Press Release

James River Announces Fourth Quarter and Year End 2019 Results

02/20/20
  • Fourth Quarter 2019 Net Income of $20.5 million -- $0.67 per diluted share and Adjusted Net Operating Income of $23.3 million -- $0.76 per diluted share
  • 65% growth in Core (Excluding Commercial Auto) Excess and Surplus Lines ("E&S") Gross Written Premium versus the prior year quarter, and 55% growth for the full year versus the prior year
     
  • Fourth quarter Combined Ratio of 93.8%, a 2.7 percentage point improvement over the prior year quarter
     
  • Underwriting Profit of $13.6 million, an increase of 91%, or $6.5 million, over the prior year quarter
     
  • Tangible Equity per Share of $18.40, an increase of 20% from year-end 2018, inclusive of dividends

PEMBROKE, Bermuda, Feb. 20, 2020 (GLOBE NEWSWIRE) -- James River Group Holdings, Ltd. ("James River" or the "Company") (NASDAQ: JRVR) today reported fourth quarter 2019 net income of $20.5 million ($0.67 per diluted share), compared to net income of $11.6 million ($0.38 per diluted share) for the fourth quarter of 2018.  Adjusted net operating income for the fourth quarter of 2019 was $23.3 million ($0.76 per diluted share), compared to adjusted net operating income of $17.1 million ($0.56 per diluted share) for the same period in 2018.

  Earnings Per Diluted Share   Three Months Ended
December 31,
 
      2019
  2018  
  Net Income   $ 0.67   $ 0.38  
  Adjusted Net Operating Income 1   $ 0.76   $ 0.56  
   
  1. See "Reconciliation of Non-GAAP Measures" below. 
   

J. Adam Abram, the Company’s Chairman and Chief Executive Officer, commented, “James River had a strong quarter, generating a 93.8% combined ratio, our lowest combined ratio in three years, and $13.6 million of underwriting profit, the highest quarterly number we have reported since becoming a public company in 2014.

We have enjoyed twelve consecutive quarters of rate increases in our E&S segment.  This quarter, renewal rates increased by 6.6%, which was the largest quarterly increase since the market began to improve.  The strong rate environment, coupled with a 27% growth in submissions during the fourth quarter, positions us well for 2020.”

Fourth Quarter 2019 Operating Results

  • Gross written premium of $375.2 million, consisting of the following:
    Three Months Ended
       
    December 31,
       
  ($ in thousands) 2019   2018   % Change
 
  Excess and Surplus Lines $ 234,449     $ 166,417     41 %  
  Specialty Admitted Insurance 94,758     91,238     4 %  
  Casualty Reinsurance 45,963     37,655     22 %  
    $ 375,170     $ 295,310     27 %  
                         

  • Net written premium of $224.6 million, consisting of the following:
             
             
               
                         
                     
                     
                         
                         
    Three Months Ended        
             
             
               
                         
                     
                     
                         
                         
    December 31,        
             
             
               
                         
                     
                     
                         
                         
  ($ in thousands) 2019   2018   % Change
 
             
             
               
                         
                     
                     
                         
                         
  Excess and Surplus Lines $ 163,614     $ 138,791     18 %  
             
             
               
                         
                     
                     
                         
                         
  Specialty Admitted Insurance 15,012     13,513     11 %  
             
             
               
                         
                     
                     
                         
                         
  Casualty Reinsurance 46,004     37,343     23 %  
             
             
               
                         
                     
                     
                         
                         
    $ 224,630     $ 189,647     18 %  
             
             
               
                         
                     
                     
                         
                         
                         

  • Net earned premium of $221.1 million, consisting of the following:
    Three Months Ended
       
    December 31,
       
  ($ in thousands) 2019   2018   % Change
 
  Excess and Surplus Lines $ 168,176     $ 145,057     16 %  
  Specialty Admitted Insurance 14,650     13,642     7 %  
  Casualty Reinsurance 38,280     42,857     (11 )%  
    $ 221,106     $ 201,556     10 %  
                         

