James River falls to Q4 loss and unveils Gallatin Point investment and Fortitude Re LPT

James River announced it has secured a $150mn investment from a Gallatin Point affiliate and a loss portfolio transfer (LPT) deal ceding $335mn of casualty reinsurance liabilities to Fortitude Re as it also reported a widening operating loss driven by $115.0mn of adverse reserve development on the book.

The Bermuda-based holding company reported an adjusted net operating loss for the fourth quarter that increased from $29.0mn to $67.5mn.

At $1.81 a share, the adjusted net operating loss compared to consensus forecasts compiled by MarketWatch of a $0.25 a share profit.

The carrier reported a net loss of $66.3mn ($1.78 a share) that widened from $20.3mn ($0.66 a share) in the prior-year period.

James River CEO Frank D’Orazio, who joined in late 2020 to turn the business around, highlighted the focus on profitably growing the group’s E&S and fronting business while taking “significant steps” to strengthen its balance sheet.

That included actions to bring economic finality to its legacy run-off commercial auto portfolio and the majority of its historical casualty reinsurance reserves.

“With these significant reserving actions and legacy transactions behind us, and with the support of Gallatin Point fortifying our capital base, we believe we have unburdened the organization’s earnings potential, which should allow it to produce attractive future returns for shareholders,” he said.

Announcing the strategic actions, James River said its operating subsidiary JRG Reinsurance Company has entered into a LPT retrocession agreement with Fortitude Re under which the legacy specialist will reinsure the majority of reserves from the carrier’s casualty reinsurance segment.

JRG Re will cede to Fortitude Re around $335mn of liabilities for certain business written in the 2011-2020 years, with the coverage provided by Fortitude Re subject to a $400mn aggregate limit.

James River will take an after-tax loss on the transfer of around $6.8mn during the first quarter of 2022.

The transaction provides $65mn of net limit above the held reserves as protection for the Bermudian.

The company also revealed it has entered into an investment agreement with an affiliate of US private equity firm Gallatin Point Capital LLC, related to the issue of $150mn of convertible preferred shares that will inject capital to the business.

That transaction is slated to close tomorrow (1 March) with the convertible preferred stock paying a quarterly dividend in cash at an annualized rate of 7.0 percent.

It is convertible to common shares at an initial 27.5 percent premium to the price based on the lower of the average daily volume weighted prices for the five trading days prior to today, or the average of the daily volume weighted average prices over the five trading days immediately after the deal was announced.

Gallatin Point co-founder Matthew Botein has been approved to join the board of James River.

Casualty Re reserve charges drive loss

The fourth quarter losses at James River were driven by $115.0mn of adverse reserve development in the carrier’s casualty reinsurance segment, in contrast to “strong” underwriting profitability in its E&S and specialty admitted segments with combined ratios of 82.1 percent and 84.7 percent respectively.

The reserve charge represented a 60.0 percentage point increase in James River’s loss ratio and related to the 2014-2018 underwriting years. The loss ratio of 126.7 percent for the quarter was up from 111.1 percent in the prior-year period, and the combined ratio increased from 131.0 percent to 140.6 percent.

The increase to its casualty reinsurance reserves came after an in-depth review during the fourth quarter and primarily related to general liability, specifically construction and construction defect.

James River said many of the treaties causing the reserve development have previously been terminated and will be covered by the LPT transaction.

The carrier reiterated that it will meaningfully reduce gross written premium in its casualty reinsurance segment through 2022, although sources have previously said that it remains committed to segments of the portfolio, including a number of MGA relationships.

In the earnings release, James River highlighted 14.1 percent growth in its core E&S gross written premium in the fourth quarter as well as a 9.5 percent increase in renewal pricing on the book.

Nearly all underwriting divisions reported positive growth and rate increases, with the segment experiencing its 20th consecutive quarter of renewal rate increases, compounding to 49 percent over the same period.

Meanwhile, fronting GWP within specialty admitted grew 11.1 percent driven by the expansion of recently added programs, with gross fee income up 27.1 percent over the prior-year period.

Overall GWP grew 13 percent to $407.3mn, with net written premiums up 8 percent to $218.0mn at the group level.