UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended | |||||
or
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______ to _______ | |||||
Commission File Number: 001-36777
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices)
(Zip Code)
(441 ) 278-4580
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Names of each exchange on which registered | |||||||||||||||
| Global Select Market | |||||||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| x | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | Emerging growth company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No x
Number of shares of the registrant's common shares outstanding at April 30, 2021: 30,774,930
James River Group Holdings, Ltd.
Form 10-Q
Index
| Page Number | ||||||||
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements may be identified by the fact that they do not relate strictly to historical or current facts. You may identify forward-looking statements in this Quarterly Report by the use of words such as “anticipates,” “estimates,” “expects,” “intends,” “plans”, “seeks” and “believes,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could.” These forward-looking statements include, among others, all statements relating to our future financial performance, our business prospects and strategy, anticipated financial position and financial strength ratings, liquidity and capital needs and other similar matters. These forward-looking statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.
Our actual results may differ materially from those expressed in, or implied by, the forward-looking statements included in this Quarterly Report as a result of various factors, many of which are beyond our control, including, among others:
•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;
•downgrades in the financial strength rating of our regulated insurance subsidiaries may impact our ability to attract and retain insurance and reinsurance business that our subsidiaries write, our competitive position, and our financial condition;
•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;
•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, or decision to terminate, such relationships;
•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;
•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 a former customer with whom we have an indemnification arrangement failing to perform their reimbursement obligations;
•inadequacy of premiums we charge to compensate us for our losses incurred;
•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, such as natural disasters and terrorist acts, which substantially exceed our expectations and/or exceed the amount of reinsurance we have purchased to protect us from such events;
•the effects of the COVID-19 pandemic and associated government actions on our operations and financial performance;
3
•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;
•the potential impact of internal or external fraud, operational errors, systems malfunctions or cyber security incidents;
•our ability to manage our growth effectively;
•failure to maintain effective internal controls in accordance with Sarbanes-Oxley Act of 2002, as amended (“Sarbanes-Oxley”); 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 Part II, Item 1A "Risk Factors" in this Quarterly Report, and our filings with the U.S. Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 26, 2021.
Forward-looking statements speak only as of the date of this Quarterly Report. Except as expressly required under federal securities laws and the rules and regulations of the SEC, we do not have any obligation, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this Quarterly Report, whether as a result of new information or future events or otherwise. You should not place undue reliance on the forward-looking statements included in this Quarterly Report or that may be made elsewhere from time to time by us, or on our behalf. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
4
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
| (Unaudited) March 31, 2021 | December 31, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Assets | |||||||||||
| Invested assets: | |||||||||||
Fixed maturity securities, available-for-sale, at fair value (amortized cost: 2021 – $ | $ | $ | |||||||||
Equity securities, at fair value (cost: 2021 – $ | |||||||||||
| Bank loan participations, at fair value | |||||||||||
| Short-term investments | |||||||||||
| Other invested assets | |||||||||||
| Total invested assets | |||||||||||
| Cash and cash equivalents | |||||||||||
| Restricted cash equivalents | |||||||||||
| Accrued investment income | |||||||||||
| Premiums receivable and agents’ balances, net | |||||||||||
| Reinsurance recoverable on unpaid losses, net | |||||||||||
| Reinsurance recoverable on paid losses | |||||||||||
| Prepaid reinsurance premiums | |||||||||||
| Deferred policy acquisition costs | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
See accompanying notes.
5
JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
| (Unaudited) March 31, 2021 | December 31, 2020 | ||||||||||
| (in thousands, except share amounts) | |||||||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Liabilities: | |||||||||||
| Reserve for losses and loss adjustment expenses | $ | $ | |||||||||
| Unearned premiums | |||||||||||
| Payables to reinsurers | |||||||||||
| Funds held | |||||||||||
| Senior debt | |||||||||||
| Junior subordinated debt | |||||||||||
| Accrued expenses | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingent liabilities | |||||||||||
| Shareholders’ equity: | |||||||||||
Common Shares – 2021 and 2020: $ | |||||||||||
Preferred Shares – 2021 and 2020: $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained (deficit) earnings | ( | ||||||||||
| Accumulated other comprehensive income | |||||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
See accompanying notes.