  • The Excess and Surplus Lines segment gross written premium and net written premium increased principally due to 65% growth in core (non-commercial auto) lines gross written premium and 60% growth in core lines net written premium, as eleven out of twelve core underwriting divisions grew.  The Commercial Auto division also contributed to the segment's increase in gross written premium, growing 17% over the prior year quarter, although this division's net written premium decreased 11% over the prior year quarter due to reinsurance on the Commercial Auto book, incepting March 1, 2019;
  • The Specialty Admitted Insurance segment gross written premium and net written premium increased as the segment added 4 new fronted programs throughout the year, growing fee income;
  • Net earned premium in our Casualty Reinsurance segment decreased from the prior year quarter, which was in line with our expectations and is consistent with plans we put in place two years ago.  Gross written premium and net written premium increased from the prior year quarter due to adjustments to premium estimates from previous underwriting years;
  • The Company had unfavorable reserve development of $8.8 million compared to unfavorable reserve development of $5.8 million in the prior year quarter (representing a 4.0 and 2.9 percentage point increase to the Company’s loss ratio in the periods, respectively);
  • Pre-tax (unfavorable) favorable reserve development by segment was as follows:
    Three Months Ended
 
    December 31,
 
  ($ in thousands) 2019
  2018
 
  Excess and Surplus Lines $ 46     $ (5,781 )  
  Specialty Admitted Insurance 1,000     3,238    
  Casualty Reinsurance (9,802 )   (3,296 )  
    $ (8,756 )   $ (5,839 )  
                   

  • The Casualty Reinsurance segment's $9.8 million of unfavorable development was materially offset by commission slide adjustments of $4.6 millionThe Specialty Admitted Insurance segment experienced $1.0 million of favorable development in its workers' compensation business;
  • Group combined ratio of 93.8% versus 96.5% in the prior year quarter;
  • Group expense ratio of 16.4% improved from 21.3% in the prior year quarter, driven by a larger portion of our consolidated net earned premium coming from the Excess and Surplus Lines segment, which has significant scale and a lower expense ratio than our other segments; a reduction to sliding scale commissions in the Casualty Reinsurance segment; increased scale in the Specialty Admitted segment coupled with higher fee income; and a reduction to the 2019 compensation bonus pools.
  • Gross fee income by segment was as follows:
    Three Months Ended
       
    December 31,
       
  ($ in thousands) 2019   2018   % Change
 
  Excess and Surplus Lines $ 1,944     $ 2,410     (19 )%  
  Specialty Admitted Insurance 4,248     3,876     10 %  
    $ 6,192     $ 6,286     (1 )%  
                         
  • Fee income in the Excess and Surplus Lines segment decreased from its level in the prior year quarter.  Revenue from certain contracts that was previously recorded as fee for services revenue is now recognized as gross written premium because insurance is now a component of these contracts.  Fee income in the Specialty Admitted Insurance segment increased as a result of a mix shift to fronting arrangements with higher fees;
  • Net investment income was $20.8 million, an increase of 35% from the prior year quarter.  Further details can be found in the "Investment Results" section below.

Investment Results

Net investment income for the fourth quarter of 2019 was $20.8 million, which compares to $15.5 million for the same period in 2018.  The increase resulted from a larger portfolio due to the October 2019 addition of $1.2 billion that was previously held in a collateral trust established in favor of the Company by a captive insurance company affiliate of a former insured.  The funds withdrawn from the collateral trust were invested in short term U.S. Treasury securities and are included in restricted cash equivalents on the Company's consolidated balance sheet.  As these assets were classified as cash equivalents, they were not included in the calculations of annualized gross investment yield on average fixed maturity, bank loan and equity securities and average duration of the fixed maturity and bank loan portfolio.

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

    Three Months Ended
December 31,
       
  ($ in thousands) 2019   2018   % Change
 
  Renewable Energy Investments $ (329 )   $ 904     -    
  Other Private Investments 665     (1,327 )   -    
  All Other Net Investment Income 20,472   15,878   29 %  
  Total Net Investment Income $ 20,808     $ 15,455     35 %  

The Company’s annualized gross investment yield on average fixed maturity, bank loan and equity securities for the three months ended December 31, 2019 was 3.7% (versus 4.1% for the three months ended December 31, 2018) and the average duration of the fixed maturity and bank loan portfolio was 3.3 years at December 31, 2019 (versus 3.4 years at  December 31, 2018).  Renewable energy and other private investments produced an annualized return of 2.1% for the three months ended December 31, 2019 (-2.3% for the three months ended December 31, 2018).

