Global Indemnity Group, LLC Q3 FY2025 Earnings Call

Good morning, everyone, and thank you for your patience. My name is Kelvin, and I will be your conference operator today. I would like to welcome you to the Global Indemnity Group Q3 2025 Earnings Call. I will now hand the call over to Nathaniel DeRose, Senior Vice President and Senior Counsel. Please proceed.

Thank you, operator. Before we begin today, I would like to remind everyone that this conference call may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words, including, 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. We do not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events or otherwise, except as required by law. It is now my pleasure to turn the call over to Mr. Jay Brown, Chief Executive Officer of Global Indemnity.

Thank you, Nathaniel. Good morning, and thanks for joining us for the Global Indemnity Third Quarter Results Conference Call. Alongside Nathaniel, I have Evan Kasowitz, President of Belmont Holdings; Praveen Reddy, President and CEO of Katalyx Holdings; and Brian Riley, our Chief Financial Officer. I will start with an overview of this quarter's results and share my thoughts on our current positioning as I conclude my third year as CEO. After that, Brian will provide highlights of our financial and operational results. We look forward to your questions after his remarks. This quarter's results reflect the positive insurance operating and investment trends we have experienced over the past several quarters. Our accident year combined ratio of 90.4% resulted in an underwriting profit of $10.2 million, a significant improvement from the 93.5% of last year. This is our best quarterly combined ratio in recent years, indicating strong property results in both catastrophic and non-catastrophic losses. Our short duration investment portfolio yielded acceptable net investment income of $17.9 million, marking a 9% increase from the previous year. We did experience a slight short-term mark-to-market loss this quarter as we shift away from a predominantly short-term fixed income portfolio. While the very positive insurance and investment results were somewhat tempered by our planned higher corporate expenses as we continue to invest in our Agency and Insurance Services segment, these investments are aimed at driving long-term growth. Our net income of $12.5 million is consistent with last year's results, and our underlying operating income increased by 19%, showing a strong year-over-year change. In terms of insurance operations, gross premium excluding terminated products grew 13% over the third quarter of 2024. We observed solid growth in Vacant Express, Collectibles, Wholesale Commercial, and Assumed Reinsurance. Premium rate changes on our direct book are currently in the mid-single digits and align with our expectations for loss trends, although competition is increasing despite the favorable market for our existing products. Moving on to our technological advancements, our efforts under Project Kaleidoscope to enhance our technology and data infrastructure are progressing well. We plan to have all our existing products on the new system architecture by 2026, designed to integrate seamlessly with our AI technology investments. Our initiatives over the past three years have shown significant progress, particularly in improving our accident results and achieving double-digit growth in our ongoing businesses. With a strong foundation established, we initiated a new legal and organizational structure at the start of the year, and with Praveen Reddy joining in March, we are enhancing our underwriting and distribution teams. Our focus remains on executing our strategy for substantial growth in our Agency and Insurance Services segment through organic growth, new products, service enhancements, and strategic acquisitions. We recently rebranded this group to Katalyx and acquired Sayata, a high-tech AI-enabled digital distribution marketplace for commercial insurance, which aligns with our strategy to provide faster distribution solutions for specialty insurance. We acknowledge that it may take some time for the market to properly value GBLI in this new configuration, but we are committed to effectively communicating our story to investors. Additionally, our Board has decided to move our stock listing to the NASDAQ exchange, which we believe is more appropriate for our company as we embark on this new chapter. I am confident that our core business, alongside our restructured organization and strategic initiatives, will generate significant value for our shareholders in the coming years. Now, I will hand it over to Brian.

