James River Group Holdings, Ltd. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited consolidated results. The company is a Bermuda-based specialty insurance and reinsurance holding company with four reportable segments. Comparisons are with Q1 2018 unless stated otherwise.
Key financial results
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenues | $214.1 million | $218.3 million; down 1.9% |
| Net earned premiums | $190.2 million | $200.9 million; down 5.4% |
| Gross written premiums | $327.3 million | $298.1 million; up 9.8% |
| Net written premiums / retention | $207.7 million / 63.5% | $211.0 million / 70.8% |
| Underwriting profit | $7.1 million | $7.2 million |
| Net investment income | $19.4 million | $13.3 million; up 46.6% |
| Income before taxes | $25.5 million | $17.1 million; up 48.9% |
| Net income / diluted EPS | $22.7 million / $0.75 | $15.6 million / $0.52 |
| Combined ratio | 96.2% | 96.4% |
| Operating cash flow | $35.5 million | $48.5 million |
Performance and material changes
- Premium growth was concentrated in Excess and Surplus Lines (gross written premiums up 11.4%) and Specialty Admitted Insurance (up 17.8%). Casualty Reinsurance gross written premiums declined 12.5%, consistent with management’s planned reduction and redeployment of capital.
- Net earned premiums fell despite higher gross written premiums, alongside lower net retention and a 37.3% reduction in Casualty Reinsurance net earned premiums.
- Net investment income rose substantially, reflecting portfolio growth and higher yields, as well as higher returns from limited partnership investments. The annualized gross investment yield on average cash and invested assets was 4.4%, versus 3.5%.
- The consolidated combined ratio improved slightly. The expense ratio fell to 22.6% from 24.9%, while the loss ratio rose to 73.6% from 71.5%.
- Prior-year reserve development was $1.0 million adverse in Q1 2019, versus $2.6 million favorable in Q1 2018. Q1 2019 included $3.0 million adverse development in Casualty Reinsurance, partly offset by $2.0 million favorable development in Specialty Admitted Insurance.
- Adjusted net operating income, a non-GAAP measure, was $21.7 million, up 31.0%. GAAP net income also benefited from a $1.6 million net investment gain, compared with an $0.8 million investment loss a year earlier.
Balance sheet, debt and liquidity
- At March 31, total assets were $3.30 billion, total liabilities $2.54 billion, and shareholders’ equity $754.3 million. Cash and cash equivalents were $132.6 million; total invested assets were $1.77 billion.
- Gross loss and loss adjustment expense reserves were $1.73 billion, including $1.08 billion of IBNR. Reinsurance recoverables on unpaid losses were $508.7 million.
- Senior debt was $98.3 million, down $20.0 million from year-end following repayment during the quarter; junior subordinated debt was $104.1 million. Debt to total capitalization was 21.2%, compared with 23.9% at December 31, 2018.
- Cash declined $39.9 million during the quarter. Operating cash flow of $35.5 million was more than offset by $47.4 million used in investing and $28.0 million used in financing, including the debt repayment and $9.2 million of dividends paid.
- Management reported compliance with credit-facility covenants. The $112.5 million unsecured revolving facility had $73.3 million drawn; the separate 2017 facility had $10.0 million of unsecured loans and $5.3 million of secured letters of credit outstanding.
- Subsidiary dividends are subject to insurance-regulatory limits. The filing estimates 2019 dividend capacity without regulatory approval of $24.2 million from U.S. insurance subsidiaries and approximately $109.8 million from Bermuda insurers, subject to regulatory requirements.
Outlook, risks and unusual items
- The filing provides no specific financial guidance or quantified full-year outlook. Management cautions that interim results are not necessarily indicative of full-year performance.
- Key risks include uncertainty in loss reserves, catastrophe and other claims, premium adequacy, reinsurance availability and counterparty credit, investment market and credit risk, dependence on brokers and customers, regulation and tax changes, and the ability of subsidiaries to distribute dividends.
- A collateral trust for an insured group held approximately $1.156 billion in cash-equivalent collateral, exceeding claims receivable and unpaid reported losses and expenses outstanding. Management cautions that estimated exposures under these contracts are growing faster than collateral balances and that estimation shortfalls could create material credit exposure.
- Two bank loan participations were impaired, with a $1.5 million allowance; three fixed-maturity securities from one issuer were impaired, with $271,000 in losses, and management intended to sell them at a loss in Q2. The fixed-maturity portfolio was 99.5% investment grade.
- Adoption of the new lease standard resulted in an $8.3 million increase to retained earnings from derecognition of a build-to-suit lease arrangement. The company reported no material effect on operating results, EPS, cash flows, or credit-covenant compliance.
- Ordinary-course legal proceedings were not expected by management to materially affect financial position. The company reported no material changes to previously disclosed risk factors and said disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Whether reserve assumptions remain adequate, particularly for Casualty Reinsurance, where prior-year development was adverse, and whether future development changes the combined ratio.
- Whether growth in gross premiums converts into net earned premium and underwriting returns, given lower retention and the planned Casualty Reinsurance contraction.
- How much of the investment-income increase is repeatable, and the performance and credit quality of bank loans, limited partnerships, and other private investments.
- Whether collateral supporting indemnification arrangements keeps pace with estimated exposures, and whether reinsurance recoverables remain collectible.
- Cash generation, debt repayments, revolver availability, covenant compliance, and regulatory capacity to upstream subsidiary dividends.
- The results of the planned Q2 sale of the impaired fixed-maturity securities and any subsequent developments in impaired loans.