Global Indemnity Group - Q1 2024

Executive Summary

• Q1 2024 delivered materially improved profitability: net income available to common shareholders rose to $11.3M ($0.82 diluted EPS) from $2.4M ($0.17) on a sharply better combined ratio (94.9% vs 101.0%), despite lower insurance revenues due to Non-Core runoff. Investment income rose 21% to $14.5M on higher book yields.
• Penn-America (core E&S) posted a 94.0% combined ratio (vs 101.2% in Q1’23), with property non-cat performance driving an 8.2 pt improvement in the current accident year loss ratio to 54.8%.
• Book value per share increased to $48.18 from $47.53 including a 40% higher quarterly dividend ($0.35) paid in Q1; Board subsequently approved another $0.35 distribution payable 6/28/24.
• Management reiterated long-term targets (10% premium growth, low-90s combined ratio, 36–37% expense ratio) and expects investment yield to continue rising as ~$700M of 2024 portfolio cash flows are reinvested at higher rates; noted ~$200M of excess capital and active consideration of buybacks/special dividends/acquisitions (James River discussions paused).

What Went Well and What Went Wrong

What Went Well

• Core underwriting inflection: Penn-America current accident year combined ratio improved to 94.0% (from 101.2%), driven by property non-cat improvement; property loss ratio fell to 50.1% (from 68.7%) as large fire losses abated.
  “I was extremely gratified to see a combined ratio of 94.0% for the Penn-America segment in the first quarter… driven by… a super quarter for property loss ratios.” — CEO.
• Investment income momentum: Net investment income up 21% to $14.5M; book yield rose to 4.3% (up 26 bps q/q), duration shortened to 1.06 years; ~$700M of 2024 cash flows (avg 4% yield) expected to be reinvested at ~5% if rates hold.
• Capital return and book value growth: BVPS rose to $48.18 (+2.1% including the $0.35 dividend); Q2 distribution of $0.35 approved (payable 6/28/24).

What Went Wrong

• Top-line contraction from runoff: Gross written premiums declined 24% to $93.5M, primarily due to Non-Core runoff; Penn-America GWP was roughly flat (-1.4%) with Programs down 26.7% (ex-terminated, -11.9%).
• Elevated expense ratio: Consolidated expense ratio increased to 39.6% (from 38.2%) as earned premium remains pressured by prior-year reductions; management expects gradual improvement but not at target until ~2026.
• Non-Core drag persists: Non-Core combined ratio of 105.5% produced a small underwriting loss; runoff expenses were “a bit high” as portfolios wind down.

Transcript

Operator (participant)

Thank you for standing by. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Global Indemnity Group first quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press Star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press the star 1 again. We will also be taking questions from the webcast. If you'd like to submit a question, please use the Q&A button located at the bottom right of your webcast screen. Thank you. I would now like to turn the call over to Steve Ries, Head of Investor Relations. Please go ahead.

Steve Ries (Head of Investor Relations)

Thank you, Kathleen. As a reminder, today's conference call is being recorded, as some 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 descriptions of the business environment in which we operate and 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.

Jay Brown (CEO)

Thank you, Steve. Good morning, and thank you for all for joining us for our first quarter, quarter call. I will first provide a few overview comments, and then our new Chief Financial Officer, Brian Riley, will review the financial highlights for our insurance operations. What a difference a year makes! 12 months ago, we were in the midst of a significant restructuring of our insurance activities. Our then current results were a mix of ongoing and exited businesses, making it difficult to gauge performance. To assist investors on how to assess our progress, we had reaffirmed a simple set of objectives consisting of 3 long-term metrics as guidelines for measuring the performance of our ongoing insurance operations: revenue growth, underwriting performance, and expense management. The metric goal for revenue growth was to achieve a long-term annual average for premium written of plus 10%.

For underwriting performance, we want to see a combined ratio in the low 90s, and then to achieve our desired underwriting performance, we need to have a 36%-37% expense ratio over time, given our current mix. As Brian will highlight, we have made substantial progress against these goals, and the comparison to first quarter results from a year ago demonstrates real value creation for our shareholders. In terms of revenues, most of our insurance divisions are tracking against long-term double-digit growth. We expect that the combination of Penn-America Wholesale Commercial, InsurTech, and Assumed Reinsurance will achieve this target by year-end. However, the expansion of our program division remains a work in progress and will lag behind a bit in 2024.