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, 2019 and 2018 was 29.0% and 11.2%, respectively, while the tax rate for the twelve months ended December 31, 2019 and 2018 was 26.1% and 9.9%, respectively.  The tax rates were elevated for the three months and twelve months ended December 31, 2019 due to increases in reserve estimates in prior accident years which did not generate significant tax benefits.

Tangible Equity

Tangible equity before dividends increased 21.8% from $489.9 million at December 31, 2018 to $596.6 million at December 31, 2019, principally due to $38.3 million of net income, $46.9 million of after tax unrealized gains in the Company's fixed income investment portfolio, $8.3 million for derecognition of a build-to-suit lease and $12.6 million of option exercise activity and stock compensation.

December 31, 2019 tangible equity of $559.8 million after dividends increased 14.3% from $489.9 million at December 31, 2018.  Tangible equity per common share was $18.40 at December 31, 2019, net of $1.20 of dividends per share the Company paid during 2019.  The adjusted net operating income return on average tangible equity was 7.9% for the full year 2019, which compares to 14.8% for 2018.

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 Tuesday, March 31, 2020 to all shareholders of record on Monday, March 16, 2020.

Director Resignation

The Company also announced today the resignation of Bryan Martin from its Board of Directors.  J. Adam Abram, the Company’s Chairman and CEO stated, "Bryan Martin has been an instrumental member of our Board of Directors for the last 12 years, and a trusted and valuable advisor and friend to the management team and the Company. His support and guidance has been a critical factor in our success, dating from our privatization in 2007 to our return to the public markets and many years of profitable growth.  We will miss his counsel, and wish him all the best going forward."

"I am extremely proud of what James River has accomplished over the last 12 years and believe the Company is well-positioned to take advantage of robust opportunities," said Bryan Martin. "I'm confident that James River is prepared to continue its success as I increase my focus on my responsibilities at DE Shaw, along with other demands on my time."

Conference Call

James River Group Holdings, Ltd. will hold a conference call to discuss its fourth quarter results tomorrow, February 21, 2020, at 8:00 a.m. Eastern Time. Investors may access the conference call by dialing (877) 930-8055, Conference ID# 1553476, or via the internet by visiting www.jrgh.net and clicking on the “Investor Relations” link. Please access the website at least 15 minutes early to register and download any necessary audio software. A replay of the call will be available until 12:00 p.m. (Eastern Time) on March 22, 2020 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 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 the frequency or severity of claims, 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; losses resulting from reinsurance counterparties failing to pay us on reinsurance claims, insurance companies with whom we have a fronting arrangement failing to pay us for claims, or an insured group of companies with whom we have an indemnification arrangement failing to perform their reimbursement obligations; changes in laws or government regulation, including tax or insurance law and regulations; the ongoing effect of Public Law No. 115-97, informally titled the Tax Cuts and Jobs Act, which may have a significant effect on us including, among other things, by potentially increasing our tax rate, as well as on 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; a failure of any of the loss limitations or exclusions we utilize to shield us from unanticipated financial losses or legal exposures, or other liabilities; 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; our ability to obtain reinsurance coverage at prices and on terms that allow us to transfer risk and adequately protect our company against financial loss; 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; 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 February 27, 2019. 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, adjusted net operating return on average tangible equity (which is calculated as annualized adjusted net operating income divided by the average tangible equity for the trailing five quarters), 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.  The A.M. Best financial strength rating for our group’s regulated insurance subsidiaries is “A” (Excellent).

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, 2019   December 31, 2018
               
  ($ in thousands, except for share data)
ASSETS      
Invested assets:      
Fixed maturity securities, available-for-sale $ 1,433,626     $ 1,184,202  
Equity securities, at fair value 80,735     78,385  
Bank loan participations, held-for-investment 260,864     260,972  
Short-term investments 156,925     81,966  
Other invested assets 61,210     72,321  
Total invested assets 1,993,360     1,677,846  
       
Cash and cash equivalents 206,912     172,457  
Restricted cash equivalents 1,199,164      
Accrued investment income 13,597     11,110  
Premiums receivable and agents’ balances 369,462     307,899  
Reinsurance recoverable on unpaid losses 668,045     467,371  
Reinsurance recoverable on paid losses 33,221     18,344  
Deferred policy acquisition costs 62,006     54,450  
Goodwill and intangible assets 218,771     219,368  
Other assets 259,867     207,931  
Total assets $ 5,024,405     $ 3,136,776  
       
