Global Indemnity Group, LLC Q3 FY2023 Earnings Call

Thank you for standing by. My name is Danica, and I'll be your conference operator today. At this time, I would like to welcome everyone to the GBLI Third Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Steve Ries, Head of Investor Relations. Please go ahead.

Thank you, Danica. Today's conference call is being recorded. GBLI's remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words, without limitation, beliefs, expectations, or estimates. We caution you that such forward-looking statements should not be regarded as a representation by us that the future plans, estimates, or expectations contemplated by us will, in fact, be achieved. Please refer to our annual report on Form 10-K and our other filings with the SEC for a description of the business environment in which we operate and the important factors that may materially affect our results. Global Indemnity Group, LLC is not under any obligation and expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise. It is now my pleasure to turn the call over to Mr. Jay Brown, Chief Executive Officer of Global Indemnity.

Thank you, Steve. Good morning, and thanks to everyone for joining us this morning for our third quarter results call. Before I provide some commentary on our 2023 results, let me address an obvious topic. As we have previously disclosed, the Company has been engaged in conversations that could potentially lead to a transaction to sell a portion of our insurance operations or the entire company. GBLI has now retained an investment banker, Tony Ursano of Insurance Advisory Partners, to assist the Company in evaluating the efficacy of any potential transaction. We expect this process will likely conclude in the next few months. Given where we are in the process, we will not say anything more today or respond to any questions on this during this call. As we have noted in our previous calls this year, the significant restructuring that occurred at the beginning of 2023 continues to make direct comparisons to prior year overall results somewhat difficult. Our ongoing operating segments are primarily Commercial Specialty and, to a lesser extent, Reinsurance Operations. I will focus my comments on Commercial Specialty year-to-date accident year results, and then Tom will address all the financial aspects of our GAAP results. As a reminder, the long-term operating metrics we are focused on for Commercial Specialty are our loss and loss expense ratios, consistent with our long-term average in the mid-50s, an expense ratio of below 38% for this year, trending to 36% in a couple of years, and a combined ratio in the low 90s with growth averaging 10%. Although we continue to make good progress against our growth objectives, we are still observing some continued negative effects from our restructuring efforts, primarily in our Targeted Specialty class specific segment, where our priority focus on profitability has caused a drop in gross written premium through the first nine months of 32%. Offsetting these results were more than satisfactory growth of 12% in Package Specialty and 17% in InsurTech, both of which are consistent with our long-term growth objectives. Turning to our nine-month accident year results for our Continuing Lines. We recorded a 97.6% combined ratio, comprised of a loss and loss expense ratio of 60.2% and an expense ratio of 37.4%. Our third quarter results were similar with a combined ratio of 97.8%, comprised of a loss and loss expense ratio of 59.3%, and an expense ratio of 38.5%. Although we are on target for expense dollars, the premium shortfall in targeted class specific means that going forward, we have a bit more work to do to achieve our long-term 36% expense ratio objective. In terms of loss and loss expense ratio, the 60.2% ratio is falling short of our long-term target due to a combination of high catastrophe losses, about two points higher than expected year-to-date, and continued loss emergence for terminated casualty business in Package Specialty and Targeted Specialty class specific, causing another couple of points below target. We continue to achieve strong pricing of 9% in Package Specialty and 10% in Targeted Specialty class specific, which is in line with our expectation and exceeds expected loss trends. Although Tom will report on all of our GAAP results, I will share the observation that the same terminated business that has hurt our 2023 accident year results was the source of reserve strengthening that we have experienced this year in Commercial Specialty. The net effect on calendar year loss ratio was $12 million in the third quarter and $19 million through nine months, which translates into 10.7 points in the quarter and 5.3 points year-to-date. Although this strengthening was offset by the release of some redundancy in Exited Lines, it reinforces the decisions we have made to exit these specific books of business. Tom will provide more details, but our decision to play defense on interest rates by dramatically shortening the duration of our bond portfolio starting 21 months ago continues to pay dividends. Our investment yield is rising every month, with overall investment income coming in at $14 million for the quarter and $39 million year-to-date, more than double that from a year ago. With the current book yield of 4%, a duration of 1.2 years and $800 million of cash flow from the investment portfolio in the next five quarters, we fully expect that this number should keep rising every quarter. While we continue to make progress against our long-term goals, both the overall accident year and calendar year underwriting results of our continuing operations were modestly short of our objectives. The underlying profitability of our continuing book of business convinces me that better results will be forthcoming in the future. I will now turn it over to our CFO, Tom McGeehan, before taking any questions.

