Q2 2023 James River Group Holdings Ltd Earnings Call
Okay.
Good morning, ladies and gentlemen, I'll welcome James River group due to the 20th 23 earnings call.
So we introduce you to your host for today's call Brett Shirreffs Investor Relations James River Group all lines have been placed on mute to prevent any background noise. After the speakers' remarks will be a question there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one.
Thank you Bret you may begin your conference.
Good morning, everyone and welcome to the James River Group second quarter 2023 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.
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 other reports and filings we've made with the Securities Exchange Commission.
We do not undertake any duty to update any forward looking statements.
In addition, during this presentation, we may reference non-GAAP financial measures.
Adjusted net operating income underwriting profit tangible equity.
On the equity and adjusted net operating return on tangible common equity.
Please refer to our earnings press release for a reconciliation of these numbers to GAAP.
We have which can be found on our website at www dot <unk> dot com.
Lastly, unless otherwise specified.
<unk> 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 Raphael Chief Executive Officer of James River Group.
Thank you for the introduction Brett good morning, everyone and welcome to our second quarter 2023 earnings call.
I'm pleased to be joining you today to provide additional color on our strong second quarter results. While also sharing some thoughts on market conditions and future opportunities for James River.
Our results released last night reflect strong positive momentum as we delivered yet another consistent quarter or six scenario of a mid teens return on tangible common equity.
Putting in OCI.
Continue to see robust growth in our E&S segment as hard market conditions persist.
<unk> performance of our investment portfolio contributing to our attractive results for shareholders.
For the second quarter, we reported adjusted net operating income of $26 million.
Consistent with our prior guidance.
Adjusted net operating return on tangible common equity ex Aoc.
It was 14, 8% for the quarter and.
And 15, 5% year to date.
Tangible common equity per share has increased more than 17% before dividends through the first half of the year as we delivered strong underwriting profit.
Sure.
As I alluded to E&S market conditions remained very attractive as we recorded an 11% renewal rate increase for the quarter.
Our 26th consecutive quarter of positive rate growth, bringing our compounded rate change to 10, 2% for the year.
72, 3% since 2017.
The 11% increase in renewal pricing. This quarter is the strongest it has been since a 14, 1% effective rate change we experienced in the second quarter of last year and exceeds the nine 9% we reported for the full year 2022.
Beyond excess property energy environmental and our excess casualty division led the way relative to rate change meaningfully above our expectations as our core product lines and E&S.
We need to achieve rate below levels in excess of our view of loss trends.
The assumptions in our 2023 business plan.
Conditions in excess casualty, our largest E&S underwriting division remain especially attractive as we achieved an 11, 6% rate increase for the quarter.
Additionally, our excess property unit continues to enjoy a very opportune trading environment.
<unk> nearly 30% premium growth for the quarter and 42, 4% premium growth at the midpoint of the year on the strength of year to date rate change totaling 77, 8%.
As I have reported in the past.
We have not changed our attachment strategy, our risk appetite, while posting these production results.
And while our excess property underwriters are clearly taking advantage of favorable market conditions and experiencing healthy rate driven premium growth. We continue to believe that our property writings will still account for less than 10% of the E&S segment overall.
Taken in concert across our underwriting division, we believe our results and the trends that we see in our business support our outlook for favorable future pricing conditions for the E&S market.
Continued opportunities for profitable growth for James River.
During the second quarter, we saw strong new and renewal submission trends for the segment overall and some of our larger divisions experienced accelerating submission growth rates relative to the last few quarters and general casualty. We saw submission growth increased from 9% in the first quarter to 13% in the second quarter and in excess casualty submission growth improve.
The 12% in the second quarter supporting continued premium growth opportunity.
For E&S, which excludes our commercial auto Division grew gross written premiums by 9% in the second quarter driven by strong growth in excess casualty general casualty manufacturers and contractors and excess property.
Net earned premium growth for the segment was 15, 3% in the second quarter.
Additionally, we continue to demonstrate prudent portfolio management in the segment commercial auto premiums declined by 33% as we've reduced our appetite for certain risk classes within the sector and that's been pushing rate more aggressively.
We also nonrenewed over $7 million of primary liability habitation, all premium choosing not to file a new entrant aggression in this space.