LIABILITIES AND SHAREHOLDERS’ EQUITY      
Reserve for losses and loss adjustment expenses $ 2,045,506     $ 1,661,459  
Unearned premiums 524,377     386,473  
Funds held 1,199,164      
Senior debt 158,300     118,300  
Junior subordinated debt 104,055     104,055  
Accrued expenses 58,416     51,792  
Other liabilities 156,006     105,456  
Total liabilities 4,245,824     2,427,535  
       
Total shareholders’ equity 778,581     709,241  
Total liabilities and shareholders’ equity $ 5,024,405     $ 3,136,776  
       
Tangible equity (a) $ 559,810     $ 489,873  
Tangible equity per common share outstanding (a) $ 18.40     $ 16.34  
Total shareholders’ equity per common share outstanding $ 25.59     $ 23.65  
Common shares outstanding 30,424,391     29,988,460  
(a)  See “Reconciliation of Non-GAAP Measures”.      
       
       


James River Group Holdings, Ltd. and Subsidiaries
Condensed Consolidated Income Statement Data
(Unaudited)
 
    Three Months Ended
December 31,
  Twelve Months Ended
December 31,
    2019   2018   2019   2018
                                 
    ($ in thousands, except for share data)
REVENUES                
Gross written premiums   $ 375,170     $ 295,310     $ 1,470,735     $ 1,166,773  
Net written premiums   224,630     189,647     896,150     762,672  
                 
Net earned premiums   221,106     201,556     823,746     815,398  
Net investment income   20,808     15,455     75,652     61,256  
Net realized and unrealized losses on investments (a)   (3,250 )   (5,072 )   (2,919 )   (5,479 )
Other income   2,486     2,583     10,646     14,424  
Total revenues   241,150     214,522     907,125     885,599  
                 
EXPENSES                
Losses and loss adjustment expenses   171,038     151,522     672,102     600,276  
Other operating expenses   38,621     45,321     170,908     201,035  
Other expenses       1,334     1,055     1,300  
Interest expense   2,510     3,094     10,596     11,553  
Amortization of intangible assets   150     150     597     597  
Total expenses   212,319     201,421     855,258     814,761  
Income before taxes   28,831     13,101     51,867     70,838  
Income tax expense   8,360     1,469     13,528     7,008  
NET INCOME   $ 20,471     $ 11,632     $ 38,339     $ 63,830  
ADJUSTED NET OPERATING INCOME (b)   $ 23,252     $ 17,056     $ 42,934     $ 70,596  
                 
EARNINGS PER SHARE                
Basic   $ 0.67     $ 0.39     $ 1.27     $ 2.14  
Diluted   $ 0.67     $ 0.38     $ 1.25     $ 2.11  
                 
ADJUSTED NET OPERATING INCOME PER SHARE            
Basic   $ 0.76     $ 0.57     $ 1.42     $ 2.36  
Diluted   $ 0.76     $ 0.56     $ 1.40     $ 2.33  
                 
Weighted-average common shares outstanding:                
Basic   30,407,807     29,966,695     30,275,184     29,887,990  
Diluted   30,716,072     30,356,990     30,673,924     30,307,101  
Cash dividends declared per common share   $ 0.30     $ 0.30     $ 1.20     $ 1.20  
                 
Ratios:                
Loss ratio   77.4 %   75.2 %   81.6 %   73.6 %
Expense ratio (c)   16.4 %   21.3 %   19.6 %   23.0 %
Combined ratio   93.8 %   96.5 %   101.2 %   96.6 %
Accident year loss ratio   73.4 %   72.3 %   73.2 %   71.5 %
(a) Includes losses of $2.4 million and gains of $6.3 million for the change in net unrealized gains/losses on equity securities in the three and twelve months ended December 31, 2019, respectively, in accordance with ASU 2016-01 (losses of $5.3 million and $6.0 million for the respective prior year periods).
(b) See "Reconciliation of Non-GAAP Measures".
(c) Calculated with a numerator comprising other operating expenses less gross fee income of the Excess and Surplus Lines segment and a denominator of net earned premiums.
 
