Press Release

James River Announces Fourth Quarter and Year End 2017 Results

02/22/18
  • Fourth Quarter Net Income of $0.2 million -- $0.01 per diluted share, and Adjusted Net Operating Income of $4.1 million -- $0.13 per diluted share
     
  • Full Year Adjusted Net Operating Return on Average Tangible Equity of 9.7%
     
  • During the quarter, $29.8 million of unfavorable development in the Excess and Surplus Lines segment, driven by one large account in one prior underwriting year
     
  • 85.5% growth in Gross Fee Income as compared to the prior year quarter; on a full year basis Gross Fee Income almost double prior year
     
  • 6.0% growth in Pre-Dividend Shareholders' Equity per share since December 31, 2016; 9.5% growth in Pre-Dividend Tangible Equity per share since December 31, 2016
     
  • Total capital of $23.9 million returned to shareholders during the quarter, and $50.6 million for the full year

PEMBROKE, Bermuda, Feb. 22, 2018 (GLOBE NEWSWIRE) -- James River Group Holdings, Ltd. ("James River" or the "Company") (NASDAQ:JRVR) today reported fourth quarter 2017 net income of $0.2 million ($0.01 per diluted share), compared to $25.7 million ($0.85 per diluted share) for the fourth quarter of 2016.  Adjusted net operating income for the fourth quarter of 2017 was $4.1 million ($0.13 per diluted share), compared to $23.2 million ($0.77 per diluted share) for the same period in 2016.

Earnings Per Diluted Share Three Months Ended
December 31,
  Twelve Months Ended
December 31,
  2017   2016   2017   2016
               
Net Income $ 0.01     $ 0.85     $ 1.44     $ 2.49  
Adjusted Net Operating Income $ 0.13     $ 0.77     $ 1.57     $ 2.39  

Robert P. Myron, the Company’s Chief Executive Officer, commented, “While we are disappointed with our financial results for the fourth quarter, we expect underwriting results to return to historic levels of profitability in 2018.”

“We continue to make improvements in our expense ratio due to scale and operating efficiencies.  We had a 6% rate increase and double digit growth across our core E&S business in the fourth quarter and we have renewed our largest account with attractive terms and conditions, all of which bodes well for a strong 2018.  We remain confident in our underwriting discipline and selective pursuit of attractive growth opportunities.  We believe we are well positioned to achieve a 12% or better operating return on tangible equity for 2018.”

“In the fourth quarter, we strengthened loss reserves for one account in one underwriting year.  Despite the reserve strengthening, we produced an underwriting profit and a 99.2% combined ratio for the year.  We are also pleased to report that we had a modest take down in our catastrophe loss reserves from third quarter events.  Our loss reserves at year end remain above our third party actuaries' point estimate.”

“In light of recent U.S. tax law changes, we altered our corporate structure after year end.  We will remain a Bermuda based company and expect our tax rate will remain consistent with our tax rates over the past five years.”