As we have noted before as a bottomline focused organization, we're maintaining our underwriting discipline and taking actions that we believe are needed to preserve our underwriting margins for the future.
From a profitability standpoint, the combined ratio in E&S was 87, 8% for the quarter as we generated $19 million of underwriting profit.
Overall, our E&S segment had a tremendous first half of the year with double digit rate increases 15% growth in earned premium and nearly $40 million of underwriting income as we expect to carry this strong momentum not only into the second half of the year, but well into 2020.
Turning to specialty admitted gross written premiums increased 10% for the second quarter with net premiums increasing 58%.
Our workers' compensation premium.
Our large fronted program declined 4%.
On a gross basis, while our remaining fronting business grew 15, 6% as new programs are gaining traction.
And existing programs continue to achieve rate and build scale in the quarter.
The workers' compensation trends, we've been discussing for several years now.
Largely continued in the quarter with modest improvement in rates in our individual risk book as well as moderated rate decline in our California Workers' compensation program.
By our account since 2016 rates have now declined nearly 50%.
California workers compensation.
As a result, we made a disciplined decision to non renew our large California workers' compensation program during the quarter.
Persistent rate pressure and tighter reinsurance capacity significantly challenge our opportunity for future profitability on the program and led us to this underwriting and portfolio management decision.
As a point of reference our program accounted for approximately 7% of companywide gross written premium and 2% of net earned premium over the last four quarters.
Our conservative approach to managing fronted program extends to all facets of the business, including our security and collateral requirements, which has served us well in this industry allegations that investigations with fraudulent collateral leading in this sector.
Pleased to advise that we have no direct exposure to the parties involved in the allegation and have successfully confirmed all of our letters of credit with their respective issuing banks.
The segments combined ratio for the quarter was 98, 4% with the increase from the prior year, primarily due to a higher expense ratio than our individual risk workers' compensation business related to a change in reinsurance structure than accepted at the beginning of the year.
Lastly, turning to casualty reinsurance or <unk> with <unk>.
<unk> continues to perform as expected.
Earned premium in the quarter of $26 $7 million reflects premium earned on all enforced treaties, including $4 million of premium adjustments.
We were able to produce a small underwriting profit and continue to expect the segment to operate at about breakeven.
The segment's results included $3 million of prior year development on business not subject to the segment loss portfolio transfer LTC as well as $5 $8 million of development on covered by the LPG.
The remaining limit on the retroactive reinsurance that we put in place effective October one of 2021.
Now $45 million.
Overall I'm extremely pleased with our second quarter results and remain appreciative of their commitment and dedication of all the employees here at James River.
We continue to demonstrate the strong earnings power of the franchise and remain well positioned to take advantage of the resolute in attractive trading conditions in the E&S market.
Our focus remains on deploying capital, where we're confident we can achieve consistent and attractive returns for shareholders.
I am excited for the second half of the year as we continued to build on the company's strong momentum.
And with that let me turn the call over to there.
Thank you very much and good morning to everyone and thanks for joining us today.
This quarter, we're reporting adjusted net operating income of 53 per share.
Tangible book value per common share increased <unk>.
Eight 3% before dividend was 17, 3% after when we started the year with $11.
This quarter reflected solid underwriting performance a meaningful contribution from net investment income.
Thank you Chris.
We are delivering $3 $6 million of adjusted net operating income this quarter, which included $11 $4 million of underwriting profit and $25 2 million of net investment income.
Pre tax basis or <unk>.
<unk> ratio this quarter was 94, 6% and largely identical on a year to date basis.
For the quarter adjusted net operating return on tangible common equity excluding <unk> was 14, 8%.
Including OCI, our annualized return.
From 14, 8% to $19 nine.
Our expense ratio for the quarter was 27, 5% consistent with what we had set out earlier this year.
The ratio ticked up a year ago consistent with the expectations previously communicated certainly around our reinsurance structures.
On to investments.
The level of investment income was again very strong at $25 2 million largely comparable to $25 8 million, we reported in the prior quarter.
Recall that last quarter, we had one we had a $1 2 million contribution from the sale of supervised renewable energy investments above carrying value.
Net investment income grew 70, 171% from the prior year quarter.
Reinvestment rates move higher with interest rates and we continue to have strong cash flow.
