Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2017
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______ to _______
 
Commission File Number: 001-36777
 
JAMES RIVER GROUP HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)

 
Bermuda
 
98-0585280
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
Wellesley House, 2nd Floor, 90 Pitts Bay Road, Pembroke HM08, Bermuda
(Address of principal executive offices)
(Zip Code)
 
(441) 278-4580
(Registrant's telephone number, including area code)
  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x    No   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
Emerging Growth Company  x
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   ¨     No   x
 
Number of shares of the registrant's common shares outstanding at August 2, 2017: 29,518,045

 




James River Group Holdings, Ltd.
Form 10-Q
Index

 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements can be identified by the fact that they do not relate strictly to historical or current facts. You can identify forward-looking statements in this Quarterly Report by the use of words such as “anticipates,” “estimates,” “expects,” “intends,” “plans” and “believes,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could.” These forward-looking statements include, among others, statements relating to our future financial performance, our business prospects and strategy, anticipated financial position, liquidity and capital needs and other similar matters. These forward-looking statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.
 
Our actual results may differ materially from those expressed in, or implied by, the forward-looking statements included in this Quarterly Report as a result of various risks and uncertainties, many of which are beyond our control, including, among others:
 
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;
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;
a failure of any of the loss limitations or exclusions we employ;
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;
changes in laws or government regulation, including tax or insurance law and regulations;
our ability to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us;
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;
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;
failure to maintain effective internal controls in accordance with Sarbanes-Oxley Act of 2002, as amended;
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 10, 2017.


3



 
Forward-looking statements speak only as of the date of this Quarterly Report. Except as expressly required under federal securities laws and the rules and regulations of the SEC, we do not have any obligation, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this Quarterly Report, whether as a result of new information or future events or otherwise. You should not place undue reliance on the forward-looking statements included in this Quarterly Report or that may be made elsewhere from time to time by us, or on our behalf. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
 




4

Table of Contents
 

PART 1. FINANCIAL INFORMATION

 Item 1. Financial Statements
 
 
JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets
 
(Unaudited)
June 30,
2017
 
December 31,
2016
 
(in thousands)
Assets
 

 
 

Invested assets:
 

 
 

Fixed maturity securities:
 

 
 

Available-for-sale, at fair value (amortized cost:  2017 – $972,856; 2016 – $940,212)
$
982,133

 
$
941,077

Trading, at fair value (amortized cost:  2017 – $3,802; 2016 – $5,052)
3,814

 
5,063

Equity securities available-for-sale, at fair value (cost:  2017 – $74,508; 2016 – $74,553)
81,357

 
76,401

Bank loan participations held-for-investment, at amortized cost, net of allowance
241,516

 
203,526

Short-term investments
41,348

 
50,844

Other invested assets
65,481

 
55,419

Total invested assets
1,415,649

 
1,332,330

 
 
 
 
Cash and cash equivalents
87,771

 
109,784

Accrued investment income
6,802

 
7,246

Premiums receivable and agents’ balances, net
329,519

 
265,315

Reinsurance recoverable on unpaid losses
221,553

 
182,737

Reinsurance recoverable on paid losses
8,422

 
2,877

Prepaid reinsurance premiums
95,722

 
90,147

Deferred policy acquisition costs
69,382

 
64,789

Intangible assets, net
38,633

 
38,931

Goodwill
181,831

 
181,831

Other assets
76,769

 
70,546

Total assets
$
2,532,053

 
$
2,346,533

 
See accompanying notes.
 


5

Table of Contents
 

JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets (continued)
  
 
(Unaudited)
June 30,
2017
 
December 31,
2016
 
(in thousands, except share amounts)
Liabilities and Shareholders’ Equity
 

 
 

Liabilities:
 

 
 

Reserve for losses and loss adjustment expenses
$
1,061,061

 
$
943,865

Unearned premiums
420,997

 
390,563

Payables to reinsurers
50,799

 
39,899

Senior debt
88,300

 
88,300

Junior subordinated debt
104,055

 
104,055

Accrued expenses
35,123

 
36,884

Other liabilities
51,999

 
49,746

Total liabilities
1,812,334

 
1,653,312

Commitments and contingent liabilities


 


Shareholders’ equity:
 

 
 

Common Shares – 2017 and 2016: $0.0002 par value; 200,000,000 shares authorized; 29,467,647 and 29,257,566 shares issued and outstanding, respectively
6

 
6

Preferred Shares – 2017 and 2016: $0.00125 par value; 20,000,000 shares authorized; no shares issued and outstanding

 

Additional paid-in capital
637,349

 
636,856

Retained earnings
70,495

 
55,232

Accumulated other comprehensive income
11,869

 
1,127

Total shareholders’ equity
719,719

 
693,221

Total liabilities and shareholders’ equity
$
2,532,053

 
$
2,346,533

 
See accompanying notes.


6

Table of Contents
 
JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except share amounts)
Revenues
 

 
 

 
 

 
 

Gross written premiums
$
281,475

 
$
170,671

 
$
505,654

 
$
303,742

Ceded written premiums
(73,651
)
 
(37,613
)
 
(139,920
)
 
(63,783
)
Net written premiums
207,824

 
133,058

 
365,734

 
239,959

Change in net unearned premiums
(23,747
)
 
(14,503
)
 
(26,970
)
 
(4,274
)
Net earned premiums
184,077

 
118,555

 
338,764

 
235,685

Net investment income
13,714

 
11,553

 
30,447

 
22,825

Net realized investment gains
307

 
1,619

 
1,354

 
2,166

Other income
4,296

 
2,784

 
8,231

 
5,164

Total revenues
202,394

 
134,511

 
378,796

 
265,840

Expenses
 

 
 

 
 

 
 
Losses and loss adjustment expenses
131,084

 
76,659

 
236,453

 
150,165

Other operating expenses
53,036

 
39,974

 
101,929

 
81,153

Other expenses
346

 
91

 
232

 
79

Interest expense
2,224

 
2,041

 
4,347

 
4,215

Amortization of intangible assets
149

 
149

 
298

 
298

Total expenses
186,839

 
118,914

 
343,259

 
235,910

Income before taxes
15,555

 
15,597

 
35,537

 
29,930

Income tax expense
1,014

 
1,001

 
2,546

 
2,497

Net income
14,541

 
14,596

 
32,991

 
27,433

Other comprehensive income:
 

 
 

 
 

 
 
Net unrealized gains, net of taxes of $1,157 and $2,671 in 2017 and $1,987 and $2,644 in 2016
6,708

 
12,792

 
10,742

 
28,412

Total comprehensive income
$
21,249

 
$
27,388

 
$
43,733

 
$
55,845

Per share data:
 

 
 

 
 

 
 
Basic earnings per share
0.49

 
0.50

 
1.12

 
0.95

Diluted earnings per share
0.48

 
0.49

 
1.09

 
0.92

Dividend declared per share
0.30

 
0.20

 
0.60

 
0.40

Weighted-average common shares outstanding:
 

 
 

 
 

 
 
Basic
29,406,877

 
29,035,512

 
29,348,557

 
28,994,260

Diluted
30,307,099

 
29,825,914

 
30,317,585

 
29,784,083

 
See accompanying notes.
 

