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We voted for the redomestication scheme last year
because we believed the scheme had the potential to create shareholder value by freeing up substantial excess capital that could then
be returned to shareholders. In a press release issued on August 28, 2020, and again in your annual letter to shareholders, you confirmed
that the redomestication enabled the company to move roughly $250 million of capital to the parent LLC. And yet, over the last eight months
nothing has been disclosed about the expected use of this capital, other than to say it is available for “general corporate purposes.”
This is an insufficient explanation for what amounts to roughly 60% of the current market value of the business.
To date the redomestication scheme has benefitted
insiders at the expense of shareholders. The company spent significant time and capital executing the redomestication scheme, including
a $10 million fee to Fox Paine and a $2 million grant to Director Hurwitz. The potential for a simpler corporate structure to result in
reduced expenses is offset by increased taxes. Additionally, the conversion to an LLC resulted in GBLI’s removal from the Russell
2000, creating significant selling pressure on the stock. We believe a return of the excess capital to shareholders would offset the costs
shareholders have born, drive the valuation of the stock to peer levels, and address the long-term, significant underperformance of GBLI
stock relative to peers.
As a major shareholder, we have repeatedly asked you
and the company to disclose the intended use for the excess capital, noting our preference for returning it to shareholders. Eventually,
we were told our questions would be answered at an investor day that would be held in April 2021, which we were then told was delayed
to May 2021, and now we are told has been delayed once again to September 2021. It is in the best interest of shareholders to stop any
further delays and immediately return the excess capital to shareholders.
The excess capital also drags down the long-term potential
of the business, which would otherwise be extremely attractive. The current pricing environment in the insurance industry provides a favorable
backdrop for strong fundamental results, and the compensation plan the board approved for newly hired CEO David Charlton validates this
view. The compensation package rewards Mr. Charlton with 5% of the value of the insurance operations (excluding the $250 million of excess
capital) valued at 0.0x, 1.2x, 1.4x, or 1.8x book value, depending on achieving certain levels of Return on Equity (“ROE”)
and Net Written Premium (“NWP”) growth over the next several years. In order to realize any compensation from his Book Value
Appreciation Rights, Mr. Charlton must deliver an average ROE of at least 8.4% and an average NWP CAGR of at least 6.0% between 2022 and
2026. In the best case scenario, to realize a 1.8x book multiple, Mr. Charlton must generate an average ROE of over 12.5% and NWP CAGR
of over 8.0%. Either scenario would represent a substantial improvement on GBLI’s recent performance.
1 Data per Bloomberg and company filings. Peers include AMSF,
EIG, CB, RLI, SIGI, WRB, MKL, ORI, HCI, THG, AFG, TRV, HRTG, PROS, KMPR, Y, DGICA, JRVR, STFC, HALL, UFCS, ARGO, AIZ, PTVCB.
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