Business context and reporting period
James River Group Holdings, Ltd. is a Bermuda-based specialty insurance holding company with Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other segments. This Form 10-Q covers the quarter and six months ended June 30, 2023; comparisons are to the corresponding 2022 periods unless noted. The company had suspended new underwriting in Casualty Reinsurance and is focusing on its U.S. insurance businesses.
Financial results and key metrics
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Gross written premiums | $427.7 | $399.7 | $791.6 | $759.7 |
| Net earned premiums | $209.7 | $186.3 | $417.8 | $376.1 |
| Total revenue | $238.4 | $184.8 | $474.0 | $386.8 |
| Net income | $23.7 | $7.7 | $33.3 | $17.9 |
| Net income available to common shareholders | $21.1 | $5.0 | $28.1 | $14.4 |
| Diluted earnings per share | $0.54 | $0.13 | $0.74 | $0.38 |
| Underwriting profit | $11.4 | $16.8 | $21.9 | $21.7 |
| Combined ratio | 94.6% | 91.0% | 94.7% | 94.2% |
| Net investment income | $25.2 | $14.7 | $50.9 | $31.0 |
| Net realized and unrealized investment gains (losses) | $2.1 | $(17.1) | $2.6 | $(22.1) |
| Operating cash flow, excluding restricted cash activity | — | $40.3 | $139.2 |
Underwriting profit, adjusted net operating income, and combined ratios are company-defined non-GAAP measures; the reported combined ratios exclude the accounting effects of the loss portfolio transfers (LPTs). Adjusted net operating income was $20.6 million in Q2 and $42.1 million year to date, versus $20.0 million and $33.9 million in the prior-year periods.
Balance sheet, debt, and liquidity
At June 30, 2023, total assets were $5.30 billion, total liabilities $4.56 billion, shareholders’ equity $595.9 million, and Series A redeemable preferred shares $144.9 million. Cash and cash equivalents were $227.2 million and restricted cash equivalents $105.5 million. Total invested assets were $2.19 billion, including $1.88 billion of available-for-sale fixed maturities. Gross loss and loss adjustment expense reserves were $2.89 billion, of which 64.0% was IBNR.
Senior debt was $222.3 million and junior subordinated debt $104.1 million. The company reported a 22.3% leverage ratio against a 35.0% covenant maximum and was in compliance with its credit-facility covenants at quarter-end. Six-month cash flow from investing activities was $27.1 million; financing activities used $13.3 million, including common and preferred dividends. Operating cash flow excluding restricted cash activity fell from $139.2 million in the first half of 2022 to $40.3 million in 2023.
Material changes versus prior comparable periods
- Q2 total revenue rose 29% and common-shareholder net income rose to $21.1 million from $5.0 million. Higher investment income and a swing from investment losses to gains were important contributors.
- Net earned premiums increased 12.6% in Q2 and 11.1% year to date, led by Excess and Surplus Lines. Six-month gross written premiums grew 9.4% in Excess and Surplus Lines and 4.3% in Specialty Admitted; Casualty Reinsurance premiums declined sharply as underwriting was suspended.
- Q2 underwriting profit fell to $11.4 million from $16.8 million, and the combined ratio worsened to 94.6% from 91.0%. Year-to-date underwriting profit was broadly flat and the combined ratio increased to 94.7% from 94.2%.
- Net investment income increased 71% in Q2 and 65% year to date, primarily reflecting higher yields. The annualized gross yield on fixed maturities was 4.2% for both Q2 and the first half, versus 3.0% and 2.9% in the prior-year periods.
- Interest expense increased to $6.9 million in Q2 and $13.6 million year to date, reflecting higher rates on variable-rate debt and LPT funds-withheld crediting costs.
- Accumulated other comprehensive loss improved to $148.6 million from $163.0 million at year-end 2022; first-half other comprehensive income was $14.4 million. Fixed maturities nevertheless had $173.8 million of gross unrealized losses at June 30.
Outlook, management commentary, risks, and unusual items
- The filing provides no specific full-year earnings or premium guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management described continued growth in core Excess and Surplus Lines, citing renewal rate increases and higher retention. Renewal rates in that segment were up 10.2% for the first half. Management is maintaining underwriting discipline in workers’ compensation amid soft market conditions.
- The company recognized $3.7 million of net adverse reserve development in the first half on prior-year reserves, excluding LPT-related development. Separately, adverse development on reserves covered by the Commercial Auto and Casualty Re LPTs was $67.2 million year to date. LPT accounting produced $49.8 million of retroactive reinsurance benefits, leaving a $17.5 million net expense from retroactive reinsurance in first-half results. The company states the LPTs are expected to have no economic impact over their lives if losses remain within contract limits and counterparties perform.
- The Casualty Re LPT had $45.3 million of aggregate limit remaining at June 30. The company’s gross reserves depend on actuarial estimates, and actual losses could exceed estimates.
- Credit exposure remains under the legacy Rasier commercial auto indemnity and reinsurance arrangements if losses outpace collateral or estimates prove insufficient. The company reported $122.4 million of Commercial Auto LPT reinsurance recoverables and described monitoring and collateral requirements intended to mitigate exposure.
- Fixed-income values are sensitive to interest rates; bank loan participations are generally below investment grade and carried at fair value. Management reported that 99.9% of fixed maturities were investment grade and that it found no credit-related impairment of those securities at quarter-end, but recognized an $85,000 impairment on one security it intended to sell. Persistent inflation, claim severity, investment-market volatility, and higher variable borrowing costs are identified risks.
- A securities class action concerning disclosures about Rasier-related reserves remains pending. The company says it believes the claims are without merit and intends to defend them; damages sought are unspecified. Management does not expect ordinary-course legal matters, individually or collectively, to materially affect results, but litigation outcomes remain uncertain.
- After quarter-end, the company amended its $315 million revolving credit facility, extending maturity to July 7, 2026 and increasing applicable interest and letter-of-credit fees. A $0.05 common dividend was declared for payment in September 2023.
Important facts for investors to verify
- Track reserve development, including the growing IBNR share, and distinguish ordinary reserve changes from LPT-covered adverse development and related deferred-gain accounting.
- Monitor collateral adequacy and counterparty performance for Rasier, Aleka, and Fortitude Re, as well as the remaining limit under the Casualty Re LPT.
- Assess whether premium growth in the core U.S. segments translates into durable underwriting profit, particularly given higher expense ratios and the Specialty Admitted segment’s 100.2% first-half combined ratio.
- Evaluate sensitivity to interest rates, fixed-maturity unrealized losses, below-investment-grade bank loans, and increased variable-rate debt costs.
- Review liquidity and holding-company dividend capacity, including regulatory limits, debt covenants, preferred-share obligations, and the terms and costs of the amended credit facility.
- Follow developments in the securities class action and any changes to the company’s stated expectations regarding legal exposure.