Q4 2020 James River Group Holdings Ltd Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the James River Group fourth quarter, 'twenty and 'twenty earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session.
You wont need the press star one on your telephone please be advised the today's conference is being recorded and you're acquiring the further assistance. Please press star zero.
And now I'd like to hand, the conference over to your Speaker today, Mr. Kevin Copeland head of Investor Relations. Thank you. Please go ahead.
Thank you Chelsea and good morning, everyone and welcome to the James River Group fourth quarter 2020 earnings Conference call.
During the call we will be making forward looking statements. These statements are based on current beliefs intentions expectations and assumptions that are subject to various risks and uncertainties, which may cause actual results to differ materially.
For a discussion of such risks and uncertainties.
Please see the cautionary language regarding forward looking statements in yesterday's earnings release.
And the risk factors section of our most recent form 10-K form 10, Qs and the other reports and filings we make with the Securities and Exchange Commission, we do not undertake any duty to update any forward looking statements.
And I will now turn the call over to Frank Dorazio, Chief Executive Officer, James River Group.
Thank you for that introduction, Kevin Good morning, and welcome everyone on the call. It's my pleasure to join you for the first time as the CEO of the James River Group.
And I'm here today, with our CFO, Sarah Doran as well as our president and COO Bob Myron.
Before I hand, the call over to Sarah to cover our financial performance for the quarter I'd like to share a few introductory remarks with you.
My primary focus over the first three months of my tenure of James River has been to ensure that the company remains absolutely laser focused on the market opportunity we have in front of us.
<unk> our position as the best in class of U S carrier and expanding fronting and fee income business and re profiled casualty reinsurance capability.
To keep the resources and bandwidth of the organization focused on our prospects for the future. It's critical that we respond to emerging loss trends quickly, making any necessary adjustments to our processes, our underwriting appetite and ultimately our reserve strength to prevent creating any distractions of the company's mission.
As previously announced during our fourth quarter, we strengthened our reserves by $75 $8 million and our commercial auto run off portfolio and $24 $7 million and of our casualty reinsurance unit.
Both the instances we saw emergence in the quarter changed several assumptions and acted immediately to bolster reserves, adding nearly 4% to our overall net reserve position for the group.
These charges ultimately drove our full year combined ratio for 2022, one of five 6%.
Our accident year combined ratio was <unk> 77 per cent for the quarter and the 94 per cent for the year.
These data points cast our prospective business and a very attractive light and give further credence to our focus on the opportunities in front of us.
The commercial auto reserve increase primarily related to the 2016 of 2018 years of the run off portfolio.
And we've responded to heightened reported losses this quarter.
For some context paid and reported losses on this book had trended down since putting the large commercial auto accounts into run off of a year ago.
The company started to see higher reported losses and the last two weeks of the third quarter and this trend continued and accelerated during the fourth quarter.
We believe this trend reflects the COVID-19 driven delays as well as the year and settlement season, possibly exacerbated by higher unemployment rates.
We also completed a detailed claims review of a large block of the runoff claims and increased case reserves meaningfully and the fourth quarter.
We've continued to close claims rapidly on this portfolio and have now closed almost 58% of the claims that were opened in January 2020, and are receiving very few new claims at this point.
Of our approximately $1 $4 billion of total group wide net reserves at quarter and approximately $300 million supports the runoff portfolio.
It's worth noting that even after our fourth quarter charge, our E&S unit made an underwriting profit for the year, producing and 97, 7% combined ratio and our specialty admitted segment reported a combined ratio of 92, 7%.
Our overall corporate results are clearly disappointing and not consistent with the Companys unwavering focus on underwriting profits are fourth quarter charge understate, what was otherwise the year of significant accomplishment for the organization.
I remain both enthusiastic about the positive fundamentals that underlie our ongoing business and very bullish on our prospects for 2021.
Excluding the impact of our commercial auto run off portfolio. The company grew by 26% and the fourth quarter over prior fourth quarter and by 14, 6% over prior year to more than one 5 billion of DWP of strong growth and both our E&S and specialty admitted segments, while driving margin expansion throughout the company.
And benefiting from our 16th straight quarter of positive rate change.
Over those 16 quarters are compounded aggregated rate increase on core E&S renewal book has been 31, 8%.
