GBLI - NYSE

Good day, and welcome to Global Indemnity Group LLC's First Quarter 2022 Earnings Conference Call. I would now like to introduce Stephen W. Ries, Head of Investor Relations.

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 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 is now my pleasure to turn the call over to Mr. David Charlton, Chief Executive of GBLI.

Good morning. Thank you for joining our earnings call. In addition to Steve Ries, Reiner Mauer, our COO, Jonathan Oltman, President of Insurance Operations, and Tom McGeehan, our Chief Financial Officer are also in attendance. I’m very pleased with their underwriting results in the first quarter as we execute our strategic plan to grow our existing core businesses, as well as substantially widen our small business commercial casualty product offerings. Gross written premium grew by 16.8% compared to the first quarter of 2021. The gross written premium of our continuing lines grew 27.3% compared to the first quarter of 2021. The increase is mainly due to organic growth and rate increases. Our commercial specialty segment grew by 16.7% to 104.3 million driven by growth in our Penn-America binding small business, which grew 26.9%. We obtained rate of 7.8% for this business in the first quarter and will look to continue to push this higher as the year develops. Programs grew 9.8% and strong rate increases of 12.2%. A new small commercial casualty businesses, environmental, excess casualty and professional that build out their teams in an established solid market footholds. They are actively writing business. We received strong support from our distribution partners and all are on track executing their plans. We continue to hire superior new talent. Most recently, we were very pleased to announce the hiring of Matt Carroll to lead our new InsurTech business. It will be part of our commercial specialty segment. We have two existing profitable InsurTech businesses today, collectibles and Vacant Express those service foundation for this new business that Matt has been charged with building and growing. Reinsurance had strong growth, gross written premiums in first quarter '22 were 41.4 million compared to 22 million prior. As noted on the priorities earnings call, this is due to increase in participation. The casualty quota share treaty that global has assumed for several years. This treaty continues to obtain strong rate and a hard casualty market. In addition, we wrote several smaller casualty treaties and grew our excess professional reinsurance business by 11%. Farm, ranch and equine grew by 8%. The equine mortality book, which comprises about 15% of this book grew by 39% compared to 2021. We continue to focus on driving profitability in this book and improving results from non-cat property, primarily fires. We have seen that over 25% of our non-cat fire losses are coming from just 5% of our business. We have identified a specific risk characteristics, driving these on profitable counts and have been actively non-renewing these risks. We expect this action will reduce our loss ratio by several points. Gross written premium invested in lines shrank from 31.3 million in 2021, 22.6 million in 2022. Very little businesses retain as the net written premium was only 700,000. Global Indemnity is running the mobile home and dwelling book on the policies transition to American family. Unwriting income also had good results, the combined ratio improved from 101.2% in 2021 to 95% in 2022. It has fees incurred in first quarter '22 were 4.3 million, compared to 16.9 million in 2021. Volatility is much less due to the lines we exited. The mix of business has now shifted to casually. In 2021, 45% of net written premium was casually business compared to 64% in 2022. We will continue to push towards our goal of 70% casualty business, which will be supported by growth in our three new casualty businesses throughout the year. To support the company's long-term business plan that we unveiled at last year's investor conference, beginning in May 2021, the company embarked on a program liquidity, investment flexibility, buffer market volatility and balance sheet solidity. The first step in this regard was shortening the 4.5-year duration, a company's fixed income securities portfolio, the three years, which was achieved by August of 2021. Then in August of 2022, the company liquidated the entirety of its 76 million, but we traded common stock portfolio. Finally, in April 2022, the company further shortened the duration of his investment portfolio to under two years to retire 100% that was outstanding indebtedness. We will now take your questions.

. Our first question is from Julia Ferguson with Dowling & Partners. Your line is open.

Good morning. Thank you for taking my questions. My first question is about your significant reduction in the duration of your fixed income portfolio. So can you tell us what's the difference right now between your liabilities and asset duration?

Yes. Our liabilities have a duration right now that's about 2.3 years. Our fixed income portfolio today has a duration of 1.8 years.

