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 September 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 November 1, 2017: 29,607,305

 




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)
September 30,
2017
 
December 31,
2016
 
(in thousands)
Assets
 

 
 

Invested assets:
 

 
 

Fixed maturity securities:
 

 
 

Available-for-sale, at fair value (amortized cost:  2017 – $1,006,715; 2016 – $940,212)
$
1,016,818

 
$
941,077

Trading, at fair value (amortized cost:  2017 – $3,802; 2016 – $5,052)
3,812

 
5,063

Equity securities available-for-sale, at fair value (cost:  2017 – $72,102; 2016 – $74,553)
78,705

 
76,401

Bank loan participations held-for-investment, at amortized cost, net of allowance
245,741

 
203,526

Short-term investments
42,331

 
50,844

Other invested assets
66,205

 
55,419

Total invested assets
1,453,612

 
1,332,330

 
 
 
 
Cash and cash equivalents
106,500

 
109,784

Accrued investment income
8,062

 
7,246

Premiums receivable and agents’ balances, net
390,534

 
265,315

Reinsurance recoverable on unpaid losses
283,949

 
182,737

Reinsurance recoverable on paid losses
14,221

 
2,877

Prepaid reinsurance premiums
87,087

 
90,147

Deferred policy acquisition costs
84,530

 
64,789

Intangible assets, net
38,484

 
38,931

Goodwill
181,831

 
181,831

Other assets
72,842

 
70,546

Total assets
$
2,721,652

 
$
2,346,533

 
See accompanying notes.
 


5

Table of Contents
 

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

 
 

Liabilities:
 

 
 

Reserve for losses and loss adjustment expenses
$
1,187,248

 
$
943,865

Unearned premiums
469,214

 
390,563

Payables to reinsurers
47,013

 
39,899

Senior debt
88,300

 
88,300

Junior subordinated debt
104,055

 
104,055

Accrued expenses
40,276

 
36,884

Other liabilities
64,577

 
49,746

Total liabilities
2,000,683

 
1,653,312

Commitments and contingent liabilities


 


Shareholders’ equity:
 

 
 

Common Shares – 2017 and 2016: $0.0002 par value; 200,000,000 shares authorized; 29,582,656 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
636,474

 
636,856

Retained earnings
71,904

 
55,232

Accumulated other comprehensive income
12,585

 
1,127

Total shareholders’ equity
720,969

 
693,221

Total liabilities and shareholders’ equity
$
2,721,652

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except share amounts)
Revenues
 

 
 

 
 

 
 

Gross written premiums
$
338,351

 
$
260,166

 
$
844,005

 
$
563,908

Ceded written premiums
(81,587
)
 
(55,025
)
 
(221,507
)
 
(118,808
)
Net written premiums
256,764

 
205,141

 
622,498

 
445,100

Change in net unearned premiums
(54,648
)
 
(71,992
)
 
(81,618
)
 
(76,266
)
Net earned premiums
202,116

 
133,149

 
540,880

 
368,834

Net investment income
14,880

 
15,797

 
45,327

 
38,622

Net realized investment (losses) gains
(171
)
 
210

 
1,183

 
2,376

Other income
4,041

 
2,209

 
12,272

 
7,373

Total revenues
220,866

 
151,365

 
599,662

 
417,205

Expenses
 

 
 

 
 

 
 
Losses and loss adjustment expenses
150,445

 
83,326

 
386,898

 
233,491

Other operating expenses
54,260

 
43,579

 
156,189

 
124,732

Other expenses
119

 
(43
)
 
351

 
36

Interest expense
2,304

 
2,079

 
6,651

 
6,294

Amortization of intangible assets
149

 
149

 
447

 
447

Total expenses
207,277

 
129,090

 
550,536

 
365,000

Income before taxes
13,589

 
22,275

 
49,126

 
52,205

Income tax expense
3,238

 
909

 
5,784

 
3,406

Net income
10,351

 
21,366

 
43,342

 
48,799

Other comprehensive income:
 

