Global Indemnity investor Cove Street Capital has warned that the company does not have the capabilities to make a success of its bid for rival E&S insurer James River.
Jeffrey Bronchick, founder and portfolio manager at Cove Street Capital, told this publication in an interview that the potential deal was “a terrible, ridiculous idea”.
“It’s nuts to even think about it,” he added, suggesting that putting the two franchises together would create a mess.
Yesterday, this publication revealed that James River entered into sale talks after Global Indemnity made an indicative offer to purchase the insurer at roughly $15.00 per share.
The non-binding approach, which valued the carrier at roughly $550mn, followed various approaches by Global Indemnity in prior months. The all-stock proposal values the business at more than 2x the share price.
But the shareholder lambasted the idea, saying that Global Indemnity “doesn’t have the management breadth to buy a deeply troubled insurance company”.
“The company is ill-suited for the task in hand,” he said in the interview. “And the [all-stock] part [of the proposal] is stunning.”
Cove Street is the 14th largest shareholder in Global Indemnity but ranks among the top-10 external institutional investors.
The executive also noted that James River has had problems of its own, including the recent legal dispute with Fleming Intermediate Holdings to complete the $277mn sale of its casualty re unit.
Moreover, there are concerns around the adequacy of James River’s reserves.
In Q4, James River recorded a $25mn general liability-related reserve charge that sent its combined ratio up 9.7 points to 98%.
“It is a deeply troubled insurance company,” Bronchick said. “And this is assuming that all reserving is within the limits of good taste.”
Bronchick argued James River would need to “bleed out for a couple of years” and that Global Indemnity should let the “centipede march through” on reserve deterioration.
Meanwhile, he argued that Global Indemnity has had “mediocre results through multiple [market] cycles”, despite all-time high market rates, and even after it came under activist attack from Harbert Management in 2021.
The Pennsylvania-headquartered insurer has experienced various changes since the appointment of Jay Brown as CEO in October 2022 prior to Harbert exiting its position in the firm.
Over the last year and a half, the carrier has exited certain lines of business, sought to address its expense base and even retained Insurance Advisory Partners to explore a sale of the business that was ultimately pulled. (See: Global Indemnity suspends Penn-America sale: Limited read-across for E&S M&A)
Bronchick hailed Brown’s work, saying he is a credible executive, but argued that the CEO needs time to “fix” the insurer.
He set up an opposition between this “deep water adventure” with James River and the “bird-in-the-hand" of allowing Brown to do the work “piece by piece” and driving the valuation from 60% of book up to book.
He said: “This just widens the cone of variability by mountains.”
“You’d be taking one of the worst E&S performers, one mediocre performer, and combining them – how is that going to go?”
James River’s board appointed Citi and Ardea Partners late last year to run a strategic process that includes the partial or full sale of the company.
On March 9, this publication reported that James River had been unable to secure a binding offer that hit its target valuation on February 19.
However, rather than pull the process, it is understood to have remained engaged with bidders – including HDI and Arch – and indicated there would be a fresh bidding round later this month.
Now, it is understood that James River and Global Indemnity are poised to start due diligence work.