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JAMES RIVER GROUP HOLDINGS, LTD. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. Factors that could cause such differences are discussed in the sections entitled "Special Note Regarding Forward-Looking Statements" and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q, or "Quarterly Report", and Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . The results of operations for the three and nine months endedSeptember 30, 2021 are not necessarily indicative of the results that may be expected for the full year endingDecember 31, 2021 , or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report, and in conjunction with our Annual Report on Form 10-K for the year endedDecember 31, 2020 . The accompanying condensed consolidated financial statements and related notes have been prepared in accordance withUnited States ("U.S.") generally accepted accounting principles ("GAAP") and include the accounts ofJames River Group Holdings, Ltd. and its subsidiaries. Unless the context indicates or suggests otherwise, references to "the Company", "we", "us" and "our" refer toJames River Group Holdings, Ltd. and its subsidiaries. Our BusinessJames River Group Holdings, Ltd. is aBermuda -based holding company. We own and operate a group of specialty insurance and reinsurance companies with the objective of generating compelling returns on tangible equity while limiting underwriting and investment volatility. We seek to accomplish this by consistently earning profits from insurance and reinsurance underwriting and generating meaningful risk-adjusted investment returns while managing our capital opportunistically. We are organized into four reportable segments, which are separately managed business units: •The Excess and Surplus Lines segment offers commercial excess and surplus lines liability and property insurance in everyU.S. state, theDistrict of Columbia ,Puerto Rico and theU.S. Virgin Islands throughJames River Insurance Company and its wholly-owned subsidiary,James River Casualty Company ; •The Specialty Admitted Insurance segment approaches the insurance market in two ways: as a risk bearing underwriter, and as a "fronting" company. The Company's risk bearing underwriting is focused on niche classes within the standard insurance markets, such as workers' compensation coverage for residential contractors, light manufacturing operations, transportation workers and healthcare workers. In its fronting business, the Specialty Admitted segment works with distributors, such as managing general agents and other producers, by using our licensure, rating and administrative services in order to produce and service insurance policies for reinsurers and other third party risk bearing entities. We charge fees for "fronting" for these capital providers. In some instances, we retain a small percentage of the risk on fronted business, generally 10%-20%. This segment has admitted licenses and the authority to write excess and surplus lines insurance in 50 states and theDistrict of Columbia ; •The Casualty Reinsurance segment primarily provides proportional and working layer casualty reinsurance to third parties (primarily through reinsurance intermediaries) and an aggregate stop loss reinsurance toCarolina Re Ltd ("Carolina Re"), throughJRG Reinsurance Company Ltd. ("JRG Re"), bothBermuda -based reinsurance companies. JRG Re has also in the past provided reinsurance to the Company'sU.S. based insurance subsidiaries through a quota-share reinsurance agreement; Carolina Re was formed in 2018 to do this as well; and •The Corporate and Other segment consists of the management and treasury activities of our holding companies, interest expense associated with our debt, and expenses of our holding companies, including public company expenses, that are not reimbursed by our insurance segments. All of our insurance and reinsurance subsidiaries have financial strength ratings of "A-" (Excellent) fromA.M. Best Company . 32 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates In preparing the unaudited condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. The most critical accounting policies involve significant estimates and include those used in determining the reserve for losses and loss adjustment expenses, investment valuation and impairment, and assumed reinsurance premiums. For a detailed discussion of each of these policies, refer to our Annual Report on Form 10-K for the year endedDecember 31, 2020 . There have been no significant changes to any of these policies during the current year. Impact of the COVID-19 Pandemic For a discussion of the impact of the coronavirus (COVID-19) pandemic and related economic conditions on the Company's results for the year endedDecember 31, 2020 , please see "Part II-Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operation" in our Annual Report. The Company continues to monitor the impact that the outbreak of the coronavirus (COVID-19) pandemic may be having on the Company's financial condition and results of operations. Loss Portfolio Transfer Reinsurance Transaction OnSeptember 27, 2021 ,James River Insurance Company andJames River Casualty Company (together, "James River") entered into a loss portfolio transfer transaction withAleka Insurance, Inc. ("Aleka"), a captive insurance company affiliate ofRasier LLC , to reinsure substantially all of the Excess and Surplus Lines segment's legacy portfolio of commercial auto policies previously issued toRasier LLC and its affiliates (collectively, "Rasier") for which James River is not otherwise indemnified by Rasier. Under the terms of the transaction, effective as ofJuly 1, 2021 , James River ceded to Aleka approximately$345.1 million of commercial auto liabilities relating to Rasier policies written in the years 2013-2019, which amount constituted the reinsurance premium. The reinsurance coverage is fully collateralized, not subject to an aggregate limit, and is subject to certain exclusions. A pre-tax loss of$29.6 million was recognized as adverse loss and loss adjustment reserve development in the Excess and Surplus Lines segment for the third quarter of 2021 associated with the loss portfolio transfer, of which$15.8 million was related to claims handling costs. The$15.8 million claims handling costs constitutes James River's contribution to the fees of an administrator appointed by James River and Aleka to handle the claims on the Rasier commercial auto policies for the remaining life of those claims, and unallocated loss adjustment expenses required to facilitate the transition of the claims to the administrator. 33 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The following table summarizes our results: Three Months Ended Nine Months Ended September 30, % September 30, % 2021 2020 Change 2021 2020 Change ($ in thousands) Gross written premiums$ 346,599 $ 311,852 11.1 %$ 1,100,000 $ 897,332 22.6 % Net retention (1) 45.6 % 46.5 % 47.9 % 49.7 % Net written premiums$ 158,210 $ 145,159 9.0 %$ 526,413 $ 445,570 18.1 % Net earned premiums$ 170,608 $ 152,962 11.5 %$ 503,906 $ 447,695 12.6 %
Losses and loss adjustment expenses (166,078) (106,155)
56.4 % (549,578) (301,757) 82.1 % Other operating expenses (42,171) (37,861) 11.4 % (133,511) (130,524) 2.3 % Underwriting (loss) profit (2), (3) (37,641) 8,946 - (179,183) 15,414 - Net investment income 15,289 14,959 2.2 % 44,726 51,145 (12.6) % Net realized and unrealized gains (losses) on investments 3,983 8,929 (55.4) % 13,738 (27,885) - Other income and expense (615) 192 - (1,964) (967) 103.1 % Interest expense (2,227) (2,129) 4.6 % (6,692) (7,970) (16.0) % Amortization of intangible assets (90) (149) (39.6) % (272) (447) (39.1) % (Loss) income before taxes (21,301) 30,748 - (129,647) 29,290 - Income tax expense (benefit) 2,588 4,465 (42.0) % (23,141) 4,208 - Net (loss) income$ (23,889) $ 26,283 -$ (106,506) $ 25,082 - Adjusted net operating (loss) income (4)$ (26,814) $ 17,382 -$ (116,780) $ 50,179 - Ratios: Loss ratio 97.3 % 69.4 % 109.1 % 67.4 % Expense ratio 24.8 % 24.8 % 26.5 % 29.2 % Combined ratio 122.1 % 94.2 % 135.6 % 96.6 % Accident year loss ratio (5) 71.5 % 66.6 % 67.2 % 66.0 % Accident year loss ratio ex-cat (6) 68.6 % 66.6 % 66.2 % 66.0 % (1)Net retention is defined as the ratio of net written premiums to gross written premiums. (2)Underwriting (loss) profit is a non-GAAP measure. See "Reconciliation of Non-GAAP Measures" for a reconciliation to (loss) income before taxes and for additional information. (3)Included in underwriting results for the three and nine months endedSeptember 30, 2021 is gross fee income of$5.6 million and$16.2 million , respectively ($4.6 million and$15.8 million in the respective prior year periods). (4)Adjusted net operating (loss) income is a non-GAAP measure. See "Reconciliation of Non-GAAP Measures" for a reconciliation to net (loss) income and for additional information. (5)Accident year loss ratio is defined as the ratio of losses and loss adjustment expenses for the current accident year (excluding development on prior accident year reserves) to net earned premiums. (6)Accident year loss ratio excluding the$5.0 million of net catastrophe losses related to Hurricane Ida in the three and nine months endedSeptember 30, 2021 . Three Months EndedSeptember 30, 2021 and 2020 The Company had an underwriting loss of$37.6 million for the three months endedSeptember 30, 2021 compared to an underwriting profit of$8.9 million for the same period in the prior year. Several significant items negatively impacted the underwriting results for the current quarter. They include the following: •The loss portfolio transfer transaction effectiveJuly 1, 2021 (discussed above) resulted in a$29.6 million pre-tax loss in the current quarter that was recognized as adverse loss and loss adjustment reserve development, of which$15.8 million related to claims handling costs, in the Excess and Surplus Lines segment. 34 -------------------------------------------------------------------------------- Table of Contents •Net adverse reserve development in the Casualty Reinsurance segment of$15.1 million , primarily associated with treaties the Company has exited. •$8.1 million of reinstatement premium, including$6.4 million triggered by one claim on a 2019 excess of loss treaty in the Excess and Surplus Lines segment. The reinstatement premium reduced net written and net earned premium in the quarter, and increased the underwriting loss. •$5.0 million of net catastrophe losses related to Hurricane Ida, primarily in the Company's Excess Property book in the Excess and Surplus Lines segment. The results for the three months endedSeptember 30, 2021 and 2020 also include certain non-operating items that are significant to the Company. These items (on a pre-tax basis) include: •Net realized and unrealized investment gains of$4.0 million and$8.9 million for the three months endedSeptember 30, 2021 and 2020, respectively. The net realized and unrealized investment gains for the three months endedSeptember 30, 2021 include$643,000 and$375,000 related to changes in unrealized gains and losses on equity securities and bank loan participations, respectively ($2.4 million and$9.7 million for the three months endedSeptember 30, 2020 , respectively). See "- Investing Results" for more information on these realized and unrealized investment gains. We define adjusted net operating (loss) income as net (loss) income excluding net realized and unrealized gains (losses) on investments, and certain non-operating expenses such as professional service fees related to various strategic initiatives and the filing of registration statements for the offering of securities, and severance costs associated with terminated employees. We use adjusted net operating (loss) income as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Adjusted net operating (loss) income should not be viewed as a substitute for net (loss) income calculated in accordance with GAAP, and our definition of adjusted net operating (loss) income may not be comparable to that of other companies. Our (loss) income before taxes and net (loss) income reconcile to our