6
JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Loss and Comprehensive Loss (Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands, except share amounts) | |||||||||||
| Revenues | |||||||||||
| Gross written premiums | $ | $ | |||||||||
| Ceded written premiums | ( | ( | |||||||||
| Net written premiums | |||||||||||
| Change in net unearned premiums | ( | ||||||||||
| Net earned premiums | |||||||||||
| Net investment income | |||||||||||
| Net realized and unrealized gains (losses) on investments | ( | ||||||||||
| Other income | |||||||||||
| Total revenues | |||||||||||
| Expenses | |||||||||||
| Losses and loss adjustment expenses | |||||||||||
| Other operating expenses | |||||||||||
| Other expenses | |||||||||||
| Interest expense | |||||||||||
| Amortization of intangible assets | |||||||||||
| Total expenses | |||||||||||
| Loss before taxes | ( | ( | |||||||||
| Income tax benefit | ( | ( | |||||||||
| Net loss | ( | ( | |||||||||
| Other comprehensive loss: | |||||||||||
Net unrealized losses, net of taxes of $( | ( | ( | |||||||||
| Total comprehensive loss | $ | ( | $ | ( | |||||||
| Per share data: | |||||||||||
| Basic loss per share | $ | ( | $ | ( | |||||||
| Diluted loss per share | $ | ( | $ | ( | |||||||
| Dividend declared per share | $ | $ | |||||||||
| Weighted-average common shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
See accompanying notes.
7
JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
| Number of Common Shares Outstanding | Common Shares (Par) | Preferred Shares | Additional Paid-in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income | Total | |||||||||||||||||||||||||||||||||||
| (in thousands, except share amounts) | |||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2020 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Vesting of RSUs | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||
| Compensation expense under share incentive plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2021 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
| Balances at December 31, 2019 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Vesting of RSUs | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||
| Compensation expense under share incentive plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Cumulative effect of fair value option election | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2020 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
See accompanying notes.
8
JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Operating activities | |||||||||||
| Net cash used in operating activities (a) | $ | ( | $ | ( | |||||||
| Investing activities | |||||||||||
| Securities available-for-sale: | |||||||||||
| Purchases – fixed maturity securities | ( | ( | |||||||||
| Sales – fixed maturity securities | |||||||||||
| Maturities and calls – fixed maturity securities | |||||||||||
| Purchases – equity securities | ( | ( | |||||||||
| Sales – equity securities | |||||||||||
| Bank loan participations: | |||||||||||
| Purchases | ( | ( | |||||||||
| Sales | |||||||||||
| Maturities | |||||||||||
| Other invested assets: | |||||||||||
| Purchases | ( | ( | |||||||||
| Return of capital | |||||||||||
| Redemptions | |||||||||||
| Short-term investments, net | |||||||||||
| Securities receivable or payable, net | ( | ||||||||||
| Purchases of property and equipment | ( | ||||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Financing activities | |||||||||||
| Senior debt issuances | |||||||||||
| Dividends paid | ( | ( | |||||||||
| Issuance of common shares under equity incentive plans | |||||||||||
| Common share repurchases | ( | ( | |||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Change in cash, cash equivalents, and restricted cash equivalents | ( | ( | |||||||||
| Cash, cash equivalents, and restricted cash equivalents at beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash equivalents at end of period | $ | $ | |||||||||
| Supplemental information | |||||||||||
| Interest paid | $ | $ | |||||||||
| Restricted cash equivalents at beginning of period | $ | $ | |||||||||
| Restricted cash equivalents at end of period | $ | $ | |||||||||
| Change in restricted cash equivalents | $ | ( | $ | ( | |||||||
(a) Cash used in operating activities for the three months ended March 31, 2021 and 2020 primarily reflect $108.3 million and $91.8 million, respectively, of restricted cash equivalents returned to a former insured, per the terms of a collateral trust (see Amounts Recoverable from an Indemnifying Party in Liquidity and Capital Resources). Excluding the reduction in the collateral funds, cash provided by operating activities was $27.2 million and $26.5 million for the three months ended March 31, 2021 and 2020, respectively.
