Q4 2021 James River Group Holdings Ltd Earnings Call
Please be advised that today's conference is being recorded.
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I would now like to hand, the conference over to your Speaker today, Brett Sheriffs head of Investor Relations. Please go ahead.
Thank you <unk> good morning, everyone and welcome to the James River Group fourth quarter 2021 earnings Conference call.
During our 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 SEC.
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.
Brett Thank you for that introduction and good morning, and welcome to everyone on the call.
We have quite a bit of information to share with you regarding our fourth quarter results as well as a meaningful strategic actions that we announced with our earnings last night.
James River took significant steps in an attempt to put our historical prior year development from our casualty re unit behind the organization as we look to significantly downsize that business and emphasize our insurance operations.
In doing so we believe we've extinguished our final legacy hurdle and I've had our new chief Actuary completed deep dive of all three operating segments.
While receiving external validation points along the way.
With these actions behind us our focus is on continuing to leverage this sector's robust underwriting conditions, while we continue to make James River, a stronger and more profitable specialty E&S leader.
We have confidence in our group reserve position after confronting legacy issues head on in 2021 with the actions we've taken including the two retrospective reinsurance transactions that we completed in the last several months.
On a group basis, our IV and are now represents 64, 4% of our total net reserves. This is up from 55, 3% a year ago and is the highest level of IV and are at the company since early 2018.
I am pleased with the progress that we've made organizationally, while remaining focused on profitably growing our E&S and specialty admitted segments.
The reserve actions in the quarter somewhat obscure the fact that our E&S and specialty admitted businesses reported strong results in the fourth quarter with combined ratios in the mid to low eighty's and $27 million of combined underwriting profit.
Excellent results that I wanted to expand upon.
The E&S segment reported a combined ratio of 82, 1% as well as 12% growth in gross premiums.
Underwriting profit of $24 million was the second largest quarterly underwriting profit for the segment and that did not include the benefit of any positive reserve release highlight.
Highlighting the profitability of the business. We're currently writing.
Growth in E&S was driven by continued strong performance in excess casualty as well as allied health manufacturers and contractors excess property and our small business units.
Our core E&S book grew 14% in the fourth quarter and 19% for the full year.
Rates were up nine 5% across the E&S segment in the fourth quarter and 13, 3% for 2021.
It's impressive that we've now had two consecutive years of renewal rate increases in excess of 13%, which is meaningfully ahead of both our view of loss cost trends and the rate increases implied in our loss picks for the year.
The fourth quarter of 2021 represented the 20th consecutive quarter of rate increases for the E&S segment.
Compounding to 49% over that period and providing confidence in the strength of our loss picks and the margin. We're building in the business that we're writing today.
For the full year, our overall E&S segment surpassed $830 million in gross premiums in our core E&S book.
<unk> $800 million gross premiums, which was growth of $130 million over last year or almost 20%.
This is an impressive milestone for a business that was $334 million of premium just three years ago at the end of 2018.
While we've added significantly to the top line over that period, we have done so over some of the best market conditions of the century, while remaining bottomline focused the hallmark strength of our core E&S underwriting expertise is clearly evidenced by our results this quarter.
Turning to specialty admitted.
The segment had another very strong quarter with gross premium growth of 9% and a combined ratio of 84, 7%.
Gross fee income increased 27% from the prior year quarter to $6 $5 million.
Fronting and program premiums were up 11%, which was similar to the growth we reported last quarter.
Our individual risk workers' compensation premiums were down five 5% for the quarter and 10% for 2021 as we remained focused on managing the portfolio prudently and what continues to be a countercyclical marketplace for workers' compensation.
Growth in the quarter for our fronting business was driven primarily from existing programs. We continue to have a healthy pipeline of opportunities and wrote one new program in Q4 have already bound two new programs during the fourth or excuse me during the first quarter. So we're off to a good start for 2022.
Getting back to the reserve actions in the quarter as we discussed in our November call, our new Chief Actuary, Dave Julian was in the process of completing reserve reviews for all three underwriting segments and what would be his first full quarter as chief actuary.
While those comprehensive actuarial reviews have suggested no changes in our reserve positions for both our E&S and specialty admitted segments, our thorough analysis of our casualty reinsurance segment.
<unk> in a $115 million reserve adjustment.
Given the unexpectedly high emergence in 2021, particularly in the fourth quarter.
Despite the history of relatively small, but persistent adverse charges from this segment.
