Global Indemnity Group - Earnings Call - Q4 2024

Executive Summary

• FY 2024 delivered materially better underwriting and earnings: diluted EPS rose to $3.12 (+70%), consolidated combined ratio improved to 95.6% from 99.7%, and Penn‑America’s accident-year combined ratio hit 94.4%.
• Sequentially, Q3 2024 showed improved profitability vs Q2 (combined ratio 94.3% vs 96.6%; EPS $0.92 vs $0.73), driven by lower loss and expense ratios.
• Management prioritized growth over buybacks; discretionary capital rose to $255M and duration is set to increase as reinvestment proceeds at higher yields; dividend maintained at $0.35 per quarter.
• A significant Q1 2025 event tied to Q4 themes: ~$15M loss from Los Angeles wildfires prompted reassessment of wildfire models and rate adequacy, a potential narrative catalyst for capital deployment, underwriting mix, and California exposure strategy.

What Went Well and What Went Wrong

• What Went Well

  • Underwriting improvement: consolidated combined ratio improved to 95.6% FY 2024 (loss ratio 56.6%, expense 39.0%); Penn‑America posted 94.4% accident-year combined ratio and $22.1M accident-year underwriting income.
  • Investment income momentum: +13% YoY to $62.4M; book yield 4.4% with AA‑ credit quality; reinvestments at ~5.2% and plan to extend duration to ~1.25 years by end Q1 2025.
  • Growth in focus segments: InsurTech +17% to $56.3M, Assumed Reinsurance +83% to $25.4M, Wholesale Commercial underlying policy premium +12% (incl. ~7% rate), supporting 12% Penn‑America GWP growth ex-terminated products.

• What Went Wrong

  • Elevated expense ratio: Penn‑America expense ratio at 38.1% (above long‑term 36–37% target); corporate expenses rose ~$5M on Project Manifest professional fees.
  • Runoff drag: Non‑Core operations still produced high combined ratios (current accident-year combined ratio 145.6%), though exposure is shrinking.
  • Catastrophe exposure surprise: ~$15M loss from LA wildfires substantially exceeded wildfire model tail expectations; management is reassessing model validity and rate needs in California.

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Global Indemnity Group 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 one on your telephone keypad. If you would like to withdraw your question, press star one again. We will also be taking questions from the webcast. If you would like to submit a question via the web, please use the Q&A button located at the bottom right side of your webcast screen. Thank you. I would now like to turn the call over to Evan Kasowitz. Please go ahead.

Evan Kasowitz (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," "believes," "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 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 (CEO)

Thank you, Evan. Good morning, and thank you all for joining us for the GBLI year-end update on our 2024 financial and operational results. Consistent with our past calls, I will first provide a few overview comments on the ongoing results in our Penn-America segment. Given the fact that year-end numbers are consistent with prior quarters, I will keep my comments to a minimum. Our Chief Financial Officer, Brian Riley, will expand on the 2024 financial highlights for both our insurance operations and the holding company. It gives me great pleasure to report that the GBLI team achieved solid insurance results consistent with the goals we had established for 2024. They continue building momentum to consistently hit the long-term metrics for revenue growth and underwriting profits that we had established to create value for our shareholders.

Penn-America insurance revenue momentum, as measured by gross premium, maintained the pattern we saw in the Q3, with total premium, excluding terminated programs, having finished up 12% through 2024. This was driven by the excellent 17% growth we achieved in InsurTech, coupled with 12% growth in our largest division, wholesale commercial. Our assumed reinsurance operation finished up 83% in its second full year of operations. We expect these segment-wide positive trends to continue in 2025. Turning to insurance underwriting performance, I am very delighted to report a full-year 94.4% underwriting result for the Penn-America segment. This result was modestly better than the 95.2% we recorded in 2023. The good results continue for both our casualty and property coverages. Importantly, our rate increases continue to modestly exceed our own estimates of inflation trends.

