James River Group Holdings, Ltd. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The Bermuda-based holding company operates specialty insurance and reinsurance businesses. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Gross written premiums | $380.0 | $293.4 | $707.3 | $591.5 |
| Net earned premiums | $199.1 | $208.2 | $389.3 | $409.2 |
| Total revenues | $220.4 | $228.0 | $434.5 | $446.4 |
| Income before tax | $25.0 | $18.5 | $50.5 | $35.6 |
| Net income | $20.3 | $17.0 | $43.0 | $32.6 |
| Diluted EPS | $0.66 | $0.56 | $1.41 | $1.08 |
| Combined ratio | 95.2% | 97.3% | 95.7% | 96.9% |
Underwriting profit, a company-defined non-GAAP measure, was $9.6 million for Q2 and $16.7 million for the first half, versus $5.5 million and $12.8 million in the comparable periods. Net investment income was $17.5 million in Q2 and $37.0 million for the first half. Adjusted net operating income was $20.2 million and $41.9 million, respectively.
- Margins and reserves: Q2 loss and expense ratios were 73.9% and 21.3%; first-half ratios were 73.7% and 22.0%. The first-half combined ratio improved year over year, though prior-year reserve development was adverse by $3.3 million in 2019 versus $0.4 million favorable in 2018.
- Cash flow: First-half operating cash flow was $68.1 million, down from $164.1 million. Investing used $37.5 million and financing used $34.0 million; cash declined $3.3 million to $169.1 million.
- Balance sheet at June 30: Total assets were $3.45 billion, shareholders’ equity $791.1 million, and invested assets $1.77 billion. Cash and cash equivalents were $169.1 million. Gross loss reserves were $1.78 billion, including $1.24 billion net of reinsurance.
- Debt and liquidity: Senior debt was $98.3 million and junior subordinated debt $104.1 million. Total debt to capitalization was 20.4%, down from 23.9% at year-end 2018; the company repaid $20 million on its 2017 facility during the first half. It reported compliance with credit-agreement covenants. The unsecured revolver had $73.3 million drawn at June 30.
- Capital and shareholder returns: Equity was up from $709.2 million at year-end, including an increase in accumulated other comprehensive income. Dividends declared were $0.60 per share for the first half; a further $0.30 dividend was declared July 30.
Material changes and management commentary
- Gross written premiums increased 29.5% in Q2 and 19.6% for the first half, led by Excess and Surplus Lines (E&S), where first-half gross written premiums rose 34.2%. E&S rates were up 4.2% for the first half. Net earned premiums nevertheless declined as Casualty Reinsurance earned premiums fell 36.7%.
- Management attributed improved expense ratios partly to the larger share of premiums from E&S, which has lower expenses. Gross fee income declined to $6.2 million in Q2 and $12.6 million for the first half, from $7.4 million and $15.6 million.
- The company said it was reducing Casualty Reinsurance writings as planned to redeploy capital. That segment’s combined ratio was 100.3% in Q2 and 99.7% for the first half, with adverse development tied mainly to older risk profiles and treaty structures no longer written.
- Management reported favorable workers’ compensation reserve development in Specialty Admitted Insurance, partly offset by adverse E&S commercial-auto development. Overall prior-period development was adverse by $2.3 million in Q2 and $3.3 million for the first half.
- Investment income rose, reflecting growth in fixed-income and bank-loan holdings and higher yields. However, two loans from one issuer were impaired; the company recorded a $231,000 allowance. Bank-loan participations are generally below investment grade.
Outlook, risks, contingencies and unusual items
The filing gives no specific earnings or premium guidance. Management’s stated priorities include expanding E&S business and continuing its planned reduction in Casualty Reinsurance. The company cautions that interim results are not necessarily indicative of full-year results.
- Key risks include reserve-estimate uncertainty, commercial-auto claim severity, catastrophe losses, reinsurance recoverability, investment and credit risks, regulatory constraints on subsidiary dividends, and dependence on important broker and customer relationships. The company reported A.M. Best financial strength ratings of A (Excellent) for its regulated insurance subsidiaries.
- An insured group’s indemnity obligations are supported by approximately $1.16 billion of cash-equivalent collateral. The company says this exceeds specified outstanding claims and unpaid reported losses, but warns its estimated exposure is growing faster than collateral and that a shortfall could be material.
- Reinsurance recoverables were $545.4 million on unpaid losses and $39.8 million on paid losses. The company reported no allowance for uncollectible reinsurance recoverables at quarter-end.
- Legal proceedings arise in the ordinary course; management did not expect them to materially affect financial position. Other expenses included $683,000 of employee severance costs.
- Adoption of the new lease standard led to an $8.3 million cumulative-effect increase to retained earnings from derecognizing a build-to-suit lease. Management said the change did not materially affect results, EPS, cash flows, or debt-covenant compliance.
- The effective tax rate was higher year over year; management attributed the 2019 rates partly to changes in commercial-auto reserve estimates and the resulting geographic mix of income.
Important facts for investors to verify
- Whether E&S premium growth and improved combined ratios persist, and how much results depend on reserve releases or adverse development.
- Commercial-auto loss trends and the adequacy of reserves, particularly for older accident years.
- Credit quality, valuation and impairment exposure in below-investment-grade bank loans and other private investments.
- The adequacy and continued availability of collateral for indemnity recoveries, fronting arrangements and reinsurance balances.
- Available holding-company liquidity, subsidiary dividend restrictions, and continued compliance with debt covenants as business mix and cash flows change.