James River Group Holdings Inc (JRVR) 2024 Q2 法說會逐字稿

Thank you for standing by. My name is Benjamin, and I will be your conference operator today. At this time, I would like to welcome everyone to James River Group Q2 2024 earnings call. (Operator Instructions) Thank you.

I would like to turn the call over to Zachary Shytle, Investor Relations. Please go ahead.

Good morning, everyone, and welcome to the James River Group second-quarter 2024 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 and 10-Q 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.

In addition, during this presentation, we may reference non-GAAP financial measures such as adjusted net operating income, underwriting profit, tangible equity, tangible common 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, a copy of which can be found on our website at www.jrvrgroup.com.

Lastly, unless otherwise specified, for the reasons described in our earnings press release, all underwriting performance ratios referred to are for our continuing operations and business that is not subject to retroactive reinsurance accounting for loss portfolio transfers.

I will now turn the call over to Frank D'Orazio, Chief Executive Officer of James River Group.

Thank you for that introduction, Zach. Good morning, everyone, and welcome to our second-quarter 2024 earnings call. I'm pleased to be joining you today to provide additional color on our second-quarter results, in addition to providing some commentary on market conditions and the future outlook for James River.

Before we get into the results for the quarter, I'd like to take a moment to comment on two strategic items at the company. First, we executed and announced a combined adverse development cover and loss portfolio transfer for our E&S segment, shortly after the end of the second quarter. The transaction was structured to derisk the organization while bolstering the balance sheet. The coverage will also provide a higher level of certainty for our shareholders by reducing significant reserve volatility while allowing us to focus on the future profitable growth of James River.

Second, the strategic review process that we began at the end of last year remains ongoing. The Board continues to consider and thoughtfully evaluate a range of options, and there's no set timeline for the completion of this process.

Now, turning to our results for the quarter, the franchise has continued its strong start to 2024, reporting net income from continuing operations of $0.31 per share, adjusted net operating income of $0.33 per share, and a 14.9% adjusted operating return on tangible common equity. Our flagship E&S business continues to benefit from strong submission growth and rate increases, which present optimal conditions for the underwriting and profitable growth of our heavily SME-weighted platform.

Submission growth was once again strong during the second quarter, increasing 10%, with growth in both new and renewal submissions. In total, we saw over 80,000 submissions during the second quarter, a continuation of the strong trends we have experienced over the last several quarters. I would highlight our environmental and general casualty divisions, which saw submission growth of 37% and 33% respectively, while excess casualty saw admission growth of 9%.

In addition to strong submission growth, our E&S business continues to experience favorable pricing conditions across the different divisions. Renewal rates for the quarter were up 9.1% across the segment and 9.7% year to date. The majority of our underwriting divisions recorded pricing increases in the high single- or low-double digit range for the quarter, and pricing strength continues to come from our larger underwriting divisions.

Rates and energy were up more than 20%, excess casualty up more than 12%, and general casualty up at more than 6%. Rate change continues to exceed our view of loss trends as well as the pricing assumptions in our 2024 business plan. We remain confident that we are continuing to generate attractive margins on this portfolio.

Our E&S casualty divisions, which exclude excess property, grew by over 5% during the quarter. However, property rate increases have moderated amid a market with significantly more capacity than recent past quarters. While we believe rates remain attractive in the E&S excess property market, we've seen increased competition on our renewal portfolio, which led to the reduction in production this quarter.

We've observed several market participants aggressively increasing limits in catastrophe-exposed areas, while providing premium reductions. We've remained disciplined in our underwriting approach. And as a result of these dynamics, gross premiums from our excess property unit declined 28% during the quarter. With this reduction in excess property writings, overall, the E&S segment grew its premium base by 2.3% during the second quarter.

We've also continued our work in re-underwriting our large account exposures in our excess casualty division. While the premium impact was less significant than during the first quarter, there were still a handful of large six and seven-figure accounts that we chose to non-renew during the quarter. Nonetheless, we feel confident in the underwriting actions we've taken and are pleased with the overall portfolio and the opportunities we're seeing in the market.

Our E&S combined ratio was strong at 95.4%, producing $6.4 million of underwriting income. The accident year loss ratio was 64.2% for the second quarter, which was a 180-basis-point improvement from the prior year. We also strengthened reserves for the E&S segment by $10.7 million during the quarter, heavily focused on other liability occurrence and general casualty and, to a lesser extent, excess casualty and commercial auto for the 2017 to 2020 years. Additionally, we experienced no cat losses in the quarter.

