Q3 2021 James River Group Holdings Ltd Earnings Call
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The language regarding forward looking statements and yesterday's earnings release and the risk factors.
Most of our most recent Form 10-K Form 10-Q, and other reports from filings we've made with the Securities and Exchange Commission we.
We do not undertake any duty to update any forward looking statements.
I'll now turn the call over to Frank Durazo, Chief Executive Officer of James River Group.
Thank you for that introduction, Brett good morning, and welcome to everyone on the call pleasure to join you again, having just yesterday completed my first year at James River CEO.
I certainly plan to cover the result of the quarter in a moment, but given the timing of this call.
But first reflect on some of the goals I originally set for the organization and review the progress we've achieved in my first 12 months.
As I said on my first call with your last February my primary objectives or to ensure that the company remained laser focus on the market opportunity that we have in front of us to strengthen our position as a best in class E&S carrier with an expanded fronting in fee income business.
And to eliminate the overhang surrounding our commercial auto run off portfolio.
I believe we have been very successful in executing on these two priorities, having put a loss portfolio transfer agreement in place in late September.
With coverage provided.
Highlighted without an aggregate limit and fully collateralized.
Priced very close to our held reserves.
And secondly by driving strong growth and attractive rate increases throughout our two very strong insurance for any strong insurance franchises are.
Our Unf's unit, which has long been an industry leader in our specialty admitted unit, which we emphasize are fronting capabilities in fee income generation.
At the same time I have also significantly added to my senior management team with the addition of highly experienced leadership and our new Chief Actuary and new teeth claims officer.
Who have joined US this past quarter and are playing pivotal roles and the risk framework of the organization as we invest in and bolster our enterprise risk program.
James River has also added to its board of directors, adding two very strong independent directors with deep industry experience, who on dabbling provide valuable guidance of the management team.
When I took the rain cico I told the board I would emphasize growing are highly profitable for businesses.
The core E&S business was approximately $650 million in gross written premiums on a trailing 12 month basis at the time I joined the organization.
Over the subsequent four quarters, we've taken advantage of dislocation in the market as well as rate increases to grow the corina booked by 25%.
With the opportunities available to us today, the corina business should soon be exceeding 800 million and DWP.
Right in the segment have increased by more than 13% over the last four quarters.
Meaningfully in excess of loss trend.
Account's continued to stay in the E&S marketplace for longer because we've been able to provide renewal quotes on nearly our entire enforced portfolio. Each of the last few quarters. Our policy count has grown over 24% during the last year.
Our E&S segment grew 21.3% in this most recent quarter.
Which is a significant acceleration from Q2.
And a validation that we remain a preferred destination for our valued wholesale market partners.
I mentioned on our last earnings call that we saw a brief slowdown a new business volume during the month of May around the time of our equity offering new.
New business volume returned to normal during June and July and that momentum has continued during Q3.
Just as importantly, the macroeconomic conditions that have created this market hardening syllogist today concerns.
Concerns of social inflation, the impact of climate change a continued low interest rate environment and a hangover effects associated with soft market era underwriting lead me to believe that the market's current pricing and underwriting discipline to continue well into 2022.
Given our capabilities as an expert in the universe Caturday arena, the relationships of our experienced and dynamic underwriting team and.
And what we see in terms of market opportunities in front of US I have no doubt that our franchise will continue to be a leader and will continue to benefit from a robust market opportunities in the sector.
And a specialty admitted segment are fronting business has grown by almost $100 million of gross written premium on a trailing 12 month basis or approximately 27% since I joined James River.
And in the most recent quarter fee income was up more than 20% relative to the third quarter of 2020.
We have another very experienced and capable team running this business that is deep relationships with both our underwriting partners and a strong panel of reinsurers that support the programs.
Growth in our fronting and program business slowed a bit during the third quarter as new programs added in 2020 have begun to complete 12 month renewal cycles.
But our growth was still up double digits from the prior year quarter, which was largely due to newer fronting relationships.
I would note the deal driven nature of the fronting and program business can produce large swings in premium results from quarter to quarter.
It can take months, if not more to bind the program and so topline results for this segment can be lumpy.
Would expect our long term growth over the next few years, it's not likely to be in an absolute straight line for this segment.
I would also dismissed any suggestion that our prospects for this segment are hampered by a recent ratings change.
Most of our competitors in this space carry the same a minus stable rating as we do but I believe our team and level of experience set us apart as we've been in this business now for nearly a decade.
We've renewed all of our programs that have been up for renewal since our downgrade in submission activity for new program opportunities was up more than 30% during the third quarter.
