Global Indemnity Group, LLC 10-Q

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes of the Company included elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to the Company’s plans and strategy, constitutes forward-looking statements that involve risks and uncertainties. Please see "Cautionary Note Regarding Forward-Looking Statements" at the end of this Item 2 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein. For more information regarding the Company’s business and operations, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Recent Developments Stock Repurchase From April 1, 2023 through May 1, 2023, an additional 200,000 shares with an average cost of $28.00 per share were repurchased as part of the share repurchase program. Including these purchases, a total of 1,357,082 shares with average purchase price of $25.05 per share were repurchased under the share repurchase program that was initially authorized on October 21, 2022. Distributions The Board of Directors approved a distribution payment of $0.25 per common share to all shareholders of record on the close of business on March 24, 2023. Distributions paid to common shareholders were $3.9 million during the quarter ended March 31, 2023. In addition, distributions of $0.1 million were paid to Global Indemnity Group, LLC’s preferred shareholder during the quarter ended March 31, 2023. Overview The Company operates and manages its business through three business segments: Commercial Specialty, Reinsurance Operations, and Exited Lines. The Company’s Commercial Specialty products are distributed through approximately 365 wholesale general agent and wholesale broker offices. The Company’s wholesale general agents have limited quoting and binding authority. Commercial Specialty offers specialty property and casualty products designed for GBLI's Wholesale Commercial and InsurTech product offerings. These product lines are offered primarily in the excess and surplus lines marketplace. The Company’s Reinsurance Operations provides reinsurance and insurance solutions through brokers and primary writers including insurance and reinsurance companies. It uses its capital capacity to write niche and casualty-focused treaties and business which meet the Company’s risk tolerance and return thresholds. To support future growth in the Company's Commercial Specialty segment and provide capital for business initiatives including share repurchases, a decision was made to reduce writings in its Reinsurance Operations. The Company anticipates that its Reinsurance Operations will comprise a smaller percentage of the Company's overall business prospectively. The Company’s Exited Lines segment represents lines of business that are no longer being written or are in runoff. Exited Lines includes specialty personal lines and property and casualty products such as manufactured home, dwelling, motorcycle, watercraft, certain homeowners business, property brokerage, property and catastrophe reinsurance treaties, several smaller casualty lines, and the farm, ranch and equine business. These insurance products were distributed through wholesale general agents, wholesale brokers, and retail agents. The Company derives its revenues primarily from premiums paid on insurance policies that it writes and from income generated by its investment portfolio, net of fees paid for investment management services. The amount of insurance premiums that the Company receives is a function of the amount and type of policies it writes, as well as prevailing market prices. 30 The Company’s expenses include losses and loss adjustment expenses, acquisition costs and other underwriting expenses, corporate and other operating expenses, interest, investment expenses, and income taxes. Losses and loss adjustment expenses are estimated by management and reflect the Company’s best estimate of ultimate losses and costs arising during the reporting period and revisions of prior period estimates. The Company records its best estimate of losses and loss adjustment expenses considering both internal and external actuarial analyses of the estimated losses the Company expects to incur on the insurance policies it writes. The ultimate losses and loss adjustment expenses will depend on the actual costs to resolve claims. Acquisition costs consist principally of commissions and premium taxes that are typically a percentage of the premiums on the insurance policies the Company writes, net of ceding commissions earned from reinsurers. Other underwriting expenses consist primarily of personnel expenses and general operating expenses related to underwriting activities. Corporate and other operating expenses are comprised primarily of outside legal fees, other professional and accounting fees, directors’ fees, management fees & advisory fees, and salaries and benefits for company personnel whose services relate to the support of corporate activities . Interest expense is primarily comprised of amounts due on outstanding debt. Critical Accounting Estimates and Policies The Company’s consolidated financial statements are prepared in conformity with GAAP, which require it to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions. The most critical accounting policies involve significant estimates and include those used in determining the liability for unpaid losses and loss adjustment expenses, recoverability of reinsurance receivables, investments, fair value measurements, goodwill and intangible assets, deferred acquisition costs, and taxation. For a detailed discussion on each of these policies, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes to any of these policies or underlying methodologies during the current year. 31 Results of Operations The following