As I mentioned previously, early in July, we entered into a combined adverse development cover loss portfolio transfer agreement with State National. This transaction, effective as of January 1, 2024, provides the E&S segment with $160 million in adverse development reinsurance coverage for accident years 2010 through 2023 and is subject to a 15% co-participation by James River. As a result, the adverse development experienced this quarter is expected to be recognized as a reinsurance recoverable during the next quarter.

Turning to specialty admitted, gross written premiums in our fronting and programs business increased in excess of 12% compared to the prior year quarter and 17% year to date, excluding the impact of workers' compensation business that is now in runoff. Many of our existing programs continue to show substantial growth and benefit from positive renewal rate changes available in the market.

The segment produced an excellent combined ratio of 85% and an underwriting profit of $3.4 million for the second quarter. We benefited from the recognition and collection of approximately $1 million of boards, bureaus, and taxes from prior periods in the second quarter. We have experienced infrequent adjustments like this in the past, and they can have an outsized impact given the size of the segment.

Undoubtedly, we are pleased with specialty admitted performance this quarter, and the segment's continued execution of our objectives. Overall, we continue to see strong rate increases in excess of expected loss trend and consistent submission opportunities across James River. We look forward to the second half of 2024 to provide additional opportunities to profitably expand the franchise as we remain focused on generating consistent and attractive returns for shareholders.

And with that, I'll ask Sarah to provide some additional color on the quarter.

Thank you very much, Frank. Good morning, everyone, and thanks for joining us today. As you've seen, 2024 continues to be a strong year with net income from continuing operations available to common shareholders this quarter of $11.9 million or $0.31 per diluted share, compared to $9.5 million or $0.25 per diluted share for the same period a year ago.

On an adjusted net operating basis, we are reporting $12.7 million of income or $0.33 per share as compared to $6.6 million for $0.18 per diluted share for the same period a year ago. Our operating return on tangible common equity is 16.1% through the first half of the year.

Turning to our underwriting results, the second quarter combined ratio of 99.3% compares to 98.9% of a year ago. Our loss ratio increased to 73% from 70.7% a year ago. And as Frank mentioned, we did not experience any cat losses.

There was a net impact from prior year development of $10.7 million, the majority of which we expect will be recovered under the new E&S, LPT, and ADC, which closed on July 2. At 26.3%, our expense ratio declined from 28.2% a year ago. As mentioned previously, upon renewal last summer, we changed the key E&S reinsurance treaty to cover more of the portfolio, limit volatility, and maximize underwriting income, while more efficiently managing reinstatement premiums.

We had no significant changes at the treaties renewal earlier this month. This has had the impact of pushing our E&S net to gross retention to 55% this quarter, down from 61% in the prior year period but consistent with the last four quarters. As Frank mentioned, the benefit to the expense ratio this quarter originated from the specialty admitted segment and specifically due to the $1 million board, bureaus, and tax true-up collected and recognized in the quarter as well as a $500,000 benefit in the quarter for sliding scale commission adjustments. Those adjustments reduced the combined ratio in that segment by about 6 points this quarter.

For the second quarter, we recorded net investment income of $24.9 million from continuing operations, an increase of 37% or $6.7 million from the prior year quarter. Included in the net investment income is a contingent payment of $1.2 million associated with one of our renewable energy investments, which was previously sold. Our embedded book yield was 4.6% compared to 3.6% at this time last year and 4.5% last quarter. We've been holding a fair amount of cash in our portfolio, which is returning an excess of 5% as we work to complete the LPT, ADC transaction.

As we begin to allocate some of this to our core-fixed income portfolio, reinvestment rates remain attractive in the low 5% range. We experienced $2.3 million of net realized and unrealized losses on investments, the majority of which were related to changes in fair value of our common and preferred stock and bank loan portfolios. Overall, our portfolio remains well positioned to take advantage of market dynamics.

Before opening for questions, following on from Frank's comments, I did want to spend a minute on a few points of likely impact from the LPT, ADC, which we will book in the third quarter, given that it was signed on July 2. I would caution that our accounting work is ongoing and will be completed in the third quarter. But first, on the underwriting side, we would expect that a little bit more than $8 million of the adverse development experienced in the E&S segment this quarter will be covered by the treaty in Q3 and booked as a reinsurance recoverable, as Frank mentioned.

Second, as I alluded to in my investment comments a minute ago, we have been holding cash as we work to structure the transaction, and our quarter-end balance sheet included the approximately $310 million in cash that we have since transferred to State National at close of the transaction in early July. As a result of the agreement, we do expect to recognize a reduction in pretax income of approximately $44 million in the third quarter.

And finally, I just wanted to take a moment and wish our former colleague, Brett Shirreffs, all the best in his new adventures. We've all benefited from your hard work and thoughtful approach, and it's been a pleasure having you on the team.

And with that, I'll turn the call back over to the operator to open the line for any questions.