 


James River Group Holdings, Ltd. and Subsidiaries
Segment Results
 
EXCESS AND SURPLUS LINES              
               
  Three Months Ended
December 31,
      Twelve Months Ended
December 31,
   
  2019   2018   % Change   2019   2018   % Change
                                           
  ($ in thousands)
Gross written premiums $ 234,449     $ 166,417     40.9 %   $ 922,320     $ 656,538     40.5 %
Net written premiums $ 163,614     $ 138,791     17.9 %   $ 685,814     $ 571,098     20.1 %
                       
Net earned premiums $ 168,176     $ 145,057     15.9 %   $ 625,528     $ 555,684     12.6 %
Losses and loss adjustment expenses (128,137 )   (116,386 )   10.1 %   (528,133 )   (437,904 )   20.6 %
Underwriting expenses (20,443 )   (18,555 )   10.2 %   (78,238 )   (74,946 )   4.4 %
Underwriting profit (a), (b) $ 19,596     $ 10,116         $ 19,157     $ 42,834      
                       
Ratios:                      
Loss ratio 76.2 %   80.2 %       84.4 %   78.8 %    
Expense ratio 12.1 %   12.8 %       12.5 %   13.5 %    
Combined ratio 88.3 %   93.0 %       96.9 %   92.3 %    
Accident year loss ratio 76.2 %   76.2 %       76.2 %   76.1 %    
                       
(a) See "Reconciliation of Non-GAAP Measures".                    
(b) Underwriting results include fee income of $1.9 million and $9.1 million for the three and twelve months ended December 31, 2019, respectively ($2.4 million and $13.9 million for the respective prior year 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,
   
  2019   2018   % Change   2019   2018   % Change
                                           
  ($ in thousands)
Gross written premiums $ 94,758     $ 91,238     3.9 %   $ 387,642     $ 374,346     3.6 %
Net written premiums $ 15,012     $ 13,513     11.1 %   $ 58,637     $ 55,840     5.0 %
                       
Net earned premiums $ 14,650     $ 13,642     7.4 %   $ 54,338     $ 55,146     (1.5 )%
Losses and loss adjustment expenses (9,775 )   (7,340 )   33.2 %   (34,860 )   (32,623 )   6.9 %
Underwriting expenses (2,720 )   (3,710 )   (26.7 )%   (13,565 )   (15,551 )   (12.8 )%
Underwriting profit (a), (b) $ 2,155     $ 2,592     (16.9 )%   $ 5,913     $ 6,972     (15.2 )%
                       
Ratios:                      
Loss ratio 66.7 %   53.8 %       64.2 %   59.2 %    
Expense ratio 18.6 %   27.2 %       24.9 %   28.2 %    
Combined ratio 85.3 %   81.0 %       89.1 %   87.4 %    
Accident year loss ratio 73.5 %   77.5 %       73.8 %   69.2 %    
                       
(a) See "Reconciliation of Non-GAAP Measures".                    
(b) Underwriting results include fee income of $4.2 million and $15.8 million for the three and twelve months ended December 31, 2019, respectively ($3.9 million and $14.8 million for the respective prior year periods).


CASUALTY REINSURANCE              
               
  Three Months Ended
December 31,
      Twelve Months Ended
December 31,
   
  2019   2018   % Change   2019   2018   % Change
                                           
  ($ in thousands)
Gross written premiums $ 45,963     $ 37,655     22.1 %   $ 160,773     $ 135,889     18.3 %
Net written premiums $ 46,004     $ 37,343     23.2 %   $ 151,699     $ 135,734     11.8 %
                       
Net earned premiums $ 38,280     $ 42,857     (10.7 )%   $ 143,880     $ 204,568     (29.7 )%
Losses and loss adjustment expenses (33,126 )   (27,796 )   19.2 %   (109,109 )   (129,749 )   (15.9 )%
Underwriting expenses (8,254 )   (15,007 )   (45.0 )%   (41,932 )   (69,716 )   (39.9 )%
Underwriting (loss) profit (a) $ (3,100 )   $ 54         $ (7,161 )   $ 5,103      
                       
Ratios:                      
Loss ratio 86.5 %   64.9 %       75.8 %   63.4 %    
Expense ratio 21.6 %   35.0 %       29.2 %   34.1 %    
Combined ratio 108.1 %   99.9 %       105.0 %   97.5 %    
Accident year loss ratio 60.9 %   57.2 %       59.8 %   59.4 %    
                       
(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 of operating segments.  Our definition of underwriting profit of operating segments and underwriting profit may not be comparable to that of other companies.

