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GLOBAL INDEMNITY GROUP, LLC – 10-Q – 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 endedDecember 31, 2021 . Recent Developments
Sale of Renewal Rights related to Farm, Ranch & Stable and Sale of
Reliable Insurance Company
OnAugust 8, 2022 , the Company sold the renewal rights related to all business lines within its Farm, Ranch & Stable segment for business written on or afterAugust 8, 2022 toEverett Cash Mutual Insurance Company for$30.0 million . The Company will retain the unearned premium reserves for business written prior toAugust 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 4th quarter of 2022. Under the agreements, total consideration to be paid byEverett Cash Mutual Insurance Company is$40.0 million .
Appointment of new Chief Executive Officer
Effective
of
Global Indemnity Group, LLC's Board of Directors appointedJoseph W. Brown as its Chief Executive Officer.Mr. Brown has served as aGlobal Indemnity Group, LLC director sinceDecember 2015 and will remain onGlobal Indemnity Group, LLC's Board of Directors.Mr. Brown has close to 50 years of insurance industry experience, including prior tenures as a Director, Chairman, and Chief Executive Officer of MBIA, Inc. (NYSE: MBI), Chairman of the Board of Safeco, Chairman of theBoard of Talegen Holdings, Inc. , Chairman ofNoblr, Inc. , and President and Chief Executive Officer ofFireman's Fund Insurance Company .
Board of Directors
Global Indemnity Group, LLC also announced thatJason B. Hurwitz rejoinedGlobal Indemnity Group, LLC's Board of Directors.Mr. Hurwitz had previously served onGlobal Indemnity Group, LLC's Board fromSeptember 2017 toJanuary 2022 .Mr. Hurwitz is a partner withOsier Capital LLC , an investment firm focused on insurance and other long-term investments. As a principal and advisor during his career,Mr. Hurwitz completed 28 corporate acquisitions or divestitures totaling over$5 billion and served on the Boards of Directors of eight of these companies.Mr. Hurwitz will joinGlobal Indemnity Group, LLC's Audit Committee. EffectiveNovember 1, 2022 ,Gary Tolman joined the Board of Directors ofGlobal Indemnity Group, LLC pursuant to the Class B Majority Shareholder's rights underGlobal Indemnity Group, LLC's Second Amended and Restated Limited Liability Company Agreement.Mr. Tolman has over 45 years of experience in the property and casualty insurance and reinsurance industry. He was the chief executive officer and co-founder ofNoblr, Inc. and previously served as the chief executive officer and president ofEsurance Holdings, Inc. He also served as the chairman ofAnswer Financial, Inc. and president and treasurer ofTalegen Holdings, Inc. Mr. Tolman spent 15 years at theFireman's Fund Insurance Company , ultimately serving as senior vice president. He previously served on the board of directors of the White Mountains Insurance Group, Ltd. (NYSE: WTM).Mr. Tolman will serve as a member of the Audit Committee. 41 -------------------------------------------------------------------------------- OnNovember 1, 2022 ,James R. Holt , Jr. resigned fromGlobal Indemnity Group, LLC's Board of Directors by providing notice toGlobal Indemnity Group, LLC .Mr. Holt's decision to resign was due to the time demands presented by his primary commercial activities. Stock RepurchaseGBLI also announced that it will commence a stock repurchase program beginning in the fourth quarter of 2022. Repurchases of up to$32 million ofGlobal Indemnity Group LLC's currently outstanding Class A Common Shares have been authorized byGlobal Indemnity Group, LLC's Board of Directors. The authorization to repurchase will expire onDecember 31, 2027 . The timing and actual number of shares repurchased, if any, will depend on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. Under the repurchase program, repurchases may be made from time to time using a variety of methods, including open market purchases or privately negotiated transactions, all in compliance withGlobal Indemnity Group, LLC's Insider Trading Policy, theUnited States Securities and Exchange Commission , and other applicable legal requirements. The repurchase program does not obligateGlobal Indemnity Group, LLC to acquire any particular amount of Class A Common Shares, and the repurchase program may be suspended or discontinued at any time atGlobal Indemnity Group, LLC's discretion.
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 onMarch 21, 2022 ,June 20, 2022 , andOctober 4, 2022 . Distributions paid to common shareholders were$7.4 million during the nine months endedSeptember 30, 2022 . In addition, distributions of$0.3 million were paid toGlobal Indemnity Group, LLC's preferred shareholder during the nine months endedSeptember 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. OnMay 19, 2022 , AM Best affirmed the financial strength rating of "A" (Excellent) for theU.S. operating subsidiaries ofGlobal Indemnity Group, LLC .
Redemption of Debt
OnApril 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 ofApril 15, 2022 . 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 offers specialty property and casualty products designed for product lines such as small business binding authority, professional lines, excess casualty, environmental, InsurTech business, and specialized programs.
