Good day, and thank you for standing by. Welcome to the James River Group Q4 2021 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brett Shirreffs, Head of Investor Relations, and please go ahead.

Thank you, Deedee. 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 a 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’Orazio: 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 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 completed a deep dive of all 3 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 2 retrospective…

Thanks, Frank, and good morning, everyone. Given Frank's extensive comments on the current quarter, I'm going to focus my comments on a brief review of the operating results and then the transactions we are announcing today as well as capital and guidance. We've made significant progress in strengthening our balance sheet, while our E&S and Specialty Admitted businesses continue to shine. Last night, we reported a net loss for the quarter of $66.3 million and an operating loss of $67.5 million. As Frank detailed, this is heavily impacted by the $115 million of reserve development in our casualty reinsurance segment. Across the group, quarterly net earned premium growth outpaced that of the year, an increase of 15% on the year and 20% on the quarter. The accident year loss ratio was 66.7% for the quarter and 67.1% for the year. The quarter benefited from strong earnings in both our Excess and Surplus Lines and Specialty Admitted segments. Moving to expenses. Our expense ratio was 13.9% for the quarter and 23% for the year. The quarter benefited from 6.6 points of slide commission offsets related to the casualty reinsurance reserve additions and the year 1.8 points for the same impact. Given our performance on the year, we reduced our compensation expenses which had a 2-point impact on the quarter and about a 1-point impact on the year. Final comment on quarterly operating performance. Net investment income for the fourth quarter was $12.1 million, a decrease of 45% from the fourth quarter of last year and about 20% from the prior quarter. The decline is due to decreased returns in the renewable energy portfolio especially compared to an exceptional quarter for that asset class in the same quarter last year and a decline in assets in the portfolio, given the commercial auto…

Our first question comes from Cullen Johnson of B. Riley Securities.

When we look at the dividend cut, do you think of that as maybe more of a temporary measure? Or is that more saying that capital is kind of highest and thus use is supporting the growth of the E&S book and at a more fundamental shift of your capital management strategy?

Thanks, Cullen. We appreciate the question. That's obviously a very good one. We think about our dividend as really rightsized for the growth opportunity that we continue to see. I think that I just kind of go back to my comments there that we expect to, through our Board and our internal processes, look at moving that up annually as part of a regular process. But I'm not expecting significant volatile movements up and down in that. We think it's almost about a 1% yield. It's rightsized according to the growth opportunity and also is fairly consistent across the board with some of the other folks who have similar business profiles and returns as we do.

Okay. Great. That's helpful. And then we touched on with the Uber loss portfolio transfer, we kind of saw a decline in the size of the investment portfolio and that kind of flowed through to investment income. And we'd see a kind of similar size reduction with the Casualty Re transaction as well?

I think it will be a little bit different potentially here because the way this transaction works is most of the assets will remain on our balance sheet instead of going over, that's the construct of the funds withheld on this portfolio. So we'll retain the assets, but we will pay the 2%, otherwise known as 50 basis points a quarter crediting rate on that declining balance of assets. So said a different way, we would expect to have a return on our assets ahead of 2%. So that return would be netted against ideally what would be a slightly higher return than that. So it's not going to be a full transfer and a full give up of all the assets in that way.

Our next question comes from Matt Carletti of JMP Securities.

Matt Carletti at JMP. First question, I hope that's a question on E&S and just understanding kind of the picture of the accident year loss ratio picture you've been making. So if we look back historically, I think inception to date since kind of beginning of James River fully developed high 50s is probably the profile of kind of where accident loss ratios have gone. And clearly, your booking I think, 67 or so is where this year was or '21 was at least. And Frank, I think you termed it as best conditions we've seen in the century. So my question is, has anything changed in terms of mix in the book or otherwise, that should lead us to believe that we should look at history as we think about where recent years could go in what you're terming as one of the best pricing cycles in at least people's careers. Or is that more just we have to let the process play out, obviously, and see where the losses develop? Frank D’Orazio: Thanks for the question, Matt. So I would point to your latter part of your commentary there that we're going to be more patient as an organization and let reserve season. I would suggest that our process is fairly conservative in terms of taking a look at the rates that we were able to get on our renewal business in the prior year, look at what is excess of our view of loss trend and have a very contemporary view of what loss trend is by product line and then only accept a portion of that increase when calculating our loss ratios for the following year. So fairly conservative. If you're looking at maybe the jump between 2020 and 2021. 2020, certainly, we had the reduction in claims frequency of, call it, 20% to 30% on an exposure-adjusted basis. And what I said at the time was we weren't going to assume that, that was the new run rate of the new normal. And so we were going to assume that claims frequency would return to pre-COVID levels. And so that's why you saw maybe a jump between '20 and '21 relative to the loss ratio picks.