 

7

Table of Contents
JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)




 
 
Number of
Common
Shares
Outstanding
 
Class A
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
 
(in thousands, except share amounts)
Balances at December 31, 2015
28,941,547

 
$
6

 
$
630,820

 
$
47,026

 
$
3,186

 
$
681,038

Net income

 

 

 
27,433

 

 
27,433

Other comprehensive income

 

 

 

 
28,412

 
28,412

Dividends

 

 

 
(11,722
)
 

 
(11,722
)
Exercise of stock options and related excess tax benefits
149,949

 

 
2,050

 

 

 
2,050

Compensation expense under stock incentive plans

 

 
2,687

 

 

 
2,687

Balances at June 30, 2016
29,091,496

 
$
6

 
$
635,557

 
$
62,737

 
$
31,598

 
$
729,898

Balances at December 31, 2016
29,257,566

 
$
6

 
$
636,856

 
$
55,232

 
$
1,127

 
$
693,221

Net income

 

 

 
32,991

 

 
32,991

Other comprehensive income

 

 

 

 
10,742

 
10,742

Dividends

 

 

 
(17,728
)
 

 
(17,728
)
Exercise of stock options
185,159

 

 
(2,458
)
 

 

 
(2,458
)
Vesting of restricted share units
24,922

 

 
(627
)
 

 

 
(627
)
Compensation expense under stock incentive plans

 

 
3,578

 

 

 
3,578

Balances at June 30, 2017
29,467,647

 
$
6

 
$
637,349

 
$
70,495

 
$
11,869

 
$
719,719

 
See accompanying notes.
 

8

Table of Contents
 JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Cash Flows (Unaudited)



 
Six Months Ended June 30,
 
2017
 
2016
 
(in thousands)
Operating activities
 

 
 

Net cash provided by operating activities
$
65,326

 
$
30,770

Investing activities
 

 
 

Securities available-for-sale:
 

 
 

Purchases – fixed maturity securities
(196,208
)
 
(157,918
)
Sales – fixed maturity securities
33,723

 
68,049

Maturities and calls – fixed maturity securities
128,640

 
52,728

Purchases – equity securities

 
(3,000
)
Sales – equity securities
409

 

Bank loan participations:
 

 
 

Purchases
(144,172
)
 
(51,304
)
Sales
79,959

 
5,360

Maturities
28,638

 
33,304

Other invested assets:
 

 
 

Purchases
(6,322
)
 
(1,000
)
Return of Capital

 
985

Maturities and repayments

 
6,500

Short-term investments, net
9,496

 
4,364

Securities receivable or payable, net
1,205

 
(1,598
)
Purchases of property and equipment
(1,426
)
 
(1,858
)
Net cash used in investing activities
(66,058
)
 
(45,388
)
Financing activities
 

 
 

Dividends paid
(17,729
)
 
(11,604
)
Issuance of common shares under equity incentive plans
868

 
1,743

Common share repurchases
(3,953
)
 
(716
)
Repayments of financing obligations net of proceeds
(467
)
 
(557
)
Net cash used in financing activities
(21,281
)
 
(11,134
)
Change in cash and cash equivalents
(22,013
)
 
(25,752
)
Cash and cash equivalents at beginning of period
109,784

 
106,406

Cash and cash equivalents at end of period
$
87,771

 
$
80,654

Supplemental information
 

 
 

Interest paid
$
4,329

 
$
3,973

 
See accompanying notes.
 



9

Table of Contents
 

JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

1.    Accounting Policies

Organization
 
James River Group Holdings, Ltd. (referred to as “JRG Holdings” or, with its subsidiaries, the “Company”) is an exempted holding company registered in Bermuda, organized for the purpose of acquiring and managing insurance and reinsurance entities.
 
The Company owns six insurance companies based in the United States (“U.S.”) focused on specialty insurance niches and a Bermuda-based reinsurance company as described below:
 
James River Group Holdings UK Limited (“James River UK”) is an insurance holding company formed in 2015 in the United Kingdom (“U.K.”). JRG Holdings contributed James River Group, Inc. (“James River Group”), a U.S. insurance holding company, to James River UK in 2015.

James River Group is a Delaware domiciled insurance holding company formed in 2002 which owns all of the Company’s U.S.-based subsidiaries, either directly or indirectly through one of its wholly-owned U.S. subsidiaries. James River Group oversees the Company’s U.S. insurance operations and maintains all of the outstanding debt in the U.S.

James River Insurance Company is an Ohio domiciled excess and surplus lines insurance company that, with its wholly-owned insurance subsidiary, James River Casualty Company, is authorized to write business in every state and the District of Columbia.

Falls Lake National Insurance Company (“Falls Lake National”) is an Ohio domiciled insurance company which wholly owns Stonewood Insurance Company (“Stonewood Insurance”), a North Carolina domiciled company, Falls Lake General Insurance Company, an Ohio domiciled company, and Falls Lake Fire and Casualty Company, a California domiciled company. Falls Lake National began writing specialty admitted fronting and program business in late 2013. Falls Lake Fire and Casualty began operations in 2016.

JRG Reinsurance Company, Ltd. (“JRG Re”) was formed in 2007 and commenced operations in 2008. JRG Re, a Bermuda domiciled reinsurer, provides non-catastrophe casualty reinsurance to U.S. third parties and to the Company’s U.S.-based insurance subsidiaries.

Basis of Presentation
 
The accompanying condensed consolidated financial statements and notes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and do not contain all of the information and footnotes required by U.S. GAAP for complete financial statements. The condensed consolidated financial statements include the results of the Company and its subsidiaries from their respective dates of inception or acquisition, as applicable. Readers are urged to review the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for a more complete description of the Company’s business and accounting policies. In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results of operations for the full year. The consolidated balance sheet as of December 31, 2016 was derived from the Company’s audited annual consolidated financial statements.
 
