James River Group Holdings, Ltd. — Q2 2022 Form 10-Q
Business context and period. Bermuda-based specialty insurer and reinsurer reporting the quarter and six months ended June 30, 2022. Its segments are Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other. Amounts below are in U.S. dollars; financial statements are unaudited.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Gross written premiums | $399.7m | $380.1m | $759.7m | $753.4m |
| Net earned premiums | $186.3m | $172.7m | $376.1m | $333.3m |
| Total revenue | $184.8m | $191.6m | $386.8m | $374.5m |
| Net income (loss) | $7.7m | $20.8m | $17.9m | $(82.6)m |
| Net income (loss) available to common shareholders | $5.0m | $20.8m | $14.4m | $(82.6)m |
| Operating cash flow, excluding restricted cash movements | Not stated for quarter | Not stated for quarter | $139.2m | $43.4m |
- Q2 combined ratio was 91.0% versus 89.7% a year earlier; six-month ratio was 94.2% versus 142.5%. A ratio below 100% indicates underwriting profit.
- Underwriting profit was $16.8m in Q2 versus $17.8m; six-month profit was $21.7m versus a $141.5m loss. Six-month adjusted net operating income was $33.9m versus an $90.0m loss; this is a non-GAAP measure.
- Net investment income rose to $14.7m in Q2 and $31.0m for the half. Net realized and unrealized investment losses were $17.1m and $22.1m, respectively, versus gains of $3.5m and $9.8m in the comparable periods.
- Q2 loss ratio was 65.2% and expense ratio 25.8%; six-month ratios were 68.3% and 25.9%, respectively. Six-month accident-year loss ratio increased to 66.9% from 65.1%.
Balance sheet, debt, and liquidity
- At June 30, total assets were $5.27bn and total liabilities $4.53bn. Shareholders’ equity was $594.4m; the company also reported $144.9m of Series A redeemable preferred shares outside shareholders’ equity.
- Cash and cash equivalents were $350.7m, with another $102.1m restricted. Total invested assets were $2.04bn. Fixed-maturity securities had a $1.60bn fair value, down from $1.68bn at year-end 2021.
- Senior debt was $222.3m and junior subordinated debt $104.1m. The company repaid $40.0m under its 2017 facility during the first quarter. Its reported leverage ratio was 23.1%, below the 35.0% covenant maximum; it reported compliance with applicable covenants.
- Operating cash flow excluding restricted cash increased to $139.2m for the half. Financing cash flow included $144.9m net proceeds from preferred issuance and $40.0m of debt repayments.
Material changes and unusual items
- Gross written premiums rose 5.1% in Q2, led by 24.6% growth in Excess and Surplus Lines. Casualty Reinsurance premiums fell 78.0% as the company downsized that book; Specialty Admitted premiums declined 3.3%.
- The prior-year six-month loss included $166.7m of adverse reserve development, primarily from a legacy commercial auto account. In 2022, six-month prior-year development was $5.2m adverse, including $6.8m related to the new casualty retrocession transaction.
- On March 31, 2022, JRG Re completed a loss portfolio transfer with Fortitude Re covering specified casualty reinsurance business, for a $335.0m premium and up to a $400.0m aggregate limit. $310.0m was credited to a funds-withheld account and $25.0m paid in cash. The agreement generated $1.3m of first-half crediting fees and $11.5m of segment losses, including adverse development.
- In March, the company issued $150.0m of 7% perpetual convertible preferred shares; carrying value after issuance costs was $144.9m. The shares accrue dividends, rank senior to common shares, and are initially convertible into about 5.64m common shares. Q2 preferred dividends reduced earnings available to common shareholders by $2.6m.
- Rising interest rates drove $144.6m of after-tax unrealized fixed-income losses through other comprehensive income in the first half, reducing equity. Accumulated other comprehensive loss reached $114.6m from $30.0m of income at year-end.
Outlook, commentary, and risks
- No specific earnings or revenue guidance was provided. Management cited attractive Excess and Surplus Lines market conditions and premium growth, while continuing to reduce Casualty Reinsurance exposure. Management cautioned that interim results are not necessarily indicative of full-year performance.
- Management said higher yields on newly invested funds were supporting investment income, but rising rates and inflation pressured fixed-income valuations and equity and loan holdings, and increased variable-rate debt expense. It noted possible further inflation and economic slowdown risks.
- Reserve estimation remains a critical uncertainty. Gross loss reserves were $2.73bn, of which 59.5% was incurred but not reported. The company also has material counterparty exposure if Rasier/Aleka collateral fails to keep pace with legacy auto losses; management monitors collateral and may request additions.
- Other risks include investment-market and credit exposure, reinsurance recoverability, catastrophe losses, inflation’s effect on claims and expenses, and the impact of financial-strength ratings. A.M. Best rating was A- with a stable outlook.
- A securities class action alleges inadequate disclosures about reserves for Rasier-related policies; plaintiffs indicated they intended to seek leave to amend their complaint. The company considers the claims without merit and intends to defend them. Management said other proceedings were not reasonably likely to have a material adverse effect.
- After quarter-end, the board declared a $0.05 per common share dividend payable September 30, 2022, and a $2.6m preferred dividend payable the same date.
Most important facts for investors to verify
- Whether reserve estimates—especially legacy commercial auto and casualty reinsurance—remain adequate as claims develop.
- The sufficiency and collectibility of collateral and recoverables from Rasier, Aleka, Fortitude Re, and other reinsurers.
- How interest rates, inflation, and market conditions affect investment values, earnings, liquidity, and capital.
- The terms, dividend burden, potential dilution, and change-of-control provisions of the Series A preferred shares.
- Progress and potential exposure from the securities class action, and continued compliance with debt covenants and insurance-company capital requirements.