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JAMES RIVER GROUP HOLDINGS, LTD. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. Factors that could cause such differences are discussed in the sections entitled "Special Note Regarding Forward-Looking Statements", and Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2022 . The results of operations for the three months endedMarch 31, 2023 are not necessarily indicative of the results that may be expected for the full year endingDecember 31, 2023 , 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, 2022 . 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 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 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 "fronting" company and as a risk bearing underwriter. 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%-35%. 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. This segment has admitted licenses and the authority to write excess and surplus lines insurance on a non-admitted basis in everyU.S. state and theDistrict of Columbia ; •The Casualty Reinsurance segment, until the suspension of its underwriting activities at the beginning of this year, primarily provided proportional and working layer casualty reinsurance to third parties (primarily through reinsurance intermediaries) throughJRG Reinsurance Company Ltd. ("JRG Re"). JRG Re also provided reinsurance to the Company'sU.S. -based insurance subsidiaries in the past 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 companies, and JRG Re is licensed as a Class 3B reinsurer by theBermuda Monetary Authority . 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 . Carolina Re surrendered its Class 3A insurance license in 2022. •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 2022, Carolina Re commuted 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 32 -------------------------------------------------------------------------------- Table of Contents Operations'' prior to the effects of intercompany reinsurance, consistent with the manner in which we evaluate the operating performance of our reportable segments.
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 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).
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Net retention is defined as the ratio of net written premiums to gross written
premiums.
Gross investment yield 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. Retroactive reinsurance accounting
lacks economic impact and management believes that the presentation of our key
metrics on business not subject to retroactive reinsurance accounting is 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, 2022 . There have been no significant changes to any of these policies during the current year.
Impact of the COVID-19 Pandemic
The Company's financial condition and results of operations were not materially impacted by the coronavirus (COVID-19) pandemic during the three months endedMarch 31, 2023 . For a description of the risks that COVID-19 poses to the Company, see "Part I-Item 1A. Risk Factors" in our Annual Report.
Impact of Inflation and Higher Interest Rates
The Company continues to be impacted by the heightened inflationary environment and higher interest rates. Most evident are the impacts on our investment portfolio and investing results, as well as the interest due on our outstanding variable rate senior and trust preferred debt. Our investment portfolio is primarily comprised of fixed maturity investments (85.8% of total invested assets atMarch 31, 2023 ). The fair values of fixed maturities generally move inversely with interest rates, and unrealized gains and losses associated with the changes in fair values, which are recognized as a component of other comprehensive income (loss), contribute to volatility in shareholders' equity and tangible equity. For the three months endedMarch 31, 2023 and 2022, other comprehensive income (loss), representing the after-tax impact of the unrealized gains and losses on fixed maturity investments, was$30.9 million and$(86.0) million , respectively. We continue to monitor our portfolio for credit-related impairments, and to date, we have concluded that the declines are primarily market-driven with no allowance for credit losses deemed necessary. As turnover occurs in our portfolio and we invest cash generated from operations, our investment income benefits from the addition of higher yielding fixed income investments. The annualized gross investment yield on fixed maturities was 4.1% and 2.7% for the three months endedMarch 31, 2023 and 2022, respectively. Higher interest rates have also increased interest expense on our outstanding variable rate senior and trust preferred debt. The applicable rates on our debt reset periodically and are structured as LIBOR or SOFR plus a margin or spread. Interest expense on our outstanding debt was$5.6 million and$2.3 million (average interest rates of 6.9% and 2.8%) for the three months endedMarch 31, 2023 and 2022, respectively. Recent Strategic Actions
Suspension of Underwriting Activities in Casualty Reinsurance Segment
As disclosed in our Form 10-K for the year endedDecember 31, 2022 , the Company has suspended writing business in the Casualty Reinsurance segment, as we continue our focus on growing our higher returningU.S. insurance businesses. The Casualty Reinsurance segment will continue earning premium due to the nature of the earnings patterns in the reinsurance business, which can extend over multiple years. Aside from the suspension of underwriting activities, the Casualty Reinsurance segment will maintain its normal day-to-day operations, with a staff to service the business on its books and facilitate compliance with regulatory requirements. 34 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS
The following table summarizes our results:
Three Months Ended
March 31, %
2023 2022 Change
($ in thousands)
Gross written premiums $ 363,893 $ 359,936 1.1 %
Net retention 50.3 % 48.9 %
Net written premiums $ 183,220 $ 175,859 4.2 %
Net earned premiums $ 208,113 $ 189,824 9.6 %
Losses and loss adjustment expenses excluding retroactive
reinsurance
(138,425) (135,608) 2.1 % Other operating expenses (59,138) (49,261) 20.1 % Underwriting profit (1), (2) 10,550 4,955 112.9 % Losses and loss adjustment expenses - retroactive reinsurance (16,863) - - Net investment income 25,772 16,267 58.4 % Net realized and unrealized gains (losses) on investments 407 (5,010) - Other income and expense (415) (301) 37.9 % Interest expense (6,616) (2,292) 188.7 % Amortization of intangible assets (91) (91) - Income before taxes 12,744 13,528 (5.8) % Income tax expense 3,136 3,323 (5.6) % Net income$ 9,608 $ 10,205 (5.9) % Dividends on Series A Preferred Shares (2,625) (875) 200.0 % Net income available to common shareholders$ 6,983 $ 9,330 (25.2) % Adjusted net operating income (1)$ 21,591 $ 13,867 55.7 % Ratios: Loss ratio 66.5 % 71.4 % Expense ratio 28.4 % 26.0 % Combined ratio 94.9 % 97.4 % Accident year loss ratio 65.9 % 67.9 %
(1)Underwriting profit and adjusted net operating income are non-GAAP measures.