The magnitude of the development was both unexpected and extremely disappointing.
The bulk of the adverse development was driven by less than one handful of sealants.
And most of the charge emanated from the 2014 to 2018 underwriting years by all accounts very different underwriting conditions in today's marketplace. The underlying coverage of most of these treaties was primary general liability, including exposure to construction and construction defect.
To a lesser degree treaties contributing to the charge also had aspects of premises and financial lines exposures.
Actual results.
Reported and paid losses in the casualty reinsurance segment significantly exceeded expected indications in 2021, particularly in the fourth quarter, causing us to refine several of the assumptions used to determine our best estimate of ultimate losses for the segment.
We responded to the elevated loss emergence by making significant adjustments to our assumed tail and development factors in particular, we play significantly more weight on incurred loss development methods, particularly for treaties with exposure to construction operations.
Roughly half of these treaties are no longer enforced and those that are have undergone significant underwriting and pricing changes as a segment is heavily derisked the portfolio over the last three years.
We believe those actions are clearly evident in the meaningfully improved loss experience, we see and the most recent underwriting years.
After the reserve movements this quarter, our IV NR represents 66% of net reserves in cabinet in the casualty re segment.
This is up from 59, 2% at the end of the prior year and at the highest level in more than seven years.
In addition to the reserve strengthening we moved quickly to provide our shareholders additional certainty around the size of the charge and protection against further development for the segment.
We believe that with the legacy transaction that we've just signed covering the bulk of the segments reserves, we've meaningfully improved the confidence associated with the casualty reserve portfolio as well as our overall balance sheet.
Sarah will describe the loss portfolio transaction in a bit more detail momentarily, but I would quickly emphasize two points for.
For one our counterparty in this transaction Fortitude re is a sophisticated a rated legacy reinsurer with greater than $4 billion in surplus that we're very pleased to be working with secondly.
Secondly, I view, the transaction, which is being executed at less than $7 million above our Q4 held reserves as further validation of the actuarial work that we completed in the quarter.
With our reserves for our casualty re segment now significantly strengthened and further bolstered by the legacy transaction with Fortitude, we expect to substantially reduce casualty re premiums in 2022.
I expect we could see a premium reduction of $100 million or so based on our 2022 plan, which was driven by portfolio optimization and profitability not volume we.
We do still view the market as attractive given the strength of the rate environment and terms and conditions, but expect to be selective relative to the makeup of that portfolio, while deploying the majority of our capital and our E&S and specialty admitted businesses.
Before I move on given the reserve development, we are announcing in the casualty re segment this quarter and the impact of construction defect exposure has had in driving the charge I wanted to spend a moment discussing why we have not also seen emergence present in our E&S segment and provide some qualitative rationale for that sentiment.
For one our E&S segment has historically not written large homebuilders are general contractors, who construct massive scale multifamily housing.
We also don't write construction ramps either on an owner controlled or contractor control basis. These structures and programs tend to be vulnerable to latency because they have very long products and completed operations coverage extensions.
We haven't written these programs in our E&S segment, but a few of our larger Siemens in the casualty re portfolio didn't underwrite these structures.
So then what do we write our manufacturers and contractors unit in our E&S segment tends to target artisan and trade contractors with average premium sizes of 25% to $30000 and we tried to avoid many of the most problematic states for the class.
Finally, we write no new residential construction and our small business our contract binding units.
Before Sarah provides greater detail I'd like to comment briefly on capital and the strength of our balance sheet moving forward I'm very excited about our new relationship with Galton point capital and the $150 million investment in convertible preferred stock date, we'll make in support of our company.
Galaxy is a highly regarded private investment firm that specializes in investments and financial institutions.
Our board has approved the appointment of Matthew <unk> co founder and managing partner of Gallatin point capital to serve as a member of our board following the receipt of any necessary regulatory approvals.
Several members of the management team and the board have recently spent considerable time with Matt and his colleagues and it is clear that they view our franchise and our future with the same appreciation that we do.
We're very excited to be in partnership with Galton point and have Matt join our board.
Together with the reserve actions taken earlier in 2021 for a run off commercial auto portfolio and the legacy solution, We announced in September we believe our balance sheet is strong and very well positioned to continue to support the fantastic opportunities. We're seeing in our two U S insurance segments.
And the last 16 months the company has significantly increased our reserve balance.
Executing two legacy reinsurance transactions to substantially reduce reserve risk.
