AM Best announced on Tuesday that the rating agency won’t change the A- (Excellent) financial strength ratings for the operating subsidiaries of James River Group Holdings, Ltd., a day after the insurer announced a fourth-quarter loss $66.2 million.
The bottom-line net loss for the final quarter, contributing to a $172.8 million loss for all of last year, was mainly the result of adverse reserve development of $115.0 million in the casualty reinsurance segment of James River’s business.
James River announced strategic actions to strengthen its balance sheet and remove the drag of legacy reinsurance business, allowing a go-forward focus more on its core E&S (excluding commercial auto) and specialty admitted businesses. Those insurance businesses each reported combined ratios in the 80s for the quarter. The adverse loss development in the casualty reinsurance, added 60.0 points to the companywide combined ratio, pulling it up to 140.6. (Note: James River isn’t entirely exiting casualty reinsurance but premiums will shrink by $100 million in 2022, executives said.)
AM Best said the “long-term stability of the organization’s core excess and surplus lines segment reserves, and strong profitability in the E&S and specialty admitted insurance segments, were factors it considered in maintaining James River’s ratings, also noting the rating agency’s view of three strategic actions that James River is taking.
First, the company announced that one of its operating subsidiaries, JRG Reinsurance Company Ltd. (JRG Re), has entered into a loss portfolio transfer retrocession agreement with Fortitude Reinsurance Company Ltd. (FRL), under which FRL will reinsure the majority of the casualty reinsurance reserves.
Terms of the transaction call for JRG Re to cede roughly $335 million of liabilities for certain business written in the years 2011-2020 to FRL. The coverage being provided by FRL is subject to an aggregate limit of $400 million. In other words, the transaction will provide the company with $65 million of net limit above held reserves for the subject business (the difference between $400 million and $335 million).
In addition, James River said it has entered into an investment agreement with Gallatin Point Capital, a private investment firm that specializes in investments in financial institutions, services, and assets, calling for Gallatin and its affiliated funds to purchase $150 million convertible preferred shares from the James River. In conjunction with the investment transaction, James River’s board of directors approved the appointment of Matthew Botein, one of Gallatin Point’s co-founders and managing partners, as a director.
James River will also be reducing its quarterly common stock dividend to five cents per share from 30 cents per share.
These three moves—the LPT, the Gallatin investment and the dividend cut—described by James River as “strategic actions,” followed a previous action announced by James River involving a commercial auto rideshare book of business in October last year. Then, James River announced that two of its principal operating subsidiaries entered into LPT reinsurance transaction with a wholly owned captive insurer of Uber Technologies, Inc.—Uber’s captive, Aleka Insurance Inc., which agreed to reinsure substantially all of James River’s legacy portfolio of commercial auto policies related to Uber’s ridesharing business.
Under that deal, James River ceded about $345.1 million of commercial auto liabilities relating to business written for Uber’s ridesharing business in the years 2013-2019.
In response to the latest strategic actions and earnings report, AM Best said it would keep a stable outlook on the specialty insurance company’s ratings. “After holding discussions with company management and reviewing the financial and operational impacts of the aforementioned strategic initiatives, AM Best believes that the immediate balance sheet pressures arising from the adverse prior-year reserve development in the casualty reinsurance segment have been addressed.”
“Notably, the implementation of the LPT provides $65 million of protection on the subject liabilities, in case of further adverse reserve development,” the Best announcement said, also noting that the risk-adjusted capital position of the operating companies will be strengthened because most of the proceeds from the convertible preferred share issuance will be downstreamed to the operating entities.
During an earnings conference call on Monday, James River’s Chief Executive Officer Frank D’Orazio, reviewed the strategic actions, the profitability of the core E&S and specialty books, and other changes that have taken place since he joined the company in October 2020.
“James River will continue to be a dynamic and entrepreneurial underwriting organization as we build upon our industry-leading insurance franchises. What we’ve highlighted in the actions taken since I’ve joined the organization is the blueprint for how we’re going to manage and govern the company. And frankly, there’s no turning back,” he said.
D’Orazio, a former chief operating officer of Allied World, started his career in casualty underwriting at Chubb in 1990. And since he took the helm of James River, the company has signed on several other industry veterans to C-suite positions, including Chief Actuary David Gelinne (a 40-year veteran and former chief actuary or Allied World, who started his career at AIG) and Chief Claims Officer Jim Gunson (a former senior vice president of complex casualty claims for CNA with 25 years of legal and operational claims experience). In addition, James River created a new role of group chief underwriting officer in November last year, appointing Mike Hoffman, who previously worked at Everest, Allied World and Chubb, to the position.
“We’ve done this while growing the company by 20 percent over the past year, D’Orazio said, referring to the hires, reserves actions (including a $170 million reserve boost in early 2021 for commercial auto business in runoff), the LPTs portfolio and capital raises.
Gross written premiums for James River grew to $1.5 billion in 2021 from $1.3 billion in 2020, with E&S premiums rising to $833.7 million and specialty admitted to $491.6 million—up 19.2 percent and 20.3 percent, respectively.
D’Orazio noted that E&S turned in an underwriting profit of $24 million for the fourth quarter of 2021—”the second largest quarterly underwriting profit ever for the segment, and that did not include the benefit of any positive reserve release, highlighting the profitability of the business we’re currently writing.”
E&S pricing, he said, is meaningfully ahead of loss cost trends. “The fourth quarter of 2021 represented the 20th consecutive quarter of rate increases for the E&S segment, compounding to 49 percent over that period and providing confidence in the strength of our loss picks and the margin we’re building in the business that we’re writing today,” he said.
D’Orazio also explained the makeup of the reserve charge for the reinsurance business, noting that the bulk of the adverse development was driven by “less than one handful of cedents” for underlying primary general liability coverage, including exposure to construction and construction defect. Later in the call, he went on to explain why the emergence of construction defect claims has impacted the reinsurance book but not James River’s core E&S book. “Our E&S segment has historically not written large homebuilders or general contractors who construct massive-scale multifamily housing. We also don’t write construction wraps either on an owner-controlled or contractor-controlled basis. These structures and programs tend to be vulnerable to latency because they had very long products and completed operations coverage extensions.”
While these programs weren’t written in the E&S segment, a few of James River’s larger cedents did underwrite these structures, he said.
“So then what do we write? Our manufacturers and contractors unit in our E&S segment tends to target artisan and trade contractors with average premium sizes of $25,000 to $30,000. And we try to avoid many of the most problematic states for the class,” he said. “Finally, we write no new residential construction in our small business or contract binding units.”
Going forward, AM Best said it will monitor the financial performance of JRG Holdings and its operating subsidiaries closely. “Of particular importance will be the continuation of strong profitability trends in the E&S segment, the stabilization of casualty reinsurance segment reserves that are not subject to the LPT, and the gradual reduction of financial leverage at JRG Holdings, which is elevated currently following the convertible preferred stock issuance.”
Results differing materially from AM Best’s expectations in any of these areas will put negative pressure on the ratings, AM Best said.