Global Indemnity Group LLC Q1 2023 Earnings Call
At this time I would like to welcome everyone to the <unk> first quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again.
The star and the number one.
Now I'd like to turn the call over to Stephen Wright you may begin.
Thank you Jeremy today's conference call is being recorded.
Realized remarks may contain forward looking statements. Some of the forward looking statements can be identified by the use of forward looking words.
<unk> got 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 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. Jay Brown, Chief Executive Officer of global uncertainty.
Thank you Steve.
Good morning, and thank everyone for taking the time this morning to join us for our quarterly results call.
Before I turn it over to our Chief Financial Officer, Tom again.
Who will provide a detailed explanation of our first quarter financial results.
I would like to briefly reiterate the background on the pivotal changes that have been implemented to position <unk> going forward.
It's been six months since I joined the company as CFO .
Although a lot has transpired during that time period it.
It has really been a continuation of a process that began in 2021.
To alter the composition of our company to improve the returns for our shareholders.
In 2021, we were successful in selling the renewal rights to our manufactured home and dwelling business.
And significantly reduced the amount of our property brokerage unit.
This was followed in 2022 by the sale of the renewal rights to our farm <unk> ranch and stable business.
And at year end, the sale of the American reliable legal entity.
As previously reported these exits contributed $43 million to the Bottomline and freed up a substantial amount of capital.
Also at year end 'twenty two 2022, we made the decision to exit our involvement in the four wholesale brokerage operations, we had established earlier that year.
And eliminated all of the staff associated with those operations.
In addition, we significantly reduced our appetite for retrocession reinsurance business.
As Tom will explain in a few minutes that although overall reported business written is down consistent with our plan, resulting from these decisions. We are seeing double digit growth tracking our long term objectives and most of our commercial specialty operations.
Okay.
As a result of exiting businesses that comprise close to one half of our top line premium written only two years ago.
It was then necessary to significantly restructure our internal cost.
Some of which occurred in the fourth quarter of 2022 and the remainder in the first quarter of this year.
We established a very simple set of expense objectives that will be needed to produce underwriting combined ratios in the low nine needs for our remaining businesses consistent with the loss ratios, we have achieved over the past five years.
Okay.
Our first quarter results are consistent with our goal to have underwriting expenses under 38%. This year and then below 36% within two more years.
Okay.
As Tom will highlight although we are on target with both our growth objectives and our expensive targets.
We had a big mess in the property loss ratio in the first 90 days of the year due to a limited number of significant fire losses.
Not a great start to the year, but our casualty loss ratio remains on target as we continue to achieve adequate rate increases.
Let me provide a bit more detail on the specifics of the fire losses.
The source of these type of fires first showed up a bit in the fourth quarter last year.
And then jumped way up in the first quarter.
Virtually all of the higher than expected losses came in the vacant commercial property portion of our business.
This was a big deviation from our decades long extremely profitable.
Business that we've experienced in this class of business.
The combination of extreme homelessness and cold weather on the west coast jumped out as the root cause.
We are now on top of this situation and are making the appropriate changes in our underwriting criteria and pricing.
To accommodate the demographic and wellness uncertainties that are present in certain U S <unk> markets.
In addition to the changes we have made in our insurance operations that I just articulated.
Our board quickly reacted to the emergence of the significant inflation that occurred post pandemic after the administration change.
As we have previously reported our decision to dramatically shorten our portfolio duration to around one five years is now bearing fruit with investment income almost doubling in comparison to the first quarter a year ago.
Okay.
We remain convinced that our company is now positioned to continue to generate excess capital over the next couple of years.
We bought back 250000 shares in the first quarter and another 200000 shares in April .
Have about 26 million remaining in our share buyback authorization.
We expect that our financial ability to buy back shares will continue to expand as we meet our combined ratio targets over the next couple of years.
Okay.
While I am generally satisfied with our progress in my first six months I was very disappointed with our property loss ratio that popped in the first quarter.
I fully expect we will see improvement as the remainder of the year unfolds.
With that I'll turn it over to Tom.
Thank you Jay.
Net income for the first quarter of 2023 was $2 5 million.
And adjusted operating income, which excludes realized losses and results of exited lines was $3 4 million.
