Q3 2022 Global Indemnity Group LLC Earnings Call
Speaker 1: Good day and welcome to the Global Indemnity Group, LLC, third quarter 2022 earnings conference call.
Speaker 1: I would now like to introduce Stephen W. Reese, head of investor relations.
Speaker 1: 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.
Speaker 1: 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.
Speaker 1: 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. Joining us are Jay Brown, CEO , Tom McGee and CFO , and Jonathan Altman, President. It is now my pleasure to turn the call over to Jay Brown.
Speaker 2: Thank you, Steve.
Speaker 1: Good morning and thank everyone for joining us today.
Speaker 2: I am sure you are all surprised to see me sitting here today as the CEO of Global.
Speaker 2: to be truthful. A few months ago it never occurred to me either.
Speaker 2: That said-
Speaker 2: The board asked if I would step in and take on the CEO role.
Speaker 2: And I said yes without any reservations.
Speaker 2: having served on the board for seven years
Speaker 2: I am obviously quite familiar with GBLI.
Speaker 2: its business, and its management team.
Speaker 2: It probably makes sense if I first address the issue of David Charlton's departure before offering my initial observations as CEO and turning the presentation over to Tom McKeon to review the nine months results.
Speaker 2: David was recruited to Global to execute the board-driven strategy of completing a transformation to an excess and surplus lines, casually focused insurance organization.
Speaker 2: In the past 18 months,
Speaker 2: David recruited many outstanding seasoned executives and specialists to complement the significant talent we already had in place.
Speaker 2: I use the word season carefully here as it is a very high energy group with significant variations in years of experience.
Speaker 2: In parallel, David initiated a significant effort to develop IT tools to substantially enhance our customer-focused strategies and to address some of our internal expense issues.
Speaker 2: As a result of suffering a series of both third-party IT delivery delays and unacceptable product deliveries,
Speaker 2: The board requested that I step in as CEO .
Speaker 2: given both my decades of CEO and Chairman experience at several leading property casualty insurance companies and extensive oversight of IT procurement, development and implementation, including most recently.
Speaker 2: as chairman of a highly-innovated insurance tech startup.
Speaker 2: In addition to my new role, the Board is fortunate to have added two experienced executives as Board members.
Speaker 2: to assist us in achieving our objectives.
Speaker 2: Jason Hurwitz, and Gary Tolman.
Speaker 2: Jason is among the most brilliant analysts I have ever worked with.
Speaker 2: and will help us tremendously as he has in the past in focusing on the key areas that need to be addressed to create value at Global.
Speaker 2: Gary has served in multiple roles in his insurance career, but most notably led the team as CEO that created two leading firms in the InsureTech space, e-Surance and Nobler Inc., where I served as chairman. Gary has served in multiple roles in the InsureTech space, e-Surance and Nobler Inc., where I served as chairman.
Speaker 2: His experience with contemporary technology development will be a significant asset to both the board and me as we refocus our technology efforts.
Speaker 2: Both the Board and I have the utmost respect for David Charlton and will be forever thankful for David's many contributions to and enhancements to the company.
Speaker 2: We wish David nothing but the best in the future.
Speaker 2: But now that the decision has been made, it is my role to lead this organization forward.
Speaker 2: I became a modest shareholder in Global at the time of Fox Payne's initial investment in 2003.
Speaker 2: In 2015, I joined the Board of Global and worked with Saul and the rest of the Board in developing a long-term strategy to maximize the value of global to all of our investors.
Speaker 2: While I have obviously been privy to much of the internal company information as a director,
Speaker 2: It is worth a minute to share my observations of global today after just a couple of weeks on site in our executive offices as a CEO .
Speaker 2: Looking at today's insurance market, it is a terrific time for anyone to be in the D&S market.
Speaker 2: More importantly, on a relative basis,
Speaker 2: Global has an enviable competitive position in the insurance market today.
Speaker 2: We have completed a rapid transformation of our existing book of business that is comprised solely now of business consistent with our specialty E&S objective to well-execute sales of businesses that didn't fit and second, by adding teams to expand the breadth of our product offerings. We have completed a rapid transformation of our existing book of business consistent with
Speaker 2: From both an internal and an external assessment of our balance sheet, we have a very strong capital position. And as Dr. skills have ledge listed above we
Speaker 2: An investment portfolio that's been optimized for today's volatile investment market.
