.0
%)
$
39,317
$
88,079
(55.4
%)
Net earned premiums
$
21,981
$
49,382
(55.5
%)
$
44,078
$
97,592
(54.8
%)
Other income (loss)
(25
)
290
(108.6
%)
175
510
(65.7
%)
Total revenues
21,956
49,672
(55.8
%)
44,253
98,102
(54.9
%)
Losses and expenses:
Net losses and loss adjustment expenses
14,095
36,669
(61.6
%)
25,280
66,787
(62.1
%)
Acquisition costs and other underwriting expenses
10,507
20,438
(48.6
%)
21,333
40,371
(47.2
%)
Underwriting loss
$
(2,646
)
$
(7,435
)
(64.4
%)
$
(2,360
)
$
(9,056
)
(73.9
%)
Quarters Ended
June 30,
Point
Six Months Ended
June 30,
Point
2022
2021
Change
2022
2021
Change
Underwriting Ratios:
Loss ratio:
Current accident year
76.1
%
61.9
%
14.2
70.9
%
63.0
%
7.9
Prior accident year
(12.0
%)
12.3
%
(24.3
)
(13.5
%)
5.4
%
(18.9
)
Calendar year loss ratio
64.1
%
74.2
%
(10.1
)
57.4
%
68.4
%
(11.0
)
Expense ratio
47.8
%
41.4
%
6.4
48.4
%
41.4
%
7.0
Combined ratio
111.9
%
115.6
%
(3.7
)
105.8
%
109.8
%
(4.0
)
49
GLOBAL INDEMNITY GROUP, LLC
Reconciliation of non-GAAP financial ratios
The table below reconciles the non-GAAP measures or ratios, which excludes the impact of prior accident year adjustments, to its most directly comparable GAAP measure or ratio. The Company believes the non-GAAP measures or ratios are useful to investors when evaluating the Company's underwriting performance as trends within Exited Lines may be obscured by prior accident year adjustments. These non-GAAP measures or ratios should not be considered as a substitute for its most directly comparable GAAP measure or ratio and does not reflect the overall underwriting profitability of the Company.
Quarters Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(Dollars in thousands)
Losses
Loss Ratio
Losses
Loss Ratio
Losses
Loss Ratio
Losses
Loss Ratio
Property
Non catastrophe property losses and ratio excluding the effect of prior accident year (1)
$
9,229
55.5
%
$
22,271
51.6
%
$
19,108
55.8
%
$
41,608
48.9
%
Effect of prior accident year
(2,754
)
(16.6
%)
(277
)
(0.6
%)
(4,291
)
(12.5
%)
1,764
2.1
%
Non catastrophe property losses and ratio (2)
$
6,475
39.0
%
$
21,994
51.0
%
$
14,817
43.3
%
$
43,372
51.0
%
Catastrophe losses and ratio excluding the effect of prior accident year (1)
$
5,189
31.2
%
$
4,958
11.5
%
$
7,262
21.2
%
$
13,150
15.5
%
Effect of prior accident year
191
1.1
%
6,298
14.6
%
(1,165
)
(3.4
%)
4,691
5.5
%
Catastrophe losses and ratio (2)
$
5,380
32.3
%
$
11,256
26.1
%
$
6,097
17.8
%
$
17,841
21.0
%
Total property losses and ratio excluding the effect of prior accident year (1)
$
14,418
86.7
%
$
27,229
63.1
%
$
26,370
77.0
%
$
54,758
64.4
%
Effect of prior accident year
(2,563
)
(15.4
%)
6,021
14.0
%
(5,456
)
(15.9
%)
6,455
7.6
%
Total property losses and ratio (2)
$
11,855
71.3
%
$
33,250
77.1
%
$
20,914
61.1
%
$
61,213
72.0
%
Casualty
Total casualty losses and ratio excluding the effect of prior accident year (1)
$
2,307
43.0
%
$
3,358
53.8
%
$
4,880
49.6
%
$
6,764
53.9
%
Effect of prior accident year
(67
)
(1.3
%)
61
1.0
%
(514
)
(5.2
%)
(1,190
)
(9.5
%)
Total casualty losses and ratio (2)
$
2,240
41.8
%
$
3,419
54.7
%
$
4,366
44.4
%
$
5,574
44.4
%
Total
Total net losses and loss adjustment expense and total loss ratio excluding the effect of prior accident year (1)
$
16,725
76.1
%
$
30,587
61.9
%
$
31,250
70.9
%
$
61,522
63.0
%
Effect of prior accident year
(2,630
)
(12.0
%)
6,082
12.3
%
$
(5,970
)
(13.5
%)
5,265
5.4
%
Total net losses and loss adjustment expense and total loss ratio (2)
$
14,095
64.1
%
$
36,669
74.2
%
$
25,280
57.4
%
$
66,787
68.4
%
(1)
Non-GAAP measure / ratio
(2)
Most directly comparable GAAP measure / ratio
Premiums
See “Result of Operations” above for a discussion on consolidated premiums.
