Q3 2022 James River Group Holdings Ltd Earnings Call
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Thank you for holding and welcome everyone to the James River Group third quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you'd like to withdraw your question again press the star one.
It is now my pleasure to turn the call over to Brett Sheriffs head of Investor Relations. Mr. Sheriffs. Please go ahead.
Yeah.
Good morning, everyone and welcome to the James River Group third 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 of our most recent Form 10-K form 10, Qs and other reports and filings we've made with the Securities and Exchange Commission.
We do not undertake any duty to update any forward looking statements.
In addition, during this presentation, we may make reference to non-GAAP financial measures such as adjusted net operating income and adjusted net operating return on tangible common equity.
Please refer to our earnings press release for a reconciliation of these numbers to GAAP.
Lastly, unless otherwise specified for the reasons described in our earnings press release, all underwriting performance ratios referred to our for our business that is not subject to retroactive reinsurance accounting for loss portfolio transfers.
I will now turn the call over to Frank Dorazio, Chief Executive Officer, and James River Group.
Thank you for that introduction, Brett good morning, and welcome to everyone on the call I'm pleased to be back with all of you today to provide additional color on our third quarter results as our focus on underwriting profitability and disciplined risk management continues to drive our results through the first nine months of the year.
The combination of strong underwriting margins and growing investment income resulted in a third quarter group combined ratio of 94, 1% and 91, 5%, excluding the impact of catastrophe losses as well as an adjusted net operating return on tangible common equity of 17, 5% for the quarter and 16%.
On a year to date basis.
As I've repeated before generating consistent returns for shareholders is our ultimate focus and our enviable expense ratio of 24, 6% for this quarter continues to shine through in our results.
In a quarter marked by significant industry catastrophe activity and volatile investment markets. We believe we've posted very compelling results.
Overall market conditions remain broadly attractive with E&S renewal rates up eight 4%.
Very much in line with positive rate change we recorded during the same period last year.
On a year to date basis rate increases in our E&S segment stand at greater than 10% and over the last 23 quarters, our renewal rate increases some compounded to 61, 5%.
As noted in the past headline rate changes or excuse me headline rate change figures will vary from quarter to quarter based on mix and other factors, but continue to be well ahead of our plan and our view of loss cost trends across the vast majority of our portfolio.
I would note that most of our underwriting units, including general casualty excess casualty excess property Allied health, environmental and sports and entertainment continue to achieve rate increases in the high single and low double digits during the third quarter and that the majority of our E&S premium formulas are revenue rated providing us.
Meaningful inflation protection.
While rate versus loss trend dynamic certainly remain positive and bode well for future margins.
Underwriting culture remains highly disciplined and Bottomline focus.
During the end of the second quarter, we introduced new underwriting directives and increased pricing strategies and discrete areas of our underwriting portfolio, primarily aimed at large trucking and transportation risks in our excess casualty and commercial auto portfolios and in certain states in our general casualty unit.
As a result of these actions our gross premium in E&S declined five 9% from the prior year quarter as we non renewed several large dollar accounts that did not meet our new profitability thresholds.
We've continued to experience strong submission activity, particularly in our renewal portfolio and our conversion ratio on those submissions does remain very strong despite.
Despite the underwriting actions that I've referenced aimed primarily at larger insurers and premium items, our E&S segment still increase our policy count by seven 3% in the quarter.
From a profitability standpoint, I believe replacing larger insured with smaller accounts. The lifeblood of James River is generally a very good trade.
Also notable from a portfolio management standpoint, net written premium in our E&S segment increased 10, 2% during the third quarter. Despite the slight reduction in gross premiums partially driven by our mid year decision to increase our net retention by 10 percentage points on our excess casualty business historically profitable line for James River, where renewal rates.
Creases have compounded in excess of 100% over the last few years.
Notably the combined ratio in the E&S segment was $88 two during the third quarter or <unk> 84, 6% excluding catastrophes both.
Both impressive and consistent results.
While hurricane Dorian was a significant event for the industry that will have lasting effects on certain segments of the market. We have again benefited from carefully managing our property catastrophe exposure and related volatility that's property remains a small portion of our portfolio.
Net catastrophe losses during the third quarter were limited to the $5 million retention under our catastrophe treaty.
Primarily related to the excess property division of our E&S segment.
As such we expect losses from the event to be contained in the third quarter.
Also during the quarter shareholders benefited from our legacy commercial auto loss portfolio transfer transaction that we executed last September .
