Q1 2022 James River Group Holdings Ltd Earnings Call
Good day and thank you for standing by welcome to the James River Group Q1, 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.
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I would now like to hand, the conference over to Brett Sheriffs head of Investor Relations. Please go ahead.
Thank you good morning, everyone and welcome to the James River Group first quarter 2022 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 in 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'll now turn the call over to Frank Dorazio, Chief Executive Officer of James River Group.
Thank you for that introduction, Brett good morning, and welcome to everyone on the call.
I am pleased to be back with all of you today to provide some additional color on our first quarter as I believe the groups earnings potential is beginning to show through in these results and we only expect this dynamic to accelerate and become more apparent in the coming quarters.
We also remain encouraged by both our continued ability to execute on our business initiatives as well as the positive trends, we're seeing in the market and believe they should both continue throughout 2022.
One hallmark of our franchise. It has remained consistent despite some of the strategic actions that we've announced over the last few quarters is that our core E&S business has continued to produce extremely attractive margins and premium growth in our first quarter. This year was no different in that respect.
We also continue to make progress in delivering on our business plan for our specialty admitted and casualty reinsurance segment.
Good thing our capital on our U S businesses, while acting as nimble and opportunistic underwriters.
Before turning to Sara I'd like to provide some commentary on the performance and outlook for each segment.
In our E&S segment.
We experienced compelling results from a top and bottom line perspective.
Gross premium growth was 12, 6% compared to the first quarter of 2021 with 10 of our 13 underwriting units experiencing double digit growth demonstrating significant broad based expansion across the segment.
Renewal rates increased eight 4% across our E&S unit, marking the 20 <unk> consecutive quarter of rate increases totaling 52% over that period.
In many instances this is the fourth or fifth renewal cycle of positive rate increase on our renewal business.
As accounts are remaining in the E&S marketplace longer and for multiple renewal cycles.
We believe this is a key indicator support our belief that the favorable market conditions that the sector has enjoyed for several years should last throughout 2022 and likely beyond.
Turning to profitability. The E&S segment reported a combined ratio of 83, 7% and produced underwriting income of $21 $5 million.
The accident year loss ratio in the first quarter was 64, 7%.
<unk> consistent with a 64, 3% in the prior year quarter.
While rate increases have moderated from the mid teens level of a year ago. They continue to be a boat. They would continue to be above both our own view of loss costs and our own rate expectations for the year.
As previously stated we intend to remain patient and recognizing these favorable trends in our loss picks.
In specialty admitted we decreased our writings in workers compensation by 12, 6%, while growing the rest of our fronted program book.
Gross written premiums across the segment declined 1% in the quarter driven by the declines in both our individual risk workers' compensation business and our largest program relationship that is also workers' comp focus extra.
Excluding workers' compensation gross written premiums in the balance of the segment grew six 5%. Despite the loss of a fronting partner that was acquired in the fourth quarter of 2021.
Just as importantly, we added new fronted programs in the quarter that will diversify our exposure base prospectively as we continue to have an attractive pipeline of new opportunities in various stages of diligence being.
The income in the segment increased eight 4% during the quarter to $5 $6 million.
Turning to casualty reinsurance as discussed last quarter, we expect to reduce the top line in this segment by approximately $100 million. During 2022, as we continue to focus our business and capital on what we believe to be the best opportunities throughout the group.
We nonrenewed several treaties during the first quarter that drove the segment's premium decline of approximately 54% versus the prior year period.
The business that did renew in the quarter, we achieved significant rate increases as we focus on margin enhancement and portfolio optimization and the reinsurance segment.
As initially disclosed with our fourth quarter earnings release, our Q1 underwriting results in casualty reinsurance included $11 $5 million of loss associated with the legacy portfolio transaction, which closed on March 31.
Overall, we are pleased with the underlying performance of the group remain thankful for the tremendous relationships, we share with our distribution partners and firmly believe that the strategic actions. We've taken over the last 18 months to Derisk. The balance sheet will continue to allow the earnings power of our franchise to shine through.
We believe the outlook for James River is very strong.
Lastly, you may have noticed we filed an 8-K on April 28th announcing the retirement of Gerry Masters from our board of directors.
Gary has served on the James River Board since 2014 and was the chair of our audit Committee and our lead independent director. We have benefited greatly from his service. Thank him for his much valued counsel over the last eight years and certainly wish Gerry the best in his retirement.
And with that let me turn the call over to Sarah Doran.
Thanks, Frank and good morning, everyone.