<unk> meaningful capital and brought on new experienced senior management, and our actuarial and claims functions as well as hired a group CFO to provide improved underwriting governance.
We have made investments in our technology updated and improved our enterprise risk management plan and have continued to improve our governance by adding three new independent directors to our board.
Each with meaningful and impressive insurance industry experience.
We've done this while growing the company by 20% over the past year.
James River will continue to be a dynamic and entrepreneurial underwriting organization as we build upon our industry, leading insurance franchises, what we've highlighted and the actions taken since I've joined the organization is the blueprint for how we're going to manage and govern the company and frankly, there's no turning back with the actions that I've taken since joining James River I see a very bright future for.
The organization and an opportunity for the company to achieve its earning promise and potential.
This is an exciting time for James River.
And with that let me turn the call over to Sarah.
Thanks, Frank and good morning, everyone.
Even frank's extensive comments on the current quarter I'm going to focus my comments on a brief review of the operating results and then the transactions we are announcing today as well as capital guidance.
We've made significant progress in strengthening our balance sheet, while our E&S and specialty admitted businesses continue to shine.
Last night, we reported a net loss for the quarter of $66 $3 million and an operating loss of 67 $5 million as Frank detail. This is heavily impacted by the $115 million of reserve development in our casualty reinsurance segment.
Across the group quarterly net earned premium growth outpaced that of the year, an increase of 15% on the year and 20% on the quarter. The accident year loss ratio was 66, 7% for the quarter and 67, 1% for the year.
The quarter benefited from strong earnings in both our excess and surplus lines and specialty admitted segments.
Moving to expenses our expense ratio was 13, 9% for the quarter and 23% for the year the quarter benefited from six six points.
Slide Commission offsets related to the casualty reinsurance reserve additions in the year, one eight points for the same impact.
Given our performance on a year, we've reduced our compensation expenses, which had a two point impact on the quarter and about a one point impact on the year.
Final comment on quarterly operating performance net investment income for the fourth quarter was $12 1 million a decrease of 45% from the fourth quarter of last year and about 20% from the prior quarter.
The decline is due to decreased returns in our renewable energy portfolio, especially compared to an exceptional quarter for that asset class in the same quarter last year and a decline in assets in our portfolio given the commercial auto LPT, we executed in September .
I'd like to now spend a few minutes on the transactions capital in 2022 guidance.
We are releasing our quarter quarterly earnings a bit later than we typically do as it was imperative to us to complete our reserve work, but at the same time deliver on the validation and security that we believe the loss portfolio transfer transaction and capital raise together provide <unk>.
So simultaneously was a critical strategic objective.
Note that earlier this morning, and best released a press release and comment that our ratings, which are a minus with a stable outlook.
<unk> unchanged following the earnings and strategic actions, we disclosed last night.
Our reserve Committee completed and finalized its reserve work in early January .
Following Frank's comments during the third quarter call, we began working with Tiger risk on a potential loss portfolio transfer transaction in late 2021, as our new Chief Actuary completed his work in parallel.
We received a final indication on the 42 to <unk> in early February and worked expeditiously with our partner Fortitude during February to negotiate the contract that we signed last Wednesday.
As we announced last night, we've entered into a loss portfolio transfer transaction with fortitude, it's related to the majority of the reserves and our third party casualty reinsurance segment the.
The transaction will enable us to strengthen our focus on our U S insurance businesses, while reducing potential future reserve volatility as we shrink our exposure to the reinsurance business.
It's been executed by both parties and is pending omi regulatory approval for fortitude.
We will pay $335 billion of premium for the $400 million aggregate limit and of that $335 million $25 billion of that will be in cash and the balance completed on funds withheld basis, wherein we retain the underlying assets.
We expect to recognize an after tax loss of $6 $8 million in connection with the transaction during the first quarter of 2022.
And the impact of the 2% crediting rate on the funds withheld assets will flow through our expenses.
Adjusting for the $6 $8 million expense, which is a consequence of increasing reserves to the inception of the LPT the.
The transaction will provide us with $65 million of net limit above are held reserves for the portfolio.
As Frank mentioned it will cover the majority of the segment's reserves and importantly, the majority of the construction and construction defects in the portfolio.
The portfolio was designed to both significantly derisk, our exposure to further emergence in casualty reinsurance and to help enable a transaction during early 'twenty, two especially given our accelerated timing.
We're very pleased to be working with such a high quality and a rated legacy carrier and fortitude re.
