Global Indemnity Group, LLC (NYSE:GBLI) Q1 2023 Earnings Call Transcript May 14, 2023

Operator: Hello. Thank you for standing by. My name is Jeremy, and I will be your conference operator today. At this time, I would like to welcome everyone to the GBLI First Quarter 2023 Earnings Call. [Operator Instructions] I would now like to turn the call over to Stephen Ries. You may begin.

Stephen Ries: Thank you, Jeremy. 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 about 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 met 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. Jay Brown, Chief Executive Officer of Global Indemnity.

Jay Brown: Thank you, Steve. Good morning, and thank you, 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 McGeehan, 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 GBLI going forward. It’s been 6 months since I joined the company as CEO. And although a lot has transpired during that time period, 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, branch 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 bottom line and freed up a substantial amount of capital. Also at year-end 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 in most of our Commercial Specialty operations.

As a result of exiting businesses that comprise close to half of our top line premium written only 2 years ago, it was then necessary to significantly restructure our internal costs, 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 90s for our remaining businesses, consistent with the loss ratios we have achieved over the past 5 years. Our first quarter results are consistent with our goal to have underwriting expenses under 38% this year and then below 36% within 2 more years. As Tom will highlight, although we are on target with both our growth objectives and our expenses targets, we had a big miss 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 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. As we analyze the common characteristics of these losses, 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 [indiscernible] in our underwriting criteria and pricing to accommodate the demographic and lawless uncertainties that are present in certain U.S. metropolitan 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 a 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 1.5 years is now bearing fruit with investment income almost doubling in comparison to the first quarter a year ago. We remain convinced that our company is now positioned to continue to generate excess capital over the next couple of years. We bought back 250,000 shares in the first quarter and another 200,000 shares in April and have about $26 million remaining in our share buyback authorization we expect our financial ability to buy back shares will continue to expand as we meet our combined ratio targets over the next couple of years.

While I am generally satisfied with our progress in my first 6 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.

Tom McGeehan: 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 value of the fixed income portfolio and share repurchases. As Jay noted, during the first quarter, 250,000 shares were acquired. Share buybacks during the first quarter of 2023 increased book value per share by $0.35. Since the share repurchase program was initiated in the fourth quarter of 2022, the company has repurchased 1,357,000 shares from third parties for an aggregate amount of $34 million.

This amount includes 200,000 purchased in April 2023.As a result of these 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 in ‘23 compared to $6.6 million in 2022. Income from alternative investments, which is included in the $12 million in last year’s number, was $0.5 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.

Book yield on the portfolio increased from 2.3% at March 31, 2022 to 3.6% at March 31, 2023. At March 31, 2023, the duration of the fixed income portfolio was 1.5 years. Now in comparison of the March numbers to December 31, 2022, at December 31, 2022, book yield was 3.5% and duration was 1.7 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 and investment income is realized. Realized losses in the first quarter were $1.5 million. Approximately 2/3 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 in the first quarter of 2023.

On a consolidated basis, the underwriting loss was $1.1 million. As Jay noted, in the first quarter of 2023, fire losses were much higher than average, and this negatively impacted our underwriting results. Actions are being taken to address this issue. Our property loss ratio was high due to the fires. Our casualty loss ratio remains on target. Gross written premium in our continuing lines was $118.9 million compared to $143.8 million in 2022. Much of this decrease was planned. Reinsurance operations rose $23.4 million in ‘23 compared to $41 million in 2022. This decline is mainly due to non-renewal casualty treaty. Within Commercial Specialty, there was some business that was underperforming that was terminated. Package specialty E&S, which is comprised of Pan American business, the company’s primary division within its Commercial Specialty segment, increased gross written premiums by 13.5% to $58.3 million in ‘23 from $51.4 million 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, Package Specialty grew by 18%. Targeted Specialty E&S, which contains the remaining business lines in Commercial Specialty had $37.2 million of premium – of gross written premium in 2023 compared to $51.5 million in 2022. 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 $0.4 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 right-size 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 that become available are currently being invested at yields higher than 5%. And with that, thank you and we will now take your questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Tom Kerr. Tom, please go ahead.

Operator: Okay. Our next question comes from the line of Jeff Bronchick. Jeff, please go ahead.

Operator: Alright. Our next question comes from the line of Anthony Mottolese. Anthony, please go ahead.

Operator: Alright. Thank you. Our next question comes from the line of David Schiff. David, please go ahead.

Operator: Alright. Thank you. And our next question comes from the line of Tom Kerr. Tom, please go ahead.

Operator: Okay. And I see no further questions at this time. This concludes today’s conference call. You may all disconnect.