For the first quarter of 2022, we delivered $13 $9 million of operating income. This included $5 million of underwriting profit and $16 3 million of net investment income.
The loss portfolio transfer agreement, we executed in the first quarter, which now reinsurers most of our casualty reinsurance segment reserves.
Elevated the group combined ratio by 6.1 percentage point and reduced underwriting income by $11 $5 billion for the quarter.
As we previously announced.
Excluding the impact of the transaction the segment would have generated an accident year loss ratio of 66%.
Our annualized net operating return on average tangible common equity was 11, 8% for the quarter again. This was made lower by the discrete impact of the transaction.
Our expectation for 2022 continues to be that we would earn a low double digit return on tangible common equity across the group.
Our strong underwriting profit in both of our U S segment.
And also grow our tangible book value per share excluding as yet.
Moving on to our profitability ratios.
Both our loss and expense ratios were down considerably from the first quarter of last year.
James you ever continues to have a very competitive expense ratio. It was 26% for the quarter down almost three points from the same quarter last year.
This is due both to our focus on expense management as well as to the scale. We continue to build in the insurance business, while revenue growth continues to outpace operating expense growth.
We continue to believe that a 26% to 28% expense ratio is extremely attractive for our franchise and business mix. This year.
Frank largely covered the results of the U S segment, but it's worth spending a moment on specialty admitted.
As we've mentioned, we reduced workers' compensation writings, and given the market condition, but continue to grow the other risks in our fronting business. While claims counts have decreased and workers' comp rates continue to be less compelling than it was in other parts of our businesses.
This quarter the segment produced at 98, 9% combined ratio and 79.6% accident year loss ratio.
The accident year loss ratio is broadly consistent with that of the second half of last year. When we increased our then current year workers' compensation loss ratio.
I would also point out that we had a few one off impacts that influenced the segment expense ratio at different quarters last year, none of which were a factor in the current quarter.
Moving on.
Investment income grew about 8% this quarter as we benefited from increased returns from our portfolio of renewable energy private investment.
Realized losses were $5 million this quarter almost evenly attributed to a decrease in the fair value of each of our small dividend paying common equity portfolio and our floating rate bank loan portfolio.
In addition to the strong operating cash flow, we generated this quarter of $65.4 million.
The floating rate exposure that characterize our bank loan portfolio and near term maturities and the rest of our portfolio. We expect that over 20% of our current portfolio will have the opportunity for reinvestment or reset over the coming year.
During the month of April our reinvestment rate was about 100 basis points above our current portfolio yield of 2.75%.
Net unrealized investment gains decreased $86 million for the first quarter of the year.
<unk> decline in the fair value of our fixed income portfolio. As a reminder, we tend to hold substantially all of our fixed maturities and an unrealized loss position until they recover their fair value or mature.
And the average credit quality of the fixed him come portfolio remains a plus.
And finally on taxes, our effective tax rate this quarter was 24, 6%.
It was elevated by discrete tax items, primarily related to the excess tax expenses associated with vested restricted stock units.
While there are many points of impact to our tax rate.
We continue to believe that the full year rate will be closer to 21%.
In conclusion, James River ended the first quarter and an excellent financial and strategic position, we have ample capital to operate in the current environment and continue to see very attractive opportunities to invest and continue to scale. Our company. We ended the quarter with tangible common equity of $429 $9 million.
Tangible equity of $574 $8 million, which includes the series a preferred we issued last quarter.
And with that I will turn it back to the moderator to open the line for questions.
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.
Our first question comes from the line of Mark Hughes with Chris Your line is open.
Yes. Thank you good morning.
Good morning, Mark Frank when you think about the.
Progression of the cycle, let's say through 2022, you expressed optimism and it suggests that it might extend into 2023 what would.
When you look at the market what gives you a more positive signals around that.
I think fee.
Water macro factors driving rate increases have not really shown any signs of slowing momentum in the first few months of the year, so underlying economic fundamentals.
And growth thus far remain very strong and inflation is obviously emerges as a factor. So I expect carriers are going to be successful in continuing to push for rate throughout the year in terms of our own production. We saw strong growth across almost all E&S underwriting units in the first quarter and we're seeing a good flow of new opportunities.
Our fronting and program business, so everything that we're seeing in the marketplace. Just suggests a continuation of the recent trends.
Yeah.
Thank you for that in theory, you are you described.
At 11, 8% return on tangible this quarter.
Which included the.
Six points of of losses in casualty re your guidance was for low double digit for the full year.
Is that a.
Conservatism, if we add back those six points should be returns be little bit higher.
Yeah. Thanks for the question Mark if we added back.