See "Reconciliation of Non-GAAP Measures."
(2)Included in underwriting results for the three months ended
and 2022 is gross fee income of
Three Months Ended
The Company produced underwriting profits of
(combined ratios of 94.9% and 97.4%) for the three months ended
and 2022, respectively.
Net earned premiums grew by$18.3 million or 9.6% over the prior year driven by the Excess and Surplus Lines segment. Net earned premiums for the Excess and Surplus Lines segment grew by$20.1 million or 15.3% reflecting growth in our larger underwriting divisions with broad based renewal rate increases and higher net retentions. Our loss ratio improved from 71.4% in the prior year to 66.5% in the current year. The improvement was primarily driven by net reserve development on prior accident years which was$1.4 million or 0.7 percentage points adverse for the three months endedMarch 31, 2023 compared to$6.8 million or 3.6 percentage points of net adverse development in the three months endedMarch 31, 2022 . The net adverse development in the prior year included$6.8 million in the Casualty Reinsurance segment associated with the Casualty Re LPT (as defined below). The Company has entered into two loss portfolio transfers, which 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 35 -------------------------------------------------------------------------------- Table of Contents bring economic finality on the subject risks as long as any additional losses are within the limit of the loss portfolio transfer and the counterparty performs under the contract. 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. The reinsurance coverage is structured to be fully collateralized, is not subject to an aggregate limit, and is subject to certain exclusions. OnFebruary 23, 2022 , JRG Re entered into a loss portfolio transfer retrocession agreement (the "Casualty Re LPT") 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. 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$6.8 million of net adverse reserve development in the three months endedMarch 31, 2022 associated with the Casualty Re LPT. The Funds Withheld Account balance was$199.6 million and$213.6 million atMarch 31, 2023 andDecember 31, 2022 , respectively. Funds Withheld Account crediting fees of$1.0 million and$15,000 are included in interest expense in our Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three months endedMarch 31, 2023 and 2022, respectively. The Company periodically reevaluates the remaining reserves subject to the Commercial Auto LPT and the Casualty Re LPT. For the three months endedMarch 31, 2023 , due to adverse paid and reported loss trends on the business subject to the loss portfolio transfers, the Company recognized adverse prior year development of$48.9 million on the reserves subject to the Commercial Auto LPT ($41.0 million ) and Casualty Re LPT ($7.8 million ), resulting in corresponding additional amounts ceded under the respective loss portfolio transfers. Both loss portfolio transfers are in gain positions as the cumulative amounts ceded under the loss portfolio transfers exceed the consideration paid, requiring the application of retroactive reinsurance accounting. Under retroactive reinsurance accounting, gains are deferred and recognized in earnings in proportion to actual paid recoveries under the loss portfolio transfers using the recovery method. Over the life of the contracts, 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. In periods where the Company recognizes a change in the estimate of the reserves subject to the loss portfolio transfers that increases or decreases the amounts ceded under the loss portfolio transfers, the proportion of actual paid recoveries to total ceded losses is affected and the change in deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the loss portfolio transfer. The effect of the deferred retroactive reinsurance benefit is recorded in losses and loss adjustment expenses on the Condensed Consolidated Statements of Income and Comprehensive Income (Loss). Retroactive reinsurance benefits totaling$32.0 million ($29.3 million for the Commercial Auto LPT and$2.7 million for the Casualty Re LPT) were recorded in losses and loss adjustment expenses for the three months endedMarch 31, 2023 using the recovery method, resulting in a net impact of$16.9 million within our net losses and loss adjustment expenses for the current period. As ofMarch 31, 2023 , the cumulative amounts ceded under the loss portfolio transfers was$781.7 million ($432.8 million under the Commercial Auto LPT and$348.9 million under the Casualty Re LPT). The total unrecognized deferred retroactive reinsurance gain of$37.0 million atMarch 31, 2023 under the loss portfolio transfers ($27.4 million related to the Commercial Auto LPT and$9.5 million related to the Casualty Re LPT) is separately presented on the Company's Condensed Consolidated Balance Sheets. AtMarch 31, 2023 , the Company has$51.1 million of aggregate limit remaining under the Casualty Re LPT. Investment income surpassed the prior year by$9.5 million or 58.4% driven by higher yields on fixed maturities, bank loans, and cash equivalents. Net realized and unrealized gains and losses on investments largely reflect the impact of market volatility in the respective periods on the fair values of equity securities and bank loan participations. Equities and bank loans are carried at fair value with changes in fair value recognized as unrealized gains and losses in our Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (see Investing Results below). Interest expense was$4.3 million higher in the current year due to higher interest rates on our variable rate senior and trust preferred debt and$1.0 million of 36 -------------------------------------------------------------------------------- Table of Contents additional crediting fees on the funds withheld balance under the Casualty Re LPT. Net income available to common shareholders reflects dividends on the Series A Preferred Shares of$2.6 million and$875,000 in the three months endedMarch 31, 2023 and 2022, respectively. Adjusted net operating income increased from$13.9 million in the three months endedMarch 31, 2022 to$21.6 million in the three months endedMarch 31, 2023 . Tangible equity and tangible equity per share increased by 10.8% and 10.4%, respectively, in the current quarter mainly due to the positive operating results and unrealized gains on fixed maturities in other comprehensive income. Our 16.3% adjusted net operating return on tangible equity for the three months endedMarch 31, 2023 also compares favorably to the 10.3% return for the three months endedMarch 31, 2022 .