Speaker 2: and attract record-stressing back 19 years to Fox Payne's 2003 acquisition of Global of maintaining strong reserves.
Speaker 2: By shifting our business mix to more than 70% casually, we have mitigated the company's disproportionate exposure to catastrophic property losses.
Speaker 2: which has made the last several years of results totally unacceptable to our owners.
Speaker 2: Given all that, the obvious question is why has the market assigned a significant discount to tangible book value per share?
Speaker 2: There are no doubts that our extremely thin daily trading volumes can create distortions in value assessment.
Speaker 2: But the longer record reflects a clear assessment that we are being valued at a significant discount to book. And if you can't go out and re-value that bank account in a short amount of time, you
Speaker 2: By definition, the market is telling us that our insurance operations subtract value from our capital base rather than enhance value.
Speaker 2: There is no doubt that our underwriting results as reported over the past five years have weighed heavily on our share price.
Speaker 2: Given the actions that we've taken over the past couple of years,
Speaker 2: The future must provide an immediate sharp contrast that allows our owners
Speaker 2: to alter their perception of the value of our insurance operations.
Speaker 2: Although the challenges and opportunities I faced in my five prior executive roles were unique to each organization.
Speaker 2: Every one of them had a common objective of maximizing value for the owners.
Speaker 2: As such.
Speaker 2: My daily focus as CEO will be to work with both the board and the management team to make that happen here at Global.
Speaker 2: As I turn you over to Tom, a reminder of the principles that our management team has embraced to create value. All of the Reproducencewho live on stage, listen to the song to get to know how to lead them.
Speaker 2: First, our staff is our most important asset.
Speaker 2: Second, we embrace a customer-centric mentality to create value in our product for our insurers.
Speaker 2: And third.
Speaker 2: And foremost, among my view of what's important, our disciplined underwriting practices are the core to long-term profitable growth.
Speaker 2: With that, I'll turn it over to Tom.
Speaker 3: All right, thank you, Jay. Good morning, everybody.
Speaker 3: Shareholders' equity increased from $641.3 million at the end of June to $643.6 million in September 2022.
Speaker 3: That income for the quarter is $23.7 million versus a loss in 2021 of $7.7 million.
Speaker 3: Underwriting income was positive.
Speaker 3: We are realizing benefits from actions taken to reduce catastrophe exposure that started several years ago.
Speaker 3: As previously announced, Hurricane Ian had a very modest impact through this quarter.
Speaker 3: We compared our losses from Hurricane Ian to four event models that were selected by AIR from their stochastic event catalog.
Speaker 3: These four event models most closely represented Hurricane Ian post-landfall.
Speaker 3: Have we not taken action to reduce catastrophe exposure, but model losses from these four events averaged 12.8 million?
Speaker 3: Our losses from Hurricane Ian are approximately 11 million lower than these average model losses.
Speaker 3: As a result of exiting the property catastrophe business, reinsurance business, discontinuing writing properties with total insured values of $10 million and more, and recent actions to non-renew tap-prone business in certain geographies, earning volatility from catastrophes has reduced significantly.
Speaker 3: Catastrophes incurred for our entire bulk in the third quarter of 2022 were 5.9 million compared to 22.3 million in the third quarter of 2021.OG
Speaker 3: Commercial specialty lines cat losses are down significantly as well. Catastrophes were $3.9 million in 3-2-22 compared to $8.9 million in 2021.
Speaker 3: The quarter includes the sale of farm renewal rights, which were sold for $30 million.
Speaker 3: as well as write-offs and costs associated with services provided by third parties of approximately $9.2 million.
Speaker 3: The change to equity also includes an unrealized loss of 18.7 million net of tax.
Speaker 3: Rising interest rates are negatively impacting both values for the entire property and casualty industry.
Speaker 3: While we don't like unrealized losses,
Speaker 3: We expect that our short duration fixed income portfolio will perform well compared to Pierce.
Speaker 3: For our continuing business lines, gross written premium in the third quarter of 2022 grew by 13% to $144.3 million compared to $127.7 million in the third quarter of 2021.
