GBLI: Global Indemnity reports 2nd quarter 2023 earnings which showed significant underwriting improvement.
NYSE:GBLI
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Global Indemnity Group (NYSE:GBLI) reported 2nd quarter 2023 financial and operating results on August 8th which showed improved underwriting results on a sequential basis. Net Earned Premiums of $129.2 million were slightly behind expectations due to a planned reduction in the Targeted Special E&S lines to eliminate unprofitable wholesale business.
In the 2nd quarter, Commercial Specialty gross written premiums and net written premiums decreased 9.2% and 7.8%, respectively compared to the prior year period. The decrease in gross written premiums and net written premiums was primarily driven by the non-renewal of a restaurant book of business as well as proactive moves taken to improve underwriting results by nonrenewing underperforming business. This was partially offset by increased pricing.
Package Specialty E&S, the company’s primary division within the Commercial Specialty segment increased gross written premiums (excluding terminated business) by 13.0% in the 2nd quarter when compared to the prior year period. This increase was primarily driven by driven by new agency appointments, strong rate increases as well as increased exposure growth in both property and general liability.
Targeted Specialty E&S, a division within the company’s Commercial Specialty segment, gross written premiums excluding terminated decreased by 28.4% in the quarter compared to the prior year period. This was driven by actions taken to improve underwriting results by not renewing underperforming business.
The other part of Continuing Lines is Reinsurance Operations where gross written premiums and net written premiums both decreased 68.1% in the 2nd quarter. The reduction in gross written premiums and net written premiums was primarily due to the non-renewal of a major casualty treaty in 2022.
For the Exited Lines segment, gross written premiums and net written premiums decreased 100.2% and 103.5%, respectively, during the 2nd quarter. The decrease in gross written premiums and net written premiums was primarily due to divesting the manufactured home & dwelling and farm businesses in 2022.
On a consolidated basis, underwriting income for the company was $4.3 million in the 2nd quarter compared to $2.1 million in the prior year period. Underwriting results in the quarter significantly improved from the 1st quarter of 2023. In particular, Commercial Specialty's accident year loss ratio, which was 62.9% for the 1st quarter of 2023 due to fire losses in vacant properties in the Los Angeles area, improved to 57.5% in the 2nd quarter of 2023.
The consolidated combined ratio was 97.0% for the 2nd quarter (Loss Ratio 60.5%, Expense Ratio 36.5%) which compared to 98.7% (Loss Ratio 59.5%, Expense Ratio 39.2%) for the 2nd quarter of 2022. The accident year combined ratio for Continuing Lines was 94.9% for the 2nd quarter (Loss Ratio 58.7%, Expense Ratio 36.2%) as compared to 96.8% (Loss Ratio 59.4%, Expense Ratio 37.4%) for the 2nd quarter of 2022. The calendar year combined ratio for Continuing Lines was 100.0% for the 2nd quarter of 2023, (Loss Ratio 63.6%, Expense Ratio 36.4%) as compared to 94.4% (Loss Ratio 56.8%, Expense Ratio 37.6%) for 2nd quarter of 2022. The calendar year combined ratio for Continuing Lines was impacted by loss reserve strengthening primarily driven by the restaurant book of business that was not renewed as well as strengthening related to other non-renewed business.
For the Continuing Lines business, the accident year casualty loss ratio improved by 0.2 points to 59.7% in 2023 from 59.9% in 2022 primarily due to lower claims frequency within the Commercial Specialty segment. The consolidated accident year casualty loss ratio increased by 0.4 points to 59.8% in 2023 from 59.4% in 2022 mainly due to higher claims severity and an increase in the expected loss ratio in Exited Lines.
For the Continuing Lines business, the accident year property loss ratio improved by 1.8 points to 56.3% in 2023 from 58.1% in 2022. The consolidated accident year property loss ratio improved by 4.3 points to 61.9% in 2023 from 66.2% in 2022. The improvement in the Continuing Lines and the Consolidated accident year property loss ratios is primarily due to lower non-catastrophe claims frequency.
The company provides a Non-GAAP adjusted operating income figure in order to provide an underlying metric for the health of the core Continuing Lines businesses. Adjusted operating income excludes exited lines underwriting losses, realized investment losses, as well as other extraordinary gains and losses. The 2nd quarter 2022 adjusted operating income was $6.9 million, or $0.50 per diluted share, which is a significant improvement from $4.2 million in adjusted operating income and $0.28 per diluted share in the prior year period.
Net investment income increased to $13.2 million in the 2nd quarter of 2023 which compares to $1.9 million in the 2nd quarter of 2022. The increase in net investment income was primarily due to the strategies undertaken by the company in April 2022 to take advantage of rising interest rates, which resulted in a 65% increase in book yield over time on the fixed income portfolio to 3.8% as of June 30, 2023 from 2.3% as of March 31, 2022. Average duration of these securities was shortened to 1.4 years at June 30, 2023 from 3.3 years as of March 31, 2022.
Approximately $900 million of cash flow, or roughly 70% of the fixed income portfolio, will be generated from maturities and investment income between June 30, 2023 and December 31, 2024, which positions the company to continue to increase book yield by investing maturities in higher yielding bonds. Some of this cash flow is being reinvested at rates above 5.0%. It’s possible that the total fixed income book yield could increase to the mid-4.0% range in 2024.
Book value per share was $46.03 at the end of the 2nd quarter, compared to $45.68 at the end of the 1st quarter of 2023 and $44.87 as of 12/31/2022. The increase was primarily due to consolidated net income of $9.2 million and share buybacks in the quarter totaling $5.6 million. Approximately 200,000 shares were repurchased at an average cost of $28.00 per share. Share buybacks for the 1st half of 2023 totaled $12.7 million.
In the 4th quarter of 2022, the company announced it would begin a stock repurchase program before the end of the year. Repurchases of up to $32 million (since increased to $135 million) of GBLI’s outstanding Common A Shares were authorized with an expiration of December 31, 2027. Share repurchases in the 2nd quarter of 2023 totaled $5.6 million.
On June 9th, 2023, the company announced multiple parties have indicated preliminary interest in exploring an acquisition of, or merger with Penn-America, Global Indemnity's insurance group, or an acquisition of, or merger with the company itself. The company is responding to certain of these preliminary indications of interest, but no further update or information was provided on the 2nd quarter 2023 earnings call.
We are increasing our full year 2023 EPS estimate to $2.44 due to improved underwriting results experienced in the 2nd quarter and a lower share count. This may prove to be conservative if the company’s combined ratio on its Continuing Lines continues to decline more rapidly than expected. The company is currently selling at 76.0% of book value based on June 30, 2023 shareholders’ equity. There are no changes to our valuation target of $60.00 at this time as we believe that in the long term, the company can trade at a small premium to future book value per share.
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