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

Good day, and welcome to Global Indemnity Group, LLC's First Quarter 2022 Earnings Conference Call. I would now like to introduce Stephen W. Ries, Head of Investor Relations.

Thank you, operator. 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, 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 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 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. David Charlton, Chief Executive of GBLI.

Good morning. Thank you for joining our earnings call. In addition to Steve Ries; Reiner Mauer, our COO; Jonathan Oltman, President of Insurance Operations; and Tom McGeehan, our Chief Financial Officer, are also in attendance. I am very pleased with our underwriting results in the first quarter as we execute our strategic plan to grow our existing core businesses, as well as substantially widen our small business commercial casualty product offerings. Gross written premium grew by 16.8% compared to the first quarter of 2021. The gross written premium of our continuing lines grew 27.3% compared to the first quarter of 2021. The increase is mainly due to organic growth and rate increases. Our Commercial Specialty segment grew by 16.7% to $104.3 million, driven by growth in our Penn-America binding small business, which grew 26.9%. We obtained a rate of 7.8% for this business in the first quarter and we'll look to continue to push this higher as the year develops. Programs grew 9.8% on strong rate increases of 12.2%. Our new small commercial casualty businesses, environmental, excess casualty and professional have built out their teams and have established solid market footholds. They are actively writing business and receive strong support from our distribution partners and all are on track executing their plans. We continue to hire superior new talent. Most recently, we were very pleased to announce the hiring of Matt Carroll to lead our new InsurTech business. It will be part of our Commercial Specialty segment. We have 2 existing profitable InsurTech businesses today, Collectibles and VacantExpress that will serve as the foundation for this new business that Matt has been charged with building and growing. Reinsurance has strong growth. Gross written premiums in the first quarter '22 were $41.4 million compared to $22 million prior. As noted on the prior earnings call, this is due to increasing participation with casualty quota share treaty that Global has assumed for several years. This treaty continues to obtain strong rate in a hard casualty market. In addition, we wrote several smaller casualty treaties and grew our excess professional reinsurance business by 11%. Farm, Ranch and Equine grew by 8%. The equine mortality book, which comprises about 15% of this book grew by 39% compared to 2021. We continue to focus on driving profitability in this book and improving results from non-cat property, primarily fires. We have seen that over 25% of our non-cat fire losses are coming from just 5% of our business. We have identified a specific risk characteristics driving these unprofitable accounts and have been actively non-renewing these risks. We expect this action will reduce our loss ratio by several points. The gross written premium of exited lines shrank from $31.3 million in 2021 to $22.6 million in 2022. Very little businesses retained, as the net written premium was only $700,000. Global Indemnity is fronting the mobile home and dwelling book of the policies transitioned to American Family. Underwriting income also had good results. The combined ratio improved from 101.2% in 2021 to 95% in 2022. Catastrophes incurred in first quarter of '22 were $4.3 million compared to $16.9 million in 2021. Volatility is much less due to the lines we exited. The mix of business has now shifted to casualty. In 2021, 45% of net earned premium was casualty business compared to 64% in 2022. We will continue to push towards our goals of 70% casualty business which will be supported by growth in our 3 new casualty businesses throughout the year. To support the company's long-term business plan that we unveiled at last year's Investor Conference beginning in May 2021, the company embarked on a program to enhance liquidity, investment flexibility, buffer market volatility and balance sheet solidity. The first step in this regard was shortening the 4.5-year duration of the company's fixed income securities portfolio to 3 years, which was achieved by August of 2021. Then in August of 2022, the company liquidated the entirety of a $76 million public traded common stock portfolio. Finally, in April 2022, the company further shortened the duration of its investment portfolio to under 2 years of entire 100% that was outstanding indebtedness. We will now take your questions.

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

My first question is about your significant reduction in the duration of your fixed income portfolio. So can you tell us what's the difference right now between your liabilities and the asset duration?

Yes. So our liabilities have the duration right now that's about 2.3 years. Our fixed income portfolio today has a duration of 1.8 years.

All right. Okay, so it's not that different. And what's kind of -- under what conditions would you consider lengthening the duration again going forward?