Recent claims data for this portfolio has shown adverse paid loss trends, which drove an increase in our gross loss expectations highlighting the value of our recent strategic actions and focus on enterprise risk management. As a reminder, the LPT provides unlimited coverage for the subject portfolio and as a result, we do not expect to have any economic impact from the increase in gross reserves.
While the existence of the LPT does create some accounting administration and intermediate volatility that Sarah will explain in more detail. The bottomline is that the LPT covers future development on this transferred portfolio.
And the remainder of our business reserve development overall was modestly favorable driven by releases from our specialty admitted segment well E&S casualty re were generally flat.
Turning to results in specialty admitted for the third quarter, we reported one 8% growth in gross premium and a combined ratio of 98, 4%. We continue to feel the effects of the competitive workers' compensation market as premium for our individual risk portfolio and large, California Workers' compensation program were down a combined.
<unk>, 4% compared to the prior year.
The remainder of our fronting and program business reported premium growth of five 1% in the quarter or 19, 2%. Excluding a program partner that was acquired late last year, which was approximately in line with trends over the last few quarters.
The income of $5 $9 million was up five 5% compared to the prior year quarter.
We also increased the current accident year loss take for our individual risk workers' compensation portfolio in the quarter and recognition of both rate pressures and recent accident year loss activity. The year to date loss pick is representative of our view of the business and is yet. Another example of how we react quickly developing trends to make sure we're maintaining a strong reserve position.
We also experienced modest favorable reserve development in the quarter, primarily from our workers compensation business across several accident years dating back to 2016 and consistent with favorable industry experience for the period.
In casualty reinsurance, we remain on track to deliver on the plan, we discussed earlier in the year to optimize the portfolio while significantly reducing its size I am pleased that the segment was again profitable and reported a combined ratio of 99% with no reserve movements, resulting in $3 million of.
Income.
While gross premium for the quarter increased significantly on a year over year basis. This was largely due to premium adjustments on the existing treaty and the effective date extension of another client for.
For the full year, we still anticipate reducing our top line by approximately $100 million realm.
Relative to 2021.
To sum up our results I'm extremely pleased that all three of our segments have once again produced an underwriting profit for the quarter and our investment income continued to grow at a strong pace.
We remain very well positioned to take advantage of growth opportunities in the core markets, while maintaining our discipline and focus on risk management or.
Our earnings potential is clear and we 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 river's reporting another solid and consistent quarter characterized by our year to date annualized adjusted net operating return on tangible common equity of 16%.
Once again, our return accelerated meaningfully from the first quarter of this year.
I'm going to spend a moment, providing a high level overview of the performance of the quarter and then come back to highlight the very significant benefit we realized from the commercial auto loss portfolio transfer restructured about 14 months ago and how this materializes in our numbers.
But first quarter.
We're delivering $15 5 million of adjusted net operating income and moving further to the back half of the strong 2022.
This included $11 $3 million of underwriting profit and $17 $3 million of net investment income on a pretax basis.
Net investment income grew 18% from the sequential quarter.
Our competitive expense ratio of 24, 6% improved from that of last quarter and continues to be a meaningful advantage, we enjoy as compared to our peers in the sector generally.
As mentioned earlier investment income was $17 $3 million this quarter.
We continue to benefit from improved yields in the portfolio, including but higher new money yield on fixed maturities and higher base rates in our bank loan portfolio.
Income, excluding renewable energy and other private investment was $17 7 million as compared to $13 $5 million in the prior year quarter.
Overall, our book yield on the portfolio improved approximately 20 basis points sequentially and was approximately three 1% during the third quarter.
Portfolio duration is four two years and it remained stable.
We expect that 20% of our existing portfolio will have the opportunity for reinvestment or reset over the next year.
Cash flow from operations continued to be strong at $28 million this quarter and about $170 million year to date.
Reinvestment yields in the core fixed income maturity portfolio averaged 4.75% during the third quarter and have moved about 5% during October .
The combination of strong operating cash flow and rising reinvestment yields positions us well going forward.
Realized losses were about seven $8 million this quarter largely due to our high grade preferred stock portfolio, which we continue to hold in total our equity, which is largely preferred and bank loan portfolios represent about 12% of our portfolio, including cash.
Like others, a OCI declined $67 million during the third quarter largely on par with that during the second quarter, just given the interest rate moves.
As a reminder, we tend to hold substantially all of our fixed income maturities and an unrealized loss 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 $330 million intangible equity of $475 million, which includes the series a preferred we issued during the first quarter.
The decline was driven was driven by the third quarter rise in interest rates, particularly towards the long end of the curve.
But excluding the impact of a OCI, our tangible equity totaled $650 million at the end of the quarter and we feel this is a more meaningful representatives representation of our capital position.