Reinvestment yields in our core fixed income portfolio averaged 5% and we continue to see reinvestment rate in excess of our average three 9% book yield during the quarter.
The combination of our growing base of invested assets Nashville portfolio turnover and exposure to floating rate assets.
Positions us well to continue to deliver strong NII.
Our duration came down slightly to four.
With respect to credit collateral and reinsurance a few comments following on from what Frank mentioned, a few minutes ago.
As color as collateral quality, especially in the pricing business has received heightened attention recently.
We thought it would be helpful to Cherokee thoughts on how we approach the ceded reinsurance for our organization.
We've long had a best practices approach that includes active management of an improved reinsurer list.
As you can see from the public disclosures certainly around our reinsurance recoverable.
Either partnered with high quality reinsurers are require meaningful collateral.
To that end, we have both rating and surplus requirements.
I would note a minimum am best rating of a minus or better on the ratings front.
And if those are not met we require collateral support for coverage.
Our collateral, including select letters of credit and as Frank mentioned, we recently reconfirmed each of these with the issuing bank.
Many of our collateral calculations are updated quarterly and the balanced certainty.
Finally, with regards to our tax rate our tax rate year to date was 23, 9% and is always impacted by the geographic location of profit.
Okay.
And with that let me turn it back to the moderator to open the line for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one your telephone keypad.
Alright, then the number one on your telephone keypad.
Our first question will come from the line of Mark Hughes from <unk> Securities. Your line is now open.
Yes. Thank you good morning.
Good morning Margaret.
Non renewal of the California workers comp program is going to be any notable impact on the expense ratio any kind of stranded costs or anything like that in the near term.
If you have.
Hi, <unk>.
Income will that impact the overall expense ratio going forward.
Yes, that's a great question, Mark I think to highlight Frank had a few stats in areas that the relative size of this relative to the overall organization I would also say that one of the influences on on the non renewal with the program had I'd say minimal profitability to some <unk>.
Lack of profit, especially over the last few quarters. So I don't see a meaningful impact on that just given the overall profitability of where the program is that over the last few quarters.
We'll take also a couple of quarters for us to fully see kind of lap the business coming through on paper.
But I think that as we go through the rest of the year, we don't expect to see a meaningful impact on expense ratio overall, just given how that program has been performing.
Greg You had mentioned that you expect.
Momentum to continue into 2024, what do you see in the market that gives you confidence that you described.
Is it a inflection in some pricing submissions and <unk>.
When you think about.
The durability of the cycle what jumps out at you.
Yeah. Thanks, Mark So I really haven't seen any change in what I perceive to be our opportunity set.
For the remainder of the year end.
And beyond so we saw very healthy growth opportunities.
Really broad based across much of the platform during the second quarter.
With.
The majority of our online division began reporting solid growth nearly all divisions reporting very positive renewal rate changes.
And we also saw strong submission trends continue in the second quarter with growth in new submissions up.
5% growth in overall submissions up in some of our larger departments fairly significantly 13% general casualty, 12% in excess casualty. So these dynamics strong rate increases healthy submission trends suggest to me that favor.
Favorable market conditions should certainly persists.
For 2023.
And then on the.
$45 million in remaining limit how are you seeing the claims closing are being resolved.
Okay.
So Greg.
Continuing reinsurance anything you can tell us about.
Sure.
How long that.
These claims have been.
Hey didn't cross the split the close rate is like just to give us some sense of the AD.
Adequacy about $45 million.
Sure. So let me start first with the process.
That we go through each quarter, so our actuaries review.
Every single Treaty and treaty year and respond to what their savings.
Not doing it annually or semi annually, we are looking at it.
At a very granular level and so if you're talking specifically about the portfolio.
It is subject to the LPT we saw.
$5 $8 million of development.
Not surprisingly driven by construction and construction defect claims, particularly for policies written during 2014 to 2018 underwriting years.
And just in terms of the.
<unk>.
But limit remaining I mean, we feel that.
Very confident in our reserve position.
And Thats, a $45 million limit under the <unk>.
Is adequate in terms of I guess your question relative to payout.
We think about that in terms of the.
Business subject to.
The port the <unk> excuse me, having a mean payout of approximately seven years.
Specifically for the business.
