Q2 2022 James River Group Holdings Ltd Earnings Call
Yeah.
Okay.
Welcome to the James River Group second quarter 2022 earnings Conference call. My name is yoga and I will be your operator for today.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
During the question and answer session. If you have a question please drop.
What you're seeing your touchtone phone.
And now I would like to turn the call over to Mr. Brett Burford hold Investor Relations you may begin.
Thank you good morning, everyone and welcome to the James River Group second quarter 2022 earnings conference call during.
During the call, we will be making forward looking statements.
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 and form 10, Qs and other reports and filings we have made with the Securities and Exchange Commission.
We do not undertake any duty to update any forward looking statements.
I will now turn the call over to Frank Dorazio, Chief Executive Officer of James River Group.
Thank you for that introduction, Brett good morning, and welcome to everyone on the call.
Pleased to be back with all of you today to provide additional color on our second quarter as our strong operating momentum has continued throughout the first half of the year.
Undoubtedly we remain a leader in the E&S market and our teams across the entire organization have executed exceptionally well on their business plans.
We've been able to capitalize on market opportunities, while optimizing portfolios that haven't met our profitability expectations.
We've done this while also building out our enterprise risk management framework.
Making other investments across the platform.
Make sure James River becomes stronger and more profitable underwriting company.
These efforts have resulted in very strong financial results for both the second quarter and for the first half of the year as we posted a 91% combined ratio in Q2, and the 94, 2% at the midway point of the year.
Our adjusted net operating return on tangible common equity came in at 19, 9% for the second quarter and 15, 5% on a year to date basis.
These are excellent results by any measure and are driven by our focus on delivering consistent underwriting profit.
That and I am extremely pleased that all three of our segments produced an underwriting profit during the second quarter, demonstrating the strong earnings potential of our company.
I referenced enterprise risk management, just a moment ago.
And to just expand a bit on that topic E. R. M has been a key priority for the executive team and our board since I joined the company almost two years ago.
We remain focused on building out our enterprise risk management discipline by adding staff and functional expertise.
Embedding, our new risk framework into the fabric of the organization.
We expect that integrating these processes throughout our business will continue to enhance the organization and lead to more stable returns across the company over the longer term.
Turning to macro conditions briefly and remaining mindful of the state of the broader economy. The majority of the markets that we operate in remain quite healthy we.
We are confident in our near term outlook for growth at attractive margins and our balance sheet remains strong.
Our renewal retention levels remain extremely high and we feel certain that we are producing positive rate change well in excess of our view of loss cost trend.
Clearly the excess and surplus lines marketplace continues to benefit from pockets of industry dislocation.
Cause admitted market underwriting discipline remains broadly enforced driving sustained pricing improvement in the E&S sector.
Rate increases in our book during the second quarter were the strongest level that we've seen in a year.
In aggregate, we've experienced renewal rate increases for 22 consecutive quarters, where five and a half years compounding to 58, 1%.
As a reminder, the rate change information that we've historically cited is exposure adjusted <unk>.
Level, setting any changes and limit attachments and exposure basis that occur at the transaction level.
Pure rate change model.
We have not seen any overall change in market dynamics that would lead us to believe that our pricing momentum in D&S should not persist through at least the end of this year if not longer.
Our franchise value relationships with wholesale distribution and expertise in the SME space leave us well positioned to serve our clients and generate attractive returns for shareholders.
Before I turn it over to Sarah let me share some additional highlights from the results of our second quarter.
In our E&S segment, we experienced strong rate increases significant premium growth and notable profitability drew.
Driven by a 14.1% positive renewal rate change gross premiums increased 24, 6%.
While net premiums grew by 22, 8%.
Consistent with our results last quarter, we saw broad based positive growth and rate trends across the segment with 10 of our 13 underwriting divisions experiencing double digit premium growth for the second consecutive quarter.
Our largest underwriting divisions led the way in terms of growth excess casualty in general casualty were both up more than 30% from the prior year quarter with continued strong trends in our renewal book.