Six points on the combined ratio to the return on.
<unk> common equity that the ROE would be considerably higher I think in a high teens for the quarter and.
And we do feel like we had.
A wonderful contribution from our renewable energy portfolio this quarter.
And in that that's kind of pushed out I think NII up versus our expectations for sure, but I do think there is a little bit of conservatism in our low double digit R. O T X.
Expectation there.
We felt we certainly feel good about them about achieving that over the course of this year.
I know you mentioned that the turnover in the portfolio are likely to be about 20% this year.
Would it be similar next year as well.
So the 20% is a combination of what is the portfolio is floating rate and what's the what's maturing over the year and it's about half and half to each.
And I would think that next year would be would be pretty similar in terms of that.
In terms of that turnover, if I would say that.
Yeah understood.
The specialty admitted the underlying program the underlying workers' comp program was that just a change in their appetite.
Was there any change in your allocation or the nature of the relationship with a large account.
No Mark.
<unk> seen some pressure on rates for the last couple of years in workers' comp that large program happens to be California workers' comp focus until we've been bringing.
Bringing down our retention in terms of what we assume on that program over the last couple of years, but it's really the rate environment, we're not a 50 state writer.
We have as you know in individual risk workers' comp unit that focuses on the south east.
And then this large program.
Broadly I would say the rates that we're seeing in the south east and the individual risk workers' comp unit.
Our behaving a bit better closer to it.
Closer to leveling off, but we're still seeing double digit decrease pressure in terms of rates.
And the large program and so I wouldn't say, it's actually change in appetite its kind of responding to the market conditions.
You know rationally.
Understood. Thank you.
Thanks Mark.
Our next question comes from the line of Brian Meredith with UBS. Your line is open.
Yeah. Thanks, a couple quick ones here for you first so you're you're still guiding to a 26, 28% expense ratio I know you had a 26 here in the first quarter and typically if you look back historically the first quarters your highest expense ratio. So so why is there still going to be 26 to 28.
Sure you're right. It is typically the highest mark excuse me, Brian apologies, but one of the things that I point out is in the fourth quarter, we've had significant reductions in our expense ratios, we've reduced our compensation throughout the organization just given the performance that the company had achieved in recent periods.
We are we are obviously not anticipating anything like that would happen in this year and we feel very comfortable with our balance sheet and our earnings forecast there.
So part of that is is that expectation I think that's important to point out that fourth quarter is probably been artificially low as we as we look at the organization and its earnings power going forward.
Got you, but if I look at the second and third quarter, though.
Yeah, I know it can fluctuate in any given quarter, just given our scale, but I think the biggest piece of the annual expense ratio is really bad and for example last year that it was down it I.
I think 14% in the fourth quarter, which I put it down to the 23% for the year.
And then the second question I'm, just curious given that rate continues to be in excess of trend and interesting. It looks quite good if I look at your your E&S do your underlying loss ratio was actually up on a year over year basis.
Any reason for that.
Well I would say two things one I mean, it's just about right on the number right. So fairly consistent with the last year and that's going to change it based on changes in the business mix from year to year, but overall don't forget the theme that we've been stressing is just that we're going to be patient just relative to and conservative relative to both.
The loss ratios that we set and how we let those.
Those loss ratios kind of season over time great.
Great and in fact any significant changes in business mix that you're looking at in the first quarter or in 2022 versus 21, any any areas or lines of business that we'll see in your 10-Q that are popping up more.
No I'd say that.
The appetite is fairly consistent with the past I mean, we've been taking risk primarily in the E&S segment and being more of a fronting carrier in our specialty admitted segment.
In terms of the growth, it's really been kind of consistent throughout most of our E&S segment I referenced before the.
10 out of 13, I believe segments that are showing double digit growth in the quarter. So very strong and pricing is is really holding up very well. So we're now <unk>.
21 quarters of consecutive renewal rate increases at this point right on rates is extremely meaningful.
Full and we're seeing it throughout the book and we're seeing it back to double digit rate increases in some lines.
That kind of started off this market change a few years ago in terms of being leaders relative to rate. So that's great to see and the other point I would mention is.
We mentioned it in the prepared comments as well.
Business, just staying in the E&S market and with us for much longer.
And that's that's extremely positive we see it in our submission.
Stats renewal submissions grew over 20% this quarter, so that's a faster clip than last quarter.
And in line with quarters earlier in this.
And this hard market, so extremely beneficial to us we quote roughly 90% of our renewals and bind a very high percentage of them call. It high Seventy's low 80 percentages just given our familiarity with the risk. So those are multiples of our quote and bind ratios on new business. So it's a very.
