James River Group Holdings, Ltd. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The company is a Bermuda-based specialty insurer and reinsurer with Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other segments. Unless noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $191.6 | $186.7 | $374.5 | $297.0 |
| Net earned premiums | $172.7 | $148.8 | $333.3 | $294.7 |
| Net income (loss) | $20.8 | $35.6 | $(82.6) | $(1.2) |
| Diluted EPS | $0.60 | $1.16 | $(2.54) | $(0.04) |
| Combined ratio | 89.7% | 95.0% | 142.5% | 97.8% |
- Q2 underwriting profit was $17.8 million, versus $7.4 million a year earlier. Q2 included $3.5 million of favorable prior-year reserve development. Six-month underwriting loss was $141.5 million, chiefly reflecting $166.7 million of adverse prior-year reserve development.
- Six-month losses and loss adjustment expenses rose 96% to $383.5 million. The six-month accident-year loss ratio was 65.1%, compared with 65.7% in 2020; the overall loss ratio was 115.1% because of prior-year reserve strengthening.
- Gross written premiums increased 26% in Q2 and 29% for the first half. Net retention fell to 50.9% in Q2 and 48.9% for the first half, from 55.0% and 51.3%, respectively.
- Net investment income decreased 6.5% in Q2 and 18.7% for the first half, to $14.3 million and $29.4 million. Six-month realized and unrealized investment gains were $9.8 million, compared with losses of $36.8 million in 2020.
- At June 30, total assets were $5.39 billion, shareholders’ equity $858.5 million, and cash and cash equivalents $360.9 million. Restricted cash equivalents were $723.5 million and are not freely available operating cash.
- Senior debt was $262.3 million and junior subordinated debt $104.1 million. The reported leverage ratio was 27.5%, below the 35% maximum covenant level; the company said it was in compliance with its credit covenants.
- Six-month operating cash flow was negative $93.0 million, largely reflecting $136.4 million of restricted collateral funds returned under the Rasier arrangement. Excluding that reduction, operating cash flow was positive $43.4 million. Financing cash flow included $192.1 million of net proceeds before expenses from a May share offering.
Material changes and management commentary
- Commercial auto reserve strengthening: The company recorded $170.0 million of adverse development on a previously canceled commercial auto account in runoff, contributing to $161.2 million of net adverse development in Excess and Surplus Lines. Management changed its actuarial approach after first-quarter claim emergence exceeded expectations. It said second-quarter emergence was in line with expectations and took no additional reserve development on that account in Q2.
- Segment mix: Six-month gross premiums grew in all segments, led by Specialty Admitted (+34%) and Casualty Reinsurance (+43%). Specialty Admitted growth reflected new and existing fronting programs; individual-risk workers’ compensation premiums declined. Casualty Reinsurance remained unprofitable, with a 109.2% Q2 and 107.4% six-month combined ratio.
- Capital and dilution: The May offering sold 6.50 million shares at $31 per share, raising $192.1 million before expenses for general corporate purposes. Shares outstanding increased from 30.65 million at year-end to 37.28 million at June 30. The company declared $0.60 per share in dividends in the first half and announced a further $0.30 dividend payable September 30, 2021.
- Ratings: A.M. Best downgraded the regulated subsidiaries’ financial strength rating from A to A- on May 7, 2021 and maintained a negative outlook, citing reserve development. Management said the rating remained consistent with its business plans; the filing warns further downgrades could impair business and may affect credit-facility covenants.
- Rasier collateral: The company reported approximately $820.8 million of cash-equivalent collateral associated with Rasier, including $723.5 million held on the balance sheet as restricted cash. The funds are intended to reimburse covered losses and related expenses under indemnity agreements.
Outlook, risks, and contingencies
The filing provides no specific earnings or premium guidance. Management said interim results are not necessarily indicative of full-year results and continues to monitor COVID-19 effects. Key risks include reserve-estimate uncertainty, further commercial auto claim development, rating changes, reinsurance and counterparty credit risk, investment-market exposure, regulatory limits on subsidiary dividends, and the possibility of losses exceeding reinsurance protection. A July 2021 purported securities class action alleges inadequate disclosures concerning Rasier-related reserves; the company disputes the claims and intends to defend the case. Management reported disclosure controls were effective as of June 30, 2021.
Important facts for investors to verify
- Subsequent commercial auto claims and whether the revised reserve methodology remains consistent with actual loss emergence.
- Reserve adequacy, including the composition and development of the $2.45 billion gross loss reserve and the recoverability of reinsurance balances.
- Effects of the A.M. Best A- rating with negative outlook on new business, broker relationships, and compliance with debt covenants.
- Availability and restrictions on cash, including the purpose and recoverability of Rasier-related collateral and the ability of subsidiaries to pay dividends upstream.
- Progress and potential exposure from the securities class action, and the impact of share issuance and ongoing dividends on per-share capital measures.