Global Indemnity Group, LLC (GBLI) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Global Indemnity's 2021 Investor Day. I'm Stephen Ries, Head of Investor Relations. We're excited you could be with us here today as we discuss the company's performance, its business objectives going forward and answer questions related thereto. We have received pre-submitted questions from our web audience. For those with us here today, if you have a question, please write it down and signal my colleague, Katherine Sweeney. She will collect it between speakers. If we run out of time and your questions were not addressed, we are delighted to meet with you afterwards. With us today, we have our Directors, Chairman Saul Fox, Jay Brown, Seth Gersch, Jason Hurwitz and Bruce Lederman. From our management team, we have our CEO, David Charlton; Jonathan Oltman, our President; Reiner Mauer our Chief Operations Officer; and our Chief Financial Officer, Thomas McGeehan. Now during the presentation, which you can find on our website, we may make forward-looking statements. These statements are based on current expectations and assumptions. They are subject to various risks and uncertainties. Actual results may differ materially from the results expressed or implied here today, and we undertake no duty to update any forward-looking statement. With that being said, I'd like to welcome to the podium, Global Indemnity's Chairman, Saul Fox.

Thank you very much, Stephen, and again, thank you all for being here today in person as well as hooked in by phone over the web. Let me start with some background. Global Indemnity was 1 of 6 platform build-up investments in Fox Paine Fund II, which was launched in the year 2000. The Fox Paine Fund II invested $682 million in aggregate across the 6 platform -- across 6 platform investments, from which it ultimately realized $1.9 billion in value, 284% return on investment, a 49% internal rate of return and 95% of which has been realized in cash. I founded Fox Paine in 1996. Prior to founding Fox Paine, I was a senior partner at Kohlberg, Kravis & -- Roberts & Co., KKR, a pioneering merchant banking firm, which I joined in 1984. At KKR, I initiated and led the firm's foray into insurance, which became KKR's first industry silo. I also led the acquisitions, divestitures and chaired the Boards of Motel 6, a 530% ROI investment with a 38% IRR and $661 million of equity value realized; American Reinsurance, which generated a 660% ROI, 57% internal rate of return and $2 billion equity value realized; as well as Canadian General Insurance, which generated a 360% ROI, a 55% internal rate of return and $433 million equity value realized, which ranked among KKR's most successful investment transactions. Prior to joining KKR in 1984, I was a tax and mergers and acquisitions attorney at Latham & Watkins, having joined the firm in 1978 following graduation with honors from the University of Pennsylvania Law School. I received a baccalaureate degree with highest honors from Temple University in 1975. Fox Paine founded Global Indemnity in September 2003 and, today, together with Fox Paine's affiliates, owns 5.9 million common shares, representing 41% of shares outstanding and an 83% voting interest. Global Indemnity initially organized offshore in 2003, redomesticated to the United States from the Cayman Islands in August 2020, which facilitated several opportunities for the company's growth and profitability. Prior to the redomestication, financial engineering, more than anything else, enabled the company to grow book value per share 7.4% per year from the company's inception in 2003 through the redomestication as well as to return $525 million to our shareholders. Going forward, management, rather than financial engineering, will be the primary driver of growth and profitability. In that regard, David Charlton, a well experienced and highly successful insurance industry leader with distinguished tenures at 3 of the industry's most esteemed competitors, Philadelphia Consolidated, Berkshire Hathaway's USLI operation and Chubb's Westchester specialty operation, was recruited as Global Indemnity's Chief Executive Officer. Since becoming CEO just 6 months ago, Mr. Charlton already substantially augmented the breadth and depth of the company's management team by recruiting as Global Indemnity's Chief Operations Officer, Reiner Mauer, formerly the President of the property/casualty division of Berkshire Hathaway's USLI operation, as well as 8 other new executive, divisional and operational leaders, all of whom have had highly successful careers managing small business casualty underwriting operations. Also, as a result of the redomestication in which we merged our Bermuda insurance operation into our domestic businesses, Global Indemnity was able to free up $250 million of unrestricted capital for our new unregulated parent company, Global Indemnity Group, LLC, treated as a partnership for federal income tax purposes, which is available to support all the company's ongoing operations as well as for dividends to shareholders. In addition, the redomestication further simplified the company's corporate and operational structure and resulted in over $5 million of ongoing and recurring savings. As a result of the changes enabled by the redomestication, including, most importantly, the significant augmentation of the company's executive leadership, the Board established new long-term growth and performance objectives for the company that are incorporated as multimillion-dollar long-term incentive compensation targets in David Charlton's and Reiner Mauer's 5-year employment agreements. These agreements include net written premium growth targets over the 5-year, 2022 to 2026, period of, on the low end, 6% annual compounded growth and, on the high end, 8% annual compounded growth. These net written premium growth targets are based upon the last 10 years', 2011 through 2020, historical performance of, on the low end, the median of P&C companies and, on the high end, the top quartile of E&S companies. These agreements also include return on equity targets over the 5-year, 2022 through 2026, period of, on the low end, 8.37% on average and, on the high end, 12.5% on average. These return on equity targets are based upon the last 10 years', 2011 through 2020, historical performance of, on the low end, the median of P&C companies and, on the high end, the top quartile of E&S companies. Global's core small business commercial specialty businesses, United National, acquired in 2003, and Penn-America, acquired in 2005, have performed admirably over the years, generating 16% growth in net premiums per year and a 20% average return on equity from 2016 through 2020 and will represent an even greater proportion of the company's premium going forward as growth is enhanced by new products such as professional liability, excess casualty, environmental, special events, small commercial umbrella/excess as well as other innovative small business offerings. The company's outstanding results in its core commercial specialty businesses were offset, however, by the very disappointing performance of American Reliable, acquired in 2015. American Reliable's very disappointing performance was due to poor management of its property catastrophe exposures. While it was understood that American Reliable's business was substantially catastrophe-exposed, it took the company years too long to resolve the underlying catastrophe exposures in the business. As of today, the company's overall catastrophe exposure, as measured by the annual aggregate probable maximum loss, PML, on a 1-in-250 year basis has been reduced from $247 million following the American Reliable acquisition in 2015 to $84 million, a 66% reduction. Moreover, as a result of these and other actions taken, going forward, the company expects American Reliable's business will generate quite attractive returns on the capital deployed. At the midpoint of the performance objectives incorporated in the company's Chief Executive Officer's and Chief Operating Officer's agreements, net written premium are targeted to grow from $613 million in 2021 to $859 million by 2026. Net income is targeted to grow from $30 million or $2.03 per share in 2021 to $91 million or $6.21 per share by 2026, assuming only a 2.5% annual pretax investment return over the period. As a result, book value is targeted to grow from $709 million or $49.36 per share including cumulative dividends at 12/31/21, to $961 million or $70.92 per share including cumulative dividends at 12/31/26. In order to achieve these performance objectives, maintaining the company's A rating and continue its dividends to shareholders at the current rate, the company will need to supplement its existing capital resources with approximately $150 million over the next 5 years. If the company achieves the Board's objectives over the next 5 years, it will result in book value per share increasing from $49 at 12/31/21, to between $66 and $75, including cumulative dividends by 12/31/26. Based on the 10-year median multiples of book value at which P&C and E&S companies trade, the company's share price would increase from $27 today to between $76 and $135, including cumulative dividends by 12/31/26, generating a 23% to 37% internal rate of return for shareholders over the next 5 years. With that, I have the honor of introducing and passing this podium to our new Chief Executive, David Charlton.