See accompanying notes.
9
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. Accounting Policies
Organization
James River Group Holdings, Ltd. (referred to as “JRG Holdings” or, with its subsidiaries, the “Company”) is an exempted holding company registered in Bermuda, organized for the purpose of acquiring and managing insurance and reinsurance entities.
The Company owns five insurance companies based in the United States (“U.S.”) focused on specialty insurance niches and two Bermuda-based reinsurance companies as described below:
•James River Group Holdings UK Limited (“James River UK”) is an insurance holding company formed in 2015 in the United Kingdom (“U.K.”). JRG Holdings contributed James River Group, Inc. (“James River Group”), a U.S. insurance holding company, to James River UK in 2015.
▪James River Group is a Delaware domiciled insurance holding company formed in 2002 which owns all of the Company’s U.S.-based subsidiaries, either directly or indirectly through one of its wholly-owned U.S. subsidiaries. James River Group oversees the Company’s U.S. insurance operations and maintains all of the outstanding debt in the U.S.
◦James River Insurance Company is an Ohio domiciled excess and surplus lines insurance company that, with its wholly-owned insurance subsidiary, James River Casualty Company, a Virginia domiciled company, is authorized to write business in every state and the District of Columbia.
◦Falls Lake National Insurance Company (“Falls Lake National”) is an Ohio domiciled insurance company which wholly owns Stonewood Insurance Company (“Stonewood Insurance”), a North Carolina domiciled company, and Falls Lake Fire and Casualty Company, a California domiciled company. Falls Lake National and its subsidiaries primarily write specialty admitted fronting and program business and individual risk workers' compensation insurance.
◦JRG Reinsurance Company Ltd. (“JRG Re”) was formed in 2007 and commenced operations in 2008. JRG Re, a Bermuda domiciled reinsurer, primarily provides non-catastrophe casualty reinsurance to U.S. third parties and, through December 31, 2017, to the Company’s U.S.-based insurance subsidiaries.
◦Carolina Re Ltd (“Carolina Re”) was formed in 2018 and as of January 1, 2018 provides reinsurance to the Company’s U.S.-based insurance subsidiaries. Carolina Re is also the cedent on a stop loss reinsurance treaty with JRG Re.
Basis of Presentation
The accompanying condensed consolidated financial statements and notes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and do not contain all of the information and footnotes required by U.S. GAAP for complete financial statements. The condensed consolidated financial statements include the results of the Company and its subsidiaries from their respective dates of inception or acquisition, as applicable. Readers are urged to review the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for a more complete description of the Company’s business and accounting policies. In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results of operations for the full year. The consolidated balance sheet as of December 31, 2020 was derived from the Company’s audited annual consolidated financial statements.
Intercompany transactions and balances have been eliminated.
Estimates and Assumptions
Preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying disclosures. Those estimates are inherently subject to change, and actual results may ultimately differ from those estimates.
10
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
Variable Interest Entities
Entities that do not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest are referred to as variable interest entities (“VIE”). A VIE is consolidated by the variable interest holder that is determined to have the controlling financial interest (primary beneficiary) as a result of having both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE’s capital structure, contractual terms, nature of the VIE’s operations and purpose, and the Company’s relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE. The Company reassesses its VIE determination with respect to an entity on an ongoing basis.
