James River-Global Indemnity deal comes amid evolving E&S market

A proposed merger between excess and surplus (E&S) specialists James River Group Holdings Ltd. and Global Indemnity Group LLC comes as the US E&S market continues to evolve after recent strong growth.

Global Indemnity Group made an indicative nonbinding offer to acquire James River Group Holding in a proposed all-stock transaction at about $15 per share, which values the firm at approximately $550 million, according to a March 15 Insurance Insider US article.

The E&S market comprises specialty lines that fall outside the scope of more conventional insurance.

E&S coverage and rates have been growing organically in the past few years, making M&A between underwriters offering E&S coverage less of a priority, according to Keefe Bruyette & Wood analyst Meyer Shields.

"When companies can grow organically, and that is a consequence of rate increases more than anything else, then undertaking the distraction and the risk of a deal is less tempting," Shields told S&P Global Market Intelligence.

Evolving E&S market

While declining to speak on the James River-Global Indemnity deal directly, Piper Sandler analyst Paul Newsome said any transaction would come during what may be a slowdown in the E&S market generally, as price increases become fewer and smaller following years of growth. Following periods of rate increases and an expanding market, it is not unusual for companies who previously focused on organic growth to turn to M&A to continue growing amid a changing marketplace, Newsome told Market Intelligence.

"You will always see companies that make mistakes in a hard market and, as things slow down, the mistakes start to become visible," Newsome said. "So, companies do restructurings, they buy other things, they sell them or sell parts of them — the M&A in general and the restructuring starts to accelerate."

Casualty lines

The majority of James River's E&S direct premiums written are in the casualty space, according to a Market Intelligence data analysis, an area that remains a major line of business for E&S carriers.

After years of growth, E&S casualty lines are now feeling the effects of social inflation, Newsome said.

While acknowledging a smaller increase in E&S property rates in 2024 versus 2023, Shields flagged a potential rise in casualty rates due to social inflation. Additionally, risks like climate change and cybersecurity are increasing, providing room for both admitted and nonadmitted carriers to grow, Shields said.

"You've got these perennially climbing risks, which requires more expertise to underwrite, and that overlaps pretty decently with the excess and the surplus lines market," Shields said.

One part of the E&S casualty market with mixed results of late is the broad "other liability" line of business reported within regulatory statements. This includes numerous subtypes of insurance such as directors and officers, completed operations, errors and omissions, environmental liability, commercial excess and umbrella.

Among US insurers writing E&S business, W. R. Berkley Corp. was the largest underwriter of other liability coverage, with $2.89 billion in direct premiums in 2023, up 11.5% from the year prior.

Fairfax Financial Holdings Limited, the second-largest underwriter of other liability coverage, wrote $2.71 billion in premiums, a modest decrease of 1% from the year before. Berkshire Hathaway Inc., the third largest underwriter, with $2.69 billion in direct premiums written, saw its direct premiums decline 16.6% from 2022.

American International Group Inc. and Chubb Ltd., which also rank among the largest underwriters of other liability coverage, saw modest growth in direct other liability coverage premiums written year over year, with 4.1% and 1.9%, respectively.

Watching the reserves

The potential deal comes amid a difficult time for the potential target, with James River's stock in freefall and announcing in November that it would sell its third-party casualty reinsurance business, JRG Reinsurance, to Fleming Insurance Holdings. The sale was expected to close during the first quarter of 2024 but has so far only resulted in a lawsuit against Fleming Intermediate Holdings seeking to force Fleming to complete the $277 million acquisition of JRG Reinsurance. Per a New York Supreme Court order Monday, Fleming must complete the transaction on or before April 16.

James River is likely pursuing the sale due to stresses on its loss reserves, Shields said.

"There are a lot of companies that have been reassessing the adequacy of their loss reserves, because the nature of casualty is it has a long tail, taking years for claims to be completely paid," Shields said. "That means that even if the claim we're talking about happened quite a few years back, if they're not settled then those claims are still subject to the inflation that we're seeing right now."

Neither James River nor Global Indemnity responded to Market Intelligence's request for comment on the potential merger.