Newswires
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 I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . The results of operations for the three and nine months endedSeptember 30, 2022 are not necessarily indicative of the results that may be expected for the full year endingDecember 31, 2022 , 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 on Form 10-Q, and in conjunction with our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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 Business
James 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 earning profits from insurance and reinsurance underwriting and generating meaningful risk-adjusted investment returns while managing our capital.
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%-30%. 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) throughJRG Reinsurance Company Ltd. ("JRG Re"). 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 Ltd ("Carolina Re") was formed in 2018 to also provide reinsurance to the Company'sU.S. -based insurance subsidiaries through a quota-share reinsurance agreement, and was also the cedent on an aggregate stop loss reinsurance treaty with JRG Re throughDecember 31, 2021 . JRG Re and Carolina Re are bothBermuda -based reinsurance companies. Carolina Re 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 . •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 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 fromJanuary 1, 2018 throughDecember 31, 2021 , ceded 70% of their premiums and losses to Carolina Re. During the three months endedSeptember 30, 2022 , Carolina Re commuted the majority of the outstanding obligations ceded under the intercompany quota-share reinsurance agreements back to the Company'sU.S. -based insurance subsidiaries with effect fromJanuary 1, 2022 . 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. 33
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All of our insurance and reinsurance subsidiaries have financial strength
ratings of "A-" (Excellent) from
Key Metrics
We discuss certain key metrics, described below, which we believe provide useful
information about our business and the operational factors underlying our
financial performance.
Underwriting profit is a non-GAAP measure commonly used in the property and casualty insurance industry to evaluate underwriting performance. 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. We define underwriting profit as net earned premiums and gross fee income (in specific instances when the Company is not retaining insurance risk) less losses and loss adjustment expenses on business not subject to retroactive reinsurance accounting for loss portfolio transfers (see Loss Portfolio Transfers in Strategic Actions below) and other operating expenses. Other operating expenses include the underwriting, acquisition, and insurance expenses of the operating segments and, for consolidated underwriting profit, the expenses of the Corporate and Other segment. Our definition of underwriting profit may not be comparable to that of other companies. See "Reconciliation of Non-GAAP Measures" for a reconciliation of underwriting profit to income before taxes and for additional information.
Loss ratio, expressed as a percentage, is the ratio of losses and loss
adjustment expenses on business not subject to retroactive reinsurance
accounting for loss portfolio transfers to net earned premiums. Our definition
of loss ratio may not be comparable to that of other companies. See
"Underwriting Performance Ratios" for a reconciliation of underwriting ratios.
Accident year loss ratio, expressed as a percentage, is the ratio of losses and loss adjustment expenses for the current accident year (excluding development on prior accident year reserves) to net earned premiums.
Expense ratio, expressed as a percentage, is the ratio of other operating
expenses net of gross fee income included in other income to net earned
premiums.
Combined ratio is a measure of underwriting performance calculated as the sum of the loss ratio and the expense ratio. A combined ratio of less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. Our definition of combined ratio may not be comparable to that of other companies. See "Underwriting Performance Ratios" for a reconciliation of underwriting ratios. Adjusted net operating income is an internal performance measure used in the management of our operations. 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 income is defined as income available to common shareholders excluding a) the impact of retroactive reinsurance accounting for loss portfolio transfers, b) net realized and unrealized gains (losses) on investments, c) certain non-operating expenses such as professional service fees related to a purported class action lawsuit, various strategic initiatives, and the filing of registration statements for the offering of securities, and d) severance costs associated with terminated employees. Adjusted net operating income is a non-GAAP measure and should not be viewed as a substitute for net income calculated in accordance with GAAP. Our definition of adjusted net operating income may not be comparable to that of other companies. See "Reconciliation of Non-GAAP Measures" for a reconciliation of income available to common shareholders to adjusted net operating income. Tangible equity is defined as shareholders' equity plus mezzanine Series A Preferred Shares (as defined below) and the unrecognized deferred retroactive reinsurance gain on loss portfolio transfers less goodwill and intangible assets, net of amortization. We believe tangible equity is a good measure to evaluate the strength of our balance sheet and to compare returns relative to this measure. 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. Tangible equity is a non-GAAP measure and should not be viewed as a substitute for shareholders' equity calculated in accordance with GAAP. Our definition of tangible equity may not be comparable to that of other companies. See "Reconciliation of Non-GAAP Measures" for a reconciliation of shareholders' equity to tangible equity.
Adjusted net operating return on tangible equity is defined as annualized
adjusted net operating income expressed as a percentage of the average quarterly
tangible equity balances in the respective period.
Tangible equity per share represents tangible equity divided by the sum of total common shares outstanding plus the common shares resulting from an assumed conversion of the outstanding Series A Preferred Shares into common shares (at the current conversion price).
Net retention is defined as the ratio of net written premiums to gross written
premiums.
34 -------------------------------------------------------------------------------- Table of Contents Gross investment return is annualized investment income before any deductions for fees and expenses, expressed as a percentage of the average beginning and ending carrying values of those investments during the period. Unless specified otherwise, all references to our defined metrics above in this Management's Discussion and Analysis of Financial Condition and Results of Operations are for our business that is not subject to retroactive reinsurance accounting for loss portfolio transfers. Management believes that the lack of economic impact of retroactive reinsurance accounting makes the presentation of our key metrics on business not subject to retroactive reinsurance accounting helpful to the users of our financial information. See "Underwriting Performance Ratios" and "Reconciliation of Non-GAAP Measures."
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 and investment valuation and impairment. For a detailed discussion of each of these policies, refer to our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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, 2021 , 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 ongoing coronavirus (COVID-19) pandemic may be having on the Company's financial condition and results of operations.
Impact of Macroeconomic Events Including Higher Levels of Inflation and Rising
Interest Rates
Current macroeconomic events including the war inUkraine and sustained supply chain constraints stemming from the COVID-19 pandemic have led to higher levels of inflation. TheFederal Reserve , attempting to gain control of inflation, has implemented a series of federal funds rate increases in 2022 with more expected in the near future. Interest rates, in response, have risen significantly in 2022 and fears of an impending economic slowdown have increased the likelihood of an economic recession, all of which have negatively impacted financial markets. The more immediate impacts to the Company are on our investment portfolio and investing results. Our investment portfolio is primarily comprised of fixed maturity investments (75.3% of total invested assets atSeptember 30, 2022 ). The fair values of fixed maturities generally move inversely with interest rates, and unrealized losses associated with the declines in fair values are recognized as a component of other comprehensive income, contributing to declines in shareholders' equity and tangible equity. For the nine months endedSeptember 30, 2022 , other comprehensive loss, representing the after-tax impact of the unrealized losses on fixed maturity investments, was$205.2 million . We are monitoring our portfolio for signs of credit-related impairments, and to date, we have concluded that the declines are primarily market-driven with no allowance for credit losses considered necessary. As turnover has occurred in our portfolio and we invest cash generated from operations, we are benefiting from the higher yields now available on fixed maturities which is reflected in our investment income. Our investment portfolio also contains investments in equity securities and bank loan participations (comprising 5.4% and 7.4% of total invested assets atSeptember 30, 2022 , respectively) that are carried on our Balance Sheets at fair value. The fair values of these investments, the changes in which are recognized as unrealized gains and losses in our Statements of (Loss) Income and Comprehensive Loss, have been negatively impacted by the ongoing macroeconomic events and associated declines in financial markets. Net realized and unrealized (losses) gains on investments for the nine months endedSeptember 30, 2022 include unrealized losses of$16.0 million and$13.8 million , respectively, for the changes in fair values of equity securities and bank loan participations. The rising interest rates have also increased interest expense on our outstanding variable rate senior and trust preferred debt. The applicable rates on our debt reset quarterly or semi-annually and are structured as LIBOR plus a margin or spread.
Strategic Actions
Issuance of Series A Preferred Shares
The Company closed on the issuance and sale of 150,000 7% Series A Perpetual Cumulative Convertible Preferred Shares, par value$0.00125 per share (the "Series A Preferred Shares") onMarch 1, 2022 for an aggregate purchase price of$150.0 million , or$1,000 per share, in a private placement. The Series A Preferred Shares are convertible into the Company's common shares at the option of the holder at any time, or at the Company's option under certain circumstances. Dividends on the Series A preferred shares accrue quarterly at the initial rate of 7% of the$1,000 liquidation preference per share (the "Liquidation Preference") per annum, which may be paid in cash, in-kind in common shares or in Series A Preferred Shares, at the 35 -------------------------------------------------------------------------------- Table of Contents Company's election. Dividends declared and paid on the Series A Preferred Shares in the nine months endedSeptember 30, 2022 (which represent the dividends fromMarch 1, 2022 , the date of issuance of the Series A Preferred Shares, throughSeptember 30, 2022 ) were$6.1 million . Please see "Part I-Item 1-Note 12. Series A Preferred Shares" in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q.
Loss Portfolio Transfers
Loss portfolio transfers are a form of reinsurance utilized by the Company to transfer losses and loss adjustment expenses and associated risk of adverse development on covered subject business, as defined in the respective agreements, to an assuming reinsurer in exchange for a reinsurance premium. Loss portfolio transfers can bring economic finality on the subject risks when they no longer meet the Company's appetite or are no longer aligned with our risk management guidelines. The Company periodically reevaluates the remaining reserves subject to its loss portfolio transfers, and when recognized adverse prior year development on the subject business causes the cumulative amounts ceded under a loss portfolio transfer to exceed the consideration paid, the loss portfolio transfer moves into a gain position subject to retroactive reinsurance accounting under GAAP. Gains are deferred under retroactive reinsurance accounting and recognized in earnings in proportion to actual paid recoveries under the loss portfolio transfer using the recovery method. While the deferral of gains can introduce volatility in our results in the short-term, over the life of the contract, we would expect no economic impact to the Company as long as any additional losses are within the limit of the loss portfolio transfer and the counterparty performs under the contract. The impact of retroactive reinsurance accounting is not indicative of our current and ongoing operations.
