International General Insurance Holdings Ltd. (NASDAQ: IGIC) Q4 2020 earnings call dated Mar. 12, 2021
Corporate Participants:
Robin Sidders — Head of Investor Relations
Wasef Jabsheh — Chairman & Chief Executive Officer
Waleed Jabsheh — President
Pervez Rizvi — Group Chief Financial Officer
Analysts:
Mark Dwelle — RBC Capital Markets — Analyst
Will Allen — WFSA Capital — Analyst
Presentation:
Operator
Good day, and welcome to the International General Insurance Holdings Limited’s Fourth Quarter and Full Year 2020 Financial Results Conference Call. [Operator Instructions]
I would now like to turn the conference over to Robin Sidders, Head of Investor Relations. Please go ahead.
Robin Sidders — Head of Investor Relations
Thanks, operator. Thank you, and good morning everybody and welcome to today’s conference call. Today, we’ll be discussing our fourth quarter and full year 2020 financial results. You will have seen the results press release, which we issued after the market close yesterday. If you’d like a copy of the press release, it’s available in the Investors section of our website at www.iginsure.com. We’ve also posted a supplementary investor presentation, which can also be found on the website on the presentation page in the Investors section.
On today’s call are Wasef Jabsheh, Chairman and CEO; Waleed Jabsheh, President; and Pervez Rizvi, Chief Financial Officer. Wasef will begin the call with some high level comments before handing over to Waleed to talk through the results for the fourth quarter and full year 2020 and also give some insight into current market conditions and opportunities that we’re seeing. At that point, we’ll open up the call for Q&A. And I would point out that we are all doing — I would point out that we’re all doing this call from different locations today for each from our own — from homes. So in the event that we have any technical difficulties, please bear with us. When we begin the Q&A period, Waleed will take all the questions in the first instance and then direct the relevant person to respond. And then after the Q&A, Wasef will come back with some closing thoughts.
So I’ll begin with the customary Safe Harbor language. Our speakers’ remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words. 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. Forward-looking statements involve risks, uncertainties and assumptions.
Actual events or results may differ materially from those projected in the forward-looking statements due to a variety of factors, including the risk factors set out in the company’s annual report on Forms 20-F for the year ended December 31, 2019 and the company’s reports on Form 6-K and other filings with the SEC as well as our earnings press release issued yesterday evening. We undertake no obligation to update or revise publicly any forward-looking statements, which speak only as of the date on which they are made. In addition, we use non-IFRS financial measures in this conference call. For a reconciliation of these non-IFRS financial measures to the nearest IFRS measures, please see our earnings release, which has been filed with the SEC and is available on our website.
So with that, I’ll hand the call over to our Chairman and CEO, Wasef Jabsheh.
Wasef Jabsheh — Chairman & Chief Executive Officer
Thank you, Robin, and good day to everyone. Thank you for joining on today’s call. 2020 was a transformational year for IGI. While we faced many challenges, we achieved many successes. We reported one of our most profitable underwriting years in our history in line with our track record of profitable growth. We grew our top-line by 33.8% and we did that while recording a combined ratio below 90%. We grew our invested assets by 30.5% and total equity by 26.4%. And most importantly, we have grown our book value per share sequentially every quarter during 2020. I’m very proud of these results.
All of us know well the disruption caused by COVID-19 during 2020 as well as devastation caused by many severe natural catastrophes across the world. The political uncertainty in many countries, including turmoil in the United States around the transition of presidential power and the withdrawal of U.K. from European Union. 2020 was also the year that we became public company, listed on NASDAQ, United States.
It was against these challenging backdrop that we delivered on our promise and achieved these strong results, improving on every financial performance measure when compared to 2019. This is clear indication of what IGI is capable of, particularly in difficult times, and demonstrates the discipline, focus, ingenuity and hard work for our people. I’ve never been more proud of our company and our people. Their dedication and sacrifice through 2020 have been constant.
Looking ahead, all indications are that the very good market conditions that we saw throughout 2020 are continuing in ’21. Rate momentum is continuing and as IGI remains well positioned to capitalize on market opportunities that have arisen from the dislocation I mentioned a moment ago. We will continue on the path we set in 2020, although we are probably not likely to see the same level of growth. As you know, our primary focus is on the bottom line. So we will only grow the top-line with profitable business.