Good afternoon, and welcome, and thank you for coming today. I am David Charlton. So excited to have taken on the Chief Executive role and the opportunity to build a really special company here. I'm very thankful to Saul Fox and the entire Board just for all the support we've had as a management team as we've come on. And it's been exciting times in the first 4 to 5 months we've been here. I'll give you a little background on myself. I spent my career building profitable insurance divisions. I started out building professional lines division at Philadelphia Insurance Companies. Then over the next 20 years, I was the Executive Vice President and Chief Underwriting Officer at USLI, a Berkshire Hathaway company. 19 out of 20 years, we had combined ratios of 90% or better. I was at USLI. And then the last 7 years, I've been building -- binding a small business at Westchester, a Chubb company. So let's get into our strategic vision, and that is to be a best-in-class specialty insurance company focused on small to medium-sized and middle-market business, achieving steady growth and a consistent combined ratio in the low 90s. Today, we're going to discuss our strategic road map of how we make this happen, and it all starts with people and talent. We're going to detail our plans to show how we're going to basically -- how we brought this talent on to date, our plans going forward with people and talent and what we've done with the hiring executive talent since May. Revenue. We're going to detail our plans to grow current core businesses, develop new businesses while decreasing or eliminate less profitable higher risk business. Operations. Analytics and technology will play a key role as we move forward, and our new COO, Reiner Mauer, will be detailing that in his section. Investments. We will continue our conservative investment approach, and Tom McGeehan, our CFO, will be walking you through that as well. So we have a very experienced team of executives at Global Indemnity from our CFO, Tom McGeehan, who's been with us in the company for 20 years; and our President, Jonathan Oltman, who, over his 7 years at Global, has overseen our profitable commercial lines operations. And it's an overall strong, experienced leadership team in place from actuarial to claims to audit. Since joining the company in late April, I'm really excited to share with you the investment we've already made in new executive talent. First off, Reiner Mauer. As Saul mentioned, Reiner was President of P&C at USLI and someone I've had the privilege of working with for many years, I have an incredible amount of respect for and really just a terrific hire for us. We've also brought on Marc Garganigo, a 30-year experienced leader who most recently headed a professional lines at Skyward Specialty. Marc has already started building out his team. He's already started to add to his staff. You'll see Rochelle Elliot, a 20-year experienced veteran and -- driving our product development team. And so I'm going to share more with you about how we're building our professional line a little later. Melanie Herring has joined us to lead product management and development. Melanie has a nice background coming from Nautilus Insurance, a very strong casualty player. And you're going to hear a lot about today as we transition from a property company to a casualty company, why that's so important to get that underwriting talent into the company. Evan Kasowitz has joined us. Evan has -- came over from Attune, and Evan is going to lead our dedicated cannabis team. We have hired Alan Hirst as our new Chief Information Officer to oversee technology. Alan joins us from The Hartford, a leader in small and middle-market business and also a leading technology insurer. Nicole Reilly has joined us from Lincoln Financial and is leading our recruiting and our training, which will both be critical areas for Global Indemnity. Biju Joy, we have already hired as a division leader for our new excess casualty business. Biju is a 30-year veteran who most recently led and built the highly profitable excess casualty practice to Philadelphia Insurance Companies. And finally, Dennis Willette has been hired and is leading our new environmental division. Dennis most recently led the east region for AXA XL environmental. So all these people are already onboard at GBLI, executing on our vision. I'm really proud of our team for recruiting this incredibly talented group of insurance executives over a 4-month period. We have a lot of momentum, energy and excitement as we move forward in this next chapter of our company. Let's get into our core business strategy, and that's really to build out our core businesses that can drive long-term, consistent and sustainable profitability. And we define core businesses the following way: They have a proven track record of profitability. They're comprised of small to middle-market business. They're specialty in nature and they're aligning with risk that Global -- a Global-sized company should be writing. They're casualty-driven and not cat-exposed. And they're all supported by leading technology, analytics and third-party data. So as we build out these core businesses, we plan to transition to more of a 70% casualty company, 30% property, and this is going to enable us to produce much more consistent earnings without the volatility of cash affecting our earnings so much quarter-to-quarter. On the left, you'll see the core businesses that we have today and that we're going to continue to invest in. That consists of Penn-America binding, cannabis, collectibles, programs, casualty reinsurance and vacants. You also see the 3 new businesses that we're building: professional lines, environmental and excess casualty. And then the business on the right are the ones where we need to adapt our strategy to make them core businesses. That would be farm, ranch and equine; property; and our personal lines businesses, and Jonathan will be following me, talking about our strategy to adapt in those areas. So I'm going to jump in, talking about Penn-America binding. Penn-America binding is traditionally a very profitable segment for us. This year, it's trending for 11% growth in '21, along with accelerating rate. We're going to build out and refine over 1,000 classes that we write today. As I mentioned, the hiring of Melanie Herring from Nautilus really brings us a nice focus in casualty, the ability to expand that offering into areas such as light manufacturing, special events, umbrella and excess as well as really refine our casualty guidelines to make this business even more profitable. Penn-America fits our core definition of what a core business is. It's made up of small E&S business. It has an average premium of $2,800. It's already 