 
 

 
 

 
 
Net unrealized gains (losses), net of taxes of $(136) and $2,535 in 2017 and $(373) and $2,271 in 2016
716

 
(1,672
)
 
11,458

 
26,740

Total comprehensive income
$
11,067

 
$
19,694

 
$
54,800

 
$
75,539

Per share data:
 

 
 

 
 

 
 
Basic earnings per share
$
0.35

 
$
0.73

 
$
1.47

 
$
1.68

Diluted earnings per share
$
0.34

 
$
0.71

 
$
1.43

 
$
1.64

Dividend declared per share
$
0.30

 
$
0.20

 
$
0.90

 
$
0.60

Weighted-average common shares outstanding:
 

 
 

 
 

 
 
Basic
29,524,243

 
29,101,550

 
29,407,762

 
29,030,284

Diluted
30,220,077

 
29,935,152

 
30,285,733

 
29,834,686

 
See accompanying notes.
 

 

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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

 

 

 
48,799

 

 
48,799

Other comprehensive income

 

 

 

 
26,740

 
26,740

Dividends

 

 

 
(17,604
)
 

 
(17,604
)
Exercise of stock options and related excess tax benefits
174,949

 

 
2,585

 

 

 
2,585

Compensation expense under stock incentive plans

 

 
4,207

 

 

 
4,207

Balances at September 30, 2016
29,116,496

 
$
6

 
$
637,612

 
$
78,221

 
$
29,926

 
$
745,765

Balances at December 31, 2016
29,257,566

 
$
6

 
$
636,856

 
$
55,232

 
$
1,127

 
$
693,221

Net income

 

 

 
43,342

 

 
43,342

Other comprehensive income

 

 

 

 
11,458

 
11,458

Dividends

 

 

 
(26,670
)
 

 
(26,670
)
Exercise of stock options
300,168

 

 
(5,093
)
 

 

 
(5,093
)
Vesting of restricted share units
24,922

 

 
(627
)
 

 

 
(627
)
Compensation expense under stock incentive plans

 

 
5,338

 

 

 
5,338

Balances at September 30, 2017
29,582,656

 
$
6

 
$
636,474

 
$
71,904

 
$
12,585

 
$
720,969

 
See accompanying notes.
 

8

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



 
Nine Months Ended September 30,
 
2017
 
2016
 
(in thousands)
Operating activities
 

 
 

Net cash provided by operating activities
$
121,001

 
$
83,916

Investing activities
 

 
 

Securities available-for-sale:
 

 
 

Purchases – fixed maturity securities
(174,635
)
 
(233,753
)
Sales – fixed maturity securities
58,678

 
62,006

Maturities and calls – fixed maturity securities
48,172

 
106,687

Purchases – equity securities

 
(3,680
)
Sales – equity securities
2,748

 
4,811

Bank loan participations:
 

 
 

Purchases
(192,624
)
 
(86,074
)
Sales
105,747

 
21,743

Maturities
47,157

 
45,861

Other invested assets:
 

 
 

Purchases
(6,322
)
 
(1,990
)
Return of capital

 
717

Maturities and repayments

 
6,500

Short-term investments, net
8,513

 
(3,986
)
Securities receivable or payable, net
12,682

 
705

Purchases of property and equipment
(2,118
)
 
(2,142
)
Net cash used in investing activities
(92,002
)
 
(82,595
)
Financing activities
 

 
 

Dividends paid
(26,596
)
 
(17,428
)
Issuance of common shares under equity incentive plans
1,548

 
2,134

Common share repurchases
(6,613
)
 
(716
)
Repayments of financing obligations net of proceeds
(622
)
 
(844
)
Net cash used in financing activities
(32,283
)
 
(16,854
)
Change in cash and cash equivalents
(3,284
)
 
(15,533
)
Cash and cash equivalents at beginning of period
109,784

 
106,406

Cash and cash equivalents at end of period
$
106,500

 
$
90,873

Supplemental information
 

 
 

Interest paid
$
6,626

 
$
6,011

 
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, primarily 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 $31.3 million and $27.1 million as of September 30, 2017 and December 31, 2016, respectively, representing the Company’s maximum exposure to loss.
 
