James River Group Holdings, Inc.

Good day and thank you for standing by. Welcome to the James River Group Q4 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star and zero. I would now like to hand the conference over to your speaker today, Brett Sherriff, Head of Investor Relations, and please go ahead.

Thank you, Dede. Good morning, everyone, and welcome to the James River Group Fourth Quarter 2021 Earnings Conference Call. During our 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 factors of our most recent Form 10-K, Form 10-Qs, and other reports and filings we've made with the SEC. We do not undertake any duty to update any forward-looking statements. I will now turn the call over to Frank D'Orazio, Chief Executive Officer of James River Group.

Frank D' Brett, thank you for that introduction. Good morning, and welcome to everyone on the call. We have quite a bit of information to share with you regarding our fourth quarter results, as well as the meaningful strategic actions that we announced with our earnings last night. James River took significant steps in an attempt to put our historical prior year development from our casualty re-unit behind the organization as we look to significantly downsize that business and emphasize our insurance operations. In doing so, we believe we've extinguished our final legacy hurdle and have had our new chief actuary complete his deep dive of all three operating segments while receiving external validation points along the way. With these actions behind us, our focus is on continuing to leverage the sector's robust underwriting conditions while we continue to make James River a stronger and more profitable specialty E&S leader. We have confidence in our group reserve position after confronting legacy issues head-on in 2021 with the actions we've taken, including the two retrospective reinsurance transactions that we completed in the last several months. On a group basis, our IBNR now represents 64.4% of our total net reserves. This is up from 55.3% a year ago, and is the highest level of IBNR at the company since early 2018. I'm pleased with the progress that we've made organizationally, while remaining focused on profitably growing our ENS and specialty admitted segments. The reserve actions of the quarter somewhat obscure the fact that our ENS and specialty admitted businesses reported strong results in the fourth quarter, with combined ratios in the mid to low 80s and $27 million of combined underwriting profit. Excellent results that I want to expand upon. The E&S segment recorded a combined ratio of 82.1 percent, as well as 12 percent growth in gross premiums. Underwriting profit of $24 million was the second largest quarterly underwriting profit ever for the segment, and that did not include the benefit of any positive reserve release, highlighting the profitability of the business we're currently riding. Growth in E&S was driven by continued strong performance in excess casualty, as well as allied health, manufacturers and contractors, excess property, and our small business unit. Our core E&S book grew 14% in the fourth quarter and 19% for the full year. Rates were up 9.5% across the E&S segment in the fourth quarter and 13.3% for 2021. It's impressive that we've now had two consecutive years of renewal rate increases in excess of 13%, which is meaningfully ahead of both our view of lost cost trends and the rate increases implied in our loss picks for the year. The fourth quarter of 2021 represented the 20th consecutive quarter of rate increases for the E&S segment, compounding to 49% over that period and providing confidence in the strength of our loss picks and the margin we're building in the business that we're writing today. For the full year, our overall E&S segment surpassed $830 million in gross premiums, and our core E&S book reached $800 million in gross premiums, which was growth of $130 million over last year, or almost 20%. This is an impressive milestone for a business that was $334 million of premium just three years ago at the end of 2018. While we've added significantly to the top line over that period, we've done so over some of the best market conditions of this century, while remaining bottom line focused. The hallmark strength of our core ENS underwriting expertise is clearly evidenced by our results this quarter. Turning to specialty admitted, the segment had another very strong quarter with gross premium growth of 9 percent and a combined ratio of 84.7 percent. Gross fee income increased 27 percent from the prior year quarter to $6.5 million. Fronting and program premiums were up 11 percent, which was similar to the growth we reported last quarter. Our individual risk workers' compensation premiums were down 5.5% for the quarter and 10% for 2021, as we've remained focused on managing the portfolio prudently in what continues to be a counter-cyclical marketplace for workers' compensation. Growth in the quarter for our fronting business was driven primarily from existing programs. We continue to have a healthy pipeline of opportunities and wrote one new program in Q4, have already bound two new programs during the fourth excuse me, during the first quarter, so we're off to a good start for 2022. Getting back to the reserve actions of the quarter, as we discussed in our November call, our new chief actuary, Dave Jeline, was in the process of completing reserve reviews for all three underwriting segments in what would be his first full quarter as chief actuary. While those comprehensive actuarial reviews have suggested no changes in our reserve positions for both our E&S and specialty admitted segments, Our thorough analysis of our casualty reinsurance segment resulted in a $115 million reserve adjustment, given the unexpectedly high emergence in 2021, particularly in the fourth quarter. Despite the history of relatively small but persistent adverse charges from this segment, the magnitude of the development was both unexpected and extremely disappointing. The bulk of the adverse development was driven by less than one handful of and most of the charge emanated from the 2014 to 2018 underwriting years. By all accounts, very different underwriting conditions than today's marketplace. The underlying coverage of most of these treaties was primary general liability, including exposure to construction and construction defect. To a lesser degree, treaties contributing to the charge also had aspects of premises and financial lines