Business context and reporting period
James River Group Holdings, Ltd. is a Bermuda-based specialty insurance holding company with Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other segments. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023, compared with the same periods in 2022. Casualty Reinsurance had suspended new underwriting; the company said it was focusing on its U.S. insurance businesses.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $233.4 million | $201.2 million | $695.1 million | $588.0 million |
| Net income (loss) | $19.6 million | $(4.6) million | $42.5 million | $13.2 million |
| Net income (loss) available to common shareholders | $16.9 million | $(7.2) million | $34.6 million | $7.1 million |
| Adjusted net operating income (non-GAAP) | $18.3 million | $15.5 million | $50.1 million | $49.4 million |
| Net earned premiums | $202.6 million | $190.2 million | $608.1 million | $566.3 million |
| Combined ratio | 96.2% | 94.1% | 97.2% | 94.2% |
Gross written premiums were $342.5 million in Q3 (down 4.5%) and $1.134 billion year to date (up 1.4%). Net written premiums fell 21.4% in Q3 and 4.0% year to date, reflecting increased cessions and the runoff of reinsurance. Net investment income rose 52.0% in Q3 to $26.3 million and 60.0% year to date to $77.3 million, principally on higher yields. Interest expense increased 48.1% in Q3 to $7.3 million and 85.0% year to date to $20.9 million as variable borrowing costs rose.
The Q3 loss ratio was 68.6% and expense ratio 27.6%; year-to-date ratios were 68.8% and 28.4%, respectively. Underwriting profit, a company-defined non-GAAP measure, was $7.6 million in Q3 and $17.2 million year to date, down from $11.3 million and $33.0 million. The filing reports basic/diluted earnings per common share of $0.45/$0.45 for Q3 and $0.92/$0.91 year to date.
Balance sheet, liquidity and capital
At September 30, 2023, total assets were $5.193 billion and total liabilities were $4.486 billion. Shareholders’ equity was $562.5 million; Series A preferred shares are presented separately as $144.9 million of redeemable mezzanine equity. Cash and cash equivalents were $232.9 million, restricted cash $106.9 million, and invested assets $2.190 billion. The reserve for losses and loss adjustment expenses was $2.887 billion, including $1.509 billion of net reinsurance recoverables on unpaid losses.
For the first nine months, operating cash flow was $94.1 million excluding restricted-cash activity, compared with $167.6 million a year earlier. Investing activities used $18.0 million and financing activities used $16.3 million. Senior debt was $222.3 million and junior subordinated debt $104.1 million; the company reported a 22.1% leverage ratio, below its 35% covenant maximum, and compliance with credit covenants. The $315 million revolving facility was extended to July 2026; $185.8 million was drawn on its unsecured portion at quarter-end. The company declared common dividends of $0.05 per share per quarter and has 7% Series A preferred shares.
Material changes versus the prior comparable period
- Q3 returned to GAAP profitability from a loss in Q3 2022; year-to-date net income rose to $42.5 million from $13.2 million. Higher investment income and improved current accident-year loss experience contributed, while underwriting profit declined and debt costs increased.
- Net adverse reserve development outside the retroactive LPT accounting was $12.5 million in Q3 and $16.1 million year to date, versus $1.1 million favorable in Q3 2022 and $4.1 million adverse year to date in 2022. The company cited adverse emergence in older General Casualty years and prior Casualty Reinsurance treaties.
- Fixed-maturity unrealized losses in other comprehensive income were $40.2 million in Q3 and $25.8 million year to date, primarily reflecting rising interest rates. Accumulated other comprehensive loss was $188.8 million at September 30.
- Cash operating flow was lower year over year, which management attributed partly to the suspension of Casualty Reinsurance underwriting.
Outlook, commentary, risks and unusual items
- Strategic actions: The company closed the sale of Individual Risk Workers’ Compensation renewal rights on September 29, recording a $2.2 million gain and a $2.5 million trademark impairment. It had also non-renewed a large California workers’ compensation program. On November 8, it agreed to sell JRG Re for stated consideration of $277 million, including $138 million cash at closing and a planned $139 million pre-closing dividend or return of capital, plus a possible $2.5 million contingent payment. Closing was expected in Q1 2024, subject to conditions including Bermuda regulatory approval and availability of unencumbered assets. On November 10, the board announced an exploration of strategic alternatives, including a possible sale or merger; no outcome or timetable was assured.
- Reserves and reinsurance: The company recognized $81.3 million of adverse development on reserves subject to its Commercial Auto and Casualty Re loss portfolio transfers during the first nine months, with corresponding cessions. The Casualty Re LPT had $38.3 million of aggregate limit remaining. LPT benefits depend on the reinsurers performing and losses remaining within contract limits. The company also identified potential material credit exposure if Rasier/Aleka collateral does not keep pace with legacy commercial-auto losses.
- Reinstatement premium and controls: Year-to-date results included $12.3 million of reinstatement premium triggered by claims on 2020 and 2021 treaty years; management said it increased the consolidated combined ratio by 2.0 percentage points. The filing identifies an unremediated material weakness in controls over recognition of reinstatement premiums. The company said the Q2 2023 financial statements were restated in a November 14 Form 10-Q/A, and that this 10-Q’s statements were fairly stated. Planned remediation includes additional review, staff training, and updated accounting policies and documentation; effectiveness had not yet been demonstrated.
- Litigation and other risks: An existing securities class action over disclosures concerning Rasier reserves was proceeding to discovery after denial of a motion to dismiss. A second securities class action was filed November 13, alleging deficient reinstatement-premium controls and overstated income; the company said it would defend the claims. Other key risks include reserve estimation, inflation, catastrophe losses, reinsurance recoverability, interest-rate and investment risks, broker/customer concentration, ratings, and potential limits on subsidiary dividends. A.M. Best ratings were A- with stable outlook.
- The filing gives no specific earnings or premium guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Review the Q2 2023 amended filing and subsequent disclosures to understand the reinstatement-premium correction, its financial impact, and progress remediating the material weakness.
- Track reserve development, especially older General Casualty and Casualty Reinsurance years, and the remaining $38.3 million Casualty Re LPT limit.
- Verify the JRG Re sale’s regulatory approvals, closing adjustments, availability of the planned $139 million distribution, and final proceeds; separately monitor the strategic-alternatives review.
- Assess underwriting profitability and expense trends against the reported combined ratios, including the effects of treaty cessions, reinstatement premiums, and the Casualty Reinsurance runoff.
- Monitor variable-rate borrowing costs, liquidity and covenant headroom, fixed-income unrealized losses, and collateral/recoverability exposure associated with the Rasier/Aleka legacy book.