Intercompany transactions and balances have been eliminated.
 
Estimates and Assumptions
 
Preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying disclosures. Those estimates are inherently subject to change, and actual results may ultimately differ from those estimates.
 
Variable Interest Entities
 
Entities that do not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest are referred to as

10

Table of Contents
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


variable interest entities (“VIE”). A VIE is consolidated by the variable interest holder that is determined to have the controlling financial interest (primary beneficiary) as a result of having both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE’s capital structure, contractual terms, nature of the VIE’s operations and purpose, and the Company’s relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE. The Company reassesses its VIE determination with respect to an entity on an ongoing basis.
 
The Company holds interests in VIEs through certain equity method investments included in “other invested assets” in the accompanying condensed consolidated balance sheets. The Company has determined that it should not consolidate any of the VIEs as it is not the primary beneficiary in any of the relationships. Although the investments resulted in the Company holding variable interests in the entities, they did not empower the Company to direct the activities that most significantly impact the economic performance of the entities. The Company’s investments related to these VIEs totaled $30.6 million and $27.1 million as of June 30, 2017 and December 31, 2016, respectively, representing the Company’s maximum exposure to loss.
 
Adopted Accounting Standards
 
Effective January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting using the prospective method. The guidance requires that all tax effects related to share-based payments be made through the income statement at the time of settlement as opposed to excess tax benefits being recognized in additional paid-in capital under the previous guidance. The ASU also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. Additionally, all tax related cash flows resulting from share-based payments are now reported as operating activities on the statement of cash flows, a change from the previous requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities. For the six months ended June 30, 2016, net cash provided by operating activities increased by $1.0 million and net cash used in financing activities was increased by $1.0 million for the adoption of ASU 2016-09. The Company has elected to recognize forfeitures as they occur in accordance with ASU 2016-09. The adoption of ASU 2016-09 did not materially impact the Company’s consolidated income statements.
 
Prospective Accounting Standards
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance applies to all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards, such as insurance contracts. Under this guidance, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 becomes effective for the Company during the first quarter of 2018 and must be applied retrospectively. The Company is currently evaluating ASU 2014-09 to determine the potential impact that adopting this standard will have on reported fee income. As part of this evaluation, the Company is completing a review of its contracts and assessing the impact the new standard will have on our disclosures and internal controls. The Company does not believe adoption will have a material impact on its consolidated financial statements. The Company plans to adopt this ASU using the modified retrospective method, with the cumulative effect of initially applying this update recognized in the first quarter of 2018. The Company is in the process of drafting an updated accounting policy for revenue recognition, evaluating new disclosure requirements and identifying and implementing appropriate changes to its business processes, systems and controls to support recognition and disclosure under the new guidance.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Among other things, this ASU will require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. This ASU is effective for interim and annual reporting periods beginning after December 15, 2017. Upon adoption, a cumulative-effect adjustment to the balance sheet will be made as of the beginning of the fiscal year of adoption. The Company has not yet completed the analysis of how adopting this ASU will affect our consolidated financial statements.
 

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JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under current guidance for lessees, leases are only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, are met. This update will require the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating ASU 2016-02 to determine the potential impact that adopting this standard will have on its consolidated financial statements.
 
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Current GAAP delays the recognition of credit losses until it is probable a loss has been incurred. The update will require financial assets measured at amortized cost, such as bank loan participations held for investment, to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses, with the amount of the allowance limited to the amount by which fair value is below amortized cost. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Upon adoption, this ASU will be applied using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period presented. The Company has not yet completed the analysis of how adopting this ASU will affect Company’s financial statements.
 
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments to address the diversity in practice of how certain cash receipts and payments are classified in the statement of cash flows. The update addresses specific issues, including distributions received from equity method investees and the classification of cash receipts and payments that have aspects of more than one class of cash flows. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017. Upon adoption, the update will be applied using the retrospective transition method. The Company has not yet completed the analysis of how adopting this ASU will affect its financial statements, but does not expect a material impact on our statement of cash flows.

2.    Investments

The Company’s available-for-sale investments are summarized as follows:
 

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JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in thousands)
June 30, 2017
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

State and municipal
$
124,955

 
$
5,865

 
$
(432
)
 
$
130,388

Residential mortgage-backed
139,809

 
1,001

 
(2,327
)
 
138,483

Corporate
398,049

 
7,017

 
(2,282
)
 
402,784

Commercial mortgage and asset-backed
178,248

 
1,024

 
(523
)
 
178,749

Obligations of U.S. government corporations and agencies
62,464

 
109

 
(141
)
 
62,432

U.S. Treasury securities and obligations guaranteed by the U.S. government
67,306

 
93

 
(190
)
 
67,209

Redeemable preferred stock
2,025

 
63

 

 
2,088

Total fixed maturity securities
972,856


15,172


(5,895
)

982,133

Equity securities
74,508

 
8,288

 
(1,439
)
 
81,357

Total investments available-for-sale
$
1,047,364


$
23,460


$
(7,334
)

$
1,063,490

December 31, 2016
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

State and municipal
$
101,793

 
$
5,032

 
$
(984
)
 
$
105,841

Residential mortgage-backed
152,703

 
1,070

 
(2,975
)
 
150,798

Corporate
379,727

 
4,382

 
(5,661
)
 
378,448

Commercial mortgage and asset-backed
167,967

 
906

 
(826
)
 
168,047

Obligations of U.S. government corporations and agencies
64,823

 
276

 
(85
)
 
65,014

U.S. Treasury securities and obligations guaranteed by the U.S. government
71,174

 
131

 
(185
)
 
71,120

Redeemable preferred stock
2,025

 

 
(216
)
 
1,809

Total fixed maturity securities
940,212


11,797


(10,932
)

941,077

Equity securities
74,553

 
4,503

 
(2,655
)
 
76,401

Total investments available-for-sale
$
1,014,765


$
16,300


$
(13,587
)

$
1,017,478

 
The amortized cost and fair value of available-for-sale investments in fixed maturity securities at June 30, 2017 are summarized, by contractual maturity, as follows:
 
 
Cost or
Amortized
Cost
 
Fair
Value
 
(in thousands)
One year or less
$
100,713

 
$
100,916

After one year through five years
246,589

 
248,690

After five years through ten years
184,543

 
185,759

After ten years
120,929

 
127,448

Residential mortgage-backed
139,809

 
138,483

Commercial mortgage and asset-backed
178,248

 
178,749

Redeemable preferred stock
2,025

 
2,088

Total
$
972,856

 
$
982,133

  
Actual maturities may differ for some securities because borrowers have the right to call or prepay obligations with or without penalties.
 

