James River Group Holdings, Ltd. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing was signed March 1, 2018. The company is a Bermuda-based specialty insurance and reinsurance holding company, with three operating segments: Excess and Surplus Lines, Specialty Admitted Insurance, and Casualty Reinsurance.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Gross written premiums | $1,081.9 million | $737.4 million |
| Net written premiums | $766.6 million | $557.7 million |
| Net earned premiums | $741.1 million | $515.7 million |
| Total revenues | $817.6 million | $586.2 million |
| Income before taxes | $55.1 million | $79.3 million |
| Net income | $43.6 million | $74.5 million |
| Diluted EPS | $1.44 | $2.49 |
| Adjusted net operating income (non-GAAP) | $47.4 million | $71.3 million |
| Net cash from operating activities | $207.8 million | $154.3 million |
| Cash and invested assets | $1,611.1 million | $1,442.1 million |
| Total debt | $202.4 million | $192.4 million |
| Shareholders’ equity | $694.7 million | $693.2 million |
- The consolidated combined ratio rose to 99.2% from 94.3%; the loss ratio increased to 74.9% from 63.1%, while the expense ratio improved to 24.3% from 31.2%. A ratio below 100% generally indicates an underwriting profit.
- Underwriting profit declined to $5.8 million from $29.5 million. Net investment income rose 16.1% to $61.1 million; realized investment results shifted from $7.6 million of gains to $2.0 million of losses.
- Operating cash flow was positive. Investing activities used $104.7 million and financing activities used $49.4 million, principally reflecting $50.8 million of shareholder dividends. Year-end cash and cash equivalents were $163.5 million.
- Debt comprised $98.3 million of senior debt and $104.1 million of junior subordinated debt; debt-to-total-capitalization was 22.6%, versus 21.7%. The company reported compliance with its credit-facility covenants. Its $112.5 million unsecured revolving facility had $73.3 million drawn; a separate $100 million facility had $10.0 million of loans and $6.9 million of letters of credit outstanding.
- Year-end tangible equity was $474.5 million, or $15.98 per share. Return on average tangible equity based on adjusted net operating income was 9.7%, compared with 14.6% in 2016.
Material changes and segment results
- Premium growth was broad-based: gross written premiums increased 46.7%. Excess and Surplus Lines rose 42.9% to $530.1 million; Specialty Admitted Insurance rose 73.7% to $316.4 million; Casualty Reinsurance rose 27.7% to $235.4 million.
- Excess and Surplus Lines underwriting profit fell to $29.7 million from $47.2 million; its combined ratio increased to 93.6% from 84.3%. Commercial auto premiums more than doubled to $248.0 million and represented 46.8% of segment premiums.
- Specialty Admitted Insurance underwriting profit was $3.2 million, versus $2.9 million, with a 95.4% combined ratio. Fronting and program business grew substantially, while the company began de-emphasizing program business amid poor underwriting results and market conditions.
- Casualty Reinsurance recorded a $1.8 million underwriting loss, compared with a $0.2 million loss; its combined ratio was 100.8%. Segment results exclude internal reinsurance with the company’s U.S. insurers.
- Fee income included in underwriting profit increased to $28.3 million from $14.2 million, including $11.3 million from Specialty Admitted fronting business. Management described fronting fees as a potential recurring revenue source.
Outlook, commentary, risks and unusual items
- Management described stable rates and growth opportunities in targeted specialty markets, but said it would reduce writings where pricing or terms are inadequate. The filing provides no specific earnings or premium guidance.
- Prior-year reserve development swung to $21.5 million adverse in 2017 from $23.7 million favorable in 2016. The principal adverse item was $38.7 million in commercial auto, primarily relating to one insured and the 2016 contract year; favorable development elsewhere partly offset it. Net reserves were $989.8 million, with 65.0% classified as incurred but not reported.
- Hurricanes Harvey, Irma and Maria contributed $6.9 million of net catastrophe losses. Management estimated group-wide pre-tax loss from a 1-in-1,000-year property catastrophe event at no more than $10 million, including reinstatement premiums.
- Customer, broker and program concentration is significant: Rasier LLC generated $216.1 million of gross written premiums (20.0% of consolidated premiums); Atlas General generated $183.0 million (16.9%); and State National generated $120.3 million (11.1%). The two largest E&S brokers accounted for 61.2% of that segment’s premiums.
- A collateral trust related to a rapidly growing insured-group relationship held $780.9 million of cash-equivalent collateral at year-end, exceeding the specified claims and reported-loss balances. Management warned that exposure could grow faster than collateral and estimates could prove insufficient.
- The Tax Cuts and Jobs Act reduced the U.S. corporate rate to 21% and introduced BEAT. Management planned to form Carolina Re, elect U.S. tax treatment, and redirect the 70% internal quota share of U.S. premiums from JRG Re to Carolina Re effective January 1, 2018. Management did not expect BEAT to apply in 2018, but stated future applicability was uncertain. 2017 tax expense included a $3.5 million deferred-tax benefit from rate remeasurement and $1.1 million of dividend withholding tax.
- Other notable items: fourth-quarter 2017 net income was $0.2 million, compared with $25.7 million in fourth-quarter 2016; a second-quarter contingent-commission accrual correction reduced 2017 second-quarter net income by $2.0 million; and the company recorded a $1.5 million impairment on an equity security. The 2017 annual dividend was $1.70 per share, including a $0.50 special dividend.
- Robert P. Myron became CEO effective January 1, 2018, succeeding J. Adam Abram, who remained non-executive chairman. A.M. Best financial strength ratings for regulated insurance subsidiaries were “A” (Excellent). The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether commercial auto claims from the concentrated account continue to develop adversely, and whether the associated reserves remain adequate.
- Whether premium growth—particularly commercial auto and fronting—produces sustainable underwriting returns, and how the reduced program business affects results.
- Collateral sufficiency and counterparty performance for the large indemnity relationship, fronting arrangements, and reinsurance recoverables.
- Actual implementation and tax consequences of the Carolina Re structure, including future BEAT exposure and related-party reinsurance terms.
- Cash available at the holding-company level, subsidiary dividend capacity, debt and letter-of-credit usage, and the sustainability of shareholder dividends.
- Investment portfolio credit quality and liquidity, including below-investment-grade bank loans, private investments, related-party investments, and interest-rate sensitivity.