Q2 2022 Global Indemnity Group LLC Earnings Call

and 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-wise, GRIPS written premium grew by 28.4% compared to the first six months of 2021.

The increase is due to organic growth and rate increases.

our commercial specialty and reinsurance lines.

Unruring 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.

The cash were $5.4 million in 2022 compared to $11.6 million in 2021.

The mix of business has now shifted to casually.

I am very pleased to note the casually earned premium in our continuing lines of 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 Pan 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 on gross rate and premium, and a strong rate increase of 10.6%.

When we include exposure change, rate was up 21.6% in programs.

The market remains strong for ENS commercial business and we will continue to push free.

Our short-term business grew by 10%, generating a gross-driven premium of $19.7 million.

Our InsureTech 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 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, Excess Casualty, Environmental, and Professional, are steadily growing and together now see over $5 million dollars of premium.

We are building up 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 writing.

Our reinsurance operations primarily focus on casualty reinsurance.

Gross-driven 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 have recently ridden. It is a great time to be in this part of the market where premium rate increases continue to be strong. For more information, visit www.fema.gov

Running a longer tail business 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 of 2021, as well as other business we have exited.

Now that farm is sold, net premiums written prospectively will be very low. Every 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 continued 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 great resets.

cash and treasuries with a duration of approximately 1.9 years to price 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 2022 and is currently 2.81%.

We've been deploying the proceeds from sales back into shorter term investments.

with turations 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.

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 Matalice with 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.

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 missed your question.

Sorry, the natural catastrophes.

Yeah, we, in David's script, we noted that cap 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. Thank you again. So then I just also had some follow-up questions related to the sale of American Reliable. Can you guys also share what the expected after tax gain will be?

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, so 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, 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, 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...

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. We are, David mentioned our book yield, 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,

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 catload and the PML profile of the company?

Yeah, absolutely. I mean the agriculture book was largely a property book, so it is subject to more Midwest driven and some of our other business that might be coastal driven, but yes, cat exposure will absolutely decrease. I think when we looked at the sale of farm, we estimate AAL is reduced by 27%.

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 to price more competitively to achieve your internal growth targets? Do 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, you know, 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 the number of cases that we've seen in the last year.

in audit premium. We were looking at, when you look at our PEN 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.

Thanks. 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?

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

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

That was all my questions and I really appreciate all your answers. Thank you, Anthony.

We'll take our next question from Tom Kerr with Zacks Investment Research.

Hi guys, good morning

Good morning.

Can you go back to the commercial specialty and the individual lines within there?

of the strength of 10 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?

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 and that line, it was over 10 million. Really across the commercial specialty area, you know, we mentioned that, you know, PEN America programs growth is strong, the new businesses we feel good about, and the reinsurance side of the casualty.

And the InsureTech, 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?

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.

And from an investment process, is there something you guys would look at to sort of re-entry back into equities itself, or 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 and helped us pay down our subordinated debt in April . And it was absolutely the right decision because after January , equity's dropped. And 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. That right now, as I said, our only equity exposure on the balance sheet is.

manage our entire portfolio except for alts.

Got it. That's right.

The next question is kind of a more general big picture economy question or recession focused…

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 real session?

in the near term.

Yeah, I mean, obviously with the recession, the nice part about insurance is that it's for the most pretty soft to buy insurance. But when we look at where we're very focused is inflation, and that really hits different products very differently.

We're fortunate, we're seeing a lot of pain in the personal auto market. We're not in that marketplace. 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, it's somewhat there as well. So, but we are, you know, 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.

Okay, thanks. That makes sense. A couple more financial questions. The corporate expenses, I think it was down 50% or so. What was that or is that the current run rate? We're getting into my15th Isni steeped out by my values half a percent.

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.

And to add to that, we're saving with the CAT reduction, we're saving significantly on reinsurance. On our CAT training, we saved 55% this year, a significant number.

OK, 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're looking at 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 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 up 130 million dead, any color on that?

a normal corporate allocation decision, capital allocation decision? 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.

That's correct. And then so we.

As of the August date, all newbies will be 100% reinsured until they take that over and then on the, we'll have the unearned premium will be the only remaining part of the farm and then that obviously runs off.

Okay, got it.

All right, last question. This is more of an analyst questions coming up, but the performance objectives and goals that were set last fall, 6, 7, 8% premium growth.

Do you foresee those changing or those under discussion? Or are you guys still good without at least time to be in that range of 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 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 their volatility.

And so we felt pretty good about 72% being casually for our premium 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.

That's all I got for today. I appreciate it. Thanks, Tom.

And that does conclude the question and answer session. I would like to turn the call back over to Stephen Rees 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.

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