Premiums
Insurance premiums are earned ratably over the terms of our insurance policies,
generally twelve months. Reinsurance premiums assumed are earned over the terms
of the underlying policies or reinsurance contracts. Reinsurance contracts
written on a "losses occurring" basis cover claims that may occur during the
term of the contract or underlying insurance policy, which is typically twelve
months. Reinsurance contracts written on a "risks attaching" basis cover claims
which attach to the underlying insurance policies written during the terms of
such contracts. Premiums earned on such contracts usually extend beyond the
original term of the reinsurance contract, typically resulting in recognition of
premiums earned over a 24-month period or more in proportion to the level of
underlying exposure.
The following table summarizes the change in premium volume by component and
business segment:
Three Months Ended
March 31, %
2023 2022 Change
($ in thousands)
Gross written premiums:
Excess and Surplus Lines $ 228,903 $ 204,282 12.1 %
Specialty Admitted Insurance 124,551 125,710 (0.9) %
Casualty Reinsurance 10,439 29,944 (65.1) %
$ 363,893 $ 359,936 1.1 %
Net written premiums:
Excess and Surplus Lines $ 147,430 $ 125,710 17.3 %
Specialty Admitted Insurance 26,725 20,205 32.3 %
Casualty Reinsurance 9,065 29,944 (69.7) %
$ 183,220 $ 175,859 4.2 %
Net earned premiums:
Excess and Surplus Lines $ 151,359 $ 131,301 15.3 %
Specialty Admitted Insurance 20,481 19,318 6.0 %
Casualty Reinsurance 36,273 39,205 (7.5) %
$ 208,113 $ 189,824 9.6 %
Gross written premiums for the Excess and Surplus Lines segment (which
represents 62.9% of our consolidated gross written premiums in the three months
ended March 31, 2023 ) increased 12.1% over the prior year driven by the
continued favorable market conditions. Total policy submissions for Core E&S
lines (excluding commercial auto) increased 2.4% from the prior year and our
ratio of bound policies to quoted policies was also higher, generating 5.8% more
bound policies in the three months ended March 31, 2023 than in the three months
ended March 31, 2022 . The total number of policies in force for the segment
increased 12.8% over the prior year. Renewal rates for the Excess and Surplus
Lines segment were up 8.9% compared to the three months ended March 31, 2022 .
The change in gross written premiums was notable in several divisions as shown
below:
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Three Months Ended
March 31, %
2023 2022 Change
($ in thousands)
Excess Casualty $ 81,394 $ 70,182 16.0 %
Manufacturers & Contractors 42,182 35,799 17.8 %
General Casualty 37,610 34,395 9.3 %
Excess Property 16,528 9,804 68.6 %
Small Business 10,184 9,048 12.6 %
All other Core E&S divisions 34,490 36,649 (5.9) %
Total Core E&S divisions 222,388 195,877 13.5 %
Commercial Auto 6,515 8,405 (22.5) %
Excess and Surplus Lines gross written premium $ 228,903 $ 204,282 12.1 %
The components of gross written premiums for the Specialty Admitted Insurance
segment (which represents 34.2% of our consolidated gross written premiums for
the three months ended March 31, 2023 ) are as follows:
Three Months Ended
March 31, %
2023 2022 Change
($ in thousands)
Fronting and program premium $ 111,583 $ 110,091 1.4 %
Individual risk workers' compensation premium 12,968 15,619 (17.0) %
Specialty Admitted gross written premium
Our fronting written premium increased over the prior year driven primarily by the continued expansion of existing fronting relationships. Our two largest fronting relationships represented$62.2 million and$53.6 million (49.9% and 42.6%) of segment gross written premium for the three months endedMarch 31, 2023 and 2022, respectively. Individual risk workers' compensation premium declined for the comparable three month periods as we maintain underwriting discipline against continued soft market conditions for workers' compensation. The Company suspended writing business in the Casualty Reinsurance segment earlier this year, and we are now focused on growing our higher returningU.S. insurance businesses. The gross written premiums of$10.4 million for the three months endedMarch 31, 2023 represents adjustments to written premium estimates for prior year treaties. Net Retention
Our net premium retention is summarized by segment as follows:
Three Months Ended
March 31,
2023 2022
Excess and Surplus Lines 64.4 % 61.5 %
Specialty Admitted Insurance 21.5 % 16.1 %
Casualty Reinsurance 86.8 % 100.0 %
Total 50.3 % 48.9 %
The net premium retention for the Excess and Surplus Lines segment increased
relative to the three month period of the prior year. The segment's Excess
Casualty division, which comprises slightly more than one-third of the segment's
gross written premiums in the three months ended March 31, 2023 and 2022, 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. In the third quarter of 2022, we increased our retention on the
reinsurance treaty applicable to the Excess Casualty division. Net retention for
the Excess Casualty division was 26.9% and 14.1% for the comparable three month
periods.
The net premium retention for the Specialty Admitted Insurance segment increased
for the three months ended March 31, 2023 as compared to the prior year
primarily due to the termination of an individual risk workers' compensation
quota share treaty effective January 1, 2023 . The net retention on the
individual risk workers' compensation business was 73.2% and 30.6% for the three
months ended March 31, 2023 and 2022, respectively. Net retention on the
fronting business was also higher due
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to the mix of business and changes in reinsurance coverage as treaties renew.