Fourth Quarter 2017 Operating Results

  • Net written premiums of $144.1 million, consisting of the following:
  Three Months Ended December 31,  
($ in thousands) 2017   2016   % Change
Excess and Surplus Lines $ 123,535     $ 77,304     60 %
Specialty Admitted Insurance 7,495     16,304     -54 %
Casualty Reinsurance 13,098     19,000     -31 %
  $ 144,128     $ 112,608     28 %
  • Net earned premiums of $200.2 million, consisting of the following:
  Three Months Ended December 31,  
($ in thousands) 2017   2016   % Change
Excess and Surplus Lines $ 128,798     $ 83,662     54 %
Specialty Admitted Insurance 14,773     15,465     -4 %
Casualty Reinsurance 56,658     47,702     19 %
  $ 200,229     $ 146,829     36 %
  • The Excess and Surplus Lines segment grew due to increases in its Commercial Auto division as well as 14.0% growth in core (non-Commercial Auto) lines;
  • The Specialty Admitted Insurance segment decreased as a result of the October 1st inception of a new 50% quota share reinsurance agreement on its Workers' Compensation line;
  • Net Written Premium in the Casualty Reinsurance segment decreased due to lower positive adjustments to premium estimates from treaties written in prior periods;
  • Unfavorable reserve development of $30.7 million compared to favorable reserve development of $9.0 million in the prior year quarter (representing a 15.3 percentage point increase and 6.1 percentage point reduction to the Company’s loss ratio in each period, respectively).  The quarter’s unfavorable development was largely a result of $29.8 million of adverse development in the Excess and Surplus Lines segment, driven by the 2016 accident year of one commercial auto account.  This adjustment was the result of the Company's internal and external actuarial reviews conducted at year end.  Pre-tax favorable (unfavorable) reserve development by segment was as follows:
  Three Months Ended
December 31,
($ in thousands) 2017   2016
Excess and Surplus Lines $ (29,798 )   $ 10,301  
Specialty Admitted Insurance 591     1,323  
Casualty Reinsurance (1,528 )   (2,656 )
  $ (30,735 )   $ 8,968  
  • Group accident year loss ratio of 68.8% was relatively flat from its level of 68.7% in the prior year quarter;
  • Group combined ratio of 102.0%, as compared to 92.0% in the prior year quarter primarily driven by $29.8 million of adverse development in the Excess and Surplus Lines segment;
  • Group expense ratio of 17.9% improved from 29.4% in the prior year quarter, driven by increased net earned premium and fee income, as well as growth in lines of business which carry relatively low expense ratios and a refinement of certain accruals related to the Company's change in business mix, which resulted in a $4.5 million reduction to acquisition expenses.  Absent this refinement, the Company’s expense ratio would have been 20.1% for the quarter.  The Company also significantly reduced its 2017 compensation bonus pools this quarter;
  • Gross fee income of $8.5 million, an increase of 85.5% over the prior year quarter as a result of increased fronting volume in the Specialty Admitted Insurance segment and increased fee-for-service business in the Excess and Surplus Lines segment.  Gross fee income resulted in a 4.2 and 3.1 percentage point reduction to the Company’s fourth quarter 2017 and 2016 expense ratios, respectively;
  • Gross fee income by segment was as follows:
  Three Months Ended December 31,  
($ in thousands) 2017   2016   % Change
Excess and Surplus Lines $ 5,023     $ 2,904     73 %
Specialty Admitted Insurance 3,445     1,662     107 %
  $ 8,468     $ 4,566     85 %
  • Net investment income of $15.8 million, an increase of 12.7% from the prior year quarter.  Further details can be found in the ‘Investment Results’ section below;
  • $3.5 million increase to net income resulting from the recently enacted U.S. tax reform legislation as the Company's deferred tax liability position was revalued at the reduced 21% U.S. corporate income tax rate.

Investment Results

Net investment income for the fourth quarter of 2017 was $15.8 million, which compares to $14.0 million for the same period in 2016.  The increase was principally driven by fair value gains in the Company’s renewable energy portfolio and asset growth across the core investment portfolio.

The Company’s net investment income consisted of the following:

  Three Months Ended
December 31,
 
($ in thousands) 2017   2016   % Change
Renewable Energy Investments $ 1,947     $ 1,505     29 %
Other Private Investments 1,394     1,564     (11 )%
All Other Net Investment Income   12,451       10,947     14 %
Total Net Investment Income $ 15,792     $ 14,016     13 %

The Company’s annualized gross investment yield on average fixed maturity and bank loan securities for the three months ended December 31, 2017 was 3.6% (3.5% for the three months ended December 31, 2016) and the average duration of the fixed maturity and bank loan portfolio was 3.5 years at December 31, 2017 (3.6 years at December 31, 2016).  Renewable energy and other private investments produced an annualized return of 19.6% for the three months ended December 31, 2017 (22.8% for the three months ended December 31, 2016) and an actual return of 22.4% for the twelve months ended December 31, 2017 (17.4% for the twelve months ended December 31, 2016).

During the fourth quarter, the Company recognized $3.2 million of pre-tax net realized losses ($5.2 million of net realized gains in the same period in 2016).

Taxes

Generally, the Company's 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.  The tax rate for the three months ended December 31, 2017 and 2016 was 96.3% and 5.4%, respectively, while the tax rate for the twelve months ended December 31, 2017 and 2016 was 21.0% and 6.1%, respectively.  The Company’s tax rate is influenced by the jurisdiction in which it earns underwriting and investment income.  The unfavorable reserve development in the Excess and Surplus Lines segment, a portion of which is earned in Bermuda through the intercompany quota share, caused a loss offshore for the quarter.  This resulted in a larger proportion of the Company’s net income in the quarter being taxed at a higher rate applicable to earnings in the US.

Tax Reform Impact

The Tax Cuts and Jobs Act of 2017 ("TCJA") was signed into law on December 22, 2017.  Among other provisions, the TCJA lowered the U.S. federal corporate tax rate from 35% to 21% for the tax years beginning after December 31, 2017.  As a result, James River reduced its deferred tax liability as of December 31, 2017 to reflect the lower rate.  This resulted in a reduction to its net deferred tax liability of $3.5 million.

The TCJA also incorporated certain provisions including the introduction of the Base Erosion Anti-Abuse Tax, or “BEAT”.  The BEAT establishes a minimum tax on transactions between U.S. corporations and their non U.S. affiliates.  Effective January 1, 2018, the Company will restructure its internal quota share to be ceded to a newly formed related counterparty, Carolina Re Ltd, which will be licensed as a Bermuda Class 3A (re)insurance company.  Carolina Re Ltd. will make a 953(d) election to become a U.S. corporate tax payer.  The Company does not expect that its third party casualty reinsurance operations will be affected by the TCJA.

Tangible Equity

Tangible equity before 2017 dividends increased 11.1% from $472.5 million at December 31, 2016 to $525.1 million at December 31, 2017, largely due to net income of $43.6 million and $9.2 million of unrealized gains, net of taxes, on available-for-sale securities.  Tangible equity after 2017 dividends increased 0.4% from $472.5 million at December 31, 2016 to $474.5 million at December 31, 2017.  Tangible equity per common share was $15.98 at December 31, 2017, net of $1.70 of dividends per share the Company paid during 2017.  The 2017 adjusted net operating income return on average tangible equity was 9.7%, which compares to 14.6% for the full year 2016.

Capital Management

The Company announced that its Board of Directors declared a cash dividend of $0.30 per common share.  This dividend is payable on Friday, March 30, 2018 to all shareholders of record on Monday, March 12, 2018.

As previously announced, on December 28, 2017, the Company paid an ordinary dividend of $0.30 per common share and a special dividend of $0.50 per common share.  The Company paid $23.9  million of dividends during the fourth quarter.

During 2017, the Company paid $50.6 million of dividends, as compared to $66.3 million in 2016.  Operating leverage (the ratio of trailing twelve month net earned premium to tangible equity at December 31, 2017) was 1.56x as of December 31, 2017 as compared to 1.09x as of December 31, 2016.  James River Group Holdings, Ltd. has paid cumulative dividends, including this upcoming payment, of $173.6 million since its December 2014 initial public offering, or 37.2% of its tangible equity at initial public offering.

Guidance

The Company has announced its guidance to achieve a 12.0% or better operating return on average tangible equity and a combined ratio of between 94% and 97% for 2018.

Conference Call

James River Group Holdings, Ltd. will hold a conference call to discuss its fourth quarter results tomorrow, February 23, 2018, at 8:00 a.m. Eastern Standard Time. Investors may access the conference call by dialing (877) 930-8055, Conference ID# 7656869, or via the internet by going to www.jrgh.net and clicking on the “Investor Relations” link. Please visit the website at least 15 minutes early to register and download any necessary audio software. A replay of the call will be available until noon (Eastern Standard Time) on March 25, 2018 and can be accessed by dialing (855) 859-2056 or by visiting the company website.

Forward-Looking Statements

This press release contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. In some cases, such forward-looking statements may be identified by terms such as believe, expect, seek, may, will, intend, project, anticipate, plan, estimate, guidance or similar words. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.  Although it is not possible to identify all of these risks and factors, they include, among others, the following: the inherent uncertainty of estimating reserves and the possibility that incurred losses may be greater than our loss and loss adjustment expense reserves; inaccurate estimates and judgments in our risk management which may expose us to greater risks than intended; the potential loss of key members of our management team or key employees and our ability to attract and retain personnel; adverse economic factors resulting in the sale of fewer policies than expected or an increase in frequency or severity of claims and premium defaults or both; a decline in our financial strength rating resulting in a reduction of new or renewal business; reliance on a select group of brokers and agents for a significant portion of our business and the impact of our potential failure to maintain such relationships; reliance on a select group of customers for a significant portion of our business and the impact of our potential failure to maintain such relationships; a failure of any of the loss limitations or exclusions we employ; losses from catastrophic events which substantially exceed our expectations and/or exceed the amount of reinsurance we have purchased to protect us from such events; potential effects on our business of emerging claim and coverage issues; exposure to credit risk, interest rate risk and other market risk in our investment portfolio; changes in laws or government regulation, including tax or insurance laws and regulations; our ability to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us; losses resulting from reinsurance counterparties failing to pay us on reinsurance claims or insurance companies with whom we have a fronting arrangement failing to pay us for claims; the potential impact of internal or external fraud, operational errors, systems malfunctions or cyber security incidents; our ability to manage our growth effectively; inadequacy of premiums we charge to compensate us for our losses incurred; the recently enacted Public Law No. 115-97, informally titled the Tax Cuts and Jobs Act, may have a significant effect on us and our shareholders; in the event we do not qualify for the insurance company exception to the passive foreign investment company (“PFIC”) rules and are therefore considered a PFIC, there could be material adverse tax consequences to an investor that is subject to U.S. federal income taxation; the Company or any of its foreign subsidiaries becoming subject to U.S. federal income taxation; failure to maintain effective internal controls in accordance with Sarbanes-Oxley Act of 2002, as amended; and  changes in our financial condition, regulations or other factors that may restrict our subsidiaries’ ability to pay us dividends. Additional information about these risks and uncertainties, as well as others that may cause actual results to differ materially from those in the forward-looking statements, is contained in our filings with the U.S. Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K filed with the SEC on March 10, 2017. These forward-looking statements speak only as of the date of this release and the Company does not undertake any obligation to update or revise any forward-looking information to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.

Non-GAAP Financial Measures

In presenting James River Group Holdings, Ltd.’s results, management has included financial measures that are not calculated under standards or rules that comprise accounting principles generally accepted in the United States (“GAAP”). Such measures, including underwriting profit, adjusted net operating income, tangible equity, net operating return on average tangible equity,  and pre-dividend tangible equity per share, are referred to as non-GAAP measures. These non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those measures determined in accordance with GAAP. Reconciliations of such measures to the most comparable GAAP figures are included at the end of this press release.

About James River Group Holdings, Ltd.

James River Group Holdings, Ltd. is a Bermuda-based insurance holding company which owns and operates a group of specialty insurance and reinsurance companies. The Company operates in three specialty property-casualty insurance and reinsurance segments: Excess and Surplus Lines, Specialty Admitted Insurance and Casualty Reinsurance. Each of the Company’s regulated insurance subsidiaries are rated “A” (Excellent) by A.M. Best Company.

Visit James River Group Holdings, Ltd. on the web at www.jrgh.net


James River Group Holdings, Ltd. and Subsidiaries
Condensed Consolidated Balance Sheet Data
(Unaudited)
 
 

 
December 31, 2017   December 31, 2016
  ($ in thousands, except for share data)
ASSETS      
Invested assets:      
Fixed maturity securities, available-for-sale $ 1,016,098     $ 941,077  
Fixed maturity securities, trading 3,808     5,063  
Equity securities, available-for-sale 82,522     76,401  
Bank loan participations, held-for-investment 238,214     203,526  
Short-term investments 36,804     50,844  
Other invested assets 70,208     55,419  
Total invested assets 1,447,654     1,332,330  
       
Cash and cash equivalents 163,495     109,784  
Accrued investment income 8,381     7,246  
Premiums receivable and agents’ balances 352,436     265,315  
Reinsurance recoverable on unpaid losses 302,524     182,737  
Reinsurance recoverable on paid losses 11,292     2,877  
Deferred policy acquisition costs 72,365     64,789  
Goodwill and intangible assets 220,165     220,762  
Other assets 178,383     160,693  
Total assets $ 2,756,695     $ 2,346,533  
       
LIABILITIES AND SHAREHOLDERS’ EQUITY      
Reserve for losses and loss adjustment expenses $ 1,292,349     $ 943,865  
Unearned premiums 418,114     390,563  
Senior debt 98,300     88,300  
Junior subordinated debt 104,055     104,055  
Accrued expenses 39,295     36,884  
Other liabilities 109,883     89,645  
Total liabilities 2,061,996     1,653,312  
       
Total shareholders’ equity 694,699     693,221  
Total liabilities and shareholders’ equity $ 2,756,695     $ 2,346,533  
       
Tangible equity (a) $ 474,534     $ 472,459  
Tangible equity per common share outstanding (a) $ 15.98     $ 16.15  
Total shareholders’ equity per common share
  outstanding
$ 23.39    

 
$ 23.69  
Common shares outstanding 29,696,682     29,257,566  
Debt (b) to total capitalization ratio 22.6 %   21.7 %
(a)  See “Reconciliation of Non-GAAP Measures”.
(b) Includes senior debt and junior subordinated debt.
     