table summarizes the Company’s results for the quarters ended March 31, 2023 and 2022: Quarters Ended March 31, % (Dollars in thousands) 2023 2022 Change Gross written premiums $ 122,985 $ 190,983 (35.6 %) Net written premiums $ 115,861 $ 159,482 (27.4 %) Net earned premiums $ 140,072 $ 148,823 (5.9 %) Other income 335 439 (23.7 %) Total revenues 140,407 149,262 (5.9 %) Losses and expenses: Net losses and loss adjustment expenses 88,001 84,695 3.9 % Acquisition costs and other underwriting expenses 53,478 56,692 (5.7 %) Underwriting income (loss) (1,072 ) 7,875 (113.6 %) Net investment income 12,008 6,592 82.2 % Net realized investment losses (1,520 ) (25,385 ) (94.0 %) Other income (loss) 19 (13 ) NM Corporate and other operating expenses (6,368 ) (4,660 ) 36.7 % Interest expense — (2,595 ) (100.0 %) Income (loss) before income taxes 3,067 (18,186 ) (116.9 %) Income tax expense (benefit) 573 (3,413 ) (116.8 %) Net income (loss) $ 2,494 $ (14,773 ) (116.9 %) Underwriting Ratios: Loss ratio (1) : 62.8 % 56.9 % Expense ratio (2) 38.2 % 38.1 % Combined ratio (3) 101.0 % 95.0 % NM – not meaningful (1) The loss ratio is a GAAP financial measure that is generally viewed in the insurance industry as an indicator of underwriting profitability and is calculated by dividing net losses and loss adjustment expenses by net earned premiums. (2) The expense ratio is a GAAP financial measure that is calculated by dividing the sum of acquisition costs and other underwriting expenses by net earned premiums. (3) The combined ratio is a GAAP financial measure and is the sum of the Company’s loss and expense ratios. 32 Premiums The following table summarizes the change in premium volume by business segment: Quarters Ended March 31, (Dollars in thousands) 2023 2022 % Change Gross written premiums (1) Commercial Specialty $ 95,508 $ 102,848 (7.1 %) Reinsurance Operations (3) 23,416 40,996 (42.9 %) Continuing Lines 118,924 143,844 (17.3 %) Exited Lines 4,061 47,139 (91.4 %) Total gross written premiums $ 122,985 $ 190,983 (35.6 %) Ceded written premiums Commercial Specialty $ 4,274 $ 4,685 (8.8 %) Reinsurance Operations (3) — — — Continuing Lines 4,274 4,685 (8.8 %) Exited Lines 2,850 26,816 (89.4 %) Total ceded written premiums $ 7,124 $ 31,501 (77.4 %) Net written premiums (2) Commercial Specialty $ 91,234 $ 98,163 (7.1 %) Reinsurance Operations (3) 23,416 40,996 (42.9 %) Continuing Lines 114,650 139,159 (17.6 %) Exited Lines 1,211 20,323 (94.0 %) Total net written premiums $ 115,861 $ 159,482 (27.4 %) Net earned premiums Commercial Specialty $ 93,182 $ 91,197 2.2 % Reinsurance Operations (3) 34,847 34,298 1.6 % Continuing Lines 128,029 125,495 2.0 % Exited Lines 12,043 23,328 (48.4 %) Total net earned premiums $ 140,072 $ 148,823 (5.9 %) (1) Gross written premiums represent the amount received or to be received for insurance policies written without reduction for reinsurance costs, ceded premiums, or other deductions. (2) Net written premiums equal gross written premiums less ceded written premiums. (3) External business only, excluding business assumed from affiliates. Gross written premiums decreased by 35.6% for the quarter ended March 31, 2023 as compared to same period in 2022. The decrease in gross written premiums is being driven by a reduction in premiums in both Continuing Lines as well as Exited Lines. The reduction in Continuing Lines is primarily due to the non-renewal of a casualty treaty within Reinsurance Operations, the non-renewal of a restaurant book of business within Commercial Specialty, and actions taken within Commercial Specialty to improve underwriting results by not renewing underperforming business. These decreases were partially offset by increased pricing within Commercial Specialty. To support future growth in the Company's Commercial Specialty segment and provide capital for business initiatives including share repurchases, a decision was made to reduce writings in its Reinsurance Operations. The Company anticipates that its Reinsurance Operations will comprise a smaller percentage of the Company's overall business prospectively. 33 Underwriting Ratios Quarters Ended March 31, Point 2023 2022 Change Loss ratio Commercial Specialty 64.5 % 58.9 % 5.6 Reinsurance Operations 61.0 % 61.4 % (0.4 ) Continuing Lines 63.6 % 59.5 % 4.1 Exited Lines 55.0 % 42.8 % 12.2 Total loss ratio 62.8 % 56.9 % 5.9 Expense ratio Commercial Specialty 38.1 % 36.8 % 1.3 Reinsurance Operations 36.8 % 34.9 % 1.9 Continuing Lines 37.8 % 36.2 % 1.6 Exited Lines 42.6 % 48.0 % (5.4 ) Total expense ratio 38.2 % 38.1 % 0.1 Combined ratio Commercial Specialty 102.6 % 95.7 % 6.9 Reinsurance Operations 97.8 % 96.3 % 1.5 Continuing Lines 101.4 % 95.7 % 5.7 Exited Lines 97.6 % 90.8 % 6.8 Total combined ratio 101.0 % 95.0 % 6.0 Net Retention The ratio of net written premiums to gross written premiums is referred to as the Company’s net premium retention. The Company’s net premium retention is summarized by segments as follows: Quarters Ended March 31, Point (Dollars in thousands) 2023 2022 Change Commercial Specialty 95.5 % 95.4 % 0.1 Reinsurance Operations 100.0 % 100.0 % — Continuing Lines 96.4 % 96.7 % (0.3 ) Exited Lines 29.8 % 43.1 % (13.3 ) Total 94.2 % 83.5 % 10.7 The net premium retention for the quarter ended March 31, 2023 increased by 10.7 points as compared to the same period in 2022. While the Company still has ceding arrangements in place related to the sale of renewal rights, the Company's overall net retention is not significantly impacted in 2023 as Exited Lines' gross written premiums comprise a much smaller percentage of the Company's consolidated gross written premiums. See Note 3 of the notes to the consolidated financial statements in Item 8 of Part II of the Company’s 2022 