The net retention on the segment's fronting business was 15.4% and 14.0% for the
three months ended March 31, 2023 and 2022, respectively.
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 the net retention below 100% in the current
year reflects 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
March 31,
2023 2022
Excess and Surplus Lines 86.8 % 83.7 %
Specialty Admitted Insurance 102.3 % 98.9 %
Casualty Reinsurance 99.2 % 122.5 %
Total 94.9 % 97.4 %
Excess and Surplus Lines Segment
Results for the Excess and Surplus Lines segment are as follows:
Three Months Ended
March 31, %
2023 2022 Change
($ in thousands)
Gross written premiums $ 228,903 $ 204,282 12.1 %
Net written premiums $ 147,430 $ 125,710 17.3 %
Net earned premiums $ 151,359 $ 131,301 15.3 %
Losses and loss adjustment expenses excluding retroactive
reinsurance
(99,189) (84,925) 16.8 % Underwriting expenses (32,175) (24,919) 29.1 % Underwriting profit (1)$ 19,995 $ 21,457 (6.8) % Ratios: Loss ratio 65.5 % 64.7 % Expense ratio 21.3 % 19.0 % Combined ratio 86.8 % 83.7 % Accident year loss ratio 65.7 % 64.7 %
(1)Underwriting Profit is a non-GAAP Measure. See "Reconciliation of Non-GAAP
Measures."
The Excess and Surplus Lines segment produced underwriting profits of$20.0 million and$21.5 million (combined ratios of 86.8% and 83.7%) in the three months endedMarch 31, 2023 and 2022, respectively. Attractive market conditions and higher net retentions drove the growth in written and earned premiums. The higher loss ratio for the three months endedMarch 31, 2023 primarily reflects the mix of business for the current accident year. Net reserve development on prior accident years (excluding adverse prior year development on the legacy Rasier business and the impact of retroactive reinsurance - see discussion above) was$324,000 favorable and$59,000 favorable in the three months endedMarch 31, 2023 and 2022, respectively. The expense ratio increased over the prior year due to the mix of business and higher retentions which resulted in higher net commissions expense. 39 -------------------------------------------------------------------------------- Table of Contents Specialty Admitted Insurance Segment
Results for the
Three Months Ended
March 31, %
2023 2022 Change
($ in thousands)
Gross written premiums $ 124,551 $ 125,710 (0.9) %
Net written premiums $ 26,725 $ 20,205 32.3 %
Net earned premiums $ 20,481 $ 19,318 6.0 %
Losses and loss adjustment expenses (15,492) (15,435) 0.4 %
Underwriting expenses (5,458) (3,674) 48.6 %
Underwriting (loss) profit (1), (2) $ (469) $ 209 -
Ratios:
Loss ratio 75.6 % 79.9 %
Expense ratio 26.7 % 19.0 %
Combined ratio 102.3 % 98.9 %
Accident year loss ratio 76.5 % 79.6 %
(1)Underwriting (Loss) 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 had an underwriting loss of$469,000 and a combined ratio of 102.3% for the three months endedMarch 31, 2023 compared to an underwriting profit of$209,000 and a combined ratio of 98.9% in the three months endedMarch 31, 2022 . The loss ratio improvement from 79.9% in the prior year to 75.6% in the current year primarily reflects changes in the mix of business which helped to produce a lower current accident year loss ratio. Net development in our loss estimates for prior accident years was$171,000 favorable and$63,000 adverse in the three months endedMarch 31, 2023 and 2022, respectively. The higher expense ratio of 26.7% for the three months endedMarch 31, 2023 compared to 19.0% in the prior year was driven by higher net commission expense due to theJanuary 1, 2023 termination of the individual risk workers' compensation quota share treaty.
Casualty Reinsurance Segment
Results for the Casualty Reinsurance segment are as follows:
Three Months Ended
March 31, %
2023 2022 Change
($ in thousands)
Gross written premiums $ 10,439 $ 29,944 (65.1) %
Net written premiums $ 9,065 $ 29,944 (69.7) %
Net earned premiums $ 36,273 $ 39,205 (7.5) %
Losses and loss adjustment expenses excluding retroactive
reinsurance
(23,744) (35,248) (32.6) % Underwriting expenses (12,223) (12,794) (4.5) % Underwriting profit (loss) (1)$ 306 $ (8,837) - Ratios: Loss ratio 65.5 % 89.9 % Expense ratio 33.7 % 32.6 % Combined ratio 99.2 % 122.5 % Accident year loss ratio 60.3 % 72.6 %
(1)Underwriting Profit (Loss) is a non-GAAP Measure. See "Reconciliation of
Non-GAAP Measures."
The Casualty Reinsurance segment suspended underwriting activities earlier this
year. Current year written premiums represent adjustments to written premium
estimates for prior year treaties. The earning patterns of the business can
extend over multiple years, and changes in net earned premium for this segment
will lag the decline in gross and net written premium. For
40
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the three months ended March 31, 2023 , the segment had an underwriting profit of
$306,000 and a combined ratio of 99.2%. This compares to an underwriting loss of
$8.8 million and a combined ratio of 122.5% in the three months ended March 31,
2022 . The loss ratio improved from 89.9% in the prior three month period to
65.5% in the current year, driven by a decline in the current accident year
ratio and the impact of $6.8 million or 17.3 percentage points of net adverse
development in our loss estimates for prior accident years in the three months
ended March 31, 2022 that was associated with the Casualty Re LPT. For the three
months ended March 31, 2023 , $1.9 million or 5.1 percentage points of net
adverse reserve development was recognized (excluding adverse prior year
development on the business subject to the Casualty Re LPT and the impact of
retroactive reinsurance - see discussion above). The expense ratio increased
from 32.6% for the three months ended March 31, 2022 to 33.7% for three months
ended March 31, 2023 primarily reflecting higher commissions due to changes in
the mix of business.