As a company, there is still work to be done, and we will continue to build on the foundation we have. We will continue to focus on what’s important to us, while maintaining the values of trust, honesty and integrity, which we have — which have underpinned our success. I look forward to further success in ’21 as we remain strong, reliable and trusted partner for all of our stakeholders and continue our long track record of shareholder value.
With that, I’m going to now ask Waleed to talk to you about the results and our market outlook. And here I would like to thank you again. Waleed?
Waleed Jabsheh — President
Yeah. Thank you, Wasef, and thank you all for joining us today. As Wasef said, 2020 was a whirlwind of a year for us. I too am very proud of all our people for their dedication and focus throughout the year. It hasn’t always been easy, but we’ve made significant progress and we will continue to build on that in 2021.
I’ll start with the high level recap of the numbers as you have the press release, and the story is fairly straightforward. As Wasef said, we grew our total underwriting portfolio by 33.8% to $467.3 million of gross written premium when compared to the full year 2019. During the fourth quarter of 2020, gross written premium increased 45.3% when compared with the fourth quarter of 2019. Growth in both the fourth quarter and the full year 2020 was across our portfolio as a result of increases in new and renewal business as well as rates.
In the Long-tail segment, we recorded growth in pretty much every line, but mostly in the professional lines of professional indemnity and D&O. In the Short-tail segment, we also saw growth in most lines, but particularly in energy and property where we saw growth in most markets as well as in the U.S. where you will recall we began writing Excess & Surplus lines business from April 1. Specifically in the U.S., we have written over $8 million on a Excess & Surplus line basis, but in total, in the U.S., we’ve written a little more than $20 million.
For the full year 2020, the most significant growth was in the Long-tail segment, which recorded gross written premium growth of 42.1% for the period. Growth was primarily driven by professional lines business where rates were up on average over 30%, and specifically, in professional indemnity and D&O. As we have mentioned previously, capacity in these lines have been shrinking as many players have either exited the business, significantly reduced their line sizes or have stopped writing the new business. A large proportion of our business in these lines is written on excess of loss basis and also on the claims made basis.
In the professional indemnity book, which is predominantly U.K. based, about 60% is excess of loss, while our D&O book, which is much more geographically diverse, about 90% of the business is written on excess of loss basis. It is worth reiterating that we do write this business in the U.S. It is primarily made up of business within the U.K. and to a lesser extent Europe and the Middle East region.
In the Short-tail segment, growth for the full year 2020 was primarily in the energy, engineering, construction and property lines. Here we saw rate increases on average of more than 18%. And it’s worth noting that rate increases were seen in almost every line of business. In our treaty reinsurance book, we wrote gross premiums of $2.8 million and $19.3 million in the fourth quarter and full year 2020 respectively. Gross premiums were flat in the fourth quarter and increased 7.2% for the full year. The treaty reinsurance business accounted for approximately 4% of total gross written premium in 2020.
Net underwriting income was $14.7 million for the fourth quarter and $77.4 million for the full year 2020. This compares with underwriting income of $10.4 million for the fourth quarter 2019 and $52 million for the full year 2019. The combined ratio was 96.8% for the fourth quarter of 2020 and 89.3% for the full year 2020. This represents improvement of 4.2 points for the fourth quarter and 4.8 points for the year.
As you saw from our press release, the claims and claims expense ratios were down for the fourth quarter and full year 2020, driven by a lower level of losses in the quarter and full year when compared to the same periods in 2019. We also noted in the press release issued last night there was 7.3 points of unfavorable developments on prior year loss reserves in the fourth quarter and 2.2 points of favorable development for the full year.
You’ll recall, in prior quarters, we’ve addressed the impact of foreign currency on our results. And this was again evidenced in the fourth quarter of 2020 when the pound sterling, which is a major transactional currency, strengthened against the U.S. dollar, which is our financial reporting currency. If we were to exclude the impact of foreign exchange, we would have recorded favorable development for the fourth quarter. But as you know, we can’t include impacts from one area of our results without discussing the impact elsewhere in the results.