This will continue to be a key objective for 2025, given the continued uncertainty on the national inflation front. Also, our estimates for the past year results remain stable, with virtually no difference between calendar and accident year numbers. Our reserve margins remain solid, with modest improvement recorded throughout the year. The ongoing efforts to manage catastrophe exposures for our property segments continue to be reflected in our modest losses from catastrophes in 2024. Total catastrophe losses for the full year were down roughly 26% from 2023. I will note that we experienced $15 million in catastrophic losses from the recent Los Angeles wildfires. Given the magnitude of the LA fires, this result was modestly below our property market share in California, albeit still significant for a company of our size.

Although we expect an annual average of around $17 million from cat losses, given our current book of business, the sheer magnitude of this single loss exceeded the different models we have used for wildfires in the LA Basin. Like most industry players, we are rethinking the validity of our past severity model estimates for wildfire cat exposures. We continue to manage internal expenses a bit higher than our long-term targets to provide the best service to our customers. As noted in past quarters, we have maintained Penn-America staff numbers just slightly below 2023 as we grow our business at double-digit levels and keep expense growth at roughly half of that growth rate. Our Penn-America expense ratio is starting to trend in the right direction, with the 2024 ratio of 38.1%, but we still have significant work to do in order to get this down to 37% or lower.

As noted last quarter, a key factor in growing our business is attaining outstanding underwriting results, achieving competitive expense levels, and utilizing technology effectively across all dimensions. We have just completed the first full year of a multi-year effort to transform our technology platforms, transactions, and information software and data storage. These investments are well underway, with our transition to the cloud about 75% completed, with the remaining migration to be completed in 2025. As I mentioned last quarter, the first transactional application went live in September, and we are now processing all aspects of our wholesale commercial excess liability policies in the new technology environment. We recently added similar capabilities for special events in wholesale commercial, and are on schedule to add transaction processing for all the remaining products for wholesale commercial this year.

An additional module is in development, which is focused on our agents, underwriters, and operations staff. They will receive an integrated underwriting workstation in the next few months to improve the time to handle referral business and service for our wholesale commercial agents. As a follow-up to my comments from last quarter, the decision to focus on the underwriting areas where we can excel has begun to pay dividends. We completed a legal and operational transformation that was announced in January, labeled Project Manifest. One of the main objectives of this project was to enhance our ability to attract additional talent to complement our existing teams. These efforts will provide the expertise needed to accelerate our ability to use our growing excess capital in order to expand our product offerings for both existing and new customers.

I am very, very pleased that we kicked off this talent expansion with the hiring of Praveen Reddy to head up Penn-American Underwriters LLC, which is comprised of all of our existing underwriting and service teams. Praveen joined us last week and has begun his efforts to rapidly expand our current product offerings. I am thankful that we have the support of the full board and Fox Paine as our financial advisor to effect these structural changes, which I personally believe will yield significant future results for our company. Equally important, I remain blessed to benefit from the superb efforts of all the managers and staff at Global. We are all looking forward to 2025 and beyond as we enhance and implement our tactical and strategic plans. Brian.

Brian Riley (CFO)

Thank you, Jay. My commentary will focus on full-year results. Of course, we can answer any questions you may have on the Q4 numbers. Net income was $43.2 million compared to $25.4 million in 2023. The combination of net income and a $12 million increase in market value of the fixed income portfolio, book value per share increased from $47.53 at year-end in 2023 to $49.98 at December 31st. Including dividends paid in 2024 of $1.40 per share, return to shareholders was 8.1% for 2024. For 2024, both underwriting income and investment forms again contributed to the improvement in net income. Starting with investments, investment income increased 13% to $62.4 million from a year ago. Actions taken since early 2022 to sell longer-dated securities and short-duration have translated into much higher current book yields.