So moving on second and arguably more importantly, I wanted to review the very meaningful benefits of the Runoffs commercial auto reinsurance transaction, we negotiated and completed in September of 2021.
These came to bear in a very substantial way on the current quarter.
Taking a step back claims on the runoff commercial auto book have been paying off fairly quickly and given paid loss trends, we experienced adverse prior year development on the portfolio of $46 $7 million this quarter.
Recall that these reserves are fully subject to the loss portfolio transfer. So we'll have no economic impact on the company over time.
Also.
The agreement is unlimited and does not have a cap any potential future increase in loss reserves would also be subject to the agreement and similarly would have no economic impact.
In terms of our GAAP results under retroactive accounting, we're required to recognize 100% of any adverse development related to the covered liabilities.
In our GAAP net income.
This will create and does create some volatility in the GAAP financial statements.
This quarter, given the pace at which claims have been paid off in the portfolio.
$25 $9 million of that adverse development was offset by a recovery.
That leaves the remaining $28 million of the reserve increase to flow through the financials in losses and loss adjustment expenses of the consolidated income statement without an offsetting recovery this quarter and that will create an additional liability on the balance sheet.
Okay.
Importantly, or most importantly, this impact is temporary the $28 million deferred gain to down our balance sheet will earn into our financials. According to the timeline at which the claims are paid.
As I mentioned, a moment ago is a reasonably short timeline for this type of risk.
So that will effectively reverse out a meaningful component of this period's GAAP loss over future periods.
But as I referred to above and as Brett also referred to earlier all profitability ratios and operating income figures are not subject to the retroactive reinsurance accounting.
Okay.
In conclusion, James River ended the third quarter, and an excellent financial and strategic position, we're very well positioned from a reinsurance and risk management point of view and we have ample capital to operate in the current environment and most importantly, we continue to see very attractive opportunities to invest and continue to scale our company.
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So with that I'll turn it back to the moderator to open up the line for questions.
Certainly at this time, if you'd like to ask a question. Please press star one on your telephone keypad will pause for a moment to compile the Q&A roster again that is star one.
Yeah.
Mark Hughes with true Securities. Your line is open.
Hey, Good morning, guys. This is Michael Ramirez on for Mike Mark Thanks for taking our questions.
Good morning.
First.
First what will be the impact on future quarters.
Decision to non renew certain businesses.
And will there be more quarters and keep pressure on those growth.
Like I'm sorry, the last part of your question was what.
Sure I apologize.
And.
Will there be more quarter that include pressure on growth.
Okay sure So let me.
First of all thank you for the question, let me take a step back and just talk a little bit about what we did and then we can talk about what I think.
Youre getting at is relative to future impacts so.
First and foremost the underwriting culture at James River is really a strength of the company.
And we will remain bottom line focused so even in this period of strong market conditions you.
You need to remain vigilant you need to underwrite because it's not a foolproof business. So we regularly review the portfolio to make sure we react quickly to any emerging trends that we see in our loss data as well as any any changes that we might see in the broader competitive landscape.
Again, we actually grew the net premiums and E&S by 10%, we increased our policy count by over 7%, but the decline in E&S gross premium. So I think you're referring to is primarily a result of a few discrete underwriting actions.
The underwriting and pricing actions that we took in select underwriting units.
Primarily.
In.
General casualty commercial auto and some parts of <unk>.
General casualty as well.
The end result of those actions resulted in us not renewing some large dollar items of the seven figure variety most of them are larger trucking or auto exposures, primarily impacting again exit casualty.
Let me talk a little bit more about the actions.
That we took so we really have strengthened the feedback loops that we have in place between underwriting claims and actuarial.
We saw that we identified as some from walk drivers and the sectors.
We address them. So we acted upon what we saw and we moved on it's not a long term ongoing project. We made some tactical adjustments and now we will continue to monitor monitor and remain vigilant.
And just to give you some additional perspective of all the underwriting actions. We took the biggest impact on DWP in the quarter were handled these large trucking our transportation accounts.
Again, an extra casualty happen to be seven figure premium items, but trucking overall account for less than 5% of that excess casualty portfolio.
$10 million premiums are very rare in this segment. So I think he kind of gets too.
What you were looking for we've got roughly 32000 and for clients across all E&S and only a few dozen have premiums of greater than $1 million. So we're talking about 110th of 1%.
Our accounts are in that kind of premium range. So in all these cases.
We believe the actions we took will help us maintain strong margins in this segment and this is really the discipline that.
You should continue to expect from us at the end of the day and really at the expensive.