13

Table of Contents
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


The following table shows the Company’s gross unrealized losses and fair value for available-for-sale securities aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:
 
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
(in thousands)
June 30, 2017
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

State and municipal
$
21,105

 
$
(409
)
 
$
707

 
$
(23
)
 
$
21,812

 
$
(432
)
Residential mortgage-backed
79,778

 
(1,143
)
 
29,827

 
(1,184
)
 
109,605

 
(2,327
)
Corporate
138,683

 
(2,111
)
 
1,617

 
(171
)
 
140,300

 
(2,282
)
Commercial mortgage and asset-backed
50,374

 
(518
)
 
4,997

 
(5
)
 
55,371

 
(523
)
Obligations of U.S. government corporations and agencies
52,122

 
(141
)
 

 

 
52,122

 
(141
)
U.S. Treasury securities and obligations guaranteed by the U.S. government
48,254

 
(190
)
 

 

 
48,254

 
(190
)
Total fixed maturity securities
390,316


(4,512
)

37,148


(1,383
)

427,464


(5,895
)
Equity securities
2,828

 
(46
)
 
6,749

 
(1,393
)
 
9,577

 
(1,439
)
Total investments available-for-sale
$
393,144


$
(4,558
)

$
43,897


$
(2,776
)

$
437,041


$
(7,334
)
December 31, 2016
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

State and municipal
$
28,398

 
$
(984
)
 
$

 
$

 
$
28,398

 
$
(984
)
Residential mortgage-backed
93,242

 
(1,548
)
 
32,330

 
(1,427
)
 
125,572

 
(2,975
)
Corporate
199,841

 
(4,212
)
 
8,477

 
(1,449
)
 
208,318

 
(5,661
)
Commercial mortgage and asset-backed
47,990

 
(799
)
 
7,195

 
(27
)
 
55,185

 
(826
)
Obligations of U.S. government corporations and agencies
50,573

 
(85
)
 

 

 
50,573

 
(85
)
U.S. Treasury securities and obligations guaranteed by the U.S. government
48,989

 
(185
)
 

 

 
48,989

 
(185
)
Redeemable preferred stock
1,809

 
(216
)
 

 

 
1,809

 
(216
)
Total fixed maturity securities
470,842


(8,029
)

48,002


(2,903
)

518,844


(10,932
)
Equity securities
21,345

 
(1,071
)
 
6,558

 
(1,584
)
 
27,903

 
(2,655
)
Total investments available-for-sale
$
492,187


$
(9,100
)

$
54,560


$
(4,487
)

$
546,747


$
(13,587
)
 
The Company held securities of 138 issuers that were in an unrealized loss position at June 30, 2017 with a total fair value of $437.0 million and gross unrealized losses of $7.3 million. None of the fixed maturity securities with unrealized losses has ever missed, or been delinquent on, a scheduled principal or interest payment.
 
At June 30, 2017, 99.8% of the Company’s fixed maturity security portfolio was rated “BBB-” or better (“investment grade”) by Standard & Poor’s or received an equivalent rating from another nationally recognized rating agency. Fixed maturity securities with ratings below investment grade by Standard & Poor’s or another nationally recognized rating agency at June 30, 2017 had an aggregate fair value of $2.4 million and an aggregate net unrealized gain of $204,000.
 
Management concluded that none of the fixed maturity securities with an unrealized loss at June 30, 2017 or December 31, 2016 experienced an other-than-temporary impairment. Management does not intend to sell available-for-sale securities in an unrealized loss position, and it is not “more likely than not” that the Company will be required to sell these securities before a recovery in their value to their amortized cost basis occurs. Management also concluded that none of the equity securities with an unrealized loss at June 30, 2017 or December 31, 2016 experienced an other-than-temporary impairment. Management has evaluated the near-term prospects of these equity securities in relation to the severity and duration of the impairment, and management has the ability and intent to hold these securities until a recovery of their fair value.

14

Table of Contents
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


 
At June 30, 2017, the Company held a participation in a loan issued by a company that produces and supplies power to Puerto Rico through a power purchase agreement with Puerto Rico Electric Power Authority (“PREPA”), a public corporation and governmental agency of the Commonwealth of Puerto Rico. PREPA’s credit strength and ability to make timely payments has been impacted by the economic conditions in Puerto Rico, thus raising doubt about the company’s ability to meet the debt obligations held by the Company. In July 2017, PREPA filed a petition for relief in U.S. District Court under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act. Management concluded that the loan, which matures in November 2017, was impaired at June 30, 2017. The loan had a carrying value of $1.0 million, unpaid principal of $1.2 million, and an allowance for credit losses of $110,000 at June 30, 2017. At December 31, 2016, the loan had a carrying value of $1.7 million, unpaid principal of $2.0 million, and an allowance for credit losses of $177,000.
 
The Company’s bank loan portfolio includes loans to oil and gas companies in the energy sector. The market values of these loans have been impacted by declining energy prices. At June 30, 2017, the Company’s oil and gas exposure in the bank loan portfolio was in four loans with a carrying value of $9.7 million and an unrealized loss of $1.7 million. All of the loans were current at June 30, 2017. Management concluded that two of these loans were impaired as of June 30, 2017. At June 30, 2017, the two impaired loans had a carrying value of $2.0 million, unpaid principal of $2.5 million and an allowance for credit losses of $469,000. At December 31, 2016, one loan was impaired with a carrying value of $1.6 million, unpaid principal of $2.2 million and an allowance for credit losses of $545,000.
 
Management also concluded that one non-energy sector loan was impaired at June 30, 2017. The loan had a carrying value of $583,000, unpaid principal of $710,000, and an allowance for credit losses of $127,000. At December 31, 2016, three non-energy sector loans were impaired with a total carrying value of $3.2 million, unpaid principal of $3.5 million, and an allowance for credit losses of $221,000.
 
The aggregate allowance for credit losses was $705,000 at June 30, 2017 on impaired loans from four issuers with a total carrying value of $3.6 million and unpaid principal of $4.4 million. At December 31, 2016, the aggregate allowance for credit losses was $943,000 on impaired loans from five issuers with a total carrying value of $6.5 million and unpaid principal of $7.6 million. The aggregate allowance for credit losses on impaired loans was $3.7 million at June 30, 2016 and $4.3 million at December 31, 2015.
 
