James River faces lawsuit over earnings overstatement
Bermuda-based James River Group Holdings is facing a lawsuit after it overstated its earnings in its second quarter report.
James River reported the error when it released its third quarter earnings report last week when it restated its second quarter earnings.
The company, which announced a strategic review this week in which it said it would examine all options including a merger or a sale, said it understated ceded written premium and overstated net written premium and net earned premium which resulted in overstatement of net income.
The company said: “In preparing its quarterly report on Form 10-Q for the period ended September 30, 2023, management identified an error in the accounting for reinstatement premium on a specialty casualty reinsurance treaty in its excess & surplus lines segment in the company's previously issued condensed consolidated financial statements as of and for the three and six months ended June 30, 2023.
“This error resulted in understatements of ceded written premium, and overstatements of net written premium and net earned premium of $9.4 million and $12.3 million, respectively, and overstatements of net income of $7.8 million and $10.4 million, respectively within the condensed consolidated statements of income and comprehensive income (loss) for the three and six months ended June 30, 2023, as well as corresponding effects on the condensed consolidated balance sheet and consolidated statements of changes in shareholders' equity as of and for the three and six months ended June 30, 2023.”
The company added: “ The Company's management has assessed the effect of the foregoing on the Company's internal control over financial reporting and disclosure controls and procedures. The Company's control over the review of the determination of when reinstatement premiums for reinsurance should be recognised did not operate effectively as of March 31, 2023 and June 30, 2023 resulting in a material weakness in the Company's internal control over financial reporting.”
Ratings agency AM Best said it will conclude an analysis of James River’s ratings this month and its ratings would remain unchanged until then.
It said the analysis would cover the company’s announcement that it will explore strategic business alternatives, its recent announcement that it has entered into a stock purchase agreement to sell JRG Reinsurance Company Ltd., as well as the error in accounting for reinstatement premium in the company’s previously issued results through June 30, 2023.
“Accordingly, AM Best is aware that the second quarter 10Q/A and the third quarter 10Q results are expected to be filed later this week,” AM Best said.
Law firm Bragar Eagel & Squire said it had filed a class action lawsuit against James River in the United States District Court for the Southern District of New York on behalf of all persons and entities who purchased or otherwise acquired James River securities between August 7, 2023 and November 7, 2023, both dates inclusive.
The law firm said James River’s share price fell $0.99, or 7%, to close at $13.15 after it made the announcement on on November 8, 2023, on unusually heavy trading volume.
It said: “According to the filed complaint, throughout the class period, defendants made materially false and/or misleading statements, as well as failed to disclose material adverse facts about the company’s business, operations, and prospects.
“Specifically, defendants failed to disclose to investors: (1) that James River lacked effective internal controls regarding the recognition of reinstatement premiums for reinsurance; (2) that, as a result, the company overstated its net income; (3) that the company was reasonably likely to restate its financial results; and (4) that, as a result of the foregoing, Defendants’ positive statements about the company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.”
James River last week reported third quarter 2023 net income of $16.9 million compared to a net loss of $7.2 million for the third quarter of 2022. Adjusted net operating income was $18.3 million, compared to adjusted net operating income of $15.5 million for the third quarter of 2022.
James River chair Ollie Sherman said the board is exploring strategic alternatives including a possible sale.
James River’s board said it had retained Citi and Ardea Partners as financial advisors, adding it was exploring all options.
The announcement came two days after James River announced it was selling its third-party casualty reinsurer JRG Reinsurance to Fleming Intermediate Holdings for $277 million.