Well, again, we -- when the interest rate environment becomes more stable and we have more certainty on how we perceive inflation and interest rates to perform on a going-forward basis. At that point, we would be a little more comfortable extending. Now, we are seeing there, Julia, some rate opportunity. It doesn't mean that we have to keep our portfolio completely as short as it is today. We are working closely with our investment managers. So -- but at the moment, we do not have plans to go very far out on the curve until we have a little more certainty.

No, that definitely makes sense. Yes. And what is impact of your -- what is the impact of this action on your net investment income going forward? So if you look what the yield you mentioned you're getting on those new securities, new money you purchased -- in the process of purchasing. It looks like it's still above your current fixed income portfolio yield. Am I correct?

Yes, definitely. At year-end, in our 10-K, we have reported an overall book yield of 2.2%. We identified $390 million for -- $390 million for sale, sold most of it. We originally put the money into 2-year treasuries to park it. The 2-year treasuries were getting just about 2.5%. We've since deployed some of that money, a little more than $200 million. We've gone mainly into corporates, a little bit into securitized, the overall duration of what we've currently been buying by moving out of the treasuries. We're buying in the duration range of 1.3 years, but we're seeing yields -- we're getting yields on that money right now at approximately 3.2%.

3.2% okay. So it's gapped like about 100 basis points, which is good. All right. And staying with your investments. Other investment -- other investments or other invested assets, which are kind of more debt-related, I understand, funds, limited partnerships, they were significant contributors to your NII in 2021. And I understand there is, at least partially, they are reported on one quarter lag. So how should we think about kind of expected or normalized returns on those investments going forward? I understand you increased the balance there, and I understand that you haven't sold any of that, right? So would you kind of for our planning purposes or modeling purposes, what's kind of an expected return on those investments? How should we think about it?

Yes. Well, the reason we're in those investments is that we do want to get some extra return. Now, of the alternative investments, we have $100 million of the alternatives. On the balance sheet, we're showing $147 million in total, but a little more than $100 million of that is in a floating loan fund. Approximately, 97% of what that fund invest in are mainly first lien loans -- not all 97%. But that's what they invest in, are loans. The loans are, as I said, 97% are floating rate. Right now, those yields are in about the 4.5% to 5% range. As interest rates go up, we would expect the returns on that fund to go up. Now, in the first quarter, that fund was not immune to the geopolitical events that were happening throughout the world. So supply chain -- supply chain problems, Russian-Ukraine war, rising prices of oil and inflation in general. And in that particular market, there was a -- I don't want to call it a flight to quality for the loan market, but there was a change in the market where people or companies where shifting their investments from lower grade loans to higher-grade loans and it caused in -- for that particular fund, a temporary -- what we believe to be a temporary decline in the market value of that fund. So for the $100 million that we had invested in that fund in quarter 1, we actually, again, solely because of market value, no defaults, but we actually had negative income with that fund of approximately $400,000 for the quarter. Now, that's an alternative that we do not book on a lag, where we actually get the data timely enough that we can book it to date. So what you're seeing for that fund, what I just said, is accurate. The other 3 funds, they are, one, invest in real estate debt, one, invest in distressed debt, and there's another one that is in runoff that we've been in for years that when Europe had Basel III hit and the banks had unload some loans off of their balance sheet, we're in a fund there where we still -- it's in runoff at this point, it's in its harvest phase. So that's what comprises the rest of our alternative investments. Those investments are booked on a 1 quarter lag. And we'll -- Julia, to answer your question in the beginning. On our alternatives in total, we would like to make more than 5% this year in our projections. We have these performing somewhere in the 5% to 6% range. No guarantees on performance, but that's where we have been.

Certainly. This is a very thorough answer. And any kind of indices -- market indices you would suggest for us to look at as a potential benchmark for the performance of this portfolio? It does look like there was...

At this time, that's something that we'll be readdressing as we go forward. Obviously, we were on a Barclays Bond Index before. The duration shortening is something where our investment mix currently is really -- it's not in proportion to the benchmark. And as I said, as we look at inflation and interest rates on a going-forward basis, there's a high -- I don't want to say a high likelihood, but there is a likelihood that we will be considering different benchmarks to pattern our portfolio against. But right now, it's really that we're managing to short durations and looking for yield opportunity.