Speaker 3: The increase is due to the addition of new business lines.
Speaker 3: rate increases in commercial specialty, and growth in reinsurance lines.
Speaker 3: Underwriting income also had good results.
Speaker 3: The combined ratio of our continuing lines was 96.9% in the third quarter of 2022. The overall combined ratio, including continuing lines and exit lines, was 97.2% in the third quarter of 2022.
Speaker 3: The mix of business has now shifted to casualty. Casualty earned premium for our continuing lines with 72.5% during the third quarter.
Speaker 3: Moving to our commercial specialty segment.
Speaker 3: It grew by 2.7% to 100.6 million in the third quarter of 2022, compared to 98 million in the third quarter of 2021, driven by the addition of new lines.
Speaker 3: growth in emerging markets,
Speaker 3: growth in vacant properties and collectibles.
Speaker 3: Growth is net of actions taken to cease writing a few classes of business that were not providing a proper return.
Speaker 3: Pan America rose 52.6 million in the third quarter of 2022, compared to 54.9 million in the third quarter of 2021.
Speaker 3: On a year-to-date basis through September , PenaMyrk obtained rate increases of 8.4%. And this is just rate. Exposure change added an additional 5.2%.
Speaker 3: Programs rode 27.6 million in the third quarter of 2022 versus 29 million in the same quarter last year.
Speaker 3: Our program division had year-to-date rate increases through September of 13.2 percent and exposure change of 11.3 percent.
Speaker 3: The market remains strong for E&S commercial business.
Speaker 3: Over the past several years, our product development team has spent considerable time and effort expanding and enhancing some of our most profitable business segments in PEN America and programs such as small artisan contractors...
Speaker 3: and vacant buildings and land.
Speaker 3: At the same time, we've moved swiftly to exit areas that have been problematic for us and the rest of the industry, such as hotels and motels, liquor liability coverage, and certain areas made difficult by unique legal or regulatory issues such as construction business in the state of Colorado.
Speaker 3: One example of the benefits realized as a result of using proprietary analytics is it helped us reduce the number of firearms-related claims by over 85%, saving the company millions of dollars in claims.
Speaker 3: This same tool is currently being used to target specific pricing actions in areas with higher propensity for losses.
Speaker 3: While these actions have slowed growth this quarter, they will improve profitability.
Speaker 3: Our InsureTech businesses vacant property and collectible lines grew by 4.5% in the third quarter of 2022, generating gross written premium of $10.9 million compared to $10.4 million in the same quarter last year.
Speaker 3: Our three new businesses, Excess Casualty, Environmental, and Professional, are steadily growing. They rode 4.4 million this quarter.
Speaker 3: Are re-insurance operations primarily focused on casualty re-insurance?
Speaker 3: Gross written premiums were $43.7 million in the third quarter of 2022, compared to $29.7 million in the third quarter of 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.
Speaker 3: Net premiums written prospectively will be very low.
Speaker 3: Roast-redded premiums for the quarter in discontinued lines where 31.5 million net premium was only 3.2 million.
Speaker 3: In 2022, I'm moving to the investment portfolio, in 2022 significant efforts were taken to enhance liquidity, provide investment flexibility, and buffer market volatility.
Speaker 3: In response to expected rises and interest rates, we started to reposition the portfolio by Lower E duration in May 2021.
Speaker 3: As we enter 2022, concerns about market volatility.
Speaker 3: Further rises in interest rates and a possible recession caused us to take additional actions.
Speaker 3: In the first quarter of 2022, we sold the common stock portfolio. We identified and took actions to sell longer duration fixed income securities. And in response to a possible recession during the second quarter of 2022, we took action to exit a fund that invested heavily in below investment grade loans.
Speaker 3: We are well positioned to deploy funds into higher yielding investments.
Speaker 3: The duration of our fixed income portfolio is currently 1.7 years.
Speaker 3: Bulk yield was 2.34% at the end of March 2022 and increased to 3.07% at September 30, 2022.
Speaker 3: We have been deploying the proceeds from sales mainly back into shorter term treasuries. We have also deployed a small amount of the portfolio into higher tranche asset backed securities and CMOs.
