Press Release

James River Announces Second Quarter 2018 Results

08/01/18
  • Second Quarter 2018 Net Income of $17.0 million -- $0.56 per diluted share, a 17% increase over the second quarter of 2017, and Adjusted Net Operating Income of $17.6 million -- $0.58 per diluted share, an 18% increase over the second quarter of 2017

  • Year-to-date annualized Adjusted Net Operating Return on Average Tangible Equity of 14.5% 
  • Underwriting Profit of $5.5 million, an improvement of 33% over the prior year quarter
     
  • Net Investment Income of $16.1 million, an increase of 18%, or $2.4 million, over the prior year quarter
     
  • 15% growth in core (non-Commercial Auto) Excess and Surplus Lines Gross Written Premium driven by strong growth in the General Casualty, Excess Casualty, Life Sciences and Small Business divisions

PEMBROKE, Bermuda, Aug. 01, 2018 (GLOBE NEWSWIRE) -- James River Group Holdings, Ltd. ("James River" or the "Company") (NASDAQ: JRVR) today reported second quarter 2018 net income of $17.0 million ($0.56 per diluted share), compared to $14.5 million ($0.48 per diluted share) for the second quarter of 2017.  Adjusted net operating income for the second quarter of 2018 was $17.6 million ($0.58 per diluted share), compared to $14.9 million ($0.49 per diluted share) for the same period in 2017.

   
Earnings Per Diluted Share Three Months Ended
June 30,
  2018   2017
       
Net Income 1 $ 0.56     $ 0.48  
Adjusted Net Operating Income 2 $ 0.58     $ 0.49  
       
1 2018 results include unrealized losses on equity securities and related taxes.
2 See "Reconciliation of Non-GAAP Measures" below.
 

Robert P. Myron, the Company’s Chief Executive Officer, commented “We had another solid quarter and our results for the first half of the year have been strong.  For the second consecutive quarter we delivered an annualized Adjusted Net Operating Return on Average Tangible Equity greater than 14%, driven by good underwriting results in all three segments and the exceptional performance of our bank loan and alternative investment portfolios.

Our two U.S. primary segments continued to have strong growth in gross written premium, while the decrease in our Casualty Reinsurance premium was in line with our expectations.”

Second Quarter 2018 Operating Results

  • Gross written premium of $293.4 million, consisting of the following:
     
  Three Months Ended
June 30,
 
($ in thousands) 2018   2017   % Change
Excess and Surplus Lines $ 165,398     $ 138,004     20 %
Specialty Admitted Insurance 97,100     76,771     26 %
Casualty Reinsurance 30,880     66,700     -54 %
  $ 293,378     $ 281,475     4 %
                     
  • Net written premium of $188.6 million, consisting of the following:
     
  Three Months Ended
June 30,
 
($ in thousands) 2018   2017   % Change
Excess and Surplus Lines $ 143,235     $ 124,197     15 %
Specialty Admitted Insurance 14,487     16,900     -14 %
Casualty Reinsurance 30,884     66,727     -54 %
  $ 188,606     $ 207,824     -9 %
  • Net earned premium of $208.2 million, consisting of the following:
  Three Months Ended
June 30,
 
($ in thousands) 2018   2017   % Change
Excess and Surplus Lines $ 139,127     $ 117,268     19 %
Specialty Admitted Insurance 14,266     17,760     -20 %
Casualty Reinsurance 54,817     49,049     12 %
  $ 208,210     $ 184,077     13 %
                     
