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

Good day, and welcome to Global Indemnity Group LLC's Third Quarter 2021 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 31, 2020, 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 our 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 of 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 will open it up for Q&A. The third quarter had strong gross written premium growth of 21.3% to $174.3 million. Our growth is coming in the right places from our core businesses, and America binding, programs and casualty reinsurance were the most significant drivers for the quarter. Net loss for the quarter was $7.7 million. Hurricane Ida was a $14.8 million event for us. Property Brokerage also had a significant negative impact on the quarter. Excluding Ida and Property Brokerage, combined ratio would have been 88.5%. So a similar story to past quarters were cats and property losses are behind the negative results. Let's now review our 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-renewing policies with limits greater than $10 million 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 program and other E&S businesses. The Property Brokerage business is down 23.1% year-to-date, and will continue to run off in profitable business in the remainder of 2021 and into 2022. The further our strategy to focus on core, small and middle market commercial lines, we recently completed the sale of our 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 team from K2 and American Family for being such great partners on the deal. This transaction made sense as an integral component of our corporate strategy. By selling these business lines, Global Indemnity will see $30.4 million in cash as well as retaining the American Reliable 50-state licensed operating unit, $65 million of net capital supporting the business and related $42 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 2022 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 focused most particularly on building out our Commercial Specialty operations. We are transitioning to a business mix of 70% casualty and 30% of property, enabling us to produce more consistent earnings quarter-to-quarter by substantially reducing cat 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 3 new businesses: environmental, excess casualty and professional, in the first quarter of 2022. We continue to make critical key hires for the 3 new teams and build out the products, 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 $96 million for the quarter is up 28% from 2020. Penn-America binding gross written premium was $55 million, an increase of approximately 34% from 2020. United National programs gross written premiums was $27.5 million, up approximately 27%. Vacant property gross written premium of $6.4 million was up 1%. Property Brokerage had gross written premiums of $6.9 million and was down 26% in the quarter due to actions taken to improve profitability. Commercial Specialty lines suffered an undirect loss of $8.6 million, primarily due to catastrophe losses from Hurricane Ita and several high-severity losses in the Property Brokerage line. Reinsurance continues to perform well. Gross written premium was $29.6 million compared to $14.6 million in the third quarter of 2020. 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 2021. Its combined ratio for the quarter was 96.2%. Farm, Ranch & Stable's gross written premium was $18.5 million, down 5% from 2020. 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 Property's gross written premium of $30.5 million was down 12% compared to 2020. It had an underwriting loss of $3.3 million, primarily attributable to catastrophes, and in particular, Hurricane Ida. Investment income was $9.3 million, which is down from $11.7 million in 2020 due to low bond yields, offset somewhat by growth in the investment portfolio. The embedded book yield on the fixed income portfolio was 2.1% compared to 2.4% at September 30, 2021. Duration of the fixed income portfolio was lower to 3.6 years at September 30, 2021 compared to 4.2 years at December 31, 2020. Operating cash flow for the first 9 months was $66 million compared to $34 million for the first 9 months of 2020. 2020's operating cash flow included an alternative minimum tax carryforward recovery of $11 million. Excluding the tax recovery, operating cash flow increased $43 million. The increase is mainly due to gross written premium growth. Premiums collected increased by $46 million for the 9 months ended September 30, 2021 compared to the same period in 2020. In 2021, casualty net earned premium was 48% of total earned premium compared to 40% for the same period in 2020. Casualty losses take longer to pay than property losses. Prospectively, 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 short term but a 5-year plan. We are being actionable on the business that has historically had a negative impact on our earnings, but we are working hard to build our core businesses. Our strategy is at play and is being executed by a solid and committed team. That concludes our remarks, and we are now open -- we'll now open the call to your questions.

[Operator Instructions] Our first question is from Julia Ferguson with Dowling & Partners.

Can you hear me?

Yes.

Yes?

Yes, we can.