Thank you, Jay, and good morning, everyone. Net income for the third quarter of 2023 was $7.7 million, up from $7.3 million in the same period of 2022. The 2022 figure excludes the net gain from selling the farm business in August 2022. Loss reserve releases were $0.1 million in the third quarter of 2023, compared to $3 million in the same period last year. Our focus on core business lines, expense reduction, catastrophe exposure management, and portfolio repositioning is paying off. The Company is making progress. Book value per share rose from $46.03 at June 30, 2023, to $46.27 at September 30, 2023. Investment income has significantly increased in 2023 and underwriting income was positive. Now, I will go over some key drivers of net income, starting with investment performance. Investment income totaled $14.2 million, with $13.3 million coming from fixed income and $900,000 from alternatives. This is a substantial increase from the third quarter of last year, which had $8.4 million, including $9.5 million from fixed income and a negative $1.1 million from alternatives. Year-to-date, investment income stands at $39.4 million, made up of $37.3 million from fixed income and $2.1 million from alternative investments, compared to $16.9 million in 2022, which included $22.8 million from fixed income and a negative $5.9 million from alternatives. Investment income from the fixed income portfolio has nearly doubled since 2022 due to actions taken early in 2022 to sell longer-dated securities and shorten duration. Market interest rates increased in the third quarter of 2023. Despite rising interest rates, our short-duration portfolio limited unrealized losses to $0.9 million, net of tax, for the quarter. The book yield on the portfolio was 4% at September 30, and its duration is 1.2 years. The average credit quality of the fixed income portfolio is A+. In comparison, as of December 31, 2021, the book yield was 2.2% and the duration was 3.2 years. Between September of this year and December 31, 2024, we anticipate that the investment portfolio will generate approximately $800 million of cash flow as bonds mature and investment income is realized. In this higher interest rate environment, our portfolio is well positioned to enhance book yield. Now turning to underwriting. In the third quarter of 2023, our Continuing Lines reported an accident year underwriting profit of $2.7 million, down from $3 million in 2022. The $2.7 million profit reflects losses of $2.5 million from the Maui fires. The combined ratio for Continuing Lines in the third quarter of 2023 was 97.8%, with the Maui fires contributing a loss ratio of 2.3%, included in the 97.8% figure I mentioned. Exited Lines experienced an accident year underwriting loss of $0.9 million during the third quarter of 2023. We expect this drag from exiting the business to lessen as it runs off, and support for businesses sold in 2021 and 2022 will no longer be necessary. Accident year underwriting income from both Continuing and Exited Lines totaled $1.8 million in the third quarter of 2023, compared to $2 million in the same quarter of 2022. On a consolidated basis, prior year loss reserve releases in the third quarter of 2023 amounted to $0.1 million, compared to $3 million in 2022. In the third quarter of 2023, Exited Lines showed good development of approximately $11.9 million, primarily from property reserves. Within our Continuing Lines, loss reserves increased by about $11.8 million, with roughly $7 million related to the Targeted Specialty business. The remaining increase is mainly from accident years 2020 and prior. Booked reserves continue to exceed actuarial indications. In the third quarter of 2023, gross written premium for our Continuing Lines was $98.9 million compared to $139.1 million in 2022, with much of this decrease being planned. Reinsurance Operations recorded $11.9 million in 2023, down from $43.1 million in 2022, primarily due to the non-renewal of a casualty treaty. Within Commercial Specialty, we focus on two main product lines: Package Specialty and Targeted Specialty. Package Specialty, which includes the Penn-America business, increased gross written premiums from $52.7 million to $53.5 million in 2023. Excluding $2.3 million of underperforming business that was terminated in 2022, Package Specialty grew by 6% during the quarter. Targeted Specialty, which covers the remaining business in Commercial Specialty, reported $33.5 million of premium in 2023, down from $43.3 million in the third quarter of 2022. Within Targeted Specialty, several products saw growth. The Vacant Express product generated $8.5 million in premiums during the third quarter of 2023, which is a 28% increase compared to the same period in 2022. Collectibles grew approximately 14% to $4.8 million. The decline in the Targeted Specialty class was primarily a result of efforts to enhance underwriting income through rate increases, reducing exposure to catastrophe-prone risks, and non-renewing underperforming business. Exited Lines include the farm business sold in August 2022 as well as the Specialty property book sold in the fourth quarter of 2021 and other lines we have divested. Exited Lines are continuing to wind down as expected. Net written premium for the quarter was $5.3 million compared to $14.4 million in 2022, with the 2022 figure including $9.2 million of expenses related to the sale of the farm business that occurred in August 2022. We are satisfied with the direction of our company. Our core business is yielding positive returns relative to 2022; expenses have significantly decreased due to actions taken in early 2023. We are managing expenses to align with the business being written. Currently, 96% of the portfolio is invested in fixed maturity investments and cash, positioning the portfolio to generate cash flow that can be reinvested at higher yields. The funds that become available are currently being invested at yields above 5%. Thank you, and we will now take your questions.