Looking at the underwriting performance, I was extremely gratified to see a combined ratio of 94.0% for the Penn-America segment in the first quarter. This performance was driven by a continuation of achievement of solid casualty loss ratios and a super quarter for property loss ratios. Offsetting this a bit was a higher than target expense ratio of 39.2%. While we have kept our internal costs in check from last year, after the dramatic drop we experienced in premium from 2022 to 2023, it will take another couple of years for us to start hitting our long-term targets for expense ratio.

This reflects a very conscious decision to maintain our Penn-America staff this year at 2023 levels after the substantial reduction from 2022, in order to continue to meet the service needs of our customers. We are also investing heavily in a full digital transformation of our existing technology infrastructure to stay competitive in the markets we serve. We do continue to achieve rate increases that are modestly in excess of our assessment of underlying inflation trends. This should allow us to maintain the consistent long-term loss ratio results we are both currently achieving and having experienced historically. We also continue to deliver outstanding investment returns following the repositioning of our investment portfolio to take advantage of the dramatic increase that has taken place in short-term interest rates....

Book yield should continue to increase modestly throughout the year, as roughly half of our existing investments will mature in the next twelve months. Overall, I was very pleased with the improved results we saw this quarter, and will now turn it over to Brian to provide a more detailed review of the numbers.

Brian Riley (CFO)

Thank you, Jay. Net income was $11.4 million, compared to $2.5 million in 2023. The combination of net income and a $3 million increase in market value of the fixed income portfolio; book value per share increased from $47.53 at year-end to 48.18 at March 31. Including dividends paid in 2024, return to shareholders was 2.1% for the first quarter of 2024. Dividends of $0.35 per share were paid during the quarter, an increase of 40% over the $0.25 per share paid quarterly since inception in 2018. This quarter, both underwriting and investment performance contributed to the improvement in net income. Starting with investments. Investment income increased 21% to $14.5 million a year ago.

Actions taken since early 2022 to sell longer-dated securities and shorten duration have translated into much higher current book yields. Cash flows of $22 million, plus 146 million of fixed income securities yielding 3.4% that matured during the quarter, were reinvested at an average yield of 5%. The current book yield on the fixed income portfolio is now 4.3%, an increase of 26 basis points in the last three months. Duration on the fixed income portfolio is 1.06 years at March, down from 1.15 at year-end. The average credit quality of the fixed income portfolio remains at double-A minus.

It is worth noting that the magnitude of the change in our fixed income portfolio in the last nine quarters, comparing the current yield of 4.3% and duration of 1.06 years. At December 31, 2022, book yield was 3.4%, with a duration of 1.7 years. At December 31, 2021, book yield was 2.2%, with a duration of 3.2 years. For the remainder of 2024, we expect investment portfolio will generate an additional $700 million of cash flow from investment income and maturities. For reference, the average book yield on the fixed income investments maturing in the remainder of 2024 is approximately 4%. If the current higher interest rate environment continues through year-end, our portfolio remains well positioned to further increase investment returns.

Now, let's move to underwriting performance. We had a very strong start to the year. The current accident year consolidated underwriting income was $5.3 million, compared to a loss of $600,000 in 2023. This was driven by a consolidated accident year combined ratio of 94.9, compared to 100.6 in 2023. The improvement in the current accident year underwriting income was due to strong performance in our core business, Penn-America. Penn-America's accident year underwriting income of $5.7 million was compared to a loss of $800,000 in 2023. As Jay noted, Penn-America's accident year combined ratio is 94, an improvement of 7.2 points from 101.2 in 2023.

The excellent overall accident year loss ratio of 54.8% was mainly due to the performance of our property business. The property loss ratio improved to 50.1%, compared to 68.7% in 2023. Non-catastrophe performance was the primary driver due to a decline in the number of large fire losses we experienced in 2023. The non-cat loss ratio improved to 41.9%, compared to 59.9% in 2023. The cat loss ratio improved slightly to 8.2%, compared to 8.8% in 2023. The casualty loss ratio of 58.6% remains in line with expectations. Unlike our Non-Core operations have a diminished effect on the overall performance. Our Non-Core operations net earned premiums dropped $7.5 million, compared to $49.5 million in 2023.