Okay. Great. And then just one question on Casualty Re. And I guess the question is, why remain in it at all? I mean I appreciate your comments that you'll shrink the book significantly, expect $100 million to come out. But my question is kind of why remain there at all? Why not just cut it off clean and be core E&S with a fee income fronting business? And secondarily, if you were to cut it completely, would that at all change kind of capital requirements for the organization? Or would that not have an impact on that? Frank D’Orazio: Sure. So good question. Listen, Casualty Re is in our 2022 plan because we feel, given the market conditions and demand for reinsurance, that we can make money there. If you put the cost of this transaction aside, the legacy transaction aside, we expect to make money in 2022. Rates in the underlying business for that unit were up, call it, 12%, 13% last year. But our team is not going to be under premium pressure and will significantly shrink the book, as I've kind of outlined in my earlier comments. The action that we have taken there, though, in the quarter, I think, give us more flexibility, so we can be very selective about the business that we write there, continue to monitor our market assumptions and make changes to strategy if we feel they're warranted. And I guess -- I think the latter part of your question, you were kind of speaking to kind of capitalization there. So one other item. I think we should make clear that our ratings and capital are consolidated across the group. So said another way, keeping our Casualty Re unit as an ongoing concern did not impact the size of the capital raise.

That's right. Some of my comments there too, I think that, that -- I don't think not writing that business would reduce the amount reraise maybe just -- if I could just say that in my own words, too. Frank D’Orazio: Agree.

Yes.

Our next question comes from Mark Hughes of Truist.

Frank, what gives you confidence that the bulk of the reserves or the -- yes, I guess your phrasing was the majority of the reserves or bulk of the reserves that you've got the problem handled with this LTP portfolio. How much is still on your books that you have exposure to? Frank D’Orazio: Sure. So let me step back to what I committed the company to during the November call. So I said that we were going to be addressing the casualty reserves after what's been a series of adverse charge. As I said, we do that in Q4. We finished that work in early January. And as I said, we made significant adjustments to our tail and developmental factors and put more weight on the incurred loss development methods that drove the 115 charge that we talked about. But given the company's reserving history or recent reserving history, we wanted to further validate that point and provide some additional certainty to shareholders. So we explore the legacy marketplace with a goal to have something meaningful to announce, providing that certainty with Q4 earnings, as Sarah said earlier. So our Casualty Re segment, just to give you some background, that reserve portfolio currently includes about 480 treaty participations historically, dating back to when the segment first started running business in 2008. Many of those treaties have long been in active, just relative to claims activity and just not concerning. What we tried to accomplish in selecting the subject business was capturing a majority of the reserves, including our largest treaty relationships and treaties where we've had meaningful reserve strengthening, but also treaties that would capture the most significant exposure to construction classes. So we wanted a high percentage of the total reserves. We wanted treaties that have driven our reserve strengthening. We wanted to cover concerns with latency or latent exposures like construction defect. And we needed to allow counterparties the opportunity to review a subject portfolio that would allow us to execute a transaction in the time frame that we were talking about, while protecting ourselves from further reserve volatility. And that's what we believe we accomplished with this transaction. We didn't get the final terms completed from the legacy market until February, as Sarah said. So it really was a separate work stream than the work of our Chief Actuary. So again, just provide another validation point in the quarter. Beyond that, obviously, we went through the capital raise process as well as obviously discussions, as you might imagine with A.M. Best. So we feel we picked up additional validation points along the way relative to the actions that we took. And hopefully, that gives you some sense of how we came to where we ended up on the subject portfolio.