Speaker 3: The majority of the investment income will generate a tremendous amount of cash flow between now and the end of 2024.
Speaker 3: Yesterday, two-year treasuries closed at 4.72%. There is a significant opportunity for book yields to continue to increase.
Speaker 3: Our balance sheet is very strong.
Speaker 3: The average credit quality rating of the fixed income portfolio is A plus.
Speaker 3: Book reserves remain above actuarial indications.
Speaker 3: We have discretionary capital to support our growth and a stock repurchase program that was announced on October 21st.
Speaker 3: This concludes my remarks, and we'll now take your questions.
Speaker 1: If you would like to ask a question, simply press star, then the number one on your telephone keypad.
Speaker 2: Once again, to ask a question, please press star and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.
Speaker 1: And your first question is from the line of Anthony Modolis with Dowling & Partners. Please go ahead.
Speaker 4: Hi, good morning. Tom, I had a quick number question. Could you also provide the total prior year development in the quarter? Sure. And then, thank you. And I just have one other follow up on the total CAT number you provided. I was just kind of curious beyond
Speaker 4: Ian where those cats were coming from the quarters is very low like you mentioned given your risk moving your risk profile away from cat exposed business.
Speaker 3: Yeah, I'm sorry, your first question was the total number of cats. Oh, I'm sorry. Yeah, 3 million of reserve relation total.
Speaker 4: Okay, thank you.
Speaker 3: And the second one, it really was from just a number of smaller cats that had occurred during the quarter. It's nothing significant beyond what we previously had announced for Hurricane Ea.
Speaker 4: Okay, thank you. Another question I had, it looked like commercial specialty growth seemed to slow a little bit in Q3 compared to the first half. Was there anything driving that? Maybe any books of business that
Speaker 4: We're performing as well.
Speaker 3: The actions we took to, as mentioned, we exited Colorado contractors. We took some actions in our habitational book. It was really actions that were taken to stop writing certain classes of business to improve profitability. Jonathan, do you want to add anything to that? Yeah. Hi, this is Jonathan Altman. Yeah, just to add to Tom's comments, as he mentioned earlier. Senator farmmate, if there are things needs to report to the office, what we did tostals that would require a meeting in Babe for many of those Yam 17 you.
Speaker 2: It was really several different underwriting actions that had been underway for quite a while. So the growth that you see that has slowed is very much part of our plan. We took underwriting actions, as Tom mentioned, to exit certain problematic classes of business that were troublesome from a loss ratio perspective. For example, hotels and hotels were mentioned, liquor liability, and some more conservative positions on some areas where we've seen some pressure on the loss ratio.
Speaker 2: And that combined with the rate increases that we've been getting has put some pressure on the top line, but we think all of those actions ultimately benefit the organization from an improved bottom line.
Speaker 4: Okay, thanks for the detail on that. So then with your overall plan and strategy going forward, is there any changes under this new management team in terms of strategy or just the planned execution of it?
Speaker 3: Not really. I mean, there'll be nuanced changes because everybody has a slightly different style of approaching things. But in terms of the businesses we're in, I was part of the process at the board of approving the entry into those businesses. And I am enthusiastic about driving them forward. So I think from the outside, you won't see any major changes. On the inside, there'll be subtle shifts, but nothing of any real significance.
Speaker 4: Okay, thank you. And if I may, I have one last question. I was just hoping to have any additional insight on the timing in regards to your recent buyback authorization and was curious kind of how you came to the $32 million, that amount.
Speaker 3: Sure, that's straightforward. The issue was if you realize we had exited farm less than two months ago in terms of the actual timing of the transaction, we've been analyzing our capital position post that transaction to make sure we understood where we were. As part of the change, we thought it behooved us to also indicate to the market we were prepared to enter the market with some buyback.
Speaker 3: We chose 32 million as roughly the day it was announced, 10% of the value of the outstanding shares. Obviously, because it was announced pre our earnings release, we were in a quiet period. And so we couldn't enter into the actual market outside of anybody was interested in a reverse inquiry back to us. Going forward, we've retained an agent that will be entering the marketplace.