The Company's Reinsurance Operations provides reinsurance and insurance
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 and property and casualty products such as manufactured home, dwelling,
motorcycle, watercraft, and certain homeowners business, certain business lines
within property brokerage, property and catastrophe
42
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reinsurance treaties, and the farm, ranch and equine business. 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, please see the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . There have been no significant changes to any of these policies or underlying methodologies during the current year. 43 -------------------------------------------------------------------------------- Results of Operations
The following table summarizes the Company's results for the quarters and nine
months ended
Quarters Ended Nine Months Ended
September 30, % September 30, %
(Dollars in thousands) 2022 2021 Change 2022 2021 Change
Gross written premiums $ 175,827 $ 174,303 0.9 % $ 563,633 $ 513,097 9.8 %
Net written premiums $ 142,835 $ 162,299 (12.0 %) $ 469,475 $ 470,635 (0.2 %)
Net earned premiums $ 153,644 $ 157,565 (2.5 %) $ 458,216 $ 450,673 1.7 %
Other income 379 414 (8.5 %) 992 1,334 (25.6 %)
Total revenues 154,023 157,979 (2.5 %) 459,208 452,007 1.6 %
Losses and expenses:
Net losses and loss
adjustment expenses (4) 88,459 109,195 (19.0 %) 265,772 290,916 (8.6 %)
Acquisition costs and other
underwriting expenses 60,876 59,282 2.7 % 178,666 171,259 4.3 %
Underwriting income (loss) 4,688 (10,498 ) (144.7 %) 14,770 (10,168 ) NM
Net investment income 8,389 9,344 (10.2 %) 16,911 29,813 (43.3 %)
Net realized investment gains
(losses) 2,234 (310 ) NM (33,067 ) 7,342 NM
Other income (loss) 29,937 (25 ) NM 29,847 (47 ) NM
Corporate and other operating
expenses (14,064 ) (5,387 ) 161.1 % (21,718 ) (15,992 ) 35.8 %
Interest expense - (2,596 ) (100.0 %) (3,004 ) (7,887 ) (61.9 %)
Loss on extinguishment of
debt - - - (3,529 ) - NM
Income (loss) before income
taxes 31,184 (9,472 ) NM
210 3,061 (93.1 %)
Income tax expense (benefit) 7,438 (1,759 ) NM
3,399 (1,118 ) NM Net income (loss)$ 23,746 $ (7,713 ) NM$ (3,189 ) $ 4,179 (176.3 %) Underwriting Ratios: Loss ratio (1): 57.6 % 69.3 % 58.0 % 64.5 % Expense ratio (2) 39.6 % 37.6 % 39.0 % 38.0 % Combined ratio (3) 97.2 % 106.9 % 97.0 % 102.5 % 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. (4) Losses related to Hurricane Ian are estimated to be$1.5 million for the quarter and nine months endedSeptember 30, 2022 . 44 --------------------------------------------------------------------------------
Premiums
The following table summarizes the change in premium volume by business segment:
Quarters Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2022 2021 % Change 2022 2021 % Change
Gross written premiums (1)
Commercial Specialty $ 100,598 $ 97,950 2.7 % $ 314,661 $ 286,690 9.8 %
Reinsurance Operations (3) 43,717 29,748 47.0 % 131,556 76,186 72.7 %
Continuing Lines 144,315 127,698 13.0 % 446,217 362,876 23.0 %
Exited Lines 31,512 46,605 (32.4 %) 117,416 150,221 (21.8 %)
Total gross written premiums $ 175,827 $ 174,303 0.9 % $ 563,633 $ 513,097 9.8 %
Ceded written premiums
Commercial Specialty $ 4,681 $ 5,128 (8.7 %) $ 19,260 $ 20,049 (3.9 %)
Reinsurance Operations (3) - - - - - -
Continuing Lines 4,681 5,128 (8.7 %) 19,260 20,049 (3.9 %)
Exited Lines 28,311 6,876 NM 74,898 22,413 NM
Total ceded written premiums $ 32,992 $ 12,004 174.8 % $ 94,158 $ 42,462 121.7 %
Net written premiums (2)
Commercial Specialty $ 95,917 $ 92,822 3.3 % $ 295,401 $ 266,641 10.8 %
Reinsurance Operations (3) 43,717 29,748 47.0 % 131,556 76,186 72.7 %
Continuing Lines 139,634 122,570 13.9 % 426,957 342,827 24.5 %
Exited Lines 3,201 39,729 (91.9 %) 42,518 127,808 (66.7 %)
Total net written premiums $ 142,835 $ 162,299 (12.0 %) $ 469,475 $ 470,635 (0.2 %)
Net earned premiums
Commercial Specialty $ 100,822 $ 88,807 13.5 % $ 287,757 $ 249,464 15.4 %
Reinsurance Operations (3) 35,148 24,235 45.0 % 108,707 59,094 84.0 %
Continuing Lines 135,970 113,042 20.3 % 396,464 308,558 28.5 %
Exited Lines 17,674 44,523 (60.3 %) 61,752 142,115 (56.5 %)
Total net earned premiums $ 153,644 $ 157,565 (2.5 %) $ 458,216 $ 450,673 1.7 %
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 0.9% and 9.8% for the quarter and nine
months ended September 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 and the organic growth of existing casualty treaties within
Reinsurance Operations. This increase was partially offset by actions taken
within Commercial Specialty to improve underwriting results by not renewing
underperforming business as well as a reduction in premiums within Exited Lines.