11
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
2. Investments
The Company’s available-for-sale fixed maturity securities are summarized as follows:
| Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| March 31, 2021 | |||||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||||
State and municipal | $ | $ | $ | ( | $ | ||||||||||||||||||
Residential mortgage-backed | ( | ||||||||||||||||||||||
Corporate | ( | ||||||||||||||||||||||
Commercial mortgage and asset-backed | ( | ||||||||||||||||||||||
U.S. Treasury securities and obligations guaranteed by the U.S. government | ( | ||||||||||||||||||||||
| Total fixed maturity securities, available-for-sale | $ | $ | $ | ( | $ | ||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||||
State and municipal | $ | $ | $ | ( | $ | ||||||||||||||||||
Residential mortgage-backed | ( | ||||||||||||||||||||||
Corporate | ( | ||||||||||||||||||||||
Commercial mortgage and asset-backed | ( | ||||||||||||||||||||||
U.S. Treasury securities and obligations guaranteed by the U.S. government | ( | ||||||||||||||||||||||
| Total fixed maturity securities, available-for-sale | $ | $ | $ | ( | $ | ||||||||||||||||||
The amortized cost and fair value of available-for-sale investments in fixed maturity securities at March 31, 2021 are summarized, by contractual maturity, as follows:
| Cost or Amortized Cost | Fair Value | ||||||||||
| (in thousands) | |||||||||||
| One year or less | $ | $ | |||||||||
| After one year through five years | |||||||||||
| After five years through ten years | |||||||||||
| After ten years | |||||||||||
| Residential mortgage-backed | |||||||||||
| Commercial mortgage and asset-backed | |||||||||||
| Total | $ | $ | |||||||||
Actual maturities may differ for some securities because borrowers have the right to call or prepay obligations with or without penalties.
12
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
The following table shows the Company’s gross unrealized losses and fair value for available-for-sale securities aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:
| Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| March 31, 2021 | |||||||||||||||||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||||||||||||||||
| State and municipal | $ | $ | ( | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
| Residential mortgage-backed | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Corporate | ( | ( | |||||||||||||||||||||||||||||||||
| Commercial mortgage and asset-backed | ( | ( | ( | ||||||||||||||||||||||||||||||||
U.S. Treasury securities and obligations guaranteed by the U.S. government | ( | ( | |||||||||||||||||||||||||||||||||
| Total fixed maturity securities, available-for-sale | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||||||||||||||||
| State and municipal | $ | $ | ( | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
| Residential mortgage-backed | ( | ( | |||||||||||||||||||||||||||||||||
| Corporate | ( | ( | |||||||||||||||||||||||||||||||||
| Commercial mortgage and asset-backed | ( | ( | ( | ||||||||||||||||||||||||||||||||
U.S. Treasury securities and obligations guaranteed by the U.S. government | ( | ( | |||||||||||||||||||||||||||||||||
| Total fixed maturity securities, available-for-sale | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
At March 31, 2021, the Company held fixed maturity securities of 192 issuers that were in an unrealized loss position with a total fair value of $505.5 million and gross unrealized losses of $14.4 million. None of the fixed maturity securities with unrealized losses has ever missed, or been delinquent on, a scheduled principal or interest payment. At March 31, 2021, 99.3 % 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. Fixed maturity securities with ratings below investment grade by Standard & Poor’s or another nationally recognized rating agency at March 31, 2021 had an aggregate fair value of $11.9 million and an aggregate net unrealized gain of $114,000 .
The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2020. This update changed the impairment model for available-for-sale fixed maturities and requires the Company to determine whether unrealized losses on available-for-sale fixed maturities are due to credit-related factors. An allowance for credit losses is established for any credit-related impairments, limited to the amount by which fair value is below amortized cost. Changes in the allowance for credit losses are recognized in earnings and included in net realized and unrealized gains (losses) on investments. Unrealized losses that are not credit-related will continue to be recognized in other comprehensive income.