Second on the convertible preferred of Gallatin point.
First a moment on process and strategy.
As we work to complete the reserve work and L. T. T. Our objective was to raise equity capital as needed for rating agency purposes, but at a premium to market trading price and our work with city enabled us to deliver on this objective.
Our capital and ratings are allocated across the group and I believe it very unlikely we could have raised less capital to get to maintain the rating outcome that was reiterated this morning.
The gallon 10 point affiliate will purchase $150 million of convertible preferred securities, which will pay a 7% coupon beginning in June the.
The transaction is expected to close this morning.
The securities are convertible at a premium of 27, 5% to either the lower of our volume weighted average price of our stock during the five trading days preceding our earnings release of last night.
Or the volume weighted average price of our stock from today through March 7th.
We have an ability to force conversion in two years, if the stock trades for at least 20 consecutive days above 130% of the conversion price.
Voting rights of the preferred are capped at nine 9% on an as converted basis and the conversion price is subject to customary anti dilution adjustments.
We intend to contribute the majority of the proceeds of the capital raise to our insurance operating subsidiaries.
I Echo Frank's comments in saying that we are thrilled to have Gallatin point in all of the thoughtful strategic expertise and experience they bring onboard.
With regard to capital, we are allowing cash to build so that we can continue to support the operating businesses and the robust environment that we believe is meaningful room to run.
As part of this assessment of capital and the events of the past year, we made the decision to reduce our quarterly dividend from <unk> 30 per share to <unk> <unk> per share per quarter, beginning with the cash dividend declared earlier this month by our board of directors.
The dividend reflects our current growth profile, which remains robust.
Balanced capital with growth opportunities and consider a moderate regular increases annually. According to our opportunity set.
Our balance sheet and ratings are critical to us.
Our expectation for 2022 is to earn a low double digit return on tangible common equity across the group.
With strong underwriting profit in both of our U S segments and to grow our tangible book value per share. We believe our franchise current operating conditions and balance sheet have set up our small account casualty E&S operation to deliver a very strong performance as mentioned and also cited specifically.
In the Investor presentation, entitled frequently asked questions, which we filed last night.
The loss portfolio transfer will have an impact on our income statement.
This includes a $6 $8 million that we will record as adverse development in the segment in the first quarter of 'twenty two.
The higher current accident year losses of $5 million and the interest credited on the LPT funds held assets funds withheld assets.
Together I believe these will limit the opportunity for the casualty reinsurance segment to achieve a profit this year, but provide us with significant balance sheet comfort.
With that I'll hand, it back to Frank.
Thanks Sarah.
Operator, I think we can open up the lines for questions from our listeners.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from Colin Johnson of be wildly Securities. Please proceed.
Hey, good morning, Thanks for taking my questions.
When we look at the dividend cut do you think of that as maybe more of a temporary measure or is that more saying.
Our capital is kind of highest and best use is supporting the growth of the E&S book.
It's a more fundamental shift of your capital management strategy.
Yes, Thanks, Colin we appreciate the question.
I would say very good one we think about our dividend is really right sized for the growth opportunity that we continue to see.
I think that just kind of go back to my comments, there that we expect to through our board and our internal processes look at moving that up annually as part of our regular process.
But I'm not expecting.
<unk> volatile movement up and down and that we think it's almost about a 1% yield it's right sized according to the growth opportunity and also it's fairly consistent across the board with them with some of the other folks about similar business profiles and returns as we do.
Okay, great. Thanks, that's helpful.
And then we.
Touched on with the Uber loss portfolio transfer, we kind of saw a decline in the size of the investment portfolio and that kind of flowed through to <unk>.
Income and we'd see a kind of similar size reduction.
With the casualty re transaction as well.
I think it'll be a little bit different potentially here because.
The way. This transaction works is most of the assets will remain on our balance sheet instead of going over and Thats. The construct of the funds withheld.
On this portfolio. So we will retain the assets, but we will pay the 2%.
Otherwise known as 50 basis points, a quarter quieting crediting rate on that declining balance of assets.
So said a different way, we would expect to have a return on our assets.
Head of 2% so that return would be would be netted against it.
Ideally what would be a slightly higher return to that so it's not going to be a full transfer and a full catch up of all the assets in that way.
Okay great. Thanks, that's helpful. That's all my questions.
Thank you our next.
Our next question comes from Matt Carlotti of MPC Cure MTS Securities.
Thanks, Yeah, Mac holiday at JMP.