James River Group Holdings, Ltd. and Subsidiaries
Condensed Consolidated Income Statement Data
(Unaudited)
       
  Three Months Ended
December 31,
  Twelve Months Ended
December 31,
  2017   2016   2017   2016
  ($ in thousands, except for share data)
REVENUES              
Gross written premiums $ 237,900     $ 173,490     $ 1,081,905     $ 737,398  
Net written premiums 144,128     112,608     766,626     557,708  
               
Net earned premiums 200,229     146,829     741,109     515,663  
Net investment income 15,792     14,016     61,119     52,638  
Net realized investment (losses) gains (3,172 )   5,189     (1,989 )   7,565  
Other income 5,114     2,988     17,386     10,361  
Total revenues 217,963     169,022     817,625     586,227  
               
EXPENSES              
Losses and loss adjustment expenses 168,479     91,930     555,377     325,421  
Other operating expenses 40,804     46,096     196,993     170,828  
Other expenses 188     1,554     539     1,590  
Interest expense 2,323     2,154     8,974     8,448  
Amortization of intangible assets 150     150     597     597  
Total expenses 211,944     141,884     762,480     506,884  
Income before taxes 6,019     27,138     55,145     79,343  
Income tax expense 5,795     1,466     11,579     4,872  
NET INCOME $ 224     $ 25,672     $ 43,566     $ 74,471  
ADJUSTED NET OPERATING INCOME (a) $ 4,071     $ 23,221     $ 47,385     $ 71,318  
               
EARNINGS PER SHARE              
Basic $ 0.01     $ 0.88     $ 1.48     $ 2.56  
Diluted $ 0.01     $ 0.85     $ 1.44     $ 2.49  
               
ADJUSTED NET OPERATING INCOME PER SHARE            
Basic $ 0.14     $ 0.80     $ 1.61     $ 2.45  
Diluted $ 0.13     $ 0.77     $ 1.57     $ 2.39  
               
Weighted-average common shares outstanding:              
Basic 29,621,823     29,160,732     29,461,717     29,063,075  
Diluted 30,233,639     30,072,744     30,273,149     29,894,378  
Cash dividends declared per common share $ 0.80     $ 1.65     $ 1.70     $ 2.25  
               
Ratios:              
Loss ratio 84.1 %   62.6 %   74.9 %   63.1 %
Expense ratio 17.9 %   29.4 %   24.3 %   31.2 %
Combined ratio 102.0 %   92.0 %   99.2 %   94.3 %
Combined ratio excluding catastrophe impact 103.5 %   92.0 %   98.3 %   94.3 %
Accident year loss ratio 68.8 %   68.7 %   72.0 %   67.7 %
(a) See "Reconciliation of Non-GAAP Measures".            




James River Group Holdings, Ltd. and Subsidiaries
Segment Results
 
EXCESS AND SURPLUS LINES
  Three Months Ended
December 31,
      Twelve Months Ended
December 31,
   
  2017   2016   % Change   2017   2016   % Change
($ in thousands)                      
Gross written premiums $ 142,696     $ 91,427     56.1 %   $ 530,120     $ 370,844     42.9 %
Net written premiums $ 123,535     $ 77,304     59.8 %   $ 469,891     $ 316,922     48.3 %
                       
Net earned premiums $ 128,798     $ 83,662     54.0 %   $ 463,521     $ 301,404     53.8 %
Losses and loss adjustment expenses (122,773 )   (51,311 )   139.3 %   (371,717 )   (188,768 )   96.9 %
Underwriting expenses (6,807 )   (16,511 )   (58.8 )%   (62,111 )   (65,401 )   (5.0 )%
Underwriting (loss) profit (a), (b) $ (782 )   $ 15,840     -   $ 29,693     $ 47,235     (37.1 )%
                       
Ratios:                      
Loss ratio 95.3 %   61.3 %       80.2 %   62.6 %    
Expense ratio 5.3 %   19.7 %       13.4 %   21.7 %    
Combined ratio 100.6 %   81.1 %       93.6 %   84.3 %    
Combined ratio excluding catastrophe impact 102.3 %   81.1 %       92.5 %   84.3 %    
Accident year loss ratio 72.2 %   73.6 %       75.9 %   70.6 %    
Accident year loss ratio excluding catastrophe impact 73.8 %   73.6 %       74.8 %   70.6 %    
                       
(a) See "Reconciliation of Non-GAAP Measures".                    
(b) Underwriting results include fee income of $5.0 million and $2.9 million for the three months ended December 31, 2017 and 2016, respectively, and $17.0 million and $10.1 million for the respective twelve month periods. These amounts are included in “Other income” in our Condensed Consolidated Income Statements.