Book value per share increased from $44 87.
At December 31, 2022 to $45 68 at March 31 2023.
Much of this increase is due to appreciation of the value of the fixed income portfolio and share repurchases.
As Jay noted during the first quarter 250000 shares were required.
Share buybacks during the first quarter of 2023 increased book value per share by 35.
Since the share repurchase program was initiated in the fourth quarter of 2020. So the company has repurchased $1 357000 shares from third parties for an aggregate amount of $34 million.
This amount includes 200000 shares purchased in April 2023.
As a result of the share repurchase transactions book value per share increased $1 69 per share.
As Jay noted an additional $26 million is still available for repurchases under the current $60 million share repurchase program.
I will now discuss some of the key drivers of net income starting with investment performance.
Investment income almost doubled in the first quarter of 2023 compared to the first quarter of 2022.
Investment income was $12 million and 23 compared to $6 6 million in 2022 <unk>.
Income from alternative investments, which is included in the 12 $12 million at last year's number was half of half a million in both the first quarter of 2023 and the first quarter of 2022.
The increase in investment income is due to higher book yields.
We hold onto the portfolio increased from two 3% at March 31, 2022 to three 6% at March 31 2023.
At March at March 31, 2023, the duration of the fixed income portfolio was one five years.
Now in comparison of the March numbers through December 31, 2022 at December 31, 2022 book yield was three 5% and duration was one seven years.
Between March 31, 2023, and December 31, 2024, we expect our investment portfolio will generate approximately $900 million of cash flow as bonds mature in investment income is realized.
Realized losses in the first quarter were $1 5 million approximately two thirds of this realized loss is due to Silicon Valley Bank.
During the first quarter of 2023, the fixed income portfolio appreciated in value by $10 million.
Moving to underwriting results.
Our continuing lines had an underwriting loss of $1 4 million as the first quarter of 2023.
On a consolidated basis, the underwriting loss was $1 1 million.
As Jay noted is the first quarter of 2023 fire losses were much higher than average as this negatively impacted our underwriting results actions are being taken to address this issue our property loss ratio was high due to the fires are casual.
The loss ratio remains on target.
Gross written premium in our continuing lines was $118 9 million compared to $143 8 million in 2022.
<unk> of this decrease was planned reinsurance operations rose $23 4 million and 23 compared to $41 million in 2022.
This decline is mainly due to non <unk> casualty treaty with.
Within commercial specialty there was some business that was underperforming investments terminated.
Packaged specialty E&S, which is which is comprised of Pan America business. The company's primary division within its commercial specialty segment increased gross written premiums by 13, 5% to $58 3 million a 23 from 51 four.
In 2022, driven by New agency appointments strong rate increases as well as exposure growth in both property and general liability.
Excluding underperformance business that was terminated packaged specialty grew by 18%.
Targeted specialty E&S, which contains the remaining business lines and commercial specialty at $37 2 million of premium of gross written premium in 2023 compared to $51 5 million in 2022 <unk>.
Excluding terminated business gross written premium was $36 8 million in 2023 compared to $40 8 million in 2022.
Exited 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 exited lines are continuing to run down as expected net written premium for the quarter was $1 2 million and underwriting profit of $4 million was realized.
Corporate expenses in the first quarter of 2023 were $6 4 million.
Corporate expenses include $2 2 million of restructuring costs related to actions taken to rightsize the expense base. Our annual expense base is approximately $16 million lower as a result of the restructuring actions.
In summary.
Shareholder value is being created we are returning capital to shareholders through share repurchases and dividends. We are very focused on profitably growing our core books of business expenses have been reduced actions are regularly taken to assure the business written is providing a good return.
Our high quality short duration investment portfolio is very well positioned funds.
Bonds that become available are currently being invested at yields higher than 5%.
And with that thank you and we will now take your questions.
Okay.
Awesome. Thank you and at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Our first question comes from Tom curve, Tom. Please go ahead.
Good morning, guys.
Sure.
Couple of quick ones here.
Actually the lines business does that run off completely in 2023 or is there still stragglers throughout the end of the year and maybe even into next year I am sorry could you just.
I had trouble hearing the first part of your question Tom.