50
GLOBAL INDEMNITY GROUP, LLC
Other Income (Loss)
The Company recognized a loss of less than $0.1 million and income of $0.3 million for the quarters ended June 30, 2022 and 2021, respectively, and income of $0.2 million and income of $0.5 million for the six months ended June 30, 2022 and 2021, respectively. Other income is primarily comprised of fee income net of bank fees.
Loss Ratio
The current accident year losses and loss ratio is summarized as follows:
Quarters Ended
June 30,
%
Six Months Ended
June 30,
%
(Dollars in thousands)
2022
2021
Change
2022
2021
Change
Property losses
Non-catastrophe
$
9,229
$
22,271
(58.6
%)
$
19,108
$
41,608
(54.1
%)
Catastrophe
5,189
4,958
4.7
%
7,262
13,150
(44.8
%)
Property losses
14,418
27,229
(47.0
%)
26,370
54,758
(51.8
%)
Casualty losses
2,307
3,358
(31.3
%)
4,880
6,764
(27.9
%)
Total accident year losses
$
16,725
$
30,587
(45.3
%)
$
31,250
$
61,522
(49.2
%)
Quarters Ended
June 30,
Point
Six Months Ended
June 30,
Point
2022
2021
Change
2022
2021
Change
Current accident year loss ratio:
Property
Non-catastrophe
55.5
%
51.6
%
3.9
55.8
%
48.9
%
6.9
Catastrophe
31.2
%
11.5
%
19.7
21.2
%
15.5
%
5.7
Property loss ratio
86.7
%
63.1
%
23.6
77.0
%
64.4
%
12.6
Casualty loss ratio
43.0
%
53.8
%
(10.8
)
49.6
%
53.9
%
(4.3
)
Total accident year loss ratio
76.1
%
61.9
%
14.2
70.9
%
63.0
%
7.9
The current accident year non-catastrophe property loss ratio increased by 3.9 points during the quarter ended June 30, 2022 as compared to the same period in 2021 recognizing higher claims frequency in Farm, Ranch & Stable business lines partially offset by lower claims frequency in the specialty property lines and lower claims severity in the property brokerage lines.
The current accident year non-catastrophe property loss ratio increased by 6.9 points during six months ended June 30, 2022 as compared to the same period in 2021 due to a higher loss ratio in the specialty property lines as well as higher claims frequency and severity in the Farm, Ranch & Stable business lines.
The current accident year catastrophe loss ratio increased by 19.7 points during the quarter ended June 30, 2022 as compared to the same period in 2021 recognizing higher claims frequency and severity in the specialty property lines and Farm, Ranch & Stable business lines.
The current accident year catastrophe loss ratio increased by 5.7 points during the six months ended June 30, 2022 as compared to the same period in 2021 reflecting higher claims severity in the Farm, Ranch & Stable business lines partially offset by lower claims frequency and severity in the property brokerage lines.
The current accident year casualty loss ratio improved by 10.8 points during the quarter ended June 30, 2022 as compared to the same period in 2021 which reflects that the premium has been running off and is down to $0.9 million in net earned premiums for the specialty property lines, property brokerage, and property and catastrophe reinsurance treaties in the quarter as well as lower claims frequency in Farm, Ranch & Stable business lines.