Admission activity continues to remain robust, particularly in our renewal portfolio, where we have a much higher conversion ratio.
As alluded to previously renewal rate change increased sequentially from eight 4% in the first quarter to 14, 1% in the second quarter as we've experienced over the last few years rate changes have fluctuated a bit from quarter to quarter and we expect that dynamic is likely to continue on a year to date basis, our renewal rate.
Jane is 12%.
Which is comfortably ahead of both our planned rate increase and expected loss cost trends for the segment.
For the quarter the headline rate increase is driven by some of our larger underlying divisions like excess casualty, but we also had double digit rate increases in a number of product lines, including general casualty.
What's an entertainment health care and excess property.
From our perspective, we think it's safe to say that for a few of these classes certainly for excess property in excess casualty capacity still remains fairly tight for many industries.
Carriers have reduced their risk appetite and our offering compress limits and that hasn't abated.
This dynamic has allowed us to push rate and I think the organization has done a very good job of making our underwriters are aware of the rate thresholds they need to meet or exceed based on our 2022 plan.
From a profitability perspective, our E&S combined ratio was 83, 8% again broadly consistent with our results from the first quarter of this year.
Underwriting income came in at $22 million, our third consecutive quarter of segment underwriting profit greater than $20 million.
In specialty admitted results followed many of the same trends, we shared last quarter as our top line was impacted by continued rate pressure in the workers compensation market.
This was particularly evident in our program focused on the California marketplace.
In total our workers' compensation related premiums declined approximately 14% during the second quarter and 13% on a year to date basis.
We have been carefully managing through what has been a counter cyclical workers compensation market for several years.
We remain disciplined to reduce our topline when and where appropriate.
The remainder of our ongoing fronting and program business experienced solid growth during the second quarter and continues to build scale and diversification.
Excluding workers' compensation and a program partner that was acquired late last year, our fronting and program business.
Premiums have increased approximately 20% during the first half of the year.
We've continued to add new programs in the quarter, while fee income for the segment increased 8% from the prior year quarter to $5 9 million.
Turning to casualty reinsurance, we wrote $8 million of premium during the second quarter as we non renewed or reduced our participation on several treaties.
We continue to be very selective with our authorizations in perspective participations in this segment.
The combined ratio for the segment was 93, 2% and included no reserve development.
Resulting in $2 million of underwriting profit for the second quarter.
Overall, we're excited by the performance of the group and the broad contributions to earnings from each of our underwriting segments as well as the growth in our investment income.
Market conditions remain favorable for our business, particularly in the E&S sector and we are investing in our platform with the goal of continuing to generate attractive long term return for shareholders.
For all these reasons, we firmly believe the outlook for James River is very strong.
And with that let me turn the call over to Sarah.
Thanks, Frank and good morning, everyone.
James you ever had another solid quarter delivering $20 million.
Adjusted net operating income and moving further into a strong 2022. This.
This included $16 $8 million of underwriting profit and $14 7 million of net investment income.
On a pretax basis.
Operating income was up approximately 44% from last quarter and over 6% from the comparable quarter last year.
For the first half of the year adjusted net operating return on tangible common equity was 15, 5%.
Even adjusting for the change in accumulated other comprehensive income.
Benefited our and MS competitors return on tangible common equity this quarter.
R. R O T CE accelerated meaningfully from the first quarter of this year.
Our reserves remain stable and we are recognizing $1 $5 million of favorable development in our specialty admitted segment this quarter.
As in many prior quarters that is due to prior accident years and workers compensation dating back to 2016.
As we did between the first and second quarters of last year.
We slightly raised our workers' compensation related loss pick this quarter given the impacts of continued top trade and some activity in the book.
Our competitive expense ratio of 25, 8% was largely identic identical to that of last quarter and a continued advantage, we enjoy as compared to others with similar business models.
As mentioned earlier investment income was $14 $7 million this quarter.
We are starting to see the benefit of higher new money yields in our fixed income portfolio.
Income from that part of the portfolio in particular with $15 $2 million as compared to $13 $4 million in the first quarter of this year.
