James River Group Holdings, Ltd. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods unless noted. James River is a Bermuda-based specialty insurance and reinsurance group operating in Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other.
Financial performance and position
| Metric | Q3 2022 | Nine months 2022 |
|---|---|---|
| Gross written premiums | $358.5 million, up 3.4% | $1,118.2 million, up 1.7% |
| Net earned premiums | $190.2 million, up 11.5% | $566.3 million, up 12.4% |
| Total revenue | $201.2 million | $588.0 million |
| Net income (loss) | $(4.6) million; $(7.2) million available to common shareholders | $13.2 million; $7.1 million available to common shareholders |
| Underwriting profit and combined ratio | $11.3 million; 94.1% | $33.0 million; 94.2% |
| Net investment income | $17.3 million | $48.3 million |
| Net realized and unrealized investment gains (losses) | $(7.8) million | $(29.9) million |
| Operating cash flow, excluding restricted cash movements | Not presented by quarter | $167.6 million provided |
At September 30, 2022, total assets were $5.21 billion and total liabilities were $4.53 billion. Cash and cash equivalents were $187.5 million, restricted cash $102.5 million, and short-term investments $208.9 million. Shareholders’ equity was $526.8 million, down from $725.4 million at year-end 2021; the balance sheet also included $144.9 million of Series A preferred shares classified as mezzanine equity. Senior debt was $222.3 million and junior subordinated debt was $104.1 million. The company reported a 22.8% leverage ratio, below its 35% covenant maximum, and was in compliance with its debt covenants.
Material changes and management commentary
- Underwriting results improved substantially: the nine-month combined ratio fell to 94.2% from 135.6% in 2021, and underwriting profit was $33.0 million versus a $179.2 million loss. The prior-year comparison was heavily affected by $210.8 million of net adverse prior-year reserve development, largely from a discontinued commercial auto account.
- Q3 net loss narrowed from $23.9 million to $4.6 million. Underwriting improved, but Q3 results included $7.8 million of investment losses and $20.8 million of net losses associated with retroactive reinsurance accounting for the Commercial Auto LPT.
- The Excess and Surplus Lines segment drove premium growth and reported a 94.1% year-to-date increase in net earned premiums? The filing reports segment net earned premiums of $408.3 million, up 16.2%; its combined ratio improved to 85.3% from 141.4%. Specialty Admitted’s combined ratio worsened to 96.8% from 88.1%, while Casualty Reinsurance remained loss-making year to date with a 103.6% combined ratio.
- Net adverse reserve development, excluding retroactive reinsurance accounting, was $4.1 million for the first nine months of 2022, compared with $210.8 million adverse development in 2021. Q3 2022 included $5.0 million of net Hurricane Ian losses.
- Rising interest rates increased fixed-income yields and investment income, but reduced fixed-maturity fair values. The company recorded $205.2 million of after-tax unrealized fixed-income losses in other comprehensive loss year to date, contributing to lower equity and tangible equity. It reported no credit-related impairment of fixed-maturity securities; 99.8% of the portfolio was investment grade.
Outlook, risks, and unusual items
- The filing provides no formal earnings or premium guidance. Management cited favorable market conditions in Excess and Surplus Lines, higher available fixed-income yields, and a strategic reduction in the third-party Casualty Reinsurance book. Results for the interim period are not necessarily indicative of full-year results.
- In March 2022, the company completed a $150 million issuance of 7% Series A perpetual convertible preferred shares. The shares carry senior dividend and liquidation rights and are initially convertible into approximately 5.64 million common shares; dividends paid through September totaled $6.1 million.
- The legacy Rasier commercial auto book remains a significant reserve and counterparty exposure. During 2022, adverse paid-loss trends led to $46.7 million of adverse development on reserves subject to the Commercial Auto LPT; retroactive reinsurance accounting recognized a $25.9 million benefit, with a $20.8 million deferred gain remaining unrecognized. Recoverables depend on Rasier and Aleka performance and collateral adequacy; management warns an uncollateralized exposure could be material.
- Other key risks include reserve estimation uncertainty, inflation and market volatility, interest-rate impacts on investments and variable-rate debt, reinsurance counterparty performance, catastrophe losses, and dependence on brokers and key customers. A securities class action alleges inadequate disclosures concerning Rasier-related reserves; the company says it will defend the claims.
- A.M. Best ratings for regulated insurance and reinsurance subsidiaries were A- (Excellent) with a stable outlook. Management reported effective disclosure controls as of September 30, 2022.
Important facts for investors to verify
- Subsequent reserve development, paid-loss trends, and the adequacy of reserves for the legacy Rasier commercial auto business.
- Collateral coverage and collectability of amounts due from Rasier, Aleka, and other reinsurers, including the remaining deferred LPT gain.
- Interest-rate sensitivity, realized and unrealized investment performance, and whether higher reinvestment yields offset fair-value pressure and higher debt costs.
- Liquidity available to the holding company, subsidiary dividend restrictions, debt maturities and covenants, and the 7% preferred dividend and potential conversion dilution.
- Progress and potential exposure from the securities class action and any changes to the A.M. Best rating or outlook.