Our core E&S segment truly hit its stride and 2020 with positive indicators across all major metrics, including 38, 9% DWP growth and the fourth quarter and 29, 5% growth for the year as our submission count increased 11% from 2000, and 'twenty and policy Count Rose 26%.
Over a year and 2019.
From a rate perspective, the segment experienced 13.7% positive rate change on the renewal of portfolio.
We feel particularly optimistic about our ability to carry this momentum into 2021.
Our early Q1 indicators point to a continuation of the buoyant and 2020 rate environment as our January rate change was actually more significant than both Q4 and full year 2020.
We also experienced GW P growth and the month of 37% as our quote to bind ratio increased 26% over January of 2020.
These metrics seem to signal that we remain in the market, but E&S underwriters dream about.
Should also mention that these 2020 key measures were achieved while enjoying a major reduction in claims frequency throughout the year down.
Down on and exposure adjusted basis by $19 one per cent based on policy count.
29, 3% based on unearned premiums.
I should also note that our budget for 2021 assumes that these reduction and claim frequency are temporary and we'll revert to normalcy over the course of the year.
I'm also pleased to announce that our specialty admitted segment continues to gain scale as the unit onboard and eight new programs and 2020 and shrink further growth and DWP and fee income embedded in their 2021 plan as these new programs gain traction over the course of the next year.
We are of very robust pipeline of new and exciting opportunities for 2021, as we continue to see momentum and program submission activity, which increased 74% of 2020, while fee income increased 22% over 2019 to $19 3 million.
We're seeing larger and more attractive opportunities in this space and our falls like unit makes the name for itself as the preferred fronting partner.
And of course, all of this happened against the backdrop of a global pandemic with the vast majority of our workforce working remotely.
Very proud of the dedication and resiliency of the James River staff for their accomplishments and efforts. Despite unprecedented challenges to continue to position James River is the premier specialty E&S carrier.
Our plans for 2021 call for us to continue to profitably grow the company.
Moving the commitment to our underwriting culture, while continuing to invest and our people our processes and our technology and an effort to create a larger more profitable specialty carrier consistently producing top tier returns.
Our expectation for 2021 to make an underwriting profit as a group and in each of our segments as we aim to produce of low double digit return on tangible equity for the year.
With that as an introduction, let me turn the call over to Sarah Doran.
Thanks Frank.
And highlight a few of the financial points from the quarter.
Last night, we reported a net loss of $23 million for the quarter and net income of $4 $8 million for the year, resulting in an operating return on tangible equity of three eight per cent for the year.
We had of $29 million operating loss for the quarter, given the reserve charges and operating income of $21 $2 million per the year.
And for the year, we grew tangible book value per share, 9% before dividend payments.
Our performance for the quarter reflect strong investment income performance and improved accident year loss ratios and our largest segment E and S offset by reserve charges on our commercial auto runoff book and at our smallest segment casualty re.
March and conditions remain extremely attractive for our business and we took advantage.
We are reporting accelerating core E&S growth for the Smiths recent quarter and almost 30% per the ear.
We continue to closely manage our expenses.
Frank covered the commercial auto and reserve strengthening.
But we also experienced $24 $7 million of adverse development and our casualty reinsurance segment is.
And this development was offset by seven and a half million dollars of sliding scale Commission adjustments that run through our expense ratio and those are on many of the treaties that preferred adversely.
On the adverse development of the adverse development approximately a third was on treaties that we no longer right.
A few of our reinsurance contracts experienced much higher than expected loss emergence during the quarter and in response, we adjusted and our loss development factors. While some of these contracts remain profitable. This dynamic brought on the adverse development.
This quarter, we had 13 and a half million dollars with favorable development from our core E&S business emanating from the years 2019 and prior.
We hold the most recent three years of our Korea and S business at a loss ratio of $62 six per cent.
And as Frank reviewed we also reviewed we also reduced our current year loss pick and the core E&S book almost four points due to the 20% to 30% decrease and claims frequency we saw during 'twenty and 'twenty along with the rate increases that he cited which substantially exceeded our expectation.
Our paid and reported loss ratios and Korea and S remained at or below 30% for 'twenty and 'twenty of decrease in reported losses of 10 points from 2019 and 27 points from 2018.
