James River Group Holdings, Ltd. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The company is a Bermuda-based specialty insurance and reinsurance group with Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other segments.
Financial performance and position
- Revenue: $201.9 million, up 10.4% from $183.0 million. Net earned premiums rose 18.2% to $189.8 million; gross written premiums declined 3.6% to $359.9 million, while net written premiums increased 0.7% to $175.9 million. Net retention was 48.9%, versus 46.8%.
- Profitability: Pre-tax income was $13.5 million, compared with a $140.8 million pre-tax loss in Q1 2021. GAAP net income was $10.2 million; net income available to common shareholders was $9.3 million, or $0.25 per diluted share. Adjusted net operating income, a non-GAAP measure, was $13.9 million.
- Underwriting: Combined ratio improved to 97.4% from 199.2%; loss ratio was 71.4% and expense ratio 26.0%. Excess and Surplus Lines produced $21.5 million of underwriting profit; Specialty Admitted Insurance earned $0.2 million; Casualty Reinsurance recorded an $8.8 million underwriting loss.
- Investment results and comprehensive income: Net investment income increased to $16.3 million from $15.1 million. Net realized and unrealized investment losses were $5.0 million, versus $6.3 million of gains. Net unrealized fixed-maturity losses drove an $86.0 million after-tax other comprehensive loss; total comprehensive loss was $75.8 million.
- Cash flow and liquidity: Operating cash flow, excluding restricted cash activity, was $65.4 million, versus $27.2 million. Cash and cash equivalents were $270.2 million and restricted cash was $102.0 million at quarter-end. Total invested assets were $2.125 billion.
- Debt and capital: Senior debt was $222.3 million and junior subordinated debt was $104.1 million. Senior debt declined $40.0 million during the quarter; the company reported a 23.2% leverage ratio, below its 35.0% covenant maximum, and compliance with debt covenants. Shareholders’ equity was $647.7 million; Series A preferred shares were reported separately as $144.9 million of mezzanine equity.
Material changes versus Q1 2021
- The sharp earnings and combined-ratio improvement primarily reflects the absence of Q1 2021’s $170.1 million adverse prior-year reserve development, including $168.7 million in Excess and Surplus Lines, largely tied to a legacy commercial auto account. Q1 2022 had $6.8 million of net adverse reserve development, primarily in Casualty Reinsurance.
- Excess and Surplus Lines gross written premiums grew 12.6%; Casualty Reinsurance gross written premiums fell 53.8% as the company reduced its third-party book. Specialty Admitted gross written premiums were down 1.0%.
- In March, the company issued $150 million of 7% Series A perpetual cumulative convertible preferred shares; net proceeds were $144.9 million. It used $40.0 million to repay borrowings under the 2017 Facility. The preferred shares are initially convertible into approximately 5.64 million common shares and carry senior dividend and liquidation rights.
- On March 31, the company completed a casualty reinsurance loss portfolio transfer with Fortitude Re, ceding specified legacy liabilities up to a $400 million aggregate limit for a $335 million premium. Of that premium, $310 million was credited to a funds-withheld account and $25 million paid in cash; a 2% annual crediting rate applies to the account.
Outlook, commentary, and risks
- The filing gives no quantified earnings or premium guidance. Management says interim results are not necessarily indicative of full-year results and continues to monitor COVID-19 effects.
- Management cited growth in core Excess and Surplus Lines, stronger fronting business excluding two relationships, and improved premium collection as positive factors. It also noted higher current-year loss trends in Specialty Admitted and the losses associated with the new casualty retrocession agreement.
- Higher interest rates and inflation reduced fixed-maturity fair values. The company reported $72.8 million of gross unrealized losses on fixed maturities at March 31, but said it had no credit-related impairments and did not expect it would be required to sell the securities before recovery.
- Key exposures include uncertainty in loss reserves, inflation-related claim severity and investment effects, market and credit risk, reinsurance counterparty performance, and the ability to maintain broker and customer relationships. A securities class action alleging inadequate disclosures about Rasier-related reserves is pending; the company intends to defend it and considers the claims without merit.
- Rasier/Aleka collateral arrangements reduce exposure on legacy commercial auto claims, but the company cautions that losses could grow faster than collateral or exceed estimates, creating potentially material credit exposure. The company monitors collateral and may request additional amounts.
- All insurance and reinsurance subsidiaries had an A.M. Best rating of A- with a stable outlook at filing; the rating had previously been downgraded from A after reserve deterioration. Management says the rating supports its ability to pursue broker relationships. Disclosure controls were assessed as effective, and no material risk-factor changes were reported for the quarter.
Important facts for investors to verify
- Future development of legacy commercial auto and other loss reserves, including the assumptions underlying the 59.9% IBNR share of gross reserves.
- Performance and collateral adequacy of the Fortitude Re retrocession and Rasier/Aleka agreements, including the $400 million limit and funds-withheld terms.
- Whether underwriting gains persist after accounting for the unusually large prior-year comparison and Q1 2022 casualty reinsurance losses.
- Effects of interest rates, inflation, and investment market movements on portfolio value, accumulated comprehensive income, and capital.
- Preferred-share dividend costs, potential conversion dilution, debt covenants, and subsidiary dividend restrictions; the filing states up to $27.2 million of U.S. subsidiary dividends and approximately $129.7 million from Bermuda insurers were available without regulatory approval in 2022, subject to applicable conditions.
- Developments in the securities class action and any effects on expenses, reserves, or financial exposure.