I mostly was speaking about the alternative portfolio. If there is any kind of index or proxy, which that performance would be correlated to?

Yes. Most of it would be to a loan index. I don't recall the name of it. I can get that to you offline, but 100 million of the 147 million, there is a loan index that I'll be able to give you the name to.

That would be great. All right, so -- and switching gears from investments, I'm hoping to get more color on what you're broadly seeing in the E&S market. Is the competition kind of picking up? Is the pricing momentum and submissions are still going strong? From your commentary, I understand that it's still the case.

That's correct, and we're very bullish. I mean, with more premium coming in [indiscernible]. We're continuing -- our rate increases are actually gaining momentum. As I mentioned, our programs went up substantially to 12.2%. We see room for more growth in Penn-America small business. So we're very bullish on the market right now and the growth opportunities that we're seeing.

All right. And how much -- actually, these new lines, new 3 lines -- 3 new casualty lines, how much did they contribute to premiums in the quarter?

It's still not material in the first quarter. If you look at when they kicked off, just to give out a little flavor, so excess casualty was the first business to go live and really started to really raise the premium towards the end of the first quarter into the second quarter. They're a little over $1 million today in premium [ win ] and the other ones are on a similar pace based on [indiscernible].

And what you kind of project forward for this?

For all 3 lines?

Yes, all 3 or however you want to talk about it.

Yes. We've seen these being material businesses. I'm not ready to put a number on them at this point as far as forward-looking, but I believe there will be -- we really see the first year we're building the business up. The second year, on any new business, we see it as a breakeven type business and the third year is when we start to see them really making an impact on profitability.

Okay. Yes, makes sense. Your reinsurance renewal is coming up on June 1, I believe, for your property catastrophe treaty. You probably are already in the process of negotiating that treaty renewal. So what kind of changes are you contemplating, given that your exposure -- cat exposure is down significantly?

No, I think you're right on in that. We absolutely should be able to decrease the amount we purchased. And with that, we see the ability for some real cost savings as well. So -- and that's really across our reinsurance portfolio as it pertains to property.

All right. Okay, makes sense. And then, in your press release -- a number questions from your press release. Prior year development, I understand there was very small, looks like about $0.1 million in your continuing [ operations ]. But overall, on the consolidated basis, what was the prior period development?

Yes. It was just over $3 million, Julia. More -- a little more than $2 million of that came out from our discontinued lines. And in discontinued, we had a program. We only assume business for 1 year, but it was a multiyear policy. And we were able to release reserves by about $2 million on that particular treaty. But the way the treaty works is that there's a contingent commission, so any reserves we released we actually had to up our contingent commissions by exactly the same amount. So the net impact was 0. When you look at our $3 million reserve released, net of contingent commissions, we had about $1 million of what I would call is a positive contribution from prior year results to our numbers this quarter.

Okay. So it's a $1 million net favorable?

$1 million net positive. Yes.

Okay. All right. And then probably a numbers question. About your corporate expense line, what would you consider the right or reasonable run rate to use for that number? I know that you did take some cost reduction measures.

Yes. We have. We've quoted, I think, on prior calls right now that you would expect on a normal year right now, we'd be somewhere in the $17 million to $20 million range -- $18 million to $20 million range. That's where we would expect to be probably by year-end.

Okay. On a run rate basis, okay. Another question. So you retired $130 million of high-interest, high coupon subordinated notes. Do you plan to replace it with any new debt issuance? I remember that during your Investor Day last year, you suggested that you would need about $150 million of additional capital to fund the growth over the next 5 years. So can you tell me what your plans for there?

Well, we had a couple of things happen. One, we sold obviously, the renewal rights to our specialty property book. That helped free up, by the end of this year we believe that, that was going to give us back over $60 million of capital, and it gave us an opportunity to rethink about our debt. This step was 30-year paper and at an interest rate of 7% - 7%, 8%, it was not inexpensive. We've been to the market twice now, and we believe with some of the things that we're doing with our company that as we become a, I'll call it, a more seasoned debt issuer that as we go forward, if there is a need to raise additional capital, we would hope to do so at a less expensive price than what the current debt was that was outstanding.