Annual Report on Form 10-K for additional information on the sale of renewal rights related to the Company’s manufactured and dwelling homes business and the Company's Farm, Ranch & Stable business. Net earned premiums within the Commercial Specialty segment increased by 2.2% for the quarter ended March 31, 2023 as compared to the same period in 2022. The increase in net earned premiums was primarily due to the growth in premiums written in the prior year as a result of organic growth from existing agents and pricing increases. Property net earned premiums were $37.7 million and $34.3 million for the quarters ended March 31, 2023 and 2022, respectively. Casualty net earned premiums were $55.5 million and $56.9 million for the quarters ended March 31, 2023 and 2022, respectively. Net earned premiums within the Reinsurance Operations segment increased by 1.6% for the quarter ended March 31, 2023 as compared to the same period in 2022 primarily due to organic growth of existing casualty treaties experienced in prior years. There were no property net earned premiums for the quarter ended March 31, 2023. Property net earned premiums were less than $0.1 million for the quarter ended March 31, 2022. Casualty net earned premiums were $34.8 million and $34.3 million for the quarters ended March 31, 2023 and 2022, respectively. 34 Net earned premiums within the Exited Lines segment decreased by 48.4% for the quarter ended March 31, 2023 as compared to the same period in 2022 primarily due to the sale of renewal rights related to the Company's Farm, Ranch & Stable business on August 8, 2022. The decrease in net earned premiums is also due to exiting lines of business unrelated to the Company’s continuing businesses. Property net earned premiums were $8.7 million and $18.8 million for the quarters ended March 31, 2023 and 2022, respectively. Casualty net earned premiums were $3.4 million and $4.5 million for the quarters ended March 31, 2023 and 2022, respectively. Reserves Management’s best estimate at March 31, 2023 was recorded as the loss reserve. Management’s best estimate is as of a particular point in time and is based upon known facts, the Company’s actuarial analyses, current law, and the Company’s judgment. This resulted in carried gross and net reserves of $857.5 million and $783.9 million, respectively, as of March 31, 2023. A breakout of the Company’s gross and net reserves, as of March 31, 2023, is as follows: Gross Reserves (Dollars in thousands) Case IBNR (1) Total Commercial Specialty $ 168,430 $ 335,871 $ 504,301 Reinsurance Operations 9,419 192,036 201,455 Continuing Lines 177,849 527,907 705,756 Exited Lines 70,441 81,323 151,764 Total $ 248,290 $ 609,230 $ 857,520 Net Reserves (2) (Dollars in thousands) Case IBNR (1) Total Commercial Specialty $ 150,240 $ 305,591 $ 455,831 Reinsurance Operations 9,419 192,036 201,455 Continuing Lines 159,659 497,627 657,286 Exited Lines 53,237 73,332 126,569 Total $ 212,896 $ 570,959 $ 783,855 (1) Losses incurred but not reported, including the expected future emergence of case reserves. (2) Does not include reinsurance receivables on paid losses. Each reserve category has an implicit frequency and severity for each accident year as a result of the various assumptions made. If the actual levels of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s best estimate. For most of its reserve categories, the Company believes that frequency can be predicted with greater accuracy than severity. Therefore, the Company believes management’s best estimate is more likely influenced by changes in severity than frequency. The following table, which the Company believes reflects a reasonable range of variability around its best estimate based on historical loss experience and management’s judgment, reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity on the Company’s current accident year net loss estimate of $88.0 million for claims occurring during the quarter ended March 31, 2023: Severity Change (Dollars in thousands) -10% -5% 0% 5% 10% Frequency Change -5% (12,760 ) (8,580 ) (4,400 ) (220 ) 3,960 -3% (11,176 ) (6,908 ) (2,640 ) 1,628 5,896 -2% (10,384 ) (6,072 ) (1,760 ) 2,552 6,864 -1% (9,592 ) (5,236 ) (880 ) 3,476 7,832 0% (8,800 ) (4,400 ) — 4,400 8,800 1% (8,008 ) (3,564 ) 880 5,324 9,768 2% (7,216 ) (2,728 ) 1,760 6,248 10,736 3% (6,424 ) (1,892 ) 2,640 7,172 11,704 5% (4,840 ) (220 ) 4,400 9,020 13,640 35 The Company’s net reserves for losses and loss adjustment expenses of $783.9 million as of March 31, 2023 relate to multiple accident years. Therefore, the impact of changes in frequency and severity for more than one accident year could be higher or lower than the amounts reflected above. Underwriting Results Commercial Specialty The components of income (loss) from the Company’s Commercial Specialty segment and corresponding underwriting ratios are as follows: Quarters Ended March 31, % (Dollars in thousands) 2023 2022 Change Gross written premiums $ 95,508 $ 102,848 (7.1 %) Net written premiums $ 91,234 $ 98,163 (7.1 %) Net earned premiums $ 93,182 $ 91,197 2.2 % Other income 267 259 3.1 % Total revenues 93,449 91,456 2.2 % Losses and expenses: Net losses and loss adjustment expenses 60,119 53,659 12.0 % Acquisition costs and other underwriting expenses 35,526 33,526 6.0 % Underwriting income (loss) $ (2,196 ) $ 4,271 (151.4 %) Quarters Ended March 31, Point 2023 2022 Change Underwriting Ratios: Loss ratio: Current accident year 62.9 % 56.8 % 6.1 Prior accident year 1.6 % 2.1 % (0.5 ) Calendar year loss ratio 64.5 % 58.9 % 5.6 Expense ratio 38.1 % 36.8 % 1.3 Combined ratio 102.6 % 95.7 % 6.9 36 Reconciliation of non-GAAP financial measures and ratios The table below reconciles the non-GAAP measures or ratios, which excludes