James River Group Holdings, Ltd. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The company is a Bermuda-based specialty insurance and reinsurance holding company with four reporting segments: Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance, and Corporate and Other. Unless stated otherwise, figures below are in millions of dollars.
Financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Gross written premiums | $293.4 | $281.5 | $591.5 | $505.7 |
| Net written premiums | $188.6 | $207.8 | $399.6 | $365.7 |
| Net earned premiums | $208.2 | $184.1 | $409.2 | $338.8 |
| Total revenue | $228.0 | $202.4 | $446.4 | $378.8 |
| Underwriting profit | $5.5 | $4.2 | $12.8 | $8.4 |
| Net investment income | $16.1 | $13.7 | $29.4 | $30.4 |
| Net income | $17.0 | $14.5 | $32.6 | $33.0 |
| Diluted EPS | $0.56 | $0.48 | $1.08 | $1.09 |
| Combined ratio | 97.3% | 97.7% | 96.9% | 97.5% |
- Q2 revenue increased 12.7% and net income increased 16.8% year over year. First-half revenue rose 17.8%, while net income declined 1.1%.
- Premium growth was led by Excess and Surplus Lines and Specialty Admitted Insurance. Casualty Reinsurance gross written premiums fell 53.7% in Q2 and 32.3% in the first half, consistent with management’s planned reduction of that business.
- Net retention fell to 64.3% in Q2 from 73.8% a year earlier, largely reflecting reinsurance ceded in Specialty Admitted Insurance. Q2 net written premiums declined despite higher gross premiums.
- Q2 loss ratio was 74.2% versus 71.2%; expense ratio improved to 23.1% from 26.5%. For the first half, loss ratio was 72.9% versus 69.8%, while expense ratio improved to 24.0% from 27.7%.
- First-half net investment income was lower despite stronger ordinary portfolio income, mainly because renewable-energy LLC investment income declined. First-half realized and unrealized investment losses were $0.9 million, compared with $1.4 million of gains in 2017.
Balance sheet, cash flow and capital
- At June 30, total assets were $2.94 billion, total liabilities $2.25 billion, and shareholders’ equity $689.2 million. Cash and cash equivalents were $267.4 million, up from $163.5 million at year-end 2017.
- First-half operating cash flow was $164.1 million, compared with $65.3 million in 2017. Investing activities used $43.7 million and financing activities used $16.5 million; cash increased by $103.9 million.
- Loss reserves were $1.47 billion gross and $1.09 billion net of reinsurance. Reinsurance recoverables on unpaid losses were $375.5 million.
- Reported senior debt was $98.3 million and junior subordinated debt was $104.1 million. The company also reported $73.3 million drawn on its $112.5 million unsecured revolving facility and $10.0 million of unsecured loans under a separate credit line. Total debt to capitalization was 22.7%, compared with 22.6% at year-end. The company reported compliance with debt covenants.
- The company declared dividends of $0.60 per share during the first half and declared a further $0.30 per share dividend on July 31, payable September 28, 2018.
- Shareholders’ equity declined to $689.2 million from $694.7 million at year-end, principally reflecting a $25.1 million first-half other comprehensive loss, partly offset by net income. Tangible equity per share was $15.69, down from $15.98; management said it increased 1.9% excluding first-half dividends.
Material changes, outlook and risks
- Q2 included $2.2 million of net adverse prior-year reserve development, mainly from Casualty Reinsurance; first-half development was $0.4 million favorable overall, with $2.3 million of adverse development in Casualty Reinsurance offset by favorable development in the other two underwriting segments. Management attributed the reinsurance adverse development primarily to legacy risk profiles and treaty structures no longer written.
- Gross reserves were 63.2% IBNR at June 30, down from 64.6% at year-end. Reserve estimates remain a key judgment and actual claims may exceed recorded reserves.
- Management described stronger E&S and admitted premiums, improved expense ratios, and deliberate retrenchment in casualty reinsurance. It provided no specific full-year earnings or premium guidance and cautioned that interim results are not necessarily indicative of full-year results.
- Carolina Re, formed in 2018 and electing U.S. tax treatment, now receives the 70% quota share previously ceded to JRG Re. Management said future exposure to the base erosion and anti-abuse tax remains uncertain; Tax Act accounting estimates were provisional and could change during 2018.
- A rapidly growing insured relationship is supported by approximately $944.8 million of collateral in a trust. The company warned that covered exposures could grow faster than collateral and that underestimated losses could create material credit exposure.
- Other key risks include reserve uncertainty, reinsurance counterparty credit, below-investment-grade bank-loan exposure, investment-market and interest-rate risk, catastrophe losses beyond reinsurance limits, and dependence on brokers, customers and key personnel. All fixed-maturity securities were investment grade; management identified no other-than-temporary impairment in the fixed-maturity portfolio.
- The company reported no material change in risk factors, no material change in internal control over financial reporting, and effective disclosure controls. Ordinary-course litigation was not expected to materially affect financial position, cash flows or results.
Important facts for investors to verify
- Whether the premium growth and lower expense ratios persist, particularly given the changing mix toward commercial auto and fronting business and the lower net retention.
- Future reserve development, especially in Casualty Reinsurance, and the assumptions underlying the substantial IBNR reserve balance.
- The collectability and collateral adequacy of reinsurance recoverables and the large indemnified insured relationship as that exposure grows.
- Investment portfolio performance and credit quality, including the below-investment-grade bank loans and unrealized fixed-maturity losses.
- Liquidity, debt-facility utilization and covenant headroom, as well as the ability of regulated subsidiaries to upstream dividends.
- Potential changes to tax estimates and the future tax impact of Carolina Re and the Tax Act.