Oversimplifying matters, we're very comfortable with the market conditions and the rate environment. We grew our policy count with smaller insurers.
By taking a tougher stance and a few of these areas that I just talked about we ended up not renewing.
Whilst trucker accounts so in terms of.
Yes, what's the carryover relative to future growth or do I see that changing.
Again, we had a concentration of these large premium items that were impacted by the underwriting actions that we took in Q3.
I've looked at our large dollar items for the current quarter I don't see that same type of concentration we've got less than 40 accounts enforced overall better greater than $1 million in premium for the entire segment and and we don't write large trucking risks in our commercial auto unit and.
The sector really account for less than 5% of the excess casualty book.
So please appreciate we've got a very limited view in terms of what fourth quarter production looks like but I'll leave you with this October has gotten off to a good start and much more in line with the production that we've experienced the rest of the year.
Yeah.
Okay. Thanks for that thanks.
Thanks for the extra detail on the end market and our lines of business there.
Well affected maybe just a quick follow up on that how much of the decision to non renew these businesses. The ones. You just spoke about the line was based on market conditions versus your own.
Internal evaluation of your past underwriting.
Yeah, no. It's a good question, Mike again ill come.
Come back to my earlier comment about the feedback loops in terms of taking us on trends that we're seeing in the data and what's drivers of loss activity and spending.
Spending time between underwriting are you all our claims department and our actuarial group and kind of breaking down what steps and actions. We thought were prudent in some respect.
<unk>.
Changing some of your underwriting guidelines and others its just about.
Pricing changes so I would say, it's based on what we saw in the market and.
We pretty quickly implemented them and to my earlier point this isn't like along a long drawn out process that we expect to be ongoing we saw something we reacted to it and we will.
Take the steps that we did.
Alright, that's helpful. Thank you.
Maybe one last one for us and will go back in the queue.
We noticed the current accident year loss ratio in E&S It was up.
We're at a point sequentially.
Are you putting up more reserves in light of your updated evaluation of the attractiveness of these business lines you've been writing.
No Mike that's really this is Sarah territory, that's really just a mix.
Think within 100 basis points of VNS that things are going to move around as we look at business that we're in it's renewing and taking on in any given quarter.
So theres no different look as regards our accident year loss picks and E&S.
Our current year packs, it's really just mix coming out and kind of proving through that 100 basis point Delta.
Yeah.
Alright, well thank you for that.
Thanks for the question.
Again, if you'd like to ask a question. Please press star one on your telephone keypad James box with K BW. Your line is open.
Hello.
So just kind of working off that last question can you kind of describe within that.
90, or 100 basis points.
Kind of what is causing the erosion in core loss ratio in E&S and at the same time, what's kind of causing it in specialty admitted which also saw kind of a worsening in the core loss ratios.
Sure.
Just kind of largely repeat myself on an asset mix a certain lines have certain loss picks.
Per the budgeted for how we can kind of go through any renewal and certain lines grow at different paces over the quarter. So again, there's nothing specific with regard to changing our <unk>. It's really just a question of what we renew and what we put on during the quarter.
With regard to specialty admitted.
Think what but it's fairly clear is it both in the top line as well as in our loss ratio is that a decent portion of this segment is related to the workers comp market and in this quarter in particular, we have a fairly small but concentrated individual risk workers' comp book, it's mostly concentrated in.
A handful of southeastern states.
And others and we took up the current year loss pick in the quarter. So by taking it up in the quarter, reflecting over the full year, you're going to feel it a little bit more on the quarter. So that's where you see the delta in the accident year loss ratios in that segment I think at the same time. So why did we do that.
Really we just haven't seen the pricing come through in that line and I don't think we're alone there with regard to kind of how states have looked at workers' comp rate increases.
So you know we've changed some of our outlook there and obviously our top line has been.
Charlie fairly small in terms of growth and even shrinkage over the course of the year as we've tried to manage that conditions in that business.
Alright, perfect and also there was a there was a pretty meaningful increase in our net debt ratio of net to gross in E&S and I wanted to know if that reflects any one time items.
It's really what Frank referred to him and his good color on underwriting appetite in his prepared comments in that we changed the retention and our excess casualty reinsurance treaty. That's a treaty that review renews mid year <unk>. The company has had in place for many many years.
It is very attracted to us it's always had a high ceding Commission.
And our reinsurers have have enjoyed the benefits of our strong underwriting for our excess casualty business in particular, so we had the opportunity renew that the same pricing terms and conditions, but we really just given our outlook on that business and the consistent performance underwriting performance in particular of the portfolio.
