James River (US:JRVR)2020-04-30 20:19PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company reported a net loss of $36.8 million in Q1 2020, primarily due to $58.4 million in investment losses, impacting assets and equity Condensed Consolidated Balance Sheets Total assets slightly decreased to $4.997 billion, liabilities increased, and shareholders' equity declined to $720.3 million by March 31, 2020 Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $4,996,810 | $5,024,405 | | Total Invested Assets | $1,963,642 | $1,993,360 | | Cash and Cash Equivalents | $291,223 | $206,912 | | Restricted Cash Equivalents | $1,107,321 | $1,199,164 | | Total Liabilities | $4,276,493 | $4,245,824 | | Reserve for Losses | $2,043,358 | $2,045,506 | | Senior Debt | $277,300 | $158,300 | | Total Shareholders' Equity | $720,317 | $778,581 | Condensed Consolidated Statements of (Loss) Income The company reported a $36.8 million net loss in Q1 2020, primarily due to $58.4 million in investment losses and a 23.3% decrease in net earned premiums Q1 2020 vs Q1 2019 Performance (in thousands, except per share data) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Gross Written Premiums | $283,841 | $327,334 | | Net Earned Premiums | $145,918 | $190,152 | | Total Revenues | $110,284 | $214,127 | | Net Realized/Unrealized (Losses) Gains | ($58,407) | $1,625 | | Total Expenses | $151,502 | $188,636 | | Net (Loss) Income | ($36,815) | $22,728 | | Diluted (Loss) Earnings Per Share | ($1.21) | $0.75 | | Dividend Declared Per Share | $0.30 | $0.30 | Condensed Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity decreased to $720.3 million by March 31, 2020, driven by a $36.8 million net loss and $9.3 million in dividend payments - Key drivers for the decrease in shareholders' equity in Q1 2020 were the net loss of $36.8 million, dividends of $9.3 million, and a cumulative effect adjustment of $7.8 million from electing the fair value option for bank loan participations20 Condensed Consolidated Statements of Cash Flows Q1 2020 saw $65.3 million net cash used in operations and $49.7 million in investing, offset by $107.5 million from financing, primarily senior debt issuances Cash Flow Summary (in thousands) | Activity | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Cash (Used in) Provided by Operating Activities | ($65,305) | $35,450 | | Net Cash Used in Investing Activities | ($49,721) | ($47,369) | | Net Cash Provided by (Used in) Financing Activities | $107,494 | ($27,986) | | Change in Cash, Cash Equivalents, and Restricted Cash | ($7,532) | ($39,905) | Notes to Condensed Consolidated Financial Statements Q1 2020 notes detail accounting changes, significant investment losses from COVID-19, precautionary credit facility draws, and $874,000 adverse reserve development - On January 1, 2020, the company adopted ASU 2016-13 regarding credit losses and elected the fair value option for its bank loan participations, resulting in a cumulative effect adjustment reducing retained earnings by $7.8 million (net of tax)3435 - The company experienced $874,000 of adverse reserve development in Q1 2020, driven by $1.9 million of adverse development in the Casualty Reinsurance segment, partially offset by favorable development in the Excess and Surplus Lines and Specialty Admitted Insurance segments63 - In response to COVID-19 uncertainty, the company drew a total of $119.0 million on its senior debt facilities during Q1 2020 as a precautionary measure to increase its cash position and preserve financial flexibility104105 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Q1 2020 saw an underwriting loss and net loss, driven by a 27.0% premium decrease from the Rasier account termination and $58.4 million in investment losses, leading to a 100.6% combined ratio Q1 2020 vs Q1 2019 Key Metrics ($ in thousands) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Gross Written Premiums | $283,841 | $327,334 | | Net Earned Premiums | $145,918 | $190,152 | | Underwriting (Loss) Profit | ($948) | $7,146 | | Net (Loss) Income | ($36,815) | $22,728 | | Adjusted Net Operating Income | $15,418 | $21,713 | | Combined Ratio | 100.6% | 96.2% | - The significant decline in financial performance was driven by the termination of the Rasier commercial auto business and severe declines in financial markets due to the COVID-19 pandemic, which led to $58.4 million in net realized and unrealized investment losses128135137 - As a precautionary measure due to COVID-19 market uncertainty, the company drew a total of $119.0 million on its senior credit facilities