Press Release

James River Announces Third Quarter 2018 Results

11/07/18
  • Third Quarter 2018 Net Income of $19.6 million -- $0.64 per diluted share, an 89% increase over the third quarter of 2017, and Adjusted Net Operating Income of $19.4 million -- $0.64 per diluted share, an 81% increase over the third quarter of 2017

  • Year-to-date annualized Adjusted Net Operating Return on Average Tangible Equity of 15.1%
     
  • Combined ratio of 96.0%, an improvement of 3.3 percentage points over the prior year quarter
     
  • Net Investment Income of $16.4 million, an increase of 10%, or $1.5 million, over the prior year quarter

PEMBROKE, Bermuda, Nov. 07, 2018 (GLOBE NEWSWIRE) -- James River Group Holdings, Ltd. ("James River" or the "Company") (NASDAQ: JRVR) today reported third quarter 2018 net income of $19.6 million ($0.64 per diluted share), compared to $10.4 million ($0.34 per diluted share) for the third quarter of 2017.  Adjusted net operating income for the third quarter of 2018 was $19.4 million ($0.64 per diluted share), compared to $10.7 million ($0.36 per diluted share) for the same period in 2017.

Earnings Per Diluted Share Three Months Ended
September 30,
  2018   2017
       
Net Income 1 $ 0.64     $ 0.34  
Adjusted Net Operating Income 2 $ 0.64     $ 0.36  
       
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, “I am very pleased with our results this quarter, and year to date we have generated a 15.1% annualized Adjusted Net Operating Return on Average Tangible Equity.  This quarter, underwriting income was up significantly across all three segments and investment income also grew nicely.

Our two U.S. primary segments grew written and earned premium, while we continued to selectively scale back our casualty reinsurance book, staying focused on attractive pockets of opportunity.  We were again able to achieve rate increases on our core E&S renewals, which were up 2% in the quarter year over year.

During the quarter we adjusted incurred but not reported loss reserves in both the current year and the 2016 year in our commercial auto division due to the relative performance of these accident years.”

Third Quarter 2018 Operating Results

  • Gross written premium of $280.0 million, consisting of the following:
    Three Months Ended
September 30,
   
  ($ in thousands) 2018   2017   % Change
  Excess and Surplus Lines $ 157,237     $ 140,425     12%
  Specialty Admitted Insurance 98,607     84,838     16%
  Casualty Reinsurance 24,125     113,088     -79%
    $ 279,969     $ 338,351     -17%
  • Net written premium of $173.4 million, consisting of the following:
    Three Months Ended
September 30,
   
  ($ in thousands) 2018   2017   % Change
  Excess and Surplus Lines $ 135,141     $ 125,188     8%
  Specialty Admitted Insurance 14,022     18,503     -24%
  Casualty Reinsurance 24,278     113,073     -79%
    $ 173,441     $ 256,764     -32%
  • Net earned premium of $204.7 million, consisting of the following:
    Three Months Ended
September 30,
 
  ($ in thousands) 2018   2017   % Change
  Excess and Surplus Lines $ 141,529     $ 123,606     15%
  Specialty Admitted Insurance 13,898     19,324     -28%
  Casualty Reinsurance 49,263     59,186     -17%
    $ 204,690     $ 202,116     1%
                     
  • 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 7% growth in core (non-commercial auto) lines gross written premium, as seven 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 third party 50% quota share reinsurance agreement on its individual risk Workers' Compensation line;
  • Gross written premium and net written premium in the Casualty Reinsurance segment decreased from that of the prior year quarter, as did net earned premium to a lesser degree.  The reduction included a shift in the renewal date of $49.5 million in premium from the third to the fourth quarter of 2018.  The balance of the reduction in gross written premium in this segment was in line with our expectations and is consistent with our planned reductions for the segment.  The Company expects gross and 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;
  • There was unfavorable reserve development of $12.2 million compared to favorable reserve development of $7.6 million in the prior year quarter (representing a 6.0 percentage point increase and 3.7 percentage point decrease to the Company’s loss ratio in each period, respectively);
  • Pre-tax (unfavorable) favorable reserve development by segment was as follows:
    Three Months Ended
September 30,
  ($ in thousands) 2018   2017
  Excess and Surplus Lines $ (10,401 )   $ 5,108  
  Specialty Admitted Insurance 833     3,037  
  Casualty Reinsurance (2,651 )   (581 )
    $ (12,219 )   $ 7,564  
                 