<unk> two <unk> for the remainder of the portfolio a bit shorter.
There are probably closer to four to five years.
Thank you.
Your next question comes from the lineup Meyer Shields from <unk> W. Baird. Your line is now open.
Great. Thanks.
<unk>.
I wanted to go on that topic of casualty re.
Reserve changes.
Ken.
Can you give us maybe some color on whether the quarterly charges, both LPG and non where loss emergence or just changing or.
We're changing assumptions in terms of loss trend or other factors.
So.
Again this is.
Just part of the quarterly process that are our actuaries go through in terms of responding.
To what what Theyre seeing I just talked in some detail in terms of what we saw relative to the portfolio are subject to the OTT.
For the portfolio not subject to the LTC.
Basically.
A small amount of development.
A number of.
<unk> back to the 16% to 19 years either.
GL based so hospitality.
And premises space nothing notable standout again very small amounts they are looking at them on a quarterly basis like I said and reacting to what they're seeing so no change in methodology necessary.
No independent I'm, just when you say what theyre seeing are those actual claim payments.
Responding to sharp claim claim payments and the activity coming.
Throughout the quarter.
Okay. Thanks, that's helpful.
Question I guess, when we look at the casualty reinsurance.
Absent year loss ratio it was about four five points better in the second quarter than the first.
And im assuming its relatively long tailed lines, hoping you could talk us through that what <unk>.
Matt.
Sure. Matt. This is Sarah I would look at that number more on a year to date basis, which is within 100 to 200 basis points of where it's been historically that high <unk> number.
We had some movement of IV and since we were just booking individuals' treaties with regard to some of the audit premium we've seen year to date.
I wouldn't focus on just the quarterly dynamics and I think more about it in terms of a year to date number.
But thats whats driving that some of the way that we had.
It accounted for in both traditional IV and <unk> as we saw some auto premiums coming in early in the year.
Okay fantastic. Thank you very much.
Your next question comes from the line of Crazy Bank <unk> from Barclays. Tracy Your line is now open.
Thank you good morning.
Within E&S, you've been getting nice pricing increases, especially on a compounded basis. You've also made some positive changes to your business mix like less commercial auto in your non renewing.
<unk> premium.
Understand why are we seeing improvements in the E&S accident year loss ratio.
Thanks, Tracy good morning, so our accident year loss ratio.
During the second quarter was up a little.
More than one point compared to the prior year quarter, and then a little less than a point compared to our full year 2022. So we had mentioned I believe earlier in the year that we slightly raised our view on loss cost trend in the portfolio.
Into the high single digits, which that felt prudent given the uncertainty in the.
In the current inflationary environment as well as.
The unknown relative to future periods on these claims are actually paid so just given the longer tail nature of casualty business, we thought that was prudent.
So we're going to continue to be cautious and youre seeing some of this conservatism evidenced in the loss fix themselves.
Along with what I would just call normal fluctuations in the business mix.
Which includes the higher retention, we took on our largest line excess casualty selected casualty historically been a very profitable line for us is taken on significant rated.
You alluded to but just given the nature of the product initially booked at a higher loss ratio than some of our other product lines. So we believe the reserves that we are retaining their will prove impactful over time.
But overall, we just think it's prudent given today's environment as well as our own recent experience.
So to take the posture.
Okay.
Thats help understand the conservatism in your current loss picks what about prior year loss picks.
It should be holding up or.
Maybe you have a higher Ed do you have a different view of loss trend.
How should we think about opex.
Okay.
Youre talking about the most recent years I would say we are.
Being patient just relative to some of those prior accident years.
Again, we've taken.
Alluded to we've taken significant rate increases approximately 10% or better even for the last three years and.
And looking ahead in 2023 at the Midway point.
I think we are outpacing loss trends and building margin, but we're going to take a cautious approach.
Okay and real quick what percentage of your fixed income portfolio is floating rate.
I'll come back to you.
I was going to say, 15% to 20%.
Overall, inter including obviously the bank of our portfolio and then the other floating rate securities in the portfolio.
Okay. Thank you.
Yeah.
Okay.
Danny if you would like to ask a question press Star then the number one our telephone keypad.
Your next question comes from the line of Brian Meredith from UBS, Brian . Your line is now open.