adjusted net operating (loss) income as follows: Three Months Ended September 30, 2021 2020 Loss Income Before Net Before Net Taxes Loss Taxes Income ($ in thousands) (Loss) income as reported$ (21,301) $ (23,889) $ 30,748 $ 26,283 Net realized and unrealized investment gains (3,983) (3,422) (8,929) (8,824) Other expenses 625 497 (21) (77) Adjusted net operating (loss) income$ (24,659) $ (26,814) $ 21,798 $ 17,382 Combined Ratios The combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and other operating expenses to net earned premiums. Our combined ratio for the three months endedSeptember 30, 2021 was 122.1%. A combined ratio of less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. The combined ratio for the three months endedSeptember 30, 2021 includes$44.1 million , or 25.8 percentage points, of net adverse reserve development on prior accident years, including$29.5 million of net adverse loss and loss adjustment reserve development from the Excess and Surplus Lines segment,$500,000 of net favorable reserve development from theSpecialty Admitted Insurance segment, and$15.1 million of net adverse reserve development from the Casualty Reinsurance segment, primarily associated with treaties the Company has exited. As discussed above,$29.6 million (17.3 points) of the adverse loss and loss adjustment reserve development in the Excess and Surplus Lines segment, of which$15.8 million related to claims handling costs, was associated with the loss portfolio transfer effectiveJuly 1, 2021 . The combined ratio for the current quarter was also negatively impacted by the aforementioned$8.1 million (5.5 points) of reinstatement premium, and$5.0 million (2.9 points) of net catastrophe losses related to Hurricane Ida. The combined ratio for the three months endedSeptember 30, 2020 was 94.2%. The combined ratio for the three months endedSeptember 30, 2020 includes$4.2 million , or 2.8 percentage points, of net adverse reserve development on prior accident years, including$27,000 of net adverse reserve development from the Excess and Surplus Lines segment,$2.0 million of net favorable reserve development from theSpecialty Admitted Insurance segment, and$6.2 million of net adverse reserve development from the Casualty Reinsurance segment. 35 -------------------------------------------------------------------------------- Table of Contents All of the Company'sU.S. -domiciled insurance subsidiaries are party to an intercompany pooling agreement that distributes the net underwriting results among the group companies based on their approximate pro-rata level of statutory capital and surplus to the total Company statutory capital and surplus. Additionally, each of the Company'sU.S. -domiciled insurance subsidiaries is a party to a quota share reinsurance agreement that in periods prior toJanuary 1, 2018 ceded 70% of their premiums and losses to JRG Re, and startingJanuary 1, 2018 , ceded 70% of their premiums and losses to Carolina Re, an entity domiciled inBermuda that made an irrevocable election to be taxed as aU.S. domestic corporation under Section 953(d) of the Internal Revenue Code of 1986, as amended, effectiveJanuary 1, 2018 . JRG Re also provides aggregate stop loss reinsurance to Carolina Re. We report all segment information in this ''Management's Discussion and Analysis of Financial Condition and Results of Operations'' prior to the effects of intercompany reinsurance, consistent with the manner in which we evaluate the operating performance of our reportable segments. Expense Ratios Our expense ratio was 24.8% for both the three months endedSeptember 30, 2021 and 2020. The expense ratio for the current quarter reflects a 10.9% increase in the Core E&S net earned premiums of the Excess and Surplus Lines segment including in lines that have meaningful ceding commissions. Gross fee income for theSpecialty Admitted Insurance segment increased from$4.6 million in the prior year quarter to$5.6 million in the current quarter driven by new fronting programs and growth in existing fronting programs. The expense ratio for theSpecialty Admitted Insurance segment also benefited from a reduction in bad debt expense and true ups to various accruals for state taxes and fees in the quarter. Nine Months EndedSeptember 30, 2021 and 2020 The Company had an underwriting loss of$179.2 million for the nine months endedSeptember 30, 2021 . This compares to an underwriting profit of$15.4 million for the same period in the prior year. Net adverse reserve development on prior accident years was the principal driver of the current year underwriting loss. Underwriting results for the nine months endedSeptember 30, 2021 include$210.8 million of net adverse reserve development on prior accident years, including$190.7 million of net adverse development from the Excess and Surplus Lines segment almost entirely related to a previous commercial auto account, and$22.6 million of net adverse development from the Casualty Reinsurance segment, primarily associated with treaties the Company has exited. As discussed above,$29.6 million of the adverse loss and loss adjustment reserve development in the Excess and Surplus Lines segment, of which$15.8 million related to claims handling costs, was associated with the loss portfolio transfer effectiveJuly 1, 2021 . Underwriting results for the nine months endedSeptember 30, 2020 included$6.2 million of net adverse reserve development on prior accident years. The underwriting results for the current year were also negatively impacted by the$8.1 million of reinstatement premium and$5.0 million of net catastrophe losses related to Hurricane Ida in the third quarter of 2021. The results for the nine months endedSeptember 30, 2021 and 2020 also include certain non-operating items that are significant to the Company. These items (on a pre-tax basis) include: •Net realized and unrealized investment gains (losses) of$13.7 million and$(27.9) million for the nine months endedSeptember 30, 2021 and 2020, respectively. For the nine months endedSeptember 30, 2021 , net realized and unrealized gains on investments include$3.8 million and$6.6 million related to changes in unrealized gains and losses on equity securities and bank loan participations, respectively($(6.9) million and$(7.6) million related to changes in unrealized gains and losses for the nine months endedSeptember 30, 2020 , respectively). See "- Investing Results" for more information on these realized and unrealized investment gains (losses). •Other expenses were$2.0 million and$1.7 million for the nine months endedSeptember 30, 2021 and 2020, respectively, and include employee severance costs, legal and other professional fees related to the Company'sMay 2021 common share offering, and certain legal and professional consulting fees related to various strategic initiatives. Our (loss) income before taxes and net (loss) income reconcile to our adjusted net operating (loss) income as follows: Nine
Months Ended
2021 2020
Loss Income
Before Net Before Net
Taxes Loss Taxes Income
($ in thousands)
(Loss) income as reported $ (129,647) $ (106,506) $ 29,290 $ 25,082
Net realized and unrealized investment (gains)
losses (13,738) (11,914) 27,885 23,646
Other expenses 1,963 1,640 1,711 1,451
Adjusted net operating (loss) income $ (141,422) $ (116,780) $ 58,886 $ 50,179
36
-------------------------------------------------------------------------------- Table of Contents Combined Ratios Our combined ratio for the nine months endedSeptember 30, 2021 was 135.6%. The combined ratio for the nine months endedSeptember 30, 2021 includes$210.8 million , or 41.8 percentage points, of net adverse reserve development on prior accident years, including$190.7 million of net adverse reserve development from the Excess and Surplus Lines segment,$2.5 million of net favorable reserve development from theSpecialty Admitted Insurance segment, and$22.6 million of net adverse reserve development from the Casualty Reinsurance segment, primarily associated with treaties the Company has exited. As discussed above,$29.6 million (5.9 points) of the adverse loss and loss adjustment reserve development in the Excess and Surplus Lines segment, of which$15.8 million related to claims handling costs, was associated with the loss portfolio transfer effectiveJuly 1, 2021 . The combined ratio for the current year was also negatively impacted by the$8.1 million (2.1 points) of reinstatement premium and$5.0 million (1.0 points) of net catastrophe losses related to Hurricane Ida in the third quarter of 2021. The combined ratio for the nine months endedSeptember 30, 2020 was 96.6%. The combined ratio for the nine months endedSeptember 30, 2020 includes$6.2 million , or 1.4 percentage points, of net adverse reserve development on prior accident years, including$2.8 million of net favorable reserve development from the Excess and Surplus Lines segment,$4.0 million of net favorable reserve development from theSpecialty Admitted Insurance segment, and$13.1 million of net adverse reserve development from the Casualty Reinsurance segment. Expense Ratios Our expense ratio decreased from 29.2% for the nine months endedSeptember 30, 2020 to 26.5% for the nine months endedSeptember 30, 2021 . The decrease reflects a 15.2% increase in the Core E&S net earned premiums of the Excess and Surplus Lines segment including in lines that have meaningful ceding commissions. Our Excess and Surplus Lines segment has significant scale and produces a lower expense ratio than our other operating segments. The Excess and Surplus Lines segment is our largest segment and makes up 69.7% of consolidated net earned premiums for the nine months endedSeptember 30, 2021 compared to 68.2% for the nine months endedSeptember 30, 2020 . Gross fee income for the Company increased from$15.8 million for the nine months endedSeptember 30, 2020 to$16.2 million for the nine months endedSeptember 30, 2021 driven by$2.0 million higher fee income in theSpecialty Admitted Insurance segment due to new fronting programs and growth in existing fronting programs, and partially offset by the termination of a commercial auto account which resulted in a$1.6 million decline of gross fee income in the Excess and Surplus Lines segment. Premiums Insurance premiums are earned ratably over the terms of our insurance policies, generally twelve months. Reinsurance premiums assumed are earned over the terms of the underlying policies or reinsurance contracts. Reinsurance contracts written on a "losses occurring" basis cover claims that may occur during the term of the contract or underlying insurance policy, which is typically twelve months. Reinsurance contracts which are written on a "risks attaching" basis cover claims which attach to the underlying insurance policies written during the terms of such contracts. Premiums earned on such contracts usually extend beyond the original term of the reinsurance contract, typically resulting in recognition of premiums earned over a 24-month period or more in proportion to the level of underlying exposure. 37 -------------------------------------------------------------------------------- Table of Contents The following table summarizes the change in premium volume by component and business segment: Three Months Ended Nine Months Ended September 30, % September 30, % 2021 2020 Change 2021 2020 Change ($ in thousands) Gross written premiums: Excess and Surplus Lines$ 217,673 $ 179,458 21.3 %$ 613,045 $ 502,649 22.0 % Specialty Admitted Insurance 121,175 112,589 7.6 % 377,400 303,831 24.2 % Casualty Reinsurance 7,751 19,805 (60.9) % 109,555 90,852 20.6 %$ 346,599 $ 311,852 11.1 %$ 1,100,000 $ 897,332 22.6 % Net written premiums: Excess and Surplus Lines$ 127,881 $ 109,170 17.1 %$ 371,477 $ 328,190 13.2 % Specialty Admitted Insurance 22,578 16,184 39.5 % 66,081 42,279 56.3 % Casualty Reinsurance 7,751 19,805 (60.9) % 88,855 75,101 18.3 %$ 158,210 $ 145,159 9.0 %$ 526,413 $ 445,570 18.1 % Net earned premiums: Excess and Surplus Lines$ 119,760 $ 104,933 14.1 %$ 351,413 $ 305,521 15.0 % Specialty Admitted Insurance 19,704 14,985 31.5 % 54,656 42,660 28.1 % Casualty Reinsurance 31,144 33,044 (5.7) % 97,837 99,514 (1.7) %$ 170,608 $ 152,962 11.5 %$ 503,906 $ 447,695 12.6 % Gross written premiums for the Excess and Surplus Lines segment (which represents 55.7% of our consolidated gross written premiums in the nine months endedSeptember 30, 2021 ) increased 21.3% and 22.0% from the corresponding three and nine month periods in the prior year, respectively. Policy submissions excluding commercial auto policies were higher by 0.2% and 15.1% more policies were bound in the nine months endedSeptember 30, 2021 than in the nine months endedSeptember 30, 2020 . Renewal rates for the Excess and Surplus Lines segment were up 14.5% compared to the nine months endedSeptember 30, 2020 . The change in gross written premiums compared to the same period in 2020 was notable in several divisions as shown below: Three Months Ended Nine Months Ended September 30, % September 30, % 2021 2020 Change 2021 2020 Change ($ in thousands) Excess Casualty$ 73,170 $ 62,492 17.1 %$ 204,704 $ 146,293 39.9 % Manufacturers & Contractors 34,539 30,833 12.0 % 102,017 90,878 12.3 % General Casualty 31,899 26,817 19.0 % 103,120 93,708 10.0 % Excess Property 10,787 8,259 30.6 % 35,306 28,342 24.6 % Allied Health 9,049 6,932 30.5 % 27,885 21,358 30.6 % Small Business 8,116 6,343 28.0 % 24,201 18,453 31.1 % Sports & Entertainment 2,451 912 168.8 % 6,726 3,650 84.3 % All other Core E&S divisions 29,569 27,151 8.9 % 78,218 76,425 2.3 % Total Core E&S divisions 199,580 169,739 17.6 % 582,177 479,107 21.5 % Commercial Auto$ 18,093 $ 9,719 86.2 % 30,868 23,542 31.1 % Excess and Surplus Lines gross written premium$ 217,673 $ 179,458 21.3 %$ 613,045 $ 502,649 22.0 % 38