First question, that's a question on E&S.
And just understanding kind of the picture of the accident year loss ratio picks you've been making so if we look back historically I think inception to date and kind of beginning of James River fully developed high fifties, it's probably the profile of kind of where actually your loss ratios have gone and clearly you're you're booking you know I think <unk>.
<unk> seven or so is where we're this year was our 'twenty one was at least and Frank I think you termed it as you know best conditions. We've seen the century. So my question is has anything changed in terms of mix in the book or otherwise that should lead us to believe that we should look at history. As we think about you know where recent years could go.
And what you're terming as you're one of the best pricing cycles.
People's careers.
Or is that more just we have to let the process play out obviously and see where the losses develop.
Thanks for the question Matt So.
I would point to your latter part of your commentary there that we're going to be more patient as an organization and let reserves season.
I would suggest that our process is fairly conservative in terms of taking a look at three.
The rates that we were able to.
Get on our renewal business in the prior year.
Look at what is excess of our view of loss trend and have a very contemporary review of what loss trend is byproduct line and then only accept a partial.
A portion.
Of that increase when calculating our <unk>.
Our loss ratios for the following years, so fairly conservative.
If you're looking at maybe.
The jump between 2020 and 2021.
2020, certainly we had.
The reduction in claims frequency of call it 20% to 30%.
On an exposure adjusted basis, and what I said at the time was we weren't going to assume that that was.
The new run rate of the new normal and so we were going to assume that.
Claims frequency would return to.
To pre Covid levels and so that's why you saw maybe a jump between 2020 , one relative to the loss ratio picks.
Okay, Great and then just one question on casualty re.
The question is what why remain in it at all I mean I. Appreciate your comments that you know you will shrink the book significantly expect up to $100 million to come out.
But my question is kind of why why remain there at all why not just cut it off queen and be a core E&S with up where the fee income the fronting business.
And then secondarily if you if you were to cut it completely.
Would that at all change kind of capital requirements for the organization or would that not have an impact on that.
Sure. So good question.
Western Calgary is in our 2022 plan, because we feel given the market conditions and demand for reinsurance that we can make money. There. If you put the cost of this transaction.
Aside.
The legacy transaction aside we expect to make money in 2020 to rates in the underlying business for that unit were up call. It 12, 13% last year.
But our team is not going to be under premium pressure and will significantly strengthen book as I've kind of outlined in my earlier comments.
The actions that we have taken there, though in the quarter I think gives us more flexibility. So we can be very selective about the business that we write there continue to monitor our market assumptions and make changes to strategy. If if we feel they're warranted and.
Yes, I think the latter part of your question you were just kind of speaking to kind of capitalization. There. So one other item I think we should make clear that our ratings and capital.
Our consolidated across the group so.
Said another way to keep our casualty re unit as an ongoing concern did not impact the size of the capital raise.
Okay. That's great. Thank you.
My comments, there too I think that that.
I don't I don't think not writing that business would reduce the amount. We raised maybe I can just say that in my own words to a great yes. Okay.
Great. Thank you appreciate it.
Sure. Thanks.
Thank you. Our next question comes from Mark Hughes of cooler. Please proceed.
Yeah. Thanks, good morning.
Frank what gives you confidence that the bulk of the reserves.
Okay.
Yes, I guess Youre phrasing was the majority of the reserves the bulk of the reserves that you've got the problem handled with the LTC portfolio.
How much is still on your books.
Did you have exposure to.
Yeah.
Sure So let me.
Let me step back to what I committed the company too.
During the November call so.
It said that we were going to be addressing the casualty reserves.
After what's been a series of adverse charges I said, we'd do that in Q4.
We finished that work in early January and as I said, we made significant adjustments to our tail on developmental factors and put more weight on the incurred loss development method that drove the $1 15 charge that we've talked about.
But given.
The Companys reserving history or recent reserving history, we wanted to further validate that point and provide some additional certainty to shareholders. So we explored the legacy marketplace with a goal to have something meaningful to announce providing that certainty with Q4 earnings as Tara said earlier.
So our casualty re segment just to give you some background that.
That reserve portfolio. Currently includes about 480 treaty participations historically dating back to when the segment first started writing business in 2008. Many of those treaties are long been inactive just relative to claims activity and just not concerning what we tried to accomplish in selecting the subject business was <unk>.
<unk> the majority of the reserves, including our largest treaty relationships and treaties, where we've had meaningful reserve strengthening but also.