Yeah. Thanks, Frank I was hoping you could talk a little bit about what's left in the specialty admitted business Jay.
I guess youre, losing around 20% of the premium there from this California comp treaty, but so what is it is it program funding business I know there was a traditional comp program, maybe talk a little bit about what's left there.
Yeah. Thanks, Bryan So specialty admitted as always consisted of our individual risk workers' comp unit.
Which is not impacted by the program. The program is going away and then we have the remainder of our fronting business and we continue to have a favorable long term outlook for.
For the fronting business, we believe will provide diversification and balance to the overall organization.
Without the SMA.
Much additional capital and <unk>.
Do think that the well publicized operational issues at several of our competitors in this space.
Provides an opportunity a real possibility that the opportunities that will be increased significantly for responsible carriers in the space.
In the coming months, but it is just simply stands the reason that program managers MDA as reinsurance partners will.
We will be seeking out funding areas is not add operational issue.
Have recently placed the sector and I think.
Paul Blake should be a winner in that context.
Yeah, we're certainly optimistic.
Great and then I'm just curious.
California exceeded the two numbers are doing I'm, just trying to understand why it was unprofitable given it was I guess seamless fronting business right. So you're not taking any risk on that are you.
You don't take any risk on your fronting business. So is it just more that the premiums were down so much. It was just hard to make it possible just from a servicing perspective.
Well I'd say two things.
Brian .
One some of our business in the funds space is completely fronted in some of our business. We actually retain some risks we did retain some risk here, but beyond that the reinsurance market was just.
In a very stretched thin because of the rate environment that I alluded to being off nearly 50 points of rate over the last several years just made it very difficult for the program to come together and just to be clear. This is ed.
This has been a program going somewhere else.
Yes to move it to another program.
It's just.
No way forward for all the partners.
Make money on this just based on where we perceive the profitability of the business today.
Makes sense and then one other just.
Quick one here on the E&S business.
You're talking about 11% plus rate, but premium growth is.
Only running I guess, 9% ex commercial auto.
Is there a mix shift going on whats going on there.
You actually get premium growth that's in line or in excess of rate.
No. That's a good question, but no I'm sure you can appreciate that the challenge.
Isn't growing in this market environment, I think most reputable carriers and view that it's really ensuring that you are growing profitably at acceptable profit hurdles, while managing volatility based on your risk appetite and we spent a lot of time internally monitoring the performance of each of our underwriting divisions.
To make sure that we're accelerating growth of pulling back a formula based on the trends that we see so.
Speaking specifically to the E&S growth results in the quarter some of our larger underwriting divisions.
<unk> manufacturers and contractors general casualty, they all reported double digit premium increases during the second quarter. So building on strong growth from the first quarter and beyond.
Beyond that our energy division had a great quarter with 24% growth and as I mentioned in my prepared remarks.
Exit properties produce.
Very strong rate driven growth. So I don't think we've seen any significant changes in the opportunity set for E&S business, which continues to be broad based but as I alluded to in.
My comments earlier overall growth results for the segment were impacted by a reduction within our commercial auto division.
Just taken a decision to push rate more aggressively taking some selected portfolio management action.
So as a result, what does that mean commercial auto premiums were down 32% in Q2 compared to the prior year, which resulted in about a two point drag on our E&S growth rate. We also non renewed a very large primary liability <unk> count.
We couldn't get our required pricing in terms of not just pricing, but just terms.
There was a competitor willing to delegated underwriting authority and something that we werent willing to do so.
That impacted the growth in the quarter as well, but really these are underwriting actions that are routine part of portfolio management across the entire organization and we believe it aligns our focus on producing attractive underwriting margins for the long term.
Great. Thank you.
There are no further questions at this time I would like to turn the call over to Brookdale Rajiv Brian over to you.
Thank you before we close I do want to acknowledge the two long standing members of our board, Michael Lopes, and our founder Adam Abram chose not to stand for reelection at our AGM last month have retired from the board. We thank them both for their 20 years of service to James River as executives and directors of our company and certainly wish them well in the future.
And personally I know that I'm looking forward to working with our chairman and his new capacity as board chairman.
Okay 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 third quarter results and we certainly hope you enjoy the remainder of your summer.
This concludes today's conference call you may now disconnect.
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