GBLI - NYSE

Hello and welcome to the GBLI 2Q 2023 Earnings Call. [Operator Instructions] I will now turn the conference over to Mr. Steve Ries. Please go ahead.

Thank you, Sarah. 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 our other filings 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's now my pleasure to turn the call over to Mr. Jay Brown, Chief Executive Officer of Global Indemnity.

Thank you, Steve. Good morning, and thanks to everyone on the call for taking the time this morning to join us for our second quarter results discussion. Before we review our results for the quarter, let me address the elephant in the room. As we stated in our June 9 press release, the company is engaged in conversations that could potentially lead to a transaction to sell a portion of our insurance operations for the entire company. These conversations are continuing, and as stated in our press release, we do not intend to make any further comments unless or until it has been completed or suspended. As such, we will not be making any further comments today. That said, let's turn to the results for the second quarter. As we noted in our last 2 calls, the significant restructuring that has occurred in the prior 2 quarters does not make direct comparisons to prior year overall results somewhat difficult. Our ongoing operating segments are primarily commercial specialty and to a much lesser extent, reinsurance operations. I will focus my comments on commercial specialty results as this is the portion of our operations, which will dictate future underwriting results. Following my comments, Tom will address all the financial aspects of our GAAP results. The long-term operating metrics we are focused on for ongoing commercial, our loss and loss expense ratios consistent with our long-term average in the mid-50s and an expense ratio of below 38% this year, trending to 36% in a couple of years, a combined ratio in the low 90s and growth averaging 10%. I am very encouraged by our second quarter accident year results, albeit we still have some work to do. For the second quarter, our accident year loss and loss expense ratio was 57.5%. Our expense ratio was 36.2% and the combined ratio was 93.7%. In addition, despite the high industry catastrophic losses in the quarter, our ongoing efforts to increase the proportion of our business that's casualty and continue to manage our catastrophic property exposures, we only incurred $4.1 million in cat losses which are reflected in the 57.5% loss and loss expense ratio I referenced above. All accident -- all excellent profitability figures, which are consistent with our metrics. But unfortunately, our core business had a very disappointing growth of minus 6% in the second quarter. The lack of growth was all driven by just 1 of our 3 divisions. This division targets specific agents with concentrated books of single-class business or substantial reunderwriting and pricing actions resulted in a loss of significant amount of premium of $15 million compared to the same period in 2022. In sharp contrast, our core packaged specialty business grew 13% and our retail-focused Vacant Express and collectible business grew 14%. As an insurance underwriter, we are consistently faced with balancing profitable pricing and underwriting with our growth objectives. Given our overarching objective, to be a consistent, profitable underwriter. This is one of those periods where we sacrificed some unprofitable business to benefit the bottom line. Tom will provide more details, but our decision to play defense on interest rates by dramatically shortening the duration of our bond portfolio starting 18 months ago, is really beginning to pay dividends as our investment book yield is rising every month with investment income coming in at $13 million for the quarter, roughly double that of a year ago. With $800 million of our investment portfolio maturing in the next 6 quarters, we fully expect this number should keep rising every quarter. During the quarter, we increased the Board authorized share repurchase from $60 million to $135 million. Because of the extremely small volume of shares traded each day, our repurchase efforts are focused on reverse inquiry opportunities. During the quarter, we repurchased 200,000 shares at an average price of $28 and have $101 million remaining available for share repurchases. Standing back, this was a pretty good quarter but we obviously have more work to do to both achieve these profitability results on a consistent basis quarter after quarter with higher growth to deliver an acceptable return for our shareholders. Tom?