Income Tax Expense
 
Our effective tax rate fluctuates from period to period based on the relative mix of income reported by country and the respective tax rates imposed by each tax jurisdiction. For the three months ended September 30, 2017 and 2016, our U.S. federal income tax expense was 23.8% and 4.1% of income before taxes, respectively (11.8% and 6.5% for the nine months ended September 30, 2017 and 2016, respectively). The catastrophe losses this quarter reduced underwriting income in both the Excess and Surplus Lines and the Casualty Reinsurance segments and this caused a higher proportion of the Group's income to be taxed at a higher rate applicable to earnings in the United States. For U.S.-sourced income, the Company’s U.S. federal income tax expense differs from the amounts computed by applying the federal statutory income tax rate to income before taxes due primarily to interest income on tax-advantaged state and municipal securities (state and municipal securities represent 12.2%and 10.0% of our available-for-sale securities at September 30, 2017 and 2016, respectively), dividends received income, and excess tax benefits on share based compensation.

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 nine months ended September 30, 2016, net cash provided by operating activities increased by $1.2 million and net cash used in financing activities increased by $1.2 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 completing it evaluation of ASU 2014-09 to determine what, if any, 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 its disclosures and internal controls. The Company does not believe adoption will have a material impact on its consolidated financial

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


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. Adoption of this ASU is not expected to have a material impact on the Company's financial position, cash flows, or total comprehensive income, but will have an impact on the Company's results of operations, as changes in fair value of equity instruments will be presented in net income rather than other comprehensive income.
 
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 the 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 does not expect that the adoption of this ASU will have a material impact on its statement of cash flows.


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


2.    Investments

The Company’s available-for-sale investments are summarized as follows:
 
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in thousands)
September 30, 2017
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

State and municipal
$
129,786

 
$
5,608

 
$
(416
)
 
$
134,978

Residential mortgage-backed
140,053

 
946

 
(1,942
)
 
139,057

Corporate
415,817

 
7,490

 
(1,901
)
 
421,406

Commercial mortgage and asset-backed
176,952

 
984

 
(489
)
 
177,447

Obligations of U.S. government corporations and agencies
62,435

 
37

 
(97
)
 
62,375

U.S. Treasury securities and obligations guaranteed by the U.S. government
79,647

 
77

 
(244
)
 
79,480

Redeemable preferred stock
2,025

 
50

 

 
2,075

Total fixed maturity securities
1,006,715


15,192


(5,089
)

1,016,818

Equity securities
72,102

 
8,116

 
(1,513
)
 
78,705

Total investments available-for-sale
$
1,078,817


$
23,308


$
(6,602
)

$
1,095,523

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 September 30, 2017 are summarized, by contractual maturity, as follows:
 
 
Cost or
Amortized
Cost
 
Fair
Value
 
(in thousands)
One year or less
$
117,434

 
$
117,483

After one year through five years
253,240

 
255,514

After five years through ten years
192,269

 
193,760

After ten years
124,742

 
131,482

Residential mortgage-backed
140,053

 
139,057

Commercial mortgage and asset-backed
176,952

 
177,447

Redeemable preferred stock
2,025

 
2,075

Total
$
1,006,715

 
$
1,016,818

  

13

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


Actual maturities may differ for some securities because borrowers have the right to call or prepay obligations with or without penalties.
 