69% casualty and 39% (sic) [ 31% ] property. It's technology-driven. And our CEO, Reiner Mauer, will be sharing -- our COO, Reiner Mauer, will be sharing on our new build-out from our system launch to be completed this year that's going to have cutting-edge analytics, APIs and third-party data. In Penn-America, we are rolling out our high margin, high income go-forward strategy. And this is really based on targeting more classes within 8 segments that have a 5-year combined ratio of 87.8%. Let me give you an example of 1 of those 8 segments just to give you a flavor for what -- when we say high margin, high income. Auto services has a proven track record of profitability. It has a 10-year loss ratio of 46%. It's got 35% compounded growth since 2017. It's a niche area overlooked by other markets. And finally, it's a complex product to underwrite that Penn-America already has expertise in. And so you'll see us continue to really -- with our distribution. We're working on plans to really drive out those 8 segments within Penn-America that have superior returns. Cannabis is the next core business I want to discuss. Global was an early adopter in the cannabis industry since 2018 and has been growing highly profitable historical combined ratios under 90%. Cannabis is a growing business. It's avoided by standard carriers, and it's in a booming, growing market with U.S. sales expected to be greater than $40 billion. To me, this is an incredible opportunity for GBLI for profitable growth. Our focus in cannabis has been shifting to our small premium business, getting away from larger cannabis property risk. And as shown by our average premium, this went from $13,000 to $6,000. And our new business policy count is up 23%. We want to double down on this business. We've hired, as I mentioned, Evan Kasowitz, to lead our dedicated cannabis team, and this is an area we want to be a leader in the space. Collectibles. Collectibles has been a long-time, extremely profitable product. And yes, those loss ratios are combined ratios. It's 100% digital direct-to-consumer business. It's trending to grow 18% in 2021 through social media campaigns. We're doing partnerships with companies such as [ Bekis ] and the Franklin Mint. And at these combined ratios and our momentum we're getting in digital marketing, collectibles is a core business that's truly worth investing in. Programs has been a core business for Global with long-term profitability and growth. We are trending to grow our programs business by 33% in 2021, and our 5 largest programs are averaging over 8% rate increases. Our programs are really a collection of small business customers. They're casualty-focused. Property has dropped to just 14% of our programs. So when you look at programs today, it's made of 86% casualty and it's backed by a dedicated team. We're using a lot of data and analytics already and it's enabling us to grow in this segment profitably as a core business for GBLI. Casualty reinsurance is trending to grow 32% in 2021, and we transformed our reinsurance book from 100% property. It's now 100% casualty on the reinsurance side. Historically, we use reinsurance to diversify against our primary insurance division. And going forward, we're going to strategically expand with small treaties to support our core business strategy at reinsurance. So if you think about it, on small -- as a primary carrier, we want to focus on small to medium-sized business. But with casualty reinsurance, we have ability to take on a play within larger accounts, delivering our risk to a small percent of assumed reinsurance. And finally, vacants, historically profitable and really in every distribution channel and division, all with combined ratios under 80%. Residential vacants, production is slow with a record low inventory of vacant homes, but we are seeing a second quarter trend of 8% growth in commercial vacants, which really ties to the increase of people working remotely. So that's an overview just to give you with some terrific core businesses at Global that we really plan to continue to grow and invest in. So now let's turn to new business where we're starting. I'm going to give you a little more detail of our professional lines area. So I have a long history of building highly profitable professional lines businesses. They generally performed at 90% or better combined ratios, and we're now excited to do the same at Global. Our focus is going to be on small to middle-market business in historically profitable segments of professional lines. This means products like employment practices, 100 employees or fewer, nonprofit D&O, private company D&O; miscellaneous E&O and tech E&O. And we're going to avoid high severity, poorly performing classes, such as public D&O, financial institutions and lawyers professional. As I mentioned, we're excited to have Marc Garganigo to lead this team. Marc has a successful record of profitably building professional lines businesses. I mentioned most recently at Skyward. He's well underway with his plan to build out this team. He's developing products and really creating his value proposition to the wholesale distribution and why should they put their small and middle-market business with GBLI. We anticipate going live with our professional lines business and products in the first quarter of 2022. Also very excited that we brought on Dennis Willette. And Dennis is a super exciting, young leader that we've hired from AXA XL. And he understands the role technology can play, writing environmental business and doing it very efficiently. And so Dennis is also -- he's going to be building out his initial products. We'll be in the contractor's pollution and the contractor's pollution and professional area, and it's going to be a focus also on small to middle-market business. And our plan with environmental is also a launch in the first quarter of 2022. Biju Joy is leading our new excess casualty business. And as I mentioned, Biju built a terrific book at Philadelphia Insurance Companies. We're interested in excess casualty right now because it's a rising rate environment. A lot of the traditional carriers are cutting limits, and it's an area that we can go in with excess limits of $5 million, and the areas we'll be targeting are manufacturing, construction, real estate and hospitality. So this business is already being built and will also be live in the first quarter of 2022. So all in all, it's a very exciting business strategy. We've got some really terrific core businesses that we're building out, and we have 3 brand-new businesses we're launching in highly profitable segments. And with that, I'm going to turn it over to Jonathan Oltman to discuss how we're going to adapt our strategy to make our other businesses core.