The Company considers the extent to which fair value is below amortized cost in determining whether a credit-related loss exists. The Company also considers the credit quality rating of the security, with a special emphasis on securities downgraded below investment grade. A comparison is made between the present value of expected future cash flows for a security and its amortized cost. If the present value of future expected cash flows is less than amortized cost, a credit loss is presumed to exist and an allowance for credit losses is established. Management may conclude that a qualitative analysis is sufficient to support its conclusion that the present value of the expected cash flows equals or exceeds a security’s amortized cost. As a result of this review, management concluded that there were no credit-related impairments of fixed maturity securities at March 31, 2021, December 31, 2020, or March 31, 2020. Management does not intend to sell the 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.
13
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
In connection with the adoption of ASU 2016-13, the Company elected the fair value option in accounting for bank loan participations effective January 1, 2020. The targeted transition relief offered by ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief was applied to elect the fair value option to account for bank loan participations already held at the January 1, 2020 date of adoption. Under the fair value option, bank loan participations are measured at fair value, 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 adoption on January 1, 2020, the Company applied the amendments on a modified retrospective basis, reducing the carrying value of its bank loan portfolio to fair value through an $8.4 million adjustment with a $7.8 million (net of tax) cumulative effect adjustment to reduce retained earnings.
Applying the fair value option to the bank loan portfolio increases volatility in the Company's financial statements, but management believes it is less subjective and less burdensome to implement and maintain than ASU 2016-13, which would have otherwise been required. At March 31, 2021, the Company's bank loan portfolio had an aggregate fair value of $160.9 million and unpaid principal of $168.6 million. Investment income on bank loan participations included in net investment income was $2.9 million and $4.1 million for the three months ended March 31, 2021 and 2020, respectively. Net realized and unrealized gains (losses) on investments includes gains of $3.9 million and losses of $43.9 million related to changes in unrealized gains and losses on bank loan participations in the three months ended March 31, 2021 and 2020, respectively. Management concluded that there were no credit-related impairments of bank loan participations at March 31, 2021. At March 31, 2020, there were $5.0 million of unrealized losses due to credit-related impairments. Losses due to credit-related impairments were determined based upon consultations and advice from the Company's specialized investment manager and consideration of any adverse situations that could affect the borrower's ability to repay, the estimated value of underlying collateral, and other relevant factors.
Bank loan participations generally provide a higher yield than our portfolio of fixed maturities and have a credit rating that is below investment grade (i.e. below “BBB-” for Standard & Poor’s) at the date of purchase. These bank loans are primarily senior, secured floating-rate debt rated “BB”, “B”, or “CCC” by Standard & Poor’s or an equivalent rating from another nationally recognized rating agency. These 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. Bank loans consist of, but are not limited to, term loans, the funded and unfunded portions of revolving credit loans, and other similar loans and investments. Management believed that it was probable at the time that these loans were acquired that the Company would be able to collect all contractually required payments receivable.
Interest income on bank loan participations is accrued on the unpaid principal balance, and discounts and premiums on bank loan participations are amortized to income using the interest method. Generally, the accrual of interest on a bank loan participation is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest. A bank loan participation may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Generally, bank loan participations are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Interest received on nonaccrual loans generally is reported as investment income. There were no bank loans on nonaccrual status at March 31, 2021 or December 31, 2020.
14
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
The Company’s net realized and unrealized gains and losses on investments are summarized as follows:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Fixed maturity securities: | |||||||||||
| Gross realized gains | $ | $ | |||||||||
| Gross realized losses | ( | ( | |||||||||
| Bank loan participations: | |||||||||||
| Gross realized gains | |||||||||||
| Gross realized losses | ( | ( | |||||||||
| Changes in fair values of bank loan participations | ( | ||||||||||
| ( | |||||||||||
| Equity securities: | |||||||||||
| Gross realized gains | |||||||||||
| Gross realized losses | ( | ( | |||||||||
| Changes in fair values of equity securities | ( | ||||||||||
| ( | |||||||||||
| Short-term investments and other: | |||||||||||
| Gross realized gains | |||||||||||
| Gross realized losses | ( | ||||||||||
| Changes in fair values of short-term investments and other | |||||||||||
| Total | $ | $ | ( | ||||||||
Realized investment gains or losses are determined on a specific identification basis.
