Harbert Discovery Fund Issues Letter to Chairman of the Board of Directors, Global Indemnity Group, LLC
Shareholders expect much greater transparency into the business, in addition to a more shareholder friendly capital allocation strategy.
BIRMINGHAM, Ala., Aug. 12, 2021 (GLOBE NEWSWIRE) --
Mr. Saul Fox, Chairman of the Board of Directors
Global Indemnity Group, LLC
Three Bala Plaza East
Suite 300
Bala Cynwyd, PA 19004
By Federal Express and email
Chairman Fox,
Global Indemnity Group, LLC’s (“GBLI” or the “Company”) recent results show that the ~$250 million of surplus capital is dragging down the overall returns of the business, and the core returns from the insurance operations have significantly underperformed peers during the best environment for the industry in years. At a time when GBLI should be able to take advantage of its excess capital to nimbly and aggressively drive profitable growth, GBLI has failed to deliver. Consequently, GBLI’s shares continue to languish, with a worst-in-class valuation multiple. We believe these results further demonstrate that the best use of the excess capital freed up by the redomestication scheme is to immediately return that capital to shareholders via a special dividend and/or a share repurchase.
In your May 24 response to the letter we sent you on May 19, you communicated that “we may not share the same strategic vision for the Company.” Yet to date you have neither engaged in a meaningful dialogue with us nor communicated your strategic vision for the Company to all shareholders. We expect you will remedy this deficiency at the September 13 investor day by either disclosing your plans to immediately return the excess capital or describing (in detail with specifics) how that capital can be put to use to deliver a better risk adjusted return for shareholders, in spite of the significant evidence to the contrary.
We urge you to detail how the business will be managed for the best interest of all shareholders, as is required by your fiduciary duty. The long history of questionable and expensive strategic actions, coupled with the excessive fee payments to Fox Paine, appear to indicate a strong preference for collecting fees rather than managing the business in the best interest of all shareholders. With the change in management incentive compensation away from restricted stock, it appears you are moving further away from aligning the incentives of insiders with the independent shareholders. This is unacceptable. You have chosen to run GBLI as a public company with independent shareholders, but if you cannot or will not run the Company with their interests in mind, then you should take GBLI private.
We received significant shareholder support following our prior letter. Shareholders expect much greater transparency into the business, in addition to a more shareholder friendly capital allocation strategy. If the Company has any interest in addressing the persistent underperformance and worst-in-class valuation multiple, GBLI must be much more transparent in how the business is being managed. In fact, while you have publicly stated that there will be an Investor Day on September 13, you still have not disclosed the exact time or location of the event. The exact time and location should be immediately disclosed so that shareholders, the owners of the business, are afforded the opportunity to attend that event and ask questions of management and the GBLI Board of Directors (the “Board”).
Following are a list of questions that we expect you, management, and the Board to address at the upcoming Investor Day. We encourage all shareholders to voice their concerns as well, and reiterate that you and the Board have a fiduciary duty to all shareholders, regardless of the Company’s control provisions.
Why is GBLI underperforming to such a significant degree during the best environment for the industry in years? If the Company had the capability to utilize the excess capital in order to support profitable organic growth, we would have expected it to show in GBLI’s fundamental results. Given the magnitude of excess capital relative to the current operations and relative size of GBLI, the Company should be able to nimbly and aggressively take advantage of the current pricing environment. However, GBLI has significantly underperformed peers in terms of underwriting and growth. Industry peers have generated banner profitability and growth, with many significantly larger companies exceeding 20% net written premium (“NWP”) growth in the second quarter. Conversely, after three straight quarters of underwriting losses, GBLI’s Q2 was only slightly profitable with single-digit NWP growth.
