Q2 2021 James River Group Holdings Ltd Earnings Call
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Good day and thank you for standing by welcome to the James River Group plenty planting 1 second quarter earnings call. At this time all participants are in a listen only mode. After he just speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your first speaker today, Sarah Doran. Please go ahead.
Thank you Henry and good morning, everyone and welcome to James The James River Group Second quarter 2021 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 of our most recent form 10-K form 10, Qs and other reports and filings we've made with the Securities and Exchange Commission.
We do not undertake any duty to update any forward looking statements.
I will now turn the call over to Frank Dorazio, Chief Executive Officer of James River Group.
Thank you Sarah good morning, everyone and thank you for joining our second quarter 2021 earnings call.
Last night James River reported very strong results for the quarter highlighted by continued robust growth and excellent underwriting return, while delivering operating earnings of 54 cents per diluted share setting a company record for quarterly segment underwriting profit of $25.7 million and recording no adverse development in our commercial auto run off portfolio.
The group experienced 26% growth for the quarter, while recording a combined ratio of 89, 7% and a very impressive return on tangible equity of 14, 2%.
These results demonstrate the resiliency of the organization and the strength and depth of the relationships with our distribution partners irrespective of the challenges of the previous 2 quarters.
Through our friends in the wholesale program management and reinsurance marketplaces. We appreciate your continued support value your partnership and look forward to continuing to service the needs of both Hugh and our mutual clients.
Now, let me talk a bit about our business segments as they continue to demonstrate the company's ability to maximize the current favorable industry market conditions.
In core E&S segment exceeded expectations for the quarter by growing DWP by 15, 1%. Despite the fact that new business production was essentially flat for the month of May following our Q1 earnings announcement.
But then rebounded tremendously in June and for that matter for July as well.
The segment recorded its 18th consecutive quarter of positive rate change at 18, 1%, bringing our cumulative compounded rate changed to 42, 5% over that period.
This was the second consecutive quarter, where rates surpassed our full year 2020 rate change.
Building on expectation that these conditions should remain in place into 2022.
More importantly, we believe the rate improvements, we are achieving significantly exceed our view of loss cost trends, allowing us to increase the future profit margins in our business.
Our key production metrics remained very strong our renewal policy retention remained consistent with prior quarters, our new business submission activity and hit ratio increased and policy count was up 27% over Q2.2020.
For the quarter, we experienced positive rate in 11 out of 12 underwriting divisions and premium growth in 10 out of those departments with particularly strong traction on our underwriting unit that serves a smaller end of the commercial market, our small business division which include contract binding.
The division grew 33, 1%.
Sector, we expect to scale as the recovery of the domestic economy continues and our investments in this space take hold.
Other underwriting units had experienced double digit rate and growth for the quarter include Allied health excess casualty and excess property.
Overall E&S recorded a 77, 2% combined ratio for the quarter benefiting from $7.5 million of favorable development from prior years and again, just as critically with our commercial auto run off portfolio performing within our actuarial indications.
Moving on our specialty admitted segment continues to expand impressively and profitably not only have we retained 100% of our programs in the quarter, but our premium growth is up 46, 1% versus prior while producing a combined.
Combined ratio of 88, 5%.
Our pipeline remains robust as we continued to see a healthy flow of program submission.
Putting a 21% increase in submission activity over Q2.2020.
Growth in fee income within that segment continues at a positive trajectory.
Excluding a 1 time catch up in fee income realized in the second quarter of 2020 fee income would have increased 33% over the prior year quarter.
This segment is currently in various stages performing diligence on a number of new opportunities while on.
Also marketing unbundled services, such as claims handling and our forthcoming new policy issuance platform.
Finally casualty re showed significant DWP growth of 41% over prior year quarter based primarily on the growth in existing treaties and underlying rate increases of approximately 16% rather than the onboarding of new placements. Unfortunately, the segment experienced adverse development of $5 million on the quarter coming substantively from <unk>.
No longer support.