Yes. My first question would be about the sale of the part of the Specialty Property business of American Reliable. A few questions. First of all, I understand that a lot of this business is cat-exposed. And this, combined with also your actions you are taking on your property -- or binding property -- property binding business, should further decrease your cat exposure. So my question would be, should we think that your expected annual cat load, which I think you indicated about 35% on your Investor Day for the year, should it go down even further with that? Then overall, what would be the impact on the earnings going forward and also on the premium growth? Should we kind of -- how should we think about your 5-year target after the sale of this business? Should it be more kind of look -- [ processed ] on the adjusted base premium growth more on a higher end of your range? And also, were there any underwriting impact? I know that the business was underperforming, but I understand that to go forward, you were looking for a combined ratio on that business about 94%. So it assumes some expected underwriting profit from it. And first of all, what would actually are the subject premium? I understand that's just some subset of your specialty property business specifically for manufactured and dwelling. That's my first question.

So I'll try to take the first part. This is Dave. So yes, for 2021, we had a cat load of $35.4 million. So when the specialty property business is fully transitioned, we would expect a reduction of between $10 million to $50 million, around $12 million on that business. And then that does not take into account the lower end also of our Property Brokerage business. So that would just give you an idea of how that affects us on the 35.4% versus '21. And Tom, do you want to address some of the other...

Yes, there's a lot of questions in there, Julia, but I'll -- if I miss anything, please step in. So again, when we modeled the Manufactured Home and Dwelling book individually, the 1-in-250 PML on that book was about 200 -- I'm sorry, was $53 million. Now the way that the -- when we renewed our cas treaty round numbers, our 1-in-250 was about $100 million. Now when you model, it doesn't necessarily mean that the P&L is going to reduce by the full 53. It's not a subtractive type of exercise. But there will be a significant reduction in the P&L. And on a going-forward basis, our catastrophe treaty renews on June 1 of next year. We are strategizing today on how that prospective reinsurance structure will look. We don't have the answer 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, in Investor Day, we had targeted. We had noted that we expect that on a going-forward basis, our net premiums written would increase by -- on a compound annual growth rate, of at least 6% annually. That's the bottom end of the range that we would be targeting. We would expect it that it could 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.

Can I take that one?

Okay. And I'll pass it back to David now for what's in and not in the K2 deal.

Yes. So in the K2 deal, we sold the renewal rights, and that's for the mobile home and the dwelling business. And that excludes the state of Louisiana. [indiscernible] is included in that. And then also on the Florida business, we sold the renewal rights, so that's not reinsured as part of the deal. Outside of that, we kept within Specialty Property, our collectibles and our homeowners businesses, which are really fronting very, very well.

And so how much premium overall is going away in setting your rights. Do you...

Yes, round numbers, when this deal is complete, it will be about $95 million. And that includes the sale of the rights plus what we will not renew for what we've retained on Louisiana. So it will take 12 to 18 months to get the full benefit of this, Julia. But as we said, you'll see a reduction -- a significant reduction in Specialty Property premium.

Okay. No, that makes sense. And you indicated that there is some gain on this transaction?

Yes. There's 2 things. We will receive $30.4 million. That's broken up into 2 pieces. The sale of the business lines will be for $28 million. K2 is also taking space in our Scottsdale location. They will be assuming about 1/3 of the space to a sublease transaction. Between now and 2029, that is worth $2.4 million.

Okay. But that's the cash proceeds, right? And the gain, any GAAP gain you will recognize?

That is yes. What will happen is from a GAAP standpoint, the $28 million will be booked immediately. Now just to be clear, we will be taking a hard look because we are not going to be continuing this business on a going forward basis. When we purchased American Reliable back in 2015, 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 on a going-forward basis, we will be writing those off in the fourth quarter. So there will be a gain, but it will be less than $28 million.

Okay. Makes sense. No, that's perfect. And just, i want -- I just want to clarify if I understood this correctly. So the cat load of $35 million, it is reduced by $12 million, or...

That is -- to be clear, that's the amount that we had. That was our average expected loss when we developed our plan for 2021. So the average -- yes, the overall amount that we expected for cash was around $35 million and approximately $12 million of that was Specialty Property. Strictly planned.

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

It's the most part on the non-cat. It has been within Property Brokerage. And a lot of that business has been within our net retention of $2 million. And so we see both a higher frequency and severity on those lines. And that's another reason why, especially within the habitational book of business. And so that's why we are non-renewing the habitational side of it. We have other pieces of property that are actually running very well, be that, [ unless of risk ], Mercantile vacants. Those are the areas that will be moving and will continue to write, managing our limits in the more than $10 million, and we'll be writing that business outside of our business segments that focus on package business as well.

All right. So there is no any kind of 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-Q.

No, it's really just traditional property loss. There's nothing in that, that could...

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.