In total, we recorded gains on foreign exchange of $6.2 million and $2.5 million for the fourth quarter and full year 2020 compared to gains of $2.5 million and $5.7 million for the corresponding periods in 2019. Policy acquisition costs increased in both the fourth quarter and full year of 2020 when compared to the same periods of 2019 due to the increase in premiums written in both periods. Consequently, the policy acquisition expense ratio increased by 0.5 for the fourth quarter 2020 when compared to the fourth quarter of 2019, but decreased 1.9 points for the full year 2020 compared to the full year 2019, reflecting a higher net earned premium base.
General and administrative expenses were higher by 13.6% during the fourth quarter and 19.3% for the full year 2020, primarily due to increased professional fees and expenses and salary costs related to new hires and offset somewhat by reduced travel expenses. Consequently, the G&A expense ratio was up two points in the fourth quarter, but down 1.6 points for the full year 2020, reflecting higher net earned premiums.
Relating to COVID-19, you’ll recall that we setup $2 million reserve early in 2020. Given the continued economic uncertainty stemming from the prolonged nature of the pandemic and abundance of caution we have taken a decision to increase our reserve to $2.5 million. As we’ve said previously, we do not participate in most of the lines of business or markets affected by the pandemic, but we’re continuing to take a cautious chew and we will continue to monitor the impact, evaluate our position and respond accordingly.
Turning to our investment portfolio. Despite lower interest available on our core interest earning portfolio, total investment income net increased in both the fourth quarter and the full year 2020 when compared to the same periods in 2019 due to a higher volume of funds deployed, particularly in the fixed maturity bond portfolio. Growth in the investment portfolio for the full year was supported by an increase in net cash flow from operations as well as increased capital related to the business combination with Tiberius.
Total investment income net increased by 25.9% to $3.4 million in the fourth quarter 2020 compared to $2.7 million in the same period in 2019. For the full year 2020, total investment income net increased by 3.6% to $11.5 million as compared to $11.1 million for the full year 2019. Including realized and unrealized mark-to-market movement, total investment income was $4.5 million and $2.9 million for the fourth quarter of 2020 and 2019 respectively and $8.5 million and $13 million for the full year 2020 and 2019 respectively.
For the first three quarters of the year 2020, IGI’s foreign currency exposure was subject to extreme volatility due to market turbulence, primarily related to COVID-19 and to a lesser extent other factors. This triggered a net foreign exchange loss of $11.9 million in the first quarter of 2020. Subsequently, however, IGI took proactive steps to reduce excess foreign currency exposure. And consequently, the foreign exchange loss was recovered by $3.3 million in the second quarter, $5 million in the third quarter and $6.2 million in the fourth quarter of 2020.
Accordingly, for the full year 2020, we posted a net foreign exchange gain of $2.6 million, driven primarily by strengthening of the pound sterling and the euro, IGI’s major transactional non-dollar currencies against the U.S. dollar, reflecting a positive — reflecting positive rate movements of almost 10% during the period April 1 through December 31, 2020.
Income from the core interest-bearing portfolio was up by 28.8% in the fourth quarter of 2020 and 12% for the full year 2020 when compared with the corresponding periods in 2019. Despite the decline in yield on both the fixed maturity and term deposits portfolio as a result of the continued low interest rate environment, interest income increased as a result of the higher volume of funds deployed, particularly in the fixed maturity bond portfolio.
The yields for the fixed maturity bond portfolio was 2.8% for the fourth quarter of 2020 and 2.6% for the full year 2020 compared with 2.8% and 2.9% for the fourth quarter and full year 2019. The yields for the bank term deposits was 2.2% and 2.5% for the fourth quarter and full year of 2020 compared with 3.4% for both the fourth quarter and full year of 2019.
Our investment portfolio remains defensively positioned to deal with the level of market downturn that we saw during 2020. Combination of the high quality and diversified nature of the bonds and term deposits portfolio along with the modest allocation to equities, yielded an immaterial negative mark-to-market adjustment in IGI’s investment portfolio.