We continue to have a healthy pipeline of new deals and my optimism an outlet for this business remain intact.
Although I'm pleased with the growth in our proven key segment I want to make it clear that we remain a bottom line focus company.
Our E&S business continues to report very attractive margins with underlying combined ratios in the low eighties. Our specialty admitted segment is growing fee income at double digit rates and driving underwriting income in that segment.
Now turning to my second priority that I referenced earlier.
[noise] you know finding a legacy solution for a runoff commercial auto portfolio that provided economic finality was a key priority for James River.
After a month long process to evaluate options related to our legacy reserves, we were able to execute a transaction to bring economic finality to substantially all of our run off portfolio.
This exposure has been transferred on a fully collateralized basis to a counterparty that is well known to us.
And I believe the ultimate cost of the transaction further support to change an actuarial methodology that was that was introduced in Q1.
The entire leadership team worked very hard to make this happen and we're very pleased with the outcome the transaction remove a significant distraction and helped to strengthen our balance sheet meaningfully we have benefited from a return to a stable ratings outlook as a result of the executed transaction.
Moving forward in addition to focusing on the Fabulous market opportunity that remains in front of our insurance businesses. My priority now is to stabilize our casualty re segment.
This is a business that we've been in for over a decade and quite frankly, the results have not met our standards.
Before I joined the organization. The decision was made to shrink the business substantially and it's down more than 35% from its recent peak a few years ago.
While we do feel much better about the prospects for performance of the recent accident years.
The persistence of emergence from older underwriting year does not acceptable and the scale of the segment does not warrant increase investment in the coming year.
The most immediate action that we can take it to continue to meaningfully reduce our exposure by exiting treaties that have proven to be unprofitable and reacting quickly to reserve indications, while we continue to analyze our options for the segment.
The focus of the organization is on our insurance and fronting businesses that is our future.
We will begin significantly shrink topline writings of our cavity re segment over the course of the next year as we focused the growth of our organization on our higher returning U S insurance businesses.
Casualty read Q4 activity is largely already underwritten inbound at this point in the calendar, but I am committed to putting a significantly greater focus on our U S businesses going forward and that will become more obvious in Q1 2022.
The $15.1 million of reserves strengthening in the quarter was extremely disappointing and largely reflects the increased loss emergence we saw during Q3.
Nearly three quarters of the development was related to general liability treaties and primarily came from the 2014 to 2017 accident years.
More than half of the reserve development came from trees that we no longer right.
Since I arrived the James River, we've consistently book to the actual real indication or higher when booking our reserves for this segment.
Ah reserves for casualty read or reviewed by third party actuaries on an annual basis and are held reserves at the beginning of 2021 were consistent with the external estimate we received.
I'll close now with just a few comments on market conditions in the quarter itself.
Our headline E&S rate increase was eight 7% in the third quarter.
And stands at 14.5% on a year to date basis.
The rate moderation relative to the second quarter reflected a slowdown in some of our larger units.
For example rates in excess casualty, we're up 12% in the third quarter of.
A very attractive level, particularly given the amount of right already achieved in that line of business in ahead of our view of loss trend, but this is down from nearly 30% in the second quarter.
Excluding the excess casualty line rate increases were stable compared to the second quarter.
I would also point out that we saw similar overall rate moderation in Q3, and Q4 of 2020 before experiencing significant right acceleration in the first half of 2021.
In total the third quarter represented the 19th consecutive quarter of renewal rate increases in the E&S segment.
Compounding to 46% over that period.
This jumping right.
Combined with significant improvements in terms and conditions over this period has given us confidence to pursue our growth objectives.
As I mentioned earlier.
Absent what would be nonrecurring events for the quarter, the underlying E&S business producing combined ratios in the low eighties, and we continue to see a margin expansion across the company.
Going forward the strength of our corina business should no longer be burdened by our commercial auto runoff results.
After completing the LPT transaction.
R I V and ours percentage of our reserves has increased meaningfully to 65, 7% in DNS and 62.9% across the company.
Increases of 8.5 points, respectively from June 30th.
Overall, we feel very good about the current market in which we're operating and our ability to take advantage of these very favorable conditions.
There is ample opportunity for us continue to continue to grow profitably in both E&S and specialty admitted.
Ah ratings are strong and stable are underwriting teams remained embraced by our distribution partners and we remain focused on effectively deploying our capital and generating attractive returns on equity.
And with that let me turn the call over to Sarah.
Thanks, Frank Good morning, everyone.
You won't find substantive comments on the current quarter as well as the past 12 months I'm going to focus my comments on a few discreet parts of the quarter as well as some other key financial items.