The current accident year casualty loss ratio improved by 4.3 points during the six months ended June 30, 2022 as compared to the same period in 2021 primarily due to lower claims severity in the Farm, Ranch & Stable business lines partially offset by higher claims severity in the specialty property lines.
51
GLOBAL INDEMNITY GROUP, LLC
The calendar year loss ratio for the quarter and six months ended June 30, 2022 includes a decrease of $2.6 million, or 12.0 percentage points, and a decrease of $6.0 million, or 13.5 percentage points, respectively related to reserve development on prior accident years. The calendar year loss ratio for the quarter and six months ended June 30, 2021 includes an increase of $6.1 million, or 12.3 percentage points, and an increase of $5.3 million, or 5.4 percentage points, respectively, related to reserve development on prior accident years. Please see Note 7 of the notes to the consolidated financial statements in Item 1 of Part I of this report for further discussion on prior accident year development.
Expense Ratio
The expense ratio for the Company’s Exited Lines increased by 6.4 points from 41.4% for the quarter ended June 30, 2021 to 47.8% for the quarter ended June 30, 2022. The expense ratio for the Company’s Exited Lines increased by 7.0 points from 41.4% for the six months ended June 30, 2021 to 48.4% for the six months ended June 30, 2022. The increase in the expense ratio is primarily due to the reduction in earned premiums resulting from the runoff of lines of business that the Company is no longer writing.
COVID-19
There is continued risk that legislation could be passed or there could be a court ruling which would require the Company to cover business interruption claims regardless of terms, exclusions including the virus exclusions contained within the Company’s Exited Lines’ policies, or other conditions included in these policies that would otherwise preclude coverage
COVID-19’s lasting impacts could result in declines in business, non-payment of premiums, and increases in claims that could adversely affect the Exited Lines’ business, financial condition, and results of operation.
Unallocated Corporate Items
The Company’s fixed income portfolio, excluding cash, continues to maintain high quality with an A average rating and a duration of 1.7 years.
Net Investment Income
Quarters Ended
June 30,
%
Six Months Ended
June 30,
%
(Dollars in thousands)
2022
2021
Change
2022
2021
Change
Gross investment income (1)
$
2,541
$
11,268
(77.4
%)
$
9,737
$
21,817
(55.4
%)
Investment expenses
(611
)
(635
)
(3.8
%)
(1,215
)
(1,348
)
(9.9
%)
Net investment income
$
1,930
$
10,633
(81.8
%)
$
8,522
$
20,469
(58.4
%)
(1)
Excludes realized gains and losses
Gross investment income decreased by 77.4% and 55.4% for the quarter and six months ended June 30, 2022 as compared to the same periods in 2021 primarily due to decreased returns from alternative investments and a decrease in dividend income as a result of the liquidation of the Company’s common stock portfolio during the first quarter of 2022. The proceeds from the sale of the common stock portfolio as well as other proceeds were used to retire the 2047 Notes in April 2022.
Investment expenses decreased by 3.8% and 9.9% for the quarter and six months ended June 30, 2022 as compared to the same periods in 2021 due to decreased investment management expenses as a result of the liquidation of the Company’s common stock portfolio during the year.
At June 30, 2022, the Company held agency mortgage-backed securities with a market value of $3.8 million. Excluding the agency mortgage-backed securities, the average duration of the Company’s fixed maturities portfolio was 1.8 years as of June 30, 2022, compared with 4.7 years as of June 30, 2021. Including cash and short-term investments, the average duration of the Company’s fixed maturities portfolio, excluding agency mortgage-backed securities, was 1.7 years and 4.5 years as of June 30, 2022 and June 30, 2021, respectively. Changes in interest rates can cause principal payments on certain investments to extend or shorten which can impact duration. The Company’s embedded book yield on its fixed maturities, not including cash, was 2.7% as of June 30, 2022, compared to 2.3% as of June 30, 2021. The embedded book yield on the $32.4 million of
52
GLOBAL INDEMNITY GROUP, LLC
taxable municipal bonds in the Company’s portfolio , was 3.1% at June 30, 2022 , compared to an embedded book yie ld of 3. 0 % on the Company’s taxable municipal bond s of $ 64.5 million at June 30, 2021 .