45
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Underwriting Ratios
Quarters Ended Nine Months Ended
September 30, Point September 30, Point
2022 2021 Change 2022 2021 Change
Loss ratio
Commercial Specialty 58.4 % 65.4 % (7.0 ) 58.0 % 60.4 % (2.4 )
Reinsurance Operations 58.0 % 63.1 % (5.1 ) 59.2 % 63.9 % (4.7 )
Continuing Lines 58.3 % 64.9 % (6.6 ) 58.4 % 61.0 % (2.6 )
Exited Lines 51.8 % 80.4 % (28.6 ) 55.8 % 72.2 % (16.4 )
Total loss ratio 57.6 % 69.3 % (11.7 ) 58.0 % 64.5 % (6.5 )
Expense ratio
Commercial Specialty 39.1 % 36.1 % 3.0 38.0 % 36.7 % 1.3
Reinsurance Operations 37.1 % 35.1 % 2.0 36.4 % 34.7 % 1.7
Continuing Lines 38.6 % 35.9 % 2.7 37.6 % 36.3 % 1.3
Exited Lines 47.3 % 42.1 % 5.2 48.1 % 41.6 % 6.5
Total expense ratio 39.6 % 37.6 % 2.0 39.0 % 38.0 % 1.0
Combined ratio
Commercial Specialty 97.5 % 101.5 % (4.0 ) 96.0 % 97.1 % (1.1 )
Reinsurance Operations 95.1 % 98.2 % (3.1 ) 95.6 % 98.6 % (3.0 )
Continuing Lines 96.9 % 100.8 % (3.9 ) 96.0 % 97.3 % (1.3 )
Exited Lines 99.1 % 122.5 % (23.4 ) 103.9 % 113.8 % (9.9 )
Total combined ratio 97.2 % 106.9 % (9.7 ) 97.0 % 102.5 % (5.5 )
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 Nine Months Ended
September 30, Point September 30, Point
(Dollars in thousands) 2022 2021 Change 2022 2021 Change
Commercial Specialty 95.3 % 94.8 % 0.5 93.9 % 93.0 % 0.9
Reinsurance Operations 100.0 % 100.0 % - 100.0 % 100.0 % -
Continuing Lines 96.8 % 96.0 % 0.8 95.7 % 94.5 % 1.2
Exited Lines 10.2 % 85.2 % (75.0 ) 36.2 % 100.0 % (63.8 )
Total 81.2 % 93.1 % (11.9 ) 83.3 % 91.7 % (8.4 )
The net premium retention for the quarter and nine months ended September 30,
2022 decreased by 11.9 points and 8.4 points, respectively, 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 . In addition, in conjunction with the
sale of the renewal rights related to the Company's Farm , Ranch & Stable
business lines on August 8, 2022 , Everett Cash Mutual Insurance Company is
reinsuring 100% of the unearned premium reserves related to the policies
included in this sale of renewal rights. 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. Please see Note 2 of the notes to the consolidated
financial statements in Item 1 of Part I of this report for additional
information on the sale of renewal rights related to the Company's Farm , Ranch &
Stable business lines.
Net Earned Premiums
Net earned premiums within the Commercial Specialty segment increased by 13.5%
and 15.4% for the quarter and nine months ended September 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 $37.4 million and $39.3 million for
the quarters
46
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ended September 30, 2022 and 2021, respectively, and $109.8 million and $111.2
million for the nine months ended September 30, 2022 and 2021, respectively.
Casualty net earned premiums were $63.4 million and $49.5 million for the
quarters ended September 30, 2022 and 2021, respectively, and $178.0 million and
$138.3 million for the nine months ended September 30, 2022 and 2021,
respectively.
Net earned premiums within the Reinsurance Operations segment increased by 45.0%
and 84.0% for the quarter and nine months ended September 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 nine months ended September 30, 2022 and 2021. Casualty net
earned premiums were $35.1 million and $24.2 million for the quarters ended
September 30, 2022 and 2021, respectively, and $108.7 million and $59.1 million
for the nine months ended September 30, 2022 and 2021, respectively.
Net earned premiums within the Exited Lines segment decreased by 60.3% and 56.5%
for the quarter and nine months ended September 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 and the sale of renewal rights related to the Company's Farm ,
Ranch & Stable business lines on August 8, 2022 . 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 $13.1 million and $38.4
million for the quarters ended September 30, 2022 and 2021, respectively, and
$48.1 million and $123.4 million for the nine months ended September 30, 2022
and 2021, respectively. Casualty net earned premiums were $4.6 million and $6.2
million for the quarters ended September 30, 2022 and 2021, respectively, and
$13.7 million and $18.7 million for the nine months ended September 30, 2022 and
2021, respectively.
Reserves
Management's best estimate at September 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 $825.6
million and $729.7 million , respectively, as of September 30, 2022 . A breakout
of the Company's gross and net reserves, as of September 30, 2022 , is as
follows:
Gross Reserves
(Dollars in thousands) Case IBNR (1) Total
Commercial Specialty $ 159,583 $ 326,525 $ 486,108
Reinsurance Operations 8,310 154,077 162,387
Continuing Lines 167,893 480,602 648,495
Exited Lines 78,390 98,709 177,099
Total $ 246,283 $ 579,311 $ 825,594
Net Reserves (2)
(Dollars in thousands) Case IBNR (1) Total
Commercial Specialty
Reinsurance Operations 8,310 154,077 162,387
Continuing Lines