Treaties that would capture the most significant exposure to construction classes. So we wanted a high percentage of the total reserves. We wanted treaties that have driven our reserve strengthening we wanted to cover concerns was latency or land exposures like construction defect and we.
We needed to allow counterparties.
The opportunity to review a subject portfolio that would allow us to execute a transaction in the timeframe that we were talking about while protecting ourselves from further reserve volatility.
That's what we believe we accomplished with this transaction we didn't get the final terms completed from the legacy market until February to service debt.
So it really was a separate work stream than the work of our chief Actuary.
So again just provided another validation point in the quarter.
Beyond that obviously.
We went through the capital raise process.
As well as obviously discussions as you might imagine with am best So we feel we picked up additional validation points along the way relative to the actions that we took and hopefully that gives you some sense of how we came to work.
We ended up on the subject portfolio.
Yes, I appreciate that.
Sara on the expenses you, you've obviously got some one timers here hitting in the.
In Q1, but kind of run rate expense ratio.
If you think about the company as a whole and then the E&S and specialty admitted I Wonder if you have any thoughts you might share there's been a lot of moving parts lately.
Sure and thank you for the question because there have been a lot of moving parts just given the reserve issues kind of related to that as well as of course.
Incumbent compensation changes and.
And various COVID-19 impacts et cetera.
There are a lot of moving pieces, if I think about it mark and I think about 2022 or kind of go forward years in particular, I think that our expense ratio remains at a significant advantage to our competitors. So it's in the mid to high <unk>.
Call it 26% to 28% on a run rate basis, and we've obviously, beating that pretty significantly this year down to the 23%.
And then within the segment.
You saw that kind of manifest through the compensation changes in particular this quarter and some of the commission offsets in casualty re but I think about the rollout being there.
Around 20% in each of the two U S segment.
Obviously to the extent specialty admitted continues to grow as it has it's got a nice offset on ceding commissions et cetera through the fronting business as does E&S. So that's how those two kind of around about 20% or a little bit better numbers could move and then casualty Reed I think thats, a low 30% expense ratio.
So call it.
32 ish percent.
And it's really hard for it to be any different than that because that's almost entirely different by the seeding commissions on casualty re in particular, even though we've got a very small expense base and a small team there as well.
So hopefully that provides you a little bit of color and context as to how that manifests itself ideally over the next year or so.
Okay. That's great appreciate that and then the.
Withheld.
The pace of run off there.
We're thinking about the two 2% fee.
And then when does that.
Or is there some trigger at some point at which the shifts entirely over the fortitude.
Yes, yes, good question.
It's in the contract that its in about five years whenever remains air shifts over to fortitude and the balance so kind of.
Truncate the funds withheld.
Balance at that point, and just return whatever assets remain there.
That business will run down.
Excuse me that balance will run down as the claims are paid and I think we think about the portfolio in the casualty reinsurance segment is in general as being probably a three to five year tail. That's obviously a fairly wide range there.
But that fits with them with how we're thinking about the give up of the assets over over the five years. After the five year period. So let's assume that runs down in a fairly linear fashion from the 310 to whatever could remain.
Five years out and I think the important thing to think about is that that 335 I E. <unk> hundred 10 is as of 10. One. So we will continue to pay claims between now and then as well so it will it affect really never be at the 310 high level at the high watermark and we'll just go down from there.
Sure.
And therefore, the interest credit at 2% on that balance will continue to decline over time as well.
Great I appreciate the answers.
Thanks for that thank you.
Our next question comes from Brian <unk> of Barclays. Please proceed.
Thank you good morning.
Let's go back to your dividend cut you mentioned part of the thinking was reassessing, how you're deploying yellow box against other growth.
I guess help us get excited about your growth prospects because what I saw was that casualty re premium growth outpace your core E&S book I know going forward, that's going to be more subdued, but if you could just touch on what happened this quarter and how much more growth we could expect from E&S in 2020 tail.
Sure. Good question Tracy, Let me, let me start off here so.
Just relative to casualty rates first I think I foreshadowed this.
Slightly during our Q3 call, we had less than $8 million in DWP in Q3, but we had seven several million dollars of acute adjustments and growth in underlying business that was in the double digits millions range as well as some new business in Q4, and so all of that of course was committed before we said we would shrink.
This segment and well before the results of our segment Reserve review, but just relative to our growth prospects.
Our core E&S grew by 14% in Q4 I.