the impact of prior accident year adjustments, to its most directly comparable GAAP measure or ratio. The Company believes the non-GAAP measures or ratios are useful to investors when evaluating the Company's underwriting performance as trends within Commercial Specialty may be obscured by prior accident year adjustments. These non-GAAP measures or ratios should not be considered as a substitute for its most directly comparable GAAP measure or ratio and does not reflect the overall underwriting profitability of the Company. Quarters Ended March 31, 2023 2022 (Dollars in thousands) Losses Loss Ratio Losses Loss Ratio Property Non catastrophe property losses and ratio excluding the effect of prior accident year (1) $ 22,576 59.9 % $ 17,334 50.5 % Effect of prior accident year (1,259 ) (3.4 %) 1,823 5.3 % Non catastrophe property losses and ratio (2) $ 21,317 56.5 % $ 19,157 55.8 % Catastrophe losses and ratio excluding the effect of prior accident year (1) $ 3,328 8.8 % $ 2,152 6.3 % Effect of prior accident year 1,422 3.8 % 74 0.2 % Catastrophe losses and ratio (2) $ 4,750 12.6 % $ 2,226 6.5 % Total property losses and ratio excluding the effect of prior accident year (1) $ 25,904 68.7 % $ 19,486 56.8 % Effect of prior accident year 163 0.4 % 1,897 5.5 % Total property losses and ratio (2) $ 26,067 69.1 % $ 21,383 62.3 % Casualty Total casualty losses and ratio excluding the effect of prior accident year (1) $ 32,737 59.0 % $ 32,287 56.8 % Effect of prior accident year 1,315 2.4 % (11 ) (0.0 %) Total casualty losses and ratio (2) $ 34,052 61.4 % $ 32,276 56.8 % Total Total net losses and loss adjustment expense and total loss ratio excluding the effect of prior accident year (1) $ 58,641 62.9 % $ 51,773 56.8 % Effect of prior accident year 1,478 1.6 % 1,886 2.1 % Total net losses and loss adjustment expense and total loss ratio (2) $ 60,119 64.5 % $ 53,659 58.9 % (1) Non-GAAP measure / ratio (2) Most directly comparable GAAP measure / ratio Premiums See “Results of Operations” above for a discussion on consolidated premiums. Other Income Other income was $0.3 million for each of the quarters ended March 31, 2023 and 2022. Other income is primarily comprised of fee income. 37 Loss Ratio The current accident year losses and loss ratio is summarized as follows: Quarters Ended March 31, % (Dollars in thousands) 2023 2022 Change Property losses Non-catastrophe $ 22,576 $ 17,334 30.2 % Catastrophe 3,328 2,152 54.7 % Property losses 25,904 19,486 32.9 % Casualty losses 32,737 32,287 1.4 % Total accident year losses $ 58,641 $ 51,773 13.3 % Quarters Ended March 31, Point 2023 2022 Change Current accident year loss ratio: Property Non-catastrophe 59.9 % 50.5 % 9.4 Catastrophe 8.8 % 6.3 % 2.5 Property loss ratio 68.7 % 56.8 % 11.9 Casualty loss ratio 59.0 % 56.8 % 2.2 Total accident year loss ratio 62.9 % 56.8 % 6.1 The current accident year non-catastrophe property loss ratio increased by 9.4 points during the quarter ended March 31, 2023 as compared to the same period in 2022 reflecting higher claims severity mainly due to fire losses in the first accident quarter compared to last year. The current accident year catastrophe loss ratio increased by 2.5 points during the quarter ended March 31, 2023 as compared to the same period in 2022 recognizing higher claims frequency in the first accident quarter compared to last year. The current accident year casualty loss ratio increased by 2.2 points during the quarter ended March 31, 2023 as compared to the same period in 2022 reflecting higher claims severity in the first accident quarter compared to last year. The calendar year loss ratio for the quarter ended March 31, 2023 includes an increase of $1.5 million, or 1.6 percentage points related to reserve development on prior accident years. The calendar year loss ratio for the quarter ended March 31, 2022 includes an increase of $1.9 million, or 2.1 percentage points related to reserve development on prior accident years. Please see Note 8 of the notes to the consolidated financial statements in Item 1 of Part I of this report for further discussion on prior accident year development. Expense Ratios The expense ratio for the Company’s Commercial Specialty segment increased by 1.3 points from 36.8% for the quarter ended March 31, 2022 to 38.1% for the quarter ended March 31, 2023 . The increase in the expense ratio is primarily due to an increase in compensation cost and advertising expense. 38 Reinsurance Operations The components of income from the Company’s Reinsurance Operations segment and corresponding underwriting ratios are as follows: Quarters Ended March 31, % (Dollars in thousands) 2023 (1) 2022 (1) Change Gross written premiums $ 23,416 $ 40,996 (42.9 %) Net written premiums $ 23,416 $ 40,996 (42.9 %) Net earned premiums $ 34,847 $ 34,298 1.6 % Other loss (9 ) (20 ) (55.0 %) Total revenues 34,838 34,278 1.6 % Losses and expenses: Net losses and loss adjustment expenses 21,263 21,059 1.0 % Acquisition costs and other underwriting expenses 12,816 11,961 7.1 % Underwriting income $ 759 $ 1,258 (39.7 %) Quarters Ended March 31, Point 2023 2022 Change Underwriting Ratios: Loss ratio: Current accident year (2) 61.0 % 61.5 % (0.5 ) Prior accident year — % (0.1 %) 0.1 Calendar year loss ratio (3) 61.0 % 61.4 % (0.4 ) Expense ratio 36.8 % 34.9 % 1.9 Combined ratio 97.8 % 96.3 % 1.5 (1) External business only, excluding business assumed from affiliates (2) Non-GAAP ratio (3) Most directly comparable GAAP ratio Reconciliation of non-GAAP financial ratios The table above reconciles the non-GAAP ratios, which excludes the impact of prior accident year adjustments, to its most directly comparable GAAP ratio. The Company believes the non-GAAP ratios are useful to investors when evaluating the Company's underwriting performance as trends within Reinsurance Operations may be obscured by prior accident year adjustments. These non-GAAP ratios should not be considered as a substitute for its most directly comparable GAAP ratio and does not reflect the overall underwriting profitability of the Company. Premiums See “Results of Operations” above for a discussion on consolidated premiums. 