Good morning, ladies and gentlemen, and welcome to the Q1 2017 James River Group Holdings, Ltd. earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Kevin Copeland, Head of Investor Relations. You may begin your conference, sir.
Thank you, Heidi. Good morning, everyone, and welcome to the James River Group first quarter 2017 earnings conference call. During the call, we will be making forward-looking statements. These statements are based on current beliefs, intentions, expectations, and assumptions that are subject to various risks and uncertainties, which may cause actual results to differ materially. For a discussion of such risks and uncertainties, please see the cautionary language regarding forward-looking statements in yesterday's earnings release and the Risk Factor section of our most recent Form 10-K, Form 10-Qs, and other reports and filings we make with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. With that, I will turn the call over to Adam Abram, Chairman and CEO of James River Group.
Thank you, Kevin. Good morning, everyone. Kevin and I are here with Bob Myron, our President and Chief Operating Officer, and Sarah Doran, our Chief Financial Officer. We're eager to get into a conversation prompted by your questions, but we thought I would start with a few preliminary comments. We enjoyed a very good quarter. Our combined ratio was 97.2% with all three underwriting segments reporting profits from underwriting. As many of you on this phone call know, profitable underwriting is the foundation stone of our company, and an accurate measure of combined ratio and strong returns on tangible equity are the two metrics we think are most important in evaluating our results. Our annualized return on tangible equity for the quarter was 14.8%, compared to 10.9% in the first quarter of last year.
I'd like to thank all of our colleagues for their attention to detail and hard work that allowed us to report these good results to you. Our combined ratio in the E&S segment is higher than it has been. Some time ago, we made a deliberate decision to grow the rideshare book within the E&S segment, knowing that it would cause the combined ratio in this segment to rise, but believing it would help us drive return on tangible equity. We are, of course, aware of the general trends around commercial auto. They're not good across the industry. However, the vast majority of our commercial auto business within E&S comes from approximately 50 transportation network company accounts, which are to be differentiated from traditional commercial auto, where trucks are the dominant risks. We have very little exposure to physical damage in this line.
While this line is only a few years old for us, it is a relatively short-tail business. Importantly, it fits our specialty focus. Our experience so far leads us to believe this is good business for us. An additional benefit of this new business is that it permits us to put to work capital we have been holding in reserve for just such an opportunity, which is part of what is driving the strong returns on equity we are reporting this quarter. Over the past two years, our operating leverage, meaning net written premiums to equity, have risen from 0.8 to 1 for 2015 to 1.0 to 1 for the 12 months ended March 31st, 2017. While we take pride in our team's innovative approach to writing accounts in the new economy, our transportation network accounts are not the only area where our company is enjoying profitable growth.
We continue to see more opportunities than ever in our core E&S book. Submissions were up 10% this quarter in the E&S core segment compared to the first quarter of last year. These submissions are leading to new business. Our core E&S business grew by 11% compared to the first quarter of last year's. Rates in the core segment were 1.2% lower than in the first quarter a year ago. We're satisfied these rates will generate our desired profits. The combined ratio in this part of our business is consistent with our historical results in E&S. However, because of the large commercial auto premium book, our overall E&S combined ratio was 90.6%, up 4.7 points from last year. In our specialty admitted business, our gross written premiums grew by 153%.
Because much of this business came in our fronting division, net written premiums grew by a smaller but still impressive 38.4%. Regular participants on this call know of our emphasis on increasing fee income. We are reporting an 88% increase in fee income over the first quarter of 2016. Comparing this quarter to the first quarter of last year, the specialty admitted segment made a one percentage point improvement in combined ratio. Some of you will remember that we write a book of workers' compensation in this segment. We refer to this business as our direct workers' compensation business, and it continues to perform well. Rates are down, however. We are watching this book carefully. Our casualty reinsurance segment reported a 97.5% combined ratio, 1.7 points better than last year at the same point. Premiums in this division were higher than in the same period last year.
For the year, we anticipate only modest growth in casualty reinsurance. Just summing up there, once again, all three of our segments made underwriting profits. We're quite pleased by that news. A quick word about investments. Once again, our alternative investment portfolio has delivered solid returns for us. We allocate a small portion of our total portfolio, it's roughly about 5% of the total, to alternatives. While these returns are lumpy, three of our past four quarters' returns from these investments have been significant contributors to our growth in tangible book value and income. In conclusion, we're growing on a number of fronts, some of which utilize more capital than others, all of which we believe are contributing to underwriting profits, and taken together, generating industry-leading returns on tangible equity.
Any of our fellow shareholders who purchased stock in our IPO in December of 2014 will likely have taken note that our dividends since the IPO equal one third of our tangible equity as of our initial public offering. This quarter, TBV, tangible book value, grew by 4.8% gross of our dividend. We're off to a good start. We're very interested to know what's on your mind. Let's get started with your questions. Operator, who's up first?
Ladies and gentlemen, if you have a question at this time, please press star, then the number one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Randy Binner with FBR. Randy, your line is now open.