  • The unfavorable reserve development in the quarter was largely a result of $10.4 million of adverse development in the Excess and Surplus Lines segment, driven by the 2016 accident year in our commercial auto division.  The unfavorable reserve development in the Casualty Reinsurance segment largely related to treaties the Company no longer writes;
  • Group accident year loss ratio of 67.5% was down from 78.2% in the prior year quarter.   Accident year loss ratios were down across all segments this quarter.  The principal drivers of this decrease were an adjustment to lower the current year loss pick in our commercial auto division, along with a lack of catastrophe losses in the current quarter, as the Company's results in the third quarter of 2017 included $10 million of pre-tax net losses from Hurricanes Harvey, Irma and Maria.  The return to normalized loss emergence in the Specialty Admitted segment and a continued shift in business mix in the Casualty Reinsurance segment also caused the current accident year loss ratio to decrease;
  • Group combined ratio of 96.0% improved from 99.3% in the prior year quarter;
  • Group expense ratio of 22.5% improved from 24.9% in the prior year quarter, driven by continued growth in lines of business which carry relatively low net expenses;
  • Gross fee income by segment was as follows:
    Three Months Ended
September 30,
   
  ($ in thousands) 2018   2017   % Change
  Excess and Surplus Lines $ 2,998     $ 3,946     (24 )%
  Specialty Admitted Insurance 3,815     3,097     23 %
    $ 6,813     $ 7,043     (3 )%
                     


  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 its fronting business;

Net investment income of $16.4 million, an increase of 10% from the prior year quarter.  Further details can be found in the "Investment Results" section below.

Investment Results

Net investment income for the third quarter of 2018 was $16.4 million, which compares to $14.9 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 an increased portfolio size.

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

  Three Months Ended
September 30,
   
($ in thousands) 2018   2017   % Change  
Renewable Energy Investments $ 329     $ 1,516     (78 )%
Other Private Investments   1,402       800     75 %
All Other Net Investment Income   14,679       12,564     17 %
Total Net Investment Income $ 16,410     $ 14,880     10 %
                     

The Company’s annualized gross investment yield on average fixed maturity, bank loan and equity securities for the three months ended September 30, 2018 was 4.1% (versus 4.3% for the three months ended June 30, 2018 and 4.1% for the three months ended September 30, 2017) and the average duration of the fixed maturity and bank loan portfolio was 3.6 years at September 30, 2018 (versus 3.4 years at June 30, 2018 and September 30, 2017).  Renewable energy and other private investments produced an annualized return of 9.0% for the three months ended September 30, 2018 (14.1% for the three months ended September 30, 2017).  These portfolios are concentrated and the renewable energy portion in particular can be heavily influenced by portfolio sales and valuation factors, including long term interest rates.

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 September 30, 2018 and September 30, 2017 was 11.5% and 23.8%, respectively.

Tangible Equity

Tangible equity before dividends increased 6.4% from $474.5 million at December 31, 2017 to $504.9 million at September 30, 2018, due to $52.2 million of net income and $7.2 million of option exercise activity and stock compensation.  These items were partially offset by $29.5 million of after tax unrealized losses in the Company's fixed income investment portfolio resulting from increased market interest rates.

September 30, 2018 tangible equity after dividends of $477.7 million increased 0.7% from $474.5 million at December 31, 2017 and increased 1.8% from $469.4 million at June 30, 2018.  Tangible equity per common share was $15.95 at September 30, 2018, net of $0.90 of dividends per share the Company paid during the first nine months of 2018.  The year-to-date annualized adjusted net operating income return on average tangible equity was 15.1%, which compares to 11.8% 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. This dividend is payable on Friday, December 28, 2018 to all shareholders of record on Friday, December 14, 2018.

