James River Group Holdings, Ltd. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. James River is a Bermuda-based specialty insurance holding company with Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other segments.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenues | $235.6 million | $201.9 million |
| Net earned premiums | $208.1 million | $189.8 million |
| Net investment income | $25.8 million | $16.3 million |
| Income before taxes | $12.7 million | $13.5 million |
| Net income | $9.6 million | $10.2 million |
| Net income available to common shareholders | $7.0 million | $9.3 million |
| Adjusted net operating income (non-GAAP) | $21.6 million | $13.9 million |
| Operating cash flow, excluding restricted cash activity | $18.4 million | $65.4 million |
Gross written premiums rose 1.1% to $363.9 million; net written premiums increased 4.2% to $183.2 million. Net retention was 50.3%, versus 48.9%.
The combined ratio was 94.9% versus 97.4%; the loss ratio improved to 66.5% from 71.4%, while the expense ratio increased to 28.4% from 26.0%. These ratios exclude retroactive reinsurance accounting; including its impact, the Q1 2023 combined ratio was 103.0%.
Balance sheet, debt and liquidity
At March 31, 2023, total assets were $5.205 billion, total liabilities $4.469 billion, shareholders’ equity $590.9 million, and Series A redeemable preferred shares $144.9 million. Cash and cash equivalents were $199.9 million, restricted cash $104.3 million, and short-term investments $25.1 million. Total invested assets were $2.214 billion.
Senior debt was $222.3 million and junior subordinated debt was $104.1 million. The company reported $185.8 million drawn on the $212.5 million unsecured revolving facility and $21.5 million of unsecured loans under the 2017 facility. It was in compliance with its debt covenants; its leverage ratio was 22.8%, against a 35% maximum. Operating cash flow declined substantially year over year, while the company also used $8.8 million in financing activities, including $5.3 million of preferred dividends.
Material changes and management commentary
- Net earned premiums grew 9.6%, led by Excess and Surplus Lines, up 15.3%. That segment’s gross written premiums rose 12.1%, supported by renewal rate increases and higher retention. Its underwriting profit was $20.0 million, although its combined ratio increased to 86.8% from 83.7%.
- Specialty Admitted Insurance recorded a $0.5 million underwriting loss and a 102.3% combined ratio, compared with a $0.2 million profit and 98.9% ratio a year earlier. Higher net commissions contributed to the weaker expense ratio.
- Casualty Reinsurance underwriting profit was $0.3 million versus an $8.8 million loss in Q1 2022. The company suspended new underwriting in this segment and said it is focusing on growing its higher-returning U.S. insurance businesses; run-off premiums will continue to be earned over time.
- Net investment income increased 58.4%, mainly due to higher yields. Annualized gross yield on fixed maturities rose to 4.1% from 2.7%. Higher rates also increased interest expense to $6.6 million from $2.3 million.
- Net income available to common shareholders fell 25.2%, primarily reflecting higher preferred dividends and interest expense, despite stronger investment income and adjusted net operating income.
Reserves, reinsurance and investment considerations
The company recorded $1.4 million of adverse prior-year reserve development on business outside retroactive reinsurance accounting, including $1.9 million adverse development in Casualty Reinsurance. Separately, adverse loss trends produced $48.9 million of adverse development on reserves subject to the Commercial Auto and Casualty Re loss portfolio transfers (LPTs). Retroactive reinsurance benefits of $32.0 million were recognized in earnings; the net reported impact was $16.9 million of expense. The company reported $37.0 million of unrecognized deferred LPT gain and $51.1 million of remaining aggregate limit under the Casualty Re LPT.
Gross loss and loss adjustment expense reserves were $2.842 billion, of which 63.3% was IBNR. The company’s fixed-maturity portfolio had $157.7 million of gross unrealized losses at quarter-end, largely attributed by management to market factors; 99.9% of the portfolio was rated investment grade or better. Management reported no credit-related impairment of fixed maturities, but identified $1.9 million of credit-related impairments in bank loan participations during the quarter.
Outlook, risks and contingencies
The filing provides no quantified earnings or premium guidance. Management cited continuing inflation and higher interest rates, which can affect claims reserves, investment values and returns, and variable-rate debt costs. It also highlighted reserve estimation uncertainty, catastrophe and claim severity risk, investment and counterparty credit exposure, reinsurance availability and performance, broker/customer concentration, regulation, and operational and cyber risks. Management said COVID-19 did not materially affect Q1 2023 results.
A securities class action remains pending, alleging inadequate disclosures concerning reserves for legacy Rasier commercial auto policies; the company disputes the claims and intends to defend itself. Management said the broader legal proceedings are not reasonably likely to have a material adverse effect, but damages sought in the class action are unspecified. The company also disclosed credit exposure if Rasier or Aleka collateral fails to keep pace with covered losses or actual losses exceed estimates; it monitors collateral and may request additional amounts.
The board declared a $0.05 per common share dividend for Q1 and, after quarter-end, declared another $0.05 dividend payable June 30, 2023. The Series A preferred shares carry a 7% annual dividend and conversion and change-of-control provisions. U.S. insurance subsidiaries had $53.7 million of dividends available in 2023 without regulatory approval; the filing notes regulatory conditions and restrictions.
Important facts for investors to verify
- Whether legacy Rasier and Casualty Re loss development remains within LPT limits and collateral, including the remaining $51.1 million Casualty Re limit.
- Future reserve development and the assumptions underlying the $2.842 billion gross loss reserve, particularly its IBNR component.
- Cash generation and holding-company liquidity, including restrictions on subsidiary dividends and the cost and availability of revolving credit.
- Whether investment income gains persist and how higher rates, market valuations, and bank-loan credit exposure affect earnings and equity.
- Developments in the securities class action and any effect on costs, claims, or disclosures; also review the Series A dividend, conversion, and change-of-control terms.