146,238 448,536 594,774 Exited Lines 57,852 77,055 134,907 Total$ 204,090 $ 525,591 $ 729,681 (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 47 -------------------------------------------------------------------------------- impact of changes (which could be favorable or unfavorable) in frequency and severity on the Company's current accident year net loss estimate of$275.4 million for claims occurring during the nine months endedSeptember 30, 2022 : Severity Change (Dollars in thousands) -10% -5% 0% 5% 10% Frequency Change -5% (39,933 ) (26,852 ) (13,770 ) (689 ) 12,393 -3% (34,976 ) (21,619 ) (8,262 ) 5,095 18,452 -2% (32,497 ) (19,003 ) (5,508 ) 7,987 21,481 -1% (30,019 ) (16,386 ) (2,754 ) 10,878 24,511 0% (27,540 ) (13,770 ) - 13,770 27,540 1% (25,061 ) (11,154 ) 2,754 16,662 30,569 2% (22,583 ) (8,537 ) 5,508 19,553 33,599 3% (20,104 ) (5,921 ) 8,262 22,445 36,628 5% (15,147 ) (689 ) 13,770 28,229 42,687 The Company's net reserves for losses and loss adjustment expenses of$729.7 million as ofSeptember 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 (loss) from the Company's Commercial Specialty segment
and corresponding underwriting ratios are as follows:
Quarters Ended Nine Months Ended
September 30, % September 30, %
(Dollars in thousands) 2022 2021 Change 2022 2021 Change
Gross written premiums $ 100,598 $ 97,950 2.7 % $ 314,661 $ 286,690 9.8 %
Net written premiums $ 95,917 $ 92,822 3.3 % $ 295,401 $ 266,641 10.8 %
Net earned premiums $ 100,822 $ 88,807 13.5 % $ 287,757 $ 249,464 15.4 %
Other income 272 $ 227 19.8 % $ 791 $ 679 16.5 %
Total revenues 101,094 89,034 13.5 % 288,548 250,143 15.4 %
Losses and expenses:
Net losses and loss
adjustment expenses 58,919 58,125 1.4 % 167,014 150,584 10.9 %
Acquisition costs and
other underwriting
expenses 39,463 32,025 23.2 % 109,374 91,624 19.4 %
Underwriting income
(loss) $ 2,712 $ (1,116 ) NM $ 12,160 $ 7,935 53.2 %
Quarters Ended Nine Months Ended
September 30, Point September 30, Point
2022 2021 Change 2022 2021 Change
Underwriting Ratios:
Loss ratio:
Current accident year 58.7 % 67.8 % (9.1 ) 57.9 % 62.5 % (4.6 )
Prior accident year (0.3 %) (2.4 %) 2.1 0.1 % (2.1 %) 2.2
Calendar year loss ratio 58.4 % 65.4 % (7.0 ) 58.0 % 60.4 % (2.4 )
Expense ratio 39.1 % 36.1 % 3.0 38.0 % 36.7 % 1.3
Combined ratio 97.5 % 101.5 % (4.0 ) 96.0 % 97.1 % (1.1 )
48
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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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Loss Loss Loss Loss
(Dollars in thousands) Losses Ratio Losses Ratio Losses Ratio Losses Ratio
Property
Non catastrophe property
losses and ratio
excluding the effect of
prior accident year (1) $ 17,829 47.7 % $ 19,473 49.5 %
Effect of prior accident
year
(2,653 ) (7.1 %) 3,994 10.2 %
(3,027 ) (2.8 %) 2,460 2.2 %
Non catastrophe property
losses and ratio (2)
Catastrophe losses and ratio excluding the effect of prior accident year (1)$ 3,896 10.4 %$ 8,910 22.7 %
Effect of prior accident
year
1,840 4.9 % 1,781 4.5 %
1,487 1.4 % 1,389 1.3 %
Catastrophe losses and
ratio (2)
$ 5,736 15.3 %$ 10,691 27.2 %
Total property losses and ratio excluding the effect of prior accident year (1)$ 21,725 58.1 %$ 28,383 72.2 %
Effect of prior accident
year
(813 ) (2.2 %) 5,775 14.7 %
(1,540 ) (1.4 %) 3,849 3.5 %
Total property losses and
ratio (2)
$ 20,912 55.9 %$ 34,158 86.9 %
Casualty
Total casualty losses and ratio excluding the effect of prior accident year (1)$ 37,492 59.1 %$ 31,839 64.3 %
Effect of prior accident
year
515 0.8 % (7,872 ) (15.9
%) 1,787 1.0 % (9,070 ) (6.6 %)
Total casualty losses and
ratio (2)
$ 38,007 59.9 %$ 23,967 48.4 %
Total
Total net losses and loss adjustment expense and total loss ratio excluding the effect of prior accident year (1)$ 59,217 58.7 %$ 60,222 67.8 %
Effect of prior accident
year
(298 ) (0.3 %) (2,097 ) (2.4 %) 247 0.1 % (5,221 ) (2.1 %) Total net losses and loss adjustment expense and total loss ratio (2)$ 58,919 58.4 %$ 58,125 65.4 %$ 167,014 58.0 %$ 150,584 60.4 % (1) Non-GAAP measure / ratio (2) Most directly comparable GAAP measure / ratio
Premiums
See "Result of Operations" above for a discussion on consolidated premiums.
49 --------------------------------------------------------------------------------
Other Income
Other income was$0.3 million and$0.2 million for the quarters endedSeptember 30, 2022 and 2021, respectively, and$0.8 million and$0.7 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Other income is primarily comprised of fee income.
Loss Ratio
The current accident year losses and loss ratio is summarized as follows:
Quarters Ended Nine Months Ended
September 30, % September 30, %
(Dollars in thousands) 2022 2021 Change 2022 2021 Change
Property losses
Non-catastrophe $ 17,829 $ 19,473 (8.4 %) $ 53,536 $ 53,263 0.5 %
Catastrophe 3,896 8,910 (56.3 %) 9,319 20,483 (54.5 %)
Property losses 21,725 28,383 (23.5 %) 62,855 73,746 (14.8 %)
Casualty losses 37,492 31,839 17.8 % 103,912 82,059 26.6 %
Total accident year losses $ 59,217 $ 60,222 (1.7 %) $ 166,767 $ 155,805 7.0 %
Quarters Ended Nine Months Ended
September 30, Point September 30, Point
2022 2021 Change 2022 2021 Change
Current accident year
loss ratio:
Property
Non-catastrophe 47.7 % 49.5 % (1.8 ) 48.8 % 47.9 % 0.9
Catastrophe 10.4 % 22.7 % (12.3 ) 8.5 % 18.4 % (9.9 )
Property loss ratio 58.1 % 72.2 % (14.1 ) 57.3 % 66.3 % (9.0 )
Casualty loss ratio 59.1 % 64.3 % (5.2 ) 58.4 % 59.3 % (0.9 )
Total accident year loss
ratio 58.7 % 67.8 % (9.1 ) 57.9 % 62.5 % (4.6 )
The current accident year non-catastrophe property loss ratio improved by 1.8
points during the quarter ended
period in 2021 reflecting lower claims severity in the current calendar quarter.