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)
September 30, 2017
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

State and municipal
$
27,813

 
$
(220
)
 
$
5,371

 
$
(196
)
 
$
33,184

 
$
(416
)
Residential mortgage-backed
81,667

 
(882
)
 
30,486

 
(1,060
)
 
112,153

 
(1,942
)
Corporate
106,427

 
(998
)
 
31,522

 
(903
)
 
137,949

 
(1,901
)
Commercial mortgage and asset-backed
46,526

 
(288
)
 
11,861

 
(201
)
 
58,387

 
(489
)
Obligations of U.S. government corporations and agencies
52,157

 
(97
)
 

 

 
52,157

 
(97
)
U.S. Treasury securities and obligations guaranteed by the U.S. government
60,192

 
(243
)
 
2,223

 
(1
)
 
62,415

 
(244
)
Total fixed maturity securities
374,782


(2,728
)

81,463


(2,361
)

456,245


(5,089
)
Equity securities
3,913

 
(68
)
 
8,847

 
(1,445
)
 
12,760

 
(1,513
)
Total investments available-for-sale
$
378,695


$
(2,796
)

$
90,310


$
(3,806
)

$
469,005


$
(6,602
)
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 146 issuers that were in an unrealized loss position at September 30, 2017 with a total fair value of $469.0 million and gross unrealized losses of $6.6 million. None of the fixed maturity securities with unrealized losses has ever missed, or been delinquent on, a scheduled principal or interest payment.
 
At September 30, 2017, 99.1% 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 September 30, 2017 had an aggregate fair value of $9.0 million and an aggregate net unrealized gain of $248,000.
 
Management concluded that none of the fixed maturity securities with an unrealized loss at September 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 September 30, 2017 or December 31, 2016 experienced an other-than-temporary impairment.

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


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.
 
At September 30, 2017, the Company held a participation in a loan with unpaid principal of $807,000 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. 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. The recent devastation caused by Hurricane Maria on the island of Puerto Rico raises additional doubt about PREPA's ability to make payments to the issuer. The loan was scheduled to mature in November 2017, but the issuer has proposed deferring payment until March 2018. Based on this deferral request and the uncertainty regarding repayment, management has concluded that an allowance for credit losses should be established on the loan to reduce its carrying value to $0 at September 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 September 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 $1.9 million. All of the loans were current at September 30, 2017. Management concluded that two of these loans were impaired as of September 30, 2017. At September 30, 2017, the two impaired loans had a carrying value of $1.9 million, unpaid principal of $2.5 million and an allowance for credit losses of $490,000. 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 September 30, 2017. The loan has a carrying value of $499,000, unpaid principal of $708,000, and an allowance for credit losses of $209,000. 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 $1.5 million at September 30, 2017 on impaired loans from four issuers with a total carrying value of $2.4 million and unpaid principal of $4.0 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 $2.0 million at September 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 September 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

15

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


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.
 
The average recorded investment in impaired bank loans was $4.5 million and $8.0 million during the nine months ended September 30, 2017 and 2016, respectively. Investment income of $231,000 and $237,000, respectively, was recognized during the time within those periods that the loans were impaired. The Company recorded net realized investment losses of $729,000 and $594,000 in the three months and nine months ended September 30, 2017, respectively, for changes in the fair value of impaired bank loans. For the three months and nine months ended September 30, 2016, the Company recorded net realized investment losses of $663,000 and $53,000, 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 ended September 30, 2017 includes $2,000 of net trading losses, all relating to securities still held at September 30, 2017. Trading gains or losses included in net investment income in the nine months ended September 30, 2017 were $0.
 
The Company’s realized gains and losses are summarized as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Fixed maturity securities:
 

 
 

 
 

 
 

Gross realized gains
$
378

 
$
70

 
$
734

 
$
1,479

Gross realized losses
(4
)
 

 
(331
)
 
(2
)
 
374


70


403


1,477

Bank loan participations:
 

 
 

 
 

 
 

Gross realized gains
341

 
273

 
1,948

 
1,466

Gross realized losses
(839
)
 
(1,308
)
 
(1,528
)
 
(1,741
)
 
(498
)

(1,035
)

420


(275
)
Equity securities:
 

 
 

 
 

 
 

Gross realized gains

 
1,174

 
409

 
1,174

Gross realized losses
(45
)
 

 
(45
)
 

 
(45
)

1,174


364


1,174

Short-term investments and other:
 

 
 

 
 

 
 

Gross realized gains
1

 
2

 
1

 
3

Gross realized losses
(3
)
 
(1
)
 
(5
)
 
(3
)
 
(2
)

1


(4
)


Total
$
(171
)

$
210


$
1,183


$
2,376

  
Realized investment gains or losses are determined on a specific identification basis.
 













