James River Group Holdings, Ltd. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods unless noted. The filing identifies the registrant as James River Group Holdings, Ltd.
Business context and financial results
Bermuda-based specialty insurance and reinsurance holding company with four reportable segments: Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other. All amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Gross written premiums | $260.2 | $148.2 | $563.9 | $463.5 |
| Net written premiums | $205.1 | $122.9 | $445.1 | $390.4 |
| Net earned premiums | $133.1 | $122.7 | $368.8 | $345.8 |
| Total revenues | $151.4 | $133.1 | $417.2 | $379.8 |
| Income before taxes | $22.3 | $21.0 | $52.2 | $45.0 |
| Net income | $21.4 | $19.0 | $48.8 | $40.8 |
| Diluted EPS | $0.71 | $0.64 | $1.64 | $1.40 |
| Net investment income | $15.8 | $9.5 | $38.6 | $34.5 |
- Premium growth was strongest in Specialty Admitted Insurance, where gross written premiums rose 145% in Q3 and 93% year to date, primarily from fronting and program business. Casualty Reinsurance Q3 premiums rose 142% largely because of contract renewal timing; year-to-date premiums were approximately flat.
- Underwriting profit was $8.4 million in Q3, down 38% year over year, and $17.8 million year to date, down 5%. The consolidated combined ratio was 93.7% for Q3 versus 89.0%, and 95.2% year to date versus 94.6%. Ratios below 100% indicate underwriting profit.
- Q3 loss ratio was 62.6% versus 54.4%; the expense ratio improved to 31.1% from 34.7%. Year-to-date loss ratio was 63.3% versus 60.5%, while the expense ratio improved to 31.9% from 34.1%.
- Net operating income, a company-defined non-GAAP measure, was $21.6 million in Q3 versus $19.2 million and $48.1 million year to date versus $43.2 million.
Balance sheet, cash flow and capital
- At September 30, 2016, total assets were $2.348 billion, shareholders’ equity $745.8 million, and cash and cash equivalents $90.9 million. Invested assets totaled $1.360 billion.
- Loss and loss adjustment expense reserves were $874.7 million gross and $718.4 million net of reinsurance. Unearned premiums were $414.0 million. Gross reserves were 69.4% IBNR.
- Senior debt was $88.3 million and junior subordinated debt was $104.1 million. Debt-to-capitalization was 20.5%, down from 22.0% at December 31, 2015. The company reported compliance with debt covenants. A $112.5 million unsecured revolver had $73.3 million drawn; the separate $102.5 million secured facility had $39.0 million of letters of credit issued.
- For the first nine months, operating cash flow was $82.7 million, down from $104.3 million; investing activities used $82.6 million and financing activities used $15.7 million. Cash declined $15.5 million to $90.9 million. Management attributed lower operating cash flow primarily to higher commercial-auto claims receivable, as claim reimbursement and premium cash collection typically lag by about 60 days.
- Cash and invested assets were $1.451 billion at September 30. Available-for-sale securities had $35.5 million of net unrealized gains; 86.6% of fixed-maturity securities were rated A- or better. Bank loan participations were $211.4 million and primarily below investment grade.
- Quarterly dividends declared during the first nine months totaled $0.60 per share, versus $0.48 in the prior-year period. Tangible equity per share grew 13.5% year to date, or 17.3% including dividends, using the company’s non-GAAP measure.
Material changes and management commentary
- Net income increased 13% in Q3 and 20% year to date. Higher investment income supported results: management cited private-investment performance, growth in average invested assets, and improved investment yield. Q3 annualized gross investment yield on average cash and invested assets was 4.7%, versus 3.1%.
- Favorable prior-year reserve development was $5.3 million in Q3 and $14.7 million year to date, similar to $9.6 million and $14.6 million in 2015. Q3 development included favorable experience in Excess and Surplus Lines and Specialty Admitted Insurance, partly offset by adverse development in Casualty Reinsurance. Favorable development helped reported combined ratios.
- Excess and Surplus Lines remained the largest underwriting contributor. Its Q3 combined ratio increased to 84.8% from 74.1%, mainly reflecting a higher loss ratio and less favorable reserve development. Specialty Admitted Insurance improved its combined ratio to 94.7% from 95.7%. Casualty Reinsurance remained near breakeven, with a 99.7% Q3 combined ratio.
- Management provided no specific earnings or premium guidance in the supplied filing text and cautioned that interim results are not necessarily indicative of full-year results. It described continued favorable casualty loss experience in Excess and Surplus Lines and growth in fronting/program business.
Risks, contingencies and unusual items
- Key risks include reserve-estimation uncertainty, catastrophe losses beyond expectations or reinsurance limits, reinsurance and fronting-counterparty credit risk, investment and interest-rate risk, competition and pricing cycles, regulatory changes, and dependence on key brokers, customers and employees.
- The investment portfolio includes impaired loans and exposure to Puerto Rico-related credit risk. At September 30, one PREPA-related loan had $2.0 million carrying value and a $208,000 allowance. Energy-sector exposure was $15.4 million, with $1.6 million unrealized loss; management identified one impaired energy loan and two impaired non-energy loans. Total allowance for credit losses was $2.0 million on four impaired loans.
- JRG Re had $127.8 million of letters of credit issued under two facilities, secured by $155.3 million in deposits; additional trust accounts for third-party reinsureds held $252.5 million. Reinsurance recoverables on unpaid losses were $156.3 million. The company said material recoverables were supported by appropriately rated reinsurers or collateral.
- The company described an expanding insured relationship where losses could grow faster than collateral, but said it monitors collateral and did not consider the exposure material. Ordinary-course legal proceedings were not expected to have a material effect. No material changes to previously disclosed risk factors were reported.
- On November 1, 2016, the board declared two cash dividends per common share—$0.30 and $1.35—both payable December 29, 2016. The filing text does not clearly explain the separate purposes of these declarations; verify their characterization and payment terms.
- Related-party investment connections include renewable-energy LLCs managed by an affiliate of the largest shareholder, with investments by the CEO, and other investments involving company directors or officers. Review the related-party disclosures and valuation arrangements.
Important facts for investors to verify
- Reserve adequacy and the sustainability of favorable prior-year development, particularly in Excess and Surplus Lines; assess the adverse development in Casualty Reinsurance and the high IBNR share.
- Whether rapid fronting/program premium growth produces durable fee income and underwriting returns, given materially lower net retention in Specialty Admitted Insurance.
- Credit quality, liquidity and valuation of below-investment-grade bank loans, including impaired Puerto Rico-related, energy and other loans.
- Cash-flow conversion and working-capital effects from commercial-auto claims and premium receivables; confirm available holding-company liquidity and regulatory limits on subsidiary dividends.
- The nature and sustainability of private-investment income, related-party arrangements, and the two post-quarter dividend declarations.