39 Other Loss The Company recognized a loss of less than $0.1 million during each of the quarters ended March 31, 2023 and 2022. Other loss is primarily comprised of foreign exchange gains and losses. Loss Ratio The current accident year loss ratio improved by 0.5 points during the quarter ended March 31, 2023 as compared to the same period in 2022 reflecting a mix of business change as more earned premium is from a treaty with a lower expected loss ratio compared to last year. The calendar year loss ratios for the quarter ended March 31, 2023 did not include any reserve development on prior accident years. The calendar year loss ratios for the quarter ended March 31, 2022 includes a decrease of less than $0.1 million or 0.1 percentage point related to reserve development on prior accident years. Please see Note 8 of the notes to the consolidated financial statements in Item 1 of Part I of this report for further discussion on prior accident year development. Expense Ratios The expense ratio for the Company’s Reinsurance Operations segment increased 1.9 points from 34.9% for the quarter ended March 31, 2022 to 36.8% for the quarter ended March 31, 2023. This increase in the expense ratio was primarily due to an increase in commission expense. Exited Lines The components of income from the Company’s Exited Lines segment and corresponding underwriting ratios are as follows: Quarters Ended March 31, % (Dollars in thousands) 2023 2022 Change Gross written premiums $ 4,061 $ 47,139 (91.4 %) Net written premiums $ 1,211 $ 20,323 (94.0 %) Net earned premiums $ 12,043 $ 23,328 (48.4 %) Other income 77 200 (61.5 %) Total revenues 12,120 23,528 (48.5 %) Losses and expenses: Net losses and loss adjustment expenses 6,619 9,977 (33.7 %) Acquisition costs and other underwriting expenses 5,136 11,205 (54.2 %) Underwriting income $ 365 $ 2,346 (84.4 %) Quarters Ended March 31, Point 2023 2022 Change Underwriting Ratios: Loss ratio: Current accident year 67.2 % 63.9 % 3.3 Prior accident year (12.2 %) (21.1 %) 8.9 Calendar year loss ratio 55.0 % 42.8 % 12.2 Expense ratio 42.6 % 48.0 % (5.4 ) Combined ratio 97.6 % 90.8 % 6.8 40 Reconciliation of non-GAAP financial measures and ratios The table below reconciles the non-GAAP measures or ratios, which excludes the impact of prior accident year adjustments, to its most directly comparable GAAP measure or ratio. The Company believes the non-GAAP measures or ratios are useful to investors when evaluating the Company's underwriting performance as trends within Exited Lines may be obscured by prior accident year adjustments. These non-GAAP measures or ratios should not be considered as a substitute for its most directly comparable GAAP measure or ratio and does not reflect the overall underwriting profitability of the Company. Quarters Ended March 31, 2023 2022 (Dollars in thousands) Losses Loss Ratio Losses Loss Ratio Property Non catastrophe property losses and ratio excluding the effect of prior accident year (1) $ 3,652 42.0 % $ 10,261 54.6 % Effect of prior accident year (1,165 ) (13.4 %) (3,867 ) (20.6 %) Non catastrophe property losses and ratio (2) $ 2,487 28.6 % $ 6,394 34.0 % Catastrophe losses and ratio excluding the effect of prior accident year (1) $ 2,142 24.7 % $ 2,152 11.4 % Effect of prior accident year 149 1.7 % (471 ) (2.5 %) Catastrophe losses and ratio (2) $ 2,291 26.4 % $ 1,681 8.9 % Total property losses and ratio excluding the effect of prior accident year (1) $ 5,794 66.7 % $ 12,413 66.0 % Effect of prior accident year (1,016 ) (11.7 %) (4,338 ) (23.1 %) Total property losses and ratio (2) $ 4,778 55.0 % $ 8,075 42.9 % Casualty Total casualty losses and ratio excluding the effect of prior accident year (1) $ 2,303 68.7 % $ 2,493 55.1 % Effect of prior accident year (462 ) (13.8 %) (591 ) (13.1 %) Total casualty losses and ratio (2) $ 1,841 54.9 % $ 1,902 42.0 % Total Total net losses and loss adjustment expense and total loss ratio excluding the effect of prior accident year (1) $ 8,097 67.2 % $ 14,906 63.9 % Effect of prior accident year (1,478 ) (12.2 %) (4,929 ) (21.1 %) Total net losses and loss adjustment expense and total loss ratio (2) $ 6,619 55.0 % $ 9,977 42.8 % (1) Non-GAAP measure / ratio (2) Most directly comparable GAAP measure / ratio Premiums See “Results of Operations” above for a discussion on consolidated premiums. Other Income The Company recognized income of $0.1 million and $0.2 million for the quarters ended March 31, 2023 and 2022, respectively. Other income is primarily comprised of fee income net of bank fees. 41 Loss Ratio The current accident year losses and loss ratio is summarized as follows: Quarters Ended March 31, % (Dollars in thousands) 2023 2022 Change Property losses Non-catastrophe $ 3,652 $ 10,261 (64.4 %) Catastrophe 2,142 2,152 (0.5 %) Property losses 5,794 12,413 (53.3 %) Casualty losses 2,303 2,493 (7.6 %) Total accident year losses $ 8,097 $ 14,906 (45.7 %) Quarters Ended March 31, Point 2023 2022 Change Current accident year loss ratio: Property Non-catastrophe 42.0 % 54.6 % (12.6 ) Catastrophe 24.7 % 11.4 % 13.3 Property loss ratio 66.7 % 66.0 % 0.7 Casualty loss ratio 68.7 % 55.1 % 13.6 Total accident year loss ratio 67.2 % 63.9 % 3.3 The current accident year non-catastrophe property loss ratio improved by 12.6 points during the quarter ended March 31, 2023 as compared to the