The current accident year non-catastrophe property loss ratio increased by 0.9 points during the nine months endedSeptember 30, 2022 as compared to the same period in 2021 due to higher claims severity in the first nine months compared to last year.
The current accident year catastrophe loss ratio improved by 12.3 points during
the quarter ended
recognizing lower claims frequency in the current calendar quarter.
The current accident year catastrophe loss ratio improved by 9.9 points during the nine months endedSeptember 30, 2022 as compared to the same period in 2021 due to lower claims frequency in the first nine months compared to last year.
The current accident year casualty loss ratio improved by 5.2 points during the
quarter ended
reflecting lower claims frequency in the current calendar quarter.
The current accident year casualty loss ratio improved by 0.9 points during the nine months endedSeptember 30, 2022 as compared to the same period in 2021 due to lower claims frequency in the first nine months compared to last year. The calendar year loss ratio for the quarter and nine months endedSeptember 30, 2022 includes a decrease of$0.3 million , or 0.3 percentage points, and an increase of$0.2 million , or 0.1 percentage points, respectively, related to reserve development on prior accident years. The calendar year loss ratio for the quarter and nine months endedSeptember 30, 2021 includes a decrease of$2.1 million , or 2.4 percentage points, and a decrease of$5.2 million , or 2.1 percentage points, respectively, related to reserve development on prior accident years. Please see Note 9 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. 50 --------------------------------------------------------------------------------
Expense Ratios
The expense ratio for the Company's Commercial Specialty segment increased by 3.0 points from 36.1% for the quarter endedSeptember 30, 2021 to 39.1% for the quarter endedSeptember 30, 2022 and increased by 1.3 points from 36.7% for the nine months endedSeptember 30, 2021 to 38.0% for the nine months endedSeptember 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 commission rate.
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 Nine Months Ended
September 30, % September 30, %
(Dollars in thousands) 2022 (1) 2021 (1) Change 2022 (1) 2021 (1) Change
Gross written premiums $ 43,717 $ 29,748 47.0 % $ 131,556 $ 76,186 72.7 %
Net written premiums $ 43,717 $ 29,748 47.0 % $ 131,556 $ 76,186 72.7 %
Net earned premiums $ 35,148 $ 24,235 45.0 % $ 108,707 $ 59,094 84.0 %
Other income (loss) (38 ) (58 ) (34.5 %) (119 ) (100 ) 19.0 %
Total revenues 35,110 24,177 45.2 % 108,588 58,994 84.1 %
Losses and expenses:
Net losses and loss
adjustment expenses 20,393 15,288 33.4 % 64,331 37,763 70.4 %
Acquisition costs and
other underwriting
expenses 13,050 8,510 53.3 % 39,596 20,487 93.3 %
Underwriting income $ 1,667 $ 379 NM $ 4,661 $ 744 NM
Quarters Ended Nine Months Ended
September 30, Point September 30, Point
2022 2021 Change 2022 2021 Change
Underwriting Ratios:
Loss ratio:
Current accident year (2) 61.5 % 63.0 % (1.5 ) 61.4 % 63.9 % (2.5 )
Prior accident year (3.5 %) 0.1 % (3.6 ) (2.2 %) - (2.2 )
Calendar year loss ratio (3) 58.0 % 63.1 % (5.1 ) 59.2 % 63.9 % (4.7 )
Expense ratio 37.1 % 35.1 % 2.0 36.4 % 34.7 % 1.7
Combined ratio 95.1 % 98.2 % (3.1 ) 95.6 % 98.6 % (3.0 )
(1)
External business only, excluding business assumed from affiliates
(2)
Non-GAAP ratio
(3)
Most directly comparable GAAP ratio
NM - not meaningful
51 --------------------------------------------------------------------------------
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 Loss
The Company recognized a loss of less than$0.1 million and$0.1 million during the quarters endedSeptember 30, 2022 and 2021, respectively, and recognized a loss of$0.1 million during each of the nine months endedSeptember 30, 2022 and 2021. Other loss is primarily comprised of foreign exchange gains and losses.
Loss Ratio
The current accident year loss ratio improved by 1.5 points during the quarter endedSeptember 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 2.5 points during the nine
months ended
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 nine months endedSeptember 30, 2022 includes a decrease of$1.2 million or 3.5 percentage points, and a decrease of$2.4 million , or 2.2 percentage points, respectively, related to reserve development on prior accident years. The calendar year loss ratios for the quarter endedSeptember 30, 2021 includes an increase of less than$0.1 million or 0.1 percentage point, related to reserve development on prior accident years. There was no adjustment related to reserve development on prior accident years for the nine months endedSeptember 30, 2021 . Please see Note 9 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 2.0 points from 35.1% for the quarter endedSeptember 30, 2021 to 37.1% for the quarter endedSeptember 30, 2022 and increased 1.7 points from 34.7% for the nine months endedSeptember 30, 2021 to 36.4% for the nine months endedSeptember 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.