Cash flows and maturities of fixed income securities of $1.1 billion, yielding 4.36%, were reinvested at an average yield of 4.87%. Current book yield on the fixed income portfolio is now 4.4%, with a duration of 0.8 years at December 31, 2024. Comparatively, at December 31, 2023, book yield was 4%, with a duration of 1.1 years. At the end of December 2022, book yield was 3.5%, with a duration of 1.7 years. At December 31, 2021, book yield was 2.2%, with a duration of 3.2 years. The average credit quality of the fixed income portfolio remains at AA-minus. As a result of the low duration, we have $1 billion of investments maturing in 2025. We expect that a significant amount of those maturities to be reinvested on longer-matured, ensuring fixed income investments to improve returns.

Through February 2025, approximately $320 million of the portfolio was reinvested at 5.2%, consisting of two-thirds in high-quality corporates and structured securities. We expect that this strategy will increase duration to about 1.25 years by the end of the Q1 of 2025. Now, let's move to underwriting performance for 2024. We continue to see good results, as the current accident year consolidated underwriting income was $18.8 million compared to $14.3 million in 2023. This was driven by a consolidated accident year combined ratio of 95.4% in 2024 compared to 97.3% in 2023. The improvement in the current accident year underwriting income is due to the strong performance of our core business, Penn-America. Penn-America's accident year underwriting income was $22.1 million in 2024 compared to $18.5 million in 2023. As Jay noted, Penn-America's accident year combined ratio improved to 94.4% in 2024 compared to 95.2% in 2023.

The accident year loss ratio of 56.4 was a point better than the 57.4 in 2023. The property loss ratio closed the year at 53.9 compared to 53.4 in 2023. Non-cat loss ratio remains strong. We posted a 46.3 in 2024 and a 43.6 in 2023. Cat loss ratio improved to 7.6 in 2024 compared to 9.8% in 2023. Overall, cat losses declined to $12.7 million compared to $13.8 million in 2023. The casualty loss ratio is 58.4 in 2024 compared to 59.9 in 2023. Unlike last year, our non-core operations have a diminished effect on our overall performance. Our non-core operations net earned premium has dropped to $7.2 million compared to $118.8 million in 2023, mainly from an assumed retrocession casualty treaty, which we did not receive in 2022.

Further, the runoff of our exited specialty property business resulted in no catastrophe losses in 2024 compared to $3.4 million last year. The current accident year underwriting loss was $3.3 million for 2024 compared to $4.2 million in 2023. The combined ratio was 145.6. The loss ratio was in line with expectations at 4.6, but runoff expenses remain a bit high as we wind down the number of the smaller underwriting portfolios. As for the calendar year underwriting income, consolidated calendar year underwriting income was $17.8 million compared to $3 million in 2023. Looking at prior accident year losses, book reserves remain solidly above our current actuarial indications. 2024 loss and LAE related to prior accident years was only a modest increase of $72,000. Turning to premiums, consolidated gross premiums was $389.8 million in 2024 compared to $416.4 million in 2023.

This decrease is entirely due to the runoff business of our non-core segment, which declined $57 million year-over-year, offset partially by the growth of Penn-America. Penn-America's gross written premium increased 8% to $400 million compared to $369.7 million in 2023. As Jay noted, excluding terminated products, Penn-America's gross written premiums grew from $352.4 million in 2023 to $395.1 million in 2024, a 12% increase. Let me add a little color on each of those divisions. Wholesale commercial, which focuses on our Main Street small business, grew 6% to $248.6 million compared to $234.9 million in 2023. Excluding premium audit in these calendar year numbers, the underlying policy year premium trends are best indicator of growth, which is 12%, which includes rate increases of 7%. InsurTech, specialty, which consists of VacantExpress and Collectibles, grew 17% to $56.3 million in 2024 compared to $48.3 million in 2023.

