James River Group Holdings, Ltd. — Q1 2021 Form 10-Q
Business and period: Bermuda-based specialty insurance and reinsurance holding company, reporting the three months ended March 31, 2021, compared with Q1 2020. Its segments are Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Premiums and revenue: Gross written premiums rose 31.5% to $373.3; net written premiums increased 29.7% to $174.6; net earned premiums increased 10.1% to $160.6. Total revenue was $183.0, compared with $110.3.
- Profitability: Net loss was $103.5, or $3.37 per diluted share, versus a $36.8 loss, or $1.21 per share. The $140.8 pretax loss included a $37.4 income tax benefit. Underwriting loss was $159.4 versus $0.9; the combined ratio rose to 199.2% from 100.6%. The current accident-year loss ratio was 64.4%, versus 65.8%.
- Investment results and margins: Net investment income declined 27.6% to $15.1. Net realized and unrealized investment gains were $6.3, versus losses of $58.4 in Q1 2020. The expense ratio improved to 28.9% from 34.2%, but was outweighed by adverse loss development.
- Cash flow: Operating cash use was $81.0, compared with $65.3 used. The filing attributes this principally to $108.3 of restricted collateral cash returned to a former insured; excluding that reduction, operating cash provided was $27.2, versus $26.5. Investing activities provided $6.0 and financing activities used $12.0. Cash, cash equivalents and restricted cash ended at $935.2.
- Balance sheet and liquidity: Total assets were $5,109.7 and total liabilities $4,470.1 at March 31. Shareholders’ equity was $639.6, down from $795.6 at year-end; tangible equity per share was $13.70, down from $18.84. Cash and cash equivalents were $183.5; restricted cash equivalents were $751.7 and are associated with the Rasier collateral arrangement.
- Debt: Balance-sheet debt comprised $262.3 of senior debt and $104.1 of junior subordinated debt. The company reported $247.3 of unsecured borrowing across its two bank credit agreements and was in compliance with facility covenants at quarter-end. Leverage ratio was 35.0%, up from 30.4% at year-end.
Material changes and key developments
- Reserve strengthening was the principal driver of the loss. Net adverse development on prior accident years was $170.1, compared with $0.9 in Q1 2020. Of the current-quarter amount, $168.7 was in Excess and Surplus Lines, including $170.0 related to a terminated commercial auto account in runoff since 2019. Management cited unexpectedly heavy reported losses and revised its methodology, giving greater weight to its own loss experience and incurred methods.
- Segment results diverged: Excess and Surplus Lines recorded a $150.9 underwriting loss, versus $8.1 profit. Specialty Admitted Insurance improved to $1.3 profit from a $1.0 loss. Casualty Reinsurance recorded a $1.6 loss versus $0.2 profit.
- Gross written premiums grew across all three insurance segments: 33.2% in Excess and Surplus Lines, 23.6% in Specialty Admitted Insurance, and 44.6% in Casualty Reinsurance. Specialty Admitted growth included eight new fronting relationships.
- Other comprehensive loss was $42.7, primarily reflecting unrealized investment losses. Accumulated other comprehensive income fell to $39.2 from $81.9 at year-end.
Outlook, risks, and unusual items
- The filing provides no formal earnings or premium guidance and cautions that quarterly results are not necessarily indicative of full-year results.
- A.M. Best had changed the outlook on the subsidiaries’ “A” (Excellent) financial strength rating to negative. Following Q1 reserve development, management believed a downgrade to “A-” was likely. A downgrade could affect business retention and credit-agreement compliance; the facilities require subsidiary ratings no lower than A-.
- The company holds $751.7 of Rasier collateral, with potential reimbursement rights under indemnity agreements. Management warned that exposure could become material if losses and expenses grow faster than collateral or actual amounts exceed estimates; it monitors collateral and may request more.
- Insurance reserve adequacy remains a significant uncertainty. The company reported 60.4% of gross reserves and 57.9% of net reserves as IBNR at March 31. Further adverse development could reduce earnings, equity, liquidity, or ratings.
- Other risks include reinsurance counterparty performance, investment-market and interest-rate risk, catastrophe losses, COVID-19 effects, regulation, and restrictions on subsidiary dividends. The company declared a $0.30-per-share dividend during the quarter and declared another $0.30 dividend after quarter-end, payable June 30, 2021.
- The filing reports $0.6 of severance and strategic-initiative legal and consulting expenses. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How the terminated commercial auto account’s claims develop after the reserve methodology change, and whether further reserve strengthening is needed.
- Whether A.M. Best changes the subsidiaries’ rating and outlook, and any resulting impact on broker relationships, premium volume, or debt covenants.
- Whether Rasier collateral remains adequate relative to estimated and ultimately paid losses and expenses.
- Cash available to the holding companies, regulatory limits on subsidiary dividends, and the company’s capacity to sustain shareholder dividends while equity and tangible equity have declined.
- Investment portfolio valuation and income trends, including exposure to below-investment-grade bank loan participations and interest-rate movements.