James River Group Holdings, Ltd. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019. The company is a Bermuda-based specialty insurance and reinsurance group with four reportable segments: Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Gross written premiums | $388.2m | $280.0m | $1,095.6m | $871.5m |
| Net earned premiums | $213.4m | $204.7m | $602.6m | $613.8m |
| Total revenues | $231.5m | $224.7m | $666.0m | $671.1m |
| Net income (loss) | $(25.2)m | $19.6m | $17.9m | $52.2m |
| Diluted EPS | $(0.83) | $0.64 | $0.58 | $1.72 |
| Operating cash flow | Not reported by quarter | Not reported by quarter | $213.8m | $251.9m |
- Underwriting: Q3 underwriting loss was $40.1m versus $8.1m profit a year earlier; the nine-month loss was $23.4m versus $20.9m profit. Combined ratios were 118.8% and 103.9%, respectively, compared with 96.0% and 96.6% in the prior-year periods. Ratios above 100% indicate underwriting losses.
- Investment income and returns: Net investment income increased 8.9% to $17.9m in Q3 and 19.7% to $54.8m year to date. Net realized and unrealized investment results were a $2.4m loss in Q3 and a $0.3m gain for nine months. The Q3 loss included significant losses on impaired bank loans, partly offset by equity-security gains.
- Margins: The loss ratio was 100.3% in Q3 and 83.1% year to date; the expense ratio was 18.5% and 20.8%. The filing’s combined ratios are the clearest overall underwriting-margin measure.
- Balance sheet and liquidity: At September 30, total assets were $3.661bn, total liabilities $2.892bn, and shareholders’ equity $769.0m. Cash and cash equivalents were $256.3m; total invested assets were $1.832bn. Operating cash flow was positive, while investing and financing activities used $87.9m and $42.0m, respectively, over nine months.
- Debt and capital: Senior debt was $98.3m and junior subordinated debt $104.1m. The company repaid $20.0m of senior debt during the first nine months. Total debt to total capitalization was 20.8%, down from 23.9% at year-end 2018. The company reported compliance with its credit-facility covenants.
- Shareholder returns: Dividends declared were $0.30 per share each quarter, or $0.90 for the first nine months. The board declared another $0.30-per-share dividend payable December 31, 2019.
Material changes versus prior periods
- Gross written premiums grew 38.7% in Q3 and 25.7% year to date, led by Excess and Surplus Lines. However, net earned premiums declined 1.8% year to date, with lower Casualty Reinsurance earned premiums offsetting growth in Excess and Surplus Lines.
- Adverse prior-year reserve development rose sharply: $57.0m in Q3 and $60.3m year to date, versus $12.2m and $11.8m in the corresponding 2018 periods. Most related to commercial auto in the Excess and Surplus Lines segment, particularly accident years 2016 and 2017; casualty reinsurance also had adverse development.
- Q3 Excess and Surplus Lines underwriting shifted to a $29.4m loss from an $11.3m profit. Year-to-date, that segment’s result fell to a $0.4m loss from $32.7m profit. Specialty Admitted remained profitable; Casualty Reinsurance reported underwriting losses in both 2019 periods.
- Shareholders’ equity increased from $709.2m at December 31, 2018 to $769.0m, including $50.4m of nine-month other comprehensive income, largely reflecting unrealized investment gains. Retained earnings were $78.3m.
Outlook, management commentary, risks, and unusual items
- Largest customer termination: On October 8, 2019, the company gave notice terminating all policies for Rasier LLC and affiliates, effective December 31, 2019. The customer generated $294.3m of 2018 gross written premiums—44.8% of Excess and Surplus Lines and 25.2% of consolidated premiums. The filing provides no quantified forecast for the revenue or earnings impact.
- Collateral dispute: The company withdrew $1.1707bn from a collateral trust associated with the insured group on October 9, 2019, stating the withdrawal was permitted under the indemnity agreements. The customer requested redeposit plus interest on November 6; the company said it did not intend to redeposit the funds. Management warned that estimated exposure under the indemnity arrangement could grow faster than collateral and that any shortfall could be material. The withdrawn funds were invested in short-term U.S. government securities.
- Reserve and credit risks: Reserve estimates are a critical accounting judgment. The company held $1.941bn of gross loss reserves, of which 62.8% was IBNR. Five bank loans were impaired, with a $5.9m allowance against $12.3m unpaid principal. Reinsurance recoverables on unpaid losses were $614.8m; the company reported no allowance for uncollectible reinsurance recoverables.
- Investment and regulatory risks: 99.6% of fixed-maturity securities were rated investment grade, but bank loan participations were generally below investment grade. Dividends from insurance subsidiaries are subject to regulatory limits. Other disclosed risks include reinsurance counterparty performance, catastrophe losses, market risk, and changes in insurance or tax regulation.
- Guidance: The filing provides no formal quantitative earnings or premium guidance and cautions that interim results are not necessarily indicative of full-year results. Management reported that all operating insurance and reinsurance subsidiaries held A.M. Best financial strength ratings.
- Other items: Adoption of the new lease standard increased retained earnings by $8.3m through a transition adjustment and did not materially affect operating results or cash flows. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- How the Rasier policy cancellation affects future premium volume, underwriting results, and concentration in commercial auto.
- The status and legal enforceability of the $1.1707bn collateral withdrawal, the customer’s redeposit request, and whether collateral adequately covers ultimate indemnity obligations.
- Whether commercial-auto reserve assumptions for the 2016 and 2017 accident years require further strengthening, and how adverse development evolves in subsequent reports.
- Trends in segment-level combined ratios and the effect of reduced net retention, reinsurance costs, and new business on profitability.
- The collectability and valuation of impaired bank loans and reinsurance recoverables, plus the effect of the planned 2020 credit-loss accounting adoption.