52 --------------------------------------------------------------------------------
Exited Lines
The components of income (loss) from the Company's Exited Lines segment and
corresponding underwriting ratios are as follows:
Quarters Ended Nine Months Ended
September 30, % September 30, %
(Dollars in thousands) 2022 2021 Change 2022 2021 Change
Gross written premiums $ 31,512 $ 46,605 (32.4 %) $ 117,416 $ 150,221 (21.8 %)
Net written premiums $ 3,201 $ 39,729 (91.9 %) $ 42,518 $ 127,808 (66.7 %)
Net earned premiums $ 17,674 $ 44,523 (60.3 %) $ 61,752 $ 142,115 (56.5 %)
Other income (loss) 145 245 (40.8 %) 320 755 (57.6 %)
Total revenues 17,819 44,768 (60.2 %) 62,072 142,870 (56.6 %)
Losses and expenses:
Net losses and loss
adjustment expenses 9,147 35,782 (74.4 %) 34,427 102,569 (66.4 %)
Acquisition costs and
other underwriting
expenses 8,363 18,747 (55.4 %) 29,696 59,148 (49.8 %)
Underwriting income
(loss) $ 309 $ (9,761 ) 103.2 % $ (2,051 ) $ (18,847 ) 89.1 %
Quarters Ended Nine Months Ended
September 30, Point September 30, Point
2022 2021 Change 2022 2021 Change
Underwriting Ratios:
Loss ratio:
Current accident year 60.2 % 79.0 % (18.8 ) 67.9 % 68.1 % (0.2 )
Prior accident year (8.4 %) 1.4 % (9.8 ) (12.1 %) 4.1 % (16.2 )
Calendar year loss ratio 51.8 % 80.4 % (28.6 ) 55.8 % 72.2 % (16.4 )
Expense ratio 47.3 % 42.1 % 5.2 48.1 % 41.6 % 6.5
Combined ratio 99.1 % 122.5 % (23.4 ) 103.9 % 113.8 % (9.9 )
53
--------------------------------------------------------------------------------
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 September 30, Nine Months Ended September 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) $ 6,636 50.7 % $ 18,600 48.5 % $ 25,744 53.6 % $ 60,208 48.8 %
Effect of prior
accident year 102 0.8 % 1,591 4.2 % (4,189 ) (8.7 %) 3,355 2.7 %
Non catastrophe
property losses and
ratio (2) $ 6,738 51.5 % $ 20,191 52.7 % $ 21,555 44.9 % $ 63,563 51.5 %
Catastrophe losses
and ratio excluding
the effect of prior
accident year (1) $ 1,986 15.2 % $ 13,368 34.9 % $ 9,248 19.2 % $ 26,518 21.5 %
Effect of prior
accident year (1,542 ) (11.8 %) 172 0.4 % (2,707 ) (5.6 %) 4,863 3.9 %
Catastrophe losses
and ratio (2) $ 444 3.4 % $ 13,540 35.3 % $ 6,541 13.6 % $ 31,381 25.4 %
Total property losses
and ratio excluding
the effect of prior
accident year (1) $ 8,622 65.9 % $ 31,968 83.4 % $ 34,992 72.8 % $ 86,726 70.3 %
Effect of prior
accident year (1,440 ) (11.0 %) 1,763 4.6 % (6,896 ) (14.3 %) 8,218 6.6 %
Total property losses
and ratio (2) $ 7,182 54.9 % $ 33,731 88.0 % $ 28,096 58.5 % $ 94,944 76.9 %
Casualty
Total casualty losses
and ratio excluding
the effect of prior
accident year (1) $ 2,004 43.7 % $ 3,189 51.7 % $ 6,884 50.2 % $ 9,953 53.2 %
Effect of prior
accident year (39 ) (0.9 %) (1,138 ) (18.5 %) (553 ) (4.0 %) (2,328 ) (12.4 %)
Total casualty losses
and ratio (2) $ 1,965 42.8 % $ 2,051 33.2 % $ 6,331 46.2 % $ 7,625 40.8 %
Total
Total net losses and
loss adjustment
expense and total
loss ratio excluding
the effect of prior
accident year (1) $ 10,626 60.2 % $ 35,157 79.0 % $ 41,876 67.9 % $ 96,679 68.1 %
Effect of prior
accident year (1,479 ) (8.4 %) 625 1.4 % (7,449 ) (12.1 %) 5,890 4.1 %
Total net losses and
loss adjustment
expense and total
loss ratio (2) $ 9,147 51.8 % $ 35,782 80.4 % $ 34,427 55.8 % $ 102,569 72.2 %
54
--------------------------------------------------------------------------------
(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
The Company recognized income of$0.1 million and$0.2 million for the quarters endedSeptember 30, 2022 and 2021, respectively, and income of$0.3 million and$0.8 million for the nine months endedSeptember 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 Nine Months Ended
September 30, % September 30, %
(Dollars in
thousands) 2022 2021 Change 2022 2021 Change
Property losses
Non-catastrophe $ 6,636 $ 18,600 (64.3 %) $ 25,744 $ 60,208 (57.2 %)
Catastrophe 1,986 13,368 (85.1 %) 9,248 26,518 (65.1 %)
Property losses 8,622 31,968 (73.0 %) 34,992 86,726 (59.7 %)
Casualty losses 2,004 3,189 (37.2 %) 6,884 9,953 (30.8 %)
Total accident year
losses $ 10,626 $ 35,157 (69.8 %) $ 41,876 $ 96,679 (56.7 %)
Quarters Ended Nine Months Ended
September 30, Point September 30, Point
2022 2021 Change 2022 2021 Change
Current accident year
loss ratio:
Property
Non-catastrophe 50.7 % 48.5 % 2.2 53.6 % 48.8 % 4.8
Catastrophe 15.2 % 34.9 % (19.7 ) 19.2 % 21.5 % (2.3 )
Property loss ratio 65.9 % 83.4 % (17.5 ) 72.8 % 70.3 % 2.5
Casualty loss ratio 43.7 % 51.7 % (8.0 ) 50.2 % 53.2 % (3.0 )
Total accident year loss
ratio 60.2 % 79.0 % (18.8 ) 67.9 % 68.1 % (0.2 )
The current accident year non-catastrophe property loss ratio increased by 2.2
points during the quarter ended
period in 2021 recognizing higher claims frequency in the current calendar
quarter.
