James River Group Holdings, Ltd. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company is a Bermuda-based specialty insurance and reinsurance holding company with Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other segments. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Gross written premiums | $346.6 | $311.9 | $1,100.0 | $897.3 |
| Net earned premiums | $170.6 | $153.0 | $503.9 | $447.7 |
| Total revenue | $191.0 | $177.5 | $565.5 | $474.5 |
| Net investment income | $15.3 | $15.0 | $44.7 | $51.1 |
| Net income (loss) | $(23.9) | $26.3 | $(106.5) | $25.1 |
| Diluted EPS | $(0.64) | $0.85 | $(3.12) | $0.81 |
| Combined ratio | 122.1% | 94.2% | 135.6% | 96.6% |
- Underwriting: Underwriting loss was $37.6 million in Q3 and $179.2 million year to date, versus profits of $8.9 million and $15.4 million in the comparable 2020 periods. The loss ratio was 97.3% for Q3 and 109.1% year to date; the expense ratio was 24.8% and 26.5%, respectively.
- Balance sheet at September 30: Total assets were $4.784 billion, total liabilities $3.970 billion, and shareholders’ equity $813.6 million. Cash and cash equivalents were $220.6 million, restricted cash $10.0 million, and total invested assets $2.061 billion. Loss reserves were $2.597 billion gross and $1.247 billion net of reinsurance.
- Debt and liquidity: Senior debt was $262.3 million and junior subordinated debt $104.1 million. The company reported a 28.5% leverage ratio against a 35.0% covenant maximum and compliance with facility covenants. At September 30, it had $185.8 million drawn on the unsecured 2013 revolver and $61.5 million of unsecured loans under the 2017 facility. Cash and invested assets held at the U.S. holding company and not subject to regulatory restrictions were $18.1 million.
- Cash flow: Operating cash flow was $(1.061) billion for the first nine months, substantially reflecting $849.9 million of restricted cash returned under a collateral trust. Excluding that collateral reduction, operating cash flow was $(211.4) million; the company says this primarily reflected a $317.6 million payment related to the loss portfolio transfer. Investing cash flow was $111.8 million and financing cash flow $157.9 million, including $192.1 million of net proceeds before expenses from a May share offering.
Material changes versus prior periods
- Gross written premiums increased 11.1% in Q3 and 22.6% year to date. Net earned premiums rose 11.5% and 12.6%, respectively. Growth included stronger Excess and Surplus and Specialty Admitted premiums.
- Results deteriorated sharply, principally due to $210.8 million of adverse prior-year reserve development in the first nine months, compared with $6.2 million in the prior-year period. Excess and Surplus Lines recorded $190.7 million of adverse development; this included $200.1 million on commercial auto business, almost entirely tied to a previously canceled account in runoff. Casualty Reinsurance recorded $22.6 million of adverse development, primarily on exited treaties.
- Net investment income fell 12.6% year to date, while net realized and unrealized investment results improved to a $13.7 million gain from a $27.9 million loss in the prior-year period. The company attributed lower investment income in part to lower yields and less income from restricted cash and bank loan participations.
- Shareholders’ equity rose to $813.6 million from $795.6 million at year-end, but tangible equity per share fell to $15.98 from $18.84. The May offering issued 6.50 million shares at $31 per share and raised $192.1 million before expenses; common shares outstanding increased to 37.29 million from 30.65 million.
Outlook, significant items, and risks
- Loss portfolio transfer: On September 27, the company entered into an LPT with Aleka, effective July 1, covering approximately $345.1 million of legacy 2013–2019 Rasier commercial auto liabilities for which James River was not otherwise indemnified. Coverage is collateralized and subject to exclusions. The transaction generated a $29.6 million Q3 pretax charge, including $15.8 million for claims-handling costs. The LPT trust held $309.6 million against $305.8 million of related recoverables at quarter end.
- Other Q3 impacts: The quarter included $44.1 million of adverse prior-year reserve development, $8.1 million of reinstatement premium, and $5.0 million of net Hurricane Ida losses. Management reported no additional reserve development on the troubled terminated commercial auto account in Q2; Q3 development included the LPT charge.
- Ratings and outlook: A.M. Best affirmed the regulated subsidiaries’ A- financial strength rating and changed the outlook from negative to stable on September 30, following completion of the LPT. The filing provides no numerical earnings or premium guidance; management cautions that interim results are not necessarily indicative of full-year results.
- Key risks: Further reserve strengthening, especially in commercial auto and casualty reinsurance; effects of the A- rating on business retention and new business; reinsurance and indemnity counterparty performance; catastrophe losses; investment market and interest-rate risks; regulatory limits on subsidiary dividends; and covenant risk if financial condition or ratings worsen.
- Legal matter: A purported securities class action alleges inadequate disclosure concerning Rasier-related reserves. The company says it believes the claims are without merit and intends to defend the case; the consolidated amended complaint was due November 19, 2021. Management said other legal proceedings were not reasonably likely to have a material adverse effect.
Important facts for investors to verify
- Subsequent reserve emergence and the adequacy of assumptions for the former commercial auto account and exited reinsurance treaties.
- The LPT’s exclusions, collateral sufficiency, recoverability, and ultimate claims-handling costs.
- Whether underwriting performance improves after the substantial adverse development and one-off LPT charge.
- Capital and liquidity flexibility, including debt covenant headroom, restricted funds, and the ability of subsidiaries to distribute dividends.
- Developments in the securities class action and any effect on litigation exposure or disclosure obligations.