Let me break down those two products a bit. One for VacantExpress grew 24% to $40.5 million, driven by organic growth from existing agents and agency appointments. New technical automation implemented in the Q3 of 2023 for our vacant dwelling products, including the expansion of monoline general liability products, contributed to the growth in premium our agents are producing. Collectibles' gross written premium of $15.8 million was slightly higher than 2023 by 2%. We've implemented underwriting action on catastrophe fund risk that has curtailed growth a bit, but is expected to improve overall profitability. Our assumed reinsurance business continues to grow at a nice pace. We signed on eight new treaties in 2024. Gross written premiums grew to $25.4 million compared to $13.9 million in 2023. Specialty products, excluding terminated products mentioned earlier, were $64.7 million compared to $55.3 million in 2023.

We signed on two new products in 2024 that contributed $1 million during the year. We expect to have four new products signed on over the next 6-12 months. In closing, we are pleased with the 2024 results. Further, despite the impact of the Q1 wildfires that Jay mentioned, our outlook for 2025 is very positive. We continue to expect revenue growth of 10% from Penn-America. Further, we expect to see continued improvement in our non-catastrophe accident year loss ratios. Book reserves remain solidly above current actuarial locations. We believe premium pricing is continuing to track with loss inflation.

Discretionary capital, which is considered the amount of consolidated equity in excess of that amount required to maintain the strongest levels with our rating agencies, increased to $255 million at December 31, 2024, compared to $200 million at December 31, 2023, due to growth in equity and the reduced capital needed to run off the non-core business. As Jay noted earlier, this will support the efforts to invest in the growth of Penn-America Underwriters. Lastly, the portfolio is well-positioned to invest in longer-term duration maturities at higher yields. Thank you. We'll now take your questions.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. If you would like to submit a question via the web, please use the Q&A button located at the bottom right side of your webcast screen. Your first question comes from the line of Tom Kerr with Zacks Small Cap Research. Please go ahead.

Tom Kerr (Analyst)

Good morning, guys. Real quick, on the California fires, was that just the underwriting type issues, or have you guys been trying to get rate increases and deal with that issue?

Jay Brown (CEO)

We've had an outstanding rate increase for our VacantExpress, probably for a year plus at this point in time. Like most carriers, it's just stalled completely in the regulatory environment. Otherwise, it was a sizable loss for us, but involved a very few number of properties. I think it was less than 10 properties overall were involved in the fire.

Tom Kerr (Analyst)

Okay, great. Can you provide a little more color on the reinsurance segment and that growth in that, and what is the plans? I mean, could that continue its strong growth in 2025?

Jay Brown (CEO)

Yeah. Our growth there is, if you recall, two years ago, when we cut back dramatically when I first arrived at the company. Obviously, our view at that point in time with the reduced volume we were doing in other sectors that we had a lot of capacity available. We had had a history of doing some reinsurance, but we decided over the near term, being two years ago and a couple of years forward, that the best use of our internal capital was to develop some existing specialty product relationships into assumed reinsurance. So we're up to, Brian, how many?

Brian Riley (CFO)

16.

Jay Brown (CEO)

16 treaties at this point in time, roughly $45 million in force, and we expect that we're going to have a nice increase in 2025 and 2026. At that point, we'll be looking at our other lines of business and allocation of capital across our businesses to decide if we want to grow it much beyond that.

Tom Kerr (Analyst)

Got it. Two more quick ones from me. On the Project Manifest, have you seen any benefits yet on the destacking of the organization in terms of the ability to move capital between organizations? Has that kind of started yet?

Brian Riley (CFO)

Yeah. We picked up, net of dividends to the holding company, about $50 million. Our statutory surplus is right around $500 million. As we get above that, that'll give us more capacity in the assumed reinsurance market.

Tom Kerr (Analyst)

Got it. Last one, I'll ask the standard share buyback question. With $255 million in discretionary capital, any portion of that could be used to buy back the stock at a discount to book value?

Jay Brown (CEO)

Of course, could be used to buy back stock at a discount. Right now, the board feels more enthusiastic about our prospects for adding additional products and different types of underwriting into our company through the Penn-America. Our decision to hire Praveen is very much focused on this, and we expect that we can get better returns on growing our insurance business in the short term than just buying back stock.