The current accident year non-catastrophe property loss ratio increased by 4.8 points during nine months endedSeptember 30, 2022 as compared to the same period in 2021 due to higher claims frequency in the first nine months compared to last year.
The current accident year catastrophe loss ratio improved by 19.7 points during
the quarter ended
recognizing lower claims frequency in the current calendar quarter.
The current accident year catastrophe loss ratio improved by 2.3 points during the nine months endedSeptember 30, 2022 as compared to the same period in 2021 reflecting lower claims frequency in the first nine months compared to last year. The current accident year casualty loss ratio improved by 8.0 points during the quarter endedSeptember 30, 2022 as compared to the same period in 2021 which mainly reflects lower claims severity in Farm, Ranch & Stable business lines in the current calendar quarter. 55 --------------------------------------------------------------------------------
The current accident year casualty loss ratio improved by 3.0 points during the
nine months ended
primarily due to lower claims severity in the Farm, Ranch & Stable business
lines in the first nine months compared to last year.
The calendar year loss ratio for the quarter and nine months endedSeptember 30, 2022 includes a decrease of$1.5 million , or 8.4 percentage points, and a decrease of$7.4 million , or 12.1 percentage points, respectively related to reserve development on prior accident years. The calendar year loss ratio for the quarter and nine months endedSeptember 30, 2021 includes an increase of$0.6 million , or 1.4 percentage points, and an increase of$5.9 million , or 4.1 percentage points, respectively, related to reserve development on prior accident years. Please see Note 9 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 5.2 points from 42.1% for the quarter endedSeptember 30, 2021 to 47.3% for the quarter endedSeptember 30, 2022 . The expense ratio for the Company's Exited Lines increased by 6.5 points from 41.6% for the nine months endedSeptember 30, 2021 to 48.1% for the nine months endedSeptember 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 Nine Months Ended
September 30, % September 30, %
(Dollars in thousands) 2022 2021 Change 2022 2021 Change
Gross investment income (1) $ 8,856 $ 10,010 (11.5 %) $ 18,593 $ 31,827 (41.6 %)
Investment expenses (467 ) (666 ) (29.9 %) (1,682 ) (2,014 ) (16.5 %)
Net investment income $ 8,389 $ 9,344 (10.2 %) $ 16,911 $ 29,813 (43.3 %)
(1)
Excludes realized gains and losses
Gross investment income decreased by 11.5% and 41.6% for the quarter and nine months endedSeptember 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, offset by an increase in yield within the fixed maturities portfolio due to the rise in rates. The proceeds from the sale of the common stock portfolio as well as other proceeds were used to retire the 2047 Notes inApril 2022 . Investment expenses decreased by 29.9% and 16.5% for the quarter and nine months endedSeptember 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. AtSeptember 30, 2022 , the Company held agency mortgage-backed securities with a market value of$3.5 million . Excluding the agency mortgage-backed securities, the average duration of the Company's fixed maturities portfolio was 1.7 56 -------------------------------------------------------------------------------- years as ofSeptember 30, 2022 , compared with 3.8 years as ofSeptember 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 3.6 years as ofSeptember 30, 2022 andSeptember 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 3.1% as ofSeptember 30, 2022 , compared to 2.1% as ofSeptember 30, 2021 . The embedded book yield on the$33.0 million of taxable municipal bonds in the Company's portfolio, was 3.0% atSeptember 30, 2022 , compared to an embedded book yield of 2.7% on the Company's taxable municipal bonds of$54.4 million atSeptember 30, 2021 .
Net Realized Investment Gains (Losses)
The components of net realized investment gains (losses) for the quarters and
nine months ended
Quarters Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2022 2021 2022 2021
Equity securities $ (60 ) $ (1,662 ) $ (3,820 ) $ 6,101
Fixed maturities (259 ) 1,447 (12,135 ) 741
Derivatives 2,553 (95 ) 9,093 500
Other-than-temporary impairment losses - -
(26,205 ) -
Net realized investment gains (losses)
In response to a rising interest rate environment, the Company took action early inApril 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 3 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 nine months endedSeptember 30, 2022 and 2021.
Corporate and Other Operating Expenses
Quarters Ended Nine Months Ended
September 30, % September 30, %
(Dollars in thousands) 2022 2021 Change 2022 2021 Change
Corporate expenses -
nondisposition related $ 4,911 $ 5,387 (8.8 %) $ 12,565 $ 15,992 (21.4 %)
Impairments and expenses
related to dispositions within
Exited Lines 9,153 - NM 9,153 - NM
Corporate and other Operating
Expenses $ 14,064 $ 5,387 161.1 % $ 21,718 $ 15,992 35.8 %
NM - not meaningful
57
-------------------------------------------------------------------------------- Corporate expenses - nondisposition related 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, impairment losses, and taxes incurred which are not directly related to operations. Corporate expenses - nondisposition related were$4.9 million and$5.4 million during the quarters endedSeptember 30, 2022 and 2021, respectively, and$12.6 million and$16.0 million during the nine months endedSeptember 30, 2022 and 2021, respectively. The decrease in corporate expenses - nondisposition related for the nine months endedSeptember 30, 2022 as compared to the same period in 2021 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 inMay 2022 . Impairments and expenses related to dispositions within Exited Lines represent impairments of goodwill, intangible assets, software, and lease costs as well as legal expenses and merger and acquisition fees related to the sale of renewal rights related to theCompany's Farm , Ranch & Stable business lines. Impairments and expenses related to dispositions within Exited Lines were$9.2 million during both the quarter and nine months endedSeptember 30, 2022 . There no impairments and expenses related to dispositions within Exited Lines during the quarter and nine months endedSeptember 30, 2021 . Please see Note 2 of the notes to the consolidated financial statements in Item 1 of Part I of this report for additional information on the sale of renewal rights related to theCompany's Farm , Ranch & Stable business lines.