To view the Q2 2021 Combined Ratio1, visit https://www.globenewswire.com/NewsRoom/AttachmentNg/794b4721-5311-4e13-941e-07e033f51bb6
To view the Q2 2021 NWP Growth2, visit https://www.globenewswire.com/NewsRoom/AttachmentNg/b95e573c-1c03-4d05-a7d9-ec704bdb7e99
What is the best use of the excess ~$250 million, if not to return the capital to shareholders? Recent results do not support the case for organic growth. Based on GBLI’s history and the years of underperformance following the 2015 acquisition of American Reliable, we do not believe an acquisition is in the best interest of shareholders. The Company paid $100 million for the American Reliable acquisition, not including $6.5 million of fees to Fox Paine or $5.1 million of additional professional fees to third parties. In the Company’s 2020 investor presentation, you highlighted the $7.9 million profit generated in 2019 from the Specialty Property segment as evidence that GBLI had finally turned around American Reliable. This was after the segment significantly underperformed expectations from the outset, including losing $47.9 million in 2018. Then in 2020, Specialty Property again underperformed, losing $16.9 million. Clearly, the segment had not been turned around, and the acquisition has been a drastic misallocation of resources. With the losses incurred to date and the fees paid in conjunction with the American Reliable acquisition, it would take decades of consistent, above average results for this transaction to deliver an acceptable outcome for shareholders. Another acquisition is not in shareholders’ best interest.
How will you address the persistent discount between the stock price and the Company’s book value? GBLI has not traded at or above book value for the last ten years. On average, the stock has traded at 0.7x book value.3
To view the GBLI Share Price vs. Book Value, visit https://www.globenewswire.com/NewsRoom/AttachmentNg/fd6a8734-3b3d-41f6-90a0-7b97eb3e0017
We believe the main reasons for this are the excess capital, concerns regarding the fees paid to Fox Paine, lack of transparency, and the long history of anemic book value growth. In fact, GBLI’s book value per share has declined from a high of $55.19 at the end of 2016 to $48.79 today, in part as a result of the Company’s apparent focus on transactions that generate fees for Fox Paine at the cost of profitably growing the business. The negative impact of these transactions and the excess capital also shows in GBLI’s five year average return on equity of 2.0%, compared to a peer average of 8.1%.4
Given the underperformance and the apparent preference for generating fees for yourself at the expense of growing book value for all shareholders, it is no wonder that the share price has underperformed the KBW Property & Casualty ETF by over 60% over the last five years.5
To view the GBLI Share Price vs. Peers, visit https://www.globenewswire.com/NewsRoom/AttachmentNg/0bd41437-b966-47df-8b82-8ca9bbcf8adf
We believe there is a significant opportunity to address this discount and underperformance by returning the excess capital to shareholders, delivering on the potential afforded the Company by the favorable industry backdrop, and ceasing all transactions/reorganizations that only serve to generate fees for yourself.
Why did you choose not to disclose Fox Paine’s fee associated with the redomestication when you issued the proxy statement to seek shareholder approval for the transaction? We question whether shareholders would have voted the same way had they known the extent to which you would benefit from the redomestication, particularly without more insight into the purpose of the transaction. It has been nearly a year since the redomestication and, other than the extremely vague for “general corporate purposes” description, you have still not disclosed the plans for the $250 million of excess, and immediately disbursable, capital which was moved up to the parent company as part of the redomestication.
Was the goal of converting to an LLC from a Corporation to force the Index funds to sell so you could buy shares at a discount? LLCs cannot be members of the Russell 2000 Index. As a result, Russell 2000 ETFs that held GBLI shares were forced to sell immediately after the conversion was approved. This resulted in millions of shares sold in the days following the shareholder meeting, when normally only 10,000 to 15,000 shares would trade in a day. The stock traded at an intraday low of $17.01 on August 27, 2020, down 32% from its close the day before. It appears you were prepared for this forced selling as you purchased 891,166 shares, or $20.7 million of stock, between August 28, 2020 and September 3, 2020. Furthermore, GBLI shareholders now receive K-1s, which significantly limits the number of investors willing to purchase shares. Unless you plan to return the excess capital to shareholders, we do not see any rationale for converting from a corporation to an LLC. Based on your actions and lack of strategic communications to date, we can only conclude that the intention of converting to an LLC was for you to take advantage of the forced selling by Index Funds.