-------------------------------------------------------------------------------- Table of Contents The components of gross written premiums for theSpecialty Admitted Insurance segment (which represents 34.3% of our consolidated gross written premiums for the nine months endedSeptember 30, 2021 ) are as follows: Three Months Ended Nine Months Ended September 30, % September 30, % 2021 2020 Change 2021 2020 Change ($ in thousands) Individual risk workers' compensation premium$ 13,461 $ 16,033 (16.0) %$ 43,897 $ 49,670 (11.6) % Fronting and program premium 107,714 96,556 11.6 % 333,503 254,161 31.2 % Specialty Admitted gross written premium$ 121,175 $ 112,589 7.6 %$ 377,400 $ 303,831 24.2 % The premium growth in fronting and programs was driven by new fronting relationships that generated$12.8 million and$40.5 million of gross written premium in the three and nine months endedSeptember 30, 2021 , respectively, and growth in existing relationships (excluding our largest fronting relationship) which generated increases of$1.2 million and$40.6 million , respectively. Our largest fronting relationship produced$30.7 million and$94.9 million of gross written premium for the three and nine months endedSeptember 30, 2021 , respectively, compared to$33.4 million and$96.3 million for the three and nine months endedSeptember 30, 2020 and represented 25.2% of the segment's gross written premium in the nine months endedSeptember 30, 2021 down from 31.7% in the nine months endedSeptember 30, 2020 . The decrease in individual risk workers' compensation gross written premiums in the three and nine months endedSeptember 30, 2021 reflects the Company's decision to exit certain northeastern states. Gross written premiums for the Casualty Reinsurance segment (which represents 10.0% of our consolidated gross written premiums in the first nine months of 2021) decreased 60.9% and increased 20.6% from the corresponding three and nine month periods in the prior year, respectively. The decrease quarter over quarter was driven by a change in renewal period for one treaty and negative written premium adjustments on prior year treaties. The increase in gross written premiums year over year was largely due to higher renewal premiums on a few treaties and a change in renewal date for one treaty. The Casualty Reinsurance segment generally writes large casualty-focused treaties that are expected to have lower volatility relative to property and catastrophe treaties. We rarely write stand-alone property reinsurance. When treaties that include property exposure are written, we utilize property occurrence caps, inuring reinsurance protection and low individual risk limits to minimize exposure. Net Retention The ratio of net written premiums to gross written premiums is referred to as our net premium retention. Our net premium retention is summarized by segment as follows: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Excess and Surplus Lines 58.7 % 60.8 % 60.6 % 65.3 % Specialty Admitted Insurance 18.6 % 14.4 % 17.5 % 13.9 % Casualty Reinsurance 100.0 % 100.0 % 81.1 % 82.7 % Total 45.6 % 46.5 % 47.9 % 49.7 % The net premium retention for the Excess and Surplus Lines segment decreased for the three and nine months endedSeptember 30, 2021 as compared to the prior year periods primarily due to growth in written premium in the Excess Casualty underwriting division, which has a higher percentage of ceded premium than our other divisions. The$8.1 million of reinstatement premium in the current third quarter reduced net written premium and the retention for the quarter and year to date. The net premium retention for theSpecialty Admitted Insurance segment increased for the three and nine months endedSeptember 30, 2021 as compared to the respective periods in the prior year primarily due to higher retentions in the fronting business. The net retention on the segment's fronting business was 17.7% and 16.3% for the three and nine months endedSeptember 30, 2021 , respectively (11.9% and 10.8% for the three and nine months endedSeptember 30, 2020 , respectively). The net retention on the individual risk workers' compensation business was 25.7% and 27.1% for the three and nine months endedSeptember 30, 2021 , respectively (29.5% and 29.7% for the three and nine months endedSeptember 30, 2020 , respectively). The net premium retention for the Casualty Reinsurance segment for the nine months endedSeptember 30, 2021 and 2020, respectively, reflects the impact of one retrocessional treaty/fronting arrangement under which 100% of the premiums are 39 -------------------------------------------------------------------------------- Table of Contents ceded. Ceded written premiums under the treaty were$20.7 million in the first quarter of 2021 compared to$15.8 million in the first quarter of 2020. Underwriting Results The following table compares our combined ratios by segment: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Excess and Surplus Lines 118.0 % 85.2 % 141.4 % 87.0 % Specialty Admitted Insurance 84.3 % 87.6 % 88.1 % 94.6 % Casualty Reinsurance 138.2 % 102.1 % 117.2 % 103.1 % Total 122.1 % 94.2 % 135.6 % 96.6 % Excess and Surplus Lines Segment Results for the Excess and Surplus Lines segment are as follows: Three Months Ended Nine Months Ended September 30, % September 30, % 2021 2020 Change 2021 2020 Change ($ in thousands) Gross written premiums$ 217,673 $ 179,458 21.3 %$ 613,045 $ 502,649 22.0 % Net written premiums$ 127,881 $ 109,170 17.1 %$ 371,477 $ 328,190 13.2 % Net earned premiums$ 119,760 $ 104,933 14.1 %$ 351,413 $ 305,521 15.0 % Losses and loss adjustment expenses (117,214) (69,938) 67.6 % (428,550) (198,877) 115.5 % Underwriting expenses (24,073) (19,414) 24.0 % (68,419) (66,856) 2.3 % Underwriting (loss) profit (1), (2)$ (21,527) $ 15,581 -$ (145,556) $ 39,788 - Ratios: Loss ratio 97.9 % 66.7 % 122.0 % 65.1 % Expense ratio 20.1 % 18.5 % 19.4 % 21.9 % Combined ratio 118.0 % 85.2 % 141.4 % 87.0 % Accident year loss ratio 73.2 % 66.6 % 67.7 % 66.0 % Accident year loss ratio ex-cat (3) 69.0 % 66.6 % 66.3 % 66.0 % (1)Underwriting (Loss) Profit is a non-GAAP Measure. See "Reconciliation of Non-GAAP Measures" for a reconciliation to (loss) income before tax and for additional information. (2)Underwriting results for the three and nine months endedSeptember 30, 2020 include gross fee income of $- and$1.6 million , respectively, related to Rasier, a former commercial auto account (none for the three and nine months endedSeptember 30, 2021 ). (3)Accident year loss ratio excluding the$5.0 million of net catastrophe losses related to Hurricane Ida in the three and nine months endedSeptember 30, 2021 . The loss ratio of 97.9% for the three months endedSeptember 30, 2021 includes$29.5 million of net adverse reserve development (24.7 percentage points) in our loss estimates for prior accident years. The loss ratio of 122.0% for the nine months endedSeptember 30, 2021 includes$190.7 million of net adverse reserve development (54.3 percentage points) in our loss estimates for prior accident years, including$9.4 million of net favorable development on Core E&S lines of business and$200.1 million of net adverse development on commercial auto business that was almost entirely related to a previously canceled account that has been runoff since 2019. The reported losses on this terminated commercial auto account meaningfully exceeded our expectations in the three months endedMarch 31, 2021 . We had expected that reported losses would decline as the account moved further into runoff, but the continued heavy reported loss emergence in the first quarter of 2021 indicated more inherent severity than anticipated. In response, we meaningfully adjusted our actuarial methodology, resulting in a significant strengthening of reserves for this account ($169.9 million of net adverse development was recorded in the first quarter). In prior quarters, our actuarial work for this terminated commercial auto account had been based on industry data, pricing data, experience data, average claims severity data, and blended methodologies. However, the continuation of the highly elevated reported losses in the first quarter of 2021 led us to conclude that using only our own loss experience in our paid and incurred reserve projections rather than the array of inputs that we had used in prior quarters, and giving greater weight to 40 -------------------------------------------------------------------------------- Table of Contents incurred methods, would give us a better estimate of ultimate losses on this account. In the third quarter, James River entered into a loss portfolio transfer transaction with Aleka to reinsure substantially all of the Excess and Surplus Lines segment's legacy portfolio of commercial auto policies previously issued to Rasier for which James River is not otherwise indemnified by Rasier. Under the terms of the transaction, effective as ofJuly 1, 2021 , James River ceded to Aleka approximately$345.1 million of commercial auto liabilities relating to Rasier policies written in the years 2013-2019, and subject to certain exclusions. A pre-tax loss of$29.6 million was recognized as adverse loss and loss adjustment reserve development in the Excess and Surplus Lines segment for the third quarter of 2021 associated with the loss portfolio transfer, of which$15.8 million related to claims handling costs. The$15.8 million claims handling costs constitutes James River's contribution to the fees of a third party claims administrator appointed by James River and Aleka to handle the claims on the Rasier commercial auto policies for the remaining life of those claims, and unallocated loss adjustment expenses required to facilitate the transition of the claims to the third party claims manager. The loss ratio for the three and nine months endedSeptember 30, 2021 also includes 4.2 and 1.4 points, respectively, related to the$5.0 million of Hurricane Ida losses recorded in the third quarter of 2021. The loss ratios of 66.7% and 65.1% for the three and nine months endedSeptember 30, 2020 include$27,000 of net adverse and$2.8 million of net favorable (0.0 and 0.9 percentage points, respectively) reserve development in our loss estimates for prior accident years. The expense ratio for this segment was 20.1% and 19.4% for the three and nine months endedSeptember 30, 2021 , respectively, compared to 18.5% and 21.9% for the three and nine months endedSeptember 30, 2020 , respectively. The current year expense ratios reflect increases of 10.9% and 15.2%, respectively, in Core E&S net earned premiums including in lines that have meaningful ceding commissions. Gross fee income related to a former commercial auto account contributed to reductions in the expense ratio of 0.0 and 0.5 percentage points for the three and nine months endedSeptember 30, 2020 , respectively (none for the three and nine months endedSeptember 30, 2021 ). As a result of the items discussed above, the underwriting results of the Excess and Surplus Lines segment declined from underwriting profits of$15.6 million and$39.8 million for the three and nine months endedSeptember 30, 2020 , respectively, to underwriting losses of$21.5 million and$145.6 million for the three and nine months endedSeptember 30, 2021 , respectively. Specialty Admitted Insurance Segment Results for theSpecialty Admitted Insurance segment are as follows: Three Months Ended Nine Months Ended September 30, % September 30, % 2021 2020 Change 2021 2020 Change ($ in thousands) Gross written premiums$ 121,175 $ 112,589 7.6 %$ 377,400 $ 303,831 24.2 % Net written premiums$ 22,578 $ 16,184 39.5 %$ 66,081 $ 42,279 56.3 % Net earned premiums$ 19,704 $ 14,985 31.5 %$ 54,656 $ 42,660 28.1 % Losses and loss adjustment expenses (15,263) (10,745) 42.0 % (39,371) (31,209) 26.2 % Underwriting expenses (1,357) (2,381) (43.0) % (8,797) (9,150) (3.9) % Underwriting profit (1), (2)$ 3,084 $ 1,859 65.9 %$ 6,488 $ 2,301 182.0 % Ratios: Loss ratio 77.5 % 71.7 % 72.0 % 73.2 % Expense ratio 6.8 % 15.9 % 16.1 % 21.4 % Combined ratio 84.3 % 87.6 % 88.1 % 94.6 % Accident year loss ratio 80.0 % 85.1 % 76.6 % 82.6 % (1)Underwriting Profit is a non-GAAP Measure. See "Reconciliation of Non-GAAP Measures" for a reconciliation to income before tax and for additional information. (2)Underwriting results include gross fee income of$5.6 million and$16.2 million for the three and nine months endedSeptember 30, 2021 , respectively ($4.6 million and$14.2 million for the same periods in the prior year). The loss ratios of 77.5% and 72.0% for the three and nine months endedSeptember 30, 2021 include$500,000 and$2.5 million (2.5 and 4.6 percentage points), respectively, of net favorable development in our loss estimates for prior accident years. The loss ratios of 71.7% and 73.2% for the three and nine months endedSeptember 30, 2020 include$2.0 million and$4.0 million (13.3 and 9.4 percentage points), respectively, of net favorable development in our loss estimates for prior accident years. The favorable reserve development for both periods reflects the fact that actual loss emergence of the workers' compensation book has been better than expected. 41 -------------------------------------------------------------------------------- Table of Contents The expense ratio of theSpecialty Admitted Insurance segment was 6.8% and 16.1% for the three and nine months endedSeptember 30, 2021 , respectively, compared to the prior year ratios of 15.9% and 21.4%, respectively. The improvement was driven by the growth in net earned premiums and higher fee income, which increased 21.5% and 13.9% over the respective three and nine month periods in the prior year due to the growth in our fronting business. In addition, the segment benefited from current quarter adjustments to the allowance for doubtful accounts, premium taxes, and assessments which together represented a 9.9 and 3.6 percentage point decrease in the segment expense ratio for the current quarter and year to date, respectively. In the prior year, underwriting results in the nine months endedSeptember 30, 2020 were favorably impacted by a$1.2 million adjustment to fee income on one fronted program (a reduction in commission expense, representing a 2.8 point reduction in the combined ratio for the period). As a result of the items discussed above, theSpecialty Admitted Insurance segment had an underwriting profit of$3.1 million and$6.5 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to an underwriting profit of$1.9 million and$2.3 million for the three and nine months endedSeptember 30, 2020 , respectively. Casualty Reinsurance Segment Results for the Casualty Reinsurance segment are as follows: Three Months Ended Nine Months Ended September 30, % September 30, % 2021 2020 Change 2021 2020 Change ($ in thousands) Gross written premiums$ 7,751 $ 19,805 (60.9) %$ 109,555 $ 90,852 20.6 % Net written premiums$ 7,751 $ 19,805 (60.9) %$ 88,855 $ 75,101 18.3 % Net earned premiums$ 31,144 $ 33,044 (5.7) %$ 97,837 $ 99,514 (1.7) % Losses and loss adjustment expenses (33,601) (25,472) 31.9 % (81,657) (71,671) 13.9 % Underwriting expenses (9,454) (8,261) 14.4 % (33,037) (30,962) 6.7 % Underwriting loss (1)$ (11,911) $ (689) 1,628.7 %$ (16,857) $ (3,119) 440.5 % Ratios: Loss ratio 107.9 % 77.1 % 83.5 % 72.0 % Expense ratio 30.3 % 25.0 % 33.7 % 31.1 % Combined ratio 138.2 % 102.1 % 117.2 % 103.1 % Accident year loss ratio 59.5 % 58.3 % 60.4 % 58.9 % (1)Underwriting Loss is a non-GAAP Measure. See "Reconciliation of Non-GAAP Measures" for a reconciliation to loss before tax and for additional information. The Casualty Reinsurance segment focuses on lower volatility, proportional reinsurance which requires larger ceding commissions resulting in a higher commission expense than in our other segments. The loss ratios of 107.9% and 83.5% for the three and nine months endedSeptember 30, 2021 , respectively, include$15.1 million and$22.6 million (48.4 and 23.1 percentage points), respectively, of net adverse development in our loss estimates for prior accident years, primarily associated with treaties that the Company has exited. The loss ratios of 77.1% and 72.0% for the three and nine months endedSeptember 30, 2020 , respectively, include$6.2 million and$13.1 million (18.8 and 13.1 percentage points), respectively, of net adverse development in our loss estimates for prior accident years. The expense ratio of the Casualty Reinsurance segment was 30.3% and 33.7% for the three and nine months endedSeptember 30, 2021 , respectively, compared to 25.0% and 31.1% in the respective prior year periods. Commission slide adjustments related to incurred losses decreased the expense ratio by 1.9 points and increased the expense ratio by 0.8 points in the three and nine months endedSeptember 30, 2021 , respectively, compared to decreases of 8.7 points and 3.4 points in the three and nine months endedSeptember 30, 2020 , respectively. A higher proportion of treaties with adverse development have reached the slide maximums in the current year, thus the slide adjustments are providing less offset despite the higher adverse development in the current year periods. As a result of the items discussed above, underwriting results for the Casualty Reinsurance segment declined from underwriting losses of$689,000 and$3.1 million for the three and nine months endedSeptember 30, 2020 , respectively, to underwriting losses of$11.9 million and$16.9 million for the three and nine months endedSeptember 30, 2021 , respectively. 42 -------------------------------------------------------------------------------- Table of Contents Reserves An indicator of reserve strength that we monitor closely is the percentage of our gross and net loss reserves that are comprised of incurred but not reported ("IBNR") reserves. The Company's gross reserve for losses and loss adjustment expenses atSeptember 30, 2021 was$2,596.8 million . Of this amount, 60.6% relates to amounts that are IBNR. This amount was 58.7% atDecember 31, 2020 . The Company's gross reserves for losses and loss adjustment expenses by segment are summarized as follows: Gross Reserves at September 30, 2021 Case IBNR Total ($ in thousands)
Excess and Surplus Lines
388,177 667,890 Casualty Reinsurance 139,959 185,795 325,754 Total$ 1,024,316 $ 1,572,513 $ 2,596,829 AtSeptember 30, 2021 , the amount of net reserves prior to the$515,000 allowance for uncollectible reinsurance recoverables of$1,247.5 million that related to IBNR was 62.9%. This amount was 55.3% atDecember 31, 2020 . The Company's net reserves for losses and loss adjustment expenses by segment are summarized as follows: Net Reserves at September 30, 2021 Case IBNR Total ($ in thousands) Excess and Surplus Lines$ 285,137 $ 546,035 $ 831,172 Specialty Admitted Insurance 40,421 61,068 101,489 Casualty Reinsurance 136,668 178,121 314,789 Total$ 462,226 $ 785,224 $ 1,247,450 Other Operating Expenses In addition to the underwriting, acquisition, and insurance expenses of the Excess and Surplus Lines segment, theSpecialty Admitted Insurance segment, and the Casualty Reinsurance segment discussed previously, other operating expenses also include the expenses of the Corporate and Other segment. Corporate and Other Segment Other operating expenses for the Corporate and Other segment include personnel costs associated with theBermuda andU.S. holding companies, professional fees, and various other corporate expenses that are included in our calculation of our expense ratio and our combined ratio. Other operating expenses of the Corporate and Other segment represent the expenses of both theBermuda andU.S. holding companies that were not reimbursed by our subsidiaries, including costs associated with our internal quota share, rating agencies and strategic initiatives. These costs vary from period-to-period based on the status of these initiatives. Total operating expenses of the Corporate and Other segment were$7.3 million and$23.3 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to$7.8 million and$23.6 million for the same periods in the prior year. Investing Results Net investment income was$15.3 million and$44.7 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to$15.0 million and$51.1 million for the same periods in the prior year. The Company's private investments generated income of$1.8 million and$2.9 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to income of$533,000 and$1.5 million in the respective prior year periods. Excluding private investments, our net investment income for the three and nine months endedSeptember 30, 2021 decreased 6.2% and 15.8% from the prior year, respectively, principally due to lower investment income from restricted cash equivalents, bank loan participations (resulting from a smaller portfolio following sales in the second quarter of the prior year to reduce exposure to this asset class) and lower investment yields. The average duration of our portfolio excluding restricted cash equivalents was 4.1 years atSeptember 30, 2021 . 43
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Major categories of the Company's net investment income are summarized as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
($ in thousands)
Fixed maturity securities $ 10,437 $ 11,359 $ 32,683 $ 33,424
Bank loan participations 2,836 2,396 8,230 9,668
Equity securities 1,225 1,246 3,636 3,677
Other invested assets:
Renewable energy investments 918 21 636 1,134
Other private investments 842 512 2,292 360
1,760 533 2,928 1,494
Cash, cash equivalents, restricted cash equivalents
and short-term investments 59 456 232 6,470
Gross investment income 16,317 15,990 47,709 54,733
Investment expense (1,028) (1,031) (2,983) (3,588)
Net investment income $ 15,289 $ 14,959 $ 44,726 $ 51,145
The following table summarizes our investment returns:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Annualized gross investment yield on:
Average cash and invested assets 2.7 % 2.7 % 2.8 % 2.9 %
Average fixed maturity securities 2.7 % 2.8 % 2.8 % 3.0 %
Of our total cash and invested assets of $2,281.9 million at September 30, 2021
(excluding restricted cash equivalents), $220.6 million represents the cash and
cash equivalents portion of the portfolio. The majority of the portfolio, or
$1,721.7 million , is comprised of fixed maturity securities that are classified
as available-for-sale and carried at fair value with unrealized gains and losses
on these securities reported, net of applicable taxes, as a separate component
of accumulated comprehensive income. Also included in our investments are $155.0
million of bank loan participations, $100.0 million of equity securities, $26.9
million of short-term investments, and $57.7 million of other invested assets.
In connection with the adoption of ASU 2016-13 on January 1, 2020 , the Company
elected the fair value option in accounting for its portfolio of bank loan
participations. Under the fair value option, bank loan participations are
measured at fair value, and changes in unrealized gains and losses in bank loan
participations are reported in our income statement as net realized and
unrealized gains (losses) on investments.
Bank loan participations generally provide a higher yield than our portfolio of
fixed maturity securities and are primarily senior, secured floating-rate debt
rated "BB", "B", or "CCC" by Standard & Poor's or an equivalent rating from
another nationally recognized statistical rating organization, and are therefore
below investment grade. Bank loans include assignments of and participations in,
performing and non-performing senior corporate debt generally acquired through
primary bank syndications and in secondary markets. They consist of, but are not
limited to, term loans, the funded and unfunded portions of revolving credit
loans, and similar loans and investments. At September 30, 2021 and December 31,
2020 , the fair market value of these securities was $155.0 million and $147.6
million , respectively.
For the nine months ended September 30, 2021 , the Company recognized net
realized and unrealized investment gains of $13.7 million ($4.0 million of net
realized and unrealized investment gains for the three months ended September
30, 2021 ), including $6.6 million of net unrealized gains on bank loan
participations, $3.8 million of net gains for the change in the fair value of
equity securities, $4.3 million of net realized investment gains on the sale of
fixed maturity securities, $645,000 of net realized investment losses on the
sale of bank loan participations, and $386,000 of net realized investment losses
on the sale of equity securities.
For the nine months ended September 30, 2020 , the Company recognized net
realized and unrealized investment losses of $27.9 million ($8.9 million of net
realized and unrealized investment gains for the three months ended September
30, 2020 ), including $7.6 million of net unrealized losses on bank loan
participations, $6.9 million of net unrealized losses for the change
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in the fair value of equity securities, $14.1 million of net realized investment
losses on the sale of bank loan securities, and $905,000 of net realized
investment gains on the sale of fixed maturity securities.
In conjunction with its outside investment managers, the Company performs
quarterly reviews of all securities within its investment portfolio to determine
whether any impairment has occurred. Management concluded that none of its fixed
maturity securities were impaired at September 30, 2021 or December 31, 2020 . At
September 30, 2021 , 99.4% of the Company's fixed maturity security portfolio was
rated "BBB-" or better ("investment grade") by Standard & Poor's or received an
equivalent rating from another nationally recognized rating agency. Management
does not intend to sell available-for-sale securities in an unrealized loss
position, and it is not "more likely than not" that the Company will be required
to sell these securities before a recovery in their value to their amortized
cost basis occurs.
The amortized cost and fair value of our available-for-sale fixed maturity
securities were as follows:
September 30, 2021 December 31, 2020
Cost or % of Cost or % of
Amortized Fair Total Amortized Fair Total
Cost Value Fair Value Cost Value Fair Value
($ in thousands)
Fixed maturity securities,
available-for-sale:
State and municipal $ 324,050 $ 335,635 19.5 % $ 277,241 $ 296,405 16.6 %
Residential mortgage-backed 258,302 261,075 15.2 % 286,104 293,848 16.5 %
Corporate 698,454 725,872 42.2 % 715,145 766,822 43.0 %
Commercial mortgage and asset-backed 307,223 313,158 18.1 % 314,911 326,719 18.3 %
U.S. Treasury securities and obligations
guaranteed by the U.S. government 85,252 85,987 5.0 % 97,489 99,848 5.6 %
Total fixed maturity securities,
available-for-sale $ 1,673,281 $ 1,721,727 100.0 % $ 1,690,890 $ 1,783,642 100.0 %
The following table sets forth the composition of the Company's portfolio of
available-for-sale fixed maturity securities by rating as of September 30, 2021 :
Standard & Poor's or Equivalent Designation Fair Value % of Total
($ in thousands)
AAA $ 358,106 20.8 %
AA 622,261 36.1 %
A 539,174 31.3 %
BBB 192,236 11.2 %
Below BBB and unrated 9,950 0.6 %
Total $ 1,721,727 100.0 %
At September 30, 2021 , our portfolio of fixed maturity securities contained
corporate fixed maturity securities (available-for-sale) with a fair value of
$725.9 million . A summary of these securities by industry segment is shown below
as of September 30, 2021 :
Industry Fair Value % of Total
($ in thousands)
Industrials and Other $ 165,359 22.8 %
Financial 189,181 26.1 %
Consumer Discretionary 111,671 15.4 %
Health Care 85,091 11.7 %
Consumer Staples 57,283 7.9 %
Utilities 117,287 16.1 %
Total $ 725,872 100.0 %
45
-------------------------------------------------------------------------------- Table of Contents Corporate fixed maturity securities (available-for-sale) include publicly traded securities and privately placed bonds as shown below as ofSeptember 30, 2021 : Public/Private Fair Value % of Total ($ in thousands) Publicly traded$ 654,464 90.2 % Privately placed 71,408 9.8 % Total$ 725,872 100.0 %
The amortized cost and fair value of our available-for-sale investments in fixed
maturity securities summarized by contractual maturity are as follows:
September 30, 2021
Amortized Fair % of
Cost Value Total Value
($ in thousands)
Due in:
One year or less $ 103,777 $ 104,859 6.1 %
After one year through five years 458,454 477,708 27.7 %
After five years through ten years 303,453 310,034 18.0 %
After ten years 242,072 254,893 14.8 %
Residential mortgage-backed 258,302 261,075 15.2 %
Commercial mortgage and asset-backed 307,223 313,158 18.2 %
Total $ 1,673,281 $ 1,721,727 100.0 %
At September 30, 2021 , the Company had no investments in securitizations of
alternative-A mortgages or sub-prime mortgages.
Interest Expense
Interest expense was $2.2 million and $2.1 million for the three months ended
September 30, 2021 and 2020, respectively ($6.7 million and $8.0 million for the
respective nine month periods). See "-Liquidity and Capital Resources-Sources
and Uses of Funds" for more information regarding our senior bank debt
facilities and trust preferred securities.
Amortization of Intangibles
The Company recorded $90,000 and $149,000 of amortization of intangible assets
for the three months ended September 30, 2021 and 2020, respectively ($272,000
and $447,000 for the respective nine month periods).
Income Tax Expense
Our effective tax rate fluctuates from period to period based on the relative
mix of income reported by country and the respective tax rates imposed by each
tax jurisdiction. For U.S. -sourced income, the Company's U.S. federal income tax
expense differs from the amounts computed by applying the federal statutory
income tax rate to income before taxes due primarily to interest income on
tax-advantaged state and municipal securities, dividends received income, and
excess tax benefits on share based compensation. The Company had a pre-tax loss
of $129.6 million for the nine months ended September 30, 2021 and recorded a
U.S. federal income tax benefit of $23.1 million . The pre-tax loss was largely
driven by the $210.8 million of net adverse reserve development on prior
accident years, including $190.7 million of net adverse development from the
Excess and Surplus Lines segment that was primarily related to a former
commercial auto account. For the nine months ended September 30, 2021 , our U.S.
federal income tax benefit was 17.8% of the loss before taxes. The Company had
pre-tax income of $29.3 million for the nine months ended September 30, 2020 and
recorded U.S. federal income taxes of $4.2 million . For the nine months ended
September 30, 2020 , our U.S. federal income tax was 14.4% of the income before
taxes. The change in effective tax rate for the two periods reflects changes in
reserve estimates in the commercial auto business, and the related impact on the
mix of income reported by country in those respective periods.
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LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Funds
Offering of Common Shares
On May 10, 2021 , the Company closed the offering and public sale (the
"Offering") of an aggregate of 6,497,500 of the Company's common shares at a
public offering price of $31.00 per share. The Company received net proceeds
(before expenses) from the Offering of $192.1 million , which were used for
general corporate purposes. The common shares were offered and sold pursuant to
an underwriting agreement entered into by the Company, Barclays Capital, Inc. ,
and Keefe, Bruyette & Woods, Inc. , as representatives of the several
underwriters named therein.
Dividends
We are organized as a Bermuda holding company with our operations conducted by
our wholly-owned subsidiaries. Accordingly, our holding company may receive cash
through loans from banks, issuance of common shares, borrowings on our credit
facilities, corporate service fees or dividends received from our subsidiaries,
and/or other transactions. Our U.S. holding company may receive cash in a
similar manner and also through payments from our subsidiaries pursuant to our
U.S. consolidated tax allocation agreement.
The payment of dividends by our subsidiaries to us is limited by statute. In
general, the laws and regulations applicable to our domestic insurance
subsidiaries limit the aggregate amount of dividends or other distributions that
they may declare or pay within any 12-month period without advance regulatory
approval. Generally, the limitations are based on the greater of statutory net
income for the preceding year or 10.0% of statutory surplus at the end of the
preceding year. James River Insurance Company paid a $17.0 million dividend to
the U.S. holding company in the three months ended March 31, 2021 , reducing the
maximum amount of dividends available to the U.S. holding company from our U.S.
insurance subsidiaries during the remainder of 2021 without regulatory approval
to $11.6 million . However, insurance regulators have broad powers to prevent the
reduction of statutory surplus to inadequate levels and could refuse to permit
the payment of dividends calculated under any applicable formula.
The Bermuda Insurance Act of 1978 prohibits an insurer from declaring or paying
a dividend if it is in breach of its minimum solvency margin, its enhanced
capital requirement, or its minimum liquidity ratio, or if the declaration or
payment of such dividend would cause such a breach. An insurer can declare or
pay dividends without prior regulatory approval up to 25% of the total statutory
capital and surplus. The maximum combined amount of dividends and return of
capital available to us from our Bermuda insurers in 2021 is calculated to be
approximately $153.8 million . However, any dividend payment is contingent upon
continued compliance with Bermuda regulatory requirements, including but not
limited to the enhanced solvency requirement calculations.
At September 30, 2021 , the Bermuda holding company had $2.7 million of cash and
cash equivalents. The U.S. holding company had $18.1 million of cash and
invested assets, comprised of cash and cash equivalents of $6.7 million and
other invested assets of $11.4 million , which are not subject to regulatory
restrictions. Additionally, our U.K. intermediate holding company had no
invested assets and cash of less than ten thousand dollars at September 30,
2021 .
Credit Agreements
The Company has a $315.0 million senior revolving credit facility (as amended or
amended and restated, the "2013 Facility"). The 2013 Facility is comprised of
the following at September 30, 2021 :
•A $102.5 million secured revolving facility used by JRG Re to issue letters of
credit for the benefit of third-party reinsureds. This portion of our credit
facility is secured by our investment securities. At September 30, 2021 , the
Company had $45.9 million of letters of credit issued under the secured
facility.
•A $212.5 million unsecured revolving facility to meet the working capital needs
of the Company. All unpaid principal on the revolver is due at maturity.
Interest accrues quarterly and is payable in arrears at 3-month LIBOR plus a
margin which is currently 1.625% and is subject to change according to terms in
the credit agreement. At September 30, 2021 , the Company had a drawn balance of
$185.8 million outstanding on the unsecured revolver.
The 2013 Facility has been amended from time to time since its inception in
2013. On November 8, 2019 , the Company entered into a Second Amended and
Restated Credit Agreement for the 2013 Facility which, among other things,
extended the maturity date of the 2013 Facility until November 8, 2024 ,
increased the amount available under the unsecured revolving credit facility to
$212.5 million , lowered the applicable interest rate and letter of credit fees,
and modified certain negative covenants to be less restrictive.
The 2013 Facility contains certain financial and other covenants (including
minimum net worth, maximum ratio of total adjusted debt outstanding to total
capitalization, and financial strength ratings) with which the Company was in
compliance at September 30, 2021 .
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On August 2, 2017 , the Company, and its wholly-owned subsidiary, JRG Re,
together as borrowers, entered into a credit agreement (the "2017 Facility")
that provides the Company with a revolving line of credit of up to $100.0
million , which may be used for loans and letters of credit made or issued, at
the borrowers' option, on a secured or unsecured basis. Obligations under the
2017 Facility carry a variable rate of interest subject to terms in the credit
agreement and will mature 30 days after notice of termination from the lender.
The 2017 Facility contains certain financial and other covenants with which we
are in compliance at September 30, 2021 . The loans and letters of credit made or
issued under the revolving line of credit of the 2017 Facility may be used to
finance the borrowers' general corporate purposes. On November 8, 2019 , the
Company entered into a First Amendment to Credit Agreement which, among other
things, lowered the applicable interest rate and modified certain negative
covenants to be less restrictive. Interest accrues quarterly and is payable in
arrears at variable rates which are subject to change according to terms in the
credit agreement. At September 30, 2021 , unsecured loans of $61.5 million and
secured letters of credit totaling $14.0 million were outstanding on the 2017
Facility.
On May 26, 2004 , we issued $15.0 million of senior debt due April 29, 2034 . The
senior debt is not redeemable by the holder or subject to sinking fund
requirements. Interest accrues quarterly and is payable in arrears at a floating
rate per annum equal to the 3-month LIBOR plus 3.85%. This senior debt is
redeemable at par prior to its stated maturity at our option in whole or in
part. The terms of the senior debt contain certain covenants, with which we are
in compliance at September 30, 2021 , and which, among other things, restrict our
ability to assume senior indebtedness secured by our U.S. holding company's
common stock or its subsidiaries' capital stock or to issue shares of its
subsidiaries' capital stock.
From May 2004 through January 2008 , we sold trust preferred securities through
five Delaware statutory trusts sponsored and wholly-owned by the Company or its
subsidiaries. Each trust used the net proceeds from the sale of its trust
preferred securities to purchase our floating-rate junior subordinated debt.
The following table summarizes the nature and terms of the junior subordinated
debt and trust preferred securities outstanding at September 30, 2021 (including
the Company's repurchases of a portion of these trust preferred securities):
Franklin
Holdings II
James River James River James River James River (Bermuda)
Capital Trust Capital Trust Capital Trust Capital Trust Capital Trust
I II III IV I
($ in thousands)
Issue date May 26, June 15, January 10,
2004 December 15, 2004 2006 December 11, 2007 2008
Principal amount of trust preferred
securities $7,000 $15,000 $20,000 $54,000 $30,000
Principal amount of junior
subordinated debt $7,217 $15,464 $20,619 $55,670 $30,928
Carrying amount of junior
subordinated debt net of repurchases $7,217 $15,464 $20,619 $44,827 $15,928
Maturity date of junior subordinated May 24, December 15, June 15, December 15, March 15,
debt, unless accelerated earlier 2034 2034 2036 2037 2038
Trust common stock $217 $464 $619 $1,670 $928
Interest rate, per annum Three-Month LIBOR plus Three-Month LIBOR plus Three-Month LIBOR plus Three-Month LIBOR plus Three-Month LIBOR plus
4.0% 3.4% 3.0% 3.1% 4.0%
All of the junior subordinated debt is currently redeemable at 100.0% of the
unpaid principal amount at our option.
The junior subordinated debt contains certain covenants with which we are in
compliance as of September 30, 2021 .
At September 30, 2021 and December 31, 2020 , the Company's leverage ratio was
28.5% and 30.4%, respectively. The leverage ratio is defined in our senior
credit agreements as the ratio of adjusted consolidated debt to total capital.
Adjusted consolidated debt treats trust preferred securities as equity capital
up to 15% of total capital. Total capital is defined as total debt plus tangible
equity excluding accumulated other comprehensive income. The maximum leverage
ratio permitted by the agreements is 35.0%. Having debt as part of our capital
structure allows us to generate a higher return on equity and greater book value
per share results than we could by using equity capital alone.
48
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Table of Contents
Ceded Reinsurance
Our insurance segments enter into reinsurance contracts to limit our exposure to
potential losses arising from large risks, to protect against the aggregation of
several risks in a common loss occurrence, and to provide additional capacity
for growth. Our reinsurance is contracted under excess of loss and quota share
reinsurance contracts. In excess of loss reinsurance, the reinsurer agrees to
assume all or a portion of the ceding company's losses in excess of a specified
amount. The premiums payable to the reinsurer are negotiated by the parties
based on their assessment of the amount of risk being ceded to the reinsurer
because the reinsurer does not share proportionately in the ceding company's
losses. In quota share reinsurance, the reinsurer agrees to assume a specified
percentage of the ceding company's losses arising out of a defined class of
business in exchange for a corresponding percentage of premiums. For the three
months ended September 30, 2021 and 2020, our net premium retention was 45.6%
and 46.5%, respectively (47.9% and 49.7% for the nine month periods,
respectively.
The following is a summary of our Excess and Surplus Lines segment's net
retention after reinsurance as of September 30, 2021 :
Company Retention
Casualty
Primary Specialty Casualty, including Up to$1.0 million per occurrence, subject to a$1.0 Professional Liability million aggregate deductible. (1) Primary Casualty Up to$2.0 million per occurrence. (2) Excess Casualty Up to$1.0 million per occurrence. (3) Property Up to$5.0 million per event. (4) (1)Except for Life Sciences quota share carve out, which is up to$2.0 million per occurrence (2)Total exposure to any one claim is generally$1.0 million . (3)For policies with an occurrence limit up to$10.0 million , the excess casualty treaty is set such that our retention is no more than$1.0 million . (4)The property catastrophe reinsurance treaty has a limit of$40.0 million with one reinstatement. We use catastrophe modeling software to analyze the risk of severe losses from hurricanes and earthquakes on our exposure. We utilize the model in our risk selection, pricing, and to manage our overall portfolio probable maximum loss ("PML") accumulations. A PML is an estimate of the amount we would expect to pay in any one catastrophe event within a given annual probability of occurrence (i.e. a return period or loss exceedance probability). In our Excess and Surplus Lines segment, we write a small book of excess property insurance, but we do not write primary property insurance. The Excess and Surplus Lines segment has a surplus share reinsurance treaty in effect that was specifically designed to cover property risks. The surplus share treaty along with facultative reinsurance helps ensure that our net retained limit per risk will be$5.0 million or less. Based upon the modeling of our Excess and Surplus Lines and Specialty Admitted segments, it would take an event beyond our 1 in 1000 year PML to exhaust our$45.0 million of property catastrophe reinsurance. In the event of a catastrophe loss exhausting our$45.0 million of property catastrophe reinsurance, we estimate our pre-tax cost at approximately$7.5 million , including reinstatement premiums and net retentions. In addition to this retention, we would retain any losses in excess of our reinsurance coverage limits. OnSeptember 27, 2021 , James River entered into a loss portfolio transfer transaction (the "LPT Transaction") with Aleka to reinsure substantially all of the Excess and Surplus Lines segment's legacy portfolio of commercial auto policies previously issued to Rasier for which James River is not otherwise indemnified by Rasier. Under the terms of the LPT Transaction, effective as ofJuly 1, 2021 , James River ceded to Aleka approximately$345.1 million of commercial auto liabilities relating to Rasier policies written in the years 2013-2019, which amount constituted the reinsurance premium. Aleka is required to post collateral equal to 102% of James River's estimate of Aleka's obligations under the reinsurance agreement, calculated in accordance with statutory accounting principles. The collateral is provided through a collateral trust arrangement (the "LPT Trust ") established in favor of James River by Aleka. The balance in theLPT Trust atSeptember 30, 2021 is$309.6 million securing total reinsurance recoverables of$305.8 million (including$292.1 million of unpaid recoverables and$13.7 million of paid recoverables) associated with the LPT Transaction. 49 -------------------------------------------------------------------------------- Table of Contents The following is a summary of ourSpecialty Admitted Insurance segment's ceded reinsurance in place as ofSeptember 30, 2021 : Line of Business Coverage Casualty Workers' Compensation Quota share coverage for 70-85% of the first$1.0 million.(1)(2) Excess of loss coverage for$29.0 million in excess of$1.0 million.(1)(2) Auto Programs Quota share coverage for 70-90% of limits up to$1.5 million liability and$5.0 million physical damage per occurrence. General Liability & Professional Quota share coverage for 70% - 100% of limits up to$3.0 Liability - Programs million per occurrence.
Umbrella and Excess Casualty - Quota share coverage for 95%-100% of limits up to
Programs
million per occurrence, and excess
of loss coverage for
million in excess of $10.0 million .
Property
Property within Package - Quota share coverage for 100% of limits up to$40.0 million Programs per occurrence. Excess Property Quota share coverage for 100% of limits up to$16.9 million . Catastrophe Coverage Excess of Loss coverage for$44.0
million in excess of
million per occurrence.
Aviation Programs Quota share coverage for 80% of
limits up to
liability and $2.5 million hull per
occurrence, each aircraft;
and excess of loss coverage for up
to
thousand of our 20% share of the
quota share each occurrence.
(1) Excluding one program which has quota share coverage for 84.5% of the first$1.0 million per occurrence and excess of loss coverage for$49.0 million in excess of$1.0 million per occurrence. (2) Includes any residual market pools. OurSpecialty Admitted Insurance segment purchases reinsurance for at least 50% of the exposed limits on specialty admitted property-casualty business. The segment enters into reinsurance contracts for the individual risk workers' compensation business as well as fronting and program business. While the segment focuses on casualty business, incidental property risk is incurred in the fronting and program business. The segment is covered for$44.0 million in excess of$1.0 million per occurrence to manage its property exposure to an approximate 1 in 1,000 year PML. In our Casualty Reinsurance segment, we also have limited property catastrophe exposure, primarily through auto physical damage coverage. In the aggregate, we believe our pre-tax group-wide PML from a 1 in 1,000 year property catastrophe event would not exceed$16.0 million , inclusive of reinstatement premiums payable. We also have a clash and contingency reinsurance treaty to cover both the Excess andSurplus Lines and Specialty Admitted Insurance segments in the event of a claims incident involving more than one of our insureds. The treaty covers$10.0 million in excess of a$2.0 million retention for loss occurrences within the treaty term. This coverage has two reinstatements in the event we exhaust any of the coverage. As ofSeptember 30, 2021 , our average net retained limit per risk is$2.5 million . EffectiveJanuary 1, 2020 , we purchased an additional$10.0 million in claims made coverage for excess policy limits and extra contractual obligations exposures above the clash and contingency treaty for the period 2014 to present. This treaty has one reinstatement. The Company's insurance segments remain liable to policyholders if its reinsurers are unable to meet their contractual obligations under applicable reinsurance agreements. We establish an allowance for credit losses for our current estimate of uncollectible reinsurance recoverables. AtSeptember 30, 2021 , the allowance for credit losses on reinsurance recoverables was$515,000 . To minimize exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk. The Company generally seeks to purchase reinsurance from reinsurers withA.M. Best financial strength ratings of "A-" (Excellent) or better. The Company's reinsurance contracts generally require reinsurers that are not authorized as reinsurers underU.S. state insurance regulations or that experience rating downgrades from rating agencies below specified levels to fund their share of the Company's ceded outstanding losses and loss adjustment expense reserves, typically through the use of irrevocable and unconditional letters of credit. In fronting arrangements, which the Company conducts through itsSpecialty Admitted Insurance segment, we are subject to credit risk with regard to insurance companies who act as reinsurers for us in such arrangements. We customarily require a collateral trust arrangement to secure the obligations of the insurance entity for whom we are fronting. AtSeptember 30, 2021 , we had reinsurance recoverables on unpaid losses of$1,348.9 million and reinsurance recoverables on paid losses of$82.1 million , and all material recoverable amounts were from companies withA.M. Best ratings of "A-" or 50 -------------------------------------------------------------------------------- Table of Contents better, collateral had been posted by the reinsurer for our benefit, or represent recoverables from a state residual market for automobile insurance. Amounts Recoverable from anIndemnifying Party James River previously issued a set of insurance contracts to Rasier under which James River pays losses and loss adjustment expenses on the contracts. James River has indemnity agreements with Rasier (non-insurance entities) and is contractually entitled to reimbursement for a significant portion of the losses and loss adjustment expenses paid on behalf of Rasier and other expenses incurred by James River. Rasier is required to collateralize amounts currently due to James River and to provide additional collateral sufficient to cover the amounts that may be recoverable under the indemnity agreements, including, among other things, case loss and loss adjustment expense reserves, IBNR loss and loss adjustment expense reserves, extra contractual obligations and excess policy limits liabilities. The collateral is provided through a collateral trust arrangement (the "Indemnity Trust ") in favor of James River by Aleka. In conjunction with the LPT Transaction described above, James River returned$691.3 million to theIndemnity Trust , representing the remaining balance of the amount withdrawn inOctober 2019 , as permitted under the indemnification agreements with Rasier and the associated trust agreement. As part of the LPT Transaction, James River and Aleka entered into an administrative services agreement with a third party claims administrator pursuant to which the administrator will handle the claims on the Rasier commercial auto policies for the remaining life of those claims following a transition period. The claims paid by the claims manager are reimbursable by James River, and pursuant to the terms of the administrative services agreement James River established a loss fund trust account for the benefit of the claims manager (the "Loss Fund Trust ") to collateralize its claims payment reimbursement obligations. James River will fund theLoss Fund Trust using funds withdrawn from theIndemnity Trust , funds withdrawn from theLPT Trust , and its own funds, in each case in an amount equal to the pro rata portion of the requiredLoss Fund Trust balance attributable to the Rasier indemnity agreements, the LPT Transaction and James River's existing third party reinsurance agreements, respectively. AtSeptember 30, 2021 , in accordance with the administrative services agreement, the Company posted$10.0 million as collateral for the claims paid by the administrator, including$6.8 million of which represents collateral supporting Rasier's obligations under the indemnity agreements and$2.8 million of which represents collateral supporting Aleka's obligations under the under the LPT Transaction. The$10.0 million collateral is classified as restricted cash equivalents on the Company's balance sheet atSeptember 30, 2021 . Cash Flows Our sources of funds consist primarily of premiums written, investment income, reinsurance recoveries, proceeds from sales and redemptions of investments, borrowings on our credit facilities, and the issuance of common shares. We use operating cash flows primarily to pay operating expenses, losses and loss adjustment expenses, reinsurance premiums, and income taxes. The following table summarizes our cash flows:
Nine Months Ended
2021 2020
($ in thousands)
Cash, cash equivalents, and restricted cash equivalents (used in)
provided by:
Operating activities $ (1,061,314) $ (222,060)
Investing activities 111,759 (135,331)
Financing activities 157,926 31,505
Change in cash, cash equivalents, and restricted cash equivalents $
(791,629)