Overall, our weighted average book yield improved sequentially from $2 75 per cent.
Approximately 3% during the quarter and current reinvestment rates are about 100 basis points ahead of that.
Our portfolio duration is four two years.
We expect that over 20% of our existing portfolio will have the opportunity for reinvestment or reset over the next year.
Cash flow from operations continues to be strong at $73 $9 million this quarter at about $140 million year to date.
Lastly on investments realized losses were about $17 million this quarter largely due to our senior secured bank loan portfolio and left out to our investment grade preferred portfolio.
In total.
Our equity exposure, which is largely preferred.
And bank loan portfolio represent about 11% of our portfolio, including cash.
A OCI declined $58 $6 million during the second quarter as a reminder, we tend to hold substantially all of our fixed income maturities.
And an unrealized position until they mature and average credit quality of the fixed income portfolio remains a plus.
We ended the quarter with tangible common equity of $376 7 million intangible equity of $521 6 million, which includes the series a preferred we issued during the first quarter.
The decline was driven by the second quarter rise in interest rates.
While the interest rate moves impacted GAAP equity.
Our key rating agency and debt facility leverage ratios exclude the impact of a OCI changes.
And also give significant or full equity credit to the preferred securities and our capital structure.
Given this as per our debt facilities, our leverage ratio was 23% this quarter unchanged from last quarter.
In conclusion, James River ended the second quarter, 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.
And with that let me turn it back to the moderator to open the line for questions.
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Okay.
And we have Mark Hughes from Trust. Please go ahead.
Yes. Thank you very much good morning.
Good morning, Mark.
Thank you had mentioned that the <unk>.
Pricing is well ahead of loss cost inflation are you seeing any kind of movement there.
Loss cost I think you pointed out how any workers' comp soft pricing and maybe some activity in the book I think is the way you describe it.
What's motivating you to pick up the loss picks there, but are you seeing anything more broadly around inflation.
Sure so.
We increased our our view of loss cost trend for 2022.
At the end of last year.
I think we've spoken to this before with trend for our portfolio in the mid single digit range with certain lines of business, perhaps as high as maybe 200 basis points or so higher.
And we look at all of our assumptions regularly as part of our quarterly review process in the event, we feel we need to make a change as we did with workers comp we address it and.
And when you think about.
Our portfolio as well as some of the more concerning areas relative to inflation remember our excess property unit is less than 5% of our E&S segment.
Marshall autos, even smaller.
So when we discuss loss trend we tend to focus on.
The difference between our view of loss trend in a particular line and exposure trend for that same product line.
So in essence, we view exposure trend is a bit of an offset to loss trend.
Unfortunately, the markets, we operate in an ever made fairly healthy and I would suggest that the majority of our portfolio captures inflation impacted exposure basis. So those jumps in exposure or being captured in our premium formulas.
But from a from a rate perspective, we've been collecting.
Positive rate change now in the U S portfolio for five and a half years or so so yes more broadly.
At the halfway point in 2022.
With rate change at positive, 12%, where we're not only well in excess of our view of loss trend, but ahead of our rate changed assumption in our 2022 business plan.
And.
That speaks to margin expansion margin expansion, especially when you consider that we.
Collected 13% a positive rate in both 2021 as well as 2020.
Thank you for that and then when it comes to the economy anything Youre seeing in your SME client base. It makes you think theres any kind of.
Slowdown that's ongoing and in the context of that I don't know if you can quantify the impact of audit premium in the quarter, but would be interested in any details there.
Well.
I would say you know despite some of the broader U S. Macro concerns are insurance continued to see solid economic fundamentals were not seeing any negative issues just relative to <unk>.
Revenues or exposure basis at this point, we see exposure growth show up in our premium formulas.
Yeah.
At this juncture and just relative to.
Premium audits, yes, its component of what we see on a quarterly basis premium audits occur.
Over the course of the entire year, it's just.
Something that we capture in addition to renewal and new business as well, but but I wouldn't see any kind of perceive trends there.
