By Thomas Kerr, CFA
NYSE:GBLI
READ THE FULL GBLI RESEARCH REPORT
Global Indemnity Group (NYSE:GBLI) reported 3rd quarter 2024 financial and operating results with net income and the combined ratio coming better than our expectations. Underwriting income was $5.8 million in the 3rd quarter compared to $3.5 million in the 2nd quarter and $0.7 million in the prior year period. Net income was $12.7 million, or $0.92 per diluted share compared to $10.0 million and EPS of $0.73 in the 2nd quarter and $7.6 million and $0.55 per share in the prior year period.
In the company’s core operating subsidiary, Penn-America, gross written premiums in aggregate for Wholesale Commercial, InsurTech, and Assumed Reinsurance business grew by 14.0% in the first nine months of 2024. Gross written premiums for the Specialty Products line decreased 16.0% in the 1st nine months of 2024 as a result of rate and underwriting actions taken to improve profitability in late 2022. We expect this segment to stabilize in 2025 and possibly return to growth in 2026.
Penn-America’s accident year underwriting income was $7.7 million in the 3rd quarter compared to $3.4 million in the 3 rd quarter of 2023. Penn-America’s loss ratio was 54.7% for the quarter which was an improvement from 57.8% for the same period in 2023.
Net investment income increased 16.2% in the quarter to $16.5 million compared to $14.2 million in the prior year period as a result of strategies employed in late 2022 to take advantage of the rising interest rate environment. Book yield on the investment portfolio increased to 4.6% from 4.0% at the end of 2023.
The average duration of these securities was shortened to 0.8 years as of 9/30/24 compared to 1.1 years on December 31, 2023. Approximately $480 million of cash flow will be generated from maturities and investment income for the rest of 2024. In 2025, $800 million to $1 billion of cash flow may be generated from maturing bonds which can be invested at higher rates. Management indicated that the bonds for the first nine months of 2024 were reinvested at approximately 5.1% and the current book yield is 4.6%
Annualized return on equity (ROE), including unrealized gains on fixed-income securities included in stockholders' equity, was 9.8% so far in 2024 compared to 5.2% in 2023. Annualized investment return was 6.1% for the first nine months of 2024.
Segment Review
During the 4th quarter of 2023, the company re-evaluated its segments and determined that the business should be managed through two reportable segments: Penn-America and Non-Core Operations. The Penn-America segment comprises the company’s core products which include Wholesale Commercial, InsurTech, Assumed Reinsurance and Specialty Programs. The Non-Core Operations segment contains lines of business that have been de-emphasized or are no longer being written.
For the nine months of 2024, Penn-America gross written premiums for the Wholesale Commercial, InsurTech, and Assumed Reinsurance businesses increased 12.0%. This growth was driven by organic agency growth and price increases. Gross written premiums for Specialty Products decreased 16.0%. Specialty Products is undergoing pricing and product line adjustments to position it for growth next year. Penn-America’s total gross written premiums increased 7.0% reflecting the large decline in Specialty Products. Management indicated that the reinsurance business is an attractive market currently and may grow 30%-40% annually over the next 3-4 years.
In the Non-Core Operations segment, gross written premiums declined to ($3.9) million in the first nine months of 2024 from $54.6 million in the prior year period. The decrease in gross written premiums was primarily due to selling the manufactured home & dwelling and farm businesses and the non-renewal of a casualty reinsurance treaty. We expect a small amount of earned premiums from this segment in 2025 and none in 2026.
Combined Ratios
The consolidated combined ratio was 95.2% for the first nine months of 2024 (Loss Ratio 56.0% and Expense Ratio 39.2%) as compared to 98.9% (Loss Ratio 60.7% and Expense Ratio 38.5%) for the prior year period. The improvement is primarily due to improved performance in non-catastrophe related business. The company’s catastrophe losses declined 35% to $10.3 million in 2024 from $15.8 million in 2023. 2024 losses include $1.5 million related to Hurricane Helene.
In the Penn-America segment, the accident year combined ratio was 93.9% as compared to 100.9% for the prior year period. In the Non-Core Operations segment, the calendar year combined ratio was 100.9% for the first nine months of 2024 compared to 95.4% in the prior year period. The expense ratio at Penn-America remains elevated as the company made a conscious decision not to reduce staff levels after the premium reductions since 2022 in order to maintain high levels of customer service. It is the company’s goal to reduce the Penn-America expense ratio to the 36%-37% range over time.
Valuation and Estimates
GBLI book value per share increased to $49.88 as of September 30, 2024. On September 19, 2024, the Board of Directors approved a dividend of $0.35 per common share which was paid on October 7, 2024. The current dividend yield is approximately 4.06% .
Our 2024 total revenue estimate is adjusted to $447.1 million which includes $381.1 million in Net Earned Premiums and $64.3 million in Investment Income. Our 2024 EPS estimate is adjusted to $3.25. As the consolidated combined expense ratio continues to drift down, we believe EPS can increase to approximately $3.48 in 2025.
Management stated its long-term financial goals which are:
1) Grow the overall business at a rate of 10% or higher,
2) Achieve a combined ratio in the low 90’s,
3) Manage the expense ratio to a competitive level of 36%-37%.
GBLI stock is currently selling at 69.3% of book value based on September 30, 2024 shareholders’ equity. We separate our price target into near-term and long-term objectives. Our near-term target is $50.00 which assumes GBLI stock will trade near book value per share. We maintain our long-term price target of $55.00 per share based on the stock selling at a small premium to future book value per share.
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