Our first question comes from David Schiff with Shift Insurance.

Jay, it's David. I wanted to ask if you are currently able to buy back stock.

We are continuing to consider reverse inquiries. Due to the limited amount of business available in the market each day, we do not have an active repurchase program in place.

Our next question comes from Tom Kerr from Zacks Investment Research.

Can you go back in more detail on the InsurTech growth? I think you mentioned Vacant and some other. What were sort of the drivers of those individual lines growing strongly?

Yes. No, it's marketing efforts. One, on the Vacant side, a number of new agents have been appointed. We've also introduced a new monoline liability product. Both of those things are driving a lot of growth there. And on Collectibles, it's very focused marketing efforts, which are driving a lot of business to our portals.

Okay. Great. And then you guys mentioned the 9% average pricing increase. Was that across all Commercial Specialty or just Package or just where that kind of came from?

Yes. Package.

So the whole Package. Okay. And are there other problematic books of business like the restaurant out there? Or is that pretty much the worst? Or is that just an ongoing process to get rid of these problem books of business?

In terms of where we were about 9 or 10 months ago, we went through a pretty thorough review when I got here. We made some very quick decisions to exit a combination of products or books of business that weren't profitable. We also made a decision to exit some lines of business that we weren't in a position to have proper expense ratios. All of that was done at the beginning of the year. And obviously, we're in a continuous process of underwriting and looking at individual risks and individual books of business. But at this point in time, we're very satisfied with the book of business that we're underwriting.

Okay. Two more quick ones. And then what's left in the cat losses? Is that being eliminated or reduced? Or how do you sort of measure how much cat exposure you have or what in the future?

No, it's been significantly reduced. Our reinsurance purchase has come down notably. The upper limit of our catastrophe tower is now $75 million, which still offers protection above a 1 in 250-year event. Our Continuing Lines catastrophe losses for the quarter were only $5.2 million, with $2.5 million of that coming from Maui. There weren't any other substantial losses during the quarter, just several minor ones. We are extremely pleased with the steps we have taken to lessen our exposure for this company.

That's great. One more quick one on the book yield. Is there a sort of timing path to go from 4% to 5%? I mean, is that a 12- or 18-month process? Or any color you can give on how that looks?

We expect to see $800 million in cash flow from now until the end of next year, which we plan to invest at yields close to 5.5%. We are confident that the overall yield of our portfolio will keep rising, and if interest rates remain steady, we will eventually achieve yields in that range.

Our next question comes from Anthony Mottolese from Dowling & Partners.

I'm just hoping to get a little bit more color on the reserve strengthening in the Continuing Lines. I understand you mentioned it was $7 million in Targeted Specialty and then just the remainder was years 2020 and prior. Are there any specific years there? And could any color on exactly what you were seeing in Targeted Specialty certain areas or geographies? Anything would be helpful there.

Sure. When we reviewed the business at the end of last year, we made decisions that led to the creation of a Discontinued Line. Certain segments remained within Package Specialty due to their coding. We anticipate a significant runoff reduction, likely around 75% to 80% in a small book of business related to New York habitational. This has impacted the current accident year, as this business is running off at approximately $7 million, which is what Tom specifically mentioned. The majority of the reserve strengthening occurred in 2020 or earlier. One reason 2020 remains a point of concern is due to COVID; we experienced a significant slowdown in reported claims and a backlog in some litigation cases. We have worked to estimate this accurately throughout 2021, 2022, and 2023, but there has been some lag effect. Consequently, we made adjustments during the quarter for 2020 and prior years.

Yes. I'm just going to add one thing to what Jay said also is within Targeted Specialty, there was also an underperforming program that was terminated in the first quarter of this year. There is no more premium after the first quarter, but we did have some earned from that program this year, and we continue to see some adverse development related to that program, which is included in the reserve strengthening numbers that we noted.

Our next question comes from Tony Polak with Aegis.

My questions were answered.

Great. Thank you. That concludes our Q&A session. I will now turn the call back over to Steve Ries for closing remarks.

Thank you, Danica. Thank you for joining us and your continued interest in investment in Global Indemnity. We look forward to speaking with you after the 2023 results release.

Thank you, ladies and gentlemen. That concludes today's call. You may now disconnect.