James River Group Holdings, Ltd. — Q2 2020 Form 10-Q
Business context and period. Bermuda-based specialty insurance and reinsurance holding company with Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other segments. This unaudited report covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods.
Financial performance and position
- Q2 revenue and earnings: Total revenue was $186.7 million, down 15.3% from $220.4 million. Net earned premiums were $148.8 million, down 25.3%. Net income was $35.6 million ($1.16 diluted EPS), versus $20.3 million ($0.66) a year earlier. Q2 included $21.6 million of net investment gains, after markets recovered from first-quarter declines.
- First-half results: Total revenue was $297.0 million, down from $434.5 million. Net earned premiums were $294.7 million, down 24.3%. The company recorded a net loss of $1.2 million (loss per diluted share $0.04), compared with net income of $43.0 million. Net investment losses were $36.8 million versus gains of $2.7 million in 2019. Adjusted net operating income, a non-GAAP measure, was $32.8 million versus $41.9 million.
- Premiums and underwriting: Q2 gross written premiums fell 20.6% to $301.6 million; net written premiums declined 30.9% to $165.8 million. First-half gross and net written premiums declined 17.2% and 32.9%, respectively. Combined ratio was 95.0% in Q2 (95.2% prior year) and 97.8% for the first half (95.7% prior year). First-half underwriting profit fell to $6.5 million from $16.7 million.
- Segments: Q2 Excess and Surplus Lines underwriting profit was $16.1 million; Specialty Admitted profit was $1.4 million; Casualty Reinsurance recorded a $2.6 million loss. For the first half, those segments recorded $24.2 million, $0.4 million, and a $2.4 million loss, respectively. First-half segment combined ratios were 87.9%, 98.4%, and 103.7%.
- Investment income and portfolio: Net investment income was $15.4 million in Q2, down 12.5%, and $36.2 million for the first half, down 2.1%. At June 30, invested assets totaled $2.10 billion; fixed maturities were $1.75 billion, with 99.7% rated investment grade. Bank loan participations were $127.7 million, below investment grade in general, with $157.2 million unpaid principal. Average fixed-maturity portfolio duration was 4.2 years.
- Balance sheet, debt, and liquidity: Total assets were $5.01 billion and shareholders’ equity was $795.7 million at June 30. Senior debt was $217.3 million, up from $158.3 million at year-end; junior subordinated debt was $104.1 million. Total debt to capitalization rose to 28.8% from 25.2%. Cash and cash equivalents were $204.3 million, alongside $1.02 billion of restricted cash equivalents held as Rasier-related collateral. The company reported $136.2 million of operating cash outflow in the first half, primarily reflecting $178.3 million returned from collateral funds; excluding that reduction, operating cash flow was $42.1 million. Dividends declared were $0.60 per share for the first half.
- Reserves and capital: Gross loss and loss-adjustment-expense reserves were $2.07 billion, including 61.5% IBNR. First-half prior-year reserve development was $2.0 million adverse, primarily reflecting $6.9 million adverse development in Casualty Reinsurance, partly offset by favorable development in other segments. Tangible equity per share was $18.89, up from $18.40 at year-end.
Material changes versus prior period
- The termination of the company’s largest customer, Rasier, effective December 31, 2019, drove much of the decline in premiums, particularly commercial auto. Excluding commercial auto, Core E&S gross written premiums increased 25.1% in the first half; renewal rates in that business were up 17.1%.
- Lower premium volume and the loss of Rasier’s comparatively low expense ratio contributed to the first-half expense ratio rising to 31.4% from 22.0%, even as the loss ratio improved to 66.4% from 73.7%.
- First-quarter market losses and a substantial Q2 recovery produced first-half net investment losses but Q2 investment gains. The company’s January 2020 election to measure bank loans at fair value added income-statement volatility; it recorded $17.4 million of first-half unrealized bank-loan losses and $9.3 million of equity-security losses.
- The company drew on credit facilities as a precaution during market uncertainty and repaid $60 million during Q2. It also recorded $1.7 million of employee severance costs in the first half.
Outlook, commentary, and risks
- Management said it had not experienced a material increase in total claims or a decline in gross written premiums attributable to COVID-19 as of the report, but noted the pandemic’s ultimate effects could not be predicted. No specific financial guidance was provided.
- COVID-19 risks include policyholder financial distress, premium collection difficulties, reduced payroll- or revenue-based premiums, changing claim frequency or severity, market volatility and lower investment yields. The company had received COVID-related business-interruption and workers’ compensation claims. Potential retroactive coverage mandates, premium refunds, or restrictions on cancellations could increase costs or impair premium recovery.
- Rasier collateral totaled $1.02 billion at June 30 and is intended to reimburse the company for covered claims and expenses. Management warned that estimated exposure could grow faster than collateral and that actual losses exceeding estimates could create material credit exposure.
- Investment risks include credit and market losses, particularly in bank loans and equities; 99.7% of fixed maturities were investment grade, but bank loans were generally below investment grade. Reserve estimation, reinsurance recoverability, catastrophe losses, and counterparties’ ability to pay are also material risks.
- Credit facilities were in compliance with covenants at quarter-end. The company’s insurance subsidiaries retained A.M. Best financial strength ratings of A (Excellent). The board declared a subsequent $0.30-per-share dividend payable September 30, 2020.
Important facts for investors to verify
- Whether Rasier collateral remains adequate as claims run off, and whether indemnification payments and collateral releases match actual losses and expenses.
- COVID-19 claim development, potential legislative or regulatory coverage changes, and any effects on premiums, collections, reserves, or reinsurance recoveries.
- Bank-loan credit quality, fair-value assumptions, realized losses, and the effect of the fair-value election on earnings volatility.
- Reserve development in Casualty Reinsurance and the assumptions underlying IBNR reserves and recoverables.
- Premium growth and underwriting profitability after Rasier’s exit, including whether Core E&S growth offsets lower commercial-auto volume and higher expense ratios.
- Debt utilization, covenant headroom, liquidity available to the holding company, and the sustainability of dividends.