While we continue to remain optimistic about the implied margin embedded in the 2020 in 2021 accident years. The prior year loss emergence drove the segment combined ratio.
109, 2% for the quarter.
Before I hand, the call back to Sara I would be remiss, if I didn't mention how extremely proud I am of the management and employees of James River Group continue to remain focused on the opportunities in front of the organization as these results indicate.
While furthering the group's objectives for the year.
<unk> committed to our underwriting culture, while continuing to make investments on our enterprise risk management framework and an effort to create a larger more profitable specialty E&S carrier sure.
Thanks Frank.
Last night, we reported net income of $20.8 million for the quarter and had $18.8 million of operating profit.
As Frank mentioned, our performance for the quarter and E&S reflects accelerating renewal rate pricing meaningful current year underwriting profit augmented by favorable benefit from prior year reserves.
In specialty admitted the story of significant growth and scale on the fronting business.
And across the organization, we delivered meaningful expense savings and scale uplift.
Income, we posted record quarterly underwriting profit and 89, 7% combined ratio experienced 26% top line growth and generated a 14, 2% average operating return on tangible equity despite holding our highest amount of tangible equity.
The accident year loss ratio was $65.7 per cent for the corner on par with that of the second quarter of 2020, and a few points above that of the full year 2020. Despite the significant rate increases we've taken over the last 18 quarters. We continue to feel that we are building reserving.
<unk> and our growing core E&S business, especially.
Our current accident year combined ratio continued to improve to 91.7 per cent in the quarter down from 94, 2% in the second quarter of last year.
We had overall favorable reserve development of $3.5 million a 2 point benefit.
Reserve development in E&S was a favorable 7 and a half million across multiple accident years, we continued to see a material claims frequency declined in the 2020 or.
We did have about $5 million of adverse development in casualty reinsurance.
About 60% of the development was on treaties that we no longer write including 1 that expired this past quarter.
Moving on to expenses.
Our group expense ratio decreased to 26% this quarter as compared to 28, 6% in the second quarter of last year and 28, 9% last quarter.
The absolute dollar amount of operating expenses increased approximately 5% across the group as compared to the same quarter last year, while net earned premium increased 16%.
This is a testament to solid expense management as well as the mix of business.
The ratio is sensitive to growth in line, where we see significant premiums for attractive ceding commission, especially excess casualty and our E&S segment.
While stronger than we expected this quarter this growth can be highly variable.
Spence ratio also benefited meaningfully from scale, we continue to build in our specialty admitted segment.
In sum our expense ratio is highly sensitive to growth in rate experienced in any 1 quarter, but we continue to expect that our expense ratio for the full year will likely be somewhere between our first quarter results of 28, 9% and our year to date results of 27.4 per cent.
Yeah.
On to investment.
Net investment income for the second quarter was $14.4 million a decline of 4.9% for my first quarter on about 6.5% from the second quarter of last year.
The decline is due to the reduction in short term interest rates and the sale of a meaningful portion of our bank loan portfolio, which occurred during the second quarter of 2020.
We're also carrying a significantly higher cash balance than we were at the end of the first quarter as we're in the process of putting the proceeds raised from our May 2021 equity offering to work.
It's going to take a moment on taxes on.
Our effective tax rate is highly dependent upon the tax rate, where we earned income.
And this quarter, we earn more income in the U S than we did in Bermuda pushing up the effective tax rate.
I expect that our full year 2021 tax rate will approximate 23, 7% that we have now reported for the first 6 months of the year.
We ended the quarter well within our target operating and leverage ratio at 1.1 too.
<unk> and 28%, respectively, having successfully positioned ourselves for further opportunistic growth.
And finally, a few points on commercial auto reserves in claims.
The rate of claim closure remains strong.
We've closed about a thousand claims since March 31st and remain with roughly 7100 open claims.
40% of which relate to the 2019 year and around 50% relate to the 2017 and 18 years combined.
We've now closed over 65 per cent of the claims that were open when we put the large account into run off in January of 2019.
