Global Indemnity Group LLC (GBLI) 2022 Q2 法說會逐字稿

Good day and welcome to the Global Indemnity Group, LLC's second-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.

Thank you, Steve. Well, good morning. Thank you for joining our earnings call. In addition to Stephen Ries, Tom McGeehan, our Chief Financial Officer; and then Jonathan Oltman, President of Insurance Operations, are also in attendance.

Yesterday, we announced the sale of our farm renewal rights for $30 million, and the sale of American Reliable Insurance Company from our equal to surplus to Everett Cash Mutual. These transactions will free up over $45 million of capital supporting the farm business and further GBLI strategy to focus on our profitable and growing small- and middle-market commercial specialty casualty businesses. I am pleased that we found such a great company to acquire this business. Everett Cash is very focused on providing insurance solutions to the farm industry.

Now let's discuss the results. For our continuing business lines, gross written premium grew by 28.4% compared to the first six months of 2021. The increase is due to organic growth and rate increases on our commercial specialty and reinsurance lines. Underwriting income also had good results. The combined ratio of our continuing lines was 95.4%.

Our strategy to reduce volatility is working. Catastrophes incurred for our entire book were $12.7 million compared to $24.5 million in 2021. Commercial specialty lines cat losses are down significantly. Cats were $5.4 million in 2022 compared to $11.6 million in 2021. The mix of business has now shifted to casualty. I am very pleased to note that casualty-earned premium in our continuing lines was 72.2% for the first six months of 2022.

Our commercial specialty segment grew by 13.4% to $214.1 million, driven by growth in our Penn-America binding small business, which grew 22% to $109.5 million. Penn-America obtained rate increases of 8.3%. This is just rate; exposure change adds another 5%.

Our program division also realized growth of 8%, generating $72.6 million of gross written premium on strong rate increases of 10.6%. When we include exposure change, rate was up 21.6% in programs. And the market remains strong for E&S commercial business, and we will continue to push rate.

Our InsurTech business grew by 10%, generating gross written premium of $19.7 million. Our InsurTech solution allows agents as well as insurers directly to obtain insurance online quickly. We are excited about the leadership we have brought to this business and see it as one of our most significant opportunities for continued growth and profitability. We are committed to investing in a state-of-the-art technology, embedding online solutions into the sales process and expanding distribution to drive this business.

Our three other new businesses -- excess casualty, environmental, and professional -- are steadily growing and together now see over $5 million of premium. We are building out the three teams of key hires across the country and continue to receive strong support from our distribution partners. All are on track exceeding their plans and while still early days, and I'm very pleased with the quality of business each team is writing.

Our reinsurance operations primarily focused on casualty reinsurance. Gross written premiums are $87.8 million compared to $46.4 million in 2021. The growth is coming from our largest casualty quota share treaty, as well as our excess professional business and several smaller casualty treaties we have recently written. It is a great time to be in this part of the market where premium rate increases continue to be strong. Running longer tail businesses helps our investment portfolio grow, and we can invest these funds at higher interest rates.

Exited lines now include the results of the foreign business. It also includes a specialty property book that was sold in the fourth quarter 2021 as well as other business we have exited. Now that farm is sold, net premiums written prospectively will be very low. Everett Cash Mutual will assume 100% of the risk for any farm policy written on or after August 8, 2022.

In 2022, significant efforts were taken to enhance liquidity, provide investment flexibility, and buffer market volatility. During the second quarter, we continue to derisk the investment portfolio by selling less liquid investments and investments that had greater exposure to spread widening. The duration of our fixed income portfolio is currently 1.8 years.

One quarter of the portfolio is invested in floating rate securities, securities with rate resets. Cash and treasuries with a duration of approximately 1.9 years comprise almost one-third of the portfolio. We are well positioned to deploy funds into higher-yielding investments. Book yield was 2.34% at the end of March 22 and is currently 2.81%. We've been deploying the proceeds from sales back into shorter-term investments with durations that are less than two years. The average yields on the funds that have been redeployed are greater than 4%.

We will now take your questions.

(Operator Instructions) Anthony Mottolese, Dowling & Partners.

Hi, good morning. My first question, I was just looking to clarify on the results. I know you provided continuing ops, the cats and prior year development in the quarter. Could you provide that on a consolidated basis as well?

Sure. I mean, in our -- on the underwriting income -- hang on just one second.

Thank you.

Yeah, our underwriting income on a current accident year basis was $6.2 million compared to $2.2 million last year. That's on a consolidated basis.

And could you also provide what the cat impact was on the consolidated basis?

I'm sorry, I had missed your question.

Sorry, the natural catastrophes?

Yeah, we -- in David's script, we noted that cat losses for the entire book were $12.7 million. And on our commercial lines business, which will be our continuing business, most of our continuing business, they were $5.4 million.

