James River (JRVR) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company's financial statements show an increase in total assets to $5.30 billion as of June 30, 2023, from $5.14 billion at year-end 2022, with total shareholders' equity also rising to $595.9 million from $553.8 million, while net income available to common shareholders significantly increased to $28.1 million from $14.4 million in the prior-year period, driven by higher net earned premiums and net investment income, though cash flow from operations decreased to $42.6 million from $139.3 million in the same period of 2022 Condensed Consolidated Balance Sheets As of June 30, 2023, total assets increased to $5.30 billion from $5.14 billion at December 31, 2022, primarily driven by increases in reinsurance recoverables and premiums receivable, while total liabilities grew to $4.56 billion from $4.44 billion, mainly due to a higher reserve for losses and loss adjustment expenses, and total shareholders' equity increased to $595.9 million from $553.8 million over the same period Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $5,295,870 | $5,137,075 | | Total Invested Assets | $2,187,116 | $2,192,294 | | Reinsurance recoverable on unpaid losses, net | $1,545,736 | $1,520,113 | | Total Liabilities | $4,555,049 | $4,438,411 | | Reserve for losses and loss adjustment expenses | $2,885,379 | $2,768,995 | | Senior debt | $222,300 | $222,300 | | Total Shareholders' Equity | $595,923 | $553,766 | Condensed Consolidated Statements of Income and Comprehensive Income (Loss) For the six months ended June 30, 2023, the company reported net income available to common shareholders of $28.1 million, a significant increase from $14.4 million in the same period of 2022, driven by an 11.1% increase in net earned premiums to $417.8 million and a 64.5% rise in net investment income to $50.9 million, resulting in total comprehensive income of $47.7 million, a substantial turnaround from a loss of $126.7 million in the prior-year period, which was heavily impacted by unrealized investment losses Financial Performance Highlights (in thousands, except per share data) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Gross Written Premiums | $791,634 | $759,650 | | Net Earned Premiums | $417,771 | $376,086 | | Net Investment Income | $50,947 | $30,972 | | Net Income Available to Common Shareholders | $28,051 | $14,369 | | Diluted EPS | $0.74 | $0.38 | | Total Comprehensive Income (Loss) | $47,746 | $(126,702) | Condensed Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased from $553.8 million at December 31, 2022, to $595.9 million at June 30, 2023, primarily due to net income of $33.3 million and other comprehensive income of $14.4 million from unrealized gains on investments, partially offset by dividends on common and preferred shares totaling $9.1 million - For the six months ended June 30, 2023, total shareholders' equity increased by $42.2 million[22] - Key drivers of the equity increase were net income ($33.3M) and other comprehensive income ($14.4M), offset by dividends on preferred shares ($5.3M) and common shares ($3.8M)[22] Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2023, net cash provided by operating activities was $42.6 million, a decrease from $139.3 million in the prior-year period, while net cash provided by investing activities was $27.1 million, a reversal from $75.1 million used in the same period of 2022, and net cash used in financing activities was $13.3 million, compared to $96.5 million provided in the prior-year period, which had included proceeds from the issuance of Series A preferred shares Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $42,621 | $139,321 | | Net cash provided by (used in) investing activities | $27,070 | $(75,060) | | Net cash (used in) provided by financing activities | $(13,329) | $96,450 | | Change in cash, cash equivalents, and restricted cash | $56,362 | $160,711 | Notes to Condensed Consolidated Financial Statements The notes detail the company's accounting policies, investment portfolio composition, loss reserve development, segment performance, and capital structure, highlighting the significant impact of two loss portfolio transfers (LPTs) on reserves and earnings, the issuance of Series A Preferred Shares, and ongoing legal proceedings, with the investment portfolio primarily composed of investment-grade fixed maturity securities, and the company having suspended underwriting in its Casualty Reinsurance segment Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance, highlighting a 24.3% increase in adjusted net operating income to $42.1 million for the first six months of 2023, driven by strong investment income growth, with gross written premiums growing 4.2% to $791.6 million, led by the Excess and Surplus Lines segment, and the company suspending underwriting in its Casualty Reinsurance segment to focus on higher-returning U.S. businesses, while detailing the significant accounting impacts of two large Loss Portfolio Transfers (LPTs) and discussing liquidity, capital resources, and ceded reinsurance programs - For the six months ended June 30, 2023, adjusted net operating income increased 24.3% to $42.1 million, compared to $33.9 million in the prior year period[176][179] - The company has suspended writing new business in its Casualty Reinsurance segment to focus on its more profitable U.S. insurance businesses[168] - The company's performance was significantly affected by two Loss Portfolio Transfers (LPTs), the Commercial Auto LPT and the Casualty Re LPT, which required retroactive reinsurance accounting and resulted in a net impact of $17.5 million to losses and loss adjustment expenses for the six months ended June 30, 2023[184][186] Results of Operations For the six months ended June 30, 2023, net income available to common shareholders was $28.1 million, up from $14.4 million year-over-year, with the consolidated combined ratio at 94.7%, slightly higher than 94.2% in the prior year, and the improvement in net income largely driven by a 64.5% increase in net investment income to $50.9 million, which offset higher interest expenses and a slight decrease in underwriting profit, with results also impacted by retroactive reinsurance accounting related to two loss portfolio transfers Consolidated Results Summary (Six Months Ended June 30) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Gross Written Premiums | $791.6M | $759.7M | | Net Earned Premiums | $417.8M | $376.1M | | Underwriting Profit | $21.9M | $21.7M | | Net Investment Income | $50.9M | $31.0M | | Net Income Available to Common Shareholders | $28.1M | $14.4M | | Combined Ratio | 94.7% | 94.2% | Segment Results For the first six months