Bank loan participations generally have a credit rating that is below investment grade (i.e. below “BBB-” for Standard & Poor’s) at the date of purchase. These bank loans are primarily senior, secured floating-rate debt rated “BB”, “B”, or “CCC” by Standard & Poor’s or an equivalent rating from another nationally recognized rating agency. These bank loans include assignments of, and participations in, performing and non-performing senior corporate debt generally acquired through primary bank syndications and in secondary markets. Bank loans consist of, but are not limited to, term loans, the funded and unfunded portions of revolving credit loans, and other similar loans and investments. Management believed that it was probable at the time that these loans were acquired that the Company would be able to collect all contractually required payments receivable.
 
Generally, the accrual of interest on a bank loan participation is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest. A bank loan participation may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Generally, bank loan participations are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Interest received on nonaccrual loans generally is reported as investment income. There were no bank loans on nonaccrual status at June 30, 2017 or December 31, 2016.
 
The allowance for credit losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management’s periodic evaluation of the adequacy of the allowance is based on consultations and advice of the Company’s independent investment manager, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions, and other relevant factors. The Company generally records an allowance equal to the difference between the fair value and the amortized cost of bank loans that it has determined to be impaired as a practical expedient for an estimate of probable future cash flows to be collected on those bank loans. Bank loans are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
 

15

Table of Contents
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


The average recorded investment in impaired bank loans was $5.0 million and $5.6 million during the six months ended June 30, 2017 and 2016, respectively. Investment income of $179,000 and $170,000, respectively, was recognized during the time within those periods that the loans were impaired. The Company recorded net realized investment losses of $42,000 and net realized investment gains of $135,000 in the three months and six months ended June 30, 2017, respectively, for changes in the fair value of impaired bank loans. For the three months and six months ended June 30, 2016, the Company recorded net realized investment gains of $913,000 and $610,000, respectively, for changes in the fair value of impaired bank loans.
 
Changes in unrealized gains or losses on securities held for trading are recorded as trading gains or losses within net investment income. Net investment income for the three months and six months ended June 30, 2017 includes $1,000 of net trading losses and $1,000 of net trading gains, respectively, of which $2,000 of net trading losses and $1,000 of net trading gains relate to securities still held at June 30, 2017, respectively.
 
The Company’s realized gains and losses are summarized as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Fixed maturity securities:
 

 
 

 
 

 
 

Gross realized gains
$
18

 
$
568

 
$
356

 
$
1,410

Gross realized losses
(31
)
 
(1
)
 
(327
)
 
(2
)
 
(13
)

567


29


1,408

Bank loan participations:
 

 
 

 
 

 
 

Gross realized gains
471

 
1,133

 
1,607

 
1,193

Gross realized losses
(150
)
 
(81
)
 
(689
)
 
(433
)
 
321


1,052


918


760

Equity securities:
 

 
 

 
 

 
 

Gross realized gains

 

 
409

 

Gross realized losses

 

 

 

 




409



Short-term investments and other:
 

 
 

 
 

 
 

Gross realized gains

 
1

 

 
1

Gross realized losses
(1
)
 
(1
)
 
(2
)
 
(3
)
 
(1
)



(2
)

(2
)
Total
$
307


$
1,619


$
1,354


$
2,166

  
Realized investment gains or losses are determined on a specific identification basis.
 
The Company invests selectively in private debt and equity opportunities. These investments, which together comprise the Company’s other invested assets, are primarily focused in renewable energy, limited partnerships, and bank holding companies.
 
 
 
 
 
 
Investment Income
 
Carrying Value
 
 
 
 
 
June 30,
 
December 31,
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Renewable energy LLCs (a)
$
30,572

 
$
27,067

 
$
1,521

 
$
(1,451
)
 
$
7,115

 
$
(769
)
Renewable energy notes receivable (b)
5,688

 

 
49

 
207

 
49

 
450

Limited partnerships (c)
24,721

 
23,852

 
703

 
1,680

 
1,085

 
1,836

Bank holding companies (d)
4,500

 
4,500

 
86

 
86

 
172

 
172

Total other invested assets
$
65,481


$
55,419


$
2,359


$
522


$
8,421


$
1,689


16

Table of Contents
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


 
(a)
The Company’s Corporate and Other segment owns equity interests ranging from 2.6% to 32.8% in various LLCs whose principal objective is capital appreciation and income generation from owning and operating renewable energy production facilities (wind and solar). The LLCs are managed by an affiliate of the Company’s largest shareholder and the Company’s Chairman and Chief Executive Officer has invested in certain of these LLCs. The equity method is used to account for the Company’s LLC investments. Income for the LLCs primarily reflects adjustments to the carrying values of investments in renewable energy projects to their determined fair values. The fair value adjustments are included in revenues for the LLCs. Expenses for the LLCs are not significant and are comprised of administrative and interest expenses. The Company received cash distributions from these investments totaling $3.6 million and $1.5 million in the six months ended June 30, 2017 and 2016, respectively.

(b)
The Company has invested in notes receivable for renewable energy projects. In June 2017, the Company invested $5.7 million in a note with an affiliate of the Company’s largest shareholder. Interest on the note, which matures in 2021, is fixed at 15.0%. The Company is committed to investing another $3.1 million in the note and commitment fees of 2.5% are earned on the unfunded commitment. Interest income on the note was $49,000 for the three and six months ended June 30, 2017. The Company’s Chairman and Chief Executive Officer and one of the Company’s directors are also lenders on this project. In May 2016, the outstanding principal on a $6.5 million note was fully repaid. Income prior to repayment of the note was $207,000 and $450,000 for the three and six months ended June 30, 2016, respectively. This note was also with an affiliate of the Company's largest shareholder.

(c)
The Company owns investments in limited partnerships that invest in concentrated portfolios of publicly-traded small cap equities, loans of middle market private equity sponsored companies, and equity tranches of collateralized loan obligations (CLOs). Income from the partnerships is recognized under the equity method of accounting. The Company’s Corporate and Other segment held an investment in a limited partnership with a carrying value of $2.8 million at June 30, 2017. The Company recognized investment income of $220,000 and $235,000 on the investment for the six months ended June 30, 2017 and 2016, respectively. The Company’s Excess and Surplus Lines segment holds investments in limited partnerships of $21.9 million at June 30, 2017. Investment income of $865,000 and $1.6 million was recognized on the investments for the six months ended June 30, 2017 and 2016, respectively. At June 30, 2017, the Company’s Excess and Surplus Lines segment has an outstanding commitment to invest another $625,000 in a limited partnership that invests in loans of middle market private equity sponsored companies.