Net Realized Investment Gains (Losses)
The components of net realized investment gains (losses) for the quarters and six months ended June 30, 2022 and 2021 were as follows:
Quarters Ended
June 30,
Six Months Ended
June 30,
(Dollars in thousands)
2022
2021
2022
2021
Equity securities
$
(2,415
)
$
3,395
$
(3,760
)
$
7,763
Fixed maturities
(8,637
)
453
(11,876
)
(706
)
Derivatives
1,816
(15
)
6,540
595
Other-than-temporary impairment losses
(680
)
—
(26,205
)
—
Net realized investment gains (losses)
$
(9,916
)
$
3,833
$
(35,301
)
$
7,652
In response to a rising interest rate environment, the Company took action early in April 2022 to shorten the duration of its fixed maturities portfolio. The Company identified fixed maturities securities with a weighted average life of five years or greater as having an intent to sell. Most of the proceeds from the sale of these securities were reinvested into fixed income investments with maturities of two years and less.
See Note 2 of the notes to the consolidated financial statements in Item 1 of Part I of this report for an analysis of total investment return on a pre-tax basis for the quarters and six months ended June 30, 2022 and 2021.
Corporate and Other Operating Expenses
Corporate and other operating expenses consist of outside legal fees, other professional fees, directors’ fees, management fees & advisory fees, salaries and benefits for holding company personnel, development costs for new products, and taxes incurred which are not directly related to operations. Corporate and other operating expenses were $3.0 million and $6.3 million during the quarters ended June 30, 2022 and 2021, respectively, and $7.7 million and $10.6 million during the six months ended June 30, 2022 and 2021, respectively. The decrease in corporate expenses was primarily due to the Company receiving an employee retention credit under the CARES Act of $2.7 million. This credit, which reduced compensation cost, was received in May 2022.
Interest Expense
Interest expense was $0.4 million and $2.7 million during the quarters ended June 30, 2022 and 2021, respectively, $3.0 million and $5.3 million during the six months ended June 30, 2022 and 2021, respectively. The reduction in interest expense was due to the redemption of the 2047 Notes on April 15, 2022.
Income Tax Benefit
Income tax benefit was $0.6 million for the quarter ended June 30, 2022 compared with income tax expense of $0.8 million for the quarter ended June 30, 2021. The increase in the income tax benefit is primarily due to investment losses incurred by the Company’s U.S. subsidiaries during the quarter ended June 30, 2022.
Income tax benefit was $4.0 million for the six months ended June 30, 2022 compared with an income tax expense of $0.6 million for the six months ended June 30, 2021. The increase in the income tax benefit is primarily due to investment losses incurred by the Company’s U.S. subsidiaries during the six months ended June 30, 2021.
See Note 6 of the notes to the consolidated financial statements in Item 1 of Part I of this report for a comparison of income tax between periods.
53
GLOBAL INDEMNITY GROUP, LLC
Net Income (Loss)
The factors described above resulted in a net loss of $12.2 million and net income of $6.4 million for the quarters ended June 30, 2022 and 2021, respectively and a net loss of $26.9 million and net income of $11.9 million for the six months ended June 30, 2022 and 2021, respectively.
Liquidity and Capital Resources
Sources and Uses of Funds
Global Indemnity Group, LLC is a holding company. Its principal asset is its ownership of the shares of its direct and indirect subsidiaries, including those of its insurance companies: United National Insurance Company, Diamond State Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, Penn-Patriot Insurance Company, and American Reliable Insurance Company.
