Global Indemnity Group, LLC Q3 FY2021 Earnings Call

Good day, and welcome to Global Indemnity Group, LLC’s Third Quarter twenty twenty one Earnings Conference call. Today's conference call is being recorded. The speakers’ remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words, including without limitation, believes, expects or estimates. We caution you that such forward-looking statements should not be regarded as a representation by us with the future, plans, estimates or expectations, contemplated by us will in fact be achieved. Please refer to our annual report on Form 10-K for the year-ended December thirty one, twenty twenty and our other filings made with the SEC for a description of the business environment in which we operate and the important factors that may materially affect the results. Global Indemnity Group, LLC is not under any obligation and expressly disclaims any such obligation to update or alter forward-looking statements, whether as a result of new information, future events, or otherwise. I would now like to turn the call over to Mr. David Charlton, Chief Executive of GBLI. Please proceed.

Good morning. Thank you for joining our earnings call. Reiner Mauer, our Chief Operating Officer; Jonathan Oltman, President, Insurance Operations; Tom McGeehan, our Chief Financial Officer, and Steve Ries, Head of Investor Relations are joining me for this call. After I complete my remarks, Tom will provide additional updates on our results. I will conclude with my closing remarks, and then we'll open it up for Q&A. The third quarter had strong gross written premium growth of twenty one point three percent to one hundred and seventy point three million dollars. Our growth is coming in the right places from our core businesses, with Penn-America Binding programs and casualty reinsurance being the most significant drivers for the quarter. Net loss for the quarter was seven point seven million dollars. Hurricane Ida was a fourteen point eight million dollar event for us. Property Brokerage also had a significant negative impact on the quarter. Excluding Ida and Property Brokerage, the combined ratio would have been eighty eight point five percent. So this is a similar story to what we have seen in past quarters, where forecast and property losses have been behind the negative results. Let's now review the recent actions taken since Investor Day to address these areas. The Property Brokerage Business division will not be a separate unit going forward. There are non-policies with limits greater than ten million dollars and policies that are written in unprofitable habitational lines. The go-forward focus is to target historically profitable areas of property with our Penn-America programs and other E&S businesses. The Property Brokerage business is down twenty three point one percent year-to-date and will continue to run off unprofitable business in the remainder of twenty twenty one and into twenty twenty two. The further growth of our strategy focuses on core small and middle market commercial lines, and we recently completed the sale of manufactured home and dwelling book that were contained in our Specialty Property segment, the K2 Insurance Services and American Family Mutual Insurance Company. I would like to thank the teams from K2 and American Family for selecting us as partners on the deal. This transaction is integral to our corporate strategy. By selling these business lines, Global Indemnity will receive thirty point four million dollars in cash as well as retaining the American Reliable fifty-state license operating unit, sixty-five million dollars of net capital supporting the business, and a related forty-two million unearned premium reserve. We will see a gain on the sale coupled with a decrease in written premium and a reduction in volatility and catastrophe exposures. Our reduction in Property Brokerage and the sale of manufactured home and dwelling will enable us to significantly reduce our reinsurance requirements in twenty twenty two and accelerate the growth of our core commercial specialty businesses, Penn-America and United National. As I shared in September at Investor Day, we are particularly focused on building out our commercial specialty operations. We are transitioning to a business mix of seven percent casualty and thirty percent property, enabling us to produce more consistent earnings quarter-to-quarter by substantially reducing catastrophe exposures and earnings volatility. We will continually enhance and fine-tune our businesses to achieve long-term and consistent profitability. I'm pleased to advise we are still on track to launch our three new businesses: environmental, excess casualty, and professional in the first quarter of twenty twenty two. We continue to make critical key hires for the new teams and build out the product, technology, and analytics for all businesses that comprise GBLI. This concludes my opening remarks. Tom will now provide color on our results.