16

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


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
 
 
 
 
 
September 30,
 
December 31,
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Renewable energy LLCs (a)
$
31,264

 
$
27,067

 
$
1,516

 
$
2,745

 
$
8,631

 
$
1,976

Renewable energy notes receivable (b)
5,688

 

 
238

 

 
287

 
450

Limited partnerships (c)
24,753

 
23,852

 
477

 
1,948

 
1,562

 
3,784

Bank holding companies (d)
4,500

 
4,500

 
85

 
86

 
257

 
257

Total other invested assets
$
66,205


$
55,419


$
2,316


$
4,779


$
10,737


$
6,467

 
(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 $4.4 million and $2.4 million in the nine months ended September 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 $238,000 and $287,000 for the three and nine months ended September 30, 2017, respectively. 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 $450,000 in the nine months ended September 30, 2016. 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 $2.9 million at September 30, 2017. The Company recognized investment income of $246,000 and $178,000 on the investment for the nine months ended September 30, 2017 and 2016, respectively. The Company’s Excess and Surplus Lines segment holds investments in limited partnerships of $21.9 million at September 30, 2017. Investment income of $1.3 million and $3.6 million was recognized on the investments for the nine months ended September 30, 2017 and 2016, respectively. At September 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 $257,000 in both nine months ended September 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 September 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 September 30, 2017, is classified as an available-for-sale fixed maturity.
 

17

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


Realized investments gains of $409,000 were recognized in the nine months ended September 30, 2017 related to the sale of common shares of the bank holding company. Income of $266,000 was recognized on the shares for the nine months ended September 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 $2,000 and $3,000 was recognized on this investment for the nine months ended September 30, 2017 and 2016, respectively.

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 September 30, 2017 and December 31, 2016.
 
The gross carrying amounts and accumulated amortization for each major specifically identifiable intangible asset class were as follows: 
 
 
 
September 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

 
4,491

 
11,611

 
4,044

Identifiable intangible assets subject to amortization
 
 
11,611

 
4,491

 
11,611

 
4,044

 
 
 
$
42,975

 
$
4,491

 
$
42,975

 
$
4,044

 

18

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


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
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except share and per share amounts)
Net income to shareholders
$
10,351

 
$
21,366

 
$
43,342

 
$
48,799

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
29,524,243

 
29,101,550

 
29,407,762

 
29,030,284

Common share equivalents
695,834

 
833,602

 
877,971

 
804,402

Diluted
30,220,077

 
29,935,152

 
30,285,733

 
29,834,686

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.35

 
$
0.73

 
$
1.47

 
$
1.68

Common share equivalents
(0.01
)
 
(0.02
)
 
(0.04
)
 
(0.04
)
Diluted
$
0.34

 
$
0.71

 
$
1.43

 
$
1.64


 
Common share equivalents relate to stock options and restricted share units (“RSU’s”). For the three and nine months ended September 30, 2017, common share equivalents of 203,758 and 168,167 shares, respectively, were excluded from the calculations of diluted earnings per share as their effects were anti-dilutive. For the three and nine months ended September 30, 2016, all common share equivalents were dilutive.