in Q1 2020 to increase its cash position and preserve financial flexibility181183211 Results of Operations Q1 2020 saw an underwriting loss and 100.6% combined ratio, driven by a 13.3% drop in gross written premiums due to the Rasier termination and $58.4 million in investment losses - Gross written premiums in the Excess and Surplus Lines segment decreased by 27.0%, largely due to the termination of the Rasier commercial auto business in Q4 2019, though excluding commercial auto, the segment's gross written premiums grew by 36.9%137 - The overall expense ratio increased from 22.6% to 34.2%, primarily due to the termination of the Rasier business, which had a lower expense ratio, and a shift in business mix135 - The company recorded net realized and unrealized investment losses of $58.4 million in Q1 2020, compared to gains of $1.6 million in Q1 2019, driven by market declines from the COVID-19 pandemic impacting equity securities and bank loan participations128168 Liquidity and Capital Resources Liquidity is maintained via dividends, investment income, and credit facilities; $119 million was drawn in Q1 2020, increasing debt-to-capitalization, with $1.11 billion in Rasier collateral providing significant liquidity - The company drew $119.0 million on its senior credit facilities in Q1 2020 as a precautionary measure due to COVID-19 market uncertainty, increasing the total debt to total capitalization ratio to 34.6% at March 31, 2020181183189 - The company holds $1.107 billion in collateral funds related to the terminated Rasier insurance contracts, which are invested in short-term securities and classified as restricted cash, used to reimburse the company for losses and expenses paid on behalf of Rasier207 - Cash from operating activities was negative $65.3 million, primarily due to returning $91.8 million of collateral to the former Rasier insured as claims are settled209 Reconciliation of Non-GAAP Measures Non-GAAP measures show a Q1 2020 underwriting loss of $948,000, adjusted net operating income of $15.4 million, and a 10.7% decrease in tangible equity per share Reconciliation of Net (Loss) Income to Adjusted Net Operating Income (in thousands) | Description | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net (Loss) Income as reported | ($36,815) | $22,728 | | Net realized and unrealized investment losses (gains) | $52,233 | ($1,015) | | Adjusted Net Operating Income | $15,418 | $21,713 | Tangible Equity per Share | Metric | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Shareholders' Equity | $720,317 | $778,581 | | Less: Goodwill & Intangibles | $218,622 | $218,771 | | Tangible Equity | $501,695 | $559,810 | | Tangible Equity per Share | $16.44 | $18.40 | Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk from 2019, with primary risks remaining interest rate and equity price fluctuations - There have been no material changes in market risk from the disclosures in the 2019 Form 10-K, with primary risks being interest rate and equity price risk225 Item 4. Controls and Procedures Management confirmed effective disclosure controls as of March 31, 2020, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2020226 - No material changes to internal control over financial reporting were identified during the quarter ended March 31, 2020227 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings, not expected to materially impact financial position - The company is party to ordinary course legal proceedings but does not expect them to have a material adverse financial impact229 Item 1A. Risk Factors Updated risk factors highlight COVID-19 impacts, including reduced premiums, increased claims, investment losses, and potential adverse legislative actions - A new material risk factor has been added concerning the COVID-19 pandemic, which could harm business and results of operations230 - Potential impacts from COVID-19 include reduced premium volume due to policyholder business declines, increased credit losses on receivables, and higher claims frequency/severity in certain lines like workers' compensation236 - The company faces risks from potential government actions, such as proposals to retroactively amend business interruption policies to cover COVID-19 claims or mandate premium payment grace periods, which could lead to un-priced losses and inadequate reserves236 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities occurred during the reporting period - None240 Item 6. Exhibits This section lists exhibits filed with Form 10-Q, including corporate governance documents and certifications