We're not counting on the low frequency trend to continue in future years as Frank mentioned as the Covid vaccine becomes more widely available and activity continues to increase but we believe the reduction in claims frequency for 'twenty and 'twenty will be permanent and that we do not expect of catch up as a result of delayed reporting.
Examples of this would be fewer slip and fall accidents fewer people and restaurants and fewer people are going to work.
Our primary external and reserve study indicates that our reserves are strong and adequate with the modest redundancy and strengthened from a year ago.
For the full year Korean estimate at approximately <unk> 65 per cent of the Companys net written premiums as compared to <unk> 40 per cent for last year and also makes up approximately 50% of our $1 $4 billion of net reserves.
Moving on the expenses.
Our expense ratio decreased to 19, 9% this quarter as compared to 34, 2% and the first quarter of this year and $26 seven per cent for the full year 'twenty and 'twenty. There were a few offsets to this years expense ratio that we would not expect to repeat.
First the outset of fighting scale of commissions and casualty re lowered the expense ratio by about two points for the year.
And then reduce travel and other COVID-19 related savings as well as a significant reduction and our performance based compensation and lowered the ratio and additional point we.
We do expect that our expense ratio in 'twenty and 'twenty, one we'll be closer to 30 per cent.
Finally, moving on to investment.
Net investment income for the fourth quarter accelerated as compared to prior recent quarters at $22 $2 million and increase from the same quarter last year, largely due to higher income from our renewable energy portfolio, one investment and this portfolio alone matured and exceeding performance targets, we do not.
I'd expect it to regularly repeat and that the net investment income will be similar and quantum of the second and third quarter of 'twenty and 'twenty.
This quarter of gross yield was about 3% or about 70 basis points reduced from the fourth quarter of 2019.
So with that I will hand, it back to Frank.
Thank you, Sir operator would you kindly open the line of questions.
As a reminder to ask a question you will need the press star one on your telephone to withdraw your question press the pound or hash key plays.
Please standby, while we compile the Q&A roster.
Your first question comes a lot of Matt Karaleti with the J P M.
And J J M P.
Hey, Thanks, good morning.
Operating Frank I appreciate I appreciate your comments on.
You know on the Uber reserve charge and the and the color that you were able to give around it I guess one question I wanted to ask you that I think is on a lot of investors' minds and and potential of investors' minds is what can you what can you say or kind of what color can you provide if there's any additional color.
And that you know your confidence level with you.
Getting it behind you right that it wasn't just a reaction to the data that.
You know actual was worse than expected and your acted to it but that there was also a very large dose of increased conservatism put into the process such that.
Hopefully I won't have to be revisited.
Thanks for the question Matt.
Let me try to walk you through kind of our thought process and how I feel about where we are right now.
So you know clearly we address the loss emergence with a large number we call four of claims audit by our.
Senior claims the leadership team to review of healthy sampling of the open files and the time.
And we boosted our case reserves on a portion of those files.
Our actuary took the data from the quarter and the insights from the claims audit and the indications where from a materially higher ultimate losses that were now book too.
I'm comfortable with where we ended the quarter and particular with the overall group reserve position given the indications of our external reserve study, but we are definitely better off today than we were a quarter ago, So and commercial auto run off to your question.
Case reserves per open claim are up about 150% year over year and up 25% since Q3.
We've closed roughly 58 per cent of the open claims since we had the beginning of 2020.
And I feel our new actuarial ultimate selection.
Reflects the experience of the latest quarter as well as what we've learned and closing out the bulk of these claims so I'm comfortable with the actions we've taken.
Now you.
That being said, if there's an opportunity for us of further reduce.
And the possibility of future of emergence of tail risk sort of.
To move to a higher end of the range of outcomes.
You know and a format that makes sense economically viable then and we're open to exploring that option because of I don't want a runoff book to.
To be and ongoing distraction of Dragon and the organization and I want the full resources of the company completely focused on the opportunities and this market to continue to grow our core E&S lines profitably and.
And scale of fronting business.
That's great. Thank you and then just another question.
Really the two part question just focus on core E&S.
The I guess twofold question, one is as I think about top line you know I think we're we just to confirm we will be anniversarying kind of the the.
