James River Group Holdings, Ltd. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The company is a Bermuda-based specialty insurance and reinsurance holding company, focused predominantly on U.S. casualty business. Its operating segments are Excess and Surplus Lines (E&S), Specialty Admitted Insurance, and Casualty Reinsurance.
Financial performance
| Metric | 2021 | 2020 |
|---|---|---|
| Gross written premiums | $1.507 billion | $1.257 billion |
| Net earned premiums | $695.6 million | $606.8 million |
| Net investment income | $56.9 million | $73.4 million |
| Net realized and unrealized investment gains (losses) | $15.6 million | ($16.0 million) |
| Underwriting loss | $256.9 million | $33.8 million |
| Net income (loss) | ($172.8 million) | $4.8 million |
| Diluted earnings (loss) per share | ($4.94) | $0.16 |
| Loss ratio / expense ratio / combined ratio | 113.9% / 23.0% / 136.9% | 78.9% / 26.7% / 105.6% |
Premium growth was broad: gross written premiums increased 19.2% in E&S, 20.3% in Specialty Admitted, and 22.1% in Casualty Reinsurance. Net retention declined to 49.4% from 51.5%, reflecting increased cessions and reinsurance activity. The 2021 underwriting loss included $325.8 million of adverse prior-year reserve development; the current accident-year loss ratio was 67.1% (66.4% excluding Hurricane Ida losses).
Cash flow and liquidity: Operating cash flow was negative $913.5 million including restricted-cash movements; excluding restricted cash equivalents, it was negative $155.6 million, versus positive $65.4 million in 2020. Management attributed the 2021 use primarily to the $317.6 million cash premium paid for the Rasier loss portfolio transfer (LPT). Investing activities provided $35.8 million and financing activities provided $147.7 million. Year-end cash and cash equivalents were $190.1 million, restricted cash equivalents $102.0 million, and invested assets $2.130 billion. Shareholders’ equity was $725.4 million; tangible equity was $507.5 million, or $13.58 per share.
Debt: Year-end senior debt was $262.3 million and junior subordinated debt was $104.1 million. The reported leverage ratio was 31.1%, below the 35% covenant limit; the company reported compliance with its credit covenants. Interest expense was $8.9 million.
Material changes and unusual items
- Reserve deterioration: Adverse development totaled $325.8 million, compared with $92.2 million in 2020. E&S recorded $190.7 million adverse development, principally $200.1 million on the legacy Rasier commercial-auto account, partly offset by favorable development in other E&S lines. Casualty Reinsurance recorded $137.6 million adverse development, concentrated in four treaties and underwriting years 2014–2018.
- Rasier LPT: In September 2021, the company ceded approximately $345.1 million of legacy Rasier liabilities to affiliate Aleka. The transaction was collateralized and had no aggregate limit, subject to exclusions. The company reported $272.3 million of LPT recoverables at year-end and disclosed continuing credit exposure if claims grow faster than collateral or estimates prove inadequate.
- Capital and ratings: The company raised $192.1 million before expenses through a May 2021 common-share offering, issuing 6.50 million shares at $31 each. A.M. Best downgraded subsidiary financial-strength ratings from A to A- in May 2021, citing reserve development and enterprise-risk-management concerns; it affirmed A- and restored a stable outlook in September following the LPT.
- Investment results: Net investment income declined 22.5%, partly due to lower yields, reduced restricted-cash and bank-loan income, and a $5.3 million renewable-energy investment gain included in 2020. Available-for-sale fixed maturities had $33.7 million of net unrealized gains at year-end; 99.5% were rated investment grade.
- Dividends: Common dividends totaled $1.20 per share in 2021. In February 2022, the board declared a $0.05-per-share dividend, down from the prior quarterly $0.30. The filing describes restrictions associated with the proposed Series A preferred shares.
Outlook, risks, and subsequent events
Management described favorable pricing and growth opportunities in E&S and Specialty Admitted, with E&S renewal rates up 13.3% and Core E&S gross written premiums up 19.4%. It also expected fronting fee income to grow; Specialty Admitted fee income was $22.7 million in 2021, versus $19.3 million in 2020. The filing provides no specific numerical earnings or premium guidance. Management emphasized underwriting discipline and willingness to reduce writings if pricing or terms are inadequate.
- Key risks include reserve uncertainty, especially long-tail casualty and reinsurance exposures; persistent inflation and social inflation; inadequate pricing; reinsurance counterparty and fronting credit risk; broker and customer concentration; rating downgrades; investment-market and interest-rate volatility; and catastrophe, pandemic, regulatory, and cyber risks.
- At year-end, gross loss reserves were $2.748 billion, of which 59.6% was IBNR; net reserves were $1.399 billion, of which 64.4% was IBNR. A reserve sensitivity analysis showed a 95th-percentile net reserve $162.3 million above the carried estimate.
- A securities class action filed in 2021 alleges inadequate disclosure regarding Rasier reserve adequacy. The company reported that defendants moved to dismiss and stated that the outcome of pending matters was not expected to materially affect its consolidated financial position; damages sought are unspecified.
- Subsequent to year-end, JRG Re agreed to a Fortitude Re loss portfolio transfer retrocession covering specified casualty reinsurance business, subject to regulatory approval and other closing conditions. The agreement provides for a $400 million aggregate limit, a $335 million premium, and a $6.8 million after-tax loss expected in first-quarter 2022.
- Also subsequent to year-end, the company entered an agreement to issue $150 million of 7% Series A perpetual cumulative convertible preferred shares to a Gallatin Point affiliate; closing was expected March 1, 2022. The preferred shares rank senior to common shares and may dilute common shareholders upon conversion.
Important facts for investors to verify
- Whether reserve strengthening in Casualty Reinsurance and the Rasier runoff has stabilized, and how actual claims compare with carried reserves and the sensitivity range.
- Whether the Aleka and Rasier collateral remains sufficient as claims develop, and whether the Fortitude retrocession receives approval and closes on the stated terms.
- Whether underwriting results recover from the 136.9% combined ratio and whether growth in fronting produces sustainable fee income without excessive counterparty or retained-risk exposure.
- The effect of the A- financial-strength rating, capital requirements, and common-dividend restrictions; confirm the actual closing and final terms of the preferred-share investment.
- Liquidity and investment exposure, including the distinction between unrestricted cash and restricted collateral, the negative operating cash flow, and sensitivity to interest-rate and credit-market changes.
- The status and potential financial impact of the securities class action and any further reserve, regulatory, or rating developments.