Last night, we reported a net loss of $23.9 million for the corner and had a $26.8 million operating loss.
That's losses impacted by the aforementioned with commercial auto L. T T that we executed and at the end of September, bringing economic finality substantially all of our commercial auto run off portfolio.
We also had two other unique impact on the quarter, which I will further explain in a moment.
Frank has already commented on the first development and the casualty realtime segment.
So.
Some unique impact of the quarter, Indiana.
First as you mentioned in Connecticut in conjunction with our AK filing and the signing of the commercial auto L. T T.
The impact of the transaction of what's the majority is related claims expense.
There is a $5 million net impact of the Ida cap often.
We have a small geographically diversified excess property portfolio that the company has written for many areas, which is heavily reinsert.
Our reinsurance and set at $5 million of losses and provides for $40 million a limit. We also benefit from a substantial surplus sure treaty.
For that reason the $5 million of net losses did not grow.
Last this quarter was unique in that we had $8.1 million reinstatement premiums.
Four casualty treaty in different years caused by losses, we experience and no vaccine.
Reinstatement premiums are a function of excess of lottery in France, which is what these treaties are generally are casually treaties work such that the first reinstatement premiums do.
First loss of the tea, but.
But thereafter, we have a few free grand statement premium to provide coverage should be blunt said further losses arrived.
D C D protect losses and prior accident years.
$8.1 million straight production to not written that earned premium in the current quarter.
Absolutely free impact was Frank mentioned, the combined ratio for D. N. A segment would've been 83.4%, which is improved by about two point as compared to the 85.2% in a comparable quarter last year.
B E N S F cat accident ear loss ratio adjusted for the casualty related reinstatement premium.
And the commercial auto L T T.
Would have been 64.6%.
Distant with our performance ear to date and in excess of our Starkel fully developed loss ratios for prior years in Korea.
Absent the casualty related reinstatement premiums.
Which again serve to reduce net written in that premium and E&S by $8 $1 million net.
Net written and that earned premium on a N S.
Would have grown 25, and 22% respectively over the prior year quarter.
Meaningful acceleration from the growth rate of last quarter.
Moving onto our group quite expensive or.
Our group expense ratio was 24.8% this quarter as compared to 24.8% in the third quarter of last year and 26% last quarter.
We had favorable adjustments to Baghdad extent, and certain accruals for taxes licenses and fees within a specialty admitted segment of corner, which serve to lower the segment expense ratio by about five points.
This was partially offset by a higher expense ratio and casualty rate due to lower sliding scale Commission reduction.
And the last premium Orange.
It also benefited meaningfully from a scale, we continue to build an R N S and special Kid minute segments.
Finally answer investment net investment income for the third quarter was $15.3 million, an increase of 2% from the third quarter of last year and about 7% from the prior quarter. The increase is due to increased returned from both our renewable energy portfolio and some other private.
Last night.
We ended the quarter well within our target operating leverage ratios of 1.2 times and 29% respectively.
So with that I will hand, it back to Frank.
Thank you Sarah operator, please it up the lines for questions from our listeners.
Certainly ladies and gentlemen, if you want to get if you have a question. Please press Star then one our first question comes from the line of Mark Hughes from Truest. Your question. Please.
Yeah. Thank you good morning.
Good morning, Mark.
Is there any impact you mentioned, the new Chief Actuary and she claims officer did that influence in any way the approach to the casual P re.
Reserve development.
No not necessarily Dave joined the organization just this quarters you know join in August.
And our prior.
Extra Archie factory retired at the end of September so.
While he was a key part of the Q3 review he's not been with us for a full quarter not completely finished his initial review in essence.
What you.
Saw relative to the quarter and casualty Ria was no.
No change relative to methodology.
Okay, and then the reinstatement premium could you talk a little bit more about that the particular circumstances that drove at that too.
At least in my experience seemed unusual that you would.
Of that magnitude of lost it would trigger the reinstatement premium just <unk> more detail and that would be helpful.
Sure market, Sarah I can help to conceptualize that a bit more as I mentioned, they're both casualty X O L treaties and we haven't E&S, if you've had any N F for many many years the same structure et cetera.
And if I, if I think about that.
For lack of a better term the randomness here is that we had losses from two different years on the treaty. So we triggered two different brands statement premium.
As I mentioned typically you pay for the first train payment premium and then you got a number of free Ram statements and see that we had further losses on those particular accident years there.
There would likely be zero percent financial impact from any teacher reinstatement premium.
But what that does is conceptually net down our losses.