All right. Thank you, David. Good afternoon, everyone. Today, I'm going to be speaking to you about 3 of our divisions and how we are adapting our underwriting and marketing strategies to make them core businesses going forward. The first is our farm, ranch and equine division, also known as agriculture. As you can see, over the past 3 years, our calendar year combined ratio has been slightly over 100%. Our strategy to improve our profitability is twofold. First is to significantly shift the makeup of our property writings from predominantly catastrophe-exposed geographies to non-cat areas. We're achieving this through aggressive renewal pricing and through targeted agency distribution and reallocation. By the end of this year, we expect that less than 40% of our agriculture property business will be in high cat areas as compared to over 60% just 18 months ago. We are appointing some new agencies in these target areas, target geographies while reducing our distribution footprint in the states more heavily impacted by wildfire, hurricanes, tornado and hail. And while our average rate increase is just over 5% this year, it is significantly higher in these severe weather geographies. The net result of these actions is, so far this year, we've grown our overall premiums over 15% in the Pacific Northwest, Upper Midwest, Mid-Atlantic and New England territories while shrinking almost 25% in the cat-exposed geographies such as California, Texas and Louisiana. In addition to reshaping our business through pricing and distribution, we've made a significant investment in our analytics and -- to allow more granularity -- or more granular focus on this book of business. For example, approximately 45% of our agriculture business is related to the equine industry. We ensure traditional exposures such as property and general liability, but our niche also includes specialty coverages such as equine mortality, which refers to life insurance and medical insurance for horses. Our analytics have enabled us to identify the areas within our agriculture book that have the highest profit margins. For example, our equine-related business outperforms our livestock and our crop business by over 10 percentage points from a loss ratio perspective. And further, within the equine space, we've been able to determine which coverages and even which breeds and ages and uses of horses are most likely to yield the most favorable underwriting results. We use this information to make targeted rate changes to very specific combinations of risk characteristics that we wish to ensure. For example, we found that the mortality loss ratio for quarter horses is roughly half that of thoroughbreds. And as a result, we've been able to reshape the makeup of our book of business to ensure more of the most profitable business and less of the least profitable. The next division is our commercial property area. Historically, Global Indemnity has been a writer of small, medium-sized and larger property exposures. However, our most profitable business has traditionally been in the smaller commercial area, which is buildings with property values under $10 million. As such, going forward, we are focusing exclusively on these smaller, more profitable accounts, which have a traditional accident year combined ratio under 90%, so also greatly reduce our reinsurance costs. And finally, we've been able to achieve significant over-year rate increases on this business this year averaging 11.8%. From a top line perspective, we are taking a step back to move forward in this area. We're reducing our premiums down to just our core businesses, where we have the best results and the most internal underwriting expertise while shedding these larger accounts, which have been our worst performing area. Our personal lines area focuses on mobile homes, dwellings and homeowners business. While historically, these lines have not been profitable for our company, our go-forward business runs an expected accident year combined ratio in the low to mid-90s. We've done this by achieving strong year-over-year rate increases of 7% to 12% dependent upon the state, along with an enhanced focus on analytics specifically related to changing weather patterns, which has allowed us to shift the makeup of our book of business from areas adversely impacted by severe weather. For example, when we acquired American Reliable in 2015, we were heavily exposed in several severe weather hotspots, such as California, Texas, Louisiana and Florida. You can see from the chart here our aggressive actions to reduce our concentration in high hazard areas over the past several years. The bars on the left represent our total personal lines insured property values exposed to hurricane and wildfire in 2015, whereas the middle bars represent where we are today. The bars on the right are where we expect to be by the end of the second quarter next year when additional runoff will be complete, further reducing our property values and positioning ourselves for longer-term profitability. With that, I'm going to turn this over to Reiner Mauer, our Chief Operating Officer.

