Q4 2022 Global Indemnity Group LLC Earnings Call
Is there a radically different business plan.
Speaker 1: My management team put together a radically different business plan.
Speaker 1: that substantially reduced the risk and costs associated with what would have been a dramatic change to our historical positive position in the excess and surplus lines business.
Speaker 1: The first decision was to immediately exit poor businesses that we had launched.
Speaker 1: in the fall of 2021 under prior management, property brokerage, professional liability,
Speaker 1: Excess casually and environmental.
Speaker 1: In January , we terminated all of the staff associated with these four lines.
Speaker 1: This decision was based on the economic assessment that we would not achieve break-even for another four to five years due to the fact that our 18 month project with a third party technology vendor was, in my opinion, a
Speaker 1: an absolute failure, and we would essentially be starting back from scratch.
Speaker 1: In addition to that decision, we also fundamentally altered our appetite in the Bermuda insurance and reinsurance space.
Speaker 1: and decided not to renew a large, casually retrocession treaty and a large book of high-access professional liability business.
Speaker 1: None of these decisions had anything to do with disappointing underwriting results in these lines. It was simply an assessment of our overall costs and use of capital.
Speaker 1: As a result of these decisions on the overall expense of running GBLI,
Speaker 1: We had a significant staff and expense reduction in early February . To bring our overall headcount back to where it was.
Speaker 1: in 2015 prior to the American Reliable Acquisition.
Speaker 1: We have now realigned our resources to what is needed for our ongoing business.
Speaker 1: including a defined plan to manage those activities associated with the business lines that we have exited in the past 18 months.
Speaker 1: The net result of these changes is that we are now back to our historical core business.
Speaker 1: which has performed over time consistent with our goal to produce combined ratios in the low to mid-90s with consistent profitable growth for our shareholders.
Speaker 1: There are a few key differences from where we were positioned just a year ago.
Speaker 1: First, we expect to generate excess capital starting immediately in contrast to our belief a year ago that we would probably need to add capital over the next few years to fuel our growth.
Speaker 1: Second, the actions we took over the past 18 months to shorten the duration of our investment portfolio from almost five years to under 1.7 years and to liquidate our publicly traded equity portfolio has already started to bear significant value for our owners.
Speaker 1: We expect that our investment income in the coming year will be almost double what it was in the prior 12 months.
Speaker 1: Third, our transition from an insurance company with a significant property exposure to catastrophic risk and the associated reinsurance cost.
Speaker 1: is now complete as we have achieved our goal of a 70-30 casualty property mix with much greater geographical dispersion on our remaining property risk.
Speaker 2: Thank you.
Speaker 1: Importantly, in 2022, we returned approximately $34 million to our shareholders by way of dividends and share buybacks.
Speaker 1: After the end of the year during the first quarter, we purchased another 250,000 shares this year, leaving around 32 million in remaining buyback authorization.
Speaker 1: Before I turn it over to Tom, I will repeat what I said on our last results call.
Speaker 1: My objective for 2023 is to get our company being valued above book value in recognition that our insurance operations are adding value to my fellow owners.
Speaker 1: As such, my relentless daily focus at CEO will continue to be to work with both the board and the management team to make that happen in the near term.
Speaker 1: With that, I will now turn it over to Tom.
Speaker 1: Thank you, Jay, and good morning, everyone.
Speaker 1: Book value per share decreased from $48.44 at December 31, 2021 to $44.87 at December 31, 2022. Excluding decreases in the market value of the fixed income portfolio due to rising interest rates, the market value of fixed income is $
Speaker 1: During the fourth quarter, 907,000 shares were acquired.
Speaker 1: Share buybacks during the fourth quarter increased book value per share by $1.09.
Speaker 1: Global Indemnity paid a distribution of 25 cents per share each quarter to our shareholders.
Speaker 1: There was a net loss in 2022 of $850,000.
Speaker 1: Net income includes realized investment losses that weren't incurred as the portfolio was restructured to lower duration.
Speaker 1: Adjusted operating income, which excludes realized gains and losses, discontinued operations, and one-time events, was $19.5 million versus $14.6 million in 2021.
Speaker 1: We are realizing the benefits of having a higher yielding, short duration portfolio.
Speaker 1: Both yields continue to increase as cash flows are reinvested.
Speaker 1: Our continuing lines generated an underwriting profit of $16.2 million. Consolidated underwriting income was $8.3 million.
Speaker 1: As Jay noted, actions were taken in the fourth quarter of 2022 and the first quarter of 2023 to enable global indemnity to focus on its commercial specialty lines.
Speaker 1: As Jay noted, actions were taken in the fourth quarter of 2022 and the first quarter of 2023 to enable global indemnity to focus on its commercial specialty lines, which were Panama salvage.
Speaker 1: InsureTech, programs, and selected specialty lines.