Apple to oranges of Uber being gone and that kind of the whether it's the core E&S growth rate you quoted and the for the quarter and the press release or talked about you know January kind of off to a good start that those sorts of numbers or what we should be thinking about in terms of that segment reporting and then of loss ratio question in the sense of.
You know as I look at kind of the 62 and change accident year that 'twenty and 'twenty ended up at.
Is that it is the sustainable starting point or should we be thinking about some of the commentary you had around some of the frequency benefit that took place in 'twenty and 'twenty.
And as being a part of that and maybe not transferrable to the 'twenty one at least to start.
Okay. So there's a lot there, Matt and let me let.
Let me say I'm going off of that of your question.
Okay, and we try to start with the last part of your question.
And just how to think about the 2021 accident year and relative to a loss ratio pick so.
What's the net as I mentioned, we had significant reductions and claims frequency and 2020.
Along with rate increases in excess of expectations. So.
We're not assuming the same reduction and claims frequency for 2021, and we've taken a fairly conservative approach to our loss picks going forward. So hopefully that gives you some.
And some sense and color there and just relative to your question on the E&S market and how to think about top line and and rate and I think that's where you're going on that.
And I would tell you I think our thesis for the rate environment for 2021.
If you asked me that the month ago I would tell you that I thought it was the.
A continuation of some blend of what we saw in Q3 and Q4.
[noise], maybe with some moderation by the back end of the year.
But our January report.
On rate was much higher not just then.
Q4, but our year end 2020 so.
That tells me, we're seeing a lot of opportunities and lines of business like excess casualty excess property.
Allied health, maybe some professional line.
And where rates, we're seeing there are higher and the lines of business that saw.
And I'm, sorry are higher there than the composite average.
That we have and the overall portfolio. So we'll continue to monitor those business mix dynamics over the course of the year, but we still think this market has legs.
But between the Lifesize limitations, and we're witnessing and the market the retrenchment of the standard market across a number of classes the.
The Lloyds Decile review and and and limitation on the stamp size growth.
And certainly the continued overhang of recent accident years, we would be pleased with our original thesis just relative to where we think growth can be and where rates will play out over 2021.
But we have some reason for some additional optimism.
Okay, great. Thank you very much.
Okay.
Your next question comes line of Mark Hughes with the truest.
Yes, Thank you and good morning.
Sarah Good morning, we're giving some numbers near the back end of your comments you talked about the decline in reported either claims or losses for 2019, and I think we see some of the core.
Yeah and this business.
Could you refresh me on the the number.
And if I'm clear and the.
Happy to and thanks Mark.
I was just reviewing paid and reported loss ratios and Korea and S. Because.
Because I think of that.
It's a pretty strong story, there and just to say that you know.
For paid and reported loss ratio and Korean assets were at or below 30% for all of 'twenty and 'twenty and that reflects the decrease of 10 points from where we were in 2019 and a decrease of 27 point from where we were in 2018.
Thank you for that and then Frank when you look at the casualty reinsurance business I Wonder if you might talk about the.
Where you know which sort of treaties. If there was any commonality of any particular lines, where you saw the.
Loss emergence and then how are you.
The business is positioned on the go forward basis. So it's you know what of your <unk>.
Competitive advantages what do you bring to the market.
To the.
You know to give us confidence and the.
And the future profitability and returns and the.
Sure.
So let me try to address your questions on of the development first so.
And casualty re roughly a third of the development that we saw comes from treaties that were no longer on.
So we saw development of treaties from 2012 to 2018.
But most of the charge was really from the 2016 and 17 years.
The lines of business and saw the most development where the.
L for contractors and commercial auto liability.
We ended up changing.
Our loss development factors on a few of our larger historical treaties, some we still right.
And we're no longer on the books been pared back in recent years so.
Net reductions or eliminations of some volatile elements non standard auto workers compensation any property exposure. So.
Roughly one third of the emergence of came from treaties that we no longer support and.
Hopefully that gives you some sense in terms of.
We were seeing it from but ultimately we chose to take a more significant charge and the actuarial recommendation that the $24 seven it's.
The largest quarterly charge the newest ever taken so I feel very good about the steps we took there.
And I feel even better about the likelihood of make an underwriting profit and the recent and current accident year just based on the re profiling of that book.
The the.
Improvements made at the transactional level relative to terms and conditions.