Thank you, Jonathan. Good afternoon. My name is Reiner Mauer. I am Global Indemnity's Chief Operations Officer. I'm very pleased to be with you this afternoon. I'd like to begin by thanking Saul and the Board for asking me to join you this afternoon. And I'd also like to thank them for asking me to join this very strong leadership team. The opportunity to rejoin David and work with him to build this organization was an opportunity I couldn't pass up. David recruited me 17 years ago at United States Liability, and I witnessed what he built at USLI. And I admired as a competitor what he built at Westchester as well. David has a proven track record of success, and I'm very excited to rejoin or to join Global Indemnity and put my imprint on an organization that has an exceptionally bright future. Operationally, we've been focused on building the teams, processes and infrastructure to support our goal to grow a sustainable and profitable organization. You've heard David and Jonathan reference our core products. Operationally, our teams have been focused on building the teams, the systems and the platforms to support those core products. A critical milestone to building our operations team has just been the recruitment of Mr. Alan Hirst as our new Chief Information Officer. Alan is a 23-year veteran of the financial technology industry. Before joining Global Indemnity, Alan was the Head of Architecture for commercial insurance at The Hartford. Alan will bring a strategic focus to building our technology platforms, supported by a more sustainable and scalable architecture. Alan will also be focused on better leveraging our technology to improve process efficiencies and reducing expenses. We're also very fortunate to have the continued support of Jay Karabin. Jay has a passion for IT infrastructure and security. He's working very closely with our new CIO to assure that we have the tools and the processes to secure our network, systems and data. Strategically, our operations teams have been focused on building the teams and systems to support our profitable Penn-America small business products as well as the new products that David mentioned. Global Indemnity distributes products through wholesale, retail and direct distribution channels. Our primary distribution focus is on the wholesale agency channel. And our leadership team really has a long history of working with national insurance wholesalers, and we built strong relationships with the most impactful wholesale agencies over our respective careers. And what we've learned is that the large wholesale agency often drive their small business to efficient carriers with easy-to-use platforms. Those national wholesalers have repeatedly communicated that frequent touches reduced their margins on small commercial business. Carriers writing small commercial business don't always need to offer the lowest rates to compete. They do, however, need to offer speed and efficiency to compete. So technology is becoming increasingly more critical in meeting distribution speed and efficiency requirements. And our operations teams have been focused on executing a strategy to exceed our agent speed and efficiency expectations. To support that goal, we entered into an agreement with ClarionDoor to develop our new small commercial platform. Our new platform will support our small commercial Penn-America products as well as several of our refreshed and profitable casualty products, including specialty events, commercial umbrella and excess. And our new core business divisions, including professional lines, environmental and excess casualty, will also be supported by our new platform. Our new small commercial platform is a cloud-based, table-driven, flexible platform that will enable us to make changes very quickly. Our new platform will also enable Global Indemnity to interface with third-party data providers that will not only reduce keystrokes but will improve our underwriting profitability as well. For example, our new platform will enable Global Indemnity to interface with third-party data providers to reduce cat exposure by better assessing the risk location to coastal or wildfire hazards. Although Global Indemnity has been an industry leader in using analytics, our new platform will enable our actuarial team and underwriting leaders to take analytics to the next level. From an ease-of-use standpoint, our new platform will enable Global Indemnity agents to electronically rate, quote, bind and issue. This will be a significant advantage over our competitors who continue to rely on manual processes, manual, inefficient and costly processes. Perhaps the greatest advantage from a growth standpoint is our new platform will enable Global Indemnity agents the ability to interface their proprietary quote systems with our new commercial platform. We are finding a growing number of large national agents migrating to these proprietary single-entry systems. Insurance carriers that can't support that strategy with application programming interface, or API, technology are finding it far more challenging to compete for small commercial business. Our new small commercial platform will have APIs for all of our commercial products, including our new historically profitable professional, environmental, excess casualty, special events and cannabis products. In fact, we believe Global Indemnity will be one of the few commercial carriers offering APIs for professional, environmental excess casualty, special events and cannabis. Our new platform, on pace to be introduced in December 2021, will offer Global Indemnity a strong competitive advantage in the wholesale distribution market and will enhance our ability to grow our core profitable, small commercial products as well as our new products. So at this time, I'll turn the presentation to Tom McGeehan, our CFO, to discuss our financial results.