I believe in E&S, we met or exceeded prior year GWG production in all but one or two months.
November was actually one of those months driven by some actions taken on a handful of accounts basically underwriting actions and three on running apartments.
In in our energy group, we took an underwriting stance on a very large accounts and ultimately we nonrenewed was a $6 $5 million budget hit that account came to me for referral and discussion with our segment President Richard Schmitzer and our segment actuary in excess casualty, we took similar stances on three other renewals just.
Taking underwriting decisions that had about $3 million impact.
And then another large win in our commercial auto segment. So.
Sure.
In our core E&S operation were writing policies typically in the 20 to $25000 range. So when you lose those larger.
Accounts. It just has more significant impact. So November production was slightly off had a little bit of impact on the fourth quarter, but we bounced back nicely in.
In December and certainly the first quarter.
Looks very robust as well.
And I'm, just going to jump in and tie that good color back to the dividend Tracy because as I said a great question. So just specifically I think transcon through the dividend excuse me that growth in particular, but.
Included in my comments, our outlook for 2022 that we absolutely expect to make a low double digit Roe.
We're getting a great return on our business. So we think it makes a lot of sense to continue to put that capital to work.
And that's that's a big piece of it.
This is well in kind of underlying what we said if we think we can continue to get that strong return specifically from.
Our highest and most capital intense business the core the core E&S business.
I think that we'd like to continue to put that to work and drive the strong and consistent Roe.
Great.
Can you also discuss the balance sheet protection. According by R. L. P. T. How did you arrive at 65 million of net one that I'm wondering how that stacks up relative to your expectation was that more.
Mike.
More or less than what you were expecting as you were going through the negotiation.
I don't know that it was more or less per se.
Dave completed his deep dives and comprehensive reserve you in early January that produced $115 million adverse development charge, which in of itself is a very significant reserve move but.
Also as validated by the other strategic actions, we've taken in the quarter as far as debt LPT limit.
We view that as.
As just bolstering kind of step that we took.
And quite frankly, when you're in a legacy market.
Two to get a limit that's.
More than 50% of the charge that you just took.
Based on the based on the premium that we paid for the for the structure I mean, it obviously I think give some credence to.
Their view of the reserves as well so we are very comfortable to tack on again like I said.
Pretty significant limit on top of that just relative to the $1 15.
And then just following up on that you did say close to a reserved option youre casualty, we can start with that above your third party central estimate so how should I think about the 400 million youre carried in that additional cover relative to potential estimate could you expressed that as the percentage of redundancy.
Sure.
We've not disclosed that Tracy.
I think we've been fairly explicit in saying its above the central estimate so.
We booked $425 million of reserves in this segment this quarter.
Those reserves, 66% of them are in incurred but not reported reserves and thats meaningful meaningfully above where it was last year.
So I would just reiterate that our reserves are above the central estimate, but we don't feel it's appropriate to disclose the percentage level there.
Thank you.
Thank you. Our next question comes from Brian Meredith of UBS. Please proceed.
Hey, Thank you sorry, I Wonder if you could tell us what the implications are.
On your tax rate from the kind of big decline here in the reinsurance business.
Or does it have any yeah sure I think.
A couple of things there, Brian as we think about it it's tax rate is related to obviously the decline in the business, but we also have a significant balance of invested assets that remained in the Bermuda.
As well.
If I could be just almost a little bit simplistic about it.
Think about the 2022 tax rate of being.
But call it anywhere from 19% to 21%.
Obviously, that's dependent on where we make the money and how we make the money when.
But I would think about that as a fairly consistent rule of thumb with with the year ahead.
Great. Thank you and then Frank I'm, just curious what's the reaction been I guess quarter to date and I guess, we'll find out over the next couple of weeks of your distribution too.
All of the issues that have been happening from a balance sheet perspective.
But the E&S business as well as just.
Willingness of people to transact business with you on the fronting business.
Sure Brian So.
We have been.
Very pleased quite frankly with the.
The loyalty and.
The support that we've received both from our wholesale distribution partners as well as our program managers in the fronting business.
Very supportive I received a note today from the CEO of one of our largest distribution partners just kind of congratulating us on this transaction and continuing to pledge support I think I've said just relative to the fronting business for those.
Several months, where we are on negative outlook.
From a M best we didnt lose one renewal.
Within our program space so.
Really no issues in that regard our a minus stable ratings is very strong and.
And being supported by our distribution partners across the segment.