And then just the underlying lift in terms of rate.
And improvements and the underlying business.
So that's some color there.
I'm sorry go ahead.
Oh yeah.
And I didn't mean to cut you off but I was going to ask.
You definitely been very optimistic about the growth outlook and the core of you know what should we think about the casualty re book are you trying to grow the holding steady.
Yeah, So and good question I would say we've been more focused on margin expansion there and growth.
I would expect to see maybe some modest growth.
But from a strategic standpoint.
Listen we like the efficiencies Bermuda has historically provided us.
Having the footprint that we do and the states I like having position of the Bermuda market I think it's got the ability to round out distribution and market access opportunities for us.
And I I spent 12 years and the Bermuda market. So I think I know that market well and I will continue to explore ways to see if we can optimize the results there further over time.
And then the terror I've asked you this before the ceded premium ratio within the core E&S.
Any directional thoughts on that I think you describe.
Ascribe that the excess casualty and property, where some loans that you saw performing quite well it sounds like you're growing there.
Hosted the ceded premium ratio trend and the core.
Yeah that the it's a great question Mark. Thank you for asking and excess casualty is really what drives that that was about a third of our premium and in Korean and this year.
And that's what brought that seeded ratio down to its kind of current level and.
And that's the book and throughout all of Korean assets growing the fastest it really has the most consistent and best rate environment. So all of that would roll up to say that I don't.
Having specific crystal ball and line, which line is going to grow line, but that one Phil certainly has significant language. So I would feel pretty comfortable with that seat of ratio and Corey and ACH, where its been this quarter, it's pretty similar to last quarter as well and think about that.
Moving forward as well.
We could.
As the year goes on as we're thinking about different things are always different levers to consider here and.
We certainly by a fair amount of external reinsurance, but that books from and been very profitable and that could be something that we'd look about ways to manage our capital going forward as well.
Just to kind of give you of tens of other things that we're thinking about moving the dial in and taking advantage of this market right now, but you know if we're just looking for a pure kind of modeling question and assumption I think the current rate is is it fair enough one for where we sit.
Current range.
True.
I appreciate that.
Your next question comes the line of Randy Binner with B Riley.
Good morning, Thanks I just.
And I just wanted to ask on the commercial auto.
Surcharge could could you lay out and.
And I was looking around and I don't think the pain.
K is out yet so.
You know a number of that would be helpful to have is kind of what the where the incurred net lawsuits and a GAAP basis.
For 2020, now, but if you don't have that then.
And kind of what accident years, the adverse development was and so we can.
Kind of understand how each accident years developing.
Yeah.
Hey, Randy asked Bob you want to help us.
And Randy let me answer of that let me answer that question. So I've got full year data here with me.
During the during the calendar year 2020, we added reserves for 16, 17 and 18 of.
$11 million and $47 million and $53 million of respectively.
I think I would want to mention again that is.
As Frank did that we've made a significant amount of progress here of closing claims and we've as of.
Relative to the peak that we had we closed 58% of.
And what was outstanding and January 2020.
The remaining 80% of sort of about 80% of what's remaining open.
The accident year was 18 and 19.
Youll read you all remember that there's a lot of moving pieces to this commercial auto book, especially that both rate and state mix change consistently throughout the six years, where are the large commercial accounts was meaningful for us.
And we got material rate increases and 18 of the 18 underwriting year of the continued into the 19 renewal.
And as we.
As we got increased rate also are.
The number of states that we insured shrunk and some of the more problematic states went away that had longer statutes of limitations and the significant U M. U I am type of exposure of like Florida.
Which wasn't in the portfolio and 18 or 19.
The state mix also as I mentioned shifted a lot and the performance of the book change with the reduction from the state of the states as well so.
I think that we continue to get a trickle of new claims and but it has slowed down a lot.
And I would just reiterate that we've made material increases in the and the case reserves.
Relative to a year ago, it's above 150% increase there.
Okay and just.
Can I just confirm those numbers. So you said for 16 and as all of you added $11 million and then for 17, you added 47 million and and for 18 out of $33 million is that right 50 353.
The five three.
Well.
Does that mean, you took 19 down to get to the back of the $76 million.
No significant.
And those numbers were for the year, Randy just a day, Bob the siting and not for the quarter just to point out.