On the exited lines businesses does that run off completely in 2023, or where they'll still be a little bit of runoff premium throughout the rest of the year.
A little bit left but not not much.
<unk>.
As I said the lumpy right now of the net written premium which is the main driver of earned premium as the income statement was only one 4 million in the first quarter. So as we go through this year.
As I had noted on our previous earnings call were not expecting.
Very much net written premium at all in 2023 so.
There is still going to be some are index at some of the unearned premium that we have.
Related to our foreign business runs off thats going to earn between now and August .
After that earned premium should be very minimal.
Okay. Our next question comes from the line of Jeff <unk>, Jeff. Please go ahead.
Good morning to all.
What I'm surprised how are Ya date, so I.
I guess, it's a general question Jake So I mean.
Obviously your predecessors came in with the mission to sort of build something to grow and for whatever reasons that was decided not to be the plan and you are coming in and sort of taking the opposite tack.
Cutting expenses and.
Things that produce near term results, which nothing wrong with that but arguably.
Three to five years, what do we have and so my question to you is.
What do you think your mission is aside from.
The first 18 months, how do you see this in and what happens after.
And it's always a difficult question to say, what's going to happen five years out.
I think when I look.
From where I kind of started six months ago. The initial goal was to position the company as quickly as profitable quickly as possible on its profitable base that we knew historically had generated good returns.
And then corresponding to that because of actions taken.
Over the previous two years, where we significantly reduced the amount of premium.
I had to make a corresponding.
Costs and expenses to make it right size back to the.
The kind of business, we wanted to right.
I think the.
The main street businesses is a forever business.
<unk> been here I've been in this business 40, plus years main street business has been a core component of almost any major property casualty companies business. During that time period. We think we're very good at that we've got a long track record of good results.
It's been confused somewhat if you look over our 20 year history with different things, we've tried along the way, including what we tried in 2022 and I think what we've now decided to do.
He is concentrated on those those that segment of the market, where we do believe we have a good competitive advantage and where we can be successful. We've got 350 375. So agents that we work with that we've built up a good relationship with over that time period.
There is growth is great and we like to grow we want to grow hopefully, 10% to 12% per year on a regular basis, but growth without profit is not going to lead to any any value for our shareholders and so I think that's what we've tried to do is just quickly reduce back down to a size that made sense.
And then grow from that base and what we saw in the first quarter was a good start on that.
Had a couple of adjustments still in in some of our business, but the basic core business Thats written.
In packaged specialty as Tom noted grew about 18% in the first quarter on a gross basis.
That's in this marketplace for that type of business, we're very happy with that.
I think importantly.
And it will occur on a regular sequential basis.
As we generate excess capital.
Hopefully, we're going to continue to deploy that in ways that make sense for our shareholders at today's stock price. It's very easy to tell you what I would do it's a board decision, but I would buyback every share I can at these kind of prices.
And I think that will eventually yield to return.
Of a share price that's more reflective of the underlying value of the business.
It's not a precise answer in the sense that we're talking about what can happen over a two to five year timeframe, but I think the results will be fine in that time period, if we achieve those kind of results.
And our next question comes from the line of Anthony amongst lessee Anthony. Please go ahead.
Hi, good morning.
A quick follow up on the Q1 results.
Are there any reserve development.
<unk> seen in the quarter favorable or adverse.
And also it would be helpful. If you could quantify any cat losses in the quarter as well, yes sure.
Just one second.
So cat losses.
Ralph start with cat losses in our continuing lines.
$3 3 million and our discontinued we do have some unearned premium that is running off $2 1 million. So in total.
$5 5 million rounding up.
That's the cat loss answer and in terms of prior year development on a net basis it was zero.
We did a little bit of strengthening in our in our GL reserves in our continue in line businesses, but.
But we had a corresponding offset where we've had some good property development and are exited lines net net it was zero so.
We're not seeing anything.
Thats, causing us.
Any real concern in the first quarter on our prior year development.
Thank you. Our next question comes from the line of David shifts David. Please go ahead.
Hi, there are there Jay I was delighted to see you become CEO and.
I like your strategy.
Just one question here just about the investments.
At least at year end, you all had about and obviously it was a great call clearly market call getting out of stocks shortening.