Global Indemnity Group, LLC’s short term and long term liquidity needs include but are not limited to the payment of corporate expenses, debt service payments, distributions to shareholders, and share repurchases. The Company also has commitments in the form of operating leases, commitments to fund limited liability investments, and unpaid losses and loss expense obligations. In order to meet its short term and long term needs, Global Indemnity Group, LLC’s principal sources of cash includes investment income, dividends from subsidiaries, other permitted disbursements from its direct and indirect subsidiaries, reimbursement for equity awards granted to employees and intercompany borrowings. The principal sources of funds at these direct and indirect subsidiaries include underwriting operations, investment income, proceeds from sales and redemptions of investments, capital contributions, intercompany borrowings, and dividends from subsidiaries. Funds are used principally by these operating subsidiaries to pay claims and operating expenses, to make debt payments, fund margin requirements on interest rate swap agreements, to purchase investments, and to make distribution payments. In addition, the Company periodically reviews opportunities related to business acquisitions and as a result, liquidity may be needed in the future.
GBLI Holdings, LLC is a holding company which is a wholly-owned subsidiary of Penn-Patriot Insurance Company. GBLI Holdings, LLC’s principal asset is its ownership of the shares of its direct and indirect subsidiaries which include United National Insurance Company, Diamond State Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, and American Reliable Insurance Company. GBLI Holdings, LLC is dependent on dividends from its subsidiaries to meet its debt obligations as well as corporate expense obligations.
As of June 30, 2022, the Company also had future funding commitments of $31.2 million related to investments that are currently in their harvest period and it is unlikely that a capital call will be made.
The future liquidity of both Global Indemnity Group, LLC and GBLI Holdings, LLC is dependent on the ability of its subsidiaries to pay dividends. Global Indemnity Group, LLC and GBLI Holdings, LLC’s insurance companies are restricted by statute as to the amount of dividends that they may pay without the prior approval of regulatory authorities. The dividend limitations imposed by state laws are based on the statutory financial results of each insurance company that are determined by using statutory accounting practices that differ in various respects from accounting principles used in financial statements prepared in conformity with GAAP. See “Regulation - Statutory Accounting Principles” in Item 1 of Part I of the Company’s 2021 Annual Report on Form 10-K. Key differences relate to, among other items, deferred acquisition costs, limitations on deferred income taxes, reserve calculation assumptions and surplus notes. See Note 21 of the notes to the consolidated financial statements in Item 8 of Part II of the Company’s 2021 Annual Report on Form 10-K for further information on dividend limitations related to the Insurance Companies. In April, 2022, the United National insurance companies, Penn-America insurance companies, and American Reliable Insurance Company paid dividends in the amount of $4.5 million, $7.5 million, and $22.5 million, respectively.
Cash Flows
Sources of operating funds consist primarily of net written premiums and investment income. Funds are used primarily to pay claims and operating expenses and to purchase investments. As a result of the distribution policy, funds may also be used to pay distributions to shareholders of the Company.
54
GLOBAL INDEMNITY GROUP, LLC
The Company’s reconciliation of net income (loss) to net cash provided by operations is generally influenced by the following:
•
the fact that the Company collects premiums, net of commissions, in advance of losses paid;
•
the timing of the Company’s settlements with its reinsurers; and
•
the timing of the Company’s loss payments.
Net cash provided by operating activities was $18.5 million and $47.5 million for the six months ended June 30, 2022 and 2021, respectively. The decrease in operating cash flows of approximately $29.0 million from the prior year was primarily a net result of the following items:
Six Months Ended June 30,
(Dollars in thousands)
2022
2021
Change
Net premiums collected
$
276,206
$
308,353
$
(32,147
)
Net losses paid
(136,756
)
(148,453
)
11,697
Underwriting and corporate expenses
(130,981
)
(126,144
)
(4,837
)
Net investment income
15,116
18,952
(3,836
)
Interest paid
(5,126
)
(5,220
)
94
Net cash provided by operating activities
$
18,459
$
47,488
$
(29,029
)
See the consolidated statements of cash flows in the consolidated financial statements in Item 1 of Part I of this report for details concerning the Company’s investing and financing activities.