Thank you, David and good morning. Commercial Specialty lines continued their strong growth. Gross written premium at ninety-six million dollars for the quarter is up twenty-eight percent from twenty twenty. Penn-America Binding gross written premium was fifty-five million dollars, an increase of approximately thirty-four percent from twenty twenty. United National Programs gross written premiums were twenty-seven point five million dollars, up approximately twenty-seven percent. Vacant property gross written premium at six point four million dollars was up one percent. Property Brokerage had gross written premiums of six point nine million dollars and was down twenty-six percent in the quarter due to actions taken to improve profitability. Commercial Specialty lines suffered an underwriting loss of eight point six million dollars, primarily due to catastrophe losses from Hurricane Ida and several high severity losses in the Property Brokerage line. Reinsurance continues to perform well. Gross written premium was twenty-nine point six million dollars, compared to fourteen point six million dollars in the third quarter of twenty twenty. This is due to increasing participation on a casualty quota share treaty that Global has assumed for the last several years and writing several smaller casualty treaties in twenty twenty-one. Its combined ratio for the quarter was ninety-six point two percent. Farm, Ranch & Stables gross written premium was eighteen point five million dollars down five percent from twenty twenty. This is due to taking action to reduce premium that is not providing an adequate return on capital and reducing catastrophe exposure. Underwriting income was close to breakeven. Lastly, Specialty Properties gross written premium of thirty point five million dollars was down twelve percent compared to twenty twenty. It had an underwriting loss of three point three million dollars primarily attributable to catastrophes and in particular Hurricane Ida. Investment income was nine point three million dollars, which is down from eleven point seven million dollars in twenty twenty due to low bond yields offset somewhat by growth in the investment portfolio. The embedded book yield on the fixed income portfolio was two point one percent compared to two point four percent at September thirty, twenty twenty-one. Duration on the fixed income portfolio was lower at three point six years at September thirty, twenty twenty-one compared to four point two years at December thirty-one, twenty twenty. Operating cash flow for the first nine months was sixty-six million dollars compared to thirty-four million dollars for the first nine months of twenty twenty. Twenty twenty’s operating cash flow included an alternative minimum tax carryforward recovery of eleven million dollars. Excluding the tax recovery, operating cash flow increased forty-three million dollars. The increase is mainly due to gross written premium growth, with premiums collected increasing by forty-six million dollars for the nine months ended September thirty, twenty twenty-one compared to the same period in twenty twenty. In twenty twenty-one, casualty net earned premium was forty-eight percent of total earned premium compared to forty percent for the same period in twenty twenty. Casualty losses take longer to pay than property losses; as gross written premium grows and a greater percentage is comprised of casualty business, operating cash flow will benefit. And now I turn it back to David.

Thank you, Tom. As we shared a couple of months ago, at the Investor Day, our transformation of GBLI is not a short-term project, but a five-year plan. We are taking actionable steps on the business as historically had a negative impact on our earnings, and we are working hard to build our core businesses. Our strategy is in play and is being executed by a solid and committed team. That concludes our remarks and we are now open to your questions.

At this time, we will be conducting a question-and-answer session. Our first question is from Julia Ferguson with Dowling & Partners. Please proceed with your question.

Good morning. Thank you for taking my question. Hello. Can you hear me?

Yes, ma'am.

Thank you. My first question is about the sale of part of the Specialty Property business of American Reliable. I have a few inquiries. First, I understand that much of this business is exposed to catastrophes, and that along with your actions on the Property Binding business should further reduce your catastrophe exposure. Should we expect that your anticipated annual catastrophe load, which you indicated is around thirty-five percent on your Investor Day, will decrease even more because of this? Also, what will be the impact on earnings moving forward, as well as on premium growth? Regarding your five-year target for the sale of this business, should we expect it to be more on the higher end of your range? Additionally, will there be any underwriting impact? I know the business was underperforming, but I've heard you are aiming for a combined ratio of about ninety-four percent going forward, which implies some expected underwriting profit. Lastly, what are the specific premiums involved? I understand that they are just a subset of your specialty property business, particularly for manufactured and dwelling. That's my first question.

I'll try to take the first part. This is David. So, yes, in twenty twenty one, we had a catastrophe load of thirty-five point four million. So when the specialty property business is fully transitioned, we would expect a reduction of about between ten million dollars to fifteen million dollars, around twelve million dollars on that business. And then that is not taking account of our Property Brokerage business. So that would just give you an idea of how that affects us on the thirty-five point four versus twenty-one.