(Operator Instructions) Dean Criscitiello, KBW.

Hi. I was hoping if you could discuss the impact of the smaller property book on the core loss ratio. And also if you could talk about the premium growth prospects between the property book and the casualty book going forward and the implications that will have on the core loss ratio?

Yeah. Thanks for the question, Dean. I don't think there is a material impact on the core loss ratio, just given the historical size of that book. While it did shrink at a gross level in that high-20s number, what we retain is a fairly small portion of that, so I think that's a fairly negligible impact as you look at the loss ratios.

Yeah, I might just give a little bit more color, Dean, just since it's a headline for the quarter for us. So just relative to the dynamic that we experienced in the quarter. So I think like much of the rest of the industry, we saw shifts in the property market in the quarter as capacity restrictions really eased up pretty significantly. And we think that's probably going to continue to transition unless there's a very significant cat season this year.

And just to provide some context, remember, we're an excess layer writer, so we do not write primary in the property space. So when MGAs or other E&S carriers or other facilities that may be distribution owned offer significantly more capacity on a ground-up basis, and we've seen several of these entities double their capacity, oftentimes our layer is under pressure or it gets taken out by that expanding primary layers.

So from a pricing standpoint, we saw renewal rates remain positive on the portfolio that we retain. But rates have moderated pretty significantly to the mid-single digit range. And we saw plenty of rate reductions being offered.

So our goal with excess property is to continue to write good business and limit volatility. And we'll continue to push rate where we think an account or class needs it. But also recognizing where rates are versus technical rating, we need to strike a balance where an account can be written profitably at slightly less premium. So anyway, hopefully that gives you a little bit more color in terms of what we saw in the quarter relative to property.

That does. Thank you. And then my second one. The core loss ratio within the E&S segment ticked down year over year nicely. I was wondering if you had an updated view of your current accident year loss picks specifically within the casualty lines.

Yeah, we don't have an updated view. I don't know if you have a specific question there. I think we've maintained some [prudence] in those loss. Then that's been the similar pick that we've maintained through '24.

Yeah. I was more curious about if that -- your loss pick for annual loss trend for casualty lines has material change from the end of last year.

No, we went through that process going into '24 year, and we start with an ISO basis, when we do our analysis. Our view of loss trend changed by less than 1 point year over year at the end of '24. And our refreshed view of exposure trend also changed by less than 1 point.

Those are the trend factors that we're using on the pricing of our business right now. We're actually in the process. Right now, we're reviewing that as we start to put our thoughts together relative to trend going into our '25 budget. So no change at this point.

Brian Meredith, UBS.

Just a quick question here. Any movements in the 2020 through 2023 reserves at all? And I think you talked about your view on tort and what's going on right now and the inflationary environmental loss trend. But there have been many companies out there that had been pushing up IBNR in 2024 just because of some concerns about what's going on tort inflation. Maybe give us kind of your perspective on what you see going on.

Yeah, happy to do that, Brian. So let me just start by saying where we actually had movement in the quarter and then try to address some of your question about the current year. So during the quarter, we reacted to some dynamics that we saw in [RA] versus the analysis. But the reserve development was really primarily related to the 2017 and 2020 accident years within general casualty, excess casualty, and commercial auto lines.

Of the $10.7 million of development, it breaks down as follows. So E&S core, obviously excluding commercial auto, was about $8.7 million. The majority of the adverse came from general casualty, with excess casualty line that we heavily reinsure, representing the second largest amount. And then as typical, there's some small offsets across parts of the portfolio.

And on a net basis, really the largest years were 2017, 2019, and 2020. We had another $943,000 of adverse outside of core ANS in our standard commercial auto portfolio. And then we had $1 million in parts of our old rideshare account that we retain. And you'll recall that at the time that we announced at LPT back in late 2021, we retained 2% of the remaining outstanding claims for various reasons. We now have exactly three open claims in that portfolio, and we decided to strengthen our position there by $1 million. So that's how you get to the $10.7 million. We've not changed our view of loss trend relative to the current year, to your other question.

It's helpful. Thank you. And my next, because I'm just curious, with the reduction in the property book, is that having any impact on some of your general casualty production just because that's a line of business maybe that some of the producers and some wholesalers may be looking at? And I don't know if you've got any stuff that the property goes with the casualty.

No, it's a good question, but less of a package dynamic in the E&S market. So much of what we see is on a mono-line basis. So again, it's not like we're not offering renewals on property. We are just a more competitive marketplace there. But actually, general casualty is an area where we've seen significant increases in submission activity, healthy rate, and good growth.

Matthew Carletti, Citizens JMP.

Hi, good morning. This is Carl calling in for Matt. Just had a quick follow up question to Sarah. Can you please just go over that Q3 guidance you mentioned earlier in the call?