Liquidity
Sale of Renewal Rights related to Farm, Ranch & Stable and Sale of American Reliable Insurance Company
On August 8, 2022 , the Company sold the renewal rights related to all business lines within its Farm, Ranch & Stable segment for business written on or after August 8, 2022 to Everett Cash Mutual Insurance Company. The Company will retain the unearned premium reserves for business written prior to August 8, 2022.
Everett Cash Mutual Insurance Company is also acquiring the Company’s wholly owned subsidiary, American Reliable Insurance Company, for book value which is expected to be $10.0 million at the time of closing. The transaction is subject to receiving regulatory approval which is expected to be received during the 4 th quarter of 2022. Under the agreements, total consideration to be paid by Everett Cash Mutual Insurance Company is $40 million.
COVID-19
The Company’s liquidity could be negatively impacted by the cancellation, delays, or non-payment of premiums related to the ongoing COVID-19 pandemic and its lasting impacts. There is continued risk that legislation could be passed or there could be a court ruling which would require the Company to cover business interruption claims regardless of terms, exclusions including the virus exclusions contained within the Company’s Commercial Specialty and Farm, Ranch & Stable policies, or other conditions included in policies that would otherwise preclude coverage which would negatively impact liquidity. In addition, the liquidity of the Company’s investment portfolio could be negatively impacted by disruption experienced in global financial markets. Management is taking actions it considers prudent to minimize the impact on the Company’s liquidity. However, given the ongoing uncertainty surrounding the duration, magnitude and geographic reach of COVID-19, the Company is regularly evaluating the impact of COVID-19 on its liquidity.
Distributions
The Board of Directors approved a distribution payment of $0.25 per common share to all shareholders of record on the close of business on March 21, 2022 and June 20, 2022. Distributions paid to common shareholders were $7.3 million during the six months ended June 30, 2022. In addition, distributions of $0.2 million were paid to Global Indemnity Group, LLC’s preferred shareholder during the six months ended June 30, 2022.
55
GLOBAL INDEMNITY GROUP, LLC
Investment Portfolio
Due to shortening duration, significantly more of the investment portfolio will mature annually.
On May 18th, 2022, the Company provided the Credit Fund, LLC with formal withdrawal requests in full. As outlined in the fund’s offering documents, redemption proceeds are wired to the account of record within 30 days of June 30, 2022. Proceeds of $99.6 million are expected to be invested into fixed income investments with maturities of two years and less.
Other than the items discussed in the preceding paragraphs, there have been no material changes to the Company’s liquidity during the quarter and six months ended June 30, 2022. Please see Item 7 of Part II in the Company’s 2021 Annual Report on Form 10-K for information regarding the Company’s liquidity.
Capital Resources
Investment Portfolio
In response to a rising interest rate environment, the Company took action early in April 2022 to shorten the duration of its fixed maturities portfolio. The Company identified fixed maturities securities with a weighted average life of five years or greater as having an intent to sell. Most of the proceeds from the sale of these securities are being reinvested into fixed income investments with maturities of two years and less.
Redemption of Debt
On April 15, 2022, the Company redeemed the entire $130 million in aggregate principal amount of the outstanding 2047 Notes plus accrued and unpaid interest on the 2047 Notes redeemed to, but not including the Redemption Date of April 15, 2022. The funds to redeem the debt were primarily obtained through the sale of the Company’s equity portfolio in the amount of $75.9 million, $32.0 million in dividends from insurance company subsidiaries, $18.4 million from distributions received from private equity investments, and the remainder from its subsidiary, GBLI Holdings, LLC.
Intercompany Pooling Arrangement
The Company’s U.S. insurance company participate in an intercompany pooling arrangement whereby premiums, losses, and expenses are shared pro rata amongst the U.S. insurance companies. American Reliable currently comprises 30% of the pool. Prior to the sale of American Reliable, the intercompany pooling agreement will be amended. American Reliable will be removed from the pool and its 30% participation in the business and capital will be allocated to the Company’s remaining five insurance companies.
For additional information on the Sale of American Reliable, please see the liquidity section above.