Great. Thank you.
Thanks, Brian .
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.
Our next question comes from Meyer Shields of <unk>. Please proceed.
So one I guess broad and one specific question on the excess and surplus lines segment I guess the specific question would be shouldn't some of the older accident years redundancy that.
Frank didn't use the word realized yet.
In your mouth, but you talked about the conservatism relative to history shouldn't some of that has manifested itself in the fourth quarter and maybe even more broadly how should we think about the loss trends that are embedded in excess and surplus reserves and what should we watch to ensure which monitor that.
Mary I, just want to make sure I got the first part of your question.
Oh, Okay. Basically so we saw I mean, 70000, I think of reserve releases of excess and surplus lines, but the.
The business has a decent tail you talked I think very reasonably about wanting to let that mature I would've thought that some of that would have matured in the fourth quarter, just because some of the reserves pertain to older accident years.
Right. So I mean listen we feel very confident in the strength of our reserves in this segment.
But.
Yes.
Didn't.
It Didnt manifest itself in our release for the quarter at this point in time.
Not suggesting anything more than that.
Okay can you give us a sense as to the maybe overall trends that are embedded in the book.
I think I'm going to jump in it's just I think we're getting a funny audio feed here.
But let me just try to address what I think we heard some of the trends in the underlying there in the underlying portfolio I guess I would say I'll start out and then kick it back to Frank.
We got the 13% rate increases renewal rate increases in E&S for each of the last two years our loss picks.
We articulated in design and booked assuming a much slower rate increase in each year than was manifested. So I think you start with that in terms of.
Conceptually thinking about margin and then ill, let Frank expand upon this a little bit more.
I also think about what's in that book in particular.
But no one's immune to social inflation, but with the SMB business that we write I think it's fair to say that we would have less exposure significantly less exposure than some of the larger carriers. So again that should kind of speak to loss trend going forward, but quite frankly, I mean, those are some of the things I think about but yeah.
Yes.
Mayor, we're obviously we are closely watching.
Inflationary trends in the industry and our business, we talked about a quarterly.
We continue to see excuse me, we continue to secure rate in excess of loss cost trend.
Regardless of some moderation in rate increases.
We also have the benefit of capturing inflation driven exposure growth when we radar policies as most of the premium excuse me most of the premium formulas are driven by our revenue metric.
And roughly another call it $45, 50% of the portfolio is adjustable based on growth in revenues over the policy years. So we feel there's a little bit of a.
The hedge in there just relative to capturing additional premium that's impacted by.
By inflation, but listen like the rest of the industry will continue to watch it trends closely and very seriously to determine whether the bottleneck dynamic on demand eases is.
Supply chain issues, eventually moderate or if its something more persistent but again, we'll watch it very closely Sarah mentioned.
Social inflation, we do have the SME focused within the portfolio, which I think shields us a bit because we don't have the large corporate profile.
That's not kind of what.
Defines our E&S book certainly.
The last piece.
The last point I would make is clearly just being able to be working here with Frank over the last year I think there is a real.
Visibility and philosophy and outlook that he's taken on in particular, which is great for our organization in terms of just patient around reserves and I think he cited that a little bit earlier in a question and he answered but.
I would just point to that in particular with this quarter.
Okay and then just a brief technical question is the 2% on the funds withheld that can be paid out of Bermuda or is it.
Taxable expense.
That'll be paid out of Bermuda, that's exactly right Mary and it'll be basically it won't kind of let me just tell you geographically where it'll be it'll basically be let's let's call that an interest expense or a contra expense. So you'll see you won't see it be be netted against that investment income you won't see it being netted against underwriting income, but it will be paid as a fee.
Out of the casualty reinsurance business.
Okay, great. Thank you so much.
Sure.
Thank you I would now like to turn it back to Frank Dorazio for closing remarks.
Thank you I want to thank everyone listening on the call for their time today and for the questions. We received this morning I look forward to speaking with you again in a few weeks to discuss our Q1 results, but I'd also like to express my appreciation for the staff of James River for the countless hours of hard work and effort over the course of 2021.
Collectively you are focused on our corporate objectives and ability to grow the organization by <unk>.
Roughly 20% in the current environment May James River, a stronger and more profitable company with a brilliant future ahead again, thank you to everyone on the call for joining US this morning and enjoy your day.
Thank you. This concludes today's conference call. Thank you for participating and you may now disconnect.
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Permian.
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Yes.
Okay.
Yes.