All right. Okay, so it's not that different and under what conditions would you consider lengthening the duration again, going forward?

Well, again, when the interest rate environment becomes more stable and we have more certainty on how we perceive inflation and interest rates to perform on a going forward basis. At that point, we would be a little more comfortable, extending. Now we are seeing that Julia some great opportunity. It doesn't mean that we have to keep our portfolio completely as short as it is today. And we are working closely with our investment managers. So but at the moment, we do not have plans to go very far out on the curve until we have a little more certainty.

That does make sense. Yes. And what is the impact of this action on your net investment income going forward? So if you look at what the yield you mentioned, you're getting on those new securities, new money you purchased in the process of purchasing. It looks like it's still above your current fixed income portfolio yield. Am I correct?

Yes, definitely. Year end in our 10-K we reported an overall book yield of 2.2%. We identified 390 million for sale, sold most of it. We originally put the money into two year treasuries to park it. The two-year treasuries we're getting just about 2.5%. We've since deployed some of that money a little more than $200 million. We've gone mainly into corporates a little bit into securitized the overall duration of what we've currently been buying by moving out of the treasuries. We're buying into duration range of 1.3 years. But we're seeing yield, we're getting yields on that money right now at approximately 3.2%.

3.2. Okay. So to get to like about 100 basis points, which is good. All right. And staying with your investments, other investments, as investments or other invested assets, which are kind of more debt related, understand funds, limited partnerships. They were a significant contributors to your NII in 2021. And I understand there was at least partially, they are reported in one quarter lag. So how should we think about kind of expected or normalized returns on those investments going forward? I understand you increased the balance there. And I understand that you haven't sold any of that, right? So with you kind of for our planning purposes or modeling purposes? What's kind of expected return on those investments? How should they think about it?

Yes. Well, the reason we're in those investments is that we do want to get some extra return. Now, of the alternative investments, we have $100 million of the alternatives. On the balance sheet, we were showing 147 million in total, but a little more than 100 million of that is in a floating loan fund. Approximately 97% of what that fund investing are mainly first lien loans, not all 97%. But that's what they invest in our loans. The loans are, as I said, 97% are floating rate. Right now, those yields are in about the 4.5% to 5% range. As interest rates go up, we would expect the returns on that fund to go up. Now in the first quarter that fund was not immune to the geopolitical events that were happening throughout the world. So supply chain problems, Russia and Ukraine war, rising prices of oil and inflation in general and in that particular market, there was a -- I don't want to call it a flight to quality for the low market. But there was a change in the market where people -- where companies were shifting their investments from lower grade loans to higher grade loans. And it caused in for that particular fund, a temporary what we believe to be a temporary decline in the market value of that fund. So for the $100 million that we had invested in that fund in quarter one, we actually, again, solely because of market value, no defaults, that we actually had negative income of that fund of approximately $400,000 for the quarter. Now that's an alternative that we do not book on a lag where we actually get the data timely enough that we can book it to date. So what you're seeing for that fund, what I just said is accurate. The other three funds, they are one invest in real estate debt, one invest in distressed debt and there's another one that is run off that we've been in for years that when Europe had Basil three hit, and the banks had loans off of their balance sheet, we are in a fund variable we still run-off at this point it's in its harvest phase. So that's what comprises the rest of -- our alternative investments. Those investments are booked on a one quarter lag and it’s joy to answer your question in the beginning. On our alternatives in total we would like to make more than 5% this year in our projections, we have these performing somewhere in the 5% to 6% range. No guarantees on performance, but that's where we have been.

Certainly. I got. Thank you very much. This is a very thorough answer. And any kind of indices -- market indices, you would suggest for us to look at as a potential benchmark for the performance of this portfolio.

At this time, that's something that we will be readdressing as we go forward. Obviously, we were on a Barclays bond index before, the duration shortening is something where our investment mix currently is -- really it's not in proportion to the benchmark. And as I said, as we look at inflation and interest rates on a going forward basis, there's a high -- I don’t want to say high likelihood that there is a likelihood that we will be considering different benchmarks to pattern our portfolio against. Right now, it's really that we're managing to short durations and looking for yield opportunity.

Thank you. I mostly was speaking about the alternative portfolio, if there's any kind of index or proxy which that performance would be correlated to?

Yes. Most of them would be to a loan index. I don't recall the name of it. I can get that to you offline. But 100 million of the 147 million there is a loan index that I'll be able to give you the name to.

That would be great. Thank you very much. All right. So and switching gears from investments. I'm hoping to get more color on what you're broadly seeing in the ENS market, is the competition kind of picking up, is it pricing momentum and submissions are still going strong. From your commentary, I understand that that's still the case.

That's correct. We're very bullish. I mean, we're premium coming into the ENS. We're continuing our rate increases are actually gaining momentum. As I mentioned, our programs went up substantially to 12.2%. We see room for more growth in Penn-America small business. So we're very bullish on the market right now. And then, the growth opportunities that we're seeing.

All right. And how much actually this new lines, new city lines -- three new casualty lines, how much did they contribute to premiums in the quarter.

This is not material in the first quarter, if you looked at, when they kicked off, just to give a little flavor. So excess casualty was the first business to go live. And really start to really raise the premium towards the end of the first quarter into the second quarter. They're a little over a million dollars today in premium written and the other ones are in a similar case base.

And what do you kind of project forward for this?

For all three lines?

Yes, all three or however you want to talk about it?

Yes. We see then as being material businesses, I'm not ready to put a number on them at this point as far as forward-looking. The league, they'll be -- we really see the first year, we're building the businesses off the second year on any new business. We see as a breakeven type business in the third year is when we start to see them really making an impact on profitability.

Okay, make sense. Your reinsurance renewal is coming up on June 1, I believe for your property catastrophe treaty. You probably are already in the process of negotiating that treaty renewal. So what kind of changes are you contemplating, given that your exposure, cat exposure is down significantly?

No. I think you're right on in that. We absolutely should be able to decrease the amount we purchased. And with that, we've seen the ability with a real cost savings as well. So that's really across our reinsurance portfolio as it pertains to property.

All right. Okay. Make sense. And then, in your press release -- another question from your press release. Prior year development, I understand there was a very small looks like about 0.1 million in your continuing operations. But overall on the consolidated basis, what was the prior period development?

Yes. It was just over $3 million. Julia. A little more than 2 million of that came out from our discontinued lines. And in discontinued, we had a program, we only assumed business for one-year, but it was a multi-year policy. And we were able to release reserves by about $2 million on that particular treaty. But the way the treaty works is that there's a contingent commission. So any reserves we've released, we actually had to up our contingent commissions by exactly the same amount. So the net impact was zero. When you look at our 3 million reserves release to the net of contingent commissions, we had about $1 million of what I would call is positive contribution from prior year results to our numbers this quarter.

Okay. So it's a 1 million net favorable –

Positive, yes.

Okay. All right. Another problem number questions about your corporate expense line? What would you consider the right or reasonable run rate to use for that number? I know that you did take some cost reduction measures.

Yes, we have. We've quoted, I think on prior calls right now that we would expect on a normal year right now, we'd be somewhere in the $17 million to $20 million range $18 million to $20 million range. That's where we would expect to be probably by year end.

Okay. On a run rate basis, okay. I think oh, yes. Another question. So you retired 130 million of high interest, high coupon, subordinated notes, do you plan to replace it with any new debt issuance? I remember that during your Investor Day last year, you suggested that you would need about 150 million of additional capital to fund the growth over the next five years. So can you tell me what your plans there?

Well, we had a couple of things happen. One, we solved, obviously the renewal of rights to our special property. That helped free up by the end of this year, we believe that that was going to give us back over $60 billion of capital. And it gave us an opportunity to rethink about our debt. This step was third year paper and had an interest rate of seven and seven eighths percent. It was not inexpensive. We've been to the market twice now. And we believe with some of the things that we're doing with our company that is, we become -- I'll call it a more seasoned debt issuer, that as we go forward, if there is a need to raise additional capital, we would hope to do so at a less expensive price to what the current debt was that was outstanding.

So you actively considering or looking to this possibility?

Well, again, it all depends. Again, we'll be closely monitoring our growth, our reserve levels, our catastrophe exposure, all the things that drive our capital needs Julia. We're always watching. And like I said, the most significant -- one of the most significant things that happened was the sale of the renewal rights. So it gave us an opportunity to actually – to retire this step. And as we go forward, if we do have a need for capital, we'll be well in front of it, and we will think about the way of raising capital that we believe benefits, Global Indemnity the best. So again, we've now been in the market twice. So hopefully, if we go back out the next time we'll and we're doing some really good things with the company. So we feel really good about the book, we feel good about the volatility that we've been able to reduce all things that should be positive if we have to go to the markets to raise or issue debt again.

Okay. And another question on the business environment. And overall, what do you think the last cost trends are now? And do you do factor increased inflation into your pricing and reserving assumptions?

No, absolutely. I mean, we were possibly looking at, we just did a shoe study really across our books on both pricing and reserves. And it's something that on the property side, especially, we see the cost of goods, which we said in our last call in the fourth quarter, that's where we're getting this point, it's a double-digit increases to address. On the casualty side, we're a little less exposed based on the type of business that we write. We're running small business. We have lower limits in place, and we're not quite as exposed to social inflation. And so it's really by keeping our limit low. So we are getting a nice rate increase on our casualty business as well.

All right. And what about your reinsurance business? Can you talk a little bit about -- I confess, I'm not as familiar. So I understood -- was that part of your business? So I understand there is one big casualty quarter share, right, which you increased participation in. And so that's what percentage of that one quarter show of your total kind of premium on that segment?

Yes. So this year, we actually kept the participation percentage the same, but with the rise erasing cap, that drove most of the increase there. Tom, I don't know if that number, but that was probably about 90 million.

Yes. And in the -- that one treaty is probably about 85% to 90% of the reinsurance book right now. We have some smaller -- about one treaty is, what comprises most of it.

Okay. And that quarter show, what kind of underlying business is it covering? What kind of underlying casualty business?

100% casualty business. So it's very much in line with strategy as a casualty writer. But it gives us a nice diversification of the type of business that we'd write spread out, really spread out. So it really gives us and then as a rising rate environment, the type of business that we want to be involved with.

Okay. Sorry, go ahead.

I was just going to say that we asked them, in addition to that, we have some excess professional liability business we've had for many years. And then we're continuing to write a number of small casualty reinsurance deals ourselves as well. That would make up the difference.

Did you see an increase in the sitting commissions on that business this year? Because I understand this kind of a market trend towards higher sitting commission's given the profitability of the underlying books?

Yes. That really is going to vary by treaty. So, example, we took out reinsurance in our three new businesses, and I thought we got there.

Okay. I think that's all I have for now. Oh, sorry. Maybe one more question, if I may. On the expense ratio, I think there was some kind of increase. At least it was higher than I expected the expense ratio in the quarter. Is there anything unusual and what would be kind of a reasonable run rate for full year expense ratio, which is included in your combined ratio?

Now, what we had said before in the prior call, Julia, is that we're investing in some of our new businesses. And obviously, we're transitionalizing half of the renewal rights. So we originally based in comparison to 2021, we had expected that at our expense ratio over the course of this year, we've actually increased by 1.5% to 2%. And then after the new businesses are up and growing and we continue to get growth in our other businesses and we complete the transition of the specialty property renewal rates that we would start seeing improvements of approximately 1% per year thereafter. So what you're seeing is, some of those factors in play right now.

Okay. Thank you very much. I don't have any further questions.

Okay. Thank you, Julia.

No further questions at this time, I'll turn it over to Stephen Ries for any closing remarks.

Thank you, operator. Thank you for joining us for our first quarter earnings call. We look forward to speaking with you after the second quarter.