Thank you, Jay, and good morning to everyone. Net income for the second quarter of 2023 was $9.3 million and adjusted operating income, which excludes realized losses and results of exited lines was $6.9 million. We are pleased with the direction of our results. Actions taken to focus on core business lines, reduce expenses, reduce catastrophe exposure and reposition the investment portfolio are being realized. Book value per share increased from $45.68 at March 31, 2023 to $46.03 at June 30, 2023, due to good underwriting results, strong investment income and share repurchases. As Jay noted, during the quarter, 200,000 shares were acquired. Since the share repurchase program was initiated in the fourth quarter of 2022, the company has repurchased 1,357,082 shares from third parties for an aggregate amount of $34 million. I will now discuss some of the key drivers of net income starting with investment performance. Investment income was $13.2 million during the second quarter of 2023. On a year-to-date basis, investment income is $25.2 million comprised of $24.1 million from fixed-income investments and $1.1 million from alternative investments. This compares to $8.5 million in 2022 and comprised of $13.3 million from fixed-income investments and negative investment income of $4.8 million from alternatives. Investment income from the fixed-income portfolio was almost double what it was in 2022 due to the actions taken in early 2022 to sell longer-dated securities and short duration. Bulk yield on the portfolio was 3.8% at June 30, 2023, and duration is 1.4 years. As a comparison, at December 31, 2021, book yield on the fixed-income portfolio was 2.2% and duration was 3.2 years. At December 31, 2022, book yield was 3.5% and duration was 1.7 years. Between June 30, 2023 and December 31, 2024, we expect our investment portfolio will generate approximately $900 million of cash flow. This is comprised of $800 million from maturities and the remainder from investment income. We expect these funds will be invested at rates that will further increase book yield. Realized losses in the second quarter of 2023 were $0.8 million, mainly due to selling several assets to improve overall investment returns. Unrealized losses increased by $3.2 million in the second quarter of 2023 due to the rise in rates. The short duration fixed-income portfolio helped minimize unrealized losses. Moving to underwriting. In the second quarter of 2023, our continuing lines had an accident year underwriting profit of $6.4 million compared to an underwriting profit of $4.5 million in 2022. Continuing lines in the second quarter performed in line with our expectations. The continuing lines accident year combined ratio in the second quarter was 94.9%. On a consolidated basis, in the second quarter of 2023, there was an underwriting gain of $4.3 million compared to an underwriting gain of $2.1 million in 2022. On a consolidated basis, prior year reserve development was flat. Exited lines had good development of approximately $6 million, primarily from property catastrophe reserves. Within our continuing lines loss reserves were strengthened by approximately $6 million primarily related to nonrenewed casualty business. In the second quarter of 2023, gross written premium in our continuing lines was $110.2 million compared to $151.5 million in 2022. Much of the decrease was planned. Reinsurance operations wrote $14.8 million in 2023 compared to $46.5 million in 2022. This decline is mainly due to nonrenewing casualty treaty in 2023. Within Commercial Specialty, package E&S, which is comprised of Penn-America business, the company's primary division within its Commercial Specialty segment, it increased gross written premiums from $58.3 million to $62.7 million in 2023. Packaged specialty grew approximately 8% driven by new agency appointments, strong rate increases as well as exposure growth in both property and general liability. Excluding underperforming business that was terminated, packaged specialty grew by 13%. Targeted specialty, which contains the remaining business lines in Commercial Specialty had $32.7 million of premium in 2023, compared to $46.7 million in the second quarter of 2022. As Jay noted, this decline was mainly due to not writing business from wholesale agents that were not providing an acceptable return and managing catastrophe capacity within targeted specialty several products growth. The Vacant Express product generated $7.9 million of premium in the second quarter of '23, which is up 23% compared to the second quarter of '22. Collector policies for private collectors grew approximately 4%. 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 negative $0.7 million. Corporate expenses in the second quarter of 2023 were $5 million compared to $3 million in 2022. 2022 included a $2.7 million Cares Act employee retention credit. We are pleased with our results this quarter. Our core business is providing good returns -- ratios performed as expected compared to 2022, expenses are much lower due to actions taken in early 2023. The company's fixed-income portfolio book yield is 3.8%. 96% of the portfolio is invested in fixed maturity investments and a little bit in cash. The fixed-income portfolio has an average rating of A and a duration of 1.4 years. Maturities and investment income are expected to generate $900 million of cash flow between June 30, 2023 and December 31, 2024. The funds that become available are currently being invested at yields higher than 5%. The actions that have been taken are providing value to our shareholders. Thank you. We will now take your questions.

[Operator Instructions] There are no questions -- my apologies, we do have a question from the line of Ross Haberman with RLH Investment.

Thank you, Chairman. I'm sorry I got on a bit late. Did you mention anything about the press release you issued, I want to say about a month ago. You said something about a number of companies that approached you in an informal or formal way? And can you say anything about the status of that now?

The conversations are continuing. That's all we're going to say at this time. Go ahead.

Other quick one, I have a follow-up. How much is left in terms of your buyback authorization?

I'm sorry. Could you repeat the question, please? I couldn't quite hear it.

How much is left in terms of your buyback authorization in dollars?

$101 million.

And that lasts through the end of the calendar year?

It's open for several years still.