Yeah.
Right, but that those and those numbers some of the 100 and maybe maybe we should take this offline, but I guess the the.
A question for right now and so there's no material change to 1919 states of like around $262 million.
So.
It's pretty close to where it was I mean, we look at that year and we look at how it's how it's performing so far and with our.
We've talked about before sort of the refocus of claims handling around commercial auto and we canceled when we significantly pared down this business.
We expect that year to the.
And we're working out and now we still think it is a profitable year.
And then just one other follow up thanks for all of the spot the 80%.
Net of the remaining claims or from the 19 and 20 accident years, correct 18, and 1918 and 19, Okay. Gotcha, Yeah, we don't have any of <unk>.
We don't have.
This was.
Well, it's just worked very quickly reminding everyone. How that worked so we're not on the risks for any accidents that happened after 12 31 19.
It was it was done out of the cutoff basis.
So we don't have any claims from two.
<unk> 2020.
Alright, and I'll leave it there thank you.
Your next question comes the line Meyer Shields with K B W.
Oh, Thanks, and good morning.
And I guess the person era.
You're talking about the diminished frequency of.
Claims that.
Clearly didn't happen I was hoping you could update us on how you're thinking of severity for accident year, 'twenty and I'm asking both in general and because of the growth and excess casualty where would imagine severity trends are typically higher.
Alright.
And I that cut out for a second and ask you about the 'twenty 'twenty, one versus 'twenty and 'twenty Mayor I apologize I didn't pick up that full question.
No I'm actually asking just about 2020 itself completely on board with the idea of the frequency was the.
The frequency of benefit is going to hold up because the things just didn't happen but.
But I wanted to get a sense as to how your book.
The severity assumptions underlying the accident year 'twenty lots of it.
Yeah, So mayer.
Bob So.
We've seen in this small account casualty book, that's individually underwritten and we have not really seen.
When we look backwards.
<unk> already has it been pretty benign.
I think it's important to bifurcate.
A couple of a couple of things here first of all in terms of the frequency decline in.
And the stats that we've quoted here in this is really related to the 'twenty and 'twenty accident year when.
And we've looked at it so not just claims that we received in the year, but specifically related to 2020 accident year claims.
But overall.
In particular referencing back to the <unk>.
Some of the stats the cera quoted.
The the Dol.
<unk> of loss emergence has been really benign and this book of business right and so we feel great about how we're awash Pixar and.
Hoping that we're continuing to build redundancy redundancy there, but when we look forward I think we're making we're making a conservative assumption around loss trend and what it probably been low single digits, we're making an assumption around probably mid single digits and I think that.
And it's really less about the data that we're seeing because R. R.
Paid and incurred actual dollars of loss are so benign, but I think where we're just cautious that you know.
While I think social inflation and the like has been a has been a bigger issue.
With the larger account business and some.
Some areas of exposure and assurance that we really don't get into I think we're just cautious of that it.
It's probably prudent to be <unk>.
<unk> that trend assumption and more to sort of mid single digits.
So.
Hopefully that was clear.
Oh, it was definitely a although the exactly the right call. So that's good to hear.
<unk>.
Of getting sort of different messages around the industry can you talk about how ceding commissions are changing and casualty re.
Sure why don't I start that.
There are some improvements and feeding commission I would not say significant at least and the portfolio that we write.
And so call it.
Appointed roughly in terms of how we look at the improvements there the more significant improvement that we're seeing relative to margin expansion is really and the underlying business, maybe some terms as well, but for the most part of the lift we're seeing.
Okay.
Some examples I guess.
Casualty related seeding commissions going up instead of down so it sounds like you'll have to worry about that.
And then finally.
With the growth of the assets property are there any material exposure to Texas weather of couple of weeks ago, where lots of it.
No.
The first question we have a.
Fairly modest sized portfolio of.
Excess property, it's heavily reinsured.
And obviously.
Watching the events over the last couple of weeks closely and monitoring them.
In constant touch with our claims folks, but we don't expect it to be.
Material event for for the organization.
Perfect. Thank you so much.
There are no further questions I would now like to turn the call over to Mr. Frank Dorazio.
Okay, operator, and thank you to everyone on our call for your interest and James River, We look forward to reporting to you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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