Thank you, Jay. Starting with one of our most important metrics. Book value per share increased from $48.35 at June 30 to $48.88 at September 30. Including dividends paid of $0.35 per share, return to shareholders was 1.8% for the third quarter of 2025. Net income was $12.5 million for the third quarter compared to $12.8 million for that same period last year. And as Jay mentioned, operating income, which excludes after-tax impact of unrealized losses on equity securities, was $15.7 million for the third quarter, an increase of 19% over the same period last year. Key drivers came from both underwriting income and investment income. Underwriting income improved 54% to $10.2 million in the third quarter of '25 compared to $6.6 million for the same period last year. Investment income improved by 9% to $17.9 million in the third quarter of 2025 compared to $16.5 million in the same period last year. This improvement was partially offset by an increase in corporate expenses to $7.8 million in the third quarter compared to $5.9 million for the same period last year, resulting from professional fees related to the build-out of personnel at Katalyx and transaction costs related to the acquisition of Sayata. As Jay mentioned, our corporate expenses will likely remain higher than previous years as we prospect new business opportunities at Katalyx and Belmont. Let me add a little color on underwriting income and investments, starting with underwriting income. Current accident year underwriting income improved by $3.6 million overall, driven by an improvement in the combined ratio of 3.1 points to 90.4%. This consisted of a 4-point improvement on the loss ratio to 50.1%, driven by both catastrophic and non-catastrophic performance. This is partially offset by an increase in the expense ratio of 1.7 points. Expenses remain elevated as we add personnel to build out Katalyx and complete the runoff of our non-core businesses. Turning to premiums. Consolidated gross written premiums increased 9% to $108.4 million in the third quarter of '25 compared to $99.8 million in the same period last year. As Jay mentioned, excluding terminated products, gross written premiums increased 13% to $108.5 million compared to $96.4 million for the same period last year. Let me add a little color to the divisional level. Our Wholesale Commercial business, Penn-America, which focuses on Main Street small business grew 10% to $67.9 million compared to $61.9 million in the same period last year and includes an average rate increase of 4%. In aggregate, Vacant Express and Collectibles grew 5% to $16.4 million in the third quarter compared to $15.7 million in the same period last year, driven by rate and growth in agency appointments. Our Assumed Reinsurance gross premiums, excluding non-core business, grew 58% to $15.6 million, resulting from 7 new treaties we added during 2024 and 5 new treaties added in 2025, increasing our in-force treaties to 16 at September 30. Specialty Products, excluding the terminated products, remained flat at $8.6 million. As for investments, total investment return was $14.5 million for the third quarter of '25, with an annualized return of 4%, consisting of $17.9 million of investment income and a $3.4 million decline in fair value on the portfolio. Investment income on our fixed income portfolio was $15.2 million for the quarter compared to $15.8 million for the same period last year. Current book yield on the fixed income portfolio is 4.5% with a duration of 1.1 years at September 30 compared to December 31, 2024, of 4.4% with a duration of 0.8 years. The average credit quality of the fixed income portfolio remains at AA-. Our outlook for 2025 is very positive. Our underwriting income excluding the impact of California wildfires in the first quarter of $21.2 million for the first 9 months of '25 compares to $15.3 million for the same period last year. Our underwriting performance for the fourth quarter of '25 is expected to improve compared to the same period in '24. We continue to expect premium growth of 10% for the full year. Booked reserves remain solidly above our current actuarial indications. We believe the premium pricing is continuing to track with loss inflation. Discretionary capital, which we consider the amount of consolidated equity in excess of that required to maintain the strongest levels with our rating agencies is $273 million at September 30. Lastly, our investment portfolio remains well positioned to invest in longer duration maturities at higher yields. Thank you. We will now take your questions.

Your first question comes from the line of Ross Haberman of RLH Investments.

It was a good quarter. Can you explain the $4 million in investment losses you took this quarter and why you chose to realize that loss? Will you experience similar losses in the coming quarters as you restructure or sell parts of your bond portfolio?

Yes. Ross, to be clear, the loss was not realized in the form of a sale. It's a fair value decline on $25 million in equities that we invested in the third quarter. We view it as short-term.

Okay. And I think you said you're going to restructure the investment portfolio. Could you elaborate on that a little bit and the reason why?

Yes. I mean, so far this year, we've deployed $200 million of our short-term investments into corporates and mortgage-backed securities right now. We're at approximately 40% of the portfolio is short term, and we're evaluating how to invest over the next quarter and/or next 5 quarters, those short-term investments.

I'm sorry, just one clarification. What percentage of your investment portfolio is equities as opposed to bonds?

Equity is about 2%...

You mentioned competition is increasing. Can you give us any more color on that, where it's happening and why it's happening now?

For our current product lines, which primarily target small commercial or very small personal collections in our Collectibles business or Vacant Express, we don't encounter the same level of competition present in larger premium markets where it begins earlier. However, we are starting to experience some pressure as we introduce new products to new customers. The competition is somewhat more intense than it was last year. It's important to note that for the business we are writing, we are still achieving pricing levels consistent with our current book. We remain optimistic about our portfolio and earnings. Nonetheless, we anticipate some pressure as we approach 2026 and 2027.

Okay. And speaking of 2026, do we still have a handle that it's going to be double-digit premium growth? Or any comment looking forward on that?

I am very optimistic it will be at least double-digit. It's not going to be triple-digit. I'm only kidding. We're sticking with our approach, which we expect our baseline of existing products will continue to grow at 10%. However, we will see an increase in overall growth rates as we start to add new products and new operations in Katalyx.

Got it. Last question. Did you give a discretionary capital number? Sorry if I missed that.

$273 million.

All right. That's up from $260 million to $273 million.

We will now move to our web questions. Your next question comes from Michael O'Brien. One great way to get your message out and show that you believe there is real value in your stock would be able to implement and execute on a buyback program. Any thoughts?

Certainly. We have consistently stated over the past two or three quarters that due to the significant investment we are making to restructure our organization, which started at the beginning of the year, we anticipate notable growth in 2026 and 2027. Therefore, the Board has decided, at least for the short term, which means in the next three to five quarters, to allocate our capital towards these growth opportunities instead of stock buybacks. This is a question that has been raised each quarter, and we have not altered our stance moving forward.

There are no further questions at this time. And with that, I will turn the call back over to Nathaniel DeRose for closing remarks. Please go ahead.

With that, we thank you all for joining us. We look forward to speaking with you about our year-end results at that time. Thank you.

Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect.