James River Group Holdings, Ltd. (NASDAQ:JRVR) is a Bermuda-based holding company that owns and operates a group of specialty insurance companies. The company's objective is to generate compelling returns on tangible equity while limiting underwriting and investment volatility. James River Group reports its continuing operations in three reportable segments: Excess and Surplus Lines, Specialty Admitted Insurance, and Corporate and Other.
Business Overview
The Excess and Surplus Lines segment offers commercial excess and surplus lines liability and property insurance in every U.S. state, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The Specialty Admitted Insurance segment focuses on niche classes within the standard insurance markets, with a primary focus on fronting business. The Corporate and Other segment consists of the management and treasury activities of the holding companies, interest expense associated with debt, and expenses of the holding companies that are not reimbursed by the insurance subsidiaries.
Financials
In 2023, James River Group reported annual net income of -$107,684,000, annual revenue of $812,009,000, annual operating cash flow of $87,953,000, and annual free cash flow of $81,519,000. For the first quarter of 2024, the company reported net income from continuing operations of $23,508,000, or $0.53 per diluted share, and adjusted net operating income of $14,832,000, or $0.39 per diluted share. The company's combined ratio for the quarter was 95.3%.
Underwriting Performance and Segment Highlights
The Excess and Surplus Lines segment produced an underwriting profit of $18,491,000 in the first quarter of 2024, with a combined ratio of 87.3%. The segment's accident year loss ratio improved by 140 basis points year-over-year to 64.3%, driven by a mix shift and a refreshed view of expected loss and trend assumptions. Gross written premiums in the segment declined 6.6% year-over-year, primarily due to the company's decision to non-renew several larger accounts that did not meet its profitability hurdles, particularly in the Excess Casualty division. This was partially offset by growth in other divisions, such as General Casualty, which saw a 16% increase in premiums.
The Specialty Admitted Insurance segment reported an underwriting profit of $786,000 and a combined ratio of 97.0% in the first quarter of 2024. Gross written premiums in the fronting and programs business increased 23% year-over-year, excluding the impact of the non-renewed workers' compensation program. The segment's performance was impacted by the sale of the renewal rights to the Individual Risk Workers' Compensation business in the prior year.
Investments and Capital Management
James River Group reported net investment income of $22,632,000 from continuing operations in the first quarter of 2024, an increase of 23% or $4,207,000 from the prior year quarter. The company's embedded book yield was 4.6% at the end of the first quarter, compared to 3.9% a year earlier. The company experienced $4,583,000 of net realized gains on investments, primarily related to changes in the fair values of its common and preferred stock portfolios.
As of March 31, 2024, the company had $1,706,818,000 in invested assets, including $1,287,466,000 in fixed maturity securities, $128,690,000 in equity securities, and $173,046,000 in bank loan participations. The company's leverage ratio, defined as the ratio of adjusted consolidated debt to total capital, was 25.6% at the end of the first quarter, well within the maximum of 35.0% permitted by its credit agreements.
Outlook
James River Group's management team remains focused on generating consistent and attractive returns for shareholders. The company continues to see strong submission growth and favorable pricing conditions in its core Excess and Surplus Lines business, with renewal rates up 10.7% across the segment in the first quarter. The company has also made strategic decisions to non-renew certain larger accounts that did not meet its profitability hurdles, particularly in the Excess Casualty division, in order to maintain underwriting discipline and preserve margins.
In the Specialty Admitted Insurance segment, the company is focused on scaling its fronting and programs business, which saw 23% growth in gross written premiums in the first quarter, excluding the impact of the non-renewed workers' compensation program. The company has a pipeline of new program opportunities that it is currently evaluating and expects to provide more details on in future quarters.
The company's strategic review process, which began at the end of 2023, remains ongoing. The Board of Directors continues to consider a wide range of options, and there is no set timeline for the completion of this process. The delay in the closing of the sale of JRG Re, the company's former Casualty Reinsurance segment, has impacted the overall timing of the strategic review.
Risks and Challenges
James River Group faces several risks and challenges that investors should be aware of. The company's insurance subsidiaries are subject to financial strength ratings from A.M. Best, and a downgrade could impact their ability to attract and retain business. The company also faces exposure to credit risk from reinsurance counterparties and indemnifying parties, as well as potential losses from catastrophic events and social inflation.
The company's results can also be impacted by changes in laws and regulations, including tax laws and insurance regulations. Additionally, the company's ability to generate consistent underwriting profits is dependent on its ability to accurately price and reserve for risks, as well as its ability to manage its exposure to large claims and adverse development on prior accident years.
Conclusion
James River Group Holdings, Ltd. is navigating the evolving specialty insurance landscape with a focus on generating consistent and attractive returns for shareholders. The company's Excess and Surplus Lines segment continues to benefit from strong submission growth and favorable pricing conditions, while the Specialty Admitted Insurance segment is focused on scaling its fronting and programs business. The company's strategic review process remains ongoing, and investors should be aware of the risks and challenges facing the business. Overall, James River Group appears well-positioned to capitalize on opportunities in the specialty insurance market, though investors should closely monitor the company's performance and strategic initiatives going forward.