(d)
The Company holds $4.5 million of subordinated notes issued by a bank holding company. Interest on the notes, which mature on August 12, 2023, is fixed at 7.6% per annum. Interest income on the notes was $172,000 in both six months ended June 30, 2017 and 2016. The Company’s Chairman and Chief Executive Officer was previously the Lead Independent Director of the bank holding company and an investor in the bank holding company. Additionally, one of the Company’s directors was an investor in the bank holding company and is currently a lender to the bank holding company.

At June 30, 2017, the Company held an investment in a collateralized loan obligation (CLO) where one of the underlying loans was issued by the bank holding company. The investment, with a carrying value of $5.0 million at June 30, 2017, is classified as an available-for-sale fixed maturity.
 
Realized investments gains of $409,000 were recognized in the six months ended June 30, 2017 related to the sale of common shares of the bank holding company. Income of $233,000 was recognized on the shares for the six months ended June 30, 2016.
 
The Company holds a $1.0 million certificate of deposit issued by the bank holding company. The certificate of deposit, which matures on December 19, 2017, is carried as a short-term investment. Interest income of $1,000 was recognized on this investment for both the six months ended June 30, 2017 and 2016.

3.    Goodwill and Intangible Assets
 
On December 11, 2007, the Company completed an acquisition of James River Group by acquiring 100% of the outstanding shares of James River Group common stock, referred to herein as the “Merger”. The transaction was accounted for under the purchase method of accounting, and goodwill and intangible assets were recognized by the Company as a result of the transaction. Goodwill resulting from the Merger was $181.8 million at June 30, 2017 and December 31, 2016.
 
The gross carrying amounts and accumulated amortization for each major specifically identifiable intangible asset class were as follows: 

17

Table of Contents
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


 
 
 
June 30, 2017
 
December 31, 2016
 
Life
(Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
 
 
($ in thousands)
Intangible Assets
 
 
 

 
 

 
 

 
 

Trademarks
Indefinite
 
$
22,200

 
$

 
$
22,200

 
$

Insurance licenses and authorities
Indefinite
 
9,164

 

 
9,164

 

Identifiable intangibles not subject to amortization
 
 
31,364

 

 
31,364

 

Broker relationships
24.6
 
11,611

 
4,342

 
11,611

 
4,044

Identifiable intangible assets subject to amortization
 
 
11,611

 
4,342

 
11,611

 
4,044

 
 
 
$
42,975

 
$
4,342

 
$
42,975

 
$
4,044

 
4.    Earnings Per Share
 
The following represents a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations contained in the condensed consolidated financial statements:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except share and per share amounts)
Net income to shareholders
$
14,541

 
$
14,596

 
$
32,991

 
$
27,433

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
29,406,877

 
29,035,512

 
29,348,557

 
28,994,260

Common share equivalents
900,222

 
790,402

 
969,028

 
789,823

Diluted
30,307,099

 
29,825,914

 
30,317,585

 
29,784,083

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.49

 
$
0.50

 
$
1.12

 
$
0.95

Common share equivalents
(0.01
)
 
(0.01
)
 
(0.03
)
 
(0.03
)
Diluted
$
0.48

 
$
0.49

 
$
1.09

 
$
0.92


 
Common share equivalents relate to stock options and restricted share units (“RSU’s”). For the three and six months ended June 30, 2017, common share equivalents of 201,821 and 150,075 shares, respectively, were excluded from the calculations of diluted earnings per share as their effects were anti-dilutive. For the three and six months ended June 30, 2016, all common share equivalents were dilutive.

5.    Reserve for Losses and Loss Adjustment Expenses
 
The following table provides a reconciliation of the beginning and ending reserve balances for losses and loss adjustment expenses, net of reinsurance, to the gross amounts reported in the condensed consolidated balance sheets:
 

18

Table of Contents
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Reserve for losses and loss adjustment expenses net of reinsurance recoverables at beginning of period
$
791,781

 
$
672,588

 
$
761,128

 
$
653,534

Add: Incurred losses and loss adjustment expenses net of reinsurance:
 

 
 

 
 

 
 

Current year
129,369

 
81,407

 
238,152

 
159,580

Prior years
1,715

 
(4,748
)
 
(1,699
)
 
(9,415
)
Total incurred losses and loss and adjustment expenses
131,084

 
76,659

 
236,453

 
150,165

Deduct: Loss and loss adjustment expense payments net of reinsurance:
 

 
 

 
 
 
 

Current year
13,908

 
8,946

 
17,606

 
10,890

Prior years
69,449

 
50,670

 
140,467

 
103,178

Total loss and loss adjustment expense payments
83,357

 
59,616

 
158,073

 
114,068

Reserve for losses and loss adjustment expenses net of reinsurance recoverables at end of period
839,508

 
689,631

 
839,508

 
689,631

Add: Reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period
221,553

 
153,706

 
221,553

 
153,706

Reserve for losses and loss adjustment expenses gross of reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period
$
1,061,061

 
$
843,337

 
$
1,061,061

 
$
843,337

  
The Company experienced $1.7 million of adverse reserve development in the three months ended June 30, 2017 on the reserve for losses and loss adjustment expenses held at December 31, 2016. This reserve development included $1.4 million of favorable development in the Excess and Surplus Lines segment, primarily from the 2015 and 2014 accident years which were partially offset by unfavorable development in the 2006 accident year. This favorable development occurred because our actuarial studies at June 30, 2017 for the Excess and Surplus Lines segment indicated that our loss experience on our casualty business continues to be below our initial expected loss ratios. The Specialty Admitted Insurance segment experienced $949,000 of adverse development, primarily due to adverse development in the programs business for the 2016 accident year. The Company also experienced $2.2 million of adverse development for the Casualty Reinsurance segment. The development was mostly related to the 2010 and 2012 contracts with one reinsured.

The Company experienced $4.7 million of favorable reserve development in the three months ended June 30, 2016 on the reserve for losses and loss adjustment expenses held at December 31, 2015. This reserve development included $3.6 million of favorable development in the Excess and Surplus Lines segment, primarily from the 2014, 2013, and 2008 accident years. This favorable development occurred because our actuarial studies at June 30, 2016 for the Excess and Surplus Lines segment indicated that our loss experience on our casualty business continues to be below our initial expected loss ratios. Favorable reserve development of $617,000 in the Specialty Admitted Insurance segment was primarily from the 2013, 2011 and 2010 accident years, partially offset by adverse development in the 2015 accident year. The Company also experienced $520,000 of favorable development on prior accident years for the Casualty Reinsurance segment.