The drop in earned premium from 2023 is mainly from an assumed retrocession casualty, which was terminated at end of 2022. For 2024, the underwriting loss was only $400,000. The combined ratio was 105.5. The loss ratio was in line with expectations at 60.6, but runoff expenses remain a bit high as we wind down a number of smaller underwriting portfolios. Moving to calendar year underwriting income. Consolidated calendar year underwriting income was virtually identical to the accident year, with $5.3 million in 2024. This compares to a loss of $1.1 million in 2023. The impact of prior accident years changed by less than $1,000 in 2024. Book reserves remain solidly above our current actuarial indications.... Turning to insurance revenues.

Consolidated gross written premiums was $93.5 million in 2024, compared to 123 million in 2023. The majority of decrease is from our Runoff business and our Non-Core segment, which declined $28.1 million year-over-year. Penn-America's gross written premiums was $94 million in 2024, compared to 95.4 million in 2023. This decrease is in line with our plan due to programs terminated in 2023 that did not meet our long-term growth and underwriting expectations. Excluding these terminated programs, Penn-America's gross written premiums grew from $90.7 million in 2023 to $94 million in 2024, a 4% increase.

As for each of the divisions within Penn-America, first, Wholesale Commercial, which focuses on Main Street small business, grew 5% to $61.1 million, compared to $58.3 million in 2023. Rate and exposure increases were 10% in the first quarter. Overall, the short-term growth rate is in line with expectation. Underwriting actions in certain states to improve underwriting income has suppressed first quarter growth to 5%, but we expect to close to 10% for the full year. Second, InsurTech, which consists of Vacant Express and Collectibles, grew 17% to $12.5 million, compared to 10.7 million in 2023. Let me break down those two products. First, Vacant Express grew twenty-two percent to $8.9 million, driven by organic growth from existing agents and agency appointments.

New technical automation implemented in the third quarter of 2023 for our Vacant Dwelling products, including expansion of Monoline General Liability product, contributes to the growth in premium our agents are producing. Collectibles gross written premiums grew 6% to $3.6 million. Our Assumed Reinsurance book of business continues to grow at a nice pace, tracking with our plan to see significant growth in 2024. We expect at least three new treaties commencing in 2024. Programs, excluding the terminated programs I mentioned earlier, was $20.5 million, lower than 2023 by 1.4 million. New programs contributed $600,000 during the quarter. In closing, we are pleased with the start of 2024. Further, our outlook for the full year is very positive. Penn-America continues to show strong current accident year performance.

We believe premium pricing is meeting loss inflation. Discretionary capital continues to increase due to income and reduced capital needs for the runoff Non-Core business. This will support growth and other corporate opportunities. We expect continued increase in book yield on the fixed income portfolio, as the $737 million of cash flows from investment income and maturities, currently yielding 4%, will be invested at higher rates during the remainder of 2024. Thank you. We will now take your questions.

Operator (participant)

We will now begin the question-and-answer session. [Operator's Instructions]. Your first question comes from the line of Dan Baldini of Oberon. Please go ahead.

Dan Baldini (Managing Partner)

Hi, good morning. Thanks for taking my question. Say, the company's combined ratio has improved very nicely and so is the investment income, but the ROE remains sort of pedestrian, and I'm wondering what you can do to improve the ROE going forward? Thanks.

Jay Brown (CEO)

It's a good question. The biggest reason that our reported ROE is continues to be low, even at these good results, is the simple fact is that we're overcapitalized to a significant degree. We estimate we have approximately $200 million in excess capital available for other purposes. Our board continues to evaluate what the best alternatives are for that board. As noted in our press release, we did increase our dividend in the last quarter from 25% to 35%, a 40% increase, and we're going to continue to look at that throughout this year to determine what's the best best use of that cash on an ongoing basis.

Dan Baldini (Managing Partner)

Okay, thanks.

Operator (participant)

Okay, we have one comment in webcast from Nathan Schwartz. It says, "Please discuss GBLI interest in pursuing a transaction with James River Insurance.

Jay Brown (CEO)

Yeah, I've heard about that in terms of what I've read in the papers. We have had conversation with James River. Those conversations are on pause at this point. We may reexamine that later on if there's a continued interest on both parties' part to pursue something.

Operator (participant)

Thank you for that. And your next question comes from the line of Tom Kerr of Zacks Investment Research. Please go ahead.