Do the independent directors consider the expected return on the transactions advised by Fox Paine, including the fees they pay you? Since 2015, GBLI has paid Fox Paine $42 million of transaction-related fees and $13 million in management fees. In 2015, GBLI paid Fox Paine $6.5 million for advising on the American Reliable acquisition, which we noted above has not generated value for shareholders other than yourself. This was in addition to $5.1 million of additional professional fees for that transaction. Even ignoring the horrendous return the transaction has generated to date, a total fee burden that exceeds 10% of the transaction value appears wildly excessive and certainly is not customary.
In 2017, the Board approved an advisory payment of $11.0 million to Fox Paine for advising on an $83.0 million share repurchase. A share repurchase at a discount to book value is clearly accretive to shareholder value, and we would be supportive of additional share repurchases with the current excess capital. However, we cannot begin to fathom the rationale for a fee that is equivalent to 13% of the value of the shares repurchased.
As we have noted repeatedly, the 2020 redomestication transaction would create shareholder value if you return the excess capital to shareholders. Barring a return of capital, the reduction in expenses is expected to be offset by higher taxes. As a result, the only beneficiaries thus far are yourself and your entity, Fox Paine, not all shareholders. Similarly, it is unclear whether the 2018 reorganization, in which GBLI paid a $12.5 million transaction fee to Fox Paine, created any shareholder value, particularly since much of that appears to have been unwound as part of the 2020 redomestication.
As shareholders, we ask the independent directors of the Company to carefully and thoughtfully contemplate how the Company’s resources are allocated. The table below highlights the combined $55 million of fees paid to Fox Paine since 2015.
To view the Fox Paine Fees6, visit https://www.globenewswire.com/NewsRoom/AttachmentNg/2ec645a9-7097-46a1-a29d-b58c12bc3f05
Under what circumstances would you consider selling GBLI to a strategic acquirer? We are aware that you have historically considered selling GBLI, that there were interested buyers in the past, and understand there would be interested buyers today. Shareholders would have been better off receiving a premium to book value for their GBLI shares at any point over the last ten years and reinvesting the proceeds in industry peers. The current M&A and industry pricing environment provide a compelling backdrop for a sale. Moreover, given the recent fundamental performance, a larger strategic buyer would likely be capable of generating significantly better results than the Company has delivered over the last five years.
Are you considering taking the company private yourself? CEO David Charlton’s Book Value Appreciation Rights accelerate in a change of control transaction. However, his employment agreement excludes an acquisition by a Fox Paine-related entity from the change of control definition. Is the reason you have not returned the excess capital to shareholders that you plan to utilize it to help fund a take private transaction at a favorable price? What assurances do shareholders have that the Board will truly represent the interests of all shareholders and ensure a fair price in the event of a take-private by Fox Paine?
We will attend the Investor Day Conference on September 13, and we look forward to asking additional questions, meeting the new management team, and discussing their plans to deliver on the aggressive targets outlined in their employment agreements. However, there is no need to wait until September, over a year after the redomestication, to either return the excess capital that was freed up as part of that transaction or to disclose an alternate use that offers a better risk-adjusted return for all shareholders.
I continue to prefer a path where we can have private conversations that are not in the public sphere. I think it would be more productive if I could speak directly with you and the Board.
Please do not squander this opportunity to generate immediate and real value. Shareholders deserve better.