same period in 2022 reflecting lower claims severity in the first accident quarter compared to last year. The current accident year catastrophe loss ratio increased by 13.3 points during the quarter ended March 31, 2023 as compared to the same period in 2022 primarily recognizing higher claims frequency in the first accident quarter compared to last year. The current accident year casualty loss ratio increased by 13.6 points during the quarter ended March 31, 2023 as compared to the same period in 2022 primarily reflecting higher claims frequency in farm, ranch & stable lines for the first accident quarter compared to last year and growth in the brokerage divisions which had a higher expected loss ratio. The calendar year loss ratio for the quarter ended March 31, 2023 includes a decrease of $1.5 million, or 12.2 percentage points related to reserve development on prior accident years. The calendar year loss ratio for the quarter ended March 31, 2022 includes a decrease of $4.9 million, or 21.1 percentage points related to reserve development on prior accident years. Please see Note 8 of the notes to the consolidated financial statements in Item 1 of Part I of this report for further discussion on prior accident year development. Expense Ratio The expense ratio for the Company’s Exited Lines decreased by 5.4 points from 48.0% for the quarter ended March 31, 2022 to 42.6% for the quarter ended March 31, 2023 due to restructuring actions which reduced expenses. Unallocated Corporate Items The Company’s fixed income portfolio, excluding cash, continues to maintain high quality with an A average rating and a duration of 1.5 years. 42 Net Investment Income Quarters Ended March 31, % (Dollars in thousands) 2023 2022 Change Gross investment income (1) $ 12,380 $ 7,196 72.0 % Investment expenses (372 ) (604 ) (38.4 %) Net investment income $ 12,008 $ 6,592 82.2 % (1) Excludes realized gains and losses Gross investment income increased by 72.0% for the quarter ended March 31, 2023 as compared to the same period in 2022. The increase was primarily due to an increase in yield within the fixed maturities portfolio due to the rise in rates. Investment expenses decreased by 38.4% for the quarter ended March 31, 2023 as compared to the same period in 2022 due to decreased investment management expenses. At March 31, 2023, the Company held agency mortgage-backed securities with a market value of $3.2 million. Excluding the agency mortgage-backed securities, the average duration of the Company’s fixed maturities portfolio was 1.5 years as of March 31, 2023, compared with 3.2 years as of March 31, 2022. Including cash and short-term investments, the average duration of the Company’s fixed maturities portfolio, excluding agency mortgage-backed securities was 1.5 years and 2.8 years as of March 31, 2023 and March 31, 2022, respectively. Changes in interest rates can cause principal payments on certain investments to extend or shorten which can impact duration. The Company’s embedded book yield on its fixed maturities, not including cash, was 3.6% as of March 31, 2023, compared to 2.6% as of March 31, 2022. The embedded book yield on the $31.9 million of taxable municipal bonds in the Company’s portfolio was 3.1% at March 31, 2023, compared to an embedded book yield of 3.2% on the Company’s taxable municipal bonds of $47.0 million at March 31, 2022. Net Realized Investment Gains (Losses) The components of net realized investment gains (losses) for the quarters ended March 31, 2023 and 2022 were as follows: Quarters Ended March 31, (Dollars in thousands) 2023 2022 Equity securities $ (914 ) $ (1,345 ) Fixed maturities (606 ) (3,239 ) Derivatives — 4,724 Other-than-temporary impairment losses (1) — (25,525 ) Net realized investment gains (losses) $ (1,520 ) $ (25,385 ) (1) In response to a rising interest rate environment, the Company took action early in April 2022 to shorten the duration of its fixed maturities portfolio. In connection with these actions, the Company identified fixed maturities securities with a weighted average life of five years or greater as having an intent to sell resulting in other-than-temporary impairment losses. The majority of which were sold in the 2nd quarter of 2022. Most of the proceeds from the sale of these securities were reinvested into fixed income investments with maturities of two years. As a result of these actions, book yield increased from 2.2% at December 31, 2021 to 3.6% at March 31, 2023. See Note 3 of the notes to the consolidated financial statements in Item 1 of Part I of this report for an analysis of total investment return on a pre-tax basis for the quarters ended March 31, 2023 and 2022. Corporate and Other Operating Expenses Corporate and other operating expenses consist of outside legal fees, other professional fees, directors’ fees, management fees & advisory fees, salaries and benefits for holding company personnel, development costs for new products, impairment losses, and taxes incurred which are not directly related to operations. Corporate and other operating expenses were $6.4 million and $4.7 million during the quarters ended March 31, 2023 and 2022, respectively. The increase in corporate and other operating expenses is primarily due to restructuring costs incurred in the first quarter of 2023. 