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, share based compensation for the full Company group, and various other corporate expenses that were not reimbursed by our subsidiaries, including costs associated with our internal reinsurance, 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$9.3 million and$7.9 million for the three months endedMarch 31, 2023 and 2022, respectively. The increase in expenses compared to the prior year was largely attributable to compensation expenses, and, in particular, share based compensation. For the three months endedMarch 31, 2023 and 2022, the Company recognized$2.7 million and$1.8 million of share based compensation expense, respectively. Investing Results Net investment income was$25.8 million for the three months endedMarch 31, 2023 , compared to$16.3 million for the same period in the prior year. The Company's private investments generated income of$1.6 million for the three months endedMarch 31, 2023 compared to income of$2.9 million in the respective prior year period. Excluding private investments, our net investment income for the three months endedMarch 31, 2023 increased 80.9% from the prior year, principally due to higher yields on fixed maturities and bank loan participations. The average duration of our portfolio excluding restricted cash equivalents was 4.1 years atMarch 31, 2023 . 41
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Major categories of the Company's net investment income are summarized as
follows:
Three Months Ended
March 31,
2023 2022
($ in thousands)
Fixed maturity securities$ 16,427 $ 10,793 Bank loan participations 4,312 2,353 Equity securities 1,665 1,234 Other invested assets:
Renewable energy investments 1,255 2,681
Other private investments 336 218
1,591 2,899
Cash, cash equivalents, restricted cash equivalents and short-term
investments 2,862 32
Gross investment income 26,857 17,311
Investment expense (1,085) (1,044)
Net investment income $ 25,772 $ 16,267
The following table summarizes our annualized gross investment yields:
Three Months Ended
March 31,
2023 2022
Cash and invested assets 4.3 % 2.8 %
Fixed maturity securities 4.1 % 2.7 %
Of our total cash and invested assets of $2,413.8 million at March 31, 2023
(excluding restricted cash equivalents), $199.9 million represents the cash and
cash equivalents portion of the portfolio. The majority of the portfolio, or
$1,898.8 million , is comprised of fixed maturity securities that are classified
as available-for-sale and carried at fair value with unrealized gains and losses
on these securities reported, net of applicable taxes, as a separate component
of accumulated comprehensive income (loss). Also included in our investments are
$146.8 million of bank loan participations, $116.1 million of equity securities,
$25.1 million of short-term investments, and $27.2 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 March 31, 2023 and December 31, 2022 , the fair
market value of these securities was $146.8 million and $155.0 million ,
respectively.
For the three months ended March 31, 2023 , the Company recognized net realized
and unrealized investment gains of $407,000 , including $2.5 million of net
unrealized gains on bank loan participations, $1.2 million of net unrealized
losses for the change in the fair value of equity securities, an $85,000
impairment loss for one fixed maturity security, $1.1 million of net realized
investment losses on the sale of bank loan participations, and $314,000 of net
realized investment gains on the sale of equity securities.
For the three months ended March 31, 2022 , the Company recognized net realized
and unrealized investment losses of $5.0 million , including $2.0 million of net
unrealized losses on bank loan participations, $2.7 million of net unrealized
losses for the change in the fair value of equity securities, $202,000 of net
realized investment gains on the sale of fixed maturity securities, $89,000 of
net realized investment losses on the sale of bank loan participations, and
$357,000 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. During the three months ended March 31,
2023 , management recognized an impairment loss of $85,000 for one fixed maturity
security due to its intent to sell the security.
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Management concluded that none of its fixed maturity securities were impaired at
December 31, 2022 . At March 31, 2023 , 99.9% of the Company's fixed maturity
security portfolio was rated "BBB-" or better ("investment grade") by Standard &
Poor's or received an equivalent rating from another nationally recognized
rating agency. Management does not intend to sell available-for-sale securities
in an unrealized loss position, and it is not "more likely than not" that the
Company will be required to sell these securities before a recovery in their
value to their amortized cost basis occurs.