At least at this juncture.
And then Tara maybe I hear what you're saying about new money yields of 100 basis points higher.
Yes.
Portfolio turnover.
Should we assume maybe extra 20 bps of portfolio yield per quarter.
25 bps similar to what you saw in Q1 to Q2.
That does not an unreasonable assumption back I think.
Okay. Thank you.
Our next question comes from Mayor field from K B W. Please go ahead.
Thanks, Good morning, sorry, if I can follow up on that question. When we talk about new money yields for James River have you seen any meaningful change in the third quarter to date.
Yeah, I think that the best I can say is you know compared to where we are in a book yield basis, It's about 100 basis points higher show where were up about 4% there.
There I think across our composite portfolio, that's not terribly different from where the end up from where we were at the end of the quarter. So over the last month or so.
But but that's that's how I'd frame that in terms of what we're looking at current reinvestment.
Rates across the whole portfolio.
Okay.
Patrick a couple of other small questions first of all any changes in ceding commission rate specifically within EDA.
No not not anything to speak of you're talking about the override just relative to what we.
Appreciate in terms of the treaties.
Treaties.
Yeah, that's right.
Fairly consistent with past years.
Relative to our major core renewals that just came up at mid year.
Okay. That's good news and then final question.
Yes.
And shown for a while a lot of growth in excess casualty can you talk about the tail of that line of business relative to I don't know general casualty or the overall non Uber portfolio a few years ago.
Yeah.
Sure. So let's talk about the portfolio first a bit.
We tend to be a first.
Excess player right. So we're playing writing over right in excess of primary.
<unk>.
The vast majority of the time, so we're not a high excess player we're not a mezzanine player we're writing right over primary.
And the tail is certainly going to be longer than.
Your primary general casualty layers.
But our limits are still fairly tight even on a gross basis.
I would say well over 90% of our limit profile is $5 million or less on a gross basis. So it's not.
As long as you might think or as long as you may think of just relative to Cal concerns with the other excess players that play throughout a program you know top of the tower and mid tower et cetera. So.
We have.
Tough products in there you can have.
<unk> exposures, you can have auto exposures et cetera, So that you know depending on what the the primary.
Exposure base is driving the rest is going to obviously.
Speaking to the tail of that component of the book.
I'm not.
I would say not out of the realm of.
<unk>.
Of of how we think about it to be a couple of years longer than lets say our primary GL.
Okay. That's perfect that's what I needed. Thank you.
Our next question comes from Brian Meredith from UBS. Please go ahead.
Yes. Thanks, a couple of them here for sure I think last quarter, you were telling us maybe 19% to 21% for the tax rate. It was lower this little lower this quarter is 19% to 21% still the number we should be thinking about.
I think I was right around 21% for the year, but that's that's probably will end up obviously, a little bit different from where we are in the quarter, Brian . So I would think about it in terms of that and that.
I think just as a quick reminder, that's due to that the losses that we experienced in Bermuda related to the LPT up first quarter I'm, just kind of pushed up the effective tax rate.
Okay terrific and then if I could just curious.
Obviously seen a nice improvement in your rate activity.
Our rate levels and this quarter, whereas a lot of the people in the industry are experiencing a moderation in meaningful deceleration in rates achieved what why do you think that is that you've got y'all are different.
Well again I've seen some of the same dynamics that you're referencing particularly in the admitted market.
Like I said in my earlier comments I think the headline increase just relative to.
The rate for us is driven by some of our larger underwriting divisions like excess casualty, where we saw rates at a double digit increases.
But also number of other kind of specialist areas, including sports and entertainment health care excess property definitely I mean, we're generally seeing healthy rate increases across our E&S segment.
In a most underwriting divisions.
Renewal rate changes have been well ahead of where we expected them to be in 2022.
So.
Broadly favorable market conditions, I think suggests that.
We can continue to push.
The price momentum that we have certainly throughout the rest of the year.
Got you that's great and then I guess my last question just curious any noticeable differences in kind of submission activity and now that we're a couple of quarters away from all of the stuff.