  • The Excess and Surplus Lines segment grew due to increases in its Commercial Auto division amid a rate increase on the March 1, 2018 renewal of the Company's largest contract, as well as 15% growth in core (non-Commercial Auto) lines gross written premium, as eight out of twelve underwriting divisions grew;
  • The Specialty Admitted Insurance segment gross written premium increased due to growth in individual risk Workers’ Compensation and fronting gross written premium, while net written premium and net earned premium decreased as a result of the October 1, 2017 inception of a new third party 50% quota share reinsurance agreement on its individual risk Workers' Compensation line;
  • Net written premium in the Casualty Reinsurance segment decreased from its level as of the prior year quarter, but net earned premium increased as a result of a higher level of net written premium during 2017 than in 2016.  The Company expects net written premium in this segment to decrease meaningfully for the full year 2018, but its net earned premium will lag given the earning patterns of the business, which generally extend to 24 months and in some cases beyond;
  • Unfavorable reserve development of $2.2 million compared to unfavorable reserve development of $1.7 million in the prior year quarter (representing a 1.1 percentage point and 0.9 percentage point increase to the Company’s loss ratio in each period, respectively);
  • Pre-tax favorable (unfavorable) reserve development by segment was as follows:
   
  Three Months Ended
June 30,
($ in thousands) 2018   2017
Excess and Surplus Lines $ 58     $ 1,440  
Specialty Admitted Insurance 167     (949 )
Casualty Reinsurance (2,449 )   (2,206 )
  $ (2,224 )   $ (1,715 )

The unfavorable reserve development in the Casualty Reinsurance segment primarily related to losses from risk profiles and treaty structures that the Company no longer writes;

  • Group accident year loss ratio of 73.2% was up from 70.3% in the prior year quarter due to changes in mix of business, specifically growth in the Commercial Auto division within the Excess and Surplus Lines segment which carries a higher initial loss pick but also a lower expense ratio than the segment as a whole;
  • Group combined ratio of 97.3% improved from 97.7% in the prior year quarter;
  • Group expense ratio of 23.1% improved from 26.5% in the prior year quarter, driven by increased net earned premium and fee income, as well as continued growth in lines of business which carry relatively low expenses.  Note that the prior year quarter included a prior period commission adjustment for three profitable contracts in the Casualty Reinsurance segment that increased the expense ratio 1.1 percentage points;
  • Gross fee income of $7.4 million increased from $6.9 million in the prior year quarter;
  • Gross fee income by segment was as follows:
     
  Three Months Ended
June 30,
 
($ in thousands) 2018   2017   % Change
Excess and Surplus Lines $ 3,663     $ 4,207     (13 )%
Specialty Admitted Insurance 3,735     2,673     40 %
  $ 7,398     $ 6,880     8 %
                     

Fee income in the Excess & Surplus Lines segment decreased from its level in the prior year quarter as a portion of the segment’s fee for services revenue is now recorded as gross written premium.  Fee income in the Specialty Admitted Insurance segment increased as a result of the continued growth of the segment's fronting business.

  • Net investment income of $16.1 million, an increase of 18% from the prior year quarter.  Further details can be found in the "Investment Results" section below.

Investment Results

Net investment income for the second quarter of 2018 was $16.1 million, which compares to $13.7 million for the same period in 2017.  The increase was driven by improved book yields in the fixed maturity and bank loan portfolios due to higher market interest rates, as well as strong performance across all investments in our "Other Private Investments" portfolio.

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

     
  Three Months Ended
June 30,
 
($ in thousands) 2018   2017   % Change
Renewable Energy Investments $ 530   $ 1,521   (65 )%
Other Private Investments   1,506   838   80 %
All Other Net Investment Income   14,099     11,355   24 %
Total Net Investment Income $ 16,135   $ 13,714   18 %
                 

The Company’s annualized gross investment yield on average fixed maturity and bank loan securities for the three months ended June 30, 2018 was 4.0% (up from 3.6% for the three months ended June 30, 2017) and the average duration of the fixed maturity and bank loan portfolio was 3.4 years at June 30, 2018 (unchanged from June 30, 2017 and down from 3.5 years at March 31, 2018).  Renewable energy and other private investments produced an annualized return of 10.7% for the three months ended June 30, 2018 (15.1% for the three months ended June 30, 2017).

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 June 30, 2018 and 2017 was 8.2% and 6.5%, respectively.

Tangible Equity

Tangible equity before dividends increased 2.7% from $474.5 million at December 31, 2017 to $487.5 million at June 30, 2018, due to $32.6 million of net income and $5.1 million of option exercise activity and stock compensation.  These items were partially offset by $25.1 million of after tax unrealized losses in the Company's fixed income investment portfolio resulting from increased market interest rates.

Tangible equity after dividends decreased 1.1% from $474.5 million at December 31, 2017 to $469.4 million at June 30, 2018, and increased 0.8% from $465.8 million at March 31, 2018 to $469.4 million at June 30, 2018.  Tangible equity per common share was $15.69 at June 30, 2018, net of $0.60 of dividends per share the Company paid during the first six months of 2018.  The year-to-date annualized adjusted net operating income return on average tangible equity was 14.5%, which compares to 13.4% for the same period in 2017.

Capital Management

The Company announced that its Board of Directors declared a cash dividend of $0.30 per common share, equal to the prior quarter. This dividend is payable on Friday, September 28, 2018 to all shareholders of record on Monday, September 10, 2018. James River Group Holdings, Ltd. has paid cumulative dividends, including this upcoming payment, of $191.8 million since its December 2014 initial public offering, or 41.2% of its tangible equity at initial public offering.

Conference Call

James River Group Holdings, Ltd. will hold a conference call to discuss its second quarter results tomorrow, August 2, 2018, at 8:30 a.m. Eastern Time. Investors may access the conference call by dialing (877) 930-8055, Conference ID# 1394997, or via the internet by going to www.jrgh.net and clicking on the “Investor Relations” link. Please visit the website at least 15 minutes early to register and download any necessary audio software. A replay of the call will be available until 11:30 a.m. (Eastern Time) on September 1, 2018 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; changes in laws or government regulation, including tax or insurance law and regulations; the recently enacted Public Law No. 115-97, informally titled the Tax Cuts and Jobs Act, 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; losses resulting from reinsurance counterparties failing to pay us on reinsurance claims or insurance companies with whom we have a fronting arrangement failing to pay us for claims; 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 (“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 our filings with the U.S. Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K filed with the SEC on March 1, 2018. 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, 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. Each of the Company’s regulated insurance subsidiaries are rated “A” (Excellent) by A.M. Best Company.

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)

 
  June 30, 2018   December 31, 2017
  ($ in thousands, except for share data)
ASSETS      
Invested assets:      
Fixed maturity securities, available-for-sale $ 1,021,387     $ 1,016,098  
Fixed maturity securities, trading     3,808  
Equity securities, available-for-sale 84,009     82,522  
Bank loan participations, held-for-investment 253,689     238,214  
Short-term investments 25,140     36,804  
Other invested assets 76,813     70,208  
Total invested assets 1,461,038     1,447,654  
       
Cash and cash equivalents 267,367     163,495  
Accrued investment income 9,502     8,381  
Premiums receivable and agents’ balances 341,391     352,436  
Reinsurance recoverable on unpaid losses 375,535     302,524  
Reinsurance recoverable on paid losses 13,365     11,292  
Deferred policy acquisition costs 65,462     72,365  
Goodwill and intangible assets 219,867     220,165  
Other assets 183,849     178,383  
Total assets $ 2,937,376     $ 2,756,695  
       
LIABILITIES AND SHAREHOLDERS’ EQUITY      
Reserve for losses and loss adjustment expenses $ 1,468,353     $ 1,292,349  
Unearned premiums 417,771     418,114  
Senior debt 98,300     98,300  
Junior subordinated debt 104,055     104,055  
Accrued expenses 40,342     39,295  
Other liabilities 119,312     109,883  
Total liabilities 2,248,133     2,061,996  
       
Total shareholders’ equity 689,243     694,699  
Total liabilities and shareholders’ equity $ 2,937,376     $ 2,756,695  
       
Tangible equity (a) $ 469,376     $ 474,534  
Tangible equity per common share outstanding (a) $ 15.69     $ 15.98  
Total shareholders’ equity per common share
  outstanding
$ 23.04    

 
$ 23.39  
Common shares outstanding 29,917,821     29,696,682  
Debt (b) to total capitalization ratio 22.7 %   22.6 %
(a) See “Reconciliation of Non-GAAP Measures”.
(b) Includes senior debt and junior subordinated debt.
 