The amortized cost and fair value of our available-for-sale fixed maturity
securities were as follows:
March 31, 2023 December 31, 2022
Cost or % of Cost or % of
Amortized Fair Total Amortized Fair Total
Cost Value Fair Value Cost Value Fair Value
($ in thousands)
Fixed maturity securities,
available-for-sale:
State and municipal $ 388,817 $ 346,194 18.2 % $ 386,456 $ 330,852 18.6 %
Residential mortgage-backed 471,852 442,081 23.3 % 437,702 401,249 22.5 %
Corporate 772,885 719,173 37.9 % 734,976 670,212 37.6 %
Commercial mortgage and asset-backed 341,742 320,054 16.9 % 335,066 309,015 17.3 %
U.S. Treasury securities and obligations
guaranteed by the U.S. government 73,925 71,256 3.7 % 75,583 72,089 4.0 %
Total fixed maturity securities,
available-for-sale $ 2,049,221 $ 1,898,758 100.0 % $ 1,969,783 $ 1,783,417 100.0 %
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 $ 409,972 21.6 %
AA 784,828 41.4 %
A 535,757 28.2 %
BBB 165,874 8.7 %
Below BBB and unrated 2,327 0.1 %
Total $ 1,898,758 100.0 %
The amortized cost and fair value of our available-for-sale investments in fixed
maturity securities summarized by contractual maturity are as follows:
March 31, 2023
Amortized Fair % of
Cost Value Total Value
($ in thousands)
Due in:
One year or less $ 65,003 $ 63,951 3.4 %
After one year through five years 525,508 504,265 26.6 %
After five years through ten years 378,716 339,759 17.9 %
After ten years 266,400 228,648 12.0 %
Residential mortgage-backed 471,852 442,081 23.3 %
Commercial mortgage and asset-backed 341,742 320,054 16.8 %
Total $ 2,049,221 $ 1,898,758 100.0 %
43
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Other income and expense primarily consists of non-operating expenses of
respectively. Non-operating expenses include legal fees related to a purported
class action lawsuit, legal and other professional fees and other expenses
related to various strategic initiatives including loss portfolio transfers
accounted for as retroactive reinsurance, and employee severance costs.
Interest Expense
Interest expense was$6.6 million and$2.3 million for the three months endedMarch 31, 2023 and 2022, respectively. The increase over the prior year primarily reflects the impact of rising interest rates on our variable rate senior and trust preferred debt. Interest expense for the respective periods also includes$1.0 million and$15,000 of crediting fees on the Funds Withheld Account balance under the Casualty Re LPT. 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
three months ended
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 or expenses on share based compensation. For the three months endedMarch 31, 2023 and 2022, ourU.S. federal income tax expense was 24.6% of the income before taxes in each period. For both periods, 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 due to discrete items for the quarter primarily related to excess tax expenses associated with vested restricted share units ("RSUs") in the respective three month periods.
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 March 31,
2023 was $2,842.0 million . Of this amount, 63.3% relates to amounts that are
IBNR. This amount was 61.5% at December 31, 2022 . The Company's gross reserves
for losses and loss adjustment expenses by segment are summarized as follows:
Gross Reserves at March 31, 2023
Case IBNR Total
($ in thousands)
Excess and Surplus Lines $ 535,507 $ 1,096,550 $ 1,632,057
Specialty Admitted Insurance 368,660 408,041 776,701
Casualty Reinsurance 139,026 294,209 433,235
Total $ 1,043,193 $ 1,798,800 $ 2,841,993
At March 31, 2023 , the amount of net reserves (prior to the $661,000 allowance
for uncollectible reinsurance recoverables) of $1,299.8 million that related to
IBNR was 69.3%. This amount was 66.6% at December 31, 2022 . The Company's net
reserves for losses and loss adjustment expenses by segment are summarized as
follows:
Net Reserves at March 31, 2023
Case IBNR Total
($ in thousands)
Excess and Surplus Lines $ 297,891 $ 706,576 $ 1,004,467
Specialty Admitted Insurance 47,894 69,171 117,065
Casualty Reinsurance 53,414 124,889 178,303
Total $ 399,199 $ 900,636 $ 1,299,835
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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:
Three Months Ended
2023 2022
($ in thousands)
Cash and cash equivalents provided by (used in):
Operating activities (excluding restricted cash equivalents) $ 18,413 $ 65,351
Investing activities 17,126 (87,134)
Financing activities (8,805) 101,855
Change in cash and cash equivalents 26,734 80,072
Change in restricted cash equivalents (operating activities) 1,039 4
Change in cash, cash equivalents, and restricted cash equivalents $
27,773
Cash provided by operating activities excluding restricted cash equivalents of$18.4 million and$65.4 million for the three months endedMarch 31, 2023 and 2022, respectively, 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. The cash provided by operating activities declined relative to the prior year due to the suspension of underwriting activities in the Casualty Reinsurance segment earlier this year. Cash provided by investing activities of$17.1 million for the three months endedMarch 31, 2023 primarily reflects the suspension of underwriting activities in the Casualty Reinsurance segment earlier this year and the withdrawal of invested assets to fund claims and operating expenses for the segment. Cash used in investing activities of$87.1 million for the three months endedMarch 31, 2022 reflects our efforts to enhance the yield in our investment portfolio by investing available cash and cash equivalents into higher yielding investments. Cash and cash equivalents (excluding restricted cash equivalents) comprised 8.3% and 11.3% of total cash and invested assets atMarch 31, 2023 and 2022, respectively. Cash used in financing activities of$8.8 million for the three months endedMarch 31, 2023 includes$2.0 million of dividends paid to common shareholders and$5.3 million of dividends paid on the Series A Preferred Shares. Cash provided by financing activities of$101.9 million for the three months endedMarch 31, 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 three months endedMarch 31, 2022 also include$2.1 million of dividends paid to common shareholders. The activity in restricted cash equivalents for the three months endedMarch 31, 2023 and 2022 relates to a former insured, per the terms of a collateral trust. See Amounts Recoverable from anIndemnifying Party and Reinsurer on Legacy CommercialAuto Book below.