To call. It a one to 2 million dollar range on anything we're writing.
Which obviously protects our balance sheet kind of play through the low volatility focus R. N S.
Cover largely helps with now I would say four or five divisions within E&S.
And one of the things to consider here with regard to X O L. C. DS in the way. These are prices there is going to be a factor for our growth set a different way yeah, we have grown a fair amount, which quite a fax make the reinstatement premiums.
Relatively large compared to where they have that may have been a few years ago, when we weren't growing as much but I think the important here is there is some randomness and then they both came through in the same corner and I would not expect if he knows triggered you know for the foreseeable future.
Anything on the nature of the loss, what sort of been market with industry, perhaps this social inflation, just a little more characterization of the underlying issue.
Yeah sure so.
The two.
Reinstatement losses that you're referencing came out of the energy segment.
Not sure how familiar you are with our energy underwriting unit there, but it's not a large unit I think we did roughly about $15 million in premium last year.
Primarily focused on oilfield services, we're not a big E&P or.
Cole underground mining type of underwriting shop, certainly there has been a push within that within that underwriting department to cut our limits take some of the volatility.
Out of the underwriting forget it has historically been very profitable line of business for us, but we have pushed.
Policy limits down so now I would say roughly a little more than half.
Of the policy that we right out of that unit have.
Limits under 5 million 5 million or less I should say.
Okay, and then any commentary in terms of the.
Business low activity early in the fourth quarter.
So sure I mean, I would say that.
And and we references I guess in queue to Rachel we saw some slowdown in terms of growth Indian ash in may but it picked right back up in June and July and that really continued.
You know through the rest of the quarter and into the fourth quarter as well so policies enforce that count is up about 24%.
Numbers of binders on our small business.
Initiatives up 11%, we continue to see the benefit of strong support from our wholesalers the negative outlook remove so.
It's all been quite positive, particularly since the.
Outlook was stabilized.
Thank you very much.
Thanks Mark.
Thank you next question comes from the line up Matt Karaleti for G. M. P. Your question. Please.
Alright, thanks, good morning.
Frank.
I was hoping to go back to your commentary on casualty re and I I caught what you said about you know expect the pop line with significantly shrink, particularly starting in Q1.
I was hoping you could give us some more color on is is what you plan to do to address the back book cause you know trying to get forward isn't going to take care of prior reserve issues is I know it's reinsurance is is it is it ADC or an L. P. T a possibility or something that's being considered is there you commented that you've always kept it.
You know app or a bug actuarial indications, but I mean, if we look back over many quarters and years like those actuarial indications of consistently been short is there a deeper reserve study or.
Are you considering kind of changing the actuarial approach I'm just trying to get out are you willing to make a commitment to kind of as you're brought economic finality to the Uber issue is there a commitment to bring economic finality to the back book here in casualty rate.
No matter if it's a good question. So you're right. It is a two step process relative to the strategic action relative to underwriting operation.
But then also.
To use your terminology tabak books, so we're going to finish our actuarial review for the segment. So again this is Dave.
First full quarter.
Working with.
With the casualty REIT portfolio, but.
To your point I'm going to be open to exploring our options fairly thoughtfully.
Some more complex than others, but I'm gonna be open options, particularly if we can improve the certainty associated with that portfolio.
Especially after what we were able to accomplish on the commercial auto runoff block and they value that are added.
To our organization and and we're doing that now.
Okay, great and on the side like a deeper dive that's taking place any any sense on timing is that something we could expect alongside her with cute for reporting or do you suspect it would take longer than that to to get through the the numbers.
We're expecting to complete our review of the reserves in the fourth quarter.
Okay, great. Thank you that this is this is underway.
[noise] understood. Thank you.
[noise]. Thanks, Matt. Thank you. Our next question comes from the line Bryan Meredith from UBS. Your question. Please.
Yeah. Thanks, a couple months here just quickly extra <unk>.
The the the wind down at the reinsurance or the.
Taking it down any tax implications that that you need to be aware of will have any effect on tax rate going forward is that at all limiting factor to doing some type of a transaction.
Now we want to do what's right for the business, Brian and I wouldn't think that we're not going to drive the business days on tax implications I think there's.
Many different things, we can think about here and that's when the team is committed to doing I wouldn't hold tax out as a reason not to be.
Four four assign kind of looking at the segment going forward.
Understood, but will it have an implication for your tax rates are going forward. Yeah, again, I don't see it primary where we're early days and that's that I'm not seeing them meaningful application alright, Okay. Great and then the second question I'm just curious.