Speaker 1: As Jay also noted, a decision was made during the fourth quarter of 2022 to stop writing business from recently formed units.
Speaker 1: The amount of investment and time it would have taken to achieve a proper rate of return from these new units was too long.
Speaker 1: Charges incurred in the fourth quarter of 2022 to exit these units were $2.3 billion.
Speaker 1: In addition, during the fourth quarter, asset impairments of approximately 1.1 million were recognized.
Speaker 1: In the first quarter of 2023, additional actions to lower expenses were taken.
Speaker 1: Due to selling to manufactured home, dwelling, and farm insurance businesses, as well as decisions to stop writing other business, actions were taken to make the operating expense phase commensurate with the amount of premium written.
Speaker 1: Approximately $2.1 million of severance costs were incurred in the first quarter of 2023.
Speaker 1: The ongoing annual savings as a result of the fourth quarter and first quarter actions
Speaker 1: is expected to be approximately $16 million annually.
Speaker 1: Moving to investments.
Speaker 1: Net investment income, excluding alternative investments.
Speaker 1: was $33.6 million in 2022 versus $26.2 million in 2021.
Speaker 1: Book yield has increased to 3.5% from 2.2%.
Speaker 1: like December 31, 2021.
Speaker 1: The benefits of repositioning the portfolio are paying off.
Speaker 1: Excluding alternatives, net investment income was $10.7 million for the fourth quarter of 2022 versus $6.2 million in the fourth quarter of 2021.
Speaker 1: The realized losses that were incurred during 2022 to reposition the portfolio are anticipated to be fully recovered.
Speaker 1: during 2024.
Speaker 1: Another action that was taken was the interest rate swaps were exited in the fourth quarter of 2022.
Speaker 1: They were due to mature in December of 2023.
Speaker 1: Accumulated under comprehensive income was negative 43.1 million at December 31, 2022 versus 6.4 million at December 31, 2021.
Speaker 1: The change in interest rate stored in 2022 had a significant impact on the portfolio.
Speaker 1: Shortening the duration of the portfolio mitigates much, but not all of the downside risk from the rise in rates. The shortening of the portfolio mitigates much, but not all of the downside risk from
Speaker 1: The duration of the fixed income portfolio is 1.7 years as of December 31st, 2022. The unrealized loss will be recovered as the investments move towards their maturity dates. Approximately $900 million of the portfolio will mature between now and 2020.
Speaker 1: and the end of 2024. Another 230 million will mature in 2025.
Speaker 1: The yield on the portfolio continues to increase as cash flows are invested.
Speaker 1: Underwriting income was $8.3 million in 2022, comprised of $16.2 million from continuing lines, and an underwriting loss of $7.9 million from exited lines.
Speaker 1: The combined ratio on a consolidated basis was 98.8%.
Speaker 1: The continuing lines combined ratio was 97.1%.
Speaker 1: Actions taken to reduce catastrophe exposure are working.
Speaker 1: Catastrophes incurred for our entire book in 2022 were 22 million compared to 53 million in 2021. envision moving forward, we are part of a larger group.
Speaker 1: Tat losses for the continuing lines were 11 million compared to 19.4 million in 2021.
Speaker 1: for our continuing lines.
Speaker 1: Gross written premium grew by 17.3% to 559.7 million.
Speaker 1: compared to 477.2 million in 2021.
Speaker 1: Casualty comprised 72% of the continuing line's net earned premium in 2022.
Speaker 1: Pan America grew by 13.1% to 219.7 million.
Speaker 1: Much of this growth was due to rate increases and exposure growth.
Speaker 1: On a year-to-date basis through December , Pan America obtained rate increases of 8.4%, exposure growth added another 4.9%.
Speaker 1: The InsureTech products comprised of Collectibles, Insurance, and Vacant Express grew by 8.2% to $41 million.
Speaker 1: We do not have as much rate pressure on these lines, but we did obtain rate as a result of higher exposure values.
Speaker 1: Programs and other specialty lines remained relatively flat from 2021 to 2022.
Speaker 1: We continually monitor this book to ensure programs are performing well. When they are not, actions are taken to improve returns.
Speaker 1: Our program division had year-to-date rate increases through December of 9.7 percent and exposure changes of 9.6 percent.
Speaker 1: Our reinsurance operations primarily focus on casualty reinsurance.
Speaker 1: Gross written premiums were $158.7 million in 2022, compared to $103.7 million in 2021. Looking forward, we will be writing less reinsurance.
Speaker 1: This will free up capital that can be deployed to the commercial specialty lines as well as providing capital for other corporate initiatives initiatives including share buybacks.
Speaker 1: On January 3rd, we announced that we increased the share buyback authorization from 32 million to 60 million. During the time of this call, 1,157,000 shares have been repurchased for 28.4 million.
