James River Group NASDAQ: JRVR reported a third-quarter net loss of $189.4 million, driven largely by a charge that eliminated the insurer’s goodwill, as reserve increases and a decline in excess and surplus lines premiums also weighed on results.
Chief Executive Officer Frank D’Orazio called the quarter difficult and said the company’s performance fell short of its own and shareholders’ expectations. He said James River remains focused on underwriting profitability rather than pursuing premium growth in an increasingly competitive market.
The net loss available to common shareholders amounted to $4.08 per diluted share. On an adjusted net operating basis, the company reported a loss of $4.4 million, or $0.10 per diluted share, compared with income of $17.4 million, or $0.32 per diluted share, a year earlier.
Goodwill Charge and Reserve Development
Chief Financial Officer Sarah Doran said the reported loss was driven primarily by a $181.8 million non-cash impairment of all the goodwill on the company’s balance sheet. The charge did not affect operating results, statutory capital, tangible common equity or compliance with debt covenants, she said.
Doran said James River conducted an updated impairment assessment in the third quarter in light of factors including its stock price performance and conditions in the excess and surplus, or E&S, market. The goodwill had been carried on the E&S business since the company’s 2007 take-private transaction, she said.
The company’s annual detailed valuation review also resulted in $19.2 million of net adverse reserve development in the E&S segment. D’Orazio said the development was concentrated primarily in the 2019 through 2023 years in the legacy product liability portfolio, involving construction defect claims associated with contractors in Florida exposed to tract housing.
He said the company had observed a high frequency of low-severity claims, many of which closed with minimal or no indemnity payments. Although new claim counts have fallen meaningfully in recent quarters, actuaries increased their trend and development assumptions and expected losses. James River has non-renewed all remaining construction accounts with the same type of tract-housing exposure, D’Orazio said.
The reserve development added 15 points to the quarterly E&S combined ratio, which was 108.5%, Doran said. Excluding that impact, the ratio would have been 93.4%. The consolidated combined ratio was 115.6% for the quarter, while the group’s current accident year loss ratio was 65.7%, unchanged from a year earlier.
Competition Pressures Premiums
E&S gross written premiums fell more than 18% from the prior-year quarter, even as submissions for active divisions rose 8%, D’Orazio said. He attributed the decline in part to intentional non-renewals and competition in habitational insurance, particularly in the company’s general casualty and excess casualty divisions.
The company non-renewed more than $15 million of habitational business during the quarter that did not meet its pricing and profitability expectations, he said. The E&S segment wrote approximately $45 million of new business in the quarter.
D’Orazio said casualty rates were roughly flat year over year, compared with mid-single-digit growth a year earlier. He described managing general agents and other E&S carriers as major sources of competition. Movement back to the admitted market was most pronounced in property, he said, but admitted carriers were not a major competitive factor overall.
James River is also shifting toward smaller accounts. Policies with premiums of $35,000 or less represent more than 80% of its policy count, have the highest premium retention in its book and have historically produced better underwriting results across the cycle, D’Orazio said. That shift has reduced near-term production: Average premium per bound policy fell 12% year over year in the quarter.
The company is using an AI-enabled underwriting workbench from Kalepa to help underwriters prioritize and quote submissions more quickly. D’Orazio said early results in the first three departments using the technology showed productivity improvements in quotes and binders per underwriter.
Costs Fall as Investment Income Rises
General and administrative expenses fell approximately $3 million from the prior-year quarter, Doran said. The consolidated expense ratio nevertheless rose to 33.7% from 28.3%, primarily because net earned premium declined 14%.
Net investment income rose 1% year over year to $22.2 million and was up 9% from the second quarter. Doran attributed the increase primarily to the fixed-income portfolio, where the company had invested new money at yields above its portfolio book yield.
Tangible common equity per share ended the quarter at $7.95, down from $8.94 at year-end. Doran said a $52 million increase in accumulated other comprehensive loss during the quarter, caused by rising rates, reduced tangible book value by $1.12 per share. She said the company considers the unrealized losses temporary because it intends and is able to hold the investments to maturity.
About James River Group (NASDAQ:JRVR)
James River Group Holdings, Ltd. NASDAQ: JRVR is a specialty insurance holding company headquartered in Hamilton, Bermuda. Through its operating subsidiaries, the company provides commercial casualty insurance and reinsurance products to businesses and other insurance organizations.
The company's operations have included excess and surplus lines insurance, specialty admitted insurance and casualty reinsurance. Its products are designed for risks that may require customized underwriting or coverage that is not readily available through standard commercial insurance markets.
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