Your maturities last year.
But of course, one has to wonder given the strength of your balance sheet very strong.
And as a long term strategy cannot own any common stocks.
Maybe you could comment on that the other thing just to comment on you do have about at year end, it was $23, 24% and triple B bonds.
And I was just wondering if.
If there was any thought of reducing that and putting some into stocks.
Although obviously your own stock is arguably the cheapest thing out there, but any way just any thoughts on.
Those things.
Sure.
<unk>.
One is I do believe.
Definitely it should have a stock component over time.
And then I think the trick is.
The easier call us to play defense, which is what we did beginning in 2022 and 'twenty two.
Your call is deciding when to go back in.
I can tell you that's not today, but I expect before the year unfolds as things stabilize in the markets when we begin to get a sense.
Where that that is going to stop and where inflation kind of targets out I think than the available or the ability to SaaS. The type of risk we want to take in the stock market or in the bond market makes sense and that includes stretching back out on duration at the appropriate time, because we're very short.
All of our normal duration target of what we would use for our company of this type curve at this point in time.
As you correctly said the easiest decision we have in terms of deploying capital is to buy back our own shares at these prices.
And then I'm going to let Tom comment about the composition of our current portfolio, Yes, no. It's right now we have.
A fair amount in treasuries over for $300 million.
We also have about a third of the portfolio with some floating floating rate investments.
Corporate <unk> that were in in the Triple B and some of the other asset classes that are there, we're very comfortable with what we're holding and they work they will purchase two to generate good returns and building on your question on redeployment into.
Common stock.
Over global Indemnities history.
And it depends when Bob we've been in and out of not only common stocks, but other asset classes that we thought at the time.
We will provide a really good return to our shareholders. So common stocks is the main one buy but there have been times in our history, where we invested in other asset classes, such as bank loans, but there's times to be in those and there were times to be out of it and the <unk>.
Time, we got out of it last year was in January I think we made a really good call at that point.
There was a lot of market volatility and the other thing that allowed us to do is.
We used the proceeds to <unk>.
Pay off all of our remaining third party debts. So at this point in time Global Indemnity has no third party debt on its balance sheet. So again for.
We will continue to look at it at the right time, we will make we will make the right decisions too.
Or what we believe are the right decisions to jump back in.
Alright, Thank you and our next question comes from the line of Tom Carroll Tom. Please go ahead.
A couple of follow ups following up on the.
The strategy question from a few callers ago, whether that was.
Would you consider adding lines of business.
The second.
Tuck in acquisitions or the use of capital still just be focused on your own shares.
I think once we get the base record established.
Established again, where we have a consistent reported result.
We will continue to look at at adding adding different things I think we got in front of ourselves.
In terms of in 2022 of trying to add four new lines.
That we're going to be significant.
Long term.
Contributors, but the cost of scaling those up at our size was was just not something that we could be accomplished none of the lines that we exited I should be clear.
Did we have any discomfort with the loss ratios.
All of the business that we wrote during that time period.
Something that at this point in time looks fine. It was just a question of.
The expense space necessary in the systems technology that would be necessary to play in those spots.
If we if and when we choose to either add new lines or acquire something again it'll be something.
That will have to be consistent with the size of the company and our record at that point in time.
Global has a history of a number of acquisitions over its history most.
Most of which have been good not all we're not we don't have a perfect track record.
And then when we look back in hindsight Thats one of the things that you have to understand is if youre going to take those risks you've got to be careful to get them right and they're not always going to turn out right.
And I think we've recovered quickly from American reliable, which cost us a little bit of money along the way and we were able to get out of it.
At a return that essentially negated our initial entry cost.
And so we even in that case, where it wasn't a great acquisition, we did fine but.
Thank the history of the company suggests that we're not afraid to take.
Step into something at the appropriate time, when we have both the financial resources and the ability to feel comfortable with it.
Alright sounds good thanks for the color on that couple of quick financial questions on the corporate expense line did you said $2 million was restructuring of the $6. Four does that mean sort of a quarterly run rate for corporate expenses is around $4 million.
Per quarter is what we can expect.
Yes.
Okay.
Okay and I see no further questions at this time. This concludes today's conference call you may all disconnect.
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