Speaker 3: in due course here once we get through the next couple of days. We're obviously, we'll have some kind of a trading plan arranged with them. And obviously certain of our owners may approach us with blocks of shares rather than going into the open market.
Speaker 3: We'll have to we'll have to see how that proceeds and will obviously report each quarter on any buybacks that took place during the quarter
Speaker 4: Okay, thank you so much. That was all my questions.
Speaker 3: Great, thank you.
Speaker 1: Our next question is from the line of Tom Kerr with Zacks Investment Research. Please go ahead.
Speaker 3: Hi guys, most of my questions were just covered. A couple quick ones. Can you break down the corporate and other operating expenses of 14 million? I didn't see that in the press release. Any further color on that? Yeah, 9.2 million of that is related to the sale of the farm renewal rights. So what that is, Tom, is right off of good will, interchangeable assets, software, lease costs.
Speaker 3: And we also had to pay third party advisors. That is what comprises the 9.2 million. The remainder of the corporate expenses are just the normal recurring corporate expenses that happen every quarter.
Speaker 3: And that's roughly 4 million per quarter? Yeah, it can be 4 to 5 million a quarter. That's correct.
Speaker 5: Yep.
Speaker 3: Any thoughts on increasing the equity exposure in the investment portfolio with some of the areas of the market having significant declines recently?
Speaker 1: It's a tough question. Obviously what we've all experienced here over the last, for us in looking at our portfolio, is really the last answer at this point where we then, as always, try to take us deeper into our core
Speaker 1: year and three quarters, we've been trying to reposition ourselves to be opportunistic going forward. I think where we sit today is incredibly positioned and our investment committee at the board is working with outside advisors and will pick appropriate times to reenter the equity market or different portions of the fixed income market as we see the opportunities arise. It's a daily occurrence trying to think about it and trying to position right now as Tom mentioned earlier.
Speaker 1: we are positioning some of our portfolio into some slightly higher yielding, high quality, short duration fixed incomes rather than just treasuries. But at this point there's no real clear.
Speaker 1: decision yet made about any decision to buy additional equities now that we've exited them.
Speaker 3: All right, one last question. The question was just asked about change in strategy with the new management team.
Speaker 3: Can you also comment on the specific financial objectives that have been outlined? You know, the 6%, 7%, 8% growth in net written premiums, is that still doable or do you think that could change? Nice.
Speaker 1: Certainly in terms of minimum objectives, I think what we've outlined at our investor day remain in place. I would hope to hit over time over the next three to five years do better than that. That's certainly what our aspirational goals are. Right now looking backwards versus looking forwards is a pretty big contrast to what we've actually achieved versus what we're committing to. So I think as I try to stay in my remarks, I think the proof is in the results.
Speaker 1: And I think we have to post some good numbers here over the next year or two to demonstrate that our transformation actually is putting us on a long-term path to that kind of profitable growth.
Speaker 6: And last question, sorry.
Speaker 3: Is acquisition, Dr. Gittings, you mentioned, as part of the strategy going forward,
Speaker 6: tech-ins or anything like that, new lines you might like.
Speaker 6: you might like.
Speaker 1: This board has been open to both divestments and purchases historically, and that remains on the agenda. We certainly have a very, very strong capital base. It will take two or three years of internal growth to even begin to dent into how much capital we have available. And so an opportunity arises in the near term. I'm sure the board will take a look at it.
Speaker 6: Great, thanks. That's all I got.
Speaker 3: And at this time, there are no further questions. I will now turn the call back over to Jay Brown for closing remarks.
Speaker 1: Thank you for joining us today. I do want to suggest that if there are any questions from investors that they follow up with Steve Rees. And one small change in our investor calls going forward, we will have an open mind for questions for all investors to ask questions rather than just the few that have been able to ask questions in the past. Thank you very much for joining us today.
Speaker 3: This does conclude the Global Indentity Group, LLC, third quarter 2022 earnings conference call. Thank you for your participation. You may now disconnect.
Speaker 3: and identity group LLC third quarter 2022 earnings conference call. Thank you for your participation you may now disconnect.
Speaker 1: Good morning and thank everyone for joining us today.
Speaker 1: Good morning and thank everyone for joining us today.