Hey, good morning. Thanks. I do have a couple. Going back to Adam's comments there on Uber and being a combination of less property exposure and not being trucking, not seeing the commercial auto issues that are plaguing the group overall, could you dig into a little bit more why you're not necessarily seeing higher loss activity at least versus your pricing? Because to me intuitively, it seems that these are vehicles that are moving around a lot and have someone looking at an iPhone when they're driving. Could you just dig into that more so we can intuitively understand how that commercial class is different from a lot of other commercial auto classes out there?
Randy, first, I just want to make the point that it's 50 ride-sharing transportation network accounts, and it's not-
Sure
a single account. You are correct, of course, that the Uber account is the largest of all of those. The answer is we're not absolutely certain why that's true. What we do know is that the reporting on this is very quick, that we've dedicated a really very substantial amount of resources, both human resources and intellectual capital, to handling the claims in this area and to rapidly adjudicating and fairly adjudicating claims in this area, and the results have been good. As to why these drivers do better than someone driving, say, a UPS truck, I can't tell you.
I do think if you just think about this kind of naturally, there are differences between your familiarity and the ease with which you can drive your personal vehicle in an urban setting, and the ability to navigate a larger panel truck or a larger delivery vehicle through a crowded urban street. I suspect while many people do work full days doing rideshare work, I also suspect that there are a very large number of drivers who are doing this part-time, and perhaps they're a little fresher when they do it. The bottom line is we don't know. I can only speculate, and I can tell you what our results are to date, and we're happy and we're satisfied with them.
Great. Just one more if I can on the reserve release, it was a little bit lower than we expected in the quarter, it tends to be lower in the front half of the year. Is there any color you can give us on kind of what accident years comprised and what lines comprised the release in the first quarter, and how we should think about the timing of reserve review as we go through the year?
Hey, Randy, it's Sarah. I think as is typical from what you've seen of this company, we are more heavily weighted to the third and the fourth quarter because that's when we have our independent reserve reviews completed. Nothing atypical this quarter versus the first quarter last year. In keeping with our historical E&S business, those are older years. It's not been the routine of this company to release anything in the last few years and to kind of wait till they age is typical. Nothing different, typical to keep the third and the fourth quarter.
Okay, great. I'll leave it there. Thank you.
Your next question comes from the line of Mark Hughes with SunTrust. Mark, your line is open.
Yeah. Thank you very much. Good morning.
Morning.
Anything in the reinsurance book, any changes? I think earned premiums up this quarter. You've had some volatility on a quarterly basis in terms of written premiums. Should we still expect that that's a relatively steady eddy, or is that going to grow a little bit?
Yeah, Mark, it's Bob Myron. I think that, as I'm sure you know, reinsurance is a tough market right now and has been for some time. The space that we play in and what our guys are focused on is the proportional reinsurance market. The terms and conditions there seem to be holding pretty steady. At least in the business that we write, which is really dominated by excess and surplus lines type of business, the underlying rates continue to be pretty good. In fact, the underlying rates were up about 4% in that book of business during the course of this quarter over a quarter a year ago. Our guys down here on our small team is not charged with growth, but opportunistically, if they see a small deal here and there, they have put it on.
We may see a little bit of growth in that segment once we get to the end of the year relative to a year ago. As you point out, it obviously is lumpy. The team isn't really being charged with growth. It's more of just opportunistic of a small deal here and there that's causing what you're seeing.
On the E&S business, I don't know whether you mentioned your submission flow, but kind of a sense on how that is looking. I think you've had initiative to try to refine your own internal processes to make sure you're getting at more of those high-quality submissions and making sure you're focusing on where the best prospects are. Could you give us updates there?
Yeah. Submission flow, as it has been in the past, continues to be strong, measured Q1 versus Q1 a year ago. Our submissions were up 10%, and it was pretty broad brush across the core E&S lines. We are getting a lot of looks from our broker partners. I think that that is a combination of responsiveness, obviously a well-rated company, good subject matter expertise, reasonable commission rates. We continue to see very good flow in that space. I think that's encouraging, and you can't make a perfect correlation between that submission flow and the numbers Adam cited. As mentioned, again, the core E&S written premium was up 11% in the quarter. We're encouraged by continuing to see good business opportunities there.
Thank you.
Your next question comes from the line of Brian Meredith with UBS. Brian, your line is now open.
Yeah, thanks. A couple of questions here. Adam, I just want to follow up a little bit on this rideshare stuff. I guess the quick question would be, are your loss picks on your rideshare business up on a year-over-year basis, or are they flat and simply this is just a mix shift situation going on?
Well, we don't break it down, Brian, by segment to that level of detail for our loss picks. The loss picks for our commercial auto rideshare book are higher than our overall loss picks for the rest of our business.
Right.