Speaker 1: Exodet lines include the farm business sold in August 2022, the specialty property book that was sold in the fourth quarter of 2021, as well as other lines we have exited.
Speaker 1: prospectively, exit aligned net premiums written will be very low. Net premiums written for the exit aligns were down to 1 million in the fourth quarter of 2022.
Speaker 1: respectively, exit align net premiums written will be very low. Net premiums written for the exit aligns were down to 1 million in the fourth quarter of 2022. In summary, the exit aligns will be down to 1 million in the fourth quarter of 2022.
Speaker 1: Significant efforts have been taken to create shareholder value.
Speaker 1: GBLI is very focused on its core business lines.
Speaker 1: Non-core businesses have been sold.
Speaker 1: New units that were not going to provide a good return on capital were jettisoned and the expense base was right-sized to be proportionate with the premium being written. The investment portfolio was repositioned to enhance liquidity, provide investment flexibility, and buffer market volatility.
Speaker 1: The duration of our fixed income portfolio is 1.7 years.
Speaker 1: Majorities and expected cash flows from operations will generate a tremendous amount of cash flow between now and the end of 2024.
Speaker 1: Book yield was 2.2% at the end of 2021, and it has increased to 3.5% at December 31, 2022.
Speaker 1: We have been deploying the proceeds.
Speaker 1: from these maturities mainly back into shorter term treasuries.
Speaker 1: At the close of business yesterday, the one-year treasury rate was 5.25%.
Speaker 1: Two-year Treasuries closed at 5.05%. There is tremendous opportunity for book yields to continue to increase.
Speaker 1: Thank you, and we will now take your questions.
Speaker 3: At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile some questions.
Speaker 3: And again, if you'd like to ask a question, it is star one on your telephone keypad. And we do have a question from the line of Tom Kerr from Zacks Investment Research. Your line is open.
Speaker 4: Bye guys.
Speaker 1: A couple of quick ones here, nothing too in depth, but can you go with a fourth quarter 5.5 million charge again? I think you said there are three components of that. I missed what those were or misunderstood them.
Speaker 1: Yeah, hang on one second. It was, the 5.5 was actually spread between the fourth quarter and the first quarter. During the fourth quarter, we had severance costs of $2.3 million, and we had asset impairments of $1.1 million.
Speaker 1: The remainder of the charges Tom were actually incurred in the first quarter of 23 and they were mainly severance costs
Speaker 1: The remainder of the charges, Tom, were actually incurred in the first quarter of 23, and they were mainly severance costs. Okay. Okay.
Speaker 5: press release to the fourth quarter. Oh, there's first quarter. All right, my bad.
Speaker 1: The big picture question sort of on the expense ratio for the last two years
Speaker 1: The big picture question sort of on the expense ratio for the last two years, you know, it increased from 36 to 37.
Speaker 6: plays.
Speaker 4: Did they ever forget?
Speaker 1: I can sit down basically. You broke up a bit, Tom. Could you repeat your question, please?
Speaker 1: The expense ratio and continuing lines went from 36.2 to 37.2 last year.
Speaker 1: But early last year is when you begin the restructuring in the severance, so I thought that might have been different. I forget what the delta was.
Speaker 1: No, and you're right, our expense ratio has been going up as we were investing in some of our new lines of business and as Jay noted, that's why we just took the actions that we took. We were selling the farm book, we were selling the manufactured homes.
Speaker 1: with the new units where, again, as we looked forward, it would have taken too long to get a proper return of capital. We were making some very significant investments in people and technology in those lines, but those were the costs that, as I said, when we looked ahead, we thought it was necessary to...
Speaker 1: It would have taken too long and we took the actions that we took to...
Speaker 1: eliminate those expenses and that will improve our expense ratio on a going-forward basis.
Speaker 5: So is it fair to get the combined ratio from 97 down to below 90 like you stated was your goal?
Speaker 5: Is it fair to say most of that comes from the expense ratio?
Speaker 5: or equally with the expense and the loss.
Speaker 1: Probably about 30% will come from the expense ratio signed. The rest will just be on the underwriting side from loss ratio.
Speaker 5: Okay, sounds good. One more, any change, and I think you mentioned this sort of investor day, you have or will have 200 million surplus capital going forward. Is that still a current number?
Speaker 5: Okay, sounds good. Alright, one more. Any change? And I think you mentioned this sort of at the investor day you have or will have 200 million surplus capital going forward. Is that still a current number or is that looking out?
Speaker 1: Well, no, as we look out, we look at it as discretionary capital, it will continue to increase. The share buybacks and rises in interest rates which have lowered our equity, right now we're in that 150 to 160 range. We'll expect that that will continue to increase. As Jay noted.
Speaker 3: And again, if you would like to ask a question, press star 1 on your telephone keypad.
Speaker 3: And there are no further questions at this time. This does conclude today's conference call. Thank you for your participation. You may now disconnect.