We hold about $400 million of commercial auto reserves on our balance sheet, the majority of which relate to the 2016 to 2019 years.
As of the end of the second quarter, we had about $55000 of reserves per open claim on our balance sheet.
Compared to our current average closing cost per open claim a $43000.
Yeah.
And all are with that I'll hand, it back the call back to for Frank.
Kick off Q&A.
Okay.
Thanks, Operator, I think we can open up the line for questions.
Thank you and as a reminder to ask a question you will need to press star 1 on your telephone.
Draw your question, perhaps on the pound.
Your first question comes from killing.
Killing Johnson, Brian Lee Security.
Your line is now open.
Hey, Thanks, good morning.
The first question.
The Investor presentation on Q1, you noted.
In closing about 100 claims a week in the commercial auto book.
That pace kept more or less constant here and would you expect it to remain so overtime if so.
Yeah, right now you know calling for it it's a great question for the most recent quarter, we closed anywhere between 50 to 100 claims a week. So it's it's a slightly slower pace than it was in the first quarter.
And I would expect that you know over time as we move further away.
From the run off of the initial data on the run off of the the large account that that would continue to flow down.
I would say that clothing 13 up about 13% of the open claims during the quarter was slightly above the pace than I think we might have expected.
So I think a very strong story as we continue to put the book them behind us.
Okay. Great. Thanks, that's helpful. And then the the 43000 closing cost per open claim that you noted in the prepared remarks I think in the prior quarter was that number closer to.
<unk> 39, if I recall does that fluctuate is that a relatively normal fluctuation you would see or would you maybe expect that to kind of sit at that 43 run rate and I'm just curious how you're thinking about that figure.
Yeah, that's exactly right. We were at 39000 day end of last quarter. So we would expect that to go up right now and we've got $55000 of reserves per open claim and then for you to close every single claim that we have opened at the average cost that we have been closing in I think I mentioned that would that would cost us roughly $43000 of claims so.
We would expect those numbers to narrow over time and I would say you know looking at the debt claims data on an accident year basis.
We are for some of those early years in terms of trajectory is very similar to where we are for the greener ear in terms of 2019, so where we're comfortable with that trajectory and we would expect that.
That dynamic to continue.
Okay, Great. Thanks, and then just last question for me.
Can you just talk a little bit about what drove the favorable development in core E&S in the quarter.
Yeah, I think we saw on court, we saw favorable development in multiple accident years, and Korea I would say in particular, the 'twenty 'twenty year continues to be a bright spot as we mentioned in the prepared remarks, a claims frequency. There is down you know almost 20.
For sent in any given point in time, and I think that we feel very very comfortable with that continuing to be a very effective and profitable year.
But we saw you know a bunch of other years performing well just over the last I would say you know that $7.5 million kind of tracks a handful of years over the last 5.6 years, which is pretty typical for us given the scale of our business.
Okay. Thanks, that's helpful. Those are all my questions.
Your next question comes from Mat Credit Lady JMP. Your line is now open.
Hey, Thanks, good morning.
Frank I thought your comments on the good morning.
Got your comments on the on the new business production that that May was a bit flat and then rebounded strongly can you can you compare kind of how.
June July.
Compared to say, maybe Q1 levels as I kind of back at those levels above those levels.
Just kind of curious if you could provide some more color on where the where the market is.
Yeah. So well you just let me give you a little bit of color. There. So obviously its 1 quarter happens to be a larger quarter for us in Q1.
And we grew core.
18% in the same quarter last year. So the bar, obviously gets higher after 18 quarters of positive rate.
But again, we exceeded our own budgeted expectations for the quarter and we've.
We've seen quarterly growth rates jump around before.
I think it boils down for some of the dynamics that I referenced earlier so new.
New business production for me was flattish right. After we announced our Q1 earnings but then the Gen rebound was tremendous I'd say that for us to.
Come in at the growth rate that we did for the quarter. Despite being flat for May give you some sense that we performed.