The Company experienced $1.7 million of favorable reserve development in the six months ended June 30, 2017 on the reserve for losses and loss adjustment expenses held at December 31, 2016. This reserve development included $4.7 million of favorable development in the Excess and Surplus Lines segment, primarily from the 2014 through 2016 accident years which were partially offset by unfavorable development in the 2006 accident year. This favorable development occurred because our actuarial studies at June 30, 2017 for the Excess and Surplus Lines segment indicated that our loss experience on our casualty business continues to be below our initial expected loss ratios. The Specialty Admitted Insurance segment experienced $907,000 of adverse development, primarily due to adverse development in the programs business for the 2016 accident year which was partially offset by favorable development in the 2015 and prior accident years. The Company also experienced $2.1 million of adverse development for the Casualty Reinsurance segment. The development was mostly related to the 2010 and 2012 contracts with one reinsured.


19

Table of Contents
JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


The Company experienced $9.4 million of favorable reserve development in the six months ended June 30, 2016 on the reserve for losses and loss adjustment expenses held at December 31, 2015. This reserve development included $8.0 million of favorable development in the Excess and Surplus Lines segment, primarily from the 2014, 2013, and 2012 accident years. This favorable development occurred because our actuarial studies at June 30, 2016 for the Excess and Surplus Lines segment indicated that our loss experience on our casualty business continues to be below our initial expected loss ratios. Favorable development of $928,000 in the Specialty Admitted Insurance segment was primarily from the 2013, 2012, 2011 and 2010 accident years, partially offset by adverse development in the 2015 accident year. The Company also experienced $483,000 of favorable development on prior accident years for the Casualty Reinsurance segment.

6.    Other Comprehensive Income
 
The following table summarizes the components of comprehensive income:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Unrealized gains arising during the period, before U.S. income taxes
$
7,853

 
$
15,346

 
$
13,851

 
$
32,464

U.S. income taxes
(1,156
)
 
(2,147
)
 
(2,792
)
 
(3,077
)
Unrealized gains arising during the period, net of  U.S. income taxes
6,697

 
13,199

 
11,059

 
29,387

Less reclassification adjustment:
 

 
 

 
 
 
 

Net realized investment gains
(12
)
 
567

 
438

 
1,408

U.S. income tax expenses
1

 
(160
)
 
(121
)
 
(433
)
Reclassification adjustment for investment gains realized in net income
(11
)
 
407

 
317

 
975

Other comprehensive income
$
6,708

 
$
12,792

 
$
10,742

 
$
28,412

 

7.       Contingent Liabilities
 
The Company is a party to various lawsuits arising in the ordinary course of its operations. The Company believes that the ultimate resolution of these matters will not materially impact its financial position, cash flows, or results of operations.
 
The Company’s reinsurance subsidiary, JRG Re, entered into two letter of credit facilities with banks as security to third-party reinsureds on reinsurance assumed by JRG Re. JRG Re has established custodial accounts to secure these letters of credit. Under a $100.0 million facility, $85.1 million of letters of credit were issued through June 30, 2017 which were secured by deposits of $104.3 million. Under a $102.5 million facility, $45.2 million of letters of credit were issued through June 30, 2017 which were secured by deposits of $64.0 million. JRG Re has also established trust accounts to secure its obligations to selected reinsureds. The total amount deposited in the trust accounts for the benefit of third-party reinsureds was $251.4 million at June 30, 2017.

The Company is also exposed to credit risk relating to a set of insurance contracts with an insured group of companies under which the Company pays losses and loss adjustment expenses on the contract. The Company has indemnity agreements with this group of insured parties (non-insurance entities) and is contractually entitled to receive reimbursement for a significant portion of the losses and loss adjustment expenses paid on behalf of the insured parties and other expenses incurred by the Company. The insured parties are required to collateralize all amounts currently due to the Company and to provide additional collateral sufficient to cover the amounts that may be recoverable under the indemnity agreement, including among other things case loss and loss adjustment expense reserves, IBNR loss and loss adjustment expense reserves, extra contractual obligations and excess of policy limits liabilities. This collateral is currently provided through a collateral trust arrangement established in favor of the Company by a captive insurance company affiliate of the insured group. At June 30, 2017, the cash equivalent collateral held in the collateral trust arrangement was approximately $549.8 million, which exceeds the amount of claims receivable and unpaid reported losses and loss adjustment expenses outstanding. This is a rapidly growing relationship, and as such, there is ongoing exposure to estimated losses and expenses on these contracts growing at a faster pace than growth in our collateral balances. In addition, we have credit exposure if our estimates of future losses and loss adjustment expenses and other amounts recoverable, which are the basis for

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Notes to Condensed Consolidated Financial Statements (continued)


establishing collateral balances, are lower than actual amounts paid or payable. The amount of our credit exposure in any of these instances could be material. To mitigate these risks, we closely and frequently monitor our exposure compared to our collateral held, and we request additional collateral when our analysis indicates that we have uncollateralized exposure.

 
8.    Segment Information
 
The Company has four reportable segments: the Excess and Surplus Lines segment, the Specialty Admitted Insurance segment, the Casualty Reinsurance segment, and the Corporate and Other segment. Segment profit (loss) is measured by underwriting profit (loss), which is generally defined as net earned premiums less loss and loss adjustment expenses and other operating expenses of the operating segments. Fee income of the Excess and Surplus Lines segment is included in that segment’s underwriting profit. Fee income of $4.2 million and $2.7 million was included in underwriting profit for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, fee income of $8.1 million and $5.0 million, respectively, was included in underwriting profit. Segment results are reported prior to the effects of intercompany reinsurance agreements among the Company’s insurance subsidiaries.
 