Conference Call

James River Group Holdings, Ltd. will hold a conference call to discuss its third quarter results tomorrow, November 8, 2018, at 8:00 a.m. Eastern Time. Investors may access the conference call by dialing (877) 930-8055, Conference ID# 2288525, 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 11:00 a.m. (Eastern Time) on December 8, 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 (which is calculated as annualized adjusted net operating income divided by the average tangible equity for the trailing four quarters), 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)

       
       
   September 30, 2018   December 31, 2017
       
  ($ in thousands, except for share data)
   
ASSETS      
Invested assets:      
Fixed maturity securities, available-for-sale $ 1,154,488     $ 1,016,098  
Fixed maturity securities, trading     3,808  
Equity securities, at fair value 84,827     82,522  
Bank loan participations, held-for-investment 262,779     238,214  
Short-term investments 40,219     36,804  
Other invested assets 76,973     70,208  
Total invested assets 1,619,286     1,447,654  
       
Cash and cash equivalents 184,417     163,495  
Accrued investment income 10,554     8,381  
Premiums receivable and agents’ balances 315,287     352,436  
Reinsurance recoverable on unpaid losses 424,400     302,524  
Reinsurance recoverable on paid losses 18,832     11,292  
Deferred policy acquisition costs 57,474     72,365  
Goodwill and intangible assets 219,718     220,165  
Other assets 185,466     178,383  
Total assets $ 3,035,434     $ 2,756,695  
       
LIABILITIES AND SHAREHOLDERS’ EQUITY      
Reserve for losses and loss adjustment expenses $ 1,569,761     $ 1,292,349  
Unearned premiums 394,994     418,114  
Senior debt 98,300     98,300  
Junior subordinated debt 104,055     104,055  
Accrued expenses 47,763     39,295  
Other liabilities 123,153     109,883  
Total liabilities 2,338,026     2,061,996  
       
Total shareholders’ equity 697,408     694,699  
Total liabilities and shareholders’ equity $ 3,035,434     $ 2,756,695  
       
Tangible equity (a) $ 477,690     $ 474,534  
Tangible equity per common share outstanding (a) $ 15.95     $ 15.98  
Total shareholders’ equity per common share
  outstanding
$ 23.29    

 
$ 23.39  
Common shares outstanding 29,950,120     29,696,682  
Debt (b) to total capitalization ratio 22.5 %   22.6 %
  1.   See “Reconciliation of Non-GAAP Measures”.
  2.   Includes senior debt and junior subordinated debt.
     
       


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

  Three Months Ended
September 30,
  Nine Months Ended
September 30,
  2018   2017   2018   2017
   
  ($ in thousands, except for share data)
REVENUES              
Gross written premiums $ 279,969     $ 338,351     $ 871,463     $ 844,005  
Net written premiums 173,441     256,764     573,025     622,498  
               
Net earned premiums 204,690     202,116     613,842     540,880  
Net investment income 16,410     14,880     45,801     45,327  
Net realized and unrealized gains (losses) on investments (a) 467     (171 )   (407 )   1,183  
Other income 3,125     4,041     11,841     12,272  
Total revenues 224,692     220,866     671,077     599,662  
               
EXPENSES              
Losses and loss adjustment expenses 150,387     150,445     448,754     386,898  
Other operating expenses 49,180     54,260     155,714     156,189  
Other expenses (131 )   119     (34 )   351  
Interest expense 2,991     2,304     8,459     6,651  
Amortization of intangible assets 149     149     447     447  
Total expenses 202,576     207,277     613,340     550,536  
Income before taxes 22,116     13,589     57,737     49,126  
Income tax expense 2,535     3,238     5,539     5,784  
NET INCOME $ 19,581     $ 10,351     $ 52,198     $ 43,342  
ADJUSTED NET OPERATING INCOME (b) $ 19,402     $ 10,731     $ 53,540     $ 43,314  
               
EARNINGS PER SHARE              
Basic $ 0.65     $ 0.35     $ 1.75     $ 1.47  
Diluted $ 0.64     $ 0.34     $ 1.72     $ 1.43  
               
ADJUSTED NET OPERATING INCOME PER SHARE            
Basic $ 0.65     $ 0.36     $ 1.79     $ 1.47  
Diluted $ 0.64     $ 0.36     $ 1.77     $ 1.43  
               
Weighted-average common shares outstanding:              
Basic 29,935,216     29,524,243     29,861,467     29,407,762  
Diluted 30,380,145     30,220,077     30,290,183     30,285,733  
Cash dividends declared per common share $ 0.30     $ 0.30     $ 0.90     $ 0.90  
               