Tom Kerr (Senior Research Analyst)

Good morning, guys. Can you go over the expense ratio issue again? I didn't understand it completely. If Penn-America continues to grow organically or sequentially, and programs decline, I'm not sure why it would take years to get down to your target 36% to 37% expense ratio. So maybe I'm missing something. Thanks.

Jay Brown (CEO)

No, you're, you're accurate. It depends on how much growth we have over the next 2 years, which will determine when that becomes earned premium. Because we're still in a decline in terms of earned premium as a company, as a result of the steep drop that we experienced in premiums written last year, and as that works through the system. So we're still cruising down a little bit in terms of earned premium. In terms of the dollars associated with expense ratio, most two-thirds of our expenses are basically set as a percentage of premium written based on commissions and other premium-related charges. So the big variable over time is our internal operating costs. For Penn-America, those currently run around $47 to 48 million a year. That's roughly where they were last year.

They will increase modestly in terms of staff, because staff makes up about two-thirds of that expense. So as we go forward, assuming we have a 3%-5% kind of change in salaries, we have to kind of overcome that with greater growth for that ratio to actually come down. We expect that that should be achieved by 2026, with progress shown throughout this year and into next year, hopefully marking that in terms of increments quarterly by quarterly.

Tom Kerr (Senior Research Analyst)

Okay, just to reiterate that last point, there is gonna be incremental improvement quarter.

Jay Brown (CEO)

Yeah

Tom Kerr (Senior Research Analyst)

Over quarter sequentially, but just not the target for a couple of years. Okay.

Jay Brown (CEO)

Right. We're gonna. The comparison for 2024 will be modestly higher for each of the quarters in 2023, but in terms of its actual percentage of earned premium, it should start going down as the year progresses.

Tom Kerr (Senior Research Analyst)

Got it. Okay, one more question. The last time we talked about a lot of problematic books out there. Anything in the horizon worth discussing? Any serious problematic programs out there that are nagging on you still?

Jay Brown (CEO)

No. At this point, we're pretty happy with the book of business. The reserve development, which we experienced last year, which was a result of exiting those businesses at the beginning of 2023, that effect has died down. We had very little volatility in our reserve book during this past quarter. We are experiencing a little bit of lingering effect in terms of growth opportunities, because when we take down a portion of our business, for example, New York Habitational, it takes down some of the agents' interest in giving us other business during that time period. So we saw our East Region, for example, is relatively flat year-over-year, whereas our West Region is up almost 20% during the same time period. So it has an effect, not necessarily on losses, but it does have a lingering effect on premium revenue.

Tom Kerr (Senior Research Analyst)

Great. That's all I have for now. Thanks.

Operator (participant)

Your next question comes from the line of Ross Haberman of RLH Investments. Please go ahead.

Ross Haberman (Research Analyst)

Good morning. Thank you for taking my call. I had two quick questions. Could you talk a little bit about your plans to put to work that $200 million of excess capital? One of your earlier questions talked about that James River potential deal. Could you talk about acquisitions in general? What do you think about them? Are you actively looking for them? And related to that, it looks like the stock, the number of shares actually went up in the quarter. In prior calls, you were talking about buying back shares. Are you currently doing that now? Thank you.

Jay Brown (CEO)

Let me take the latter question first in terms of share buyback. We are active in terms of entertaining reverse inquiries. During the past quarter, we did not have any in-market repurchase activity, partially because in the first quarter, we have a very narrow window, which is actually open. I think it's less than 10 days that we feel comfortable buying back shares. In terms of the disposition or what will happen eventually with the $200 million, obviously, we always want to keep a comfortable cushion for internal growth, but we're generating positive capital as at our current growth rate. So this is gonna be an ongoing question for us. We are active and have always been active in terms of looking at other potential acquisitions.

We, like most companies, find you have to be extremely careful when you make those decisions. We've had some success over the years, and we've had some sideways results from investments in terms of making acquisitions. There are opportunities out there. Our chairman, Mr. Fox of Fox Paine, has a 25-, 30-, 40-year record of investing in insurance operations, so a lot of people approach him from time to time with different ideas, and we continue to entertain those. But like everything, it's right now, we just don't have anything to announce that we're actively working on or looking at current time.