In our total fixed income portfolio, 67% is A-rated and above. In our total term deposit portfolio, 47% and is held with A-rated and above banks. Average duration of the fixed maturity securities is 3.4 years. Core operating income was $4.1 million for the fourth quarter of 2020 compared to a core operating loss of $0.1 million for the fourth quarter of 2019. For the full year, core operating income was $34.1 million and $21.2 million for the full year 2020 and 2019 respectively.
Core operating return on average equity annualized was 4.4% for the fourth quarter 2020 and 9.6% for the full year 2020. Shareholders’ equity was $394.6 million. Book value per share was $8.69 at December 31, 2020, representing a 14.8% increase from March 31, 2020, which is the first relevant data point for book value per share subsequent to the business combination with Tiberius.
You will recall that after our half year results, the board of directors declared an ordinary common share dividend representing 40% of the company’s net after-tax profit for the first half of 2020 in line with the half yearly dividend that IGI has paid for many years. The board of directors will hold its regular full year meeting later this month, during which time, the half yearly dividend will be discussed and it will be at that time that any dividend will be declared.
Now I’ll spend some time discussing market conditions, our position in the market and our outlook for the remainder of 2021. At this point so far, as we near the end of the first quarter of 2021, all indications of that rate momentum is continuing with certain lines either at or exceeding rate adequacy and some lines still increasing, but not quite where we’d like it to be.
While January 1 is an important renewal for IGI, we don’t have one specific major renewal for our overall book of business, and much of it renews throughout the year. I would note though that the majority of our portfolio renews during the first half of the year. For IGI specifically, you’ll recall that we entered the U.S. Excess & Surplus lines business during 2020 and introduced two new lines of business in our Short-tail segment, marine trades and marine cargo. We’re always looking at new opportunities that would be a good portfolio fit for us, and we’ll continue to evaluate those opportunities as they arise.
We’ve said before that we expect new opportunities to arise from COVID-19, particularly with many of our peers in the business impacted by pandemic-related losses. One area of potential opportunity is contingency business. It’s not something we’ve written previously, and there is certainly a dislocation in that market right now. Like everything we do, we will enter into new lines cautiously and only where we have the necessary capabilities to do so.
In other Short-tail business where rates were up in every line of business, there was a wide range of improvement with the most significant increases in Downstream Energy, Ports & Terminals and Power & Utilities. In other lines, like Upstream Energy and Political Violence, rates were slightly up following several quarters of declining rates. And in our Property book, which is the second largest Short-tail line of business for us, rates are up on average just over 13% in 2020.
In the Long-tail lines, rate improvement has been significant, and this trend is continuing, particularly in the professional lines, specifically D&O, where rates are up almost 80% and professional indemnity where rates are up more than 30%. The impact of COVID-19 generally on these lines remains somewhat uncertain, but it’s likely to become clear as recessionary pressures decrease. We are well positioned in these markets as some of the bigger players have stopped writing new business in the U.K. I’ll note that the majority of our Long-tail portfolio is written on claims made basis. And again, we don’t write any Long-tail business in the U.S.
Our reinsurance portfolio, which is well spread geographically, is seeing moderate rate improvement overall except in loss affected accounts where rates are up over 29%. There is a wide variation in rate improvement by geography. We’ve previously talked about dislocation in the MENA markets where a number of players have shut down their offices in the region and IGI is a natural beneficiary of this business given our longstanding relationships across the region.
The market conditions of 2020 that are continuing into 2021 have provided us an actual opportunity to refine our existing portfolio and improve terms and conditions. Our underwriting teams have done an excellent job of staying focused during what has been a very challenging year. And I expect we will continue to find new opportunities to add to our existing risk portfolio.
Lastly, we are in the final stage of setting up a European platform. We have applied to the multi Financial Services Authority to establish an operation from which we will have direct access to the European markets now that we can no longer access our business from London as a result of Brexit. We expect to be able to make a more formal announcement pending the completion of the review process.
So I’m going to pause there and we will turn it over for questions. Operator, we are ready to take the first question please.
Questions and Answers:
Operator
[Operator Instructions] The first question comes from Mark Dwelle with RBC. Please go ahead.