All right, thank you. I must have missed that $12.7 million. Thank you again. So then I just also had some follow-up questions related to the sale of American Reliable. Could you guys also share what the expected after-tax gain will be?

We are still looking at our expenses. But the total proceeds of these sales are $40 million. Included in the sale is we expect American Reliable will have $10 million of surplus at the point of sale. So before expenses, we are at $30 million. There will be some expenses as we look at assets that have been supporting this business. So there will be some write-offs of goodwill, intangible assets, software cost, and a little bit at lease cost. And we obviously incurred some investment banking fees and professional fees from the legal services that were provided.

Right now, my estimate of those costs are approximately $8 million in total. But that is subject to further analysis. And we will have the final numbers on that as we develop our third-quarter numbers. So right now, I'm looking at an estimate on a pretax basis of approximately $22 million.

All right, that's really helpful. Thank you. And looking at your portfolio, do you see any other areas or anticipate further business disposals as you focus more on the casualty business?

No, it's -- we've done an awful lot to position the portfolio. And during the first quarter, we have made a decision to exit any long-term security that then had a duration of over five years. During the second quarter, we took further action. We looked throughout our portfolio. We identified investments that we believed were less liquid, that might not perform as well in this type of a rate environment.

And we also had one bond, which impacted our investment income. They invested in bank loans. We had about $100 million in that fund. That fund, the fee investments -- the bank loans were lower-rated securities. And they had float or they floated. As interest rates increased, the interest rates on those investments increased. But unfortunately, as spreads widened, that particular investment was subject to the risk of spread widening and you're seeing the results of that in our income statement.

So during the second quarter, the things that I just noted, we divested of all of those things. That included that alternative investment of about $100 million. And right now, our portfolio we believe is extremely well positioned. We are -- David mentioned our book yield. Our duration is less than two years or 1.8 years. The equity exposure that you see on the phase of the balance sheet is really it's mainly preferred stocks. So right now, we think our portfolio is as well positioned as it can be for -- as we move ahead in this rising rate environment.

Thank you. That was a lot of good information. Lastly, related to the sale, does this further reduce the expected cat load or -- in the P&L profile of the company?

Yeah, absolutely. I mean, the agriculture book was largely a property book. So it is subject to more more Midwest-driven than some of our other business that might be coastal-driven. But yes, cat exposure will absolutely decrease.

Yeah, I think when we looked after the sale of farm, we estimated AAL was reduced by 27%. And just adding a little bit on why we sold the farm business. When we looked at the farm business, 76% of the premium was driven by property.

We also had some commercial auto in there. It's another product we're not targeting. And like adversely, only 24% was casualty insurance. So it did not meet our definition of a core business, and really why we made the decision that we did.

Thank you. And then one last question. I know your focus has been in the -- growing in the E&S market. Have you had the price more competitively to achieve your internal growth targets? Could you provide any color on that?

Yeah, I would say exactly the opposite. We've been able to get increasing rate really across lines of business. The other area that we've really been seeing, we talked earlier about the rate increase we're getting, the exposure increase we're getting. But the third area is we're seeing quite an increase in audit premium. We were looking at -- when you look at our Penn-America books and our programs, audit is up from this time last year about $3.6 million up to $8.8 million. So the premium we're getting from audit as well on top of rate and then premium is all increasing.

Okay, thanks. And I guess my last question, could you provide an update on what the new money rate is on the investment portfolio versus where it was earlier this year? Thank you.

Sure. We have been deploying money. We have been actually achieving yields that are a little north of 4%.

Okay. Yeah, thank you so much. That was all my questions and really appreciate all your answers.

Tom Kerr, Zacks Investment Research.

Hi, guys. Good morning.

Good morning.

Can you go back to the commercial specialty and the individual lines within there? You mentioned some of the strength -- Penn-America and other ones, I believe. But were there any laggards or disappointing ones that you felt could be better across all the lines in there?

No. I mean, where we really decrease is in the areas that we want to. So the biggest decrease has been in property brokerage, which has been very much by design, that's down significantly. Where we've run off all the business in that line, that was over $10 million, really across the commercial specialty area.

We mentioned Penn-America programs growth is strong. The new businesses, we feel good about. And the reinsurance side and the casualty and the InsurTech, which has been a profitable area for us that we're building out. So it really was a solid quarter across the board.

Okay, great. And then back on the investment portfolio, I think your answer just previously stated -- for the most part, you're done with all the duration shortening activities, is that correct? If I read (multiple speakers)

Well, I won't say we're done. Right at the moment, I think we're happy with where we are. But we always are looking at our portfolio and the market environment. And if we believe that action would be needed to reposition the portfolio, we would take it. But right now, the actions I noted, positioned the portfolio for where we believe it needs to be today.

And from an investment process, is there something you guys would look at to reentry back into the equities itself? Are you just waiting for prices or how does that work?