These numbers for the entirety of our business, these move around as we have both more experience and pricing changes. Commercial auto, size of account, consistency, profitability, competitive world that we live in has a certain pricing metric. We're very comfortable with where our pricing is on this. It's an important new area of the economy to be involved in, and we believe it's generating acceptable underwriting profit to us.
No, no, I don't doubt that. I'm sure it's incredibly attractive. Just trying to, like I said, dive into the increasing accident year loss ratios. It's a mix shift issue, I get that.
Remember, we have a long history of trying to be cautious at the early days of booking any policy in our system. If you were to look at us historically, you would see six and eight years. For across our business, we try to put up an estimate that is a good, solid, strong estimate, and we hope it's not a certainty by any means, but we hope that over time with experience and good claims handling, we can bring that down. We're approaching this business with the same methodology that we approach the rest of our business, knowing that it would take the entire E&S combined ratio up because of the nature of the business.
Brian, we'll just layer into that.
The pick has always been higher. It's more dramatic now because of the weighting and how much more that has grown relative to the rest of the core E&S business. The accident year pick has been creeping up for some period of time, for some number of quarters for that segment, and it's principally because it has been growing a lot more, that division has been than the rest of the segment.
Right.
Right.
The only other thing I'd add is obviously we go through annual renewals and pricing moves around as well. It's not just a loss pick that's moving, it's pricing that's moving too. There are a number of different things that are feeding into that.
Okay. All right, great. Second question, I'm just curious, workers' compensation insurance, what's happening there within your specialty admitted segment?
The direct book there, I think if you just look at the public filing rates that we compare ourselves, I think net pricing, you have to take the loss cost, and you have to take the rate. Take those in combination. I think overall rates are down 10%-
Wow
Which is pretty substantial. We're watching it very carefully. I would say that our current experience in our book does not reflect in terms of we're watching claims very carefully, both arisings, frequency of arising, severity, back to work, timing and percentages, medical cost, et cetera. It does not reflect that numerical calculation, in other words, it's better than that numerical calculation. Our team is watching that in real time and with what I'll call a very experienced weather eye, and we've got a lot of confidence in their skill set and their willingness to make appropriate adjustments very quickly if we see anything that gives us pause. Today, no pause.
Let me just add on to what Adam said. Remember that this is probably only going to be a $35 million-$40 million book for the full year, so it's a relatively small piece of our overall writings. Just to totally agree, we are seeing declining loss trends in terms of our own experience. The index loss costs, sort of market index loss costs for the places that we are, is actually down 5%. While rates are down 10%, the index is down as well, so the margin compression is mid-single digits, so to speak. To us, that is still a healthy level of pricing relative to underlying loss costs. We think overall the margins remain good in that space.
It's interesting, and I'm sure we're not the first person or group that has talked about that the indexes in many respects across the U.S., our pricings, our underlying loss costs are going down. We're seeing that as well. Great. Thanks for the answers.
Again, if you have a question at this time, please press star then the number one key on your touch tone telephone to be placed in queue. Your next question comes from the line of Meyer Shields with KBW. Meyer, your line is now open.
Great. Thanks. Good morning. On the TNC companies, I guess, I want to ask you a question in a different direction. Are you seeing maybe the frequency of claims on a year-over-year basis level off because all the issues that sort of stimulated higher than expected frequency over the past couple of years are either embedded in driving levels or starting to subside?
You're talking about in the commercial auto book?
Yes.
I don't think that we have. Look, the commercial auto book is growing, as you've noted, pretty considerably. There are a lot more miles being driven. I'm not seeing a trend of increase per mile driven that's causing us any concern. The book is a complex to analyze, though, because there are big changes in states and territories simultaneously with this growth.
You get different geographic concentrations that can make that a little confusing there. In general, claims per mile driven are fine and pretty consistent.
Okay, thanks. Just briefly, when you have premium adjustments in casualty reinsurance, does that affect the segment's loss ratio? I imagine it helps the expense ratio just because of volume, I was wondering whether that matters to the loss ratio.
We didn't comment on this, I don't think we've commented on this yet, but the underlying rates, this is another nice thank you for setting us up to say something nice about our casualty reinsurance business. The underlying rates that we're seeing from the cedents, and remember that, I don't know, 95%-96% of that business is quota share business, something like that. The underlying rates on that business, so that the cedents are charging their customers are up this period. That's very positive. I think they were up 3% or 4% this period. That's a very positive thing, and it contributes to profitability. It's not really contributing to growth, but it's contributing to profitability.
To your question about premium adjustments, if we got a premium adjustment through from two years ago with respect to a treaty that's fully earned, we would book a commission expense on that, but not an increase to the loss ratio, right? The increase in the earned premium would not increase the losses, so to speak. You could have some benefit that could fall to the bottom line. Positive premium adjustments on fully earned contracts are definitely positive there.
Okay. That's it.
I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Adam Abram, Chairman and CEO.
Well, we thank you. Thanks to all of our colleagues once again. Thanks to our shareholders and to those of you who follow our company, and we look forward to speaking to you next quarter, if not before.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.