Interest Expense
Interest expense was$2.6 million during the quarter endedSeptember 30, 2021 and$3.0 million and$7.9 million during the nine months endedSeptember 30, 2022 and 2021, respectively. There was no interest expense during the quarter endedSeptember 30, 2022 . The reduction in interest expense was due to the redemption of the 2047 Notes onApril 15, 2022 .
Income Tax Expense / Benefit
Income tax expense was$7.4 million for the quarter endedSeptember 30, 2022 compared with income tax benefit of$1.8 million for the quarter endedSeptember 30, 2021 . The increase in income tax expense is primarily due to the sale of the Farm, Ranch & Stable renewal rights by the Company'sU.S. subsidiaries during the quarter endedSeptember 30, 2022 . Income tax expense was$3.4 million for the nine months endedSeptember 30, 2022 compared with an income tax benefit of$1.1 million for the nine months endedSeptember 30, 2021 . The increase in income tax expense is primarily due to the sale of the Farm, Ranch & Stable renewal rights by the Company'sU.S. subsidiaries during the nine months endedSeptember 30, 2022 .
See Note 8 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.
Net Income (Loss)
The factors described above resulted in a net income of$23.7 million and a net loss of$7.7 million for the quarters endedSeptember 30, 2022 and 2021, respectively and a net loss of$3.2 million and net income of$4.2 million for the nine months endedSeptember 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 , andAmerican 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 58 -------------------------------------------------------------------------------- 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 ofPenn-Patriot Insurance Company .GBLI Holdings, LLC's principal asset is its ownership of the shares of its direct and indirect subsidiaries which includeUnited National Insurance Company ,Diamond State Insurance Company ,Penn-America Insurance Company ,Penn-Star Insurance Company , andAmerican 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 ofSeptember 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 bothGlobal Indemnity Group, LLC andGBLI Holdings, LLC is dependent on the ability of its subsidiaries to pay dividends.Global Indemnity Group, LLC andGBLI 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. The United National insurance companies, Penn-America insurance companies, andAmerican Reliable Insurance Company paid dividends in the amount of$4.5 million ,$7.5 million , and$22.5 million , respectively, during the nine months endedSeptember 30, 2022 . There were no dividend declared or paid during the quarter endedSeptember 30, 2022 . 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.
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.
59 -------------------------------------------------------------------------------- Net cash provided by operating activities was$41.7 million and$66.1 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The decrease in operating cash flows of approximately$24.3 million from the prior year was primarily a net result of the following items: Nine Months Ended September 30, (Dollars in thousands) 2022 2021 Change Net premiums collected$ 423,744 $ 464,650 $ (40,906 ) Net losses paid (208,759 ) (226,152 ) 17,393 Underwriting and corporate expenses (191,126 ) (192,147 ) 1,021 Net investment income 22,996 27,495 (4,499 ) Net federal income taxes recovered (paid) 19 (11 ) 30 Interest paid (5,125 ) (7,781 ) 2,656 Net cash provided by operating activities $ 41,749 $
66,054
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
Reliable Insurance Company
OnAugust 8, 2022 , the Company sold the renewal rights related to all business lines within its Farm, Ranch & Stable segment for business written on or afterAugust 8, 2022 toEverett Cash Mutual Insurance Company for$30.0 million . The Company will retain the unearned premium reserves for business written prior toAugust 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 4th quarter of 2022. Under the agreements, total consideration to be paid byEverett Cash Mutual Insurance Company is$40.0 million .
Stock Repurchase
GBLI also announced that it will commence a stock repurchase program beginning in the fourth quarter of 2022. Repurchases of up to$32 million ofGlobal Indemnity Group LLC's currently outstanding Class A Common Shares have been authorized byGlobal Indemnity Group, LLC's Board of Directors. The authorization to repurchase will expire onDecember 31, 2027 . The timing and actual number of shares repurchased, if any, will depend on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. Under the repurchase program, repurchases may be made from time to time using a variety of methods, including open market purchases or privately negotiated transactions, all in compliance withGlobal Indemnity Group, LLC's Insider Trading Policy, theUnited States Securities and Exchange Commission , and other applicable legal requirements. The repurchase program does not obligateGlobal Indemnity Group, LLC to acquire any particular amount of Class A Common Shares, and the repurchase program may be suspended or discontinued at any time atGlobal Indemnity Group, LLC's discretion.
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.
60
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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 onMarch 21, 2022 ,June 20, 2022 , andOctober 4, 2022 . Distributions paid to common shareholders were$7.4 million during the nine months endedSeptember 30, 2022 . In addition, distributions of$0.3 million were paid toGlobal Indemnity Group, LLC's preferred shareholder during the nine months endedSeptember 30, 2022 .
Investment Portfolio
Due to shortening duration, significantly more of the investment portfolio will
mature annually.
OnMay 18th, 2022 , the Company provided theCredit Fund, LLC with formal withdrawal requests in full. Proceeds of$99.6 million were received onJuly 29, 2022 and were invested in 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 nine months endedSeptember 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 inApril 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
OnApril 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 ofApril 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'sU.S. insurance company participate in an intercompany pooling arrangement whereby premiums, losses, and expenses are shared pro rata amongst theU.S. insurance companies. American Reliable currently comprises 30% of the pool. Prior to the completion of the sale of American Reliable and subject to appropriate regulatory approvals, 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 nine months endedSeptember 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
61
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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 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.
ORRSTOWN FINANCIAL SERVICES INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
HERITAGE INSURANCE HOLDINGS, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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