Significantly better than what we posted for the quarter in the month of in the month of June and like I said July was a in similar vein as well.
Okay, Great. That's really helpful. Thank you and then just 1 other kind of just pricing question. I mean, you guys have had strong pricing for a while.
If we kind of held serve there.
Are you are you seeing any kind of running a pricing elasticity kind of your point of view on 18 quarters in a row is it becoming harder to achieve those sorts of price increases.
Are you seeing any sort of quote to bind ratios or some other things in.
Inflation and otherwise it going on in the market.
Continuing to get to kind of support those.
For those rate increase levels more broadly.
It's a great question, we've been pleasantly surprised that for.
Rate has exceeded our full year 2020 rate change for 2 consecutive quarters now and obviously you can never predict when rates will change.
Or begin to moderate.
And eventually begin to reverse course, but I don't expect to see that this year to your question we have not.
<unk> seen it became that much more difficult in that regard, we're not seeing that in any of our ratios.
Submission activity was up our hit ratio was up so no signs of.
Of any moderation just relative to our ability to produce the type of rates that we're seeing right. Now I think there is some outside forces that could potentially have an.
Impact the next couple of quarters, obviously of Hurricane season is active.
That may have some impact in certain product lines, but right now it certainly feels to me like we've got several quarters of favorable conditions ahead of us.
Particularly as casualty losses settle for soft market years.
Carriers continue to remain disciplined relative to limit deployment.
Yeah, right now the interest rate outlooks certainly remains.
Pretty much unchanged.
Great. Thanks for the color I appreciate it.
Thanks, Matt.
Next question comes from Kathy Alexander of Compass point. Your line is now open.
Okay.
Yeah. Good morning, just 1 other things that you had mentioned previously was it if there was an opportunity to do a loss transfer capital markets transaction related to the commercial auto book.
That you would explore that has the company.
Made any moves down that path looked at any pricing in order to pull off that kind of transaction.
Mike that require some addition to.
For the reserves that exist on the commercial auto book, just some color on on where the company stands on that could be helpful.
Sure. Thanks for the question Casey.
We put so much analysis into the queue on reserve action that we took.
Basically starting over taking a different approach changing our methodology and then of course.
We've taken a charge that we did so.
I'm comfortable with the steps that we've taken.
I've been a James River certainly.
That said, if we're presented with a legacy structure that mechanically and economically makes sense for it we're going to give it serious consideration if.
If it's significantly increased certainty and is not overly cost per head.
That's still the case so.
Remember, even if there is an agreement on the ultimate of third party still needs to be paid to assume the liabilities. So.
I guess to summarize.
My comments here it is still a possibility if we find a structure that we feel make sense on the conditions that I've, just outlined but I don't feel to necessity.
Alright, great. Thank you for it that's my only question I appreciate it.
Sure. Thank you.
Your next question comes from Mark Hughes of Travis Your line is now open.
Mr Mark Hughes.
Mr. Mark Hughes. Your line is now open kindly check maybe you are on mute.
Yeah.
Yeah.
Alright, well just.
Get back to Mark. Your next question comes from Mayor Shields of J B W.
Line is now open.
Thanks.
I guess first question can you talk about the loss trends that you were assuming in <unk>.
Excess and surplus and I'm curious, particularly whether those have changed overall and as the contribution from excess casualty becomes bigger.
Yeah.
Yeah. So.
Good question there so.
Our actuarial team performed a formal trend study annually that analyzes frequency and severity trends across Cacciatore line does you might imagine we also look at exposure trends.
For the extent that business, we're writing is inflation insensitive, what we're picking up that impact on exposure.
As well.
Our actuaries look at the duration of liabilities associated with those products and have to take that into consideration relative to the impact on future claims payments book.
We're constantly seeking to identify trends in various segments for the business that we write so whether that.
Northeast habitation, all our California, nursing homes, or New York contractors just.
I guess, if I had a couple of examples and so we adjust our pricing trends on rates accordingly, when we deem it necessary.
