Good day, and welcome to Global Indemnity Group LLC's 2021 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 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..

Thank you, Steve. Well, good morning. Thank you for joining our earnings call. Reiner Mauer, our Chief Operating Officer; Jonathan Oltman, President of Insurance Operations; Tom McGeehan, our Chief Financial Officer; and Steve Ries, Head of Investor Relations are joining me for this call. After I complete my remarks, Tom will provide additional updates.

I will conclude with my closing remarks, and then we will open it up for Q&A. It has been a little less than one year since I started the Global Indemnity, and I am pleased with the progress we have made to date. I firmly believe that the greatest differentiator and key to our success is consistently recruiting, retaining and developing talent.

In 2021, we hired 15 new leaders and 16 new underwriters and product managers. We've been winning the war for talent in a highly competitive market for people. This talented team of people is buying in and excited by our vision for Global Indemnity. Our excess and surplus lines businesses are growing.

Selling manufactured homes and dwelling lowered our volatility and freed up capital that can be deployed to other lines. Our casualty business as a percentage of total business written is increasing. Our three new businesses, Environmental, Excess Casualty and Professional are all up and running. We are actively quoting and writing business.

I would like to first speak to growth in our core ongoing businesses. Gross written premium from these core lines grew by 22% to $569 million. Gross written premium growth from all lines was 12.5%. Three units saw a substantial growth.

Penn-America binding grew 15% to $204 million, programs grew 25% to $152 million and casualty reinsurance grew by 92% to $106 million. These businesses all had a strong combination of organic growth, along with rate increases. We expect to see continued progress from these lines in 2022.

This momentum will be supplemented by production from our three new business lines. The ongoing business combined ratio in 2021 is 98.9% compared to 91.8% in 2020. Excluding prior year development, underwriting income from continuing lines increased to $8.8 million compared to $7.9 million in 2020.

Prior year development was driven by Hurricane Michael and two programs that we have since terminated. While 98.9% is profitable, I expect that future results will be better. The investments we have made in people, products and processes will drive performance going forward.

We are continuing to increase rates in all our businesses, and, when necessary, we'll terminate business that fails to provide adequate returns. From 2017 to 2021, gross written premium from core ongoing businesses grew from $289 million to $569 million, a compound annual growth rate of 18.4%.

The combined ratio on the core ongoing business was 93% over the same time period. The exited lines had a combined ratio of 117.1% from 2017 to 2021.

The Farm, Ranch, & Stable gross written premium of $81.7 million was down approximately $4 million compared to 2020 due to corporate efforts to reduce business that is cat-exposed or is not providing an adequate return. The combined ratio, not including fee income, was 100.2%. Reinsurance continues to perform well.

Gross written premium was $106.5 million in 2021 compared to $55.6 million in 2020. This is due to the increasing participation in a casualty quota share treaty that Global has assumed for several years that continues to obtain strong rate in a hard casualty market.

In addition, we wrote several smaller casualty treaties in 2021, and maintain our excess professional reinsurance business. Reinsurance's combined ratio in 2021 was 97.4% compared to 97.3% in 2020.

We specifically saw the impact of inflation in the fourth quarter of 2021 on our property claims, and we are addressing this by taking double-digit increases on this part of our portfolio, in addition to the rate we are taking across all lines. Global Indemnity finished the year with net income of $29.4 million.

Investment income and investment gains are up significantly compared to 2020. Tom McGeehan is now going to provide some additional details on our results and investments..

Good morning. The consolidated combined ratio was 102.1% compared to 97.2% in 2020. In the fourth quarter, the company closed on the sale of the manufactured home and dwelling homes business lines to K2 Insurance Services and American family, and we received $28 million in cash plus future sublease payments of $2.4 million.

The exit of business that David referred to was mainly made up of this specialty property book that was sold or placed into runoff. Order reinsurance treaties, including property and property catastrophe business and the property brokerage business we are not renewing with location values of $10 million or more.

To reiterate, our business strategy includes growing casualty and non-cat exposed business, exiting these poor performing business lines of lowered catastrophe exposure, lowered earnings volatility and freed up capital that can be deployed elsewhere in our business lines.

Investment income was $37 million compared to $28 million – $28.4 million in 2020. Growth in the investment portfolio and returns from alternative investments were the two main reasons investment income increased. Realized gains were $15.9 million compared to a realized loss of $14.6 million in 2020.

Common stocks increased in value in 2021, whereas, in 2020, common stocks were negatively impacted by market volatility. During the second quarter of 2021, the Board recognized that interest rates would likely rise and actions were taken to lower duration. Duration at May 31, 2021, including cash and fixed income investments, was 4.36 years.

Duration at December 31, 2021, was 2.97 years. Book yield at May 31, 2021 was 2.39% compared to 2.35% at December 31, 2021. Lowering duration had little impact on book yield, book yields only declined by 4 basis points. Overall, the investment portfolio returned 1.1% in 2021. Operating cash flow for 2021 was $90 million.