Hum.
Having the increase in terms of.
The renewal.
Ratios going up is just a very efficient use of our underwriters' time in terms of quoting renewals and and of course, our inefficient use of our capital.
Great. That's good to hear I appreciate it thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad. Our next question comes from the line of Meyer Shields with K VW. Your line is open.
Great. Thanks, Good morning, all.
Two related questions the ratio of net growth in excess and surplus went up on a year over year basis. I was hoping you could talk about I guess, what we're seeing now underlying trends in ceding commissions and maybe long term thoughts on.
Where net growth should trend.
I'll start with that maybe Frank can jump in I think it went up a point or two mayor if I'm if I'm looking at that correctly. So so not a big jump in and this is really just the sensitivity on where we're going to grow in any given quarter I think in past quarters. For example, I think about our excess casualty.
<unk>, that's about a third of E&S two three years ago. It was a much smaller percentage. So as that line has grown its pushed it eating ratio up because that line is heavily reinsured. So if that doesn't that was really kind of outpacing everything we're still seeing great growth and great right rate in that line.
But I think some other lines grew a little bit faster overall in the quarter and you know with with 13 underwriting divisions different lines are going to go out with different patients in any given quarter. So that's just going to be mix as to how we ended the quarter.
I would just just kind of add though as well those treaties are renewing in now kind of in the summertime timeframe those treaties and partners and structures have really been very much unchanged for many many years of James River. So we are not expecting a big changes to any of the structure.
Or be big changes to the cost necessarily clearly it's lifetime that we're working through that but that's how we'd think about it. So you know on the on the heated teeth and on the cost is heated not expecting much but it will depend on where we see the growth and where we see the rate to continue to grow the different <unk>.
But that will impact through the P&L if that helps.
No. It does thank you.
The question is the mix of earned premium.
It's a net earned premium in specialty admitted is the contribution to workers' compensation changing appreciably.
Of the.
The contribution of net earned specific yes. That's your question it was a little bit lower this quarter just given the given that we have grown the fronting business other parts of the fronting business around it but I wouldn't say, it's an appreciable change and I'm not.
I'm not confident that that's going to be the case you know as we look at a year from now or a couple of quarters from now I think we want to remain pretty nimble in our ability to write that business as things change and as you know most importantly, the growth in our fronting business can be pretty lumpy because it's so kind of deal dependent for lack of a better way to describe it.
I think that's gonna untapped assistant.
Understood. Thank you.
Thanks for the question. Thanks Amir.
Thank you we have a question from the line of Casey Alexander with Compass point. Your line is open.
Hi, Good morning, just a quick question how the casualty re was gross written of about $30 million versus $64 million last year. So obviously, you're bringing it down as you said how would you look at that gross written comp.
Compared to how you expect it to play out during the year is that a fairly reasonable level of gross written for the balance of the year for casualty re.
So so for the quarter. It was about $30 million as you pointed out their T. C. That's in the first quarter is almost always our largest quarter for that segment and it's the largest by a fair amount.
So I would expect that to trend down pretty significantly over the course of the year.
Because we're already we've already said, we're going to take $100 million out of the book kind of a full year basis in the fourth and first quarters for largest so.
I think from here on out and you'll you'll see smaller DWP quarters in that segment.
Alright, great. Thank you that's very helpful.
Just one for.
Brett what what would you do you have what you would call sort of a normalized level for net investment income going forward, obviously, a large contribution from renewable energy what would you call a normalized level going forward.
Hi.
Yes, Casey I think we break out the detail of net investment income in the earnings release there.
Our more stable part of the portfolio reported a little over $13 million for the quarter.
Sure I've mentioned, the renewable energy portfolio it does it.
It does bounce around quite a bit quarter to quarter.
And she also provided some details in terms of.
Reinvestment rates being.
Higher than the existing portfolio yield yield so.
You know the more stable part of the portfolio of the $13 million in change should trend a bit higher as we continue to reinvest the portfolio.
Alright. Thank you. Thank you for taking my questions.
Okay.
Thank you I'm showing no further questions at this time I would now like to turn the conference back to Frank Dorazio.
Okay. Thank you I want to thank everyone listening on the call for their time today and for their questions that we received this morning to the employees of James River. Thank you for your hard work and dedication in delivering our Q1 results as I suggested earlier, it's certainly a very solid start to the year.
I look forward to speaking with all of you again in a few months to discuss our Q2 results. Thank you and enjoy your day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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