James River Group Holdings, Ltd. — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. James River is a Bermuda-based specialty insurer focused primarily on U.S. casualty business. Its continuing operations comprise Excess and Surplus Lines, Specialty Admitted Insurance, and Corporate and Other. The former casualty reinsurance business, JRG Re, is reported as discontinued operations following the agreement to sell it.
Key financial results
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Gross written premiums, continuing operations | $1,508.7 million | $1,411.4 million |
| Net written premiums | $693.9 million | $665.4 million |
| Net earned premiums | $708.0 million | $629.7 million |
| Continuing-operations revenue | $812.0 million | $661.5 million |
| Income from continuing operations | $61.2 million | $34.9 million |
| Net income (loss) available to common shareholders | $(118.2) million | $22.2 million |
| Underwriting profit (non-GAAP) | $24.5 million | $56.0 million |
| Net investment income | $84.0 million | $43.2 million |
| Consolidated combined ratio | 96.5% | 91.1% |
| Shareholders’ equity | $534.6 million | $553.8 million |
Premium growth reflected expansion in both operating segments, particularly core E&S. E&S renewal rates increased 10.0% year over year. Investment income nearly doubled, primarily because of higher yields. However, underwriting profit declined as losses and expenses rose, adverse prior-year reserve development increased, and $16.4 million of reinstatement premium reduced net premium measures and underwriting results. The consolidated loss includes an $168.9 million loss from discontinued operations, including an $80.4 million estimated loss on the JRG Re sale.
Cash flow, investments, debt and liquidity
- Cash flow: Reported operating cash flow was $88.0 million, including restricted-cash activity. Management reported $118.7 million excluding restricted-cash equivalents; continuing-operations operating cash flow on that basis was $234.6 million, partly offset by $115.9 million used in discontinued operations. Investing cash flow was positive $16.7 million and financing cash flow was negative $21.1 million.
- Cash and investments: At year-end, the balance sheet reported $274.3 million of cash and cash equivalents, $72.4 million of restricted cash, and $1,705.9 million of invested assets. The continuing-operations investment portfolio had a 3.6-year average duration and an “A” weighted-average credit rating for fixed maturities, bank loans and preferred stocks. Available-for-sale fixed maturities had $80.7 million of net unrealized losses.
- Debt: Senior debt was $222.3 million and junior subordinated debt was $104.1 million. The company also had $185.8 million drawn on its unsecured revolver and $21.5 million of unsecured loans under the other facility, as well as outstanding letters of credit. Interest expense rose to $24.6 million from $13.9 million; management cited higher variable rates, with the average debt interest rate increasing to 7.5% from 4.3%.
- Liquidity and capital: U.S. insurance subsidiaries reported statutory capital and surplus of $615.4 million, above the stated minimum required amount of $220.4 million. The filing does not provide a conventional current ratio; insurance-company liquidity and capital are subject to regulatory requirements and restrictions on subsidiary dividends.
Material changes and unusual items
- Gross written premiums increased 6.9%, while net earned premiums rose 12.4%. Consolidated combined ratio worsened by 5.4 percentage points to 96.5%. The E&S segment’s combined ratio increased to 91.1% from 85.1%; Specialty Admitted’s increased to 95.9% from 94.3%.
- Continuing operations recorded $31.6 million of net adverse prior-year reserve development, versus $4.4 million favorable development in 2022. E&S accounted for $32.6 million adverse development; Specialty Admitted recorded $1.0 million favorable development.
- Legacy Rasier commercial-auto reserves continued to develop adversely. The company recognized $64.4 million of adverse development on reserves subject to the Commercial Auto loss portfolio transfer (LPT) in 2023; cumulative amounts ceded under that LPT reached $456.2 million. Collateral and counterparty performance remain relevant risks.
- JRG Re generated a total discontinued-operations loss of $168.9 million, including the $80.4 million sale-related write-down and $53.2 million of investment losses recognized after the company concluded it could no longer hold certain securities for recovery. JRG Re also recorded $35.5 million of adverse development on treaties outside its LPT.
- The announced JRG Re sale has stated consideration of $277 million: $138 million cash at closing, subject to adjustments, and a $139 million pre-closing dividend or return of capital, subject to available unencumbered assets. A further $2.5 million may be payable if specified conditions are met. The transaction was expected to close in Q1 2024; the filing reports that required regulatory approvals had been received and that $5.8 million of the cash portion of the pre-closing dividend was received on February 26, 2024.
- The company is exploring strategic alternatives, including a possible sale or merger, with no announced timetable or selected outcome. It also reduced workers’ compensation exposure by non-renewing a large California program and selling IRWC renewal rights; the latter produced a $2.2 million gain and a $2.5 million trademark impairment.
Outlook, risks and contingencies
Management describes favorable pricing conditions in many commercial lines and intends to concentrate on U.S. insurance and fronting businesses. No numerical earnings or premium guidance is provided. Management expects the JRG Re disposition, if completed, to reduce future cash-flow demands from the run-off business and support growth in continuing operations; this depends on transaction completion and closing adjustments.
- Reserve estimates are inherently uncertain: net reserves were $1,247.0 million before the allowance for reinsurance credit losses, and 72.0% was IBNR. The filing’s reserve sensitivity analysis shows a 95th-percentile estimate $129.7 million above carried reserves.
- A.M. Best maintained an “A-” financial strength rating with a negative outlook for U.S. operating insurers and downgraded JRG Re to “B++” with a negative outlook. The downgrade triggered defaults under financial-strength-rating covenants in credit facilities; lenders waived the defaults through March 1, 2025. The company expects the issue to be addressed by the JRG Re sale.
- The company restated its 2023 six-month financial statements after identifying omitted reinstatement premium and a material weakness in controls over its accounting and disclosure. Management says the weakness was remediated by year-end 2023; management and the auditor reported effective internal control at December 31, 2023, and the auditor gave unqualified opinions on the financial statements and internal controls.
- Broker, agency and reinsurance concentration, counterparty credit and collateral adequacy, claims inflation and social inflation, catastrophe exposure, interest-rate and investment risk, and the ability to retain business and personnel are significant disclosed risks.
- A securities class action relating to legacy Rasier reserve disclosures reached a $30 million settlement in principle, payable by the company’s insurance carriers; the court granted preliminary approval, with a final hearing scheduled for May 2024. A separate purported securities class action concerning reinstatement-premium controls was pending, and the company intended to defend it.
Important facts for investors to verify
- Whether the JRG Re sale closed, the final proceeds and adjustments, and the availability of the full $139 million pre-closing distribution.
- Subsequent reserve development, especially in E&S casualty and legacy Rasier-related exposures, and the adequacy and collectability of LPT recoveries and collateral.
- Whether A.M. Best’s negative outlook on U.S. insurers changes and whether the rating-covenant waiver is resolved as expected.
- Whether control remediation remains effective and whether the reinstatement-premium restatement or related litigation leads to further adjustments, costs or findings.
- Continuing-operations underwriting profitability and expense trends, including the effects of reinsurance cessions, reinstatement premiums and the workers’ compensation retrenchment.
- Debt, interest expense, preferred-share dividend obligations and restrictions on common dividends; the 7% Series A preferred dividend and potential conversion dilution are material considerations.