Yeah, I don't I don't think I provided Q3 guidance. What I was just referencing is our early view from the LPT, ADC, in that the $8 million of adverse development would be booked as a recoverable that we saw this quarter, we booked as a recoverable and Q3. And that we, overall, following on from what we announced in the beginning of July, we expect to recognize the reduction in pretax income of the $44 million in the third quarter because we signed the transaction on July 2. So we'll book it in the third quarter, if that's what you're referencing, Carl.

Mark Hughes, Truist.

Yeah, thank you very much and good morning. I got on a little bit late. So I apologize if you've already addressed this, but when you think about the trajectory of the excess property from a seasonal standpoint and then how you might have been seeing that develop as the quarter progressed, is that going to have as meaningful an impact in Q3 as Q2?

Thanks for the question, Mark. So Q2 is typically a larger quarter for cat-exposed property because of the storm season dynamic as I think you're alluding to. So Q3 is just generally a smaller renewal basis, or I think the market in general. And as a part of that, it's just fewer renewal opportunities for us.

And then that pressure that you saw in the quarter, do you feel like that's stabilized or is that still something that is progressing or building the increased competition, more capacity?

I think it's been building, quite frankly, and you could even see it. We're at mid-single digits. So still positive rates for the quarter, but I could actually see that even descending on a month-to-month basis. So again, it's the dynamics that I mentioned, more capacity, primary carriers willing to double their limit, and putting more pressure on the excess layers.

Yeah. And then any plans for adding staff? Or I guess, how are you approaching that from a staff perspective or potentially new lines of business? How are you looking at the kind of investments you might be making?

Yeah, it's a good question. So first off, I would just comment on staff more broadly, really attribute to the resilience of our company. Staff retention as an organization has been quite good. It's virtually identical through the halfway mark of 2024 to the same point of '23. And it's actually improved over 2022. So certainly less concerning just relative to having to replace heads.

We did, as you know, invest in management liability and started out that product line. Really, just announced that last year. We're going slow there just given market dynamics, getting that up to speed, and probably have some more announcements relative to product expansion there before too long.

As far as additional investment of resources, obviously, we take a look at where we are performing well relative to our budget and where we think that we should be adding additional resources to take advantage of this market cycle that we're in. So that's really a constant evaluation that is ongoing with our segment president.

And then, last one if I might. I don't know if you touched on this, but the re-underwriting effort, I think you alluded to a number of larger accounts in this quarter that also were impacted by that. When you think about the back half, particularly 3Q, are there other accounts that may be in that zone that would be re-underwritten perhaps? How should we think about 3Q?

Yeah. So we started taking a hard look at large commercial auto exposures, really across our E&S segment in the middle of last year. And so I would say much of this review has been done. And by and large, we had a more significant number of accounts review last quarter, as mentioned, with less significant amount to complete this quarter.

Now, that being said, it's an ongoing process. So you renew many of those accounts that have exposures that you're watching. And you continue to take a look at them each year. But I would suggest, much of that work has been done. And that's also at a time where we've just been focusing on growth in smaller insured sector SME business. And I think, the way to demonstrate that or illustrate that best is we see it very pronounced in the average premium per policy bound in the quarter for excess casualty. And this is a Q2 data that I'm talking about now. So we've taken some underwriting actions.

So during Q2 of 2023, our average premium size we bound in our excess casualty was almost $97,000 per policy. In Q2 this year, it was about $56,000 per policy. So very notable and I think also very consistent with the actions that we've talked about the last few quarters.

When you think about the general casualty, general liability, how much do you think interest rates are having surge over the last couple of years, kept a lid on price increases in these long-tail lines. If carriers are able to make pretty good money on the investment portfolio, then that may be restrained rate increases despite the inflationary environment. Do you have any view on that dynamic? And if interest rates do come down, what does that mean for casualty pricing?

I would say, probably, less impact than you might think. I might feel differently 20, 30 years ago but not in these dynamics right now. I think folks are trying to make money on their underwriting. And it paid a lot of attention to it, particularly in that line of business. So I'm not necessarily seeing shift just relative to interest rate movements in the general casualty or other nonoccurrence line that you're talking about.

That concludes our Q&A session. I will now turn the conference back over to Frank D'Orazio for closing remarks.

Okay. Thank you, Benjamin. Before we end the call today, I'd like to recognize the resilience and hard work of all the employees of James River for their efforts this quarter and really over the last 3.5 years and continuing to make James River an even better company, employer, and trading partner.

I also want to thank everyone for their time today and for the questions we received this morning. We look forward to speaking with you all again in the fall to discuss our third-quarter results. Thank you and enjoy the rest of your day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.