James River (US:JRVR)2022-11-02 20:08PART I. FINANCIAL INFORMATION The first part presents the company's financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Financial Statements The company's financial statements for the period ended September 30, 2022, show increased total assets to $5.21 billion and liabilities to $4.53 billion, with net income of $13.2 million and decreased shareholders' equity to $526.8 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $5,205,491 | $4,948,550 | | Total Invested Assets | $2,176,033 | $2,130,485 | | Reinsurance recoverable on unpaid losses | $1,584,836 | $1,348,628 | | Total Liabilities | $4,533,789 | $4,223,188 | | Reserve for losses and loss adjustment expenses | $2,786,700 | $2,748,473 | | Total Shareholders' Equity | $526,804 | $725,362 | Condensed Consolidated Statement of Income (Loss) Highlights (in thousands) | Account | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Total Revenues | $587,983 | $565,540 | | Losses and loss adjustment expenses | $409,985 | $549,578 | | Total Expenses | $568,807 | $695,187 | | Net (Loss) Income | $13,248 | ($106,506) | | Net (Loss) Income available to common shareholders | $7,123 | ($106,506) | - Shareholders' equity decreased from $725.4 million at the end of 2021 to $526.8 million as of September 30, 2022, primarily due to a significant other comprehensive loss of $205.2 million, reflecting unrealized losses on investments22 - Net cash provided by operating activities was $168.1 million for the nine months ended September 30, 2022, a stark contrast to the $1.06 billion used in the same period of 2021, heavily impacted by restricted cash and a loss portfolio transfer reinsurance transaction26 Management's Discussion and Analysis of Financial Condition and Results of Operations Management reports a significant turnaround in underwriting performance with a $33.0 million profit, driven by lower adverse reserve development, despite negative impacts on the investment portfolio from rising interest rates Consolidated Results Summary (in thousands) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Gross Written Premiums | $1,118,155 | $1,100,000 | | Net Earned Premiums | $566,275 | $503,906 | | Underwriting Profit (Loss) | $32,996 | ($179,183) | | Net (Loss) Income | $13,248 | ($106,506) | | Adjusted Net Operating Income (Loss) | $49,391 | ($116,780) | | Combined Ratio | 94.2% | 135.6% | - The company executed two significant loss portfolio transfers (LPTs): a Retrocession Agreement with Fortitude Re for the Casualty Reinsurance segment's reserves and a Commercial Auto LPT with Aleka Insurance for a legacy commercial auto portfolio168169 - On March 1, 2022, the company issued $150 million of 7% Series A Perpetual Cumulative Convertible Preferred Shares to an affiliate of Gallatin Point Capital, strengthening its capital position117164 - Rising interest rates and macroeconomic events negatively impacted the investment portfolio, resulting in a $205.2 million other comprehensive loss from unrealized losses on fixed maturity investments and $29.9 million in net realized and unrealized investment losses for the nine months ended September 30, 2022163217220 Results of Operations For the nine months ended September 30, 2022, the company achieved an underwriting profit of $33.0 million and a combined ratio of 94.2%, a significant improvement from the prior-year period due to reduced adverse prior-year reserve development - The loss ratio for the nine months ended September 30, 2022, improved dramatically to 68.7% from 109.1% in the prior year, with the 2021 period including $210.8 million (41.8 percentage points) of net adverse reserve development primarily from a canceled commercial auto account171183 - The company experienced $5.0 million of net catastrophe losses related to Hurricane Ian in Q3 2022, comparable to the $5.0 million from Hurricane Ida in Q3 2021172176 - Due to adverse loss trends on the legacy Rasier business, the company recognized $46.7 million of adverse development subject to the Commercial Auto LPT in Q3 2022, triggering retroactive reinsurance accounting and resulting in a net impact of a $20.8 million charge to losses and loss adjustment expenses for the quarter76178 Segment Results For the first nine months of 2022, the Excess and Surplus Lines segment's combined ratio significantly improved to 85.3%, while Specialty Admitted Insurance increased to 96.8%, and Casualty Reinsurance improved to 103.6% Combined Ratios by Segment (Nine Months Ended Sep 30) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | Excess and Surplus Lines | 85.3% | 141.4% | | Specialty Admitted Insurance | 96.8% | 88.1% | | Casualty Reinsurance | 103.6% | 117.2% | | Total | 94.2% | 135.6% | - The Excess and Surplus Lines segment's nine-month 2021 results included $190.7 million of net adverse reserve development, primarily from a terminated commercial auto account, which did not recur in 2022200 - The Casualty Reinsurance segment's 2022 results include an $11.5 million charge (11.2 points on the loss ratio) associated with the Loss Portfolio Transfer Retrocession Agreement210 Investing Results Net investment income rose to $48.3 million for the nine months ended September 30, 2022, but overall investment results were negative due to $29.9 million in net realized and unrealized losses and a $205.2 million reduction in accumulated other comprehensive income from rising interest rates Net Investment Income by Source (Nine Months Ended, in thousands) | Source | 2022 | 2021 | | :--- | :--- | :--- | | Fixed maturity securities | $34,878 | $32,683 | | Bank loan participations | $8,432 | $8,230 | | Equity securities | $3,939 | $3,636 | | Other | $4,053 | $3,160 | | Total Net Investment Income | $48,278 | $44,726 | - The fair value of the fixed maturity securities portfolio was negatively impacted by rising interest rates, leading to unrealized losses recognized in other comprehensive income of $205.2 million for the nine months ended September 30, 2022217 - The company recognized net realized and unrealized investment losses of $29.9 million in its income statement for the first nine months of 2022, compared to gains of $13.7 million in the same period of 2021220221 Liquidity and Capital Resources The company maintains solid liquidity with $167.6 million cash from operations and $92.0 million from financing activities, improving its leverage ratio to 22.8% and maintaining an 'A-' (Excellent) A.M. Best rating - Cash provided by financing activities for the nine months ended September 30, 2022, was $92.0 million, primarily reflecting $144.9 million in net proceeds from the Series A Preferred Share issuance, offset by $40.0 million in debt repayments and $12.0 million in common and preferred dividends234 - The company's leverage ratio decreased to 22.8% at September 30, 2022, from 31.1% at December 31, 2021, remaining comfortably below the maximum permitted ratio of 35.0%249 - The company's regulated insurance subsidiaries have a financial strength rating of 'A-' (Excellent) with a stable outlook from A.M. Best273 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate and equity price risks, with higher interest rates in 2022 leading to $205.2 million in unrealized losses on fixed maturity securities - The company's main market risks are interest rate risk for its fixed maturity investments and equity price risk for its equity securities291 - For the nine months ended September 30, 2022, higher interest rates led to $205.2 million in unrealized losses on fixed maturity securities, which were recorded in other comprehensive loss292 Controls and Procedures As of September 30, 2022, the company's CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2022293 - No material changes to internal control over financial reporting occurred during the quarter ended September 30, 2022294 PART II. OTHER INFORMATION The second part covers legal proceedings and risk factors Legal Proceedings The company is involved in a class action lawsuit alleging inadequate disclosures regarding reserves for policies covering Rasier LLC, which the company intends to vigorously defend - A class action lawsuit alleges the company made inadequate disclosures concerning reserves for policies related to Rasier LLC (an Uber subsidiary)297298 - The company believes the claims lack merit and is actively defending against the lawsuit, having filed a motion to dismiss the second amended complaint on October 24, 2022297298 Risk Factors No material changes in the company's risk factors were reported for the quarter ended September 30, 2022 - No material changes to risk factors were reported for the quarter ended September 30, 2022299