James River Group Holdings, Ltd. and Subsidiaries
Condensed Consolidated Income Statement Data
(Unaudited)

  Three Months Ended
June 30,
  Six Months Ended
June 30,
  2018   2017   2018   2017
  ($ in thousands, except for share data)
REVENUES              
Gross written premiums $ 293,378     $ 281,475     $ 591,494     $ 505,654  
Net written premiums 188,606     207,824     399,584     365,734  
               
Net earned premiums 208,210     184,077     409,152     338,764  
Net investment income 16,135     13,714     29,391     30,447  
Net realized and unrealized (losses) gains on investments (a) (64 )   307     (874 )   1,354  
Other income 3,760     4,296     8,716     8,231  
Total revenues 228,041     202,394     446,385     378,796  
               
EXPENSES              
Losses and loss adjustment expenses 154,595     131,084     298,367     236,453  
Other operating expenses 51,751     53,036     106,534     101,929  
Other expenses 93     346     97     232  
Interest expense 2,946     2,224     5,468     4,347  
Amortization of intangible assets 149     149     298     298  
Total expenses 209,534     186,839     410,764     343,259  
Income before taxes 18,507     15,555     35,621     35,537  
Income tax expense 1,523     1,014     3,004     2,546  
NET INCOME $ 16,984     $ 14,541     $ 32,617     $ 32,991  
ADJUSTED NET OPERATING INCOME (b) $ 17,569     $ 14,864     $ 34,138     $ 32,583  
               
EARNINGS PER SHARE              
Basic $ 0.57     $ 0.49     $ 1.09     $ 1.12  
Diluted $ 0.56     $ 0.48     $ 1.08     $ 1.09  
               
ADJUSTED NET OPERATING INCOME PER SHARE            
Basic $ 0.59     $ 0.51     $ 1.14     $ 1.11  
Diluted $ 0.58     $ 0.49     $ 1.13     $ 1.07  
               
Weighted-average common shares outstanding:              
Basic 29,882,988     29,406,877     29,823,982     29,348,557  
Diluted 30,293,933     30,307,099     30,243,946     30,317,585  
Cash dividends declared per common share $ 0.30     $ 0.30     $ 0.60     $ 0.60  
               
Ratios:              
Loss ratio 74.2 %   71.2 %   72.9 %   69.8 %
Expense ratio (c) 23.1 %   26.5 %   24.0 %   27.7 %
Combined ratio 97.3 %   97.7 %   96.9 %   97.5 %
Accident year loss ratio 73.2 %   70.3 %   73.0 %   70.3 %
(a) 2018 includes net realized gains of $521,000 and net realized losses of $1.2 million for the change in net unrealized gains on equity securities in the three and six months ended June 30, 2018, respectively, in accordance with the Company's adoption of ASU 2016-01 effective January 1, 2018.
(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
June 30,
      Six Months Ended
June 30,
   
  2018   2017   % Change   2018   2017   % Change
  ($ in thousands)
Gross written premiums $ 165,398     $ 138,004     19.9 %   $ 332,884     $ 246,999     34.8 %
Net written premiums $ 143,235     $ 124,197     15.3 %   $ 297,166     $ 221,168     34.4 %
                       
Net earned premiums $ 139,127     $ 117,268     18.6 %   $ 269,098     $ 211,117     27.5 %
Losses and loss adjustment expenses (109,607 )   (86,521 )   26.7 %   (210,226 )   (153,089 )   37.3 %
Underwriting expenses (19,403 )   (19,018 )   2.0 %   (37,456 )   (37,499 )   (0.1 )%
Underwriting profit (a), (b) $ 10,117     $ 11,729     (13.7 )%   $ 21,416     $ 20,529     4.3 %
                       