Yes, I appreciate that. Sarah, on the expenses, you've obviously got some one-timers here hitting in Q1, but kind of run rate expense ratio, if you think about the company as a whole and then the E&S and specialty admitted, I wonder if you have any thoughts you might share, there's been a lot of moving parts lately.

Sure. And thank you for the question because there have been a lot of moving parts just given the reserve issues kind of related to that as well as, of course, incumbent compensation changes and in various COVID impacts, et cetera. So I appreciate there are a lot of moving pieces. If I think about it, Mark, and I think about 2022 or kind of go-forward years, in particular, I think that our expense ratio remains at a significant advantage to our competitors. So it's in the mid- to high 20s. I'm going to call it, 26% to 28% on a run rate basis, and we've obviously beaten that pretty significantly this year down to the 23%. And then within the segments, you saw that kind of manifest through the compensation changes in particular this quarter and some of the commission offsets in casualty re. But I think about the rollout being there around 20% in each of the 2 U.S. segments. Obviously, to the extent Specialty Admitted continues to grow as it has. It's got a nice offset on ceding commissions, et cetera, through the fronting business as does E&S. So that's how those 2 kind of around about 20% or a little bit better numbers could move. And then Casualty Re, I think that's a low 30s expense ratio, call it, 32-ish percent and it's really hard for it to be any different than that because that's almost entirely different by the ceding commissions on Casualty Re, in particular, even that we've got a very small expense base and a small team there as well. So hopefully, that provides you a little bit of color in context as to how that manifests itself ideally over the next year or so.

Good. That's great. I appreciate that. And then the withheld funds, what's the pace of runoff there if we're thinking about that 2% fee? And then when does that -- is there some trigger at some point of what that shifts entirely over to Fortitude?

Yes. Good question. I think it's in the contract that it's in about 5 years, whatever remains there shifts over to Fortitude and the balance. So kind of truncate the funds withheld balance at that point and just return whatever assets remain there. That business will run down -- or excuse me, that balance will run down as the claims are paid. And I think we think about the portfolio and the Casualty Reinsurance segment, in general, is being probably a 3- to 5-year tail. That's obviously a fairly wide range there. But that fits with how we're thinking about the give up of the assets over the 5-year -- after the 5-year period. So let's assume that runs down in a fairly linear fashion from the $310 million in to whatever could remain 5 years out. And I think the important thing to think about is that, that $335 million, i.e., $310 million is as of 10/1. So as we will continue to pay claims between now and then as well, so it will, in effect, really never be at the $310 million high level. That's a high watermark and it will just go down from there. And therefore, the interest credit, the 2% on that balance will continue to decline over time as well.

Our next question comes from Tracy Benguigui of Barclays.

Let's go back to your dividend cut. You mentioned part of the thinking was reassessing how your dividend yield stacks against other growth stocks. So I guess, help us get excited about your growth prospects because what I saw was that casualty re premium growth outpaced your core E&S book. I know going forward, that's going to be more subdued. But if you could just touch on what happened this quarter and how much more growth we could expect from E&S in 2022? Frank D’Orazio: Sure. Good question, Tracy. Let me start off here. So just relative to Casualty Re first, I think I foreshadowed this likely during our Q3 call. We had less than $8 million in GWP in Q3, but we had several million dollars of treat adjustments and growth in underlying business that was in the double digits millions range as well as some new business in Q4. And so all that, of course, was committed before we said we shrinked the segment and well before the results of our segment reserve review. But just relative to our growth prospects, our core E&S grew about 14% in Q4. I believe in E&S, we met or exceeded prior year GWP production in all but 1 or 2 months. November was actually one of those months driven by some actions taken on a handful of accounts, basically underwriting actions in 3 underwriting apartments. In our Energy group, we took an underwriting stance in a very large account that ultimately, we nonrenewed. It was a $6.5 million budget hit. That account came to me for a referral and discussion with our segment President, Richard Schmitzer, our segment actuary. In Excess Casualty, we took similar stances on 3 other renewals, just taking underwriting decisions that had about $3 million impact. And then another large win in our commercial auto segment. So we're -- in our core E&S operation, we're writing policies typically in the $20,000 to $25,000 range. So when you lose those larger accounts, it just has more significant impact. So November production was slightly off, had a little bit of impact on the fourth quarter, but we bounced back nicely in December, and certainly the first quarter looks very robust as well.

