Description

Global Indemnity (“GBLI”) is a fairly vanilla P&C insurance company which trades at the distressed valuation of 53% of tangible book value.  While results over the past several years have been fully uninspiring, there is nothing fundamentally broken at this company which prevents achieving a high single digit/low double-digit ROE.  This is not a distressed company. While they have taken some missteps and suffered some bad luck in recent years, Global Indemnity has a full “A” rated AM Best Financial Strength Rating and has the rare reserve development triangles which do not develop adversely over time.

It is not easy to access information about GBLI beyond their public filings.  The company has no investor relations, doesn’t speak at conferences, and has no analyst coverage.  They hold investor days some years, but not always. For a $400MM market cap company, mentioning GBLI draws blank stares even from dedicated small cap financial sector investors.  37% of the stock and a majority of voting power is held by the Chairman Saul Fox (personally and through his firm Fox Paine). My sense is that Fox is in this for the long haul and does not particularly care about the interim stock price except as a potential opportunity for capital management.  Between 2012-2017, GBLI repurchased over half of its outstanding shares. During this period GBLI stock traded around 70-80% of book value which is well above today’s multiples. GBLI is still significantly overcapitalized. On a trailing twelve-month basis, Net Premiums Written/Equity was approximately 0.8x and at their last investor day in September 2018 the company estimated that it held $200MM in excess capital or 54% of the current market cap.

The business underwrites in four segments: Commercial Specialty, Specialty Property, Farm/Ranch/Stable, and Reinsurance.  GBLI came public in 2003. In the pre-financial crisis period, ROEs ranged between 8-12%. Since that time the decline in investment yields has dragged on returns.  In 2009, the portfolio had a yield of 5.2% which declined to 1.9% by 2018. The combination of lower yields and an increasingly conservative underwriting posture drove ROEs down to around 5% by the 2013-2016 period.  The last several years saw several factors drag on results. Results in the acquired agricultural and specialty personal line segments were poor and are being restructured by the company. Then 2018 saw major losses from the California wildfires which elevated the Combined Ratio by 13 points.  In response, since 2018, GBLI has been reducing its exposure to California catastrophes.  

So where are we today?  After years of declining or flat net premium growth, underwriting has accelerated to 14% over the last twelve months.  Combined ratios over the last couple of quarters have been in a healthy 94-95% range. It should be noted that for a historically conservative underwriter like GBLI, current period results will show headwinds at times of accelerated premium growth as redundant reserves are booked today which bleed into earnings and book value over time.  As the company deploys its redundant capital and the results of its restructuring efforts in specialty personal + agriculture manifest themselves, there is no reason this company cannot trend towards a 10% ROE. This is hardly heroic performance but a result which should drive valuation at least to book value and a stock price double. The company may hold an investor day in early 2020 where they provide a view into their future plans and targets.  I would urge any current or potentially interested shareholders to communicate with GBLI on the positive merits of holding an investor event and generally improving their communications with the investment community. 

GBLI is admittedly not an exciting event driven story.  You have an OK company trading at a distressed valuation.  There are potential catalysts to close the gap. Maybe they return to their capital return agenda from several years ago which would obviously be massively accretive at half of book value.  Maybe they open up to the outside world and try to communicate their value proposition to the investment community. Or maybe they just deliver a decent return on equity and the stock valuation re-rerates.  From the starting point of half of book value for an A rated well-capitalized company, the risk-reward appears compelling from here.

APPENDIX : RESERVE TRIANGLES 

Catalyst

Time (I know, I know...)