Ratios:              
Loss ratio 73.5 %   74.4 %   73.1 %   71.5 %
Expense ratio (c) 22.5 %   24.9 %   23.5 %   26.7 %
Combined ratio 96.0 %   99.3 %   96.6 %   98.2 %
Accident year loss ratio 67.5 %   78.2 %   71.2 %   73.2 %
(a) 2018 includes net realized gains of $494,000 and net realized losses of $695,000 for the change in net unrealized gains on equity securities in the three and nine months ended September 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
September 30,
      Nine Months Ended
September 30,
   
  2018   2017   % Change   2018   2017   % Change
   
  ($ in thousands)
Gross written premiums $ 157,237     $ 140,425     12.0 %   $ 490,121     $ 387,424     26.5 %
Net written premiums $ 135,141     $ 125,188     8.0 %   $ 432,307     $ 346,356     24.8 %
                       
Net earned premiums $ 141,529     $ 123,606     14.5 %   $ 410,627     $ 334,723     22.7 %
Losses and loss adjustment expenses (111,292 )   (95,855 )   16.1 %   (321,518 )   (248,944 )   29.2 %
Underwriting expenses (18,935 )   (17,805 )   6.3 %   (56,391 )   (55,304 )   2.0 %
Underwriting profit (a), (b) $ 11,302     $ 9,946     13.6 %   $ 32,718     $ 30,475     7.4 %
                       
Ratios:                      
Loss ratio 78.6 %   77.5 %       78.3 %   74.4 %    
Expense ratio 13.4 %   14.5 %       13.7 %   16.5 %    
Combined ratio 92.0 %   92.0 %       92.0 %   90.9 %    
Accident year loss ratio 71.3 %   81.7 %       76.1 %   77.3 %    
                       
(a) See "Reconciliation of Non-GAAP Measures".                    
(b) Underwriting results include fee income of $3.0 million and $3.9 million for the three months ended September 30, 2018 and 2017, respectively, and $11.5 million and $12.0 million for the respective nine month periods. These amounts are included in “Other income” in our Condensed Consolidated Income Statements.
 
 

SPECIALTY ADMITTED INSURANCE

  Three Months Ended
September 30,
      Nine Months Ended
September 30,
   
  2018   2017   % Change   2018   2017   % Change
   
  ($ in thousands)
Gross written premiums $ 98,607     $ 84,838     16.2 %   $ 283,108     $ 234,073     20.9 %
Net written premiums $ 14,022     $ 18,503     (24.2 )%   $ 42,327     $ 53,462     (20.8 )%
                       
Net earned premiums $ 13,898     $ 19,324     (28.1 )%   $ 41,504     $ 53,337     (22.2 )%
Losses and loss adjustment expenses (8,246 )   (12,506 )   (34.1 )%   (25,283 )   (34,354 )   (26.4 )%
Underwriting expenses (3,883 )   (5,967 )   (34.9 )%   (11,841 )   (16,737 )   (29.3 )%
Underwriting profit (a), (b) $ 1,769     $ 851     107.9 %   $ 4,380     $ 2,246     95.0 %
                       
Ratios:                      
Loss ratio 59.3 %   64.7 %       60.9 %   64.4 %    
Expense ratio 28.0 %   30.9 %       28.5 %   31.4 %    
Combined ratio 87.3 %   95.6 %       89.4 %   95.8 %    
Accident year loss ratio 65.3 %   80.4 %       66.5 %   68.4 %    
                       
(a) See "Reconciliation of Non-GAAP Measures".                    
(b) Underwriting results include fee income of $3.8 million and $3.1 million for the three months ended September 30, 2018 and 2017, respectively, and $10.9 million and $7.8 million for the respective nine month periods.
 
 

CASUALTY REINSURANCE

  Three Months Ended
September 30,
      Nine Months Ended
September 30,
   
  2018   2017   % Change   2018   2017   % Change
   
  ($ in thousands)
Gross written premiums $ 24,125     $ 113,088     (78.7 )%   $ 98,234     $ 222,508     (55.9 )%
Net written premiums $ 24,278     $ 113,073     (78.5 )%   $ 98,391     $ 222,680     (55.8 )%
                       
Net earned premiums $ 49,263     $ 59,186     (16.8 )%   $ 161,711     $ 152,820     5.8 %
Losses and loss adjustment expenses (30,849 )   (42,084 )   (26.7 )%   (101,953 )   (103,600 )   (1.6 )%
Underwriting expenses (16,838 )   (20,035 )   (16.0 )%   (54,709 )   (53,083 )   3.1 %
Underwriting profit (loss) (a) $ 1,576     $ (2,933 )   -   $ 5,049     $ (3,863 )   -
                       