The Company invests selectively in private debt and equity opportunities. These investments, which together comprise the Company’s other invested assets, are primarily focused in renewable energy, limited partnerships, and bank holding companies.
| Carrying Value | Investment Income | ||||||||||||||||||||||
| March 31, | December 31, | Three Months Ended March 31, | |||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
Renewable energy LLCs (a) | $ | $ | $ | ( | $ | ||||||||||||||||||
Renewable energy notes receivable (b) | |||||||||||||||||||||||
Limited partnerships (c) | ( | ||||||||||||||||||||||
Bank holding companies (d) | |||||||||||||||||||||||
| Total other invested assets | $ | $ | $ | $ | |||||||||||||||||||
(a)The Company’s Corporate and Other segment owns equity interests ranging from 2.6 % to 32.6 % in various LLCs whose principal objective is capital appreciation and income generation from owning and operating renewable energy production facilities (wind and solar). The LLCs are managed by an entity for which two former directors served as officers, and the Company’s Non-Executive Chairman has invested in certain of these LLCs. The equity method is used to account for the Company’s LLC investments. Income for the LLCs primarily reflects adjustments to the carrying values of investments in renewable energy projects to their determined fair values. The fair value adjustments are included in revenues for the LLCs. Expenses for the LLCs are not significant and are comprised of administrative and interest expenses. The Company received cash distributions from these investments totaling $265,000 and $747,000 in the three months ended March 31, 2021 and 2020, respectively.
15
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(b)The Company's Excess and Surplus Lines and Corporate and Other segments have invested in notes receivable for renewable energy projects. At March 31, 2021, the Company held two notes issued by an entity for which two of our former directors serve as officers. Interest on the notes, which mature in 2025, is fixed at 12 %. Income from the notes was $234,000 and $166,000 for the three months ended March 31, 2021 and 2020, respectively ($104,000 and $— for the Excess and Surplus Lines segment and $130,000 and $166,000 for the Corporate and Other segment in the respective periods).
(c)The Company owns investments in limited partnerships that invest in concentrated portfolios including publicly-traded small cap equities, loans of middle market private equity sponsored companies, and tranches of distressed home loans. Income from the partnerships is recognized under the equity method of accounting. The Company’s Corporate and Other segment hold investments in limited partnerships with a total carrying value of $8.6 million at March 31, 2021. The Company recognized investment income of $754,000 and losses of $710,000 on these investments for the three months ended March 31, 2021 and 2020, respectively. The Company’s Excess and Surplus Lines segment holds investments in limited partnerships with a total carrying value of $4.8 million at March 31, 2021. Investment income of $175,000 and $141,000 was recognized on the investments for the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021, the Company’s Excess and Surplus Lines segment has outstanding commitments to invest another $7.9 million in these limited partnerships.
(d)The Company's Corporate and Other segment holds $4.5 million of subordinated notes issued by a bank holding company for which the Company’s Non-Executive Chairman was previously the Lead Independent Director and an investor and for which one of the Company’s directors was an investor and is currently a holder of the subordinated notes (the "Bank Holding Company"). Interest on the notes, which mature on August 12, 2023, is fixed at 7.6 % per annum. Interest income on the notes was $86,000
At March 31, 2021 and December 31, 2020, the Company held an investment in a CLO where one of the underlying loans was issued by the Bank Holding Company. The investment, with a carrying value of $252,000 at March 31, 2021, is classified as an available-for-sale fixed maturity.