I'm just going to jump in tie that good color back to the dividend, Tracy, because that was a great question. So just specifically, I think Frank's gone through the dividend -- excuse me, the growth in particular. But I included in my comments, our outlook for 2022 that we absolutely expect to make a low double-digit ROE. We're getting a great return on our business. So we think it makes a lot of sense to continue to put that capital to work, and that's a big piece of this as well and kind of underlying what we said. If we think we can continue to get that strong return specifically from our highest and most capital-intense business, the core E&S business, I think that we'd like to continue to put that to work and drive those strong and consistent ROEs.

Great. Can you also discuss the balance sheet protection affording by your LPT? How did you arrive at $65 million of net limit? I'm wondering how that stacks up relative to your expectations? Was that more than what -- more or less than what you were expecting as you were going through the negotiations? Frank D’Orazio: I don't know that it was more or less per se. Dave completed his deep dive and comprehensive reserve view in early January, that produced the $115 million adverse development charge, which in and of itself is a very significant reserve move. But also as validated by the other strategic actions that we've taken in the quarter. As far as that LPT limit, we view that as just bolstering kind of the step that we took. And quite frankly, when you're in a legacy market to get a limit that's more than 50% of the charge that you just took based on the premium that we paid for the structure, I mean, it obviously, I think, gives some credence to their view of the reserves as well. So we are very comfortable to tack on, again, like I said, a pretty significant limit on top of that just relative to the $115 million.

And then just following up on that. You did say poster reserve actions, our Casualty Re reserves will sit above your third-party central estimate, so how should I think about the $400 million you're carried in that additional cover relative to the central estimate. Could you express that as a percentage of redundancy?

We've not disclosed that, Tracy. We -- I think we've been fairly explicit in saying that it's above the central estimate. So we booked $425 million of reserves in the segment this quarter. Those reserves, 66% of them aren't incurred but not reported reserves, and that's meaningfully above where it was last year. So I would just reiterate that our reserves are above the central estimate, but we don't feel it's appropriate to disclose the percentage level there.

Our next question comes from Brian Meredith of UBS.

Sarah, I wonder if you could tell us what the implications are on your tax rate from the kind of big decline here in the reinsurance business? Or do you have any...

Yes, sure. I think a couple of things here, Brian. As we think about this, tax rate is related to obviously the decline in the business, but we also have a significant balance of invested assets that remain from unit environment as well. But if I could be just almost a little bit simplistic about it. I think about the 2022 tax rate of being, let's call it, anywhere from 19% to 21%. Obviously, that's dependent on where we make the money and how we make the money when, but I would think about that as a fairly consistent rule of thumb with the year ahead.

Great. And then, Frank, I'm just curious, what's the reaction been, I guess, quarter-to-date? And I guess we'll find out over the next couple of weeks of your distribution to all of the issues that have been happening from a balance sheet perspective. The E&S business as well as just willingness of people to transact business with you on the fronting business. Frank D’Orazio: Sure, Brian. So we've been very pleased, quite frankly, with the loyalty and support that we've received both from our wholesale distribution partners as well as our program managers in the fronting business, very supportive. I received a note today from the CEO of one of our largest distribution partners, just kind of congratulating us on this transaction and continuing to pledge support. I think I've said just relative to the fronting business for those several months where we were on negative outlook from A.M. Best, we didn't lose one renewal within our program space. So really no issues in that regard. Our A- stable rating is very strong and being supported by our distribution partners across the segments.

Our next question comes from Meyer Shields of KBW.