Other income was $29.8 million, $28 million is related to the sale of renewal rights. The remainder is mainly comprised of fee income charged on policies to pay in installments.

Corporate expenses of $27.2 million contained approximately $8 million of asset write-downs and professional fees related to the sale of the manufactured home and dwelling renewal rights and the remainder is comprised of recurring expenses.

Lastly, later today, we will issue a press release noting that we will retire $130 million of subordinated debt on April 15th. The interest rate on the debt is 7.875%. We are funding the redemption using internal funds.

$76 million of the funding is from the sale of the common stock portfolio, most of which was sold in the first week of January before the decline in the market occurred.

Approximately $10 million of the funding is from distributions received from a private equity investment, approximately $30 million will be funded by dividends from the insurance companies and the remainder will be from GBLI Holdings LLC, the company that owes the debt. Annual interest cost will be $10.2 million lower.

And now, I turn it back to David..

Thank you, Tom. So we introduced new products, we're growing core products, talented employees have been hired and we are investing in technology to improve our processes. We sold and discontinued business segments that have negatively impacted results. We have a strong, talented and committed team that will drive our future success.

That concludes our remarks. We will now open the call to your questions..

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question is from Julia Ferguson with Dowling & Partners. Please proceed with your question..

Good morning. Thank you for taking my questions. And the first question, a numbers question, since there are limited information in your press release.

What was your total prior year development on a GAAP basis for the full year? I understand it was about $2 million for continuing operations, but what was it on a consolidated basis? And the same question for catastrophes..

Yes. Answer number one, on a full year basis, our prior year development was $8.6 million. We strengthened reserves in two areas, one was related to Hurricane Michael and the second was for two programs that we have terminated, they were casualty programs.

And I just want to make a note on Hurricane Michael, with our reinsurance structure, we have very limited downside or – if we were to incur a little bit more of adverse development on Michael, the worst that we would incur would be a little bit more than $1 million of loss and then our XOL treaty would kick in and cover 100% of all future losses.

So, on Hurricane Michael, we are just about as reserved as we could be, and we took appropriate action on the two programs that we terminated..

Yes.

And on catastrophes?.

I'm sorry, $53 million last year..

For the full year. Okay.

On a consolidated basis, correct?.

On a consolidated basis, including business that we have exited..

Thank you. So was a statutory information has been released by now, and we have an opportunity to look at Schedule P disclosures for our companies. And I'm sure that the new team did a very thorough review of reserves.

And I would like to ask what's your overall comfort level regarding the reserving position and particularly in other liability occurrence, your largest reserving lines? And how did you factor in higher inflation trends in your reserving? Have there been any change in case reserving procedures given the signs of high inflation, or is it mostly in IBNR?.

Okay. Yes, you have several questions there. So one, I'll start with, we're very comfortable with our reserve position. Our booked reserves remain above the actuarial indications. So, again, we think we have a very strong balance sheet. In terms of inflation, it's handled in several manners.

One, our claims department does have a service where we are able to get inflation updates and accurate values, and we're considering that as we're doing our cash reserving.

The triangles themselves that the actuaries are looking at, admittedly, inflation in the last couple of quarters, is much higher than what it has been for the last several years, but this is a known factor. And as the actuaries are making their projections of ultimate losses, inflation is absolutely considered as they make those loss picks..

And, Tom, I would add to that, when we're looking at inflation, the increases we discussed of the 10% plus on property, and we're really seeing the inflation in the fourth quarter. Additionally, on the casualty side, we're seeing rate on exposure go up as same really as well. So in addition to pure rate, we're also getting rate on exposure..

Okay, makes sense.

And overall, given growth in casualty, which also means exposure to social inflation, does the small or middle market focus of your casualty book somewhat mitigates your exposure to recent social inflation trends? And can you illustrate that maybe give us what kind of average lines you're putting out or anything which would provide us with comfort in this respect?.

Sure. Yes, I think, you're correct in that. In the casualty part of our business, our traditional lines are being put out $1 million, $2 million. So we really don't have a lot of high limits out on the casualty side. Our excess casualty traditionally would be a maximum of $5 million, and we're reinsuring 60% of that as well.

So we really don't have a lot of real exposure to social inflation on our casualty book..

All right.

And overall, if you look at the dynamics of loss increases versus – I'm sorry, of rate increases versus loss cost trends in the different segments of your book, can you kind of provided with some indication of like potential further margin increases, and where this gap is running for different parts of your book between rate increases and loss cost trends?.

Yes. Well, on the property side, our rate increases will be higher than on the casualty side. As David noted during his part of today's conversation, we're actually putting in property increases that will be in low double digits, casualties behind that.

But we are cognizant of inflation and how it's impacting our book and our raising insured values and taking rate to make sure that we're properly handling it..

