James River Group Holdings, Ltd. — Q3 2018 Form 10-Q
Business and period: Bermuda-based specialty insurance and reinsurance holding company, with Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other segments. This unaudited filing covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless otherwise noted. Dollar amounts below are in millions except per-share data and ratios.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $224.7 | $220.9 | $671.1 | $599.7 |
| Net earned premiums | $204.7 | $202.1 | $613.8 | $540.9 |
| Net income | $19.6 | $10.4 | $52.2 | $43.3 |
| Diluted EPS | $0.64 | $0.34 | $1.72 | $1.43 |
| Underwriting profit (non-GAAP) | $8.1 | $1.4 | $20.9 | $9.8 |
| Combined ratio | 96.0% | 99.3% | 96.6% | 98.2% |
- Premiums: Gross written premiums fell 17.3% in Q3 to $280.0 million, but rose 3.3% for the first nine months to $871.5 million. Net written premiums declined 32.5% in Q3 and 7.9% year to date; net earned premiums increased 1.3% and 13.5%, respectively. Q3 growth in Excess and Surplus and Specialty Admitted was outweighed by reduced Casualty Reinsurance writings.
- Underwriting and margins: The consolidated loss and expense ratios were 73.5% and 22.5% in Q3, versus 74.4% and 24.9% a year earlier; year-to-date ratios were 73.1% and 23.5%, versus 71.5% and 26.7%. Lower expense ratios supported better combined ratios, partly offset by higher year-to-date loss ratios.
- Cash flow: Nine-month operating cash flow was $251.9 million, compared with $121.0 million in 2017. Investing activities used $205.6 million and financing activities used $25.4 million. Cash and cash equivalents were $184.4 million at September 30, up from $163.5 million at year-end 2017.
- Balance sheet and debt: Total assets were $3.04 billion, liabilities $2.34 billion, and shareholders’ equity $697.4 million at September 30. Invested assets totaled $1.62 billion. Reported senior debt was $98.3 million and junior subordinated debt $104.1 million; debt was 22.5% of total capitalization. The company also reported $73.3 million drawn on its unsecured 2013 revolver and $10.0 million of unsecured loans under its 2017 facility. The filing states the company complied with facility covenants.
- Capital and dividends: Nine-month dividends were $0.90 per share, or $27.2 million. Tangible equity per share was $15.95, down 0.2% from year-end; excluding dividends, it increased 5.4%. The board declared an additional $0.30-per-share dividend payable December 28, 2018.
Material changes and management commentary
- Q3 net income rose 89.2% and nine-month net income rose 20.4%. Management attributed improved underwriting results in part to better expense ratios and stronger performance in Casualty Reinsurance, which moved from an underwriting loss in 2017 to a profit in 2018.
- Casualty Reinsurance gross written premiums fell 78.7% in Q3 and 55.9% year to date. Management described reductions as planned capital redeployment toward areas it believes offer higher operating returns; a $49.5 million premium renewal shifted from Q3 to Q4.
- Reserve development shifted adversely: $12.2 million in Q3 and $11.8 million for the first nine months of 2018, versus favorable development of $7.6 million and $9.3 million in the comparable 2017 periods. 2018 adverse development was primarily in Excess and Surplus commercial auto and casualty reinsurance runoff; favorable development included workers’ compensation and prior-year catastrophe losses.
- The company formed Carolina Re in 2018 and redirected the U.S. subsidiaries’ 70% quota-share cession from JRG Re to Carolina Re, in connection with its response to the Tax Cuts and Jobs Act and potential BEAT exposure.
Outlook, risks and unusual items
- The filing provides no specific earnings or premium guidance. Management cautions that interim results are not necessarily indicative of full-year performance.
- Gross loss reserves were $1.57 billion, including $424.4 million of reinsurance recoverables on unpaid losses; net reserves were $1.15 billion. Management identifies reserve estimation as a critical accounting judgment. Adverse commercial auto development and runoff treaty exposures are notable concerns.
- Available-for-sale fixed maturities had $27.7 million of gross unrealized losses at September 30, generally attributed to rising interest rates. Management reported no other-than-temporary impairment and said it did not expect to be required to sell the securities before recovery. 99.7% of the fixed maturity portfolio was rated investment grade; the $262.8 million bank-loan portfolio was primarily below investment grade.
- Credit and collateral risks include $424.4 million in reinsurance recoverables and a large indemnity arrangement. The related collateral trust held approximately $1.015 billion, which exceeded specified outstanding claims and reported losses, but the company warned that estimated losses and expenses could grow faster than collateral and that its exposure could become material if estimates prove low.
- Other risks include reinsurance counterparty performance, catastrophe losses exceeding protection, interest-rate and credit risk, dependence on key brokers and customers, regulation and tax uncertainty, and restrictions on subsidiary dividends. The company said its risk factors were not materially changed from its 2017 Form 10-K and expected ordinary-course legal proceedings not to materially affect its financial position.
- The company reported provisional Tax Act estimates subject to possible adjustment. Adoption of the new lease standard was expected to affect the balance sheet, but not materially affect results or cash flows. Disclosure controls were assessed as effective at quarter-end.
Important facts for investors to verify
- Whether commercial auto and legacy casualty reinsurance reserves develop further adversely, and how reserve assumptions compare with subsequent claims experience.
- Whether premium growth, reinsurance purchasing, and the planned Casualty Reinsurance contraction produce the intended returns without materially increasing retained risk.
- The collectability and collateral adequacy of reinsurance recoverables and the indemnity arrangement, including whether collateral keeps pace with estimated exposures.
- The effect of interest rates and credit conditions on the investment portfolio, particularly unrealized fixed-maturity losses and below-investment-grade bank loans.
- Carolina Re’s tax treatment and any future BEAT exposure, alongside available holding-company liquidity, debt covenants, and regulatory capacity to upstream dividends.