Whether that's a price index related form of inflation or social inflation.
You know, we get fairly granular by line of business, but at a very high level. We currently think about loss cost trends on the overall portfolio in the mid single digit range.
<unk>.
Clearly the rate increases, we're producing on a multiple of that range.
We're actually in the process right now of doing that formal review and kind of setting.
Our expectation is kind of going forward. So we will be refreshing net.
Shortly.
Okay.
The second question just a numbers 1 was there any expense ratio impact associated with the reserve charge in casualty re.
No. That's a that's a great question mayor often you know there's a sliding scale impact that would move the expense ratio down the treaty that had adverse development in this quarter either didn't have a sliding scale impact or it didn't have a sliding scale in particular so thank you for asking the question there was no expense.
Ratio impact from the adverse development on casualty this quarter.
Okay perfect. Thank you very much.
Yeah.
Next question comes from Brian Meredith of UBS. Your line is now open.
Yeah. Thank you a couple of ones for you just I guess mathematically trying to figure out the E&S growth versus rate.
Is it is it that you're kind of declining exposures, where exposures are going down on your E&S given the growth was only call. It 14, 15%, but you are right was up 18 and change.
No listen I think first of all how are you I think it really boils down to just a few items. So our retention rate in line with past quarters submission our hit ratios are up.
We saw we believe we saw very little impact in terms of cancellations or non renewals that were tied to.
For the first quarter to date, we're aware of only 1 in force policy in the E&S segment that totaled $29000 that was either non renewed or canceled.
2 a rate due to a rating impact.
I talked about new business being.
Flattish for the month of May, but then rebounding in the following months. The other dynamic I think it's probably worth mentioning and maybe this gets more to your point is.
<unk> of our average new business policy premiums came down from roughly $23500 in Q2.2020.
For $17400 per new policy this past quarter.
And that's really driven by the traction we've been gaining over time in our finding facility in small business units.
But again experienced significant growth in the quarter that I referenced.
On my prepared comments, so that's been a area that we've been investing in and bringing along since 2017 are.
Contract binding portals now getting up to 900 to 1000 visits per week again been growing steadily.
As we continue to rollout access to that portal with our distribution partners. So we're certainly happy to have the growth in those units to cater to smaller insurer because the margins are attractive, but it's low touch we keep the underwriting box fairly tight.
And where we have the ability to continue to expand our network. So we like where that's going but some of the impact there is just bringing down some of the new business kind of average per.
<unk>.
Got you makes sense.
Second question.
Just curious in your specialty admitted segment.
Fronting growth, obviously terrific, what's happening with your more traditional worker's comp business right now and kind of what's your view on that business.
Yeah.
Workers' comp is.
The outlook is still mix right and PCI continues to reduce our loss cost and we still see pricing declines in most of the margin, but we do see competition flowing.
We believe that rate indications from the rating bureaus will turn positive soon and that prices will go up in the near term.
So we're in the camp that believes in inflection point is coming on we're making rate filings for increases in several states, but right now yes.
We were off.
Our individual risk workers' comp business I'm on if it was down I'm, sorry, keep me honest here, but it's mostly about 12% on the quarter.
Yeah, I think an important point, there, which I know you know too Brian is as we've grown you know had success in growing the rest of the programs business within that segment Workers' comp between you know a large program that we have in individual risk workers' comp book is about a third of the total G. P value on that segment and you know as recently as 2 years ago.
So that was the overwhelming.
Majority of it.
We have looked through the growth really diversify against that that concentration.
Gotcha, and then I guess last question here frankly, as I look at the casualty re business. It seems like every quarter. We've got adverse reserve development on that book is there anything that you're doing with respect to systems or data or other.
I don't know to basically try to get debt under control.
Yes.
Yeah well.
It's an issue that I guess, we've talked about in the past stretches of $5 million of adverse charge for the quarter coming primarily from old accident years. So in this quarter was primarily from the 2014 to 17 years.