So – and if you look at your underlying loss ratios for your kind of overall business, how should we think about the underlying margins going forward, all in rates and underwriting actions you are taking, what kind of improvement would you expect in the next couple of years?.

Well, again, as we've articulated on past calls, our executive management, David – David and Reiner absolutely have contracts that are driving us towards a minimum return on equity of 8.37%, but we're aiming above that. And there's also net premium written target hurdles that they need to meet. So over time, it's not going to happen today.

We're building new businesses. We're investing in our business. But in order to achieve those hurdles, we would have to get the combined ratios that would be in the lower 90s and that's absolutely part of the strategic vision of Global Indemnity..

Okay. Yes, it's in line with your Investor Day commentary. And this exited lines you now separate as a segment, losses for – loss for the last year was $13 million.

And what should we expect going forward? How long will this drag last? It seems like it's mostly short tail lines, right?.

Well, most of it is going to be behind us rather quickly. The biggest chunk that is in there from last year is related to the manufactured home and dwelling books. So, just a couple of comments on that. So again, on October 26th of last year, K2 acquired the rights to write that business.

And American Family, the business as it's being renewed, is either going on to American Family paper. Or if it is not, and they still have a need to use American reliable for some short period of time, it's 100% reinsured. Now again, what we did say is that we are retaining two of the states where we're still writing the business.

One is Louisiana, two is Florida, but we have placed both of those states into runoff. And by the time we get fully out to this – around this time next year, we'll largely be off of the book just about 100%. So – and again, the largest majority of the manufactured home and dwelling is no longer risk that's on our books.

The second thing that occurred is we also ceded unearned premium reserves at the end of November to the American Family Group. So again, the same business that K2 acquired on October 26, those corresponding UPR reserves in those states were ceded. We ceded approximately $34 million of UPR at the end of November.

So again, the net premium on that business will be very low in 2022. Lastly, on property brokerage, we have been downsizing it. We have made a strategic decision to not write business with location values of $10 million or more. So any policies that are left on that are in runoff mode.

And as I said, that will be a much smaller book on a going forward basis also. So we are – again, it's all part of the strategy to move to the 70% casualty, 30% property and we're taking the appropriate actions to get there and the actions that we've taken.

As we noted in our call, reduced our volatility and we expect that we'll be investing – we are investing in the businesses that will yield a higher return on investment..

I would just add one part about the casualty for properties. So when you exclude the business that was exited on a net earned premium basis, property comprised 39% and casualty was 61%. So we're already making a lot of progress towards that goal that we set out in 2021.

And we continue – especially as the new businesses kick in, we see that very much going towards the 70%..

That makes sense. So it looks like there won't be a significant impact even starting – even this year, right, from this exited line, significantly lower than what we have for 2021.

Is that the correct assumption?.

If – it should be. I mean you never – we can't make promises, but the actions that we've taken should translate into what you just said..

Yes. And probably the last questions I have, given the geopolitical situation, I assume you have no underwriting exposure to any of countries like Russia, Ukraine, but maybe there's something on the asset size.

In your invested assets, you mentioned that your – solid chunk of your equities, but maybe there is something to worry about in your investment portfolio, or maybe is there some indirect impact you're thinking about?.

Yes. We did not have any in the international exposure from the insurance side. So we're in very good shape there. And I'm also not aware of any investment exposure that we have..

Yes..

Okay..

Not high at this time..

All right. That's great.

And when are you filing your 10-K when should we expect your 10-K?.

Right now, we are aiming for the 16th..

16th. Okay. All right. There's I don't have any further questions. Thomas maybe if you want to provide a little more color on your new lines, which you launched in the first quarter.

Just I assume that maybe you you're being cautious in terms of loss picks on that lines and maybe purchasing additional reinsurance protection given those lines are new to use. So if you can provide any further information would be interesting..

Absolutely. So all three of those lines, we actually oversubscribed our reinsurance. And so all of those are in place with pretty much a consistent panel across the three product areas. And so as I mentioned earlier, we are ensuring that at 60%. We're taking 40% of those three lines to be conservative. And so the reinsurance is in place.

All the teams have built out their groups of underwriters. They're up and running their technology. And I would say most of the premium you are going to see will be in the first quarter. And so we'll report more from a results standpoint in the first quarter.

But it was great to see them all execute, get up and running, and the writing business effective the first quarter..

All right. Thank you..

Okay..

Sorry..

I should say to your other question we're also, as Tom mentioned, that we really see 2022 as we're building new businesses. And with that, we see that it's going to take some time. And so, we are being conservative and from our loss picks to how we're looking at the business, the impact on 2022.

But they really do start to make a difference when you look out in 2023 and then 2024 is really where you see those businesses making a significant contribution..

Great. Thank you very much..

Okay. Thank you..

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Stephen Ries for any closing comments..

Thank you. This concludes our 2021 earnings call. Thank you for participating. We look forward to speaking with you about our first quarter 2022 results..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..