James River Group Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to James River Group Q2 2023 earnings call. I would now like to introduce you to your host for today's call, Brett Sheriffs, Investor Relations at James River Group. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keyboard. If you would like to withdraw a question, again, press star, one. Thank you. Brett, you may begin your conference.

Good morning everyone and welcome to the James River Group second quarter 2023 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 factors of our most recent Form 10-K and other reports and filings we have made with the Securities Exchange Commission. We do not undertake any duty to update any forward-looking statements. In addition, during this presentation, we may reference non-GAAP financial measures such as adjusted net operating income, underwriting profits, tangible equity, tangible common equity, and adjusted net operating return on tangible common equity. Please refer to our earnings press release for a reconciliation of these numbers to GAAP, a copy of which can be found on our website at www.jrvrgroup.com. Lastly, unless otherwise specified for the reasons described in our earnings press release, all underwriting performance ratios referred to are for our business that is not subject to retroactive reinsurance accounting for lost portfolio transfers. I will now turn the call over to Frank D'Orazio, Chief Executive Officer of James River Group.

Thank you for the introduction, Brett. Good morning, everyone, and welcome to our second quarter 2023 earnings call. I'm pleased to be joining you today to provide additional color on our strong second quarter results, while also sharing some thoughts on market conditions and future opportunities for James River. Our results released last night reflect strong, positive momentum as we delivered yet another consistent quarter, our sixth in a row, of a mid-teens return on tangible common equity, excluding any OCI. We continue to see robust growth in our E&S segment as hard market conditions persist and strong performance from our investment portfolio, contributing to our attractive results for shareholders. For the second quarter, we reported adjusted net operating income of $20.6 million. Consistent with our prior guidance, Adjusted net operating return on tangible common equity, XAOSDI, was 14.8% for the quarter and 15.5% year-to-date. Tangible common equity per share has increased more than 17% before dividend through the first half of the year as we delivered strong underwriting profit and investment returns. As I alluded to, E&S market conditions remain very attractive as we recorded an 11% renewal rate increase for the quarter. our 26th consecutive quarter of positive rate growth, bringing our compounded rate change to 10.2% for the year and 72.3% since 2017. The 11% increase in renewal pricing this quarter is as strong as it has been since the 14.1% effective rate change we experienced in the second quarter of last year and exceeds the 9.9% we reported for the full year of 2022. Beyond excess property, energy, environmental, and our excess casualty division led the way relative to rate change meaningfully above our expectations as our core product lines in E&S continue to achieve rate levels in excess of our view of loss trends and the assumptions in our 2023 business plan. Conditions in excess casualty, our largest E&S underwriting division, remain especially attractive as we achieved an 11.5% rate increase for the quarter. Additionally, our excess property unit continues to enjoy a very opportune trading environment, experiencing nearly 30% premium growth for the quarter and 42.4% premium growth at the midpoint of the year from the strength of year-to-date rate change totaling 77.8%. As I have reported in the past, we have not changed our attachment strategy or risk appetite while posting these production results. And while our excess property underwriters are clearly taking advantage of favorable market conditions and experiencing healthy rate-driven premium growth, we continue to believe that our property writing will still account for less than 10% of the E&S segment's overall premium. Taken in concert across our underwriting division, we believe our results and the trends that we see in our business support our outlook for favorable future pricing conditions for the E&S market and continued opportunities for profitable growth for James River. During the second quarter, we saw strong new and renewal submission trends for the segment overall, and some of our larger divisions experienced accelerating submission growth rates relative to the last few quarters. In general casualty, we saw submission growth increase from 9% in the first quarter to 13% in the second quarter. And in excess casualty, submission growth improved to 12% in the second quarter, supporting continued premium growth opportunities. Poor E&S, which excludes our commercial auto division, grew gross written premiums by 9% in the second quarter, driven by strong growth in excess casualty, general casualty, manufacturers and contractors, and excess property. Net earned premium growth for the segment was 15.3% in the second quarter. Additionally, we continue to demonstrate prudent portfolio management in the segment. Commercial auto premiums declined by 33%, as we've reduced our appetite for certain risk classes within the sector and have been pushing rates more aggressively. We also now have renewed over $7 million of primary liability habitational premium, choosing not to follow new entrant aggression in the space. As we have noted before, as a bottom line focused organization, we're maintaining our underwriting discipline and taking actions that we believe are needed to preserve our underwriting margins for the future. From a profitability standpoint, The combined ratio in ENS was 87.8% per quarter, as we generated $19 million of underwriting profit. Overall, our ENS segment had a tremendous first half of the year, with double-digit rate increases, 15% growth in earned premium, and nearly $40 million of underwriting income, as we expect to carry this strong momentum not only into the second half of the year, but well into 2024. Turning to specialty admitted, gross written premiums increased 10% for the second quarter, with net premiums increasing 58%. Our workers' compensation premiums, including our large fronted program, declined 4% on a gross basis, while our remaining fronting business grew 15.6% as new programs have gained traction and existing programs continue to achieve rate and build scale in the quarter. The workers' compensation trends we've been discussing for several years now largely continued in the quarter, with modest improvement in rates in our individual risk book, as well as moderated rate decline in our California workers' compensation program. By our account, since 2016, rates have now declined nearly 50% in California workers' compensation. As a result, we made the disciplined decision to non-renew our large California workers' compensation program during the quarter. Persistent rate pressure and tighter reinsurance capacity had significantly challenged our opportunity for future profitability on the program and led us to this underwriting and portfolio management decision. As a point of reference, the program accounted for approximately 7% of company-wide gross written premium and 2% of net earned premium over the last four quarters. Our conservative approach to managing front-end programs extends to all facets of the business, including our security and collateral requirements, which has served us well amidst industry allegations and investigations of fraudulent collateral plaguing the sector. I'm pleased to advise that we have no direct exposure to the parties involved in the allegations and have successfully confirmed all of our letters of credit with the respective issuing banks. The segment's combined ratio for the quarter was 98.4%, with the increase from the prior year primarily due to a higher expense ratio in our individual risk workers' compensation business related to a change in reinsurance structure that incepted at the beginning of the year. Lastly, turning to casualty reinsurance, or JRG-RE, the segment continues to perform as expected. Earned premium in the quarter of $26.7 million reflects premium earned on all enforced treaties including $4 million of premium adjustment. We were able to produce a small underwriting profit and continue to expect the segment to operate at about break even. The segment's results included $3 million of prior year development on business not subject to the segment's lost portfolio transfer, or LPT, as well as $5.8 million of development on treaties covered by the LPT. The remaining limit on the retroactive reinsurance that was put in place effective October 1st of 2021 is now $45 million. Overall, I'm extremely pleased with our second quarter results and remain appreciative of the commitment and dedication of all the employees here at James River. We continue to demonstrate the strong earnings power of the franchise and remain well-positioned to take advantage of the resolute and attractive trading conditions in the E&S market. Our focus remains on deploying capital where we're confident we can achieve consistent and attractive returns for shareholders.