Wanted to increase our retention there. So you really see that in E&S that bumped, our retention 10 points quarter over quarter.
Again that was a mid year renewals, so I would think about that E&S.
Premium retention right now is about 16, 9%.
That's likely the number that carried through just given the change in that treaty and that will that will continue for the next few quarters.
So we think that trade to just keep more underwriting income given the really attractive conditions in a way that book has performed.
And broadly speaking, which lines net premium retention horizon.
Ah, yes, its excess casualty.
But like we've said, it's just excess casually.
A third of our business in E&S. It has grown the fastest kind of rate increase of over 100% in the last few years.
It is a treaty that just relates to that excess casualty book, so as you've seen excess casualty grow in the last few years, you've seen that retention come down because of that treaty, which again has been stable and always in place.
Now, we're changing our attention to basically for lack of a better way to describe it keep more of our underwriting profits there.
And so that's that's the line that will be impacted and that's the history and that the rate strength as to why we decided to do that.
And then kind of concerning your loss picks. However, you as James River currently doing medical inflation, and how is that kind of evolved.
It's certainly something that we're watching very very.
Very much. So you know, we certainly think that I think it shows up more for the personal lines and obviously, it's been a theme for some of the more concentrated personal lines writers.
Hard to think that it wouldn't be at some point.
A little bit of a presence in our workers' comp business and potentially other lines, but you know right now we're not seeing a big delta with.
With regard to this dynamic across our business not in a way that really changing our loss cost trends or focus on loss cost there just maybe.
Tack on some additional comments there I think we probably were more concerned about that coming directly out of COVID-19.
And it hasn't proven to be as significant as an issue maybe a couple of points or so in terms of what we've seen that's kind of our view on it I think it's less about medical cost inflation.
It's more at the.
Dynamic and the workers comp field.
To monitor is just the impact of the fantastic improvements that are being made in medical technology and the fact that folks are surviving pretty brutal accident.
So thats an issue that we obviously watch closely but <unk>.
Something that we're seeing more.
Versus concern with medical contemplation.
I think I have one last question I just wanted to get some explanation.
The explanation behind the kind of elevated tax rate.
This quarter.
Yeah happy to take you down there, but at the end of the day, our tax rate like any multinational company is a little complicated just given where we earn income.
And I think Youre, probably focused on the operating income tax rate, which obviously, we pay taxes based on net income.
And its implied Baxter operating income and if you look at what's included excluded through operating income obviously, the deferred gain is a significant piece as well.
But I think the most important piece that I would highlight there is as we focus on in the transcript.
It's about 30% year to date, we expect the year to end up that way why is it higher than the statutory rate because we found in the first quarter as we restructuring kind of the impact of the <unk> of the casualty reinsurance LPT. We did have a loss in Bermuda and thats, what that really kind of tip that over so to speak so.
That's how I think about our tax rate on a net income basis I think if you you do the math it's 20.
26%.
Tax rate on operating earnings, which again is not how the tax rate is actually calculated by the implied math that falls out of that calculation from net income and I don't think we have a reason to think that that number is anything abnormal.
Compared to the quarter that we just reported.
That helps you kind of projected going forward.
Excellent. Thank you very much.
Thanks for the question.
Yeah.
Casey Alexander with Compass point your line is open.
Alright, good morning, and thank you for taking my question.
As you've mentioned there's been a.
Little bit of a slowdown in the specialty admitted.
Growth rate I'm curious what the opportunities are for additional fronting arrangements that could sort of accelerate patel.
Potentially improve the underwriting ratios and accelerate the fee income growth.
Thanks for the question Casey So no we still feel that we've got a great opportunity. We've got a robust pipeline in terms of new opportunities. We've added several new programs over the course of the year that will get traction.
Through the remainder of this year and into next year, but.
Our pipeline is full of.
Current programs across a number of different product lines as you might imagine one of the one of the downstream impacts of these favorable market conditions is the creation of <unk> and so we see opportunities for both existing as well as new <unk> and the programs that they represent so we still think we've got.
We've got some growth runway there I mean, some of the some of the growth over prior.
As you probably appreciate is impacted by the fact that one of the fronting partners was purchased late last year and so.
Maybe not coming up as a true growth number but.
But otherwise we feel we've got plenty of opportunities there to grow the business.
Alright, great. Thank you for taking my question.
Thank you.
Thanks Casey.
There are no further questions at this time I would now like to turn the call back to Frank Dorazio for closing comments.
Okay.
Thanks, very much operator, 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 Q4 results. Thank you and enjoy your day.
This concludes the James River Group third quarter 2022 earnings call. We thank you for your participation you may now disconnect.
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