The cat loss you had in the quarter on I guess, what he said in excess property, maybe you can kind of it's something that obviously I'm familiar with you know cat losses with James River.
And I understand you've got a lot of great reinsurance protection could you maybe describe what it was what happened you know why you know it was so unusual.
[noise] sure Brian So.
As you know our excess property a book, it's always been fairly small less than $50 million and GW T about 5% to 7% of our core business.
Pretty well diversified book geographically heavily reinsured as you mentioned.
To the one in 1000 level and no basis.
It's engineered performed very well and our last year was really driven by the fact that this was a 30 billion dollar of that.
I think that's how we think about this underwriting unit is it's it performs very well when you have a very noteworthy or large event or going to have some loss and I think that we were fairly conservative in terms of how we.
Evaluated or potential loss from this event.
We are into based on where our protections attach from a property standpoint. This event can't get worse for us.
Great. Thank you.
Thanks, Brian.
Thank you. Our next question comes from the line of Cohen Johnson from be Riley. Your question. Please.
Hey, good morning, Thanks for taking my questions chicken at the higher attention ratio and Affronting broke was that just a pretty standard fluctuation quarter to quarter, you think or was that more of an intentional move there.
Yeah. That's a great question, calling there was not an intentional move a franchise. We've characterized that book is just lumpy depending on certain deals come on and when they down.
And I think on average as we've had our attention there is probably going to be 10% to 20% over the whole book, but you're going to see all of that at different points in time.
There'll be some that might go up to 30, but that should be our our average over all of that standard so.
Okay, great. Thank you and then I think I'll ask what are we kind of talked about lost cost trends at roughly mid single digits broadly across the entire portfolio is that still a reasonable way to think about that figure here.
Yeah, I think so I don't think anything's changed when we think about the portfolio at a high level mid single digits.
Is a good way to think about it.
Maybe slightly above that on exit casualty and kind of write therefore the primary.
Again, if you take a look at the rate that we've experienced over the last nine quarters, 46% over that period of time, we feel very good about where we are versus our view of trend.
Okay, great. Thank you as my questions.
Thanks, Tom.
Thank you. Our next question comes from the line of Derek Huh from Cape UW. Your question. Please.
Good morning. Thanks, I know you talked a lot about the consistent adverse to them and and casualty read in detail, but I was hoping that you could provide some color on what that implies for social inflation within dnf's fines and how does your accident and your last picks kind of reflect that.
No you're still kind of doing the reserve study, but I was hoping for some details on that.
Yeah sure so listen I think all insurance companies have some exposure to social inflation.
We've certainly seen some aspects of it I think overall, if you're talking about the E&S book based on our focused on SME business I think we'll probably a little bit more insulated than most I also think that the industry talks about social inflation like you know like the 2000 22020 2021 phenomenon I think it's something that has been kind of <unk>.
Taking up over the last five to seven years interest to some extent you've got a little bit of this.
Closure baked into.
Your your loss history, but.
I think we're we're fine we obviously take a look at it on a on a.
Pretty close basis, and that's factored into our overall views relative tool optics.
Got it and that's helpful. And then my my second question is under fronting business I know you've had pretty good grew up there in the past year or so but are you seeing any of increased competition from peers and know their tuition I recent launches a startups and other carriers kind of getting to the space.
Yeah, No I think you're right there have been some new entrants in the space, particularly over the last 18 months I would say falls Lake is considered a leader in the space I would suggest are fronting pipeline is very strong submission growth has been strong and is up 30, 30% for the court.
<unk>.
You know at any given point in time, we've got as many as three to programs in three to six programs in various stages of diligence.
And like I said during my my prepared comments.
Oftentimes take several months to actually on board a program, but right now we're very bullish about the prospects for the segment.
Two four activity is good we've actually found a new program, we expect them onboard two more over the quarter and we'll just given another notice on a on a fourth that I think it's got a little bit more of a lead time, because it's a book role and there's a notice of cancellation provision to the incumbent so.
Again, I'm very excited.
Excited about the prospects for growth in the segment.
Got it thanks for all of the color.
Sure. Thank you for the question.
Thank you. This does conclude the question and answer session of today's program I'd like to have the appropriate back to Frankfurt any further remarks.
Okay. Thank you operator, I want to thank everyone listening on the call for their time today and for the questions. We received this morning.
I'll wrap up the call by reiterating my appreciation for the staff of games River and our ability to continue to grow R. U S insurance segment profitably, while continuing to deliver on our corporate objectives to make us a stronger and more profitable company.
Look forward to speaking with you again early next year to discuss our queue for results.
And enjoy your day.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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