So one, I guess, broader one specific question on the Excess and Surplus Lines segment. I guess, the specific question would be, shouldn't some of the older accident years redundancy that Frank didn't use the word rude, I want to put words in your mouth. But you talked about the conservatism relative to history. Shouldn't some of that have manifested itself in the fourth quarter? And maybe more broadly, how should we think about the loss trends that are embedded in Excess and Surplus reserves? And what should we watch to ensure or to monitor that? Frank D’Orazio: Meyer, I just want to make sure I got the first part of your question.

Okay. Basically, we saw, I mean, 17,000, I think, of reserve releases of Excess and Surplus Lines, but the business has decent tail. You talked, I think, very reasonably about wanting to let that mature. I would have thought that some of that would have matured in the fourth quarter just because some of the reserves pertain to older accident years. Frank D’Orazio: Right. So I mean, listen, we feel very confident in the strength of our reserves in the segment. But it didn't manifest itself in a release for the quarter at this point in time. It's not suggesting anything more than that.

Okay. Can you give us a sense as to the maybe overall trends that are embedded in the book?

I think I'm going to jump in. It's just -- I think we're getting a funny audio feed here Meyer, but let me just try to address what I think we heard some of the trends in the underlying portfolio. I guess I would say I'll start out and then actually get back to Frank. We got the 13% rate increases, renewal -- rate increases in E&S for each of the last 2 years. Our loss picks were articulated in design and booked assuming a much lower rate increase in each year than was manifested. So I think you start with that in terms of conceptually thinking about margin. And then I'll let Frank expand upon this a little bit more. I also think about what's in that book, in particular, that we -- no one's immune to social inflation. But with the SMB business that we write, I think it's fair to say that we would have less exposure -- significantly less exposure than some of the larger carriers. So again, that should kind of speak to loss trend going forward. But Frank, I mean, those are some of the things I think about, but... Frank D’Orazio: Yes. So obviously, we're closely watching inflationary trends in the industry in our business. So we talk about it quarterly. We continue to secure rate in excess of loss cost trend regardless of some moderation in rate increases. We also have the benefit of capturing inflation-driven exposure growth when we rate our policies as most of the premium formulas are driven by our revenue metric and roughly another, call it, 45%, 50% of the portfolio is adjustable based on growth in revenues over the policy year. So we feel there's a little bit of a hedge in there just relative to capturing additional premium that's impacted by inflation. But listen, like the rest of the industry, we'll continue to watch the trends closely and very seriously to determine whether the bottleneck dynamic on demand eases as supply chain issues eventually moderate or if it's something more persistent. But again, we'll watch it very closely. Sarah mentioned social inflation. We do have the SME focus within the portfolio, which I think shields us a bit because we don't have the large corporate profile. That's not kind of what defines our E&S book, certainly.

I think the last piece that -- the last point I would make is clearly just being able to be working here with Frank over the last year, I think there is a real visibility and philosophy and outlook that he's taken on in particular, which is great for our organization in terms of just patients around reserves. And I think you cited that a little bit earlier in a question that he answered, but I would just point to that in particular this quarter.

Okay. And then just a brief technical question. Is the 2% on the funds was held, that can be paid out of Bermuda? Or is it a taxable expense?

That will be paid out of Bermuda. That's exactly right, Meyer, and it will be basically -- it won't come -- let me just tell you geographically where it will be. It will basically be let's call that an interest expense or a contra expense. So you'll see -- you won't see it be netted against net investment income. You won't see it being netted against underwriting income, but it will be paid as a fee out of the Casualty Reinsurance business.

I would now like to turn it back to Frank D'Orazio for closing remarks. Frank D’Orazio: Thank you. I want to thank everyone listening on the call for their time today and for the questions we received this morning. I look forward to speaking with you again in a few weeks to discuss our Q1 results. But I'd also like to express my appreciation for the staff of James River for the countless hours of hard work and effort over the course of 2021. Collectively, your focus on our corporate objectives and ability to grow the organization by roughly 20% in the current environment has made James River a stronger and more profitable company with a brilliant future ahead. Again, thank you to everyone on the call for joining us this morning and enjoy your day.

This concludes today's conference call. Thank you for participating, and you may now disconnect.