Yes. There's a lot of questions there, Julia, but I will – if I miss anything, please step in. So, again, when we modeled the manufactured home and dwelling book individually, the one and two fifty PML of that book was about – I'm sorry, it was fifty-three million dollars. Now the way that when we renewed our tax treaty, round numbers, our one and two fifty dollars was about one hundred million dollars. Now, when you model, it doesn't necessarily mean that the PML is going to reduce by the full fifty-three. It's not a subjective type of size, but there will be a significant reduction in the PML. And on an ongoing forward basis, our catastrophe treaty renews on June first of next year. We are strategizing today on how that prospect of reinsurance structure will look. We don't have the answers for that today, but we would expect that our reinsurance cost, our reinsurance buy will be significantly less as a result of the sale and the reductions that are happening in Property Brokerage. Now, in terms of premium growth at Investor Day, we had targeted. We had noted that we expect that on a going forward basis, our net premiums written would increase at a compound annual growth rate of at least six percent annually. That's the bottom end of the range that we would be targeting. We would expect it to be higher as David has noted, we have the new lines that will be going into place. And we have been experiencing good growth out of our commercial lines and reinsurance businesses.

Yeah. So in the K2 deal, we sold the renewal rights for the mobile home and the dwelling business. This excludes the state of Louisiana; all the sheets are included in that, and then also on the forward business we sold the rights that are not reinsurance as part of the deal. Outside that, we kept within specialty property our collectible and our homeowners businesses, which really run very long.

So how much premium overall is going away as you're giving your rights to you?

Yes. Round numbers when this deal is complete, it will be about ninety-five million dollars, and that includes the sale of the rights plus what we will not renew for what we've retained on with Louisiana. So, it will take twelve to eighteen months to get the full benefit of this, Julia. But as we schedule, you'll see a significant reduction in specialty property premium.

Okay. No. That makes sense. And you indicated there is some gain on this transaction.

Yeah. There are two things. We will receive thirty point four million dollars that's broken up into two pieces. The sale of the business lines will be for twenty-eight million dollars. K2 is also taking space in our Scottsdale location; they will be assuming about one-third of the space through a sublease transaction between now and twenty twenty-nine that is worth two point four million dollars.

Okay. But that's cash proceeds, right, and you will recognize any gain.

That is, yes. What will happen is from a gap standpoint, the twenty-eight million dollars will be booked immediately. Just to be clear, we will be taking a hard look because we are not going to be continuing this business going forward. When we purchased the American Reliable back in twenty fifteen, we still have a small amount of goodwill and intangibles on our books. We have software that is backing the specialty property business, and to the extent that we will not be using those assets going forward, we will be writing those off in the fourth quarter. So there will be a gain, but it will be less than twenty-eight million dollars.

Okay, that makes sense. Thank you. I just want to clarify if I understood this correctly: is the catastrophe load of thirty-five million dollars reduced by twelve million?

That is to be clear. That's the amount that we had; that was our average expected loss when we developed our plan for twenty twenty one. So, yes, the overall amount that we expected for catastrophes was around thirty-five million dollars, and approximately twelve million dollars of that was specialty property.

Okay. No perfect.

Strictly planned.

Okay. Yes. I understand. No, that's great. And if I may, another totally unrelated question. This increased severity of property loss is not non-weather non-cat property losses. You are not the only company who talks about it; other companies on the conference calls also talked about that. So, can you kind of give me a little bit more information about that? How do you explain it, if there is any trend somewhat related to the current state of the economy?

For the most part on the non-cat, losses within Property Brokerage, a lot of businesses have been within our net retention of two million dollars, and so we've seen both a higher frequency and severity on those lines. And that's another reason why especially within the habitational book of business, we have been non-renewing that habitational side of it. We have other pieces of property that are actually running very well, be that in less risk, and those are areas that we will be moving forward. And we will continue to write managing our limits above ten million dollars, but we'll be writing that business outside of our business segments that focus on package business as well.

All right. So there is no specific trend you can see in that because I thought it was for several quarters you mentioned something like that in your press releases and 10-K?

No, it's really this traditional property loss, not that good.

All right. I think that’s all for me for now.

Okay.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to Steve Ries for closing remarks.

Thank you. This concludes our earnings update call. Thank you for listening. We look forward to speaking with you again soon.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.