And it came primarily from treaties that are well on let's say this of the $5 million and the adverse charge, 60% of it came from trees that we no longer rights for treaters that are no longer underwritten by the book.
Some GL and some hospitality contracting classes.
And and.
Non standard auto account that had some trucking exposure so I continue to be.
Very very optimistic about for 2020, 1 accident years, but.
Admittedly the prior year emergence as a disappointment again this is a different part of our business in which we're not handling claims were not necessarily reported claims right.
Alright, they're coming to us from a third party, but we're going to continue to evaluate our positioning in Bermuda.
Great. Thank you.
Thanks, Brian.
Yeah.
Your next question comes from Mr. Mark He's a true ma'am your line is now open.
Yeah. Thank you good morning can you hear me.
We can we can hear you Mark Yep.
Excellent.
I My audio cut out when there is a.
Relative to rate and performance monitoring.
Have monthly segment checking calls quarterly segment reviews, we do regular deep dives on the business discussions on studies on lost strength and just as importantly, we tie those processes into how we underwrite in price and reserved for business, but I would say, though is we've been broadly looking across the organization at.
How we take very good and improve upon it so make it better.
Make it great.
The actuarial practice plays a large role in overall enterprise risk management, we've been reviewing all of our controls and the risk register individually refining where necessary, adding or unnecessary and we're going through similar processes with our our framework in government controls and a risk policies on our cyber security and how we use our economic.
Capital model it's.
Pretty much any other of process and that we expect to continue to refine.
Our governance framework and I, just think that's a healthy process to continue to go through this relative DRM.
And then you've got a new group, but 2 packs for I think any changes you might anticipate they'll bring.
Well.
It's day for.
For our new T factories, I, probably just ordered business cards, but listen I expect him to focus on the same things yet.
All newly hired executives focus on 1 day when they join a new organization and remember I was in a similar position just a few months ago. So.
Yeah.
Meet your team in a leadership at the business segment you support you listen you observe you take a lot of notes and of course, you Mercury itself in your new responsibilities and we're very fortunate our currency factory isn't retiring until the end of the quarter. So we expect to have a very orderly knowledge and profit transfer but.
Listen the other day billing to grizzled veteran with extensive expertise in line that we right cash.
<unk> workers compensation professional line property reinsurance and he's seen it all.
Nothing's going to surprise him, but he's coming in with no preconceived notions certainly.
And then 1 final question on the specialty admitted.
What kind of combined written should that be operating on what what would you be targeting for.
That combined.
Yeah, so that the business, obviously had a very corner at that the 88 and a half per cent combined ratio I think.
Peanut move around a lot Mark and this is a tough 1 just you know with any line, where you're getting 50th per cent growth in any given quarter over quarter, that's coming through new programs mix of business different retentions were still in the kind of sub 20 per cent retention, but you know it's moved it moves around on any given program so definitely.
And I'm trying to avoid the question, but just paint the picture that I think that with all these moving pieces, it's tough to probably have an exact trend line there, but conceptually I think about that business running in a combined that's probably it up tomorrow between a 90 or a 92 on a run rate base. It on that probably improved over time.
But the Delta there is just gonna be a little bit on the expense ratio. We had some expense benefits throughout the business. This quarter. If I was kind of covering in my prepared remarks, and then you know I would say some fluctuation in the loss ratio just business. There's more recent programs continue to come on.
Thank you very much.
Thanks for the question.
Thank you no further questions over the phone I would now like so hang on to conference back to Frank Sir. Please go ahead.
Okay. Thank you Henry.
James River produced an excellent quarter of both growth and profitability and we thank you all for making the time to listen to this morning's discussion before we end the call I'd like to take a moment to recognize Bob Myron are former President and C. O O who retired at the end of last week after a long and distinguished career James River Bob. Thank you for your many contributions to the group and I know I speak.
For many of the company and around the industry when I say, we wish you all the very best on your retirement.
Okay well. Thank you again for your time today, we look forward to speaking with you again next quarter have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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