of 2023, the Excess and Surplus Lines segment's underwriting profit was $39.4 million with a combined ratio of 87.3%, while the Specialty Admitted Insurance segment posted a small underwriting loss of $85,000 with a combined ratio of 100.2%, impacted by higher net commissions, and the Casualty Reinsurance segment, which has suspended new underwriting, recorded an underwriting profit of $434,000 and a combined ratio of 99.3% as it runs off existing business Combined Ratios by Segment (Six Months Ended June 30) | Segment | 2023 Combined Ratio | 2022 Combined Ratio | | :--- | :--- | :--- | | Excess and Surplus Lines | 87.3% | 83.7% | | Specialty Admitted Insurance | 100.2% | 96.1% | | Casualty Reinsurance | 99.3% | 109.8% | - The Excess and Surplus Lines segment's gross written premiums grew 9.4% to $515.0 million in the first half of 2023, driven by attractive market conditions and renewal rate increases of 10.2%[188][195] - The Specialty Admitted Insurance segment's expense ratio increased from 19.6% to 25.6% year-over-year, mainly due to the termination of a workers' compensation quota share treaty, which increased net commission expense[199] Investing Results Net investment income for the six months ended June 30, 2023, increased by 64.5% to $50.9 million from $31.0 million in the prior-year period, driven by higher yields on fixed maturities, bank loans, and cash equivalents, with the annualized gross investment yield on the total portfolio rising to 4.3% from 2.7%, and the company also recognized net realized and unrealized investment gains of $2.6 million, a significant turnaround from a $22.1 million loss in the same period of 2022 Net Investment Income by Category (Six Months Ended June 30, in thousands) | Category | 2023 | 2022 | | :--- | :--- | :--- | | Fixed maturity securities | $33,360 | $22,611 | | Bank loan participations | $8,686 | $5,062 | | Cash, cash equivalents, and short term investments | $5,811 | $380 | | Total Net Investment Income | $50,947 | $30,972 | - At June 30, 2023, 99.9% of the Company's fixed maturity security portfolio was rated investment grade ('BBB-' or better)[210] Liquidity and Capital Resources The company maintains liquidity through operating cash flows, investment income, and credit facilities, with the holding company having $22.5 million in cash and invested assets not subject to regulatory restrictions as of June 30, 2023, and a $315.0 million senior revolving credit facility and other debt instruments, with a leverage ratio of 22.3%, well below the 35.0% covenant maximum, while dividend capacity from subsidiaries is subject to regulatory limits, and the company utilizes extensive ceded reinsurance to manage risk, with all material recoverables from reinsurers rated 'A-' or better or fully collateralized - Cash provided by operating activities was $40.3 million for the first six months of 2023, down from $139.2 million in the prior year, primarily due to the suspension of underwriting in the Casualty Reinsurance segment[220] - The company's leverage ratio was 22.3% at June 30, 2023, comfortably below the 35.0% maximum permitted by its credit agreements[240] - The company has significant reinsurance recoverables of $1.55 billion on unpaid losses and $182.0 million on paid losses, with credit risk mitigated by high ratings or collateralization[254] Reconciliation of Non-GAAP Measures This section provides reconciliations for key non-GAAP financial measures used by management to evaluate performance, including Underwriting Profit, Adjusted Net Operating Income, and Tangible Equity, bridging these non-GAAP figures to their most directly comparable GAAP measures, such as income before taxes and shareholders' equity, to provide transparency into the adjustments made Reconciliation to Adjusted Net Operating Income (Six Months Ended June 30, 2023, in thousands) | Description | Amount | | :--- | :--- | | Income available to common shareholders (GAAP) | $28,051 | | Losses and loss adjustment expenses - retroactive reinsurance | $15,497 | | Net realized and unrealized investment (gains) losses | $(2,179) | | Other expenses | $773 | | Adjusted net operating income (Non-GAAP) | $42,142 | Reconciliation to Tangible Equity (as of June 30, 2023, in thousands) | Description | Amount | | :--- | :--- | | Shareholders' equity (GAAP) | $595,923 | | Add: Series A redeemable preferred shares | $144,898 | | Add: Deferred reinsurance gain | $37,572 | | Less: Goodwill | $(181,831) | | Less: Intangible assets, net | $(35,494) | | Tangible equity (Non-GAAP) | $561,068 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that its primary market risks are interest rate risk from its fixed maturity investments and equity price risk from its equity security investments, with no material changes in these market risks since the disclosures in its Annual Report on Form 10-K for the year ended December 31, 2022 - The company's primary market risks are interest rate risk and equity price risk[276] - There were no material changes in market risk exposure during the quarter ended June 30, 2023[277] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2023, with no changes in its internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[278] - No material changes to internal control over financial reporting occurred during the quarter[279] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in a purported class action lawsuit filed in July 2021, alleging failure to make appropriate disclosures concerning the adequacy of reserves for policies covering a subsidiary of Uber Technologies, Inc., with the company believing the claims are without merit and intending to defend the lawsuit vigorously, and management not believing the outcome of this or other ordinary course legal proceedings will have a material adverse effect on the company's financial position - A purported class action lawsuit filed in July 2021 alleges inadequate disclosures regarding reserves for policies covering Rasier LLC, a subsidiary of Uber[282] - The company believes the claims are without merit and is vigorously defending the lawsuit[282] Item 1A. Risk Factors The company reports that there have been no material changes in its risk factors during the quarter ended June 30, 2023, from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes to the company's risk factors from the most recent Form 10-K[283] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[284] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to employment agreements, an amended and restated credit agreement, CEO/CFO certifications, and Inline XBRL data files - Key exhibits include a Third Amended and Restated Credit Agreement dated July 7, 2023, and various CEO/CFO certifications[286]