Okay. Thank you, Reiner, and very good to see everybody this afternoon. So I'd like to spend a little bit of time talking about our 2021 forecast. We have 3 charts on this page, gross written premium, accident year combined ratio, and net income. Our gross written premium is expected to grow 10% compared to 2020. This is being driven from several areas, which the guys have talked about already. In our commercial business, we're seeing good growth in Penn-America, in our program business. Now that's somewhat tapered by some decreases that we're taking in our property brokerage lines. We're reducing the writing of larger accounts and continuing to reduce catastrophe exposure in that area. In specialty property and farm and ranch, we're continuing to reduce cat exposure, and we're trying to grow in states where returns are better and catastrophe exposure is much less. And our reinsurance segment continues to grow well also. We are now participating in -- on a larger casualty treaty, and we've also written several smaller casualty reinsurance treaties. Moving to the accident year combined ratio. Last year, we were impacted by cats. We had a 102.7% combined ratio in 2020. A lot of that was due to what happened along the Gulf Coast. This year, we still have some impacts from catastrophes. We are expecting improvements in the combined ratio to 98%. But within our numbers, we do have impacts from the winter storms that hit Texas and some of the other southern states as well as Hurricane Ida. And net income is expected to improve from a loss of $21 million last year to a profit of $30 million this year. Our underwriting results on an accident year basis have improved. We still have cats. So we believe further improvement will happen as we continue to do things to improve the quality of our book, and our investment income and realized gains are also stronger this year. Some of this has been attributable to some of the things that we've done to invest in alternatives. Moving to our balance sheet. Our cash and invested assets at June 30 were approximately $1.5 billion. They were mainly comprised of -- we have 83% of our portfolio that's invested in fixed income, securities and cash; an average duration of 2.7 years on the assets that are backing our insurance obligations; and we have an overall credit quality of A+, so a very solid, high-quality short-duration investment portfolio. For assets that are not backing our loss reserves, our unearned premium reserves and our catastrophe exposure, we have expanded our risk appetite somewhat to try to generate some better investment returns. And in the last 18 months, we've made investments in a high dividend equity strategy, bank loans and several smaller alternative investments. When you move to our loss reserves, our loss reserves currently have a duration of 2 years. We expect as we write more casualty business that duration will lengthen, and our assets that are backing those loss reserves right now are 2.7 years, a little bit longer than that. But as I said, over time, as we write more casualty business and shift more towards a 70-30 mix, we do expect that our loss reserve duration will increase. Lastly, I'd like to discuss our shareholders' equity. At June 30, we had $710 million of shareholders' equity. Over the years, we've conducted share buybacks, share redemptions that have totaled $488 million. These actions occurred in 2007, 2008, 2011, 2012, 2015 and 2017. And at the end of 2017, in order to return additional capital to our shareholders, we initiated a dividend program where the Board approved distributing $0.25 per share per quarter to our shareholders. And since that time, we have paid a dividend or distribution every quarter and have returned over $50 million to our shareholders. With that, I'd like to turn the presentation back to Mr. Ries.