SPECIALTY ADMITTED INSURANCE

  Three Months Ended
December 31,
      Twelve Months Ended
December 31,
   
  2017   2016   % Change   2017   2016   % Change
($ in thousands)                      
Gross written premiums $ 82,357     $ 63,214     30.3 %   $ 316,430     $ 182,221     73.7 %
Net written premiums $ 7,495     $ 16,304     (54.0 )%   $ 60,957     $ 55,803     9.2 %
                       
Net earned premiums $ 14,773     $ 15,465     (4.5 )%   $ 68,110     $ 52,281     30.3 %
Losses and loss adjustment expenses (10,509 )   (8,839 )   18.9 %   (44,863 )   (30,897 )   45.2 %
Underwriting expenses (3,344 )   (5,056 )   (33.9 )%   (20,081 )   (18,512 )   8.5 %
Underwriting profit (a), (b) $ 920     $ 1,570     (41.4 )%   $ 3,166     $ 2,872     10.2 %
                       
Ratios:                      
Loss ratio 71.1 %   57.2 %       65.9 %   59.1 %    
Expense ratio 22.7 %   32.7 %       29.5 %   35.4 %    
Combined ratio 93.8 %   89.8 %       95.4 %   94.5 %    
Accident year loss ratio 75.1 %   65.7 %       69.9 %   66.4 %    
                       
(a) See "Reconciliation of Non-GAAP Measures".                    
(b) Underwriting results include fee income of $3.4 million and $1.7 million for the three months ended December 31, 2017 and 2016, respectively, and $11.3 million and $4.2 million for the respective twelve month periods.

CASUALTY REINSURANCE

  Three Months Ended
December 31,
      Twelve Months Ended
December 31,
   
  2017   2016   % Change   2017   2016   % Change
($ in thousands)                      
Gross written premiums $ 12,847     $ 18,849     (31.8 )%   $ 235,355     $ 184,333     27.7 %
Net written premiums $ 13,098     $ 19,000     (31.1 )%   $ 235,778     $ 184,983     27.5 %
                       
Net earned premiums $ 56,658     $ 47,702     18.8 %   $ 209,478     $ 161,978     29.3 %
Losses and loss adjustment expenses (35,197 )   (31,780 )   10.8 %   (138,797 )   (105,756 )   31.2 %
Underwriting expenses (19,363 )   (16,789 )   15.3 %   (72,446 )   (56,416 )   28.4 %
Underwriting profit (loss) (a) $ 2,098     $ (867 )   -   $ (1,765 )   $ (194 )   -
                       
Ratios:                      
Loss ratio 62.1 %   66.6 %       66.3 %   65.3 %    
Expense ratio 34.2 %   35.2 %       34.5 %   34.8 %    
Combined ratio 96.3 %   101.8 %       100.8 %   100.1 %    
Combined ratio excluding catastrophe impact 97.9 %   101.8 %       100.0 %   100.1 %    
Accident year loss ratio 59.4 %   61.1 %       64.3 %   62.7 %    
Accident year loss ratio excluding catastrophe impact 61.0 %   61.1 %       63.4 %   62.7 %    
                       
(a) See "Reconciliation of Non-GAAP Measures".                    

RECONCILIATION OF NON-GAAP MEASURES

Underwriting Profit

The following table reconciles the underwriting profit (loss) by individual operating segment and for the entire Company to consolidated income before taxes. We believe that these measures are useful to investors in evaluating the performance of our Company and its operating segments because our objective is to consistently earn underwriting profits.  We evaluate the performance of our operating segments and allocate resources based primarily on underwriting profit (loss) of operating segments.  Our definition of underwriting profit (loss) of operating segments and underwriting profit (loss) may not be comparable to that of other companies.