Mark Dwelle — RBC Capital Markets — Analyst
Yeah, good morning. I just wanted to make sure to clarify related to the reserve adjustment in the quarter, make sure that I’ve got the accounting correct. So these are — the reserve addition was for liabilities that are denominated in say pound sterling that were just remeasured using a higher exchange rate, and then when translated back into dollars, that increment would result in what would appear like adverse development even though the actual liability is really unchanged on a sterling basis?
Waleed Jabsheh — President
That’s exactly right, Mark, and thanks for the question. Yeah. I mean, we try to balance as much as possible our liabilities and assets when it comes to foreign exchange exposure or foreign currency exposure. So yeah, I mean, our Long-tail segment is predominantly or in large part made up of policies in the U.K. So all our liabilities are held in sterling. So exactly that. I mean the pound strengthened against the U.S. dollar in the quarter by almost 6%. So that is pretty much reflected in the revaluation of the liabilities case that were there in sterling to begin with.
Mark Dwelle — RBC Capital Markets — Analyst
And then I suppose in some future quarter if the reverse is true, if the pound were to weaken, effectively you’d get a complementary benefit as those were remeasured into a lower dollar amount?
Waleed Jabsheh — President
That’s exactly right, Mark. Well, I mean, if you look at our first quarter results from last year, reports of the combined ratio of 81%, which is unusual, I mean, a lot lower than historical averages for us. So in that first quarter, the pound weakened in value against the U.S. dollar by almost 6% as well. So we got that — we saw that benefit in the underwriting results, but obviously, we took a hit on the asset side, which is just the reversal this time of — we’re taking the benefit on the asset side and we took a hit on the underwriting results. But at the end of the day, if we balance our liabilities and our assets efficiently, which is what we aim to do all the time, then whatever hit you get on one part of the financial statements, it should benefit [Indecipherable] benefit on the other. So looking at the full year results, you can see how healthy the combined ratio was at 89% and all the fundamental metrics that make up to the statement.
Mark Dwelle — RBC Capital Markets — Analyst
Okay. That’s helpful clarification. And then one other question that I had particularly to the results was just, there is a pretty sizable, about 25% increase in the investment income in the quarter on a year-over-year basis. Was that primarily due to the higher asset balance or were there other positive drivers in there as well?
Waleed Jabsheh — President
Can I direct Pervez, please to answer that question.
Pervez Rizvi — Group Chief Financial Officer
Thank you. I think one of the reason is that it was the higher asset balance, because what we did during the year, we tried to shift our investments towards the fixed income securities as compared to last year. And some of the investment where we put, we were having much more higher coupon rates. So it will start reflecting by the fourth quarter and we will see something in the coming years as well.
Mark Dwelle — RBC Capital Markets — Analyst
Okay. Thank you. That’s helpful. And then one last question, just kind of generally from a market condition standpoint. Obviously, you achieved some pretty strong rate increases in the quarter, and I was really just interested in kind of your sense or your views on how pricing continues to hold up into the new year and maybe how you see that developing as the year unfolds?
Waleed Jabsheh — President
Yeah. I mean, from what we’ve seen so far this year, there has been no significant change in pricing momentum. We’re still achieving healthy rate increases across most lines of business. There are still lines that are lagging, that have been lagging and have not necessarily been included in the last few years, such as Upstream Energy or Political Violence. We are seeing some classes such as construction, engineering actually strengthen in terms of rate momentum more recently. But in other areas, undoubtedly, in some classes of the business, we’ve had now — this would be our fourth consecutive year of achieving rate increases.
And so inevitably, new players come in, they see what’s going on in the market, they jump on the bandwagon and there will be an increased level of competition. We haven’t seen any silly, silly competition emerge just yet. We’ve seen sort of a reduction in the intensity of the rate increases in certain patches within certain classes of business, but it’s nothing that is concerning to us at this at this moment. So by and large, I mean, market continues in similar trends as we’ve reported in previous quarters.
Mark Dwelle — RBC Capital Markets — Analyst
Okay. I appreciate the color and insight. I’ll jump back in the queue and let other people have a chance. Thanks.
Waleed Jabsheh — President
Thanks, Mark.