Thank you. That concludes the presentation portion. Once again, if you're in the audience and you have a question, please write it down and pass it to my colleague, Katherine Sweeney. With that, we'll start from one of the submitted questions we've got from a listener. It is, please provide an update on your ongoing cat exposure reduction efforts. What is GBLI's normalized annual cat load going forward given the reduced cat exposures?

So cat load, if we look at cat load, based on our latest run on June 30, that's going to be $35 million where we'll be from a cat load -- that would be on an [ AAL ] basis net of reinsurance. That's based on where we're at, at 6/30 on the modeling, not based on where we're going at with the further reduction in cat.

Okay. And what type of event is your current property cat [ XOL ] treaty designed to protect for? Have you made any changes to your reinsurance program compared to that disclosed in your 10-K?

So we are insuring cat at 1-in-500 year event. And today, that looks like $15 million net, and then we have $185 million over that $15 million. That's down -- $185 million is down a little over historical, but that's in line with our reduction in cat business. And so it's still at 1-in-500 event.

Here's is a timely one. What's your expected losses from Hurricane Ida?

So I'll take that one. Ida right now, it's been a difficult storm because we've had -- obviously hit in the Southeast then hit the Northeast. So we have different dates and times of when it hit. When we look at what's being projected for the industry right now, it's in that $10 billion to $20 billion range. When you look at Global, historically, we'd be at 0.1% to 0.2% of that event, which would put us as a $20 million or greater event. What's interesting is when we look at our reported claims and development so far, we're significantly below that number. And I think that's really a result of all the actions we've taken to reduce cat. We exclude flood, for example, in Louisiana. And so while it's a little bit early to give final numbers because we're still getting claims and still developing, it's trending pretty well.

Okay. Can you talk about loss ratio, expense ratio expectations baked in the 98% guidance?

Tom, do you want to take that?