Ratios:                      
Loss ratio 78.8 %   73.8 %       78.1 %   72.5 %    
Expense ratio 13.9 %   16.2 %       13.9 %   17.8 %    
Combined ratio 92.7 %   90.0 %       92.0 %   90.3 %    
Accident year loss ratio 78.8 %   75.0 %       78.6 %   74.7 %    
                       
(a) See "Reconciliation of Non-GAAP Measures".                    
(b) Underwriting results include fee income of $3.7 million and $4.2 million for the three months ended June 30, 2018 and 2017, respectively, and $8.5 million and $8.1 million for the respective six month periods. These amounts are included in “Other income” in our Condensed Consolidated Income Statements.
 

SPECIALTY ADMITTED INSURANCE

  Three Months Ended
June 30,
      Six Months Ended
June 30,
   
  2018   2017   % Change   2018   2017   % Change
  ($ in thousands)
Gross written premiums $ 97,100     $ 76,771     26.5 %   $ 184,501     $ 149,235     23.6 %
Net written premiums $ 14,487     $ 16,900     (14.3 )%   $ 28,305     $ 34,959     (19.0 )%
                       
Net earned premiums $ 14,266     $ 17,760     (19.7 )%   $ 27,606     $ 34,013     (18.8 )%
Losses and loss adjustment expenses (9,426 )   (11,867 )   (20.6 )%   (17,037 )   (21,848 )   (22.0 )%
Underwriting expenses (3,852 )   (5,340 )   (27.9 )%   (7,958 )   (10,770 )   (26.1 )%
Underwriting profit (a), (b) $ 988     $ 553     78.7 %   $ 2,611     $ 1,395     87.2 %
                       
Ratios:                      
Loss ratio 66.1 %   66.8 %       61.7 %   64.2 %    
Expense ratio 27.0 %   30.1 %       28.8 %   31.7 %    
Combined ratio 93.1 %   96.9 %       90.5 %   95.9 %    
Accident year loss ratio 67.2 %   61.5 %       67.1 %   61.6 %    
                       
(a) See "Reconciliation of Non-GAAP Measures". 
(b) Underwriting results include fee income of $3.7 million and $2.7 million for the three months ended June 30, 2018 and 2017, respectively, and $7.1 million and $4.7 million for the respective six month periods.
 

CASUALTY REINSURANCE

  Three Months Ended
June 30,
      Six Months Ended
June 30,
   
  2018   2017   % Change   2018   2017   % Change
  ($ in thousands)
Gross written premiums $ 30,880     $ 66,700     (53.7 )%   $ 74,109     $ 109,420     (32.3 )%
Net written premiums $ 30,884     $ 66,727     (53.7 )%   $ 74,113     $ 109,607     (32.4 )%
                       
Net earned premiums $ 54,817     $ 49,049     11.8 %   $ 112,448     $ 93,634     20.1 %
Losses and loss adjustment expenses (35,562 )   (32,696 )   8.8 %   (71,104 )   (61,516 )   15.6 %
Underwriting expenses (17,526 )   (18,376 )   (4.6 )%   (37,871 )   (33,048 )   14.6 %
Underwriting profit (loss) (a) $ 1,729     $ (2,023 )   -   $ 3,473     $ (930 )   -
                       
Ratios:                      
Loss ratio 64.9 %   66.7 %       63.2 %   65.7 %    
Expense ratio 31.9 %   37.4 %       33.7 %   35.3 %    
Combined ratio 96.8 %   104.1 %       96.9 %   101.0 %    
Accident year loss ratio 60.4 %   62.2 %       61.2 %   63.5 %    
                       