43 Interest Expense Interest expense was $2.6 million during the quarter ended March 31, 2022. There was no interest expense during the quarter ended March 31, 2023. The reduction in interest expense was due to the redemption of the 7.875% Subordinated Notes due 2047 on April 15, 2022. Income Tax Expense / Benefit Income tax expense was $0.6 million for the quarter ended March 31, 2023 compared with income tax benefit of $3.4 million for the quarter ended March 31, 2022. The increase in income tax expense is primarily due to higher taxable income in the Company's U.S. Subsidiaries in 2023. See Note 7 of the notes to the consolidated financial statements in Item 1 of Part I of this report for a comparison of income tax between periods. Net Income (Loss) The factors described above resulted in a net income of $2.5 million and a net loss of $14.8 million for the quarters ended March 31, 2023 and 2022, respectively. Liquidity and Capital Resources Sources and Uses of Funds Global Indemnity Group, LLC is a holding company. Its principal asset is its ownership of the shares of its direct and indirect subsidiaries, including those of its insurance companies: United National Insurance Company, Diamond State Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, and Penn-Patriot Insurance Company. Global Indemnity Group, LLC’s short term and long term liquidity needs include but are not limited to the payment of corporate expenses, debt service payments, distributions to shareholders, and share repurchases. The Company also has commitments in the form of operating leases, commitments to fund limited liability investments, and unpaid losses and loss expense obligations. In order to meet its short term and long term needs, Global Indemnity Group, LLC’s principal sources of cash includes investment income, dividends from subsidiaries, other permitted disbursements from its direct and indirect subsidiaries, reimbursement for equity awards granted to employees and intercompany borrowings. The principal sources of funds at these direct and indirect subsidiaries include underwriting operations, investment income, proceeds from sales and redemptions of investments, capital contributions, intercompany borrowings, and dividends from subsidiaries. Funds are used principally by these operating subsidiaries to pay claims and operating expenses, to make debt payments, to purchase investments, and to make distribution payments. In addition, the Company periodically reviews opportunities related to business acquisitions, and as a result, liquidity may be needed in the future. GBLI Holdings, LLC is a holding company which is a wholly-owned subsidiary of Penn-Patriot Insurance Company. GBLI Holdings, LLC’s principal asset is its ownership of the shares of its direct and indirect subsidiaries which include United National Insurance Company, Diamond State Insurance Company, Penn-America Insurance Company, and Penn-Star Insurance Company. GBLI Holdings, LLC is dependent on dividends from its subsidiaries as well as reimbursements from its subsidiaries for utilization of net operating losses and other tax attributes in order to meet its corporate expense obligations and intercompany financing obligations. As of March 31, 2023, the Company also had future funding commitments of $14.2 million related to investments that are currently in their harvest period and it is unlikely that a capital call will be made. The future liquidity of both Global Indemnity Group, LLC and GBLI Holdings, LLC is dependent on the ability of its subsidiaries to generate income to pay dividends. Global Indemnity Group, LLC and GBLI Holdings, LLC’s insurance companies are restricted by statute as to the amount of dividends that they may pay without the prior approval of regulatory authorities. The dividend limitations imposed by state laws are based on the statutory financial results of each insurance company that are determined by using statutory accounting practices that differ in various respects from accounting principles used in financial statements prepared in conformity with GAAP. See “Regulation - Statutory Accounting 44 Principles” in Item 1 of Part I of the Company’s 2022 Annual Report on Form 10-K. Key differences relate to, among other items, deferred acquisition costs, limitations on deferred income taxes, reserve calculation assumptions and surplus notes. See Note 22 of the notes to the consolidated financial statements in Item 8 of Part II of the Company’s 2022 Annual Report on Form 10-K for further information on dividend limitations related to the Insurance Companies. There were no dividend declared or paid during the quarter ended March 31, 2023. Cash Flows Sources of operating funds consist primarily of net written premiums and investment income. Funds are used primarily to pay claims and operating expenses and to purchase investments. As a result of the distribution policy, funds are also used to pay distributions to shareholders of the Company. The Company’s reconciliation of net income (loss) to net cash provided by (used for) operations is generally influenced by the following: • the fact that the Company collects premiums, net of commissions, in advance of losses paid; • the timing of the Company’s settlements with its reinsurers; and • the timing of the Company’s loss payments. Net cash provided by (used for) operating activities was $5.3 million and ($10.1) million for the quarters ended March 31, 2023 and 2022, respectively. The increase in operating cash flows of approximately $15.4 million from the prior year was primarily a net result of the following items: Quarters Ended March 31, (Dollars in thousands) 2023 2022 Change Net premiums collected $ 120,397 $ 132,367 $ (11,970 ) Net losses paid (63,936 ) (74,081 ) 10,145 Underwriting and corporate expenses (64,116 ) (74,087 ) 9,971 Net investment income 12,981 8,299 4,682 Interest paid — (2,560 ) 2,560 Net cash provided by (used for) operating activities $ 5,326 $ (10,062 ) $ 15,388 See the consolidated statements of cash flows in the consolidated financial statements in Item 1 of Part I of this report for details concerning the Company’s investing and financing activities. Liquidity Stock Repurchase From April, 1, 2023 through May 1, 2023, an additional 200,000 shares were repurchased as part of the share repurchase program. On October 21, 2022, Global Indemnity Group, LLC announced that up to $32 million of share repurchases were authorized. On January 3, 2023, Global Indemnity Group, LLC announced that it authorized an increase in the aggregate stock purchases from $32 million to $60 million. From the time of the initial announcement, a total of 1,357,082 shares were repurchased for approximately $34.0 million at an average purchase price of $25.05 per share. 