    Three Months Ended
December 31,
  Twelve Months Ended
December 31,
    2019   2018   2019   2018
                                 
    (in thousands)
Underwriting profit (loss) of the operating segments:                
Excess and Surplus Lines   $ 19,596     $ 10,116     $ 19,157     $ 42,834  
Specialty Admitted Insurance   2,155     2,592     5,913     6,972  
Casualty Reinsurance   (3,100 )   54     (7,161 )   5,103  
Total underwriting profit of operating segments   18,651     12,762     17,909     54,909  
Other operating expenses of the Corporate and Other segment   (5,023 )   (5,639 )   (27,664 )   (26,903 )
Underwriting profit (loss) (a)   13,628     7,123     (9,755 )   28,006  
Net investment income   20,808     15,455     75,652     61,256  
Net realized and unrealized losses on investments (b)   (3,250 )   (5,072 )   (2,919 )   (5,479 )
Other income (expenses)   305     (1,161 )   82     (795 )
Interest expense   (2,510 )   (3,094 )   (10,596 )   (11,553 )
Amortization of intangible assets   (150 )   (150 )   (597 )   (597 )
Consolidated income before taxes   $ 28,831     $ 13,101     $ 51,867     $ 70,838  
                 
(a)  Included in underwriting results for the three and twelve months ended December 31, 2019 is fee income of $6.2 million and $24.9 million, respectively ($6.3 million and $28.7 million for the respective prior year periods).
(b)  Includes losses of $2.4 million and gains of $6.3 million for the change in net unrealized gains/losses on equity securities in the three and twelve months ended December 31, 2019, respectively, in accordance with ASU 2016-01 (losses of $5.3 million and $6.0 million for the respective prior year periods).
 

Adjusted Net Operating Income

We define adjusted net operating income as net income excluding net realized and unrealized gains (losses) on investments (net realized investment gains (losses) and the change in unrealized gains (losses) on equity securities per the adoption of ASU 2016-01), 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 registration statements for the sale of our securities, costs associated with former employees and interest and other expenses on a leased building that we were previously deemed to own for accounting purposes. 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 reconciles to our adjusted net operating income as follows:
 
  Three Months Ended December 31,
  2019   2018
  Income
Before Taxes
  Net Income   Income
Before Taxes
  Net Income
                               
  (in thousands)
Income as reported $ 28,831     $ 20,471     $ 13,101     $ 11,632  
Net realized and unrealized losses on investments (a) 3,250     2,781     5,072     4,008  
Other expenses         1,134     896  
Impairment of intangible assets         200     200  
Interest expense on leased building the Company is deemed to own for accounting purposes         405     320  
Adjusted net operating income $ 32,081     $ 23,252     $ 19,912     $ 17,056  
               
  Twelve Months Ended December 31,
  2019   2018
  Income
Before Taxes
  Net Income   Income
Before Taxes
  Net Income
                               
  (in thousands)
Income as reported $ 51,867     $ 38,339     $ 70,838     $ 63,830  
Net realized and unrealized losses on investments (a) 2,919     3,761     5,479     4,374  
Other expenses 1,055     834     1,100     941  
Impairment of intangible assets         200     200  
Interest expense on leased building the Company was previously deemed to own for accounting purposes         1,584     1,251  
Adjusted net operating income $ 55,841     $ 42,934     $ 79,201     $ 70,596  
               
(a)  Includes losses of $2.4 million and gains of $6.3 million for the change in net unrealized gains/losses on equity securities in the three and twelve months ended December 31, 2019, respectively, in accordance with ASU 2016-01 (losses of $5.3 million and $6.0 million for the respective prior year periods).
 

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, 2019, September 30, 2019, and December 31, 2018 and reconciles tangible equity to tangible equity before dividends for December 31, 2019.

  December 31, 2019   September 30, 2019   December 31, 2018
($ in thousands, except for share data) Equity   Equity per
share
  Equity   Equity per
share
  Equity   Equity per
share
Shareholders' equity $ 778,581     $ 25.59     $ 768,969     $ 25.29     $ 709,241     $ 23.65  
Goodwill and intangible assets 218,771     7.19     218,921     7.20     219,368     7.31  
Tangible equity $ 559,810     $ 18.40     $ 550,048     $ 18.09     $ 489,873     $ 16.34  
Dividends to shareholders for the year ended December 31, 2019 36,786     1.20                  
Pre-dividend tangible equity $ 596,596     $ 19.60                  
                               

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.