exposures. Actual reported and paid losses in the casualty reinsurance segment significantly exceeded expected indications in 2021, particularly in the fourth quarter, causing us to refine several of the assumptions used to determine our best estimate of ultimate losses for this segment. We responded to the elevated loss emergence by making significant adjustments to our assumed tail and development factors. In particular, we placed significantly more weight on incurred loss development methods, particularly for treaties with exposure to construction operations. Roughly half of these treaties are no longer in force, And those that are have undergone significant underwriting and pricing changes as the segment has heavily de-risked the portfolio over the last three years. We believe those actions are clearly evident in the meaningfully improved loss experience we see in the most recent underwriting years. After the reserve movements this quarter, our IBNR represents 66 percent of net reserves in the casualty re-segment. This is up from 59.2 percent at the end of the prior year and at the highest level in more than seven years. In addition to the reserve strengthening, we moved quickly to provide our shareholders additional certainty around the size of the charge and protection against further development for the segment. We believe that with the legacy transaction that we've just signed covering the bulk of the segment's reserves, we've meaningfully improved the confidence associated with the casualty reserve portfolio as well as our overall balance sheet. Sarah will describe the lost portfolio transaction in a bit more detail momentarily, but I would quickly emphasize two points. For one, our counterparty in this transaction, Fortitude REIT, is a sophisticated A-rated legacy reinsurer with greater than $4 billion in surplus that we're very pleased to be working with. Secondly, I view the transaction, which is being executed at less than $7 million above our Q4 held reserves, as further validation of the actuarial work that we completed in the quarter. With our reserves for our casualty REIT segment now significantly strengthened and further bolstered by the legacy transaction with Fortitude, We expect to substantially reduce casualty rate premiums in 2022. I expect we could see a premium reduction of $100 million or so based on our 2022 plan, which is driven by portfolio optimization and profitability, not volume. We do still view the market as attractive given the strength of the rate environment and terms and conditions, but expect to be selective relative to the makeup of that portfolio while deploying the majority of our capital in our E&S and specialty-admitted businesses. Before I move on, given the reserve development we are announcing in the casualty resegment this quarter and the impact that construction defect exposure has had in driving the charge, I wanted to spend a moment discussing why we have not also seen emergence present in our E&S segment and provide some qualitative rationale for that sentiment. For one, our E&S segment has historically not written large home builders or general contractors who construct massive-scale multifamily housing. We also don't write construction wraps either on an owner-controlled or contractor-controlled basis. These structures and programs tend to be vulnerable to latency because they have very long products and completed operations coverage extensions. We haven't written these programs in our E&S segment, but a few of our larger seedings in the casualty read portfolio did underwrite these structures. So then what do we write? Our manufacturers and contractors unit in our E&S segment tends to target artisan and trade contractors with average premium sizes of $25,000 to $30,000, and we try to avoid many of the most problematic states for the class. Finally, we write no new residential construction in our small business or contract-binding units. Before Sarah provides greater detail, I'd like to comment briefly on capital and the strength of our balance sheet moving forward. I'm very excited about our new relationship with Gallatin Point Capital and the $150 million investment in convertible preferred stocks will make in support of our company. Gallatin is a highly regarded private investment firm that specializes in investments and financial institutions. Our board has approved the appointment of Matthew Botin, a co-founder and managing partner of Gallatin Coin Capital, to serve as a member of our board, following the receipt of any necessary regulatory approvals. Several members of the management team and the board have recently spent considerable time with Matt and his colleagues, and it's clear that they view our franchise and our future with the same appreciation that we do. We're very excited to be in partnership with Gallatin Point and have Matt join our board. Together with the reserve actions taken earlier in 2021 for our runoff commercial auto portfolio and the legacy solution we announced in September, we believe our balance sheet is strong and very well positioned to continue to support the fantastic opportunities we're seeing in our two U.S. insurance segments. In the last 16 months, The company has significantly increased our reserve balance, executed two legacy reinsurance transactions to substantially reduce reserve risk, raised meaningful capital, and brought on new, experienced senior management in our actuarial and claims functions, as well as hired a group CUO to provide improved underwriting governance. We have made investments in our technology, updated and improved our enterprise risk management plan, and have continued to improve our governance by adding three new independent directors to our board. each with meaningful and impressive insurance industry experience. We've done this while growing the company by 20% over the past year. James River will continue to be a dynamic and entrepreneurial underwriting organization as we build upon our industry-leading insurance franchises. What we've highlighted in the actions taken since I've joined the organization is the blueprint for how we're going to manage and govern the company. And frankly, there's no turning back. With the actions that I've taken since joining James River, I see a very bright future for the organization and an opportunity for the company to achieve its earning promise and potential. This is an exciting time for James River. And with that, let me turn the call over to Sarah.