Cash used in operating activities for the nine months endedSeptember 30, 2021 and 2020, respectively, primarily reflects$849.9 million and$258.9 million of restricted cash equivalents returned to a former insured per the terms of a collateral trust (see Amounts Recoverable from anIndemnifying Party above). Excluding the reduction in the collateral funds, cash (used in) provided by operating activities was$(211.4) million and$36.9 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Cash used in operating activities excluding restricted cash equivalents for the nine months endedSeptember 30, 2021 primarily reflects the outflow of funds to effect the LPT Transaction in the third quarter. Cash provided by operating activities excluding restricted cash equivalents for the nine months endedSeptember 30, 2020 reflects growth in ourU.S. segments and the collection of premiums receivable at a quicker rate than payments of loss and loss adjustment expenses. Cash provided by investing activities for the nine months endedSeptember 30, 2021 reflects the investments sold/funds withdrawn from our investment portfolio to effect the LPT Transaction in the third quarter. Cash used in investing activities for the nine months endedSeptember 30, 2020 reflects our efforts to enhance the yield in our investment portfolio by investing 51 -------------------------------------------------------------------------------- Table of Contents available cash and cash equivalents into higher yielding investments. Cash and cash equivalents (excluding restricted cash equivalents) comprised 9.7% and 6.1% of total cash and invested assets atSeptember 30, 2021 and 2020, respectively. Cash provided by financing activities for the nine months endedSeptember 30, 2021 and 2020 included$32.0 million and$27.8 million of dividends paid to shareholders, respectively. OnMay 10, 2021 , the Company closed on a public offering of its common shares. The Company received net proceeds (before expenses) of$192.1 million . The proceeds were used for general corporate purposes. In the nine months endedSeptember 30, 2020 , we drew a net$59.0 million on our senior credit facilities as a precautionary measure to increase our cash position and preserve financial flexibility in light of uncertainty in the global markets resulting from the coronavirus (COVID-19) outbreak. Ratings TheA.M. Best financial strength rating for our group's regulated insurance and reinsurance subsidiaries is "A-" (Excellent) with a stable outlook. This rating reflectsA.M. Best's opinion of our insurance and reinsurance subsidiaries' financial strength, operating performance and ability to meet obligations to policyholders and is not an evaluation directed towards the protection of investors. The rating for our operating insurance and reinsurance companies of "A-" (Excellent) is the fourth highest rating of the thirteen ratings issued byA.M. Best and is assigned to insurers that have, inA.M. Best's opinion, an excellent ability to meet their ongoing obligations to policyholders. OnMarch 4, 2021 ,A.M. Best announced that it reduced the outlook on our regulated insurance subsidiaries to negative from stable on the "A" (Excellent) financial strength rating on such entities following our announcement of$86.0 million of adverse development on reserves for losses and loss adjustment expenses in the fourth quarter of 2020 principally related to our commercial auto business in our Excess and Surplus Lines segment. OnMay 7, 2021 , following the Company's announcement of$168.7 million of further adverse development in the first quarter of 2021 on reserves for losses and loss adjustment expenses in our Excess and Surplus Lines segment, inclusive of$170.0 million of unfavorable development in our commercial auto business,A.M. Best announced a downgrade of our financial strength rating to "A-" (Excellent) and maintained a negative outlook on our regulated insurance subsidiaries. The Company's outlook was upgraded to stable byA.M. Best in the third quarter following the completion of the LPT Transaction which reinsures substantially all of the legacy commercial auto business. The financial strength ratings assigned byA.M. Best have an impact on the ability of our regulated subsidiaries to attract and retain agents and brokers and on the risk profiles of the submissions for insurance that our subsidiaries receive. The "A-" (Excellent) ratings assigned to our insurance and reinsurance subsidiaries are consistent with our business plans and we believe allow our subsidiaries to actively pursue relationships with the agents and brokers identified in their marketing plans. EQUITY OnMay 10, 2021 , the Company closed the offering and public sale (the "Offering") of an aggregate of 6,497,500 of the Company's common shares at a public offering price of$31.00 per share. The Company received net proceeds (before expenses) from the Offering of$192.1 million , which were used for general corporate purposes. The common shares were offered and sold pursuant to an underwriting agreement entered into by the Company,Barclays Capital, Inc. , andKeefe, Bruyette & Woods, Inc. , as representatives of the several underwriters named therein. The Company also issued 140,483 common shares in the nine months endedSeptember 30, 2021 related to outstanding equity incentive plan awards. Of the new shares issued, 27,979 were related to employee stock option exercises and 112,504 were related to vesting of restricted share units ("RSUs"). As a result of the Offering and the issuances related to equity incentive plan awards, the total common shares outstanding increased from 30,649,261 atDecember 31, 2020 to 37,287,244 atSeptember 30, 2021 . Share Based Compensation Expense For the three months endedSeptember 30, 2021 and 2020, the Company recognized$1.5 million and$2.1 million , respectively, of share based compensation expense ($5.2 million and$5.9 million in the respective nine month periods). As ofSeptember 30, 2021 , the Company had$10.3 million of unrecognized share based compensation expense expected to be charged to earnings over a weighted-average period of 1.9 years. 52 -------------------------------------------------------------------------------- Table of Contents Equity Incentive Plans Options The following table summarizes option activity: Nine Months Ended September 30, 2021 2020 Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price Outstanding: Beginning of period 463,324$ 32.25 643,851$ 30.41 Granted - $ - - $ - Exercised (41,392)$ 24.87 (79,615)$ 31.77 Forfeited (29,418)$ 38.81 - $ - End of period 392,514$ 32.53 564,236$ 30.22 Exercisable, end of period 392,514$ 32.53 564,236$ 30.22 All of the outstanding options are fully vested (vesting period of three years from date of grant) and have a contractual life of seven years from the original date of grant. RSUs The following table summarizes RSU activity:
Nine Months Ended
2021 2020
Weighted- Weighted-
Average Average
Grant Date Grant Date
Shares Fair Value Shares Fair Value
Unvested, beginning of period 399,856 $ 43.59 340,368 $ 41.50
Granted 139,682 $ 50.22 197,518 $ 43.77
Vested (165,131) $ 41.86 (156,434) $ 41.50
Forfeited (56,575) $ 45.91 (16,846) $ 42.17
Unvested, end of period 317,832 $ 47.00 364,606 $ 42.70
Outstanding RSUs granted to employees vest ratably over a three year vesting
period. RSUs granted to non-employee directors have a one year vesting period.
53 -------------------------------------------------------------------------------- Table of Contents RECONCILIATION OF NON-GAAP MEASURES Reconciliation of Underwriting Profit We believe that the disclosure of underwriting profit by individual segment and of the Company as a whole is useful to investors, analysts, rating agencies and other users of our financial information in evaluating our performance because our objective is to consistently earn underwriting profits. We evaluate the performance of our segments and allocate resources based primarily on underwriting profit. Our definition of underwriting profit may not be comparable to that of other companies. The following table reconciles the underwriting (loss) profit by individual segment and for the entire Company to consolidated (loss) income beforeU.S. Federal income taxes: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in thousands) Underwriting (loss) profit of the insurance segments: Excess and Surplus Lines$ (21,527) $ 15,581 $ (145,556) $ 39,788 Specialty Admitted Insurance 3,084 1,859 6,488 2,301 Casualty Reinsurance (11,911) (689) (16,857) (3,119) Total underwriting (loss) profit of insurance segments (30,354) 16,751 (155,925) 38,970 Other operating expenses of the Corporate and Other segment (7,287) (7,805) (23,258) (23,556) Underwriting (loss) profit (1) (37,641) 8,946 (179,183) 15,414 Net investment income 15,289 14,959 44,726 51,145 Net realized and unrealized gains (losses) on investments 3,983 8,929 13,738 (27,885) Amortization of intangible assets (90) (149) (272) (447) Other income and expenses (615) 192 (1,964) (967) Interest expense (2,227) (2,129) (6,692) (7,970) (Loss) income before income taxes$ (21,301) $
30,748
(1)Included in underwriting results for the three and nine months endedSeptember 30, 2021 is gross fee income of$5.6 million and$16.2 million , respectively ($4.6 million and$15.8 million for the same periods in the prior year). Reconciliation of Adjusted Net Operating (Loss) Income We define adjusted net operating (loss) income as net (loss) income excluding net realized and unrealized gains (losses) on investments, and certain non-operating expenses such as professional service fees related to various strategic initiatives and the filing of registration statements for the offering of securities, and severance costs associated with terminated employees. We use adjusted net operating (loss) income as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Adjusted net operating (loss) income should not be viewed as a substitute for net (loss) income calculated in accordance with GAAP, and our definition of adjusted net operating (loss) income may not be comparable to that of other companies. Our (loss) income before taxes and net (loss) income reconcile to our adjusted net operating (loss) income as follows: Three Months Ended September 30, 2021 2020 Loss Income Before Net Before Net Taxes Loss Taxes Income ($ in thousands) (Loss) income as reported$ (21,301) $ (23,889) $ 30,748 $ 26,283 Net realized and unrealized investment gains (3,983) (3,422) (8,929) (8,824) Other expenses 625 497 (21) (77) Adjusted net operating (loss) income$ (24,659) $ (26,814)
54
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Table of Contents
Nine Months Ended September 30,
2021 2020
Loss Income
Before Net Before Net
Taxes Loss Taxes Income
($ in thousands)
(Loss) income as reported $ (129,647) $ (106,506) $ 29,290 $ 25,082
Net realized and unrealized investment (gains)
losses (13,738) (11,914) 27,885 23,646
Other expenses 1,963 1,640 1,711 1,451
Adjusted net operating (loss) income $ (141,422) $
(116,780)
Tangible Equity (per Share) and Pre Dividend Tangible Equity (per Share) Key financial measures that we use to assess our longer term financial performance include the percentage growth in our tangible equity per share and our return on tangible equity. We believe tangible equity is a good measure to evaluate the strength of our balance sheet and to compare returns relative to this measure. For the nine months endedSeptember 30, 2021 , our tangible equity per share decreased by 15.2%. Absent the$31.8 million in dividends to shareholders in the nine months endedSeptember 30, 2021 , our tangible equity per share decreased by 10.4% for the nine months endedSeptember 30, 2021 . We define tangible equity as the sum of shareholders' equity less goodwill and intangible assets (net of amortization). Our definition of tangible equity may not be comparable to that of other companies, and it should not be viewed as a substitute for shareholders' equity calculated in accordance with GAAP. The following table reconciles shareholders' equity to tangible equity as ofSeptember 30, 2021 andDecember 31, 2020 and reconciles tangible equity to pre-dividend tangible equity as ofSeptember 30, 2021 : September 30, 2021 December 31, 2020 Equity per Equity per Equity Share Equity Share ($ in thousands, except share amounts) Shareholders' equity$ 813,639
Less:
181,831 4.88 181,831 5.93 Intangible assets, net 36,130 0.96 36,402 1.19 Tangible equity$ 595,678
Dividends to shareholders for the nine months ended
31,833
0.90
Pre-dividend tangible equity$ 627,511 $ 16.88 55
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Table of Contents
Lincoln Financial Group Reports Third Quarter 2021 Results and Announces Increase to Dividend
UNUM GROUP – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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