Sincerely,
Harbert Discovery Fund, LP
Kenan Lucas, Managing Director and Portfolio Manager of Harbert Discovery Fund GP, LLC
Important Disclosure
THIS STATEMENT CONTAINS OUR CURRENT VIEWS ON THE VALUE OF SECURITIES OF GLOBAL INDEMNITY GROUP, LLC (“GBLI”). OUR VIEWS ARE BASED ON OUR ANALYSIS OF PUBLICLY AVAILABLE INFORMATION AND ASSUMPTIONS WE BELIEVE TO BE REASONABLE. THERE CAN BE NO ASSURANCE THAT THE INFORMATION WE CONSIDERED IS ACCURATE OR COMPLETE, NOR CAN THERE BE ANY ASSURANCE THAT OUR ASSUMPTIONS ARE CORRECT. WE DO NOT RECOMMEND OR ADVISE, NOR DO WE INTEND TO RECOMMEND OR ADVISE, ANY PERSON TO PURCHASE OR SELL SECURITIES AND NO ONE SHOULD RELY ON THIS STATEMENT OR ANY ASPECT OF THIS STATEMENT TO PURCHASE OR SELL SECURITIES OR CONSIDER PURCHASING OR SELLING SECURITIES. THIS STATEMENT DOES NOT PURPORT TO BE, NOR SHOULD IT BE READ, AS AN EXPRESSION OF ANY OPINION OR PREDICTION AS TO THE PRICE AT WHICH GBLI’S SECURITIES MAY TRADE AT ANY TIME. AS NOTED, THIS STATEMENT EXPRESSES OUR CURRENT VIEWS ON GBLI. OUR VIEWS AND OUR HOLDINGS COULD CHANGE AT ANY TIME WITHOUT NOTICE AND WE MAKE NO COMMITMENT TO UPDATE THIS STATEMENT IN THE EVENT OUR VIEWS OR HOLDINGS CHANGE. INVESTORS SHOULD MAKE THEIR OWN DECISIONS REGARDING GBLI AND ITS PROSPECTS WITHOUT RELYING ON, OR EVEN CONSIDERING, ANY OF THE INFORMATION CONTAINED IN THIS STATEMENT.
About Harbert Discovery Fund (“HDF”)
HDF invests in a concentrated portfolio of publicly traded small capitalization companies in the US and Canada. We perform significant due diligence on each portfolio company prior to investing. In addition to researching all publicly available information and meeting with management, our diligence includes substantial primary research with industry experts, consultants, bankers, customers and competitors. We often spend months or years researching ideas before making an investment decision and we only invest in companies that we believe are significantly undervalued, and where there is the potential for change to enhance or accelerate value creation. In an effort to unlock this potential value, we seek to work directly with the boards and management teams of our portfolio companies privately and collaboratively, engaging with them on a range of factors including governance, board composition, corporate strategy, capital allocation, strategic alternatives and operations. We have effected positive, fundamental changes at our current and past investments through this behind-the-scenes, constructive approach.
About Harbert Management Corporation (“HMC”)
HMC is an alternative asset management firm with approximately $7.8 billion in Regulatory Assets Under Management as of July 31, 2021. HMC currently sponsors nine distinct investment strategies with dedicated investment teams. Additional information about HMC can be found at www.harbert.net.
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1 Data per Bloomberg and company filings. Peers include: AMSF, EIG, CB, RLI, SIGI, WRB, MKL, ORI, HCI, THG, AFG, TRV, HRTG, KMPR, Y, DGICA, JRVR, ARGO, and AIZ.
2 Data per Bloomberg and company filings. Peers include: AMSF, EIG, CB, SIGI, WRB, MKL, ORI, HCI, THG, AFG, TRV, KMPR, Y, DGICA, and JRVR.
3 Data per Bloomberg.
4 Data per Bloomberg and company filings. Peers include: AMSF, EIG, CB, RLI, SIGI, WRB, MKL, ORI, HCI, THG, AFG, TRV, HRTG, KMPR, Y, DGICA, JRVR, ARGO, and AIZ.
5 Data per Bloomberg. GBLI and KBW Property& Casualty ETF normalized to 100 from August 4, 2016.
6 Data per company filings.
Harbert Management Corporation Tate Maddox www.harbert.net