Again, there's a lot of volatility there. We've been in and out of equities several times over the last couple of years. This year, we saw the equity environment as being extremely volatile. If I go back to January of this year, we had a portfolio of equities that was about $76 million. And we made a decision at that time to exit.

And we used those proceeds. It helped us pay down our subordinated debt in April. And it was absolutely the right decision because after January, equities dropped. And so Tom, the answer is that this year, we thought it was the right time to get out.

As we go forward, we work with our investment advisors. And we consider the information that they are providing to us. And if we believe at that time, it's the right time to get back into equities, we would. But right now, as I said, our only equity exposure on the balance sheet, it's primarily preferred stock.

Got it. And sorry if I missed this in our previous conversations. But who manages that? Is that a team effort, the entire investment portfolio? Or is there a chief investment officer?

We have three external investment advisors, and it's overseen. We do not have a chief investment officer in-house, but we have three, three really good managers that manage our entire portfolio, except [vaults].

Yeah, okay, that's right. The next question is kind of a more general big picture economy question or recession focused. And since -- have you guys managed that or think about that or even priced that, right? So many of end markets or customers are small businesses. So I'm not sure exactly what my question is. But how do you take that in account if we go into real recession in the near to midterm?

Yeah, I mean, obviously with the recession, the nice part about insurance business for the most part, it's (inaudible) by insurance. But when we look at -- we're very focused with inflation. And that really hits different products very differently. We're fortunate where we are seeing a lot of pain in the personal auto market. We don't -- we're not in that marketplace.

We look at social inflation, but we manage that. On small businesses, most of our limits are $1 million and under, especially on the casualty side. And then we don't have -- the area that we were seeing a little bit of inflationary pressure on our property book is becoming a much smaller part of our portfolio. So we're insulated somewhat there as well.

But we are we're definitely keeping an eye on it. And that's why we've emphasized the rate increase so much that we need to make sure that we continue to get right to outpace inflation.

Okay, thanks. That makes sense. A couple more financial questions. The corporate expenses, I think, was down 50% or so. What was that or is that the current run rate?

Yeah, well, this quarter, the corporate expenses include -- you'll see this in our 10-Q. Throughout COVID, we kept our entire workforce employed. And this quarter, we had filed last year for an employee retention credit and received $2.7 million this quarter. That was offset against corporate expenses.

And I'd add to that. With the cat reduction, we're saving significantly on reinsurance. On our cats rating, we've saved 55% this year. It was a significant number.

Okay. So that means on a true run rate or annualized run rate, it's still going to be well below $18 million to $20 million, even if you look into the next year?

Well, again, you're going to see some increase in expenses this quarter, Tom, because of the transaction with the American Reliable transaction. So every year, we usually do something. And for the last couple of years, we've noted that a corporate run rate of $18 million to $20 million is what we would expect.

What you're seeing in the first six months again includes that $2.7 million credit, and not a whole lot in the way of, I'll call it, special corporate expenses. Closing this deal, we'll have some. So the rate -- the amount of corporate expenses in the second half of the year will be higher.

Got it. Okay, that makes sense. And then paying off the $130 million debt, any color on that? Or is it just a normal corporate allocation decision, capital allocation decision?

Now it was a capital allocation decision. That was -- it had an interest rate of just under 8%. And we had sold our specialty property renewal rights in the fourth quarter of last year. It freed up some capital. And as we looked ahead -- and we are always thinking about the best way to deploy our capitals -- at that point in time, we thought a good decision was to eliminate our subordinated debt.

Makes sense. And I think the last question for me, all right, just to be clear on the farm sale, that eliminates all the farm and agriculture business? That's not going to be in the exited lines? I don't know if that makes sense or not.

That's correct. And then so we -- as of the August date, that was all new. This will be 100% reinsured until they take that over. And then on the -- we'll have the unearned premium. It will be the remaining part of the farm and then that obviously runs off.

Okay, got it. All right, last question. This is more of an Analyst Day question coming up. But the performance objectives and goals that were set last fall, the 6%, 7% and 8% premium growth. Do you foresee those changing? Are those under discussion? Are you guys still good with those at this time -- to be in that range over the next five years?

Yeah, I don't think it's changed over that five-year period. And we -- at our Investor Day, we talked about it's not a one-year journey, it's a five-year journey. And when you look at building new businesses, that takes time. We're trying to do those the right way. And so we feel good about that we're on track.

And an area as I mentioned earlier that I actually think we're a little bit ahead of our plans are that transitioning to a casualty company from a property company, which really reduces their volatility. And so we felt pretty good about -- of the 72% being casualty for our earned premium in the first six months. So we feel that we're executing on the plan.

Sounds good. That's all I got for today. I appreciate it.

And that does conclude the question-and-answer session. I would like to turn the call back over to Stephen Ries for any additional or closing remarks.

Thank you, operator. Thank you, everybody, for joining us today. We look forward to speaking to you after the third quarter.

And that concludes today's presentation. Thank you for your participation and you may now disconnect.