Ross Haberman (Research Analyst)

Just connected to that, vis-a-vis, when you're looking for new books of business or other companies, do you weigh that option as opposed to continuing to be maybe more aggressive in terms of buying back your own shares? Which is a better option? Thanks again for all your help.

Jay Brown (CEO)

That is a perfect question that we debate continuously at our board, in terms of what the, what the benefits of buying back shares are, in versus versus, potentially either putting the accelerator down and trying to grow organically faster or adding books of business. I think at this point in time, at this share price, obviously, any, any shares that we could buy back, anything resembling close to where it is right now, are very, very accretive, to book value and create value for, for all shareholders when that occurs. So we're gonna continue to try and explore that, over the short term for a portion of our excess capital.

Ross Haberman (Research Analyst)

Thank you.

Operator (participant)

Thank you. We have another question from the webcast from Michael O'Brien. It seems like a buyback program is a no-brainer at this levels. Why not be more proactive with a buyback?

Jay Brown (CEO)

I think I kind of answered that with the last question, so I, unless there's a follow on, I think we'll let it, let it ride with what I already answered.

Operator (participant)

Thank you. The next is from Andrew Vindigni. Any consideration for a special dividend, understanding that this may not be a tax-efficient, though?

Jay Brown (CEO)

The question is, is there any interest in doing a special dividend? One of the things that is unique about our structure as a publicly traded limited partnership, a majority of the dividends that we distribute are deemed as return of capital, given most investors and most shareholders basis. Unlike a lot of companies where it is not necessarily tax efficient to do special dividends, we look at that through a slightly different lens in evaluating whether that's a good thing to do. Again, that sits with the other uses of excess capital that's continuously evaluated by our board.

Operator (participant)

Thank you. And we have a follow-up question from Dan Baldini of Oberon. Please go ahead.

Dan Baldini (Managing Partner)

Thanks. So at some point, I can't remember, last year, you announced that you'd received interest in what? Inbound interest in Penn-America, and then you announced that you were reviewing alternatives for Penn-America and the entire company, I believe. And then a few months later, you announced that those discussions ended. And I imagine it's because any of this interest that came in was at a valuation that you didn't agree with. And now, in these James River stories that were out there, maybe they're wrong, mentioned that you were considering paying in part for James River with stock. And I'm just curious, are there any sort of circumstances under which you'd give away shares at the current valuation in an acquisition?

Jay Brown (CEO)

It takes a very unusual situation, given where our shares are currently trading, to use our shares in any kind of an acquisition. We have obviously, we have a large amount of excess capital, which would be the first thing we would tap before we consider any share issuance. Once in a while, you run across a transaction that, for a variety of reasons, you might want to use stock, but that's a pretty rare occurrence. As to any comments about a transaction that was at or was potentially discussed with James River, I can't offer any commentary.

Dan Baldini (Managing Partner)

Sure. Okay, thanks.

Operator (participant)

We have another follow-up question from Tom Kerr of Zacks Investment Research. Please go ahead.

Tom Kerr (Senior Research Analyst)

Yeah, just a quick one on the investment portfolio. I haven't heard you guys comment on the level of equity securities in a long time. Remains at low level, $17 million on a $1.3 billion portfolio. Any change in thinking on, on that, in increasing equity securities investments?

Jay Brown (CEO)

Our board has been playing. We played defense, as I think you know from our history two years ago, in making a decision to dramatically shorten our investment portfolio and to liquidate our then portion of equity securities. We are looking at what our long-term portfolio should look like as we go through this period of interest rates, which are starting to stabilize and perhaps eventually kind of come down a bit, or even maybe more likely, stay sideways. At that point, it becomes, behooves us to start making changes in our portfolio composition from what is essentially right now a 100% short duration fixed income portfolio.

Personally, from my perspective, it always makes sense to have a portion of your portfolio in equity securities, and that I would expect that you'll see that redeployment take place sometime in the next couple of years in our portfolio.

Dan Baldini (Managing Partner)

Great. Thanks for the answer.

Operator (participant)

[Operator's Instructions]. There are no further questions at this time. I will now turn the conference back over to Steve Ries for closing remarks.

Steve Ries (Head of Investor Relations)

Thank you, Kathleen, and thank you everybody for joining us for our first quarter 2024 call. If you have any additional questions, please reach out to me, and we look forward to talking to you after the second quarter.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.