3. Goodwill and Intangible Assets
On December 11, 2007, the Company completed an acquisition of James River Group by acquiring 100 % of the outstanding shares of James River Group common stock, referred to herein as the “Merger”. The transaction was accounted for under the purchase method of accounting, and goodwill and intangible assets were recognized by the Company as a result of the transaction. Goodwill resulting from the Merger was $181.8
The gross carrying amounts and accumulated amortization for each major specifically identifiable intangible asset class were as follows:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||
| Life (Years) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||||||||
| Intangible Assets | |||||||||||||||||||||||||||||
| Trademarks | Indefinite | $ | $ | — | $ | $ | — | ||||||||||||||||||||||
| Insurance licenses and authorities | Indefinite | — | — | ||||||||||||||||||||||||||
| Identifiable intangibles not subject to amortization | — | — | |||||||||||||||||||||||||||
| Broker relationships | |||||||||||||||||||||||||||||
| Identifiable intangible assets subject to amortization | |||||||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||
16
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
4. Earnings Per Share
The following represents a reconciliation of the numerator and denominator of the basic and diluted loss per share computations contained in the condensed consolidated financial statements:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands, except share and per share amounts) | |||||||||||
| Net loss to shareholders | $ | ( | $ | ( | |||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic | |||||||||||
| Common share equivalents | |||||||||||
| Diluted | |||||||||||
| Loss per share: | |||||||||||
| Basic | $ | ( | $ | ( | |||||||
| Common share equivalents | |||||||||||
| Diluted | $ | ( | $ | ( | |||||||
Common share equivalents of 306,712 and 309,443 were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2021 and 2020, respectively, as net losses in the respective periods made the effects of all common share equivalents anti-dilutive.
17
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
5. Reserve for Losses and Loss Adjustment Expenses
The following table provides a reconciliation of the beginning and ending reserve balances for losses and loss adjustment expenses, net of reinsurance, to the gross amounts reported in the condensed consolidated balance sheets. Reinsurance recoverables on unpaid losses and loss adjustment expenses are presented gross of a $335,000
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Reserve for losses and loss adjustment expenses net of reinsurance recoverables at beginning of period | $ | $ | |||||||||
| Add: Incurred losses and loss adjustment expenses net of reinsurance: | |||||||||||
| Current year | |||||||||||
| Prior years | |||||||||||
| Total incurred losses and loss and adjustment expenses | |||||||||||
| Deduct: Loss and loss adjustment expense payments net of reinsurance: | |||||||||||
| Current year | |||||||||||
| Prior years | |||||||||||
| Total loss and loss adjustment expense payments | |||||||||||
| Reserve for losses and loss adjustment expenses net of reinsurance recoverables at end of period | |||||||||||
| Add: Reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period | |||||||||||
| Reserve for losses and loss adjustment expenses gross of reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period | $ | $ | |||||||||
The Company experienced $170.1 million of net adverse reserve development in the three months ended March 31, 2021 on the reserve for losses and loss adjustment expenses held at December 31, 2020. This reserve development included $168.7 million of net adverse development in the Excess and Surplus Lines segment including $170.0 million on commercial auto business, almost entirely related to a previously canceled account that has been in runoff since 2019. The reported losses on this terminated commercial auto account meaningfully exceeded our expectations for the three months ended March 31, 2021. We had expected that reported losses would decline as the account moved further into runoff, but the continued heavy reported loss emergence in the first quarter of 2021 indicated more inherent severity than anticipated. In response, we meaningfully adjusted our actuarial methodology, resulting in a significant strengthening of reserves for this account at March 31, 2021. In prior quarters, our actuarial work for this terminated commercial auto account had been based on industry data, pricing data, experience data, average claims severity data, and blended methodologies. However, the continuation of the highly elevated reported losses in the first quarter of 2021 led us to conclude that using only our own loss experience in our paid and incurred reserve projections rather than the array of inputs that we had used in prior quarters, and giving greater weight to incurred methods, would give us a better estimate of ultimate losses on this account. The Company also experienced $1.0 million of net favorable development in the Specialty Admitted Insurance segment due to favorable development in the workers' compensation business for prior accident years, and $2.5 million of net adverse development in the Casualty Reinsurance segment.
The Company experienced $874,000 of net adverse reserve development in the three months ended March 31, 2020 on the reserve for losses and loss adjustment expenses held at December 31, 2019. This reserve development included $3,000 of favorable development in the Excess and Surplus Lines segment, $