That was going on.
Well.
It's been a real positive in terms of where we've seen.
In our submission.
Again like the first quarter, we saw double digit increases in our renewal submissions 16 points up quarter over quarter in the second quarter and for US that's just.
That's just very efficient use of our underwriters times, because our conversion ratios are so high on our renewal book. So we continue to see that as a very steady growth over prior just relative to holding onto our renewals longer which which is great again, particularly given the rate change we've been experiencing over.
The last couple of years.
Absolutely. Thanks, that's really helpful.
As a reminder, if you have a question. Please press zero one on your Touchtone phone.
Next in line, we have crazy Bengie from Barclays. Please go ahead.
Good morning, I'm wondering if you could provide additional color on taking up your loss picks for workers comp and we're hearing from others that.
There is a exposure component on the wage side. So I think in Germany represents 50% of claim.
So what would one it here a little bit more on why you have a more adverse being particularly as well you made a few comments about a few other.
Consideration.
Sure No I'm happy to do that Tracy so.
We've been talking about the rate of erosion in our workers' comp portfolios, particularly in California for some time.
Rates have been softening for several years and it's important to just note that.
Again, we have two very distinctively different portfolios one focus in the south east and the other a California program. So we're not a 50 state writer.
We were very disappointed to see the recommended rate increase that was put forward to the California Workers' comp rating Bureau.
Got down in the last few weeks so the recommendation as we understood. It was for an increase of a bit greater than 7%.
For us pricing for our lowered California workers comp program for 2022 is down roughly 13%.
Which is certainly greater than anticipated and.
We recognize way.
Wage changes as an offset but.
Not enough to make up that gap. So we're trying to be responsive and maybe conservative in the current accident year as for the the releases.
We've been writing individual risk workers' comp for a long time at fall asleep or specialty admitted and we've been writing our large California program since 2016.
Frankly market conditions, and our retentions have been different along that continuum and we look at our reserves quarterly and felt comfortable with the actions that we took just relative to the release.
And.
<unk> for the releases coming from.
A number this is it.
It's.
Not a huge number in any one given year and again, we've written these portfolios in both instances for a number of years. So.
It's really across a number of years I think it's a I think I said it went back to 2016, Tracy so kind of start O'hare and working with currently.
Okay.
How do you think about experience because it is a long tail line.
You think enough time had passed in 2016.
We're we're very comfortable with our reserves, we've had continued and consistent redundancy and those old years again, if you think about what that book is small south eastern exposure in those years.
For the most part in that and then obviously the California book, We're looking at six years out I think we're pretty comfortable with where we are.
They've been very can try there.
And my last question, so you've given us guidance that puzzle.
The premiums will go down $100 million.
This year versus off and if I just look at the first half of the year premiums.
By $64 million, so how should we expect the cadence to look like.
Second half of the year.
It slowed down.
Yeah, I'll, let Frank.
Frank you want to take that one or well I would just say broadly. It's again, if you think about where we finished the year.
In 2021, and the fact is that we're going to take 100 million out and where we finished through the halfway point.
We're kind of there.
Or kind of on the pace that we eat.
You might expect.
And so I don't know if you want to add to that yeah, I would just say that.
The first half of the year last year was significantly larger than the second half of the year Tracey just to kind of put that in context not at recorders even.
And that's that's one way to frame it I think the other pieces as we said as Frank said in his comments.
When I look at every single renewal on every single opportunity in a quarter by quarter basis, and make those decisions as the market as the market comes to US I don't think we're gonna be beholden to write anything or do anything. So I think those will be to some degree real time decisions, but I would also point to the cadence in the book over the course of last year.
Thank you.
At this moment, we have no further questions I will now turn the call to Mr. Frank Dorazio, Chief Executive Officer for final remarks.
Thank you and I want to thank everyone listening on the call for their time today and for the questions. We received this morning.
We look forward to speaking with you again in a few months to discuss our Q3 results.
Thank you and enjoy your day.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Yeah.
Okay.
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Okay.