The following table summarizes the Company’s segment results:
 

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JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


 
Excess and
Surplus
Lines
 
Specialty
Admitted
Insurance
 
Casualty
Reinsurance
 
Corporate
and
Other
 
Total
 
(in thousands)
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
Gross written premiums
$
138,004

 
$
76,771

 
$
66,700

 
$

 
$
281,475

Net earned premiums
117,268

 
17,760

 
49,049

 

 
184,077

Underwriting profit (loss) of insurance segments
11,729

 
553

 
(2,023
)
 

 
10,259

Net investment income
3,841

 
631

 
7,386

 
1,856

 
13,714

Interest expense

 

 

 
2,224

 
2,224

Segment revenues
125,484

 
18,435

 
56,574

 
1,901

 
202,394

Segment goodwill
181,831

 

 

 

 
181,831

Segment assets
779,428

 
369,515

 
1,268,560

 
114,550

 
2,532,053

 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 

 
 

 
 

 
 

 
 

Gross written premiums
$
97,427

 
$
34,201

 
$
39,043

 
$

 
$
170,671

Net earned premiums
70,565

 
12,207

 
35,783

 

 
118,555

Underwriting profit of insurance segments
9,783

 
125

 
206

 

 
10,114

Net investment income
5,079

 
640

 
6,936

 
(1,102
)
 
11,553

Interest expense

 

 

 
2,041

 
2,041

Segment revenues
78,940

 
13,329

 
43,304

 
(1,062
)
 
134,511

Segment goodwill
181,831

 

 

 

 
181,831

Segment assets
731,324

 
215,034

 
1,148,489

 
95,014

 
2,189,861

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
Gross written premiums
$
246,999

 
$
149,235

 
$
109,420

 
$

 
$
505,654

Net earned premiums
211,117

 
34,013

 
93,634

 

 
338,764

Underwriting profit (loss) of insurance segments
20,529

 
1,395

 
(930
)
 

 
20,994

Net investment income
7,024

 
1,267

 
14,510

 
7,646

 
30,447

Interest expense

 

 

 
4,347

 
4,347

Segment revenues
226,574

 
35,359

 
108,720

 
8,143

 
378,796

Segment goodwill
181,831

 

 

 

 
181,831

Segment assets
779,428

 
369,515

 
1,268,560

 
114,550

 
2,532,053

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 

 
 

 
 

 
 

 
 

Gross written premiums
$
179,535

 
$
62,888

 
$
61,319

 
$

 
$
303,742

Net earned premiums
136,070

 
23,612

 
76,003

 

 
235,685

Underwriting profit of insurance segments
18,987

 
600

 
540

 

 
20,127

Net investment income
8,365

 
1,251

 
13,163

 
46

 
22,825

Interest expense

 

 

 
4,215

 
4,215

Segment revenues
150,730

 
25,376

 
89,612

 
122

 
265,840

Segment goodwill
181,831

 

 

 

 
181,831

Segment assets
731,324

 
215,034

 
1,148,489

 
95,014

 
2,189,861

  
The following table reconciles the underwriting profit (loss) of the operating segments by individual segment to consolidated income before taxes:
 

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JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Underwriting profit (loss) of the insurance segments:
 

 
 

 
 

 
 

Excess and Surplus Lines
$
11,729

 
$
9,783

 
$
20,529

 
$
18,987

Specialty Admitted Insurance
553

 
125

 
1,395

 
600

Casualty Reinsurance
(2,023
)
 
206

 
(930
)
 
540

Total underwriting profit of insurance segments
10,259

 
10,114

 
20,994

 
20,127

Other operating expenses of the Corporate and Other segment
(6,095
)
 
(5,475
)
 
(12,556
)
 
(10,727
)
Underwriting profit
4,164

 
4,639

 
8,438

 
9,400

Net investment income
13,714

 
11,553

 
30,447

 
22,825

Net realized investment gains
307

 
1,619

 
1,354

 
2,166

Amortization of intangible assets
(149
)
 
(149
)
 
(298
)
 
(298
)
Other income and expenses
(257
)
 
(24
)
 
(57
)
 
52

Interest expense
(2,224
)
 
(2,041
)
 
(4,347
)
 
(4,215
)
Income before taxes
$
15,555

 
$
15,597

 
$
35,537

 
$
29,930

 
The correction of a contingent commission accrual and related commission expense increased underwriting expenses of the Casualty Reinsurance segment by $2.0 million in the three and six months ended June 30, 2017.

9.    Other Operating Expenses and Other Expenses
 
Other operating expenses consist of the following:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Amortization of policy acquisition costs
$
31,614

 
$
22,710

 
$
59,252

 
$
45,791

Other underwriting expenses of the operating segments
15,327

 
11,789

 
30,121

 
24,635

Other operating expenses of the Corporate and Other segment
6,095

 
5,475

 
12,556

 
10,727

Total
$
53,036

 
$
39,974

 
$
101,929

 
$
81,153


Other expenses of $346,000 and $232,000 for the three and six months ended June 30, 2017, respectively, were primarily legal and other professional services associated with the Company's May 2017 secondary offering. For the three and six months ended June 30, 2016, other expenses of $91,000 and $79,000, respectively, were largely comprised of filing fees and due diligence costs related to merger and acquisition activities.
 
10.    Fair Value Measurements

Three levels of inputs are used to measure fair value of financial instruments: (1) Level 1: quoted price (unadjusted) in active markets for identical assets, (2) Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument, and (3) Level 3: inputs to the valuation methodology are unobservable for the asset or liability.
 
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date.
 
To measure fair value, the Company obtains quoted market prices for its investment securities from its outside investment managers. If a quoted market price is not available, the Company uses prices of similar securities. Values for U.S. Treasury and publicly-traded equity securities are generally based on Level 1 inputs which use the market approach valuation technique. The

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Notes to Condensed Consolidated Financial Statements (continued)


values for all other fixed maturity securities (including state and municipal securities and obligations of U.S. government corporations and agencies) generally incorporate significant Level 2 inputs, and in some cases, Level 3 inputs, using the market approach and income approach valuation techniques. There have been no changes in the Company’s use of valuation techniques since December 31, 2015.
 
The Company reviews fair value prices provided by its outside investment managers for reasonableness by comparing the fair values provided by the managers to those provided by its investment custodian. The Company also reviews and monitors changes in unrealized gains and losses. The Company has not historically adjusted security prices. The Company obtains an understanding of the methods, models and inputs used by the investment managers and independent pricing services, and controls are in place to validate that prices provided represent fair values. The Company’s control process includes, but is not limited to, initial and ongoing evaluation of the methodologies used, a review of specific securities and an assessment for proper classification within the fair value hierarchy, and obtaining and reviewing internal control reports for our investment manager that obtains fair values from independent pricing services.
 

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JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


Assets measured at fair value on a recurring basis as of June 30, 2017 are summarized below:
 
 
Fair Value Measurements Using