So you're actively considering or looking this as possibility?

Well, again, it will depend. Again, we'll be closely monitoring our growth, our reserve levels, our catastrophe exposure, all the things that drive our capital needs, Julia, we're always watching. And like I said, the most significant -- one of the most significant things that happened was the sale of the renewal rights. It gave us an opportunity to actually retire -- to retire this debt. And as we go forward, if we do have a need for capital, we'll be well in front of it, and we will think about the way of raising capital that we believe benefits Global Indemnity the best. So again, we've [ not ] been in the market twice. So hopefully, if we go back out the next time, we'll -- and we're doing some really good things with the company, too. So we feel really good about the book. We feel good about the volatility that we've been able to reduce. All things that should be positive if we have to go to the markets to raise or issue debt again.

Okay. And another question on the business environment and overall. Where do you think the loss cost trends are now? And do you factor increased inflation into your pricing and reserving assumptions?

No, absolutely. I mean, we are possibly looking at -- we just did a [indiscernible] study, really, across our book on both pricing and reserves. And it's something that on the property side, especially, we see the cost of goods, which we said in our last call impact us in the fourth quarter, that's where we're getting at this point some double-digit increases to address. On the casualty side, we're a little less exposed based on the type of business that we write. We're writing small business, we have lower [ limits ] in place. So we're not quite as exposed to social inflation. And so it's really by keeping our limit flow. But yes, we are getting a nice rate increase on our casualty business as well.

Right. And what about your reinsurance business? Can you talk a little bit about them? I confess, I'm not as familiar. So I understand -- was that part of your business? So I understand there is one big casualty quota share, right, which you increased participation in. And so that -- what percentage of that 1 quarter share will be your total kind of premium on that segment?

Yes. So this year, we actually kept the participation percentage the same, but with the rising rates in casualty a business, that drove most of the increase there. Tom, I don't know if you did that number, but that was probably about $90 million?

Yes. Yes. And yes, in the -- and that one treaty is probably about 85% to 90% of the reinsurance book right now. We have some smaller treaties, but that one treaty is what comprises most of it.

Okay. And that quota share, what kind of underlying business is it covering? What kind of underlying casualty business?

It's 100% casualty business. So it's very much in line with [indiscernible] as a casualty writer, but it gives us a nice diversification of the type of business that we write spread out -- really spread out. So it really gives us -- and then it's a rising rate environment on the type of business that we want to be involved with.

Okay. And do you -- sorry. Sorry, go ahead.

I was just saying that we offset, in addition to that, we have some excess professional liability business we've had for many years. And then we're continuing to write a number of small casualty reinsurance deals [indiscernible]. That would make up the difference.

Do you see any increase -- did you see an increase in the ceding commissions on that business this year? Because I understand there's kind of a market trend towards high ceding commissions, given the profitability of the underlying books.

Yes, that really is going to vary by treaty. So for example, we took out reinsurance on our 3 new businesses, and I thought we got fair ceding [ commission on this ].

Okay. I think that's all I have for now. Sorry. Maybe, one more question, if I may. On the expense ratio, I think there was some kind of increase, at least it was higher than I expected, the expense ratio in the quarter. Is there anything unusual? And what would be kind of a reasonable run rate for your expense ratio, which is included in your combined ratio?

What we had said before in a prior call, Julia, is that we're investing in some of our new businesses. And obviously, we're transitionalizing off of the renewal rights. So we originally -- based in comparison to 2021, we had expected that our expense ratio over the course of this year would actually increase by 1.5% to 2%. And then, after the new businesses are up and rallying, and we continue to get growth in our other businesses, and we complete the transition of the specialty property renewal rights, that we would start seeing improvements of approximately 1% per year thereafter. So what you're seeing is some of those factors in play right now.

No further questions. At this time, I'll turn it over to Stephen Ries for any closing remarks.

Thank you, operator. Thank you for joining us for our first quarter earnings call. We look forward to speaking with you after the second quarter.

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