James River Group Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the James River Group Q2 2020 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero, on your touch-tone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Kevin Copeland, Head of Investor Relations. Please go ahead, Seth.

Thank you, Tiffany. Good morning, everyone, and welcome to the James River Group second quarter 2020 earnings conference call. During the call, we will be making forward-looking statements. These statements are based on current beliefs, intentions, expectations, and assumptions that are subject to various risks and uncertainties which may cause actual results to differ materially. For discussion of such risks and uncertainties, please see the cautionary language regarding forward-looking statements in yesterday's earnings release and the risk factor section of our most recent Form 10-K, Form 10-Qs, and other reports and filings we make with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. I will now turn the call over to Adam Abram, Chairman and Chief Executive Officer of James River Group.

Thank you very much, Kevin, and good morning, everyone, and welcome to our second quarter conference call. I'm joined here this morning by Sarah Doran, our Chief Financial Officer, and Bob Myron, our President and Chief Operating Officer. And as is our usual way, Sarah and I will both have a few comments. and then all three of us would enjoy answering any questions that you may have. A number of things seem worth mentioning and pointing out from my perspective. First, our returns are strong. We're reporting a group combined ratio of 95 percent. Our return on tangible equity this quarter was 12.9 percent and 12 percent for the six months. By our calculation, an investor in our IPO has enjoyed a 22.3% internal rate of return, including dividends, from our IPO in December of 2014 through the middle of last week. Our tangible book value per share grew 14.9% during the quarter. Our prospects, I think, are excellent. Our ENS segment grew gross written premiums by 18% for the quarter and 25% for the six months. Our enforced policy count in core ENS grew by 28% from June 2019 to this past June. We had a 16% increase in submissions in ENS during the first half of the year. Ten of our 12 ENS divisions had increased submission flow, and the trend of greater submissions continues Early in the third quarter. While we are growing, we're not changing our mix dramatically, and I think that's important. Average premiums remain in the low $20,000 level. And year-to-date, 9 of 12 divisions within E&S have grown. For the quarter just ended, June 30th, that was the 14th consecutive quarter in which we had rate increases in poor E&S. The pace of rate increases is accelerating. In the first quarter, we reported a 13% rate increase on renewal policies. In this most recent quarter, our E&S team achieved a 20% increase on renewal policies. Turning to our specialty admitted book, it's performing very well. The segment reported a combined ratio of 90.1% for the second quarter and 98.3%. for the first six months of the year. And during the first half of the year, our specialty admitted segment has signed new fronting deals that we expect will generate annual premiums of approximately $100 million and annual fees of about $6 million. So we're making steady progress on building a highly diversified book of fee income producing programs that will earn in over the next year. One of the things that we all pay a lot of attention to is the strength of our balance sheet, and I believe that our balance sheet strength is increasing quarter over quarter. Our loss in LAE ratio in core excess and surplus lines for the 15 years 2003 through 2018 is 57.1%. We are currently riding more of this business than in any previous year at better rates than at any time in our past, and we're booking our current year at 65.7%. I know that the runoff of our large commercial account is always a matter that has gotten some attention in recent quarters and that's proceeding well. We closed an additional 15% of the claims associated with the canceled Razier account during the quarter and that means that we've closed approximately 40% of the claims that were outstanding at the time we stopped writing the account. We continue to expect it will take two to three years to complete the runoff of the book, but we're pleased with the pace, and claims are being resolved at cost within our expectations. The claims environment in general is relatively benign, and that combined with what we're seeing in rates is a really powerful combination. Claims frequency in our E&S book is down 21.4% in the second quarter compared to a year ago, and down 19.2% in our specialty admitted segment. We have no compensable COVID-19 claims reported in our ENS unit or in our reinsurance segment. As we talked about in our last call, the classes of the ENS business we write as well as our policy language and structure insulate us against liability for COVID claims. In our specialty admitted segment, our individual risk workers compensation book has received four COVID claims, one of which was compensable, and we had a net obligation of $750 on that claim. We do write workers' compensation policies in our fronted business under the specialty admitted segment, and to date we've had approximately 55 COVID-19 claims from this program unit. However, our retentions are low. They're between 11% and 20% on the first million dollars per occurrence. and so our maximum liability is $110,000 to $200,000 per claim. To date, our average total net incurred for the few COVID claims we've had is less than $13,000 per claim. And we just don't currently expect the net liabilities from COVID-19 to be material to us. Our reinsurance segment suffers from a lack of scale, but it contributes to the overall profitability. relatively small amounts of adverse development from prior years when our book was larger overwhelmed the profitable underwriting in the much smaller book we write there today. The book we write in Bermuda today is overwhelmingly E&S casualty with good margins. However, we have allocated less capital to our reinsurance unit than to our primary segments because of the outsized opportunity available in our primary segments. Consequently, Movements in prior year development in reinsurance can cause losses in the current year underwriting profits there. Looking forward, I think the momentum of the first half of the year is shaping up to continue. And our plan is to stick to our plan to continue to write business we understand at prices we expect to produce material underwriting margin. We're focused on increasing our fee business and expect those fees to become a larger contributor to our margin over the next 12 months. We recognize at the same time the seeming disconnect between the many leading economic indicators, so unemployment, for example, and our expanding business. Still, we don't see signs of a slowdown in our business. We think the general E&S market is expanding as admitted markets retreat from more classes of business, and pricing is definitely increasing as a reaction to prior year losses in the industry and low prevailing market rates of interest. And so with that, if I could turn to Sarah to add her reflections on the quarter and the first half of the year. Sarah?