[Operator Instructions] Your next question is from John Schuster. [Ph] What forward earnings impact should we see from the reduced reinsurance costs?

Well, our reinsurance costs last year before our June 1 renewal were approximately $10 million annually. This year, when we renewed the costs dropped to approximately $5 million. And that's due to the actions -- primarily due to the actions that we've taken to reduce our catastrophe-exposed business. We were able to buy less.

[Operator Instructions] Your next question comes from the line of Tom Kerr with

A couple of quick ones here. On the Exit Line Business and the net-earned premiums, can you give any more color on how that trends down? Or will there still be earned premiums the rest of the year, maybe into '24, I know it's going to be a small amount.

Yes. It's going to be a very small amount. I mean, hang on just 1 second, Tom. Round numbers, we -- just bear with me for 1 second. We only had $6 million of -- $6.2 million of earned premium in the second quarter. We were $18.2 million year-to-date. So we went from $12 million to $6 million. We're probably going to go down somewhere between $2 million and $3 million and by the end of the year, it should be virtually nothing.

Okay. That's helpful. Can you repeat on the targeted specialty lines, the decrease there. Can you kind of give color or repeat what you said? I think you mentioned dropping wholesalers, or was there anything else?

Well, we had a couple of things in our -- in some of our wholesale business, we non-renewed business that was not providing an adequate return on capital. We also were managing catastrophe exposure. We were able to grow in our Vacant Express line, and we also grew our individual collector policies by 4%. So down a little bit in 1 area, up in a few others. Tom, it was really increased overall profitability. As Jay noted, we had to sacrifice some business to improve overall results.

When we started the year after our review in the fourth quarter, we set specific targets for reunderwriting and pricing changes per individual agents that had large blocks of business with us, and a number of those have resulted in nonrenewals.

Okay. That's helpful. And on the book yield, and I can't do the math in my head, but if you're investing that much above 5% by the end of next year, does that mean a book yield could reach for 5% or over? And I know that's a crystal ball.

Our portfolio today, Tom, is round numbers, $1.35 billion. We have 800 maturing where the extra $100 million when I noted $900 million, $100 million of that. I'm using round numbers was investment income. You're going to get a yield that if rates stay where they are today, we should have yields that are approaching the mid-4s, but that's kind of what you should be expecting.

Got it. All right. Last question is the -- I know you guys have a lot of excess capital is sort of M&A or any tuck-in lines of business on the table right now? Or are you just focused on share buybacks and operating results?

Primarily on share buybacks at this point in time, but we're always open to additional expansion if we see an opportunity out there.

Your next question comes from the line of Guy Baron with Springview.

I had a question about excess capital, similar to the previous caller. Could you give us a sense of how much excess capital, what the amount is of your excess capital above and beyond what is required to support the ongoing business?

It's been between $100 million and $200 million right now. It's always hard to specify exactly what it is. The key for us is we have excess capital in excess of the $101 million that we bought for our remaining authorization for share buyback. It will increase over time because of our shrinkage of our business down to the core business. So we expect our excess capital will probably grow over the next 2 years, absent a substantial change in our forecast of probably another $100 million or so.

Your next question is from Justin Saunders.

Are we bullish about getting growth back in targeted specialty segments after the book was cleaned up?

Are we bullish? I think we're confident that we'll shift from shrinking to growing. We will have probably a similar comparison in the second 6 months of the year before we roll into '24. But in '24, against the base that we'll have in '23, we assume that we'll be able to hit our targets of 10% or more.

Your next question comes from the line of Andrew Vindigni, with General American Investors Company.

I noticed that there was roughly an $8 difference between your book value and your book value ex investment losses. So that -- if you take that $800 million divided by $1,350 million, roughly speaking, straight line, you might get that back as the portfolio rolls off. Is there any kind of...

No, it's absolutely correct. As I noted, we have $800 million maturing between now and the end of next year. We have another round numbers, $250 million that's maturing in 2025. We're expecting that most of that unrealized loss will be recovered over that time period.

So it's pretty -- it's roughly proportion or roughly linear roughly speaking.

Yes, I haven't mapped it out month-by-month side. But as I noted, we expect that most of the unrealized loss will be recovered over the time period.

Now I noticed that I think you bought back stock and you paid kind of in the high 20s roughly. And the stock is at $34, given the expected increase in real book value with the losses going away, maybe you could be a little more aggressive in buying back stock or still be price sensitive, I guess.

I would agree with your observation.