Other than the item discussed in the preceding paragraphs, there have been no material changes to the Company’s capital resources during the quarter and six months ended June 30, 2022. Please see Item 7 of Part II in the Company’s 2021 Annual Report on Form 10-K for information regarding the Company’s capital resources.
Off Balance Sheet Arrangements
The Company has no off balance sheet arrangements.
Cautionary Note Regarding Forward-Looking Statements
Some of the statements under “Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report may include forward-looking statements within the meaning of Section 21E of the Security Exchange Act of 1934, as amended, that reflect the Company’s current views with respect to future events and financial performance. Forward-looking statements are statements that are not historical facts. These statements can be identified by the use of forward-looking terminology such as "believe," "expect," "may," "will," "should," "project," "plan," "seek," "intend," or "anticipate" or the negative thereof or comparable terminology, and include discussions of strategy, financial projections and estimates and their underlying assumptions, statements regarding plans, objectives, expectations or
56
GLOBAL INDEMNITY GROUP, LLC
consequences of identified transactions or natural disasters, and statements about the future performance, operations, products and services of the companies.
The Company’s business and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. See “Risk Factors” in Item 1A of Part I in the Company’s 2021 Annual Report on Form 10-K for risks, uncertainties and other factors that could cause actual results and experience to differ from those projected. The Company’s forward-looking statements speak only as of the date of this report or as of the date they were made. The Company undertakes no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the quarter ended June 30, 2022, risk assets were challenged with both equities and bonds moving significantly lower. Global equities fell approximately 15.4% with U.S. equities underperforming, losing approximately 16.1%. U.S. fixed income lost approximately 4.7% with average spreads moving wider during the quarter. Heightened volatility in all markets remained the theme in June as ten-year treasury yields rose significantly during the month only to end slightly higher at the end of June. The increase in rates was triggered by an upside surprise in inflation data, but the combination of decreasing consumer confidence and rising growth concerns ultimately resulted in interest rates falling and spreads across all sectors widening. While the 75-basis-point increase by the Federal Reserve was anticipated, there is growing concern that an aggressive rate rise will result in a recession. Chair Powell continues to point to the strength of the labor market as support for the economy that will allow the Federal Reserve to focus on regaining price stability.
The Company’s investment grade fixed income portfolio continues to maintain high quality with an A average rating and a duration of 1.7 years. Portfolio purchases were focused within US Treasury, and investment grade credit securities. These purchases were funded primarily through cash inflows, sales of US Treasury, MBS, and investment grade credit securities, as well as maturities and paydowns. During the second quarter, the portfolio’s allocation to US Treasuries and investment grade credit increased, while the portfolio’s exposure to MBS securities decreased.
Other than the changes described in the preceding paragraph, there have been no other material changes to the Company’s market risk since December 31, 2021. Please see Item 7A of Part II in the Company’s 2021 Annual Report on Form 10-K for information regarding the Company’s market risk.
Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded , processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2022. Based upon that evaluation, and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2022, the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
57
GLOBAL INDEMNITY GROUP, LLC
PART II-OTHER INFORMATION
Item 1.
Legal Proceedings
The Company is, from time to time, involved in various legal proceedings in the ordinary course of business. The Company maintains insurance and reinsurance coverage for risks in amounts that it considers adequate. However, there can be no assurance that the insurance and reinsurance coverage that the Company maintains is sufficient or will be available in adequate amounts or at a reasonable cost. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on its business, results of operations, cash flows, or financial condition.
There is a greater potential for disputes with reinsurers who are in runoff. Some of the Company’s reinsurers’ have operations that are in runoff, and therefore, the Company closely monitors those relationships. The Company anticipates that, similar to the rest of the insurance and reinsurance industry, it will continue to be subject to litigation and arbitration proceedings in the ordinary course of business.
Item 1A.
Risk Factors
The Company’s results of operations and financial condition are subject to numerous risks and uncertainties described in Item 1A of Part I in the Company’s 2021 Annual Report on Form 10-K, filed with the SEC on March 16, 2022. The risk factors identified therein have not materially changed.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.