Yes. Well, I mean right now, we still have an expense ratio that's in the 38% to 39% range. We distribute primarily through the wholesale channel, which is a more expensive distribution method. So we're always going to have a higher expense ratio. And depending on our reinsurance cost, commissions generally can range net of reinsurance somewhere around the 24% range. As we move forward and we continue to grow our businesses, we would expect that our fixed cost with some of the things that we're doing in systems, my department in finance, et cetera, we don't necessarily have to grow to be able to support the increase in volume. So we should see the expense ratio come down over time. We would hopefully be -- our target would be to be in the mid-30s with our current distribution. And as David has alluded to earlier, we are targeting businesses that will have better returns and hopefully lower -- much lower loss ratios. We're not going to have the volatility from the property that we currently have, and we should be able to move our combined ratios somewhere to the 90% to low 90% range over time.

Okay. Next question. The stock trades at a meaningful discount. Are you fundamentally opposed to things like special dividends and accelerated share repurchases?

I'll take a shot at that. We're certainly not fundamentally opposed. Every day, certainly every member of the Board and the senior management team is thinking about the best deployment of our capital. When you look at our returns going forward under this leadership team and plan, we're looking at mid-range of 30% compound returns annually. I don't know where you can get anything like that. I don't know where I can get anything like that on my own, and I doubt very few of our shareholders could either other than through the company. So at this point in time, we think the company is -- has the right capital and the necessary capital to support its current operations and the management plan going forward.

Will industry price trends continue?

You want me to take that? We think they will. I mean we're looking at certain lines of business might be -- the acceleration or rate might be leveling a little bit. But through the balance of 2021, we see rates continuing. We're actually on a number of our products continuing to up the rate at this point in time. And we don't really see any necessary slowing in rate in '22 based on what we're seeing, especially with Ida. We're not through cat season yet. So it continues to be a strong rate environment from everything we're seeing.

Okay. Please discuss the timing by which your current strategy should materialize into a return on equity in line with the Board's objectives of 8% to 12%.

Can you read that again?

Sorry. Discuss the timing by which your current strategy should materialize into a return on equity in line with the Board's objectives of 8% to 12%.

Well, it's a 5-year plan. So over the course of the 5 years, that's what, on balance, we'll have achieved.

I would add to that, Saul. We're taking a long-term view. Building a business from the ground up is not easy. We've done it before, but we want to do it the right way, and that's what -- when we signed on, what was terrific was we're -- there's a patience to write a bottom line-driven approach to how we build the businesses and that -- but the beauty of them are when you think about small business and middle-market business, as we do that in areas like small professionals, small environmental, the renewal retention rates are terrific, and it gives you the ability to kind of sustain that growth and build on that growth. But we're going to take our time and do it the right way.

And further to that point and to the point of the question, as I say, if you build it, they will come. They don't come unless you build something, and it takes money to build, whether it's capital or expense. And so don't be surprised if you see just the absolute expense, particularly for management talent, increasing next year and so on, but that's what's necessary to achieve these results.

Okay. Please explain the need for $150 million of additional capital. Why does the Board believe the stock will ever trade at a peer multiple when the stock has never traded above book value?

Well, the stock has traded above book value in years past, long years past but years past. I think the stock has traded appropriately given the poor performance, the performance we expect to substantially improve and lead in our tier of the industry. And we expect that our stock price will follow.

Okay. As you launch your new professional lines business, will you be offering a stand-alone cyber insurance product?

I'll take that. Cyber is a product that I have underwritten in the past, and we made money on cyber insurance. But what's been happening in recent years in stand-alone cyber is really just the broadening of terms in a soft market. And also, these ransomware claims have made cyber become pretty much a hard market in pricing right now and a tough product to write. So I don't see stand-alone cyber as a Phase 1 product for when we launch professional lines. We'll keep an eye on it. If we can get our hands around ransomware claims, with the right terms and conditions, we would consider cyber only under those -- under that way of doing it.

Okay. I think we have time for one more question. The consolidation among wholesale brokers, is this affecting Global Indemnity?

It's interesting. We have a lot of relationships both at the national level -- and when I say national, the RT, the CRCs, the Amlins. And our team has very strong relationships with the heads and leadership of those groups. We also have a lot of regional wholesalers. And I don't think they're going away. And so we have the ability really to do business either way. But as the consolidations have happened for the most part, we're already doing business with the company that's doing the consolidation and really just gives the ability to write more business. So we don't really have any concern over that.

Okay.