Global Indemnity Group, LLC

Q2 2022 Earnings Conference Call

8/9/2022

spk00: 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. Reese, Head of Investor Relations.
spk03: 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's now my pleasure to turn the call over to Mr. David Charlton, Chief Executive of GDLI.
spk04: Thank you, Steve. Well, good morning. Thank you for joining our earnings call. In addition to Stephen Reese, Tom McGeehan, our Chief Financial Officer, and Jonathan Altman, 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 for amount equal to surplus to Everett Cash Mutual. These transactions will free up over 45 million of capital supporting the farm business and further GBI 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 our results. For our continuing business lines, Glist's written premium grew by 28.4% compared to the first six months of 2021. The increase is due to organic growth and rate increases in our commercial specialty and reinsurance lines. Unrearing 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 PEN America binding small business, which grew 22% to 109.5 million. PEN America obtained rate increases of 8.3%. This is just rate. Exposure change adds another 5%. Our program division also realized growth of 8 percent, generating $72.6 million in gross-ridden premium on strong rate increases of 10.6 percent. When we include exposure change, rate was up 21.6 percent on programs. The market remains strong for ENS commercial business, and we will continue to push rate. Our insurtech business grew by 10 percent, generating gross-ridden premium of $19.7 million. Our insurtech solution allows agents, as well as insurance 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 state-of-the-art technology, embedding online solutions into the sales process, and expanding distribution to drive this business. Our three other new businesses, XS Casualty, Environmental, and Professional, are steadily growing and together now exceed 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 executing their plans, and while still early days, I am very pleased with the quality of business each team is riding. Our reinsurance operations primarily focus on casualty reinsurance. Closed-run premiums were $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've recently written. It's a great time to be in this part of the market where premium rate increases continue to be strong. Running longer tail business helps our investment portfolio grow, and we can invest these funds at higher interest rates. Exit lines now include the results of the farm business. It also includes a specialty property book that was sold in the fourth quarter of 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 de-risk 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. It 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.
spk00: Thank you. The question and answer session will be conducted electronically. If you would like to ask a question on the phone lines today, please press star 1 on your telephone keypad. Once again, everyone, that is star 1 to ask a question or make a comment. We'll take our question from Anthony Matalese with Dowling Partners.
spk01: 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?
spk05: Sure. I mean, in our, on the underwriting income, hang on just one second.
spk01: Thank you.
spk05: 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.
spk01: And could you also provide what the cat impact was on the consolidated basis?
spk05: I'm sorry, I missed your question.
spk01: Sorry, the natural catastrophes?
spk05: 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.
spk01: Thank you. I must have missed that 12.7. 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?
spk05: We're 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. There will be some write-offs of Goodwill. intangible assets, software costs, and a little bit of lease costs, 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's 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 pre-tax basis of approximately $22 million. All right.
spk01: 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?
spk05: No, we've done an awful lot to position the portfolio and during the first quarter, we had made a decision to exit any long-term security that 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 fund which impacted our investment income. They invested in bank loans. We had about $100 million in that fund. That fund, the investments, the bank loans were lower-rated securities, and they had 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 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. David mentioned our book yard. Our duration is less than two years at 1.8 years. The equity exposure that you see on the face 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.
spk01: Thank you. That was a lot of good information. Lastly, related to the sale, Does this further reduce the expected cat load and the PML profile of the company?
spk05: Yeah, absolutely. I mean, the agriculture book was largely a property book. It is subject to more Midwest-driven than some of our other business that might be coastal-driven, but yes, cat exposure will absolutely decrease.
spk04: I think when we looked after the sale of farm, we estimated AAL was reduced by 27%. 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. You know, we also had some commercial auto in there. You know, it's another product we're not targeting. And conversely, 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.
spk01: Thank you. And then one last question. I know your focus has been in the growing in the E&S market. Have you had to price more competitively to achieve your internal growth targets? Could you provide any color on that?
spk04: 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 and the exposure increase we're getting. But the third area is we're seeing quite an increase. in audit premium. You know, we were looking at, when you look at our PEN America books and our programs, you know, 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.
