Global Indemnity Group(GBLI) - 2020 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements The company reported a $22.2 million net loss for the nine months ended September 30, 2020, and completed its redomestication to Delaware Consolidated Balance Sheets Total assets decreased to $1.94 billion as of September 30, 2020, primarily due to a significant reduction in debt Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Total investments | $1,417,465 | $1,563,542 | | Cash and cash equivalents | $37,211 | $44,271 | | Total assets | $1,939,757 | $2,075,885 | | Liabilities & Equity | | | | Unpaid losses and loss adjustment expenses | $669,930 | $630,181 | | Debt | $126,253 | $296,640 | | Total liabilities | $1,219,044 | $1,349,076 | | Total shareholders' equity | $720,713 | $726,809 | | Total liabilities and shareholders' equity | $1,939,757 | $2,075,885 | Consolidated Statements of Operations The company reported a $22.2 million net loss for the nine months ended September 30, 2020, primarily due to investment losses Key Operating Results (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net earned premiums | $140,302 | $133,312 | $426,617 | $383,602 | | Total revenues | $159,913 | $142,234 | $425,274 | $428,559 | | Net losses and loss adjustment expenses | $97,148 | $73,583 | $242,092 | $201,979 | | Net income (loss) | $(15,170) | $6,721 | $(22,197) | $40,984 | | Diluted EPS | $(1.06) | $0.47 | $(1.56) | $2.86 | - The company incurred a $3.06 million loss on the extinguishment of debt in Q3 2020, which was not present in 2019[12] Consolidated Statements of Cash Flows Net cash from operations decreased to $33.9 million, with investing activities providing $139.5 million and financing using $180.5 million Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $33,936 | $45,930 | | Net cash provided by (used for) investing activities | $139,469 | $(67,730) | | Net cash provided by (used for) financing activities | $(180,465) | $484 | | Net change in cash and cash equivalents | $(7,060) | $(21,316) | - Financing activities in 2020 included a $100 million redemption of subordinated notes and a $73.6 million net repayment under the margin borrowing facility[21] Notes to Consolidated Financial Statements (Unaudited) Key notes detail the company's redomestication to a Delaware LLC, significant debt reduction, and a $10 million advisory fee - On August 28, 2020, the company completed a redomestication, changing its ultimate parent from a Cayman Islands entity to Global Indemnity Group, LLC, a Delaware limited liability company[23][29] - The company manages its business through four segments: Commercial Specialty, Specialty Property, Farm, Ranch, & Stable, and Reinsurance Operations[24] - The company redeemed the entire $100 million principal amount of its 7.75% Subordinated Notes due 2045 in August 2020, resulting in a $3.1 million loss on extinguishment of debt[143] - A $10.0 million advisory fee was agreed to be paid to Fox Paine & Company, LLC for services related to the redomestication plan[188] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 2020 net loss to investment volatility and a $10 million advisory fee, with the combined ratio increasing - Recent developments include the completion of the redomestication to the U.S., redemption of $100 million in 2045 Notes, and maintaining an "A" (Excellent) financial strength rating from A.M. Best[262][263][265] - The global outbreak of COVID-19 presents significant risks, including potential reductions in premium volume, delays in premium collection, and increases in related claims[261] Consolidated Underwriting Ratios | Ratio | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | | Loss ratio | 56.7% | 52.7% | | Expense ratio | 38.3% | 40.1% | | Combined ratio | 95.0% | 92.8% | Results of Operations by Segment Segment results show varied premium changes, with Commercial Specialty growth offsetting declines in Specialty Property and Reinsurance Net Written Premiums by Segment (Nine Months Ended Sep 30, in thousands) | Segment | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Commercial Specialty | $219,437 | $185,202 | 18.5% | | Specialty Property | $93,053 | $110,668 | (15.9%) | | Farm, Ranch, & Stable | $56,323 | $55,861 | 0.8% | | Reinsurance | $48,174 | $69,590 | (30.8%) | | Total | $416,987 | $421,321 | (1.0%) | Underwriting Income (Loss) by Segment (Nine Months Ended Sep 30, in thousands) | Segment | 2020 | 2019 | | :--- | :--- | :--- | | Commercial Specialty | $22,686 | $20,962 | | Specialty Property | $(6,523) | $4,372 | | Farm, Ranch, & Stable | $(2,587) | $(1,661) | | Reinsurance Operations | $9,200 | $5,581 | | Total | $22,776 | $29,254 | Unallocated Corporate Items Net investment income decreased 39.8%, and corporate expenses rose sharply due to redomestication costs and investment losses - Corporate expenses for the nine months of 2020 increased by $22.3 million year-over-year, primarily due to a $10.0 million advisory fee and increased legal/professional fees for the redomestication[375] - Net realized investment losses were $22.3 million for the first nine months of 2020, compared to a gain of $11.3 million in 2019, largely due to the impact of COVID-19 on equity securities and derivatives[372] - Interest expense decreased by 12.5% for the nine-month period due to lower interest rates and the redemption of the 2045 Notes[376] Liquidity and Capital Resources The company enhanced liquidity by redeeming $100 million in notes and repaying margin borrowings, and paid a $226 million dividend - In August 2020, the company redeemed the entire $100 million of its 2045 Notes and repaid all outstanding debt on its margin borrowing facility[393][394] - In June 2020, Global Indemnity Reinsurance paid a $226.0 million dividend to its parent, Global Indemnity Limited, prior to the redomestication[387][396] - Net cash from operations decreased to $33.9 million for the nine months of 2020 from $45.9 million in 2019, a decline of $12.0 million[389] Quantitative and Qualitative Disclosures about Market Risk The company's investment portfolio maintains high quality with an AA- average rating and a 4.2-year duration, shifting towards MBS - The company's investment grade fixed income portfolio maintains a high quality with an AA- average rating and a duration of 4.2 years as of September 30, 2020[407] - Portfolio purchases in Q3 2020 were focused on Mortgage-Backed Securities (MBS) and US Treasury securities, funded by cash inflows and sales of other securities[407] Controls and Procedures Management concluded disclosure controls were effective as of September 30, 2020, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[410] - No material changes to the company's internal controls over financial reporting occurred during the quarter ended September 30, 2020[411] PART II – OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings but does not expect a material adverse effect on its financial condition - The company does not believe that any currently pending legal proceedings will have a material adverse effect on its business, results of operations, cash flows, or financial condition[414] Risk Factors New risk factors include shareholders being taxed on income regardless of dividends and more complex K-1 tax reporting - A new risk factor is that shareholders will be taxed on their share of the company's income, even if they do not receive corresponding cash dividends[417] - Shareholders will receive more complicated IRS Schedules K-1 instead of Forms 1099 and may need to file for tax extensions due to the timing of information[418] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2020, 396 Class A common shares were surrendered by employees to cover tax liabilities on vested restricted stock - In Q3 2020, 396 Class A common shares were surrendered by employees to cover taxes on vested restricted stock[422] Exhibits This section lists exhibits filed with Form 10-Q, including governance documents related to the August 2020 redomestication - Exhibits filed include the Second Amended and Restated LLC Agreement, supplemental indentures for debt, and the Third Amended and Restated Management Agreement with Fox Paine & Company, LLC, all related to the August 2020 redomestication[426]