Tom Kerr (Analyst)

Got it. All right. I'll jump back in with Keith. Thank you.

Operator (participant)

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

Ross Haberman (Analyst)

Good morning, gentlemen. Thanks for taking the call. I have a quick question. Could you go back to California? Could you tell us what your total exposure is there? Is it on the direct commercial side, or is it mostly on the reinsurance side? Thank you.

Jay Brown (CEO)

Our total exposure in California is about six basis points of the total property market. I don't have it at my fingertips exactly how much the premium was. It was all on our direct book. It was not on any assumed reinsurance.

Ross Haberman (Analyst)

The $15 million could that be a bigger number as time goes on, or is that your best guess, at least as of today?

Jay Brown (CEO)

We paid over half the losses at this point. Because of the small number, as I said, it's less than 10 losses, 10 individual properties that were involved. We're pretty confident the number is not going to move too much at this point.

Ross Haberman (Analyst)

Okay. Your total fire or wildfire exposure, which you said you're reassessing, what is that number today?

Jay Brown (CEO)

It depends on the frequency and the location of loss. We have wildfire exposure in California and other states. My comment there was really focused on the fact that we use catastrophe models to estimate our exposure and manage how much we'll do in particular areas. One of the ways those models work is to assess the frequency of a cat loss of a particular size. We typically manage to a 1 in 250 or a 1 in 500 kind of level as a maximum that we expect from a loss. This one went almost double that in terms against what the model estimated. What I'm saying is that we're like a lot of people wondering at the tail of the individual models that we're using, are they that inaccurate? Why are they off that much?

Now, this was an unusual fire, but it is something that we expect in California. We have different zones that we have fire exposure. One of the two fires was in a more exposed area. That was the Eaton fire. We actually had no losses in the Eaton location. Pasadena, which was slightly better in terms of the rating and expected a less frequency of loss, actually turned out for us to be where all of the properties were burned in that particular situation. It is a modeling question for us. We are constantly trying to improve our models. This one came as somewhat of a surprise, but we have all seen an escalation in the size of cat losses. In comparison, if we go back for the prior four years, there were cat losses, wildfire losses.

In each of the four years, we had no wildfire losses at all. We were pretty comfortable with the way we're managing that exposure. Again, the models for this type of loss don't seem to work very well.

Ross Haberman (Analyst)

Basically, you've got to reassess it and rejigger, I guess, the assumptions there?

Jay Brown (CEO)

Yeah. We're looking at it. We're trying to—there's a couple of minor adjustments that we're making very quickly in terms of what we would do in a zone three versus a zone four or a five. We're trying to say maybe we have to move that out a little bit to contain that exposure. Again, this size loss is not disproportionate for a company our size. I mean, it's kind of the—if you're going to write any property business, you're going to have some cat exposures. For us, it always hurts more when it comes in the Q3. Over the course of the year, we typically expect, as I mentioned, something like $16 million or $17 million in cat losses. Some years it's more, some years it's less. That's what our current book would expect over time to see in a normal year.

Ross Haberman (Analyst)

Overall, just a follow-up question. Overall, given what happened in California, what kind of rate increases going forward do you expect in that state or in that general area, given what happened?

Jay Brown (CEO)

What we expect and what we get might be two different things. I would say that we need at least 50% on the type of business that was affected by this particular wildfire, and perhaps more depending on the types of individual exposures. California has been tough on rates, and it's a real obstacle, and they're creating a real problem for themselves in terms of not allowing carriers to get an adequate rate, which makes it much harder for people to obtain coverage. That's obviously not the goal of the insurance industry. We want to provide coverage for every possible exposure that we feel we can rate appropriately.

Ross Haberman (Analyst)

I guess if you can't get an appropriately risked rate, whether it's 50% as you hope to, do you say hypothetically, if you can only get 20% or 25%, do you say it's not worth it to us? It's not worth the risk? We're just not going to write there anymore.

