Wednesday, March 20, 2024

James River Group: E&S Insurer, Broken Divestiture, Strategics Circling

James River Group Holdings (JRVR) is a small (~$295MM market cap) insurer primarily focused on small and middle market casualty risk in the U.S. excess and surplus ("E&S") market.  The E&S market can be an attractive market segment because it doesn't face the same regulatory constraints as the admitted (regulated) market, potential clients typically have to demonstrate they can't get regular policies before entering the E&S market where pricing and policies can be more bespoke (and profitable).  James River is relatively good at underwriting these risks, they've had some hiccups with commercial auto (particularly Uber and food-delivery services), but have maintained a low-to-mid 90s combined ratio over the past decade in E&S.  The company insists that current market conditions are favorable, but like banking, it often takes several years of hindsight to confirm that conclusion.

The recent issue for James River has been their reinsurance segment, JRG Re, where the insurer had to raise capital in 2022 via a $150MM preferred stock issuance to plug a capital hole.  JRG Re was put into run-off in 2023 and then sold to Fleming Insurance Holdings (PortCo of Altamont Capital Partners) for 75% of book value (~$277MM, partially funded via an upstreamed dividend of excess capital).  Fleming has gotten cold feet and refused to close the deal, leading to James River taking the buyer to court to enforce specific enforcement.  Toss in a recent material weakness accounting issue in the mix, which has since been remediated, and you can see why investors have lost faith in the company.

Following the announcement of the JRG Re segment sale in November, James River announced plans to explore strategic alternatives that would include a "sale, merger or other strategic transaction."  In the months since, James River has been linked by insurance industry rags to much larger peers Everest Group (EG) and Arch Capital (ACGL) and more recently to odd-duck Global Indemnity (GBLI).  Global Indemnity reportedly offered an all stock deal valuing JRVR at $15/share (versus ~$8/share today), but GBLI is illiquid (controlled) and a publicly traded partnership, meaning clumsy K-1 tax forms for U.S. investors.  GBLI trades for ~2/3rds of tangible book today versus JRVR at just under 90% of tangible book.  Global Indemnity is similarly an E&S insurer that could potentially drive synergies, but given they're roughly the same size and the partnership dynamics, it's unclear to me and the market how real is that $15/share offer and where might the pair trade if a deal was announced.  Potentially GBLI views this as a way to convert to a C-Corp and boost their liquidity, which could end up benefiting both sides.

Either Arch Capital or Everest Group make more sense as buyers, they both trade well above tangible book, another beaten up E&S insurer that was recently taken private is Argo Group International (ARGO), Brookfield paid 115% of tangible book early last year (I participated in that situation, although not profitably).  A similar valuation for JRVR would equate to $10.40/share or 30% upside from $8.

Insurance Insider is reporting today that GBLI and JRVR have entered into more formal talks to merge, with the situation pretty fluid, I'll leave this as a quick note and see if the crowd has more informed/complete thoughts.

Disclosure: I own shares of JRVR

13 comments:

  1. the fact that a deal with a bigger insurer didn't materialize suggests to me that gbli might be there only option to 'obscure' some of their weaknesses. And a merger of equals to make a bigger company might not be a bad idea.

    ReplyDelete
    Replies
    1. That's a good read of the room, might be true. GBLI tried to sell themselves last year and didn't get the number they wanted, I worry that here they're sort of the seller. GBLI could merge with JRVR making their stock more liquid giving the chunky GBLI shareholders an off ramp to exit.

      On the other side, talks could still be ongoing with Arch and Everest as the final two, but GBLI just made it three with their over the top bid. I'm guessing we'll find out soon enough, it'll be an interesting proxy to read.

      Delete
  2. Thanks for the write up. Had been looking at this one. Clearly not a whole of confidence in an offer materializing given the lack of price response. Also Long, but small.

    ReplyDelete
  3. I have a technical question. JRVR has 37.8m common shares outstanding and common equity of 534m. Also, it has 150k preferred with 144.8m equity on balance sheet. Preferred appear to have preference on liquidation proceeds of $1k per share (150m).

    As per my calculation, Tangible book value is 466m. Excluding preferred it will be roughly 316m left for common equity holders. That equates to approximately $8.35 per share of TBV. Wondering if I am I missing something? Thanks, Jay

    ReplyDelete
    Replies
    1. https://www.sec.gov/Archives/edgar/data/1620459/000162045924000018/a4q23jrvrpressrelease.htm

      See the last page of their 8-K for their math. But I think you're right, should be using $150MM in this scenario, although that still gets you to above $316MM left.

      Delete
  4. https://investors.jrvrgroup.com/news-releases/news-release-details/james-river-granted-motion-ordering-fleming-complete-its-pending

    ReplyDelete
    Replies
    1. https://seekingalpha.com/pr/19689763-james-river-completes-sale-of-casualty-reinsurance-business-to-fleming-holdings

      And now its closed, that was a quick resolution.

      Delete
  5. Tracking comments

    ReplyDelete
  6. https://seekingalpha.com/news/4102802-james-river-slumps-after-global-indemnity-says-talks-have-paused

    ReplyDelete
    Replies
    1. Thanks. They seemed a bit like a long shot anyway given their discount to book and corporate structure, still think JRVR is in play.

      Delete
  7. I posted about GBLI pausing merger talks because I was surprised that the JRVR stock was tanking and that seemed like the explanation. My guess is that the sale of JRG RE leads to an increased rating for JRVR from AM Best.

    ReplyDelete
  8. https://www.insuranceinsiderus.com/article/2dbp23ybtt9mz3w7f1vcw/specialty-lines/james-river-again-exploring-divestiture-of-fronting-unit-falls-lake

    The market's initial reaction is negative

    ReplyDelete