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 45 -------------------------------------------------------------------------------- Table of Contents 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 -U.S. Insurance Regulation - State Regulation" in our Annual Report on Form 10-K for the year endedDecember 31, 2022 filed with theSEC onFebruary 28, 2023 for additional information. The maximum amount of dividends available to theU.S. holding company from ourU.S. insurance subsidiaries during 2023 without regulatory approval is$53.7 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 - Restrictions on Dividends and Distributions" in our Annual Report on Form 10-K for the year endedDecember 31, 2022 filed with theSEC onFebruary 28, 2023 for additional information. Based on that calculation, the maximum combined amount of dividends and return of capital available to us from JRG Re without regulatory approval in 2023 is calculated to be approximately$93.9 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 and are payable quarterly. Cash dividends of$5.3 million were paid in the three months endedMarch 31, 2023 including cash dividends paid in January for the three months endedDecember 31, 2022 and cash dividends paid in March for the three months endedMarch 31, 2023 . AtMarch 31, 2023 , theBermuda holding company had$809,000 of cash and cash equivalents. TheU.S. holding company had$18.5 million of cash and invested assets, comprised of cash and cash equivalents of$10.9 million , short-term investments of$5.1 million , and other invested assets of$2.6 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 atMarch 31, 2023 .
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 atMarch 31, 2023 : •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. AtMarch 31, 2023 , the Company had$44.2 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 and is payable in arrears, currently at 1-month SOFR (the Company, per the terms of the credit agreement, can elect between one, two, three, or six month interest periods) plus a 0.1% SOFR index adjustment and a SOFR margin which is currently 1.5% and is subject to change according to terms in the credit agreement. AtMarch 31, 2023 , 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. 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 atMarch 31, 2023 . 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 atMarch 31, 2023 . 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 and is payable in arrears at variable rates which are subject to change according to terms in the credit agreement. AtMarch 31, 2023 , unsecured loans of$21.5 million and secured letters of credit totaling$36.0 million were 46 -------------------------------------------------------------------------------- Table of Contents 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$15.0 million of senior debt dueApril 29, 2034 . The senior debt is not redeemable by the holder or subject to sinking fund requirements. Interest accrues quarterly and is payable in arrears at a floating rate per annum equal to the 3-month LIBOR plus 3.85%. This senior debt is redeemable at par prior to its stated maturity at our option in whole or in part. The terms of the senior debt contain certain covenants, with which we are in compliance atMarch 31, 2023 , and which, among other things, restrict our ability to assume senior indebtedness secured by ourU.S. holding company's common stock or its subsidiaries' capital stock or to issue shares of its subsidiaries' capital stock. FromMay 2004 throughJanuary 2008 , we sold trust preferred securities through fiveDelaware statutory trusts sponsored and wholly-owned by the Company or its subsidiaries. Each trust used the net proceeds from the sale of its trust preferred securities to purchase our floating-rate junior subordinated debt. The following table summarizes the nature and terms of the junior subordinated debt and trust preferred securities outstanding atMarch 31, 2023 (including the Company's repurchases of a portion of these trust preferred securities): Franklin Holdings II James River James River James River James River (Bermuda) Capital Capital Capital Capital Capital Trust I Trust II Trust III Trust IV Trust I ($ 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
AtMarch 31, 2023 andDecember 31, 2022 , the Company's leverage ratio was 22.8% and 22.9%, 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. 47 -------------------------------------------------------------------------------- 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 endedMarch 31, 2023 and 2022, our net premium retention was 50.3% and 48.9%, respectively.
The following is a summary of our Excess and Surplus Lines segment's ceded
reinsurance in place 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 specific quota share treaty in effect to cover property risks. The quota 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. The Commercial Auto LPT with Aleka reinsures 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. 48 -------------------------------------------------------------------------------- Table of Contents The following is a summary of ourSpecialty Admitted Insurance segment's ceded reinsurance in place as ofMarch 31, 2023 : Line of Business Coverage Casualty Workers' Compensation Excess of loss coverage for$29.5 million in excess of$500,000 .(1) Auto Programs Quota share coverage for 50%-90% of limits up to$1.5 million liability and$7.5 million physical damage per occurrence.
General Liability & Professional Quota share coverage for 62.5%-100% of limits up to
Liability - Programs
million 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$58.9 million . Catastrophe Coverage Excess of Loss coverage for$59.0 million in excess of$1.0 million per occurrence. Aviation Programs Quota share coverage for 80% of limits up to$20 million liability and$2.5 million hull per occurrence, each aircraft; and excess of loss
coverage for up to
of$300,000 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. 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 Casualty Re LPT with FRL to reinsure the majority of the segment risk, which closed onMarch 31, 2022 . Under the terms of the transaction, 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. 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 ofMarch 31, 2023 , 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 had one reinstatement and expired onDecember 31, 2022 . 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. AtMarch 31, 2023 , the allowance for credit losses on reinsurance recoverables was$661,000 . 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 49 -------------------------------------------------------------------------------- Table of Contents adjustment expense reserves, typically through the use of irrevocable and unconditional letters of credit. In fronting arrangements, which the Company conducts through itsSpecialty Admitted Insurance segment, we are subject to credit risk with regard to insurance companies who act as reinsurers for us in such arrangements. We customarily require a collateral trust arrangement to secure the obligations of the insurance entity for whom we are fronting. AtMarch 31, 2023 , we had reinsurance recoverables on unpaid losses of$1,541.5 million (net of a$661,000 allowance for credit losses) and reinsurance recoverables on paid losses of$158.8 million , and all material recoverable amounts were from companies withA.M. Best ratings of "A-" (Excellent) or better, or are collateralized by the reinsurer for our benefit through letters of credit or funds on deposit in trust accounts.