Ratios:                      
Loss ratio 62.6 %   71.1 %       63.0 %   67.8 %    
Expense ratio 34.2 %   33.9 %       33.9 %   34.7 %    
Combined ratio 96.8 %   105.0 %       96.9 %   102.5 %    
Accident year loss ratio 57.2 %   70.1 %       60.0 %   66.1 %    
                       
(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
September 30,
  Nine Months Ended
September 30,
  2018   2017   2018   2017
   
  (in thousands)
Underwriting profit (loss) of the operating segments:              
Excess and Surplus Lines $ 11,302     $ 9,946     $ 32,718     $ 30,475  
Specialty Admitted Insurance 1,769     851     4,380     2,246  
Casualty Reinsurance 1,576     (2,933 )   5,049     (3,863 )
Total underwriting profit of operating segments 14,647     7,864     42,147     28,858  
Other operating expenses of the Corporate and Other segment (6,526 )   (6,507 )   (21,264 )   (19,063 )
Underwriting profit (a) 8,121     1,357     20,883     9,795  
Net investment income 16,410     14,880     45,801     45,327  
Net realized and unrealized gains (losses) on investments (b) 467     (171 )   (407 )   1,183  
Other income and expenses 258     (24 )   366     (81 )
Interest expense (2,991 )   (2,304 )   (8,459 )   (6,651 )
Amortization of intangible assets (149 )   (149 )   (447 )   (447 )
Consolidated income before taxes $ 22,116     $ 13,589     $ 57,737     $ 49,126  
               
(a)  Included in underwriting results for the three months ended September 30, 2018 and 2017 is fee income of $6.8 million and $7.0 million, respectively, and $22.4 million and $19.8 million for the respective nine month periods.
(b)  2018 includes net realized gains of $494,000 and net realized losses of $695,000 for the change in net unrealized gains on equity securities in the three and nine months ended September 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 gains (losses) on investments (net realized investment gains (losses) and the change in unrealized gains (losses) 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 nine months ended September 30, 2018 and 2017, respectively, reconciles to our adjusted net operating income as follows:

   
  Three Months Ended September 30,
  2018   2017
  Income Before Taxes   Net Income   Income Before Taxes   Net Income
   
  (in thousands)
Income as reported $ 22,116     $ 19,581     $ 13,589     $ 10,351  
Net realized and unrealized (gains) losses on investments (a) (467 )   (397 )   171     82  
Other expenses (131 )   (101 )   119     93  
Interest expense on leased building the Company is deemed to own for accounting purposes 404     319     315     205  
Adjusted net operating income $ 21,922     $ 19,402     $ 14,194     $ 10,731  
               
  Nine Months Ended September 30,
  2018   2017
  Income Before Taxes   Net Income   Income Before Taxes   Net Income
   
  (in thousands)
Income as reported $ 57,737     $ 52,198     $ 49,126     $ 43,342  
Net realized and unrealized losses (gains) on investments (a) 407     366     (1,183 )   (1,000 )
Other expenses (34 )   45     351     361  
Interest expense on leased building the Company is deemed to own for accounting purposes 1,179     931     940     611  
Adjusted net operating income $ 59,289     $ 53,540     $ 49,234     $ 43,314  
               
(a)  2018 includes net realized gains of $494,000 and net realized losses of $695,000 for the change in net unrealized gains on equity securities in the three and nine months ended September 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 September 30, 2018, December 31, 2017, and September 30, 2017 and reconciles tangible equity to tangible equity before dividends for September 30, 2018.

           
  September 30, 2018   December 31, 2017   September 30, 2017
($ in thousands, except for share data) Equity   Equity per share   Equity   Equity per share   Equity   Equity per share
Shareholders' equity $ 697,408     $ 23.29     $ 694,699     $ 23.39     $ 720,969     $ 24.37  
Goodwill and intangible assets 219,718     7.34     220,165     7.41     220,315     7.45  
Tangible equity $ 477,690     $ 15.95     $ 474,534     $ 15.98     $ 500,654     $ 16.92  
Dividends to shareholders for the nine months ended September 30, 2018 27,189     0.90                  
Pre-dividend tangible equity $ 504,879     $ 16.85                  

 

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.