spk01: Okay, thanks. And I guess my last question is, Could you provide an update on what the new money rate is on the investment portfolio versus where it was earlier this year?
spk05: Sure.
spk01: Thank you.
spk05: We have been deploying money. We've been actually achieving yields that are a little north of 4%.
spk01: Okay. Yeah, thank you so much. That was all my questions and really appreciate all your answers.
spk02: Thank you, Anthony.
spk00: We'll take our next question from Tom Kerr with Zacks Investment Research.
spk06: 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 in America and other ones, I believe. But were there any laggards or disappointed ones that you thought could be better across all the lines in there?
spk04: No, I mean, you know, 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, it was over 10 million. Really across the commercial specialty area, you know, we mentioned that, you know, Penn America programs growth is strong. The new businesses we feel good about and the reinsurance side and casualty and And the insure tech, which has been a profitable area for us that we're building out. So it really was a solid quarter across the board.
spk06: 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 into that answer?
spk05: 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 position the portfolio for where we believe it needs to be today.
spk06: And from an investment process, is there something you guys would look at to sort of reentry back into equities itself, or are you just waiting for prices, or how does that work?
spk05: 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 equities 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 and helped us pay down our subordinated debt in April. And it was absolutely the right decision because after January, equities dropped. And, you know, so, Tom, the answer is that, you know, 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.
spk06: Got it. And, Soph, 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?
spk05: We have three external investment advisors. and it's overseen. We do not have a chief investment officer in-house, but we have three really good managers that manage our entire portfolio, except for Alts.
spk06: Yeah, got it. That's right. The next question is kind of a more general big-picture economy question, a recession-focused, and the How do you guys manage that or think about that or even price that? So many are in markets or customers or small businesses. So I'm not sure exactly what my question is, but how do you take that into account if we go into a real recession in the near to midterm?
spk04: Yeah, I mean, obviously with a recession, the nice part about the insurance business, for the most part, you still have to buy insurance. But when we look at where we're very focused is inflation, and that really hits different products very differently. You know, we're fortunate where, you know, we've seen a lot of pain in the personal auto market. We're not in that marketplace. You know, we look at social inflation, but we manage that. You know, on small businesses, most of our limits are a million and under, especially on the casualty side. And then we don't have the area 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. So But 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 rate to outpace inflation.
spk06: 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?
spk05: Yeah, well, this quarter, we, the corporate expenses include, you'll see this in our 10Q, 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.
spk04: To add to that, we're saving with the CAT reduction, we're saving significantly on reinsurance. On our CAT treaty, we saved 55% this year, a significant number.
spk06: Okay, so that means that a true run rate or annualized run rate is still going to be well below $18 to $20 million, even if you look in the next year?
spk05: Well, again, you're going to see some increase in expenses this quarter, Tom, because of the transaction with with the American Reliable Transactions. So every year we usually do something, and for the last couple of years we've noted that a corporate run rate of 18 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.
spk06: Got it. Okay. That makes sense. And then paying off the $130 million in debt, any color on that, or is that just a normal corporate allocation decision, capital allocation decision?
spk05: Now, it was a capital allocation decision. That debt 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 were 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.
spk02: That makes sense.
spk06: The last question for me, 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.
spk04: That's correct. As of the August date, all newbiz will be 100% reinsured until they take that over, and then we'll have the unarmed premium will be the only remaining part of the farm, and then that obviously runs off.
spk06: 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 or those in your discussion? Are you guys still good with that at this time to be in that range over the next five years?
spk04: I don't think it's changed over that five-year period. At our investor day, we talked about it's not a one-year journey. It's a five-year journey. When you look at building new businesses, that takes time. We're trying to do those the right way. We feel good about that we're on track. And, you know, in the 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 our volatility. And, you know, so we felt pretty good about, you know, 72% being casualty for our premium in the first six months. So we feel that we're executing on the plan.
spk06: Sounds good. That's all I got for today. I appreciate it. Thanks, Tom.
spk00: And that does conclude the question and answer session. I would like to turn the call back over to Stephen Reese for any additional or closing remarks.
spk03: Thank you, operator. Thank you, everybody, for joining us today. We look forward to speaking to you after the third quarter.
spk00: And that concludes today's presentation. Thank you for your participation, and you may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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