Operator
[Operator Instructions] The next question comes from Will Allen with WFSA Capital. Please go ahead.
Will Allen — WFSA Capital — Analyst
Hi, guys. Thank you very much for taking the question, and congratulations on a cracking year from an operating performance, really impressive. I just had some questions, really there is nothing to thought on the operating side, so on the capital structure. Obviously, you’ve put together some great growth using the capital from the listing. Your — the other advantage of the listing was to open up the debt markets to you. And I was just wondering, how much capital surplus do you feel you have currently? How much growth can you fund with debt capital you’re making progress on moving towards that?
You also launched the buyback, but I don’t see anything done on that front. Would you — you lay out very clearly in the back end of the presentation the mismatch between your operating performance and where the share price is today. Would you take action on that front? And then finally, just — well, I guess, not quite finally. Secondly, on the warrants, whether you’ve considered the warrant exchange offer to reduce some of that future dilution? And then finally, you mentioned the dividend will be — the board, I guess this just a box ticking question, but I presume your 40% payout ratio policy is still intact, is that correct?
Waleed Jabsheh — President
Thanks, Will, for the questions. Let me tackle it one by one. So when it comes to capital, I mean at the moment, I mean, obviously, we’re trying to figure — we’re taking advantage, full advantage of the market. Our most stringent sort of exposure to capital requirement comes with [Indecipherable] with S&P. So for the time — I mean, for the time being, we are within comfortable levels of adequacy with S&P and there is lots of sorts of discussion that we can have with them.
Are we going to need to go out and raise capital in the near future? I don’t foresee that. We grew quite significantly last year and the year before, achieving almost 35% growth last year. We anticipate to continue to grow definitely, of course, maybe not necessarily at the pace that we grew at last year. So for the time being, we are looking all right from a capital front. When the time comes that we will require additional capital then that is definitely, probably the most viable option for us along with obviously other options. But, what you call it, that is definitely one of the major options on the table and we’ll do — we’ll use whatever mechanism is best for the company and for the shareholders and provide the most value.
In terms of liquidity, as we’re — maybe all aware, I mean, all the lockups expire on 17th of March. So we appreciate the frustration that — of where the stock price is and we’re just as frustrated and have a lot of skin in the game as any other investor. And, what you call it, we are hopeful that in time lockup expire that will over time hopefully address the liquidity issue and the stock price. But at the end of the day, we’ve got a solid company here. The fundamentals are sound, market conditions are ones we would normally drive in and we expect to continue take advantage of it and benefit from it.
In terms of the share buyback or the warrants, the board has, as you know, authorized us to repurchase up to $5 million worth of warrants and/or share buybacks. We have not taken any action on that front. It’s an option for us. It’s still out there. I mean, we’re continuously considering all the options that we have and we’ll take appropriate actions.
And in terms of the dividends, finally — I hope I haven’t missed anything. But lastly, in terms of dividend, our policy is still intact and the intention to continue with that policy is still there. So the board will meet towards the end of the month and we’ll decide on what action needs to be taken on the dividend side.
Will Allen — WFSA Capital — Analyst
Perfect. Thank you very much.
Waleed Jabsheh — President
Thanks, Will.
Wasef Jabsheh — Chairman & Chief Executive Officer
This is Wasef. I’ll just add to what Waleed said. It’s been tradition of IGI throughout the years to retain 60% of profits and dividend out 40%. And when we went public, in our presentations and road shows, we said that. And there hasn’t been any change on that kind of thinking and philosophy, but it all goes back to the board towards the end of the month, as Waleed said. So you will hear from us.
Waleed Jabsheh — President
Yes. So operator, we’re ready for our next question.
Operator
We have no further questions from anyone. So this concludes our question-and-answer session. I would like to turn the conference back over to Wasef Jabsheh for any closing remarks.
Wasef Jabsheh — Chairman & Chief Executive Officer
Well, thank you all for joining us today. We appreciate your continued support through 2020. We look forward to speaking with you again soon and hope we’ll visit in person when we are all allowed to. If you have any additional questions, please contact Robin and she’ll be happy to assist. And I wish you all a great day.
Operator
[Operator Closing Remarks]