  Three Months Ended
December 31,
  Twelve Months Ended
December 31,
  2017   2016   2017   2016
  (in thousands)
Underwriting (loss) profit of the operating segments:              
Excess and Surplus Lines $ (782 )   $ 15,840     $ 29,693     $ 47,235  
Specialty Admitted Insurance 920     1,570     3,166     2,872  
Casualty Reinsurance 2,098     (867 )   (1,765 )   (194 )
Total underwriting profit of operating segments 2,236     16,543     31,094     49,913  
Other operating expenses of the Corporate and Other segment (6,267 )   (4,836 )   (25,330 )   (20,433 )
Underwriting (loss) profit (a) (4,031 )   11,707     5,764     29,480  
Net investment income 15,792     14,016     61,119     52,638  
Net realized investment (losses) gains (3,172 )   5,189     (1,989 )   7,565  
Other income and expenses (97 )   (1,470 )   (178 )   (1,295 )
Interest expense (2,323 )   (2,154 )   (8,974 )   (8,448 )
Amortization of intangible assets (150 )   (150 )   (597 )   (597 )
Consolidated income before taxes $ 6,019     $ 27,138     $ 55,145     $ 79,343  
               
(a)  Included in underwriting results for the three months ended December 31, 2017 and 2016 is fee income of $8.5 million and $4.6 million, respectively, and $28.3 million and $14.2 million for the respective twelve month periods.

Adjusted Net Operating Income

We define adjusted net operating income as net income excluding net realized investment gains and losses, as well as non-operating expenses including those that relate to due diligence costs for various merger and acquisition activities, professional fees related to the filing of a registration statement for the sale of our securities, and costs associated with former employees. We use adjusted net operating income as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance.  Adjusted net operating income should not be viewed as a substitute for net income calculated in accordance with GAAP, and our definition of adjusted net operating income may not be comparable to that of other companies.

Our income before taxes and net income for the three months and years ended December 31, 2017 and 2016, respectively, reconciles to our adjusted net operating income as follows:

  Three Months Ended December 31,
  2017   2016
  Income Before Taxes   Net Income   Income Before Taxes   Net Income
  (in thousands)
Income as reported $ 6,019     $ 224     $ 27,138     $ 25,672  
Net realized investment losses (gains) 3,172     2,375     (5,189 )   (3,699 )
Other expenses 188     214     1,554     1,045  
Dividend witholding taxes     1,053          
Interest expense on leased building the Company is deemed to own for accounting purposes 316     205     312     203  
Adjusted net operating income $ 9,695     $ 4,071     $ 23,815     $ 23,221  
               
  Twelve Months Ended December 31,
  2017   2016
  Income Before Taxes   Net Income   Income Before Taxes   Net Income
  (in thousands)
Income as reported $ 55,145     $ 43,566     $ 79,343     $ 74,471  
Net realized investment losses (gains) 1,989     1,375     (7,565 )   (5,207 )
Other expenses 539     575     1,590     1,136  
Dividend witholding taxes     1,053          
Interest expense on leased building the Company is deemed to own for accounting purposes 1,256     816     1,412     918  
Adjusted net operating income $ 58,929     $ 47,385     $ 74,780     $ 71,318  
               

Tangible Equity (per Share) and Pre-Dividend Tangible Equity (per Share)

We define tangible equity as shareholders’ equity less goodwill and intangible assets (net of amortization).  Our definition of tangible equity may not be comparable to that of other companies, and it should not be viewed as a substitute for shareholders’ equity calculated in accordance with GAAP.  We use tangible equity internally to evaluate the strength of our balance sheet and to compare returns relative to this measure.  The following table reconciles shareholders’ equity to tangible equity for December 31, 2017, December 31, 2016, and December 31, 2015 and reconciles tangible equity to tangible equity before dividends for December 31, 2017.

  December 31, 2017   December 31, 2016   December 31, 2015
($ in thousands, except for share data) Equity   Equity per share   Equity   Equity per share   Equity   Equity per share
Shareholders' equity $ 694,699     $ 23.39     $ 693,221     $ 23.69     $ 681,038     $ 23.53  
Goodwill and intangible assets 220,165     7.41     220,762     7.54     221,359     7.65  
Tangible equity $ 474,534     $ 15.98     $ 472,459     $ 16.15     $ 459,679     $ 15.88  
Dividends to shareholders for the year ended December 31, 2017 50,600     1.70                  
Pre-dividend tangible equity $ 525,134     $ 17.68                  

For more information contact:

Kevin Copeland
SVP Finance & Chief Investment Officer
Investor Relations
441-278-4573
InvestorRelations@jrgh.net

Source: James River Group Holdings, Ltd.