James River Group Holdings, Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. The company operates specialty insurance and reinsurance businesses through Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other segments.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Gross written premiums | $338.4 | $260.2 | $844.0 | $563.9 |
| Net earned premiums | $202.1 | $133.1 | $540.9 | $368.8 |
| Total revenues | $220.9 | $151.4 | $599.7 | $417.2 |
| Net investment income | $14.9 | $15.8 | $45.3 | $38.6 |
| Underwriting profit | $1.4 | $8.4 | $9.8 | $17.8 |
| Income before taxes | $13.6 | $22.3 | $49.1 | $52.2 |
| Net income | $10.4 | $21.4 | $43.3 | $48.8 |
| Diluted EPS | $0.34 | $0.71 | $1.43 | $1.64 |
| Combined ratio | 99.3% | 93.7% | 98.2% | 95.2% |
- Premium growth was strong: gross written premiums rose 30.1% in Q3 and 49.7% year to date; net earned premiums rose 51.8% and 46.6%, respectively. Net retention declined to 75.9% in Q3 and 73.8% year to date, reflecting increased ceded fronting and program business.
- Profitability weakened despite premium growth. Q3 net income fell 51.6% and nine-month net income fell 11.2% year over year. The Q3 loss ratio rose to 74.4%; the expense ratio improved to 24.9%, but not enough to offset higher losses.
- Segment results diverged. Q3 underwriting profit was $9.9 million in Excess and Surplus Lines and $0.9 million in Specialty Admitted Insurance; Casualty Reinsurance recorded a $2.9 million underwriting loss. Casualty Reinsurance’s combined ratio was 105.0% for the quarter and 102.5% year to date.
- Operating cash flow was $121.0 million for the first nine months, versus $83.9 million in 2016. Investing activities used $92.0 million and financing activities used $32.3 million; cash declined $3.3 million to $106.5 million.
- At September 30, total assets were $2.722 billion, total liabilities $2.001 billion, and shareholders’ equity $721.0 million. Invested assets were $1.454 billion. Gross loss reserves were $1.187 billion, including $903.3 million net of reinsurance.
- Debt comprised $88.3 million senior debt and $104.1 million junior subordinated debt. Debt to total capitalization was 21.1%, versus 21.7% at year-end 2016. The company had $73.3 million drawn on its unsecured revolving facility, $47.6 million of letters of credit under the secured facility, and no borrowings or letters of credit under a new $100 million facility.
Material changes, commentary and risks
- Hurricanes Harvey, Irma, and Maria generated $10.0 million of reported catastrophe losses in the quarter and year-to-date period: $7.3 million in Excess and Surplus Lines and $2.7 million in Casualty Reinsurance. Management said the catastrophe losses contributed 4.9 percentage points to the quarterly combined ratio.
- Prior-year reserve development was favorable by $7.6 million in Q3 and $9.3 million year to date. Favorable development in Excess and Surplus Lines and Specialty Admitted Insurance was partly offset by adverse development in Casualty Reinsurance. Reserve estimates remain a key uncertainty; 64.2% of gross reserves were IBNR at September 30.
- Premium growth included expansion in commercial auto and fronting/program business. Specialty Admitted gross premiums rose 96.7% year to date, while its net retention fell to 22.8%. Management noted that commercial auto has a higher loss ratio than other Excess and Surplus Lines business.
- Investment income increased year to date, driven partly by renewable-energy LLC investment income of $8.6 million, compared with $2.0 million a year earlier; Q3 income from those investments declined year over year. Certain renewable-energy investments and a note are with affiliates of the company’s largest shareholder, and company directors or the CEO also have related investment or lending interests.
- Investment and credit risks include below-investment-grade bank loan participations of $245.7 million, with a $1.5 million allowance for credit losses. A Puerto Rico-related loan was written down to zero; energy-sector loans were also impaired. Management reported 99.1% of fixed-maturity securities at investment grade.
- A rapidly growing insured-group relationship creates credit exposure if estimated losses and recoverables outgrow collateral or collateral estimates prove insufficient. The company held approximately $670.1 million of cash-equivalent collateral and said it monitors exposure and seeks additional collateral as needed.
- Management reported the insurance subsidiaries’ A.M. Best financial strength ratings remained “A” (Excellent), and the company was in compliance with its debt covenants. It cited no material change in reported risk factors and stated ordinary-course litigation was not expected to materially affect results.
- No specific earnings or premium guidance was provided. On November 1, 2017, after quarter-end, the board declared a regular $0.30 per-share dividend and a special $0.50 per-share dividend, both payable December 28, 2017.
Most important facts for investors to verify
- Subsequent catastrophe claims and reinsurance recoveries, including whether losses remain within management’s estimates.
- Reserve adequacy and the sustainability of favorable prior-year development, especially in light of the high IBNR share.
- Casualty Reinsurance underwriting performance and the effects of adverse development and commission accrual corrections.
- Growth, retention, profitability, collateral adequacy, and counterparty exposure in fronting/program and insured-group arrangements.
- Credit performance and valuation of bank loans, Puerto Rico-related exposure, and affiliated renewable-energy investments and notes.
- Availability of subsidiary dividends, compliance with debt covenants, and liquidity after declared dividends.