Jay Brown (CEO)

Typically, that'll be a decision that we face selectively over time. We try and manage it in line with what our customers are trying to achieve, meaning our agent partners. The reality is we are a for-profit business. We're very, very focused on making good returns for our shareholders. If we can't make it in California selling cat-exposed business, we'll find someplace else in the United States to sell more business.

Ross Haberman (Analyst)

Just one last question. You brought in this new gentleman to expand your lines of business. Do you have a rough idea what kind of lines is he sort of going to be focused on yet?

Jay Brown (CEO)

Stay tuned.

Ross Haberman (Analyst)

Okay.

Moderator (participant)

Your next question comes from the line of Andrew Vindigni. That's from the web. Is there room to reduce the expense ratio without compromising underwriting quality? Any uses for excess capital may be a special dividend?

Jay Brown (CEO)

We do not currently plan any special dividends. In terms of our expense ratio, there is room. We expect that as we run off the remaining terminated business, there will be a little bit of pickup in terms of that area not needing expenses. The big lift for us in terms of where we are, given that we were $250 million higher a couple of years ago, is really growing back to that size over the next couple of years and bringing the expense ratio down another point, point and a half from where it currently exists. The expense ratio is somewhat misleading sometimes to look at. You see 38% and kind of go, "Wow, that is a big number." You have to realize that less than 12% or 13% of that is our internal expenses. The remainder is commissions we pay our agents, licensing fees, etc.

The actual cost that we're dealing with out of that 38 is roughly 12 or 13% of that total. Not percent, but portion of. So about a third of the expense is something that we're focused on managing down a point and a point and a half in the next couple of years.

Moderator (participant)

Your next question comes from Justin Saunders via web. Anything abnormal in the Q4's corporate and other operating expenses wraps to $7 million for the Q?

Brian Riley (CFO)

Yeah. Yeah. For the year, corporate expenses are up $5 million. Professional fees related to Project Manifest and implementation drove most of that.

Moderator (participant)

Before going to the next question, again, if you would like to ask a question, press star one on your telephone keypad or use the Q&A button located at the bottom right side of your web screen. Your next question comes from the line of Joel Straka via web. Regarding Project Manifest, GBLI has tried growth strategies in the past and failed. You were brought in to map those out. Can you explain why a growth strategy will work this time?

Jay Brown (CEO)

Sure. One is our new structure allows us to bring in additional underwriting teams, coupled with the technology investment we're making. Our growth structure that we tried and attempted two or three years ago, our biggest problem was the underwriting teams were brought in and were operating in essentially a manual environment with no technology support. That was a mistake on our part. We talked about it at the time, and it's certainly not a mistake we're going to make going forward. This time around, we feel much more comfortable that our technology investments are creating a platform that will allow a variety of products we don't currently sell to be offered to existing and new agency partners.

The other thing to, I guess, kind of reflect on is we made a very clear decision to bring in a particular individual with a lot of experience with products that we do not currently offer. We are looking to expand given his knowledge and contacts in the industry, some of which will be built internally, some of which will be by bringing in additional people, and finally, in some cases, by actually buying certain types of operations from other carriers. It is always hard to say if you were not successful in the past, why do you think you are going to be successful this time?

I would tell you that based on my last two and a half years here, the team and the board, and particularly Fox Paine, have focused very carefully about a comprehensive plan to bring this out where we can grow at a greater rate than we've been able to grow over the most recent past. I think time will tell if we're successful at that. I think now that we have a very stable, profitable underwriting base in place, we do not have any major decisions to make about staffing in the short term in terms of having too much. Having approximately 15 months behind us in a three-year technology spend, I feel very, very personally confident that this is going to be a successful strategy for Global to pursue.

Operator (participant)

I will now turn the call back over to Evan Kasowitz for closing remarks.

Evan Kasowitz (Head of Investor Relations)

Thank you. This concludes our 2024 earnings call. We look forward to speaking with you about our Q1 2025 results.

Operator (participant)

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