(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
June 30,
  Six Months Ended
June 30,
  2018   2017   2018   2017
  (in thousands)
Underwriting profit (loss) of the operating segments:              
Excess and Surplus Lines $ 10,117     $ 11,729     $ 21,416     $ 20,529  
Specialty Admitted Insurance 988     553     2,611     1,395  
Casualty Reinsurance 1,729     (2,023 )   3,473     (930 )
Total underwriting profit of operating segments 12,834     10,259     27,500     20,994  
Other operating expenses of the Corporate and Other segment (7,307 )   (6,095 )   (14,738 )   (12,556 )
Underwriting profit (a) 5,527     4,164     12,762     8,438  
Net investment income 16,135     13,714     29,391     30,447  
Net realized and unrealized (losses) gains on investments (b) (64 )   307     (874 )   1,354  
Other income and expenses 4     (257 )   108     (57 )
Interest expense (2,946 )   (2,224 )   (5,468 )   (4,347 )
Amortization of intangible assets (149 )   (149 )   (298 )   (298 )
Consolidated income before taxes $ 18,507     $ 15,555     $ 35,621     $ 35,537  
               
(a)  Included in underwriting results for the three months ended June 30, 2018 and 2017 is fee income of $7.4 million and $6.9 million, respectively, and $15.6 million and $12.8 million for the respective six month periods.
(b)  2018 includes net realized gains of $521,000 and net realized losses of $1.2 million for the change in net unrealized gains on equity securities in the three and six months ended June 30, 2018, respectively, in accordance with the Company's adoption of ASU 2016-01 effective January 1, 2018.
 

Adjusted Net Operating Income

We define adjusted net operating income as net income excluding net realized and unrealized (losses) gains on investments (net realized investment (losses) gains and the change in unrealized (losses) gains 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 are 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 for the three and six months ended June 30, 2018 and 2017, respectively, reconciles to our adjusted net operating income as follows:

   
  Three Months Ended June 30,
  2018   2017
  Income
Before Taxes
  Net Income   Income
Before Taxes
  Net Income
  (in thousands)
Income as reported $ 18,507     $ 16,984     $ 15,555     $ 14,541  
Net realized and unrealized losses (gains) on investments (a) 64     98     (307 )   (248 )
Other expenses 93     126     346     368  
Interest expense on leased building the Company is deemed to own for accounting purposes 457     361     313     203  
Adjusted net operating income $ 19,121     $ 17,569     $ 15,907     $ 14,864  
               
  Six Months Ended June 30,
  2018   2017
  Income
Before Taxes
  Net Income   Income
Before Taxes
  Net Income
  (in thousands)
Income as reported $ 35,621     $ 32,617     $ 35,537     $ 32,991  
Net realized and unrealized losses (gains) on investments (a) 874     763     (1,354 )   (1,082 )
Other expenses 97     146     232     268  
Interest expense on leased building the Company is deemed to own for accounting purposes 775     612     625     406  
Adjusted net operating income $ 37,367     $ 34,138     $ 35,040     $ 32,583  
               
(a)  2018 includes net realized gains of $521,000 and net realized losses of $1.2 million for the change in net unrealized gains on equity securities in the three and six months ended June 30, 2018, respectively, in accordance with the Company's adoption of ASU 2016-01 effective January 1, 2018.
               

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 June 30, 2018, December 31, 2017, and June 30, 2017 and reconciles tangible equity to tangible equity before dividends for June 30, 2018.

  June 30, 2018   December 31, 2017   June 30, 2017
($ in thousands, except for share data) Equity   Equity
per share
  Equity   Equity
per share
  Equity   Equity
per share
Shareholders' equity $ 689,243     $ 23.04     $ 694,699     $ 23.39     $ 719,719     $ 24.42  
Goodwill and intangible assets 219,867     7.35     220,165     7.41     220,464     7.48  
Tangible equity $ 469,376     $ 15.69     $ 474,534     $ 15.98     $ 499,255     $ 16.94  
Dividends to shareholders for the six months ended June 30, 2018 18,109     0.60                  
Pre-dividend tangible equity $ 487,485     $ 16.29                  

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.