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. AtMarch 31, 2023 , the balance in theIndemnity Trust was$175.8 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$245.0 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 actuarial principles and based on reserves recorded in the Company's statutory financial statements. The collateral is provided through a collateral trust arrangement (the "LPT Trust ") established in favor of James River by Aleka. AtMarch 31, 2023 , the balance in theLPT Trust was$80.5 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$108.7 million . AtMarch 31, 2023 , the total reinsurance recoverables under the Commercial Auto LPT was$145.3 million (including$135.4 million of unpaid recoverables and$9.9 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. AtMarch 31, 2023 , the balance in theLoss Fund Trust was$104.3 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 50 -------------------------------------------------------------------------------- Table of Contents 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 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. 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 37,470,237 atDecember 31, 2022 to 37,619,226 atMarch 31, 2023 , reflecting 148,989 common shares issued in the three months endedMarch 31, 2023 related to vesting of RSUs.
Share Based Compensation Expense
For the three months endedMarch 31, 2023 and 2022, the Company recognized$2.7 million and$1.8 million of share based compensation expense, respectively. As ofMarch 31, 2023 , the Company had$17.4 million of unrecognized share based compensation expense expected to be charged to earnings over a weighted-average period of 2.2 years. Equity Incentive Plans Options
The following table summarizes option activity:
Three Months Ended March 31,
2023 2022
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding:
Beginning of period 287,974 $ 35.26 287,974 $ 35.26
Granted - $ - - $ -
Exercised - $ - - $ -
Forfeited (45,106) $ 34.92 - $ -
Lapsed (164,548) $ 32.07 - $ -
End of period 78,320 $ 42.17 287,974 $ 35.26
Exercisable, end of period 78,320 $ 42.17 287,974 $ 35.26
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.
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RSUs
The following table summarizes RSU activity:
Three Months Ended March 31,
2023 2022
Weighted- Weighted-
Average Average
Grant Date Grant Date
Shares Fair Value Shares Fair Value
Unvested, beginning of period 665,458 $ 25.98 292,135 $ 45.89
Granted 363,484 $ 24.83 538,778 $ 20.50
Vested (212,128) $ 28.93 (109,589) $ 45.57
Forfeited (4,293) $ 22.49 - $ -
Unvested, end of period 812,521 $ 24.71 721,324 $ 26.97
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. The RSUs granted in 2023 include 91,818 PRSU awards.
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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
March 31,
2023 2022
Excess and Surplus Lines:
Loss Ratio 65.5 % 64.7 %
Impact of retroactive reinsurance 7.7 % - %
Loss Ratio including impact of retroactive reinsurance 73.2 % 64.7 %
Combined Ratio 86.8 % 83.7 %
Impact of retroactive reinsurance 7.7 % - %
Combined Ratio including impact of retroactive reinsurance 94.5 % 83.7 %
Casualty Reinsurance:
Loss Ratio 65.5 % 89.9 %
Impact of retroactive reinsurance 14.2 % - %
Loss Ratio including impact of retroactive reinsurance 79.7 % 89.9 %
Combined Ratio 99.2 % 122.5 %
Impact of retroactive reinsurance 14.2 % - %
Combined Ratio including impact of retroactive reinsurance 113.4 % 122.5 %
Consolidated:
Loss Ratio 66.5 % 71.4 %
Impact of retroactive reinsurance 8.1 % - %
Loss Ratio including impact of retroactive reinsurance 74.6 % 71.4 %
Combined Ratio 94.9 % 97.4 %
Impact of retroactive reinsurance 8.1 % - %
Combined Ratio including impact of retroactive reinsurance 103.0 % 97.4 %
53
-------------------------------------------------------------------------------- Table of Contents RECONCILIATION OF NON-GAAP MEASURES
See "Key Metrics" above for descriptions of why management believes the
following Non-GAAP measures provide useful information about our financial
condition and results of operation.
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 income before income taxes:
Three Months Ended
March 31,
2023 2022
(in thousands)
Underwriting profit (loss) of the operating segments:
Excess and Surplus Lines
$ 19,995 $ 21,457 Specialty Admitted Insurance (469) 209 Casualty Reinsurance 306 (8,837) Total underwriting profit of operating segments 19,832 12,829 Other operating expenses of the Corporate and Other segment (9,282) (7,874) Underwriting profit (1) 10,550 4,955 Losses and loss adjustment expenses - retroactive reinsurance (16,863) - Net investment income 25,772 16,267 Net realized and unrealized gains (losses) on investments 407 (5,010) Amortization of intangible assets (91) (91) Other income and expenses (415) (301) Interest expense (6,616) (2,292) Income before income taxes
(1)Included in underwriting results for the three months ended
and 2022 is gross fee income of
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.
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Table of Contents
Our income available to common shareholders reconciles to our adjusted net
operating income as follows:
Three Months Ended March 31,
2023 2022
Income Income
Before Net Before Net
Taxes Income Taxes Income
($ in thousands)
Income available to common shareholders $ 10,119 $ 6,983 $ 12,653 $ 9,330
Losses and loss adjustment expenses - retroactive
reinsurance 16,863 14,406 - -
Net realized and unrealized investment (gains)
losses (407) (373) 5,010 4,190
Other expenses 575 575 347 347
Adjusted net operating income $ 27,150 $ 21,591 $ 18,010 $ 13,867
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
ROOT, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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