138,151 shares that were acquired were reissued at an average price per share of $24.17. As a result of these transactions, book value per share increased by $1.69 per share. Restructuring The Company is restructuring its insurance operations in an effort to strengthen its market presence and enhance its focus on GBLI’s core Wholesale Commercial and InsurTech products. The restructuring plan, which was initiated in the fourth quarter of 2022, was completed in the first quarter of 2023. The Company incurred restructuring charges of $3.4 million in the fourth quarter of 2022 and $2.2 million in the first quarter of 2023 for a total of $5.6 million. Post completion of the restructuring, the Company anticipates recurring annual expense savings of $16.0 million. 45 Distributions The Board of Directors approved a distribution payment of $0.25 per common share to all shareholders of record on the close of business on March 24, 2023. Distributions paid to common shareholders were $3.9 million during the quarter ended March 31, 2023. In addition, distributions of $0.1 million were paid to Global Indemnity Group, LLC’s preferred shareholder during the quarter ended March 31, 2023. Other than the items discussed in the preceding paragraphs, there have been no material changes to the Company’s liquidity during the quarter ended March 31, 2023. Please see Item 7 of Part II in the Company’s 2022 Annual Report on Form 10-K for information regarding the Company’s liquidity. Capital Resources There have been no material changes to the Company’s capital resources during the quarter ended March 31, 2023. Please see Item 7 of Part II in the Company’s 2022 Annual Report on Form 10-K for information regarding the Company’s capital resources. Off Balance Sheet Arrangements The Company has no off balance sheet arrangements. Cautionary Note Regarding Forward-Looking Statements Some of the statements under “Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report may include forward-looking statements within the meaning of Section 21E of the Security Exchange Act of 1934, as amended, that reflect the Company’s current views with respect to future events and financial performance. Forward-looking statements are statements that are not historical facts. These statements can be identified by the use of forward-looking terminology such as "believe," "expect," "may," "will," "should," "project," "plan," "seek," "intend," or "anticipate" or the negative thereof or comparable terminology, and include discussions of strategy, financial projections and estimates and their underlying assumptions, statements regarding plans, objectives, expectations or consequences of identified transactions or natural disasters, and statements about the future performance, operations, products and services of the companies. The Company’s business and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. See “Risk Factors” in Item 1A of Part I in the Company’s 2022 Annual Report on Form 10-K for risks, uncertainties and other factors that could cause actual results and experience to differ from those projected. The Company’s forward-looking statements speak only as of the date of this report or as of the date they were made. The Company undertakes no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. 46 Item 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK For the quarter ended March 31, 2023, global equities rose approximately 8.0% with U.S equities modestly underperforming, gaining approximately 7.5%. U.S fixed income gained approximately 3.0% with the average spread moving wider during the quarter. In March, Federal Reserve Chair Jerome Powell provided hawkish testimony in his semi-annual assessment of the economy to Congress. This was quickly followed by a shock to financial stability and confidence as we witnessed three bank failures that required swift and coordinated actions from monetary authorities. These measures played a critical role in calming fears. Just two weeks later, the Fed increased rates while making the clear delineation that it has the tools to manage financial stability while at the same time battling inflation. This has all combined to leave market participants parsing each piece of economic data for indications of the next moves by the FOMC, resulting in continued large swings in interest rates. The Company’s investment grade fixed income portfolio continues to maintain high quality with an A average rating and a duration of 1.5 years. Portfolio purchases were focused within US Treasury, asset backed, and investment grade credit securities. These purchases were funded primarily through cash inflows, sales of US Treasury securities, as well as maturities and paydowns. During the first quarter, the portfolio’s allocation to asset backed securities increased, while the portfolio’s exposure to US Treasury securities decreased. Other than the changes described in the preceding paragraph, there have been no other material changes to the Company’s market risk since December 31, 2022. Please see Item 7A of Part II in the Company’s 2022 Annual Report on Form 10-K for information regarding the Company’s market risk.