James River Group Holdings, Ltd. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The Bermuda-based specialty insurance and reinsurance group reports four segments: Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $177.5 million | $231.5 million | $474.5 million | $666.0 million |
| Net income (loss) | $26.3 million | $(25.2) million | $25.1 million | $17.9 million |
| Diluted earnings per share | $0.85 | $(0.83) | $0.81 | $0.58 |
| Net earned premiums | $153.0 million | $213.4 million | $447.7 million | $602.6 million |
| Net investment income | $15.0 million | $17.9 million | $51.1 million | $54.8 million |
| Net realized and unrealized investment gains (losses) | $8.9 million | $(2.4) million | $(27.9) million | $0.3 million |
| Combined ratio | 94.2% | 118.8% | 96.6% | 103.9% |
| Underwriting profit (loss), non-GAAP | $8.9 million | $(40.1) million | $15.4 million | $(23.4) million |
Gross written premiums declined 19.7% in Q3 and 18.1% year to date; net written premiums fell 35.2% and 33.6%, respectively. The company declared dividends of $0.30 per share in Q3 and $0.90 per share for the first nine months.
Balance sheet, cash flow, debt and liquidity
- At September 30, total assets were $4.98 billion, total liabilities $4.16 billion, and shareholders’ equity $821.4 million. Tangible equity was $603.1 million, or $19.70 per share.
- Cash and cash equivalents were $140.0 million; restricted cash equivalents were $940.2 million. The restricted balance relates to collateral associated with the terminated Rasier business and should not be treated as unrestricted operating cash.
- For the first nine months, operating cash flow was negative $222.1 million, investing cash flow negative $135.3 million, and financing cash flow positive $31.5 million. Operating cash use primarily reflected the $258.9 million return of Rasier collateral; excluding that reduction, management reported operating cash flow of positive $36.9 million.
- Senior debt was $217.3 million and junior subordinated debt $104.1 million. Debt to total capitalization increased to 28.1% from 25.2% at year-end 2019. The company reported compliance with facility covenants.
- Net investment income fell 6.7% year to date. The annualized gross yield on average fixed maturities was 3.0%, down from 3.8% in the prior-year period. The fixed-maturity portfolio was 99.5% investment grade.
Changes and management commentary
- Underwriting results improved substantially against 2019, when adverse prior-year reserve development was $57.0 million in Q3 and $60.3 million year to date. 2020 had $4.2 million and $6.2 million of net adverse development for those periods, respectively.
- The end of the Rasier commercial-auto relationship materially reduced premiums: commercial-auto gross written premiums fell 91.0% in Q3 and 92.4% year to date. Excluding commercial auto, Core E&S gross written premiums rose 27.9% in Q3 and 26.1% year to date; renewal rates in E&S were up 15.6% year to date.
- Specialty Admitted gross written premiums grew 12.1% in Q3, supported by fronting and program business. Casualty Reinsurance premiums declined, partly due to a large treaty non-renewal and changes in treaty renewal dates.
- Investment results were volatile: year-to-date investment losses included $14.1 million of realized losses on bank-loan sales, $7.6 million of unrealized bank-loan losses, and $6.9 million of equity-security losses. The Q3 investment gain included fair-value gains on bank loans and equities. Adoption of fair-value accounting for bank loans increased income volatility.
Outlook, risks and unusual items
- No specific earnings or premium guidance is provided. Management said it had not experienced a material increase in total claims or a decline in gross written premiums attributable to COVID-19 to date, while continuing to monitor the pandemic and preserving financial flexibility through precautionary borrowing.
- COVID-19 risks include policyholder premium-payment and credit deterioration, lower demand or premium bases, investment-market volatility and lower yields, potential reinsurer or fronting-partner nonpayment, and increased claims. The company has received COVID-related business-interruption and workers’ compensation claims. Retroactive expansion of coverage or premium-refund requirements could adversely affect reserves and results.
- Rasier indemnification and collateral remain significant exposures. The company held $940.2 million of collateral at quarter-end, but estimated losses and expenses were growing faster than collateral balances; management warned that any resulting uncollateralized exposure could be material.
- Reserve adequacy remains a key judgment: gross loss reserves were $2.11 billion, with 59.8% classified as IBNR. Casualty Reinsurance recorded $13.1 million of adverse prior-year development year to date.
- Other stated risks include catastrophe losses beyond reinsurance protection, reinsurance credit risk, investment credit and interest-rate risk, and evolving claims and coverage issues. Ordinary-course litigation was not expected by management to materially affect the company.
- Subsequent events: on October 28, the board declared a $0.30-per-share dividend payable December 31 and announced CEO J. Adam Abram’s retirement and Frank D’Orazio’s appointment effective November 2, 2020.
Most important facts for investors to verify
- Whether the reduction in premiums from Rasier is being offset by sustainable growth and pricing in core E&S and fronting programs.
- Subsequent development of reserves, particularly casualty reinsurance and COVID-related claims, and whether IBNR assumptions remain adequate.
- The sufficiency and collectability of Rasier collateral relative to remaining indemnification obligations and the pace of collateral releases.
- Drivers and persistence of investment losses, bank-loan credit exposure, investment yields, and the impact of fair-value accounting.
- Debt levels, covenant headroom, unrestricted holding-company liquidity, and the capacity to maintain dividends while meeting regulatory capital requirements.