Loss Portfolio Transfer Retrocession Agreement
OnFebruary 23, 2022 , JRG Re entered into a loss portfolio transfer retrocession agreement (the "Retrocession Agreement") withFortitude Reinsurance Company Ltd. ("FRL") under which FRL reinsures the majority of the reserves in the Company's Casualty Reinsurance segment. Under the terms of the transaction, which closed onMarch 31, 2022 (the "Retrocession Closing Date"), JRG Re (a) ceded to FRL all existing and future claims for losses arising under certain casualty reinsurance agreements with underlying insurance companies with treaty inception dates ranging from 2011 to 2020 (the "Subject Business"), in each case net of third-party reinsurance and other recoveries, up to an aggregate limit of$400.0 million ; (b) continues to manage and retain the benefit of other third-party reinsurance on the Subject Business; (c) paid FRL a reinsurance premium of$335.0 million ,$310.0 million of which JRG Re credited to a notional funds withheld account (the "Funds Withheld Account") and$25.0 million of which was paid in cash to FRL; and (d) pays FRL a 2% per annum crediting rate on the Funds Withheld Account balance on a quarterly basis. For the nine months endedSeptember 30, 2022 , Funds Withheld Account crediting fees of$2.6 million are included in interest expense in our Statements of (Loss) Income and Comprehensive Loss. The total premium, initial Funds Withheld Account credit, and aggregate limit was adjusted for claims paid fromOctober 1, 2021 to the Retrocession Closing Date. The Casualty Reinsurance segment incurred losses of$11.5 million (including$6.8 million of net adverse reserve development and$4.7 million of current accident year losses) in the three months endedMarch 31, 2022 associated with the Retrocession Agreement.
Commercial Auto Loss Portfolio Transfer
OnSeptember 27, 2021 ,James River Insurance Company andJames River Casualty Company (together, "James River") entered into a loss portfolio transfer transaction (the "Commercial Auto LPT") 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 structured to be fully collateralized, is 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. For the three and nine months endedSeptember 30, 2022 , due to adverse paid loss trends on the legacy Rasier business, the Company recognized adverse prior year development of$46.7 million on the net reserves subject to the Commercial Auto LPT, resulting in a corresponding additional amount ceded under the Commercial Auto LPT. As a result, the cumulative amounts ceded under the Commercial Auto LPT exceed the consideration paid, moving the Commercial Auto LPT into a gain position. The Company has applied retroactive reinsurance accounting to the Commercial Auto LPT. A retroactive reinsurance benefit of$25.9 million was recorded in losses and loss adjustment expenses on the Condensed Consolidated Statements of (Loss) Income and Comprehensive Loss for the three and nine months endedSeptember 30, 2022 using the recovery method. As ofSeptember 30, 2022 andDecember 31, 2021 , the cumulative amounts ceded under the Commercial Auto LPT were$391.8 million and$345.1 million , respectively. The unrecognized deferred retroactive reinsurance gain of$20.8 million atSeptember 30, 2022 is separately presented on the Company's Condensed Consolidated Balance Sheets. 36 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS
The following table summarizes our results:
Three Months Ended Nine Months Ended
September 30, % September 30, %
2022 2021 Change 2022 2021 Change
($ in thousands)
Gross written premiums $ 358,505 $ 346,599
3.4 %$ 1,118,155 $ 1,100,000 1.7 %
Net retention 53.1 % 45.6 % 50.2 % 47.9 % Net written premiums$ 190,251 $ 158,210 20.3 %$ 560,801 $ 526,413 6.5 % Net earned premiums$ 190,189 $ 170,608 11.5 %$ 566,275 $ 503,906 12.4 % Losses and loss adjustment expenses excluding retroactive reinsurance (132,235) (166,078) (20.4) % (389,212) (549,578) (29.2) % Other operating expenses (46,670) (42,171) 10.7 % (144,067) (133,511) 7.9 % Underwriting profit (loss) (1), (2) 11,284 (37,641) - 32,996 (179,183) - Losses and loss adjustment expenses - retroactive reinsurance (20,773) - - (20,773) - - Net investment income 17,306 15,289 13.2 % 48,278 44,726 7.9 % Net realized and unrealized (losses) gains on investments (7,754) 3,983 - (29,874) 13,738 - Other income and expense 364 (615) - 112 (1,964) - Interest expense (4,950) (2,227) 122.3 % (11,291) (6,692) 68.7 % Amortization of intangible assets (90) (90) - (272) (272) - (Loss) income before taxes (4,613) (21,301) (78.3) % 19,176 (129,647) - Income tax expense (benefit) 8 2,588 (99.7) % 5,928 (23,141) - Net (loss) income$ (4,621) $ (23,889) (80.7) %$ 13,248 $ (106,506) - Dividends on Series A Preferred Shares (2,625) - - (6,125) - - Net (loss) income available to common shareholders$ (7,246) $ (23,889) (69.7) %$ 7,123 $ (106,506) - Adjusted net operating income (loss) (1)$ 15,499 $ (26,814) -$ 49,391 $ (116,780) - Ratios: Loss ratio 69.5 % 97.3 % 68.7 % 109.1 % Expense ratio 24.6 % 24.8 % 25.5 % 26.5 % Combined ratio 94.1 % 122.1 % 94.2 % 135.6 % Accident year loss ratio 70.1 % 71.5 % 68.0 % 67.2 % Accident year loss ratio ex-cat (3) 67.5 % 68.6 % 67.1 % 66.2 %
(1)Underwriting profit (loss) and adjusted net operating income (loss) are
non-GAAP measures. See "Reconciliation of Non-GAAP Measures."
(2)Included in underwriting results for the three and nine months ended
respectively (
periods).
(3)Accident year loss ratio excluding$5.0 million of net catastrophe losses related to Hurricane Ian in the three and nine months endedSeptember 30, 2022 and$5.0 million of net catastrophe losses related to Hurricane Ida in the three and nine months endedSeptember 30, 2021 .
Three Months Ended
The Company produced an underwriting profit of
ratio of 94.1% for the three months ended
underwriting loss of
period in the prior year.
Net earned premiums grew by$19.6 million or 11.5% over the prior year driven by the Excess and Surplus Lines segment. Net earned premiums for the Excess and Surplus Lines segment grew by$19.3 million or 16.1% due to favorable market conditions and growth in the book. Our loss ratio improved from 97.3% in the prior year to 69.5% in the current year. The 37 -------------------------------------------------------------------------------- Table of Contents improvement was primarily driven by net reserve development on prior accident years which was$1.1 million or 0.6 percentage points favorable for the three months endedSeptember 30, 2022 compared to$44.1 million or 25.8 percentage points of net adverse development in the three months endedSeptember 30, 2021 . The net adverse development in the prior year included$29.6 million in the Excess and Surplus Lines segment recognized with the loss portfolio transfer transaction with Aleka that was effectiveJuly 1, 2021 (discussed above) and$15.1 million in the Casualty Reinsurance segment. Underwriting results in both periods include hurricane catastrophe losses in our small Excess Property book within the Excess and Surplus Lines segment. 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. In the three months endedSeptember 30, 2022 , the Company recorded$5.0 million (2.6 points) of net catastrophe losses for Hurricane Ian. In the three months endedSeptember 30, 2021 , the Company recorded$5.0 million (2.9 points) of net catastrophe losses for Hurricane Ida. Underwriting results in the prior year were also negatively impacted by$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. As discussed above, the Company recognized adverse prior year development of$46.7 million on the reserves subject to the Commercial Auto LPT in the three months endedSeptember 30, 2022 , resulting in a corresponding additional amount ceded under the Commercial Auto LPT and requiring retroactive reinsurance accounting. A retroactive reinsurance benefit of$25.9 million was recorded in losses and loss adjustment expenses for the three months endedSeptember 30, 2022 , resulting in a net impact of$20.8 million within our net losses and loss adjustment expenses for the current period. Higher interest rates in the current year helped to boost yields in our fixed income portfolio and increase investment income, but also resulted in higher interest expense on our variable rate senior and trust preferred debt. Interest expense for the three months endedSeptember 30, 2022 also includes$1.2 million of crediting fees on the Funds Withheld Account balance under the Retrocession Agreement. The unfavorable swing in net realized and unrealized gains and losses on investments (see Investing Results below) also had a negative impact on the comparative net results for the two periods as market values of equity securities and bank loan participations have declined in the current year due to the effect of macroeconomic events on financial markets. Net income available to common shareholders for the three months endedSeptember 30, 2022 reflects the$2.6 million of current quarter dividends on the Series A Preferred Shares. Adjusted net operating income (loss) increased from a loss of$26.8 million in the three months endedSeptember 30, 2021 to income of$15.5 million in the three months endedSeptember 30, 2022 . The turnaround was primarily driven by the improved underwriting results in the current year. Tangible equity and tangible equity per share both declined by 9.0% in the current quarter mainly due to the impact of rising interest rates, which led to$60.7 million of unrealized losses on our fixed maturity investments in other comprehensive loss. The unrealized losses are discussed further in Investing Results below. Our 12.4% adjusted net operating return on tangible equity for the three months endedSeptember 30, 2022 compared to a loss of 17.4% for the three months endedSeptember 30, 2021 .
Nine Months Ended
The Company produced an underwriting profit of
ratio of 94.2% for the nine months ended
underwriting loss of
period in the prior year.
Consistent with the discussion of the three months above, attractive market conditions, particularly in our Excess and Surplus Lines segment, have allowed us to grow both written and earned premiums year-to-date. The Excess and Surplus Lines segment is our largest segment, comprising 60.4% of consolidated gross written premiums and 72.1% of consolidated net earned premiums year-to-date. Net earned premiums for the Excess and Surplus Lines segment increased$56.9 million or 16.2% over the prior year. Net earned premiums for ourSpecialty Admitted Insurance and Casualty Reinsurance segments also increased by$627,000 and$4.9 million over the prior year, respectively. The higher net earned premiums helped produce a lower expense ratio in the nine months endedSeptember 30, 2022 as we saw growth in lines with meaningful ceding commissions and general and administrative expenses did not increase proportionately with the increase in earned premiums. Our expense ratio also benefited from 7.3% growth in fee income for ourSpecialty Admitted Insurance segment and lower commissions in our Casualty Reinsurance segment due to the mix of business and commission slides. The loss ratio for the nine months endedSeptember 30, 2022 includes$4.1 million , or 0.7 percentage points, of net adverse reserve development on prior accident years. As outlined in the "Strategic Actions" above, onFebruary 23, 2022 , JRG Re entered into the Retrocession Agreement to reinsure the majority of the Casualty Reinsurance segment's reserves. The Casualty Reinsurance segment incurred losses of$11.5 million associated with the Retrocession Agreement, including$6.8 million of net adverse reserve development on prior accident years and$4.7 million of current accident year losses, and representing 2.0 points of our loss ratio for the nine months endedSeptember 30, 2022 . The$6.8 million of net adverse development in the Casualty Reinsurance segment was partially offset by$2.8 million of net favorable reserve development on prior accident years 38 -------------------------------------------------------------------------------- Table of Contents in theSpecialty Admitted Insurance segment in the nine months endedSeptember 30, 2022 . The loss ratio for the nine months endedSeptember 30, 2021 included$210.8 million (41.8 percentage points) 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 previously canceled commercial auto account (see Segment Results below for further discussion). Current accident year losses in both nine month periods include$5.0 million of net catastrophe losses (Hurricane Ian in the current year and Hurricane Ida in the prior year) as discussed above in the three month comparative section. The higher current accident year loss ratio excluding catastrophe losses (67.1% compared to 66.2% for the nine months endedSeptember 30, 2021 ) largely reflects current actuarial indications and higher loss trends in ourSpecialty Admitted Insurance segment and the$4.7 million of current accident year losses in the Casualty Reinsurance segment associated with the Retrocession Agreement. Underwriting results in the prior year were also negatively impacted by$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 and increased the underwriting loss. Our net income increased over the prior year due to the improved underwriting results and higher net investment income boosted by higher yields in the current year, with partially offsetting items including the$20.8 million of retroactive reinsurance losses and loss adjustment expenses under the Commercial Auto LPT (see Three Months EndedSeptember 30, 2022 and 2021), the unfavorable swing in net realized and unrealized gains and losses on investments (see Investing Results), and higher interest expense. Interest expense for the nine months endedSeptember 30, 2022 includes$2.6 million of crediting fees on the Funds Withheld Account balance under the Retrocession Agreement. Net income available to common shareholders for the nine months endedSeptember 30, 2022 reflects the$6.1 million of current year dividends on the Series A Preferred Shares issuedMarch 1, 2022 . Adjusted net operating income (loss) improved from a$116.8 million loss in the nine months endedSeptember 30, 2021 to income of$49.4 million in the nine months endedSeptember 30, 2022 . Tangible equity decreased by 6.4% year-to-date as net income of$13.2 million and proceeds from the Series A Preferred Share issuance of$144.9 million were offset by$205.2 million of unrealized losses on our fixed maturity investments in other comprehensive loss (see Investing Results below). Tangible equity per share decreased by 18.8% year-to-date reflecting the decrease in tangible equity over a larger share count including an assumed conversion of the Series A Preferred Shares. Our year-to-date adjusted net operating return on tangible equity of 12.7% compares favorably to the prior year loss of 27.9% and reflects the turnaround in underwriting results.
Premiums
Insurance premiums are earned ratably over the terms of our insurance policies,
generally twelve months. Reinsurance premiums assumed are earned over the terms
of the underlying policies or reinsurance contracts. Reinsurance contracts
written on a "losses occurring" basis cover claims that may occur during the
term of the contract or underlying insurance policy, which is typically twelve
months. Reinsurance contracts which are written on a "risks attaching" basis
cover claims which attach to the underlying insurance policies written during
the terms of such contracts. Premiums earned on such contracts usually extend
beyond the original term of the reinsurance contract, typically resulting in
recognition of premiums earned over a 24-month period or more in proportion to
the level of underlying exposure.
39
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The following table summarizes the change in premium volume by component and
business segment:
Three Months Ended Nine Months Ended
September 30, % September 30, %
2022 2021 Change 2022 2021 Change
($ in thousands)
Gross written premiums:
Excess and Surplus Lines $ 204,785 $ 217,673 (5.9) % $ 675,702 $ 613,045 10.2 %
Specialty Admitted Insurance 123,389 121,175 1.8 % 374,066 377,400 (0.9) %
Casualty Reinsurance 30,331 7,751 291.3 % 68,387 109,555 (37.6) %
$ 358,505 $ 346,599 3.4 % $ 1,118,155 $ 1,100,000 1.7 %
Net written premiums:
Excess and Surplus Lines $ 140,984 $ 127,881 10.2 % $ 432,698 $ 371,477 16.5 %
Specialty Admitted Insurance 18,929 22,578 (16.2) % 57,524 66,081 (12.9) %
Casualty Reinsurance 30,338 7,751 291.4 % 70,579 88,855 (20.6) %
$ 190,251 $ 158,210 20.3 % $ 560,801 $ 526,413 6.5 %
Net earned premiums:
Excess and Surplus Lines $ 139,095 $ 119,760 16.1 % $ 408,280 $ 351,413 16.2 %
Specialty Admitted Insurance 17,824 19,704 (9.5) % 55,283 54,656 1.1 %
Casualty Reinsurance 33,270 31,144 6.8 % 102,712 97,837 5.0 %
$ 190,189 $ 170,608 11.5 % $ 566,275 $ 503,906 12.4 %
Gross written premiums for the Excess and Surplus Lines segment (which
represents 60.4% of our consolidated gross written premiums in the nine months
ended September 30, 2022 ) decreased 5.9% and increased 10.2% from the
corresponding three and nine month periods in the prior year. The decline for
the comparable three month periods was driven by discrete actions taken on
renewal business that did not meet our risk appetite. Total policy submissions
for Core E&S lines (excluding commercial auto) declined 4.9% from the prior year
to date, but renewal submissions increased 14.0% and our ratio of bound policies
to quoted policies improved generating 1.7% more bound policies in the nine
months ended September 30, 2022 than in the nine months ended September 30,
2021 . The total number of policies in force for the segment increased 7.3% over
the prior year. Renewal rates for the Excess and Surplus Lines segment were up
10.9% compared to the nine months ended September 30, 2021 . The change in gross
written premiums compared to the same period in 2021 was notable in several
divisions as shown below:
Three Months Ended Nine Months Ended
September 30, % September 30, %
2022 2021 Change 2022 2021 Change
($ in thousands)
Excess Casualty $ 65,377 $ 73,170 (10.7) % $ 220,328 $ 204,704 7.6 %
General Casualty 33,321 31,899 4.5 % 122,835 103,120 19.1 %
Manufacturers & Contractors 38,222 34,539 10.7 % 116,250 102,017 14.0 %
Excess Property 9,376 10,787 (13.1) % 38,924 35,306 10.2 %
Energy 8,094 10,796 (25.0) % 32,267 32,516 (0.8) %
Small Business 8,364 8,116 3.1 % 27,739 24,201 14.6 %
Life Sciences 7,050 10,796 (34.7) % 23,143 24,819 (6.8) %
All other Core E&S divisions 18,816 19,477 (3.4) % 59,010 55,494 6.3 %
Total Core E&S divisions 188,620 199,580 (5.5) % 640,496 582,177 10.0 %
Commercial Auto $ 16,165 $ 18,093 (10.7) % 35,206 30,868 14.1 %
Excess and Surplus Lines gross
written premium $ 204,785 $ 217,673 (5.9) % $ 675,702 $ 613,045 10.2 %
40
-------------------------------------------------------------------------------- Table of Contents The components of gross written premiums for theSpecialty Admitted Insurance segment (which represents 33.5% of our consolidated gross written premiums for the nine months endedSeptember 30, 2022 ) are as follows: Three Months Ended Nine Months Ended September 30, % September 30, % 2022 2021 Change 2022 2021 Change ($ in thousands) Individual risk workers' compensation premium$ 12,344 $ 13,461 (8.3) %$ 39,833 $ 43,897 (9.3) % Fronting and program premium 111,045 107,714 3.1 % 334,233 333,503 0.2 % Specialty Admitted gross written premium$ 123,389 $ 121,175 1.8 %$ 374,066 $ 377,400 (0.9) % Individual risk workers' compensation premium declined for the comparable three and nine month periods reflecting the soft market conditions currently present for workers' compensation. Our fronting written premium increased slightly from the prior year driven by new fronting relationships in the current year and the continued expansion of existing fronting relationships (together representing increases of$13.0 million or 19.2% and$41.8 million or 20.1% for the three and nine months endedSeptember 30, 2022 , respectively), and partially offset by the loss of one relationship from merger and acquisition activity at a general agent and a decline in written premium for our largest fronting relationship. Gross written premium for our largest fronting relationship declined from$30.7 million and$94.9 million for the three and nine months endedSeptember 30, 2021 , respectively, to$30.0 million and$84.8 million for the three and nine months endedSeptember 30, 2022 , respectively, reflecting a very competitive market for workers' compensation inCalifornia . Our largest fronting relationship represented 22.7% of the segment's gross written premium in the nine months endedSeptember 30, 2022 down from 25.2% in the nine months endedSeptember 30, 2021 . Gross written premiums for the Casualty Reinsurance segment (which represents 6.1% of our consolidated gross written premiums in the first nine months of 2022) increased$22.6 million over the corresponding three month period in the prior year primarily driven by premium adjustments and a timing difference with one renewal and extension. For the comparable nine month periods, gross written premiums decreased$41.2 million or 37.6% reflecting our current strategic focus on downsizing the Casualty Reinsurance third party book, which has resulted in the nonrenewal of several treaties in the current year and lower participations on certain renewing treaties. 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
Our net premium retention is summarized by segment as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Excess and Surplus Lines 68.8 % 58.7 % 64.0 % 60.6 %
Specialty Admitted Insurance 15.3 % 18.6 % 15.4 % 17.5 %
Casualty Reinsurance 100.0 % 100.0 % 103.2 % 81.1 %
Total 53.1 % 45.6 % 50.2 % 47.9 %
The net premium retention for the Excess and Surplus Lines segment increased
relative to the three and nine month periods of the prior year. The segment's
Excess Casualty division, which comprises approximately one-third of the
segment's gross written premiums in the nine months ended September 30, 2022 and
2021, cedes a high percentage of written premiums under a reinsurance treaty and
changes in growth rates of this division can impact comparable premium retention
ratios for the segment. Effective with the current quarter, we increased our
retention on the reinsurance treaty applicable to the Excess Casualty division.
Net retention for the Excess Casualty division was 27.8% and 14.6% for the
comparable three month periods, and 17.9% and 14.3% for the respective nine
month periods. Net retention in the prior year was impacted by the
aforementioned $8.1 million of reinstatement premium in the prior year third
quarter which reduced net written premium and the net retention for the prior
year quarter and year to date.
The net premium retention for the Specialty Admitted Insurance segment decreased
for the three and nine months ended September 30, 2022 as compared to the prior
year periods primarily due to a lower retention in the fronting business
reflecting the mix of business and changes in reinsurance coverage as treaties
renew. The net retention on the segment's fronting business was 13.8% and 13.6%
for the three and nine months ended September 30, 2022 , respectively, compared
to 17.7% and 16.3%
41
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for the three and nine months ended September 30, 2021 , respectively. The net
retention on the individual risk workers' compensation business was 29.6% and
29.9% for the three and nine months ended September 30, 2022 , respectively,
compared to 25.7% and 27.1% for the three and nine months ended September 30,
2021 . The renewal of the workers' compensation quota share treaty on January 1,
2022 resulted in a higher retention for this business.
The Casualty Reinsurance segment previously wrote a retrocessional
treaty/fronting arrangement under which 100% of the premiums were ceded. The
treaty was nonrenewed for 2022 and net retentions above 100% in the current year
reflect adjustments to prior year assumed and ceded written premiums on the
treaty.
Segment Results
The following table presents our combined ratios by segment:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Excess and Surplus Lines 88.2 % 118.0 % 85.3 % 141.4 %
Specialty Admitted Insurance 98.4 % 84.3 % 96.8 % 88.1 %
Casualty Reinsurance 90.9 % 138.2 % 103.6 % 117.2 %
Total 94.1 % 122.1 % 94.2 % 135.6 %
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, %
2022 2021 Change 2022 2021 Change
($ in thousands)
Gross written premiums $ 204,785 $ 217,673 (5.9) % $ 675,702 $ 613,045 10.2 %
Net written premiums $ 140,984 $ 127,881 10.2 % $ 432,698 $ 371,477 16.5 %
Net earned premiums $ 139,095 $ 119,760 16.1 % $ 408,280 $ 351,413 16.2 %
Losses and loss adjustment expenses
excluding retroactive reinsurance (96,355) (117,214) (17.8) % (270,464) (428,550) (36.9) %
Underwriting expenses (26,338) (24,073) 9.4 % (77,623) (68,419) 13.5 %
Underwriting profit (loss) (1)
-$ 60,193 $ (145,556) - Ratios: Loss ratio 69.3 % 97.9 % 66.2 % 122.0 % Expense ratio 18.9 % 20.1 % 19.1 % 19.4 % Combined ratio 88.2 % 118.0 % 85.3 % 141.4 % Accident year loss ratio 69.2 % 73.2 % 66.2 % 67.7 % Accident year loss ratio ex-cat (2) 65.6 % 69.0 % 65.0 % 66.3 %
(1)Underwriting Profit (Loss) is a non-GAAP Measure. See "Reconciliation of
Non-GAAP Measures."
(2)Accident year loss ratio excluding$5.0 million of net catastrophe losses related to Hurricane Ian in the three and nine months endedSeptember 30, 2022 and$5.0 million of net catastrophe losses related to Hurricane Ida in the three and nine months endedSeptember 30, 2021 . The Excess and Surplus Lines segment produced an underwriting profit of$16.4 million and combined ratio of 88.2% in the three months endedSeptember 30, 2022 compared to an underwriting loss of$21.5 million and a combined ratio of 118.0% in the three months endedSeptember 30, 2021 . The loss ratio improvement from 97.9% in the prior year to 69.3% in the current year was primarily driven by net reserve development on prior accident years which was$139,000 adverse (excluding adverse prior year development on the legacy Rasier business and the impact of retroactive reinsurance - see Commercial Auto Loss Portfolio Transfer) for the three months endedSeptember 30, 2022 compared to$29.5 million or 24.7 percentage points of net adverse development in the three months endedSeptember 30, 2021 . The net adverse development in the prior year included$29.6 million recognized with the loss portfolio transfer transaction with Aleka that was effectiveJuly 1, 2021 .
For the nine months ended
underwriting profit of
compares to an underwriting loss of
141.4% for the nine
42 -------------------------------------------------------------------------------- Table of Contents months endedSeptember 30, 2021 . The loss ratio of 66.2% for the nine months endedSeptember 30, 2022 includes$48,000 of net adverse reserve development (excluding adverse prior year development on the legacy Rasier business and the impact of retroactive reinsurance - see Commercial Auto Loss Portfolio Transfer) 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$200.1 million of net adverse reserve development on our commercial auto business that was almost entirely related to a previously canceled account that has been in 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. Attractive market conditions for our Excess and Surplus Lines segment have enabled us to grow earned premiums. Net earned premiums of the Excess and Surplus Lines segment were up 16.1% and 16.2% over the corresponding three and nine month periods in the prior year, respectively, including growth in lines that have meaningful ceding commissions. The expense ratios for the Excess and Surplus Lines segment were 18.9% and 19.1% for the three and nine months endedSeptember 30, 2022 , respectively, compared to 20.1% and 19.4% for the three and nine months endedSeptember 30, 2021 . Underwriting results in both three month and nine month periods include hurricane catastrophe losses in our Excess Property book. 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. In the three months endedSeptember 30, 2022 , the Company recorded$5.0 million of net catastrophe losses for Hurricane Ian. In the three months endedSeptember 30, 2021 , the Company recorded$5.0 million of net catastrophe losses for Hurricane Ida. Underwriting results in the prior year were also negatively impacted by$8.1 million of reinstatement premium, including$6.4 million triggered by one claim on a 2019 excess of loss treaty in the Excess and Surplus Lines segment. The reinstatement premium reduced net written and net earned premium in the prior year quarter and year to date and increased the underwriting loss.
Specialty Admitted Insurance Segment
Results for the
Three Months Ended Nine Months Ended
September 30, % September 30, %
2022 2021 Change 2022 2021 Change
($ in thousands)
Gross written premiums $ 123,389 $ 121,175 1.8 % $ 374,066 $ 377,400 (0.9) %
Net written premiums $ 18,929 $ 22,578 (16.2) % $ 57,524 $ 66,081 (12.9) %
Net earned premiums $ 17,824 $ 19,704 (9.5) % $ 55,283 $ 54,656 1.1 %
Losses and loss adjustment expenses (15,377) (15,263) 0.7 % (44,029) (39,371) 11.8 %
Underwriting expenses (2,162) (1,357) 59.3 % (9,508) (8,797) 8.1 %
Underwriting profit (1), (2) $ 285 $ 3,084 (90.8) % $ 1,746 $ 6,488 (73.1) %
Ratios:
Loss ratio 86.3 % 77.5 % 79.6 % 72.0 %
Expense ratio 12.1 % 6.8 % 17.2 % 16.1 %
Combined ratio 98.4 % 84.3 % 96.8 % 88.1 %
Accident year loss ratio 93.4 % 80.0 % 84.6 % 76.6 %
(1)Underwriting Profit is a non-GAAP Measure. See "Reconciliation of Non-GAAP
Measures."
(2)Underwriting results include gross fee income of
million
(
The Specialty Admitted Insurance segment generated underwriting profits of$285,000 and$3.1 million (combined ratios of 98.4% and 84.3%) in the three months endedSeptember 30, 2022 and 2021, respectively. The loss ratios of 86.3% and 77.5% include$1.3 million and$500,000 (7.1 and 2.5 percentage points), respectively, of net favorable development in our loss estimates for prior accident years. The impact of the higher net favorable reserve development in the current year was offset by a higher current accident year loss ratio (93.4% compared to 80.0% in the prior year) which reflects current actuarial indications and higher loss trends in the business. 43 -------------------------------------------------------------------------------- Table of Contents For the nine months endedSeptember 30, 2022 and 2021, the segment produced underwriting profits of$1.7 million and$6.5 million (combined ratios of 96.8% and 88.1%), respectively. The loss ratios of 79.6% and 72.0% include$2.8 million and$2.5 million (5.0 and 4.6 percentage points), respectively, of net favorable development in our loss estimates for prior accident years reflecting lower loss emergence in the workers' compensation book compared to expectations. The higher current accident year loss ratio (84.6% compared to 76.6% in the prior year) was the biggest driver of the higher overall loss ratio, and consistent with the three months endedSeptember 30, 2022 , reflects current actuarial indications and higher loss trends in the business. The expense ratio of theSpecialty Admitted Insurance segment was 12.1% and 17.2% for the three and nine months endedSeptember 30, 2022 , respectively, compared to the prior year ratios of 6.8% and 16.1%, respectively. The segment benefited from adjustments in the prior year to the allowance for doubtful accounts, premium taxes, and assessments which together represented a 9.9 and 3.6 percentage point decrease in the segment expense ratio for the prior year quarter and year to date, respectively. Fee income in the current year increased 5.5% and 7.3% over the respective three and nine month periods in the prior year due to the growth in our fronting business. The impact of reinstatement premiums and other adjustments to tax and assessment accruals in the current quarter together represented a 6.8 and 2.4 percentage point decrease in the segment expense ratio for the current quarter and year to date, respectively.
Casualty Reinsurance Segment
Results for the Casualty Reinsurance segment are as follows:
Three Months Ended Nine Months Ended
September 30, % September 30, %
2022 2021 Change 2022 2021 Change
($ in thousands)
Gross written premiums $ 30,331 $ 7,751 291.3 % $ 68,387 $ 109,555 (37.6) %
Net written premiums $ 30,338 $ 7,751 291.4 % $ 70,579 $ 88,855 (20.6) %
Net earned premiums $ 33,270 $ 31,144 6.8 % $ 102,712 $ 97,837 5.0 %
Losses and loss adjustment expenses (20,503) (33,601) (39.0) % (74,719) (81,657) (8.5) %
Underwriting expenses (9,723) (9,454) 2.8 % (31,727) (33,037) (4.0) %
Underwriting profit (loss) (1) $ 3,044 $ (11,911) - $ (3,734) $ (16,857) (77.8) %
Ratios:
Loss ratio 61.6 % 107.9 % 72.7 % 83.5 %
Expense ratio 29.3 % 30.3 % 30.9 % 33.7 %
Combined ratio 90.9 % 138.2 % 103.6 % 117.2 %
Accident year loss ratio 61.6 % 59.5 % 66.1 % 60.4 %
(1)Underwriting Profit (Loss) is a non-GAAP Measure. See "Reconciliation of
Non-GAAP Measures."
The Casualty Reinsurance segment produced an underwriting profit of$3.0 million and a combined ratio of 90.9% for the three months endedSeptember 30, 2022 compared to an underwriting loss of$11.9 million and a combined ratio of 138.2% for the three months endedSeptember 30, 2021 . The loss ratio improved from 107.9% in the prior three month period to 61.6% in the current year, driven mainly by the impact of$15.1 million or 48.4 percentage points of net adverse development in our loss estimates for prior accident years in the three months endedSeptember 30, 2021 . As outlined in the "Strategic Actions" above, onFebruary 23, 2022 , JRG Re entered into the Retrocession Agreement to reinsure the majority of the Casualty Reinsurance segment's reserves. No prior accident year reserve development was recognized for this segment in the three months endedSeptember 30, 2022 . For the nine months endedSeptember 30, 2022 and 2021, the segment had underwriting losses of$3.7 million and$16.9 million (combined ratios of 103.6% and 117.2%), respectively. The loss ratio of 72.7% for the nine months endedSeptember 30, 2022 includes losses of$11.5 million or 11.2 points (including$6.8 million or 6.6 points of net adverse reserve development on prior accident years and$4.7 million of current accident year losses) recognized in the three months endedMarch 31, 2022 associated with the Retrocession Agreement. The loss ratio of 83.5% for the nine months endedSeptember 30, 2021 includes$22.6 million or 23.1 percentage points of net adverse development in our loss estimates for prior accident years. The higher year to date current accident year loss ratio (66.1% for the nine months endedSeptember 30, 2022 compared to 60.4% in the prior year period) primarily reflects the$4.7 million or 4.6 points of current accident year losses associated with the Retrocession Agreement and changes in the mix of business. The Casualty Reinsurance segment focuses on proportional reinsurance which requires larger ceding commissions resulting in a higher commission expense than in our other segments. The expense ratios of the Casualty Reinsurance segment were 44 -------------------------------------------------------------------------------- Table of Contents 29.3% and 30.9% for the three and nine months endedSeptember 30, 2022 , respectively, compared to 30.3% and 33.7% in the corresponding prior year periods. The lower current year expense ratios reflects higher net earned premiums (increases of 6.8% and 5.0% versus the corresponding three and nine month prior year periods) and lower commissions due to the mix of business and commission slides which decreased the expense ratio by 4.4 and 2.4 points in the three and nine months endedSeptember 30, 2022 , respectively, compared to a decrease of 2.5 and an increase of 0.6 points in the three and nine months endedSeptember 30, 2021 . General and administrative expenses were also lower for the three and nine months endedSeptember 30, 2022 driven primarily by lower compensation and related expenses.
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 were not reimbursed by our subsidiaries, including costs associated with our internal quota share, rating agencies and strategic initiatives. The expenses are included in our calculation of consolidated underwriting profit, and in our consolidated expense ratio and combined ratio. Total operating expenses of the Corporate and Other segment were$8.4 million and$25.2 million for the three and nine months endedSeptember 30, 2022 , respectively, compared to$7.3 million and$23.3 million for the three and nine months endedSeptember 30, 2021 . The higher current year expenses as compared to the respective three and nine month periods in the prior year were largely driven by higher compensation expenses due to the hiring of additional employees.
Investing Results
Net investment income was$17.3 million and$48.3 million for the three and nine months endedSeptember 30, 2022 , respectively, compared to$15.3 million and$44.7 million for the same periods in the prior year. The Company's private investments generated losses of$424,000 and income of$2.0 million for the three and nine months endedSeptember 30, 2022 , respectively, compared to income of$1.8 million and$2.9 million in the respective prior year periods. Excluding private investments, our net investment income for the three and nine months endedSeptember 30, 2022 increased 31.1% and 10.8% from the prior year, respectively, principally due to higher yields on fixed maturities and bank loan participations. The average duration of our portfolio excluding restricted cash equivalents was 4.2 years atSeptember 30, 2022 . Major categories of the Company's net investment income are summarized as follows: Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 ($ in thousands) Fixed maturity securities$ 12,267 $ 10,437 $ 34,878 $ 32,683 Bank loan participations 3,370 2,836 8,432 8,230 Equity securities 1,390 1,225 3,939 3,636 Other invested assets: Renewable energy investments 134 918 3,068 636 Other private investments (558) 842 (1,082) 2,292 (424) 1,760 1,986 2,928 Cash, cash equivalents, restricted cash equivalents and short-term investments 1,687 59 2,067 232 Gross investment income 18,290 16,317 51,302 47,709 Investment expense (984) (1,028) (3,024) (2,983) Net investment income$ 17,306 $ 15,289 $ 48,278 $ 44,726
The following table summarizes our annualized gross investment returns:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Cash and invested assets 3.0 % 2.7 % 2.8 % 2.8 %
Fixed maturity securities 3.3 % 2.7 % 2.9 % 2.8 %
Of our total cash and invested assets of $2,363.6 million at September 30, 2022
(excluding restricted cash equivalents), $187.5 million represents the cash and
cash equivalents portion of the portfolio. The majority of the portfolio, or
$1,639.2
45
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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 (loss) income. In the nine months ended September 30,
2022 , the fair values of our fixed maturity securities were negatively impacted
by a heightened inflationary environment and rate actions of the Federal
Reserve , which led to higher interest rates and lower fair values of our fixed
maturity securities. Unrealized losses on fixed maturities recognized in other
comprehensive (loss) income resulted in a $205.2 million reduction in
accumulated other comprehensive (loss) income in the nine months ended
September 30, 2022 .
Also included in our investments are $160.3 million of bank loan participations,
$118.1 million of equity securities, $208.9 million of short-term investments,
and $49.5 million of other invested assets.
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
facilities, and similar loans and investments. Bank loan participations are
measured at fair value pursuant to the Company's election of the fair value
option, 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. At September 30, 2022 and December 31, 2021 , the fair
market value of these securities was $160.3 million and $156.0 million ,
respectively.
For the nine months ended September 30, 2022 , the Company recognized net
realized and unrealized investment losses of $29.9 million ($7.8 million of net
realized and unrealized investment losses for the three months ended September
30, 2022 ), including $13.8 million of net unrealized losses on bank loan
participations, $16.0 million of net unrealized losses for the change in the
fair value of equity securities, $284,000 of net realized investment gains on
the sale of fixed maturity securities, $376,000 of net realized investment
losses on the sale of bank loan participations, and $47,000 of net realized
investment gains on the sale of equity securities.
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 unrealized 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 $386,000 of net realized investment
losses on the sale of equity securities.
In conjunction with its outside investment managers, the Company performs
quarterly reviews of all securities within its investment portfolio to determine
whether any impairment has occurred. Management concluded that none of its fixed
maturity securities were impaired at September 30, 2022 or December 31, 2021 . At
September 30, 2022 , 99.8% of the Company's fixed maturity security portfolio was
rated "BBB-" or better ("investment grade") by Standard & Poor's or received an
equivalent rating from another nationally recognized rating agency. Management
does not intend to sell available-for-sale securities in an unrealized loss
position, and it is not "more likely than not" that the Company will be required
to sell these securities before a recovery in their value to their amortized
cost basis occurs.
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The amortized cost and fair value of our available-for-sale fixed maturity
securities were as follows:
September 30, 2022 December 31, 2021
Cost or % of Cost or % of
Amortized Fair Total Amortized Fair Total
Cost Value Fair Value Cost Value Fair Value
($ in thousands)
Fixed maturity securities,
available-for-sale:
State and municipal $ 377,410 $ 320,897 19.6 % $ 323,773 $ 333,717 19.9 %
Residential mortgage-backed 388,386 348,927 21.3 % 246,586 246,631 14.7 %
Corporate 669,209 593,957 36.2 % 711,930 732,335 43.7 %
Commercial mortgage and asset-backed 328,022 303,845 18.5 % 301,247 304,488 18.2 %
U.S. Treasury securities and obligations
guaranteed by the U.S. government 76,309 71,622 4.4 % 60,329 60,390 3.5 %
Total fixed maturity securities,
available-for-sale $ 1,839,336 $ 1,639,248 100.0 % $ 1,643,865 $ 1,677,561 100.0 %
The following table sets forth the composition of the Company's portfolio of
available-for-sale fixed maturity securities by rating as of
Standard & Poor's or Equivalent Designation Fair Value % of Total
($ in thousands)
AAA $ 368,400 22.5 %
AA 687,406 41.9 %
A 432,792 26.4 %
BBB 148,074 9.0 %
Below BBB and unrated 2,576 0.2 %
Total $ 1,639,248 100.0 %
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, 2022
Amortized Fair % of
Cost Value Total Value
($ in thousands)
Due in:
One year or less $ 50,179 $ 48,892 3.0 %
After one year through five years 439,524 409,673 25.0 %
After five years through ten years 351,577 300,364 18.3 %
After ten years 281,648 227,547 13.9 %
Residential mortgage-backed 388,386 348,927 21.3 %
Commercial mortgage and asset-backed 328,022 303,845 18.5 %
Total $ 1,839,336 $ 1,639,248 100.0 %
47
-------------------------------------------------------------------------------- Table of Contents Other Income and Expense Other income and expense primarily consists of non-operating income of$247,000 and non-operating expenses of$100,000 for the three and nine months endedSeptember 30, 2022 , respectively, and non-operating expenses of$625,000 and$2.0 million for the three and nine months endedSeptember 30, 2021 , respectively. The non-operating income for the three months endedSeptember 30, 2022 includes a$430,000 broker fee rebate associated with the Retrocession Agreement in the Casualty Reinsurance segment. Non-operating expenses include legal fees related to a purported class action lawsuit, legal and other professional fees related to the Company'sMay 2021 common share offering and various strategic initiatives, and employee severance costs.
Interest Expense
Interest expense was$5.0 million and$2.2 million for the three months endedSeptember 30, 2022 and 2021, respectively ($11.3 million and$6.7 million for the nine months endedSeptember 30, 2022 and 2021, respectively). Interest expense for the three months and nine months endedSeptember 30, 2022 includes$1.2 million and$2.6 million of crediting fees on the Funds Withheld Account balance under the Retrocession Agreement. The impact of rising interest rates on our variable rate senior and trust preferred debt also contributed to the higher current year interest expense. 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 of amortization of intangible assets in each of the three months endedSeptember 30, 2022 and 2021 ($272,000 in each of the nine months endedSeptember 30, 2022 and 2021).
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. ForU.S. -sourced income, the Company'sU.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. For the nine months endedSeptember 30, 2022 , our effective tax rate was 30.9%. The effective rate exceeded the 21.0%U.S. statutory rate due to a projected annual loss inBermuda that does not provide a tax benefit and certain discreet items including excess tax expenses associated with vested restricted share units ("RSUs") in the nine months endedSeptember 30, 2022 . The Company had a pre-tax loss of$129.6 million for the nine months endedSeptember 30, 2021 and recorded aU.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 endedSeptember 30, 2021 , ourU.S. federal income tax benefit was 17.8% of the loss before taxes.
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 at
September 30, 2022 was $2,786.7 million . Of this amount, 61.0% relates to
amounts that are IBNR. This amount was 59.6% at December 31, 2021 . The Company's
gross reserves for losses and loss adjustment expenses by segment are summarized
as follows:
Gross Reserves at September 30, 2022
Case IBNR Total
($ in thousands)
Excess and Surplus Lines
400,085 737,727 Casualty Reinsurance 141,184 285,312 426,496 Total$ 1,085,905 $ 1,700,795 $ 2,786,700 AtSeptember 30, 2022 , the amount of net reserves (prior to the$621,000 allowance for uncollectible reinsurance recoverables) of$1,201.2 million that related to IBNR was 64.8%. This amount was 64.4% atDecember 31, 2021 . The Company's net reserves for losses and loss adjustment expenses by segment are summarized as follows: 48
--------------------------------------------------------------------------------
Table of Contents
Net Reserves at September 30, 2022
Case IBNR Total
($ in thousands)
Excess and Surplus Lines $ 325,752 $ 618,822 $ 944,574
Specialty Admitted Insurance 45,810 62,024 107,834
Casualty Reinsurance 51,820 97,015 148,835
Total $ 423,382 $ 777,861 $ 1,201,243
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Funds
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 and Series A Preferred Shares. We use operating cash flows primarily to pay operating expenses, losses and loss adjustment expenses, reinsurance premiums, and income taxes. Cash flow from operations may differ substantially from net income. The potential for a large claim under an insurance or reinsurance contract means that substantial and unpredictable payments may need to be made within relatively short periods of time.
The following table summarizes our cash flows:
Nine Months Ended
2022 2021
($ in thousands)
Cash and cash equivalents provided by (used in):
Operating activities (excluding restricted cash equivalents) $ 167,649 $ (211,394)
Investing activities (262,181) 111,759
Financing activities 91,953 157,926
Change in cash and cash equivalents (2,579) 58,291
Change in restricted cash equivalents (operating activities) 480 (849,920)
Change in cash, cash equivalents, and restricted cash equivalents
Cash provided by operating activities excluding restricted cash equivalents of$167.6 million for the nine months endedSeptember 30, 2022 was driven by the growth in ourU.S. segments and the collection of premiums receivable at a quicker rate than payments of loss and loss adjustment expenses. Cash used in operating activities excluding restricted cash equivalents of$211.4 million for the nine months endedSeptember 30, 2021 primarily reflects the outflow of funds to effect the Commercial Auto LPT in the third quarter. Cash used in investing activities of$262.2 million for the nine months endedSeptember 30, 2022 reflects our efforts to enhance the yield in our investment portfolio by investing available cash and cash equivalents into higher yielding investments. Cash provided by investing activities of$111.8 million for the nine months endedSeptember 30, 2021 was primarily due to the investments sold/funds withdrawn from our investment portfolio to effect the Commercial Auto LPT in the third quarter. Cash and cash equivalents (excluding restricted cash equivalents) comprised 7.9% and 9.7% of total cash and invested assets atSeptember 30, 2022 and 2021, respectively. Cash provided by financing activities of$92.0 million for the nine months endedSeptember 30, 2022 includes$144.9 million of net proceeds (after expenses) from the issuance and sale of 150,000 Series A Preferred Shares onMarch 1, 2022 . The proceeds were used for general corporate purposes and to repay$40.0 million of loans outstanding on the 2017 Facility (as defined below) onMarch 28, 2022 . Financing activities for the nine months endedSeptember 30, 2022 also include$5.9 million of dividends paid to common shareholders and$6.1 million of dividends paid on the Series A Preferred Shares. Cash provided by financing activities of$157.9 million for the nine months endedSeptember 30, 2021 includes$192.1 million of net proceeds (before expenses) from a public offering of our common shares that closed onMay 10, 2021 . The proceeds were used for general corporate purposes. Financing activities for the nine months endedSeptember 30, 2021 also includes$32.0 million of dividends paid to common shareholders. The change in restricted cash equivalents for the nine months endedSeptember 30, 2021 primarily reflects restricted cash equivalents returned to a former insured, per the terms of a collateral trust. See Amounts Recoverable from anIndemnifying Party and Reinsurer on Legacy CommercialAuto Book below. 49 -------------------------------------------------------------------------------- Table of Contents Dividends We are organized as aBermuda holding company with our operations conducted by our wholly-owned subsidiaries. Accordingly, our holding company may receive cash through loans from banks, issuance of equity and debt securities, corporate service fees or dividends received from our subsidiaries and/or other transactions. OurU.S. holding company may receive cash in a similar manner and also through payments from our subsidiaries pursuant to ourU.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. In addition, insurance regulators have broad powers to prevent reduction of statutory surplus to inadequate levels and could refuse to permit the payment of dividends calculated under any applicable formula. See Item 1- "Business Regulation-U.S. Insurance Regulation-State Regulation" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC onMarch 1, 2022 for additional information. The maximum amount of dividends available to theU.S. holding company from ourU.S. insurance subsidiaries during 2022 without regulatory approval is$27.2 million . 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 (as shown on its previous financial year's statutory balance sheet). See Item 1- "Business Regulation- Bermuda Insurance Regulation- Restrictions on Dividends and Distributions" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC onMarch 1, 2022 for additional information. Based on that calculation, the maximum combined amount of dividends and return of capital available to us from ourBermuda insurers without regulatory approval in 2022 is calculated to be approximately$129.7 million . However, any dividend payment is contingent upon continued compliance withBermuda regulatory requirements, including but not limited to the enhanced solvency requirement calculations. Holders of the Series A Preferred Shares are entitled to a dividend at the initial rate of 7% of the Liquidation Preference per annum, paid in cash, in-kind in common shares or in Series A Preferred Shares, at our election. On the five-year anniversary of the Closing Date, and each five-year anniversary thereafter, the dividend rate will reset to a rate equal to the five-yearU.S. treasury rate plus 5.2%. Dividends accrue quarterly and are payable onMarch 31 ,June 30 ,September 30 andDecember 31 of each year. Cash dividends of$6.1 million have been paid on the Series A Preferred Shares from the date the Series A Preferred Shares were issued (March 1, 2022 ) throughSeptember 30, 2022 . AtSeptember 30, 2022 , theBermuda holding company had$2.0 million of cash and cash equivalents. TheU.S. holding company had$18.9 million of cash and invested assets, comprised of cash and cash equivalents of$5.0 million , short-term investments of$7.0 million , and other invested assets of$6.9 million , which are not subject to regulatory restrictions. Additionally, ourU.K. intermediate holding company had no invested assets and cash of less thanten thousand dollars atSeptember 30, 2022 .
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 atSeptember 30, 2022 : •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. AtSeptember 30, 2022 , the Company had$40.5 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 1.5% and is subject to change according to terms in the credit agreement. AtSeptember 30, 2022 , 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. OnNovember 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 untilNovember 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. 50 -------------------------------------------------------------------------------- Table of Contents 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 atSeptember 30, 2022 . OnAugust 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 atSeptember 30, 2022 . 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. The 2017 Facility has been amended from time to time since its inception in 2017, including onNovember 8, 2019 when 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. AtSeptember 30, 2022 , unsecured loans of$21.5 million and secured letters of credit totaling$22.6 million were outstanding on the 2017 Facility. During the three months endedMarch 31, 2022 , the Company repaid$40.0 million of loans that were outstanding under the 2017 Facility. OnMay 26, 2004 , we issued$15.0 million of senior debt dueApril 29, 2034 . The senior debt is not redeemable by the holder or subject to sinking fund requirements. Interest accrues quarterly and is payable in arrears at a floating rate per annum equal to the 3-month LIBOR plus 3.85%. This senior debt is redeemable at par prior to its stated maturity at our option in whole or in part. The terms of the senior debt contain certain covenants, with which we are in compliance atSeptember 30, 2022 , and which, among other things, restrict our ability to assume senior indebtedness secured by ourU.S. holding company's common stock or its subsidiaries' capital stock or to issue shares of its subsidiaries' capital stock. FromMay 2004 throughJanuary 2008 , we sold trust preferred securities through fiveDelaware statutory trusts sponsored and wholly-owned by the Company or its subsidiaries. Each trust used the net proceeds from the sale of its trust preferred securities to purchase our floating-rate junior subordinated debt. The following table summarizes the nature and terms of the junior subordinated debt and trust preferred securities outstanding atSeptember 30, 2022 (including the Company's repurchases of a portion of these trust preferred securities): Franklin Holdings II James River James River James River James River (Bermuda) Capital Capital Capital Capital Capital Trust I Trust II Trust III Trust IV Trust I ($ in thousands) Issue date May 26, 2004 December 15, 2004 June 15, 2006 December 11, 2007 January 10, 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 debt, unless accelerated earlier May 24, 2034 December 15, 2034 June 15, 2036 December 15, 2037 March 15, 2038 Trust common stock$217 $464 $619 $1,670 $928 Interest rate, per annum Three-Month Three-Month Three-Month Three-Month Three-Month LIBOR plus LIBOR plus LIBOR plus LIBOR plus 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
AtSeptember 30, 2022 andDecember 31, 2021 , the Company's leverage ratio was 22.8% and 31.1%, 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. The Series A Preferred Shares represent equity capital for purposes of the leverage ratio calculation under the credit agreements. 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%. We believe 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. 51 -------------------------------------------------------------------------------- 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 endedSeptember 30, 2022 and 2021, our net premium retention was 53.1% and 45.6%, respectively.
The following is a summary of our Excess and Surplus Lines segment's net
retention after reinsurance as of
Line of Business Company Retention
Casualty
Primary Specialty Casualty, Up to$1.0 million per occurrence, subject to a$1.0 million including Professional Liability aggregate deductible.(1) Primary Casualty Up to$2.0 million per occurrence.(2) Excess Casualty Up to$2.0 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$2.0 million . (4) The property catastrophe reinsurance treaty has a limit of$55.0 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 at the 1 in 1000 year PML to exhaust our$60.0 million property catastrophe reinsurance. In the event of a catastrophe loss exhausting our$60.0 million property catastrophe reinsurance, we estimate our pre-tax cost would not exceed 2.5% of shareholders' equity, 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 the Commercial Auto LPT with Aleka to reinsure substantially all of the Excess and Surplus Lines segment's legacy portfolio of commercial auto policies previously issued to Rasier. See "Amounts Recoverable from anIndemnifying Party and Reinsurer on the Legacy CommercialAuto Book " below for further information on this reinsurance agreement. 52 -------------------------------------------------------------------------------- Table of Contents The following is a summary of ourSpecialty Admitted Insurance segment's ceded reinsurance in place as ofSeptember 30, 2022 : Line of Business Coverage Casualty Workers' Compensation Quota share coverage for 65.5% 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$7.5 million physical damage per occurrence. General Liability & Professional Quota share coverage for 65%-100% of limits up to$3.0 million Liability - Programs per occurrence.
Umbrella and Excess Casualty - Quota share coverage for at least 65% of limits up to
Programs
million per occurrence, and 75% of
excess of loss coverage for
$5.0 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$59.0
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% 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$59.0 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 on treaties in run-off, 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 2.5% of shareholders' equity, inclusive of reinstatement premiums payable. OnFebruary 23, 2022 , JRG Re entered into the Retrocession Agreement with FRL to reinsure the majority of the segment risk, which closed onMarch 31, 2022 . See "Strategic Actions - Loss Portfolio Transfer Retrocession Agreement" above for further information on this retrocession agreement. We also had a contingency clash reinsurance treaty to cover both the Excess andSurplus Lines and Specialty Admitted Insurance segments in the event of a claim incident involving more than one of our insureds in addition to Extra Contractual and Excess Policy Limits protection. The treaty covered$10.0 million in excess of a$2.0 million retention for loss occurrences within the treaty term. This coverage was put into runoff effectiveJuly 1, 2022 . As ofSeptember 30, 2022 , 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, 2022 , the allowance for credit losses on reinsurance recoverables was$621,000 . 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 53 -------------------------------------------------------------------------------- Table of Contents 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, 2022 , we had reinsurance recoverables on unpaid losses of$1,584.8 million (net of a$621,000 allowance for credit losses) and reinsurance recoverables on paid losses of$110.3 million , and all material recoverable amounts were from companies withA.M. Best ratings of "A-" (Excellent) or better, are collateralized by the reinsurer for our benefit through letters of credit or funds on deposit in trust accounts, or represent recoverables from a state residual market for automobile insurance.
Amounts Recoverable from an
Commercial
James River previously issued a set of commercial auto insurance contracts to Rasier (the "Rasier Commercial Auto Policies") under which James River pays losses and loss adjustment expenses on the contracts. James River has indemnity agreements with Rasier (non-insurance entities) (collectively, the "Indemnity Agreements") and is contractually entitled to reimbursement for the portion of the losses and loss adjustment expenses paid on behalf of Rasier under the Rasier Commercial Auto Policies and other expenses incurred by James River. OnSeptember 27, 2021 , James River entered into a loss portfolio transfer reinsurance agreement (the "Commercial Auto LPT") with Aleka to reinsure substantially all of the Rasier Commercial Auto Policies for which James River is not otherwise indemnified by Rasier under the Indemnity Agreements. Under the terms of the Commercial Auto LPT, effective as ofJuly 1, 2021 , James River ceded to Aleka approximately$345.1 million of commercial auto liabilities relating to Rasier Commercial Auto Policies written in the years 2013-2019, which amount constituted the reinsurance premium.
Each of Rasier and Aleka are required to post collateral under the Indemnity
Agreements and the Commercial Auto LPT, respectively:
•Pursuant to the Indemnity Agreements, Rasier is required to post collateral equal to 102% of James River's estimate of the amounts that are recoverable or 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 connection with the execution of the Commercial Auto LPT, James River returned$691.3 million to theIndemnity Trust , representing the remaining balance of the amount withdrawn inOctober 2019 , as was permitted under the indemnification agreements with Rasier and the associated trust agreement. AtSeptember 30, 2022 , the balance in theIndemnity Trust was$262.1 million , and, together with the balance of theLoss Fund Trust (as defined below) attributable to the Indemnity Agreements as described below, the total balance of collateral securing Rasier's obligations under the Indemnity Agreements was$331.3 million . •Pursuant to the Commercial Auto LPT, Aleka is required to post collateral equal to 102% of James River's estimate of Aleka's obligations under the Commercial Auto LPT, 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. AtSeptember 30, 2022 , the balance in theLPT Trust was$118.3 million , and, together with the balance of theLoss Fund Trust (as defined below) attributable to the Commercial Auto LPT as described below, the total balance of collateral securing Aleka's obligations under the Commercial Auto LPT was$146.5 million . AtSeptember 30, 2022 , the total reinsurance recoverables under the Commercial Auto LPT was$189.1 million (including$174.3 million of unpaid recoverables and$14.8 million of paid recoverables). In connection with the execution of the Commercial Auto LPT, James River and Aleka entered into an administrative services agreement (the "Administrative Services Agreement") with a third party claims administrator (the "Administrator") pursuant to which the Administrator handles the claims on the Rasier Commercial Auto Policies for the remaining life of those claims. The claims paid by the Administrator are reimbursable by James River, and pursuant to the Administrative Services Agreement, James River established a loss fund trust account for the benefit of the Administrator (the "Loss Fund Trust ") to collateralize its claims payment reimbursement obligations. James River funds 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 Indemnity Agreements, the Commercial Auto LPT and James River's existing third party reinsurance agreements, respectively. AtSeptember 30, 2022 , the balance in theLoss Fund Trust was$102.5 million , including$69.2 million representing collateral supporting Rasier's obligations under the Indemnity Agreements and$28.2 million representing collateral supporting Aleka's obligations under the Commercial Auto LPT. Funds posted to theLoss Fund Trust are classified as restricted cash equivalents on the Company's balance sheet. While the Commercial Auto LPT brings economic finality to substantially all of the Rasier Commercial Auto Policies, the Company has credit exposure to Rasier and Aleka under the Indemnity Agreements and the Commercial Auto LPT if the estimated losses and expenses of the Rasier Commercial Auto Policies grow at a faster pace than the growth in our collateral balances. In addition, we have credit exposure if our estimates of future losses and loss adjustment expenses and other amounts recoverable under the Indemnity Agreements and the Commercial Auto LPT, which are the basis for establishing the collateral balances, are lower than actual amounts paid or payable. The amount of our credit exposure in any of these instances could be 54 -------------------------------------------------------------------------------- Table of Contents material. To mitigate these risks, we closely and frequently monitor our exposure compared to our collateral held, and we request additional collateral in accordance with the terms of the Commercial Auto LPT and Indemnity Agreements when our analysis indicates that we have uncollateralized exposure.
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 of 2021 following the closing of the Commercial Auto LPT 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. We believe the "A-" (Excellent) ratings assigned to our insurance and reinsurance subsidiaries allow our subsidiaries to actively pursue relationships with the agents and brokers identified in their marketing plans.
Series A Preferred Shares
The Company closed on the issuance and sale of 150,000 Series A Preferred Shares onMarch 1, 2022 for an aggregate purchase price of$150.0 million , or$1,000 per share, in a private placement. The Series A Preferred Shares are convertible into the Company's common shares at the option of the holder at any time, or at the Company's option under certain circumstances. Dividends on the Series A Preferred Shares accrue quarterly at the initial rate of 7% of the Liquidation Preference per annum, which may be paid in cash, in-kind in common shares or in Series A Preferred Shares, at the Company's election.
EQUITY
Total common shares outstanding increased from 37,373,066 atDecember 31, 2021 to 37,450,438 atSeptember 30, 2022 , reflecting 77,372 common shares issued in the nine months endedSeptember 30, 2022 related to vesting of RSUs.
Share Based Compensation Expense
For the three months endedSeptember 30, 2022 and 2021, the Company recognized$2.2 million and$1.5 million of share based compensation expense, respectively ($6.2 million and$5.2 million in the nine month periods endedSeptember 30, 2022 and 2021, respectively). As ofSeptember 30, 2022 , the Company had$13.5 million of unrecognized share based compensation expense expected to be charged to earnings over a weighted-average period of 2.0 years. 55 --------------------------------------------------------------------------------
Table of Contents Equity Incentive Plans Options
The following table summarizes option activity:
Nine Months Ended September 30,
2022 2021
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding:
Beginning of period 287,974 $ 35.26 463,324 $ 32.25
Granted - $ - - $ -
Exercised - $ - (41,392) $ 24.87
Forfeited - $ - (29,418) $ 38.81
End of period 287,974 $ 35.26 392,514 $ 32.53
Exercisable, end of period 287,974 $ 35.26 392,514 $ 32.53
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
2022 2021
Weighted- Weighted-
Average Average
Grant Date Grant Date
Shares Fair Value Shares Fair Value
Unvested, beginning of period 292,135 $ 45.89 399,856 $ 43.59
Granted 545,450 $ 20.54 139,682 $ 50.22
Vested (112,527) $ 45.49 (165,131) $ 41.86
Forfeited (9,760) $ 22.97 (56,575) $ 45.91
Unvested, end of period 715,298 $ 26.94 317,832 $ 47.00
Outstanding RSUs granted to employees generally vest ratably over a three year
vesting period. RSUs granted to non-employee directors have a one year vesting
period.
56
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Table of Contents
Underwriting Performance Ratios
The following table provides the underwriting performance ratios of the Company
inclusive of the business subject to retroactive reinsurance accounting for loss
portfolio transfers. There is no economic impact to the Company over the life of
a loss portfolio transfer contract so long as any additional losses subject to
the contract are within the limit of the loss portfolio transfer and the
counterparty performs under the contract. Retroactive reinsurance accounting is
not indicative of our current and ongoing operations. Management believes that
providing loss ratios and combined ratios on business not subject to retroactive
reinsurance accounting for loss portfolio transfers gives the users of our
financial statements useful information in evaluating our current and ongoing
operations.
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Excess and Surplus Lines:
Loss Ratio 69.3 % 97.9 % 66.2 % 122.0 %
Impact of retroactive reinsurance 14.9 % - % 5.1 % - %
Loss Ratio including impact of retroactive
reinsurance 84.2 % 97.9 % 71.3 % 122.0 %
Combined Ratio 88.2 % 118.0 % 85.3 % 141.4 %
Impact of retroactive reinsurance 14.9 % - % 5.1 % - %
Combined Ratio including impact of retroactive
reinsurance 103.1 % 118.0 % 90.4 % 141.4 %
Consolidated:
Loss Ratio 69.5 % 97.3 % 68.7 % 109.1 %
Impact of retroactive reinsurance 10.9 % - % 3.7 % - %
Loss Ratio including impact of retroactive
reinsurance 80.4 % 97.3 % 72.4 % 109.1 %
Combined Ratio 94.1 % 122.1 % 94.2 % 135.6 %
Impact of retroactive reinsurance 10.9 % - % 3.7 % - %
Combined Ratio including impact of retroactive
reinsurance 105.0 % 122.1 % 97.9 % 135.6 %
57
-------------------------------------------------------------------------------- Table of Contents RECONCILIATION OF NON-GAAP MEASURES
Reconciliation of Underwriting Profit
We define underwriting profit as net earned premiums and gross fee income (in
specific instances when the Company is not retaining insurance risk) less losses
and loss adjustment expenses on business not subject to retroactive reinsurance
accounting for loss portfolio transfers and other operating expenses. Other
operating expenses include the underwriting, acquisition, and insurance expenses
of the operating segments and, for consolidated underwriting profit, the
expenses of the Corporate and Other segment. Our definition of underwriting
profit may not be comparable to that of other companies.
The following table reconciles the underwriting profit (loss) of the operating
segments by individual segment to consolidated (loss) income before income
taxes:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in thousands)
Underwriting profit (loss) of the operating
segments:
Excess and Surplus Lines $ 16,402 $ (21,527) $ 60,193 $ (145,556)
Specialty Admitted Insurance 285 3,084 1,746 6,488
Casualty Reinsurance 3,044 (11,911) (3,734) (16,857)
Total underwriting profit (loss) of operating
segments 19,731 (30,354) 58,205 (155,925)
Other operating expenses of the Corporate and
Other segment (8,447) (7,287) (25,209) (23,258)
Underwriting profit (loss) (1) 11,284 (37,641) 32,996 (179,183)
Losses and loss adjustment expenses - retroactive
reinsurance (20,773) - (20,773) -
Net investment income 17,306 15,289 48,278 44,726
Net realized and unrealized (losses) gains on
investments (7,754) 3,983 (29,874) 13,738
Amortization of intangible assets (90) (90) (272) (272)
Other income and expenses 364 (615) 112 (1,964)
Interest expense (4,950) (2,227) (11,291) (6,692)
(Loss) income before income taxes $ (4,613) $
(21,301)
(1)Included in underwriting results for the three and nine months ended
respectively (
periods).
Reconciliation of Adjusted Net Operating Income
Adjusted net operating income is defined as income available to common shareholders excluding a) the impact of loss portfolio transfers accounted for as retroactive reinsurance, b) net realized and unrealized gains (losses) on investments, c) certain non-operating expenses such as professional service fees related to a purported class action lawsuit, various strategic initiatives, and the filing of registration statements for the offering of securities, and d) severance costs associated with terminated employees. Adjusted net operating income should not be viewed as a substitute for net income calculated in accordance with GAAP, and our definition of adjusted net operating income may not be comparable to that of other companies.
Our income (loss) available to common shareholders reconciles to our adjusted
net operating income (loss) as follows:
Three Months Ended September 30,
2022 2021
Income Loss
Before Net Before Net
Taxes Income Taxes Loss
($ in thousands)
Loss available to common shareholders $ (7,238) $ (7,246) $ (21,301) $ (23,889)
Losses and loss adjustment expenses - retroactive
reinsurance 20,773 16,411 - -
Net realized and unrealized investment losses
(gains) 7,754 6,581 (3,983) (3,422)
Other (income) expenses (247) (247) 625 497
Adjusted net operating income (loss) $ 21,042 $
15,499
58
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Table of Contents
Nine Months Ended September 30,
2022 2021
Income Loss
Before Net Before Net
Taxes Income Taxes Loss
($ in thousands)
Income (loss) available to common shareholders $ 13,051 $ 7,123 $ (129,647) $ (106,506)
Losses and loss adjustment expenses - retroactive
reinsurance 20,773 16,411 - -
Net realized and unrealized investment losses
(gains) 29,874 25,757 (13,738) (11,914)
Other expenses 100 100 1,963 1,640
Adjusted net operating income (loss) $ 63,798 $
49,391
Tangible Equity and Tangible Equity per Share
Tangible equity is defined as shareholders' equity plus mezzanine Series A Preferred Shares and the unrecognized deferred retroactive reinsurance gain on loss portfolio transfers less goodwill and intangible assets, net of amortization. Tangible equity per share represents tangible equity divided by the sum of total common shares outstanding plus the common shares resulting from an assumed conversion of the outstanding Series A Preferred Shares into common shares (at the current conversion price). Our definitions of tangible equity and tangible equity per share may not be comparable to that of other companies, and they should not be viewed as a substitute for shareholders' equity and shareholders' equity per share calculated in accordance with GAAP.
The following table reconciles shareholders' equity to tangible equity as of
TANDEM DIABETES CARE INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.
UNUM GROUP – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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