19

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


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:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Reserve for losses and loss adjustment expenses net of reinsurance recoverables at beginning of period
$
839,508

 
$
689,631

 
$
761,128

 
$
653,534

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

 
 

 
 

 
 

Current year
158,009

 
88,659

 
396,161

 
248,239

Prior years
(7,564
)
 
(5,333
)
 
(9,263
)
 
(14,748
)
Total incurred losses and loss and adjustment expenses
150,445

 
83,326

 
386,898

 
233,491

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

 
 

 
 
 
 

Current year
21,305

 
10,734

 
38,911

 
21,624

Prior years
65,349

 
43,847

 
205,816

 
147,025

Total loss and loss adjustment expense payments
86,654

 
54,581

 
244,727

 
168,649

Reserve for losses and loss adjustment expenses net of reinsurance recoverables at end of period
903,299

 
718,376

 
903,299

 
718,376

Add: Reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period
283,949

 
156,286

 
283,949

 
156,286

Reserve for losses and loss adjustment expenses gross of reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period
$
1,187,248

 
$
874,662

 
$
1,187,248

 
$
874,662

  
The Company experienced $7.6 million of favorable reserve development in the three months ended September 30, 2017 on the reserve for losses and loss adjustment expenses held at December 31, 2016. This reserve development included $5.1 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 2016 accident year. This favorable development occurred because our actuarial studies at September 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 $3.0 million of favorable development, primarily due to favorable development in the workers' compensation business for the 2015 and 2014 accident years. The Company also experienced $581,000 of adverse development for the Casualty Reinsurance segment. The development was primarily related to the 2011 and 2013 contracts with one reinsured.

The Company experienced $5.3 million of favorable reserve development in the three months ended September 30, 2016 on the reserve for losses and loss adjustment expenses held at December 31, 2015. This reserve development included $5.8 million of favorable development in the Excess and Surplus Lines segment, primarily from the 2013, 2014, and 2015 accident years. This favorable development occurred because our actuarial studies at September 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. The Company also experienced $1.6 million of favorable development in the Specialty Admitted Insurance segment primarily from the 2013, 2014 and 2015 accident years. The Casualty Reinsurance segment experienced $2.0 million of adverse development on prior accident years primarily from two contracts from 2012 and 2013 underwriting years that had higher than expected reported losses in the quarter.

The Company experienced $9.3 million of favorable reserve development in the nine months ended September 30, 2017 on the reserve for losses and loss adjustment expenses held at December 31, 2016. This reserve development included $9.8 million of favorable development in the Excess and Surplus Lines segment, primarily from the 2014 through 2016 accident years. This favorable development occurred because our actuarial studies at September 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

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


Admitted Insurance segment experienced $2.1 million of favorable development, primarily due to favorable development in the workers' compensation business for the 2016, 2015, and 2014 accident years which was partially offset by adverse development in programs for the 2016 accident year. The Company also experienced $2.6 million of adverse development for the Casualty Reinsurance segment. The development was mostly related to the 2011 through 2013 contracts with one reinsured.

The Company experienced $14.7 million of favorable reserve development in the nine months ended September 30, 2016 on the reserve for losses and loss adjustment expenses held at December 31, 2015. This reserve development included $13.8 million of favorable development in the Excess and Surplus Lines segment, primarily from the 2013, 2014, and 2015 accident years. This favorable development occurred because our actuarial studies at September 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. The Company also experienced favorable development of $2.5 million in the Specialty Admitted Insurance segment primarily from accident years 2010 through 2014. The Casualty Reinsurance segment experienced $1.5 million of adverse reserve development on prior accident years primarily from two contracts from the 2012 and 2013 years that had higher than expected reported losses in 2016.

6.    Other Comprehensive Income
 
The following table summarizes the components of other comprehensive income:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Unrealized gains (losses) arising during the period, before U.S. income taxes
$
909

 
$
(802
)
 
$
14,760

 
$
31,662

U.S. income taxes
21

 
(38
)
 
(2,771
)
 
(3,115
)
Unrealized gains (losses) arising during the period, net of  U.S. income taxes
930

 
(840
)
 
11,989

 
28,547

Less reclassification adjustment:
 

 
 

 
 
 
 

Net realized investment gains
329

 
1,243

 
767

 
2,651

U.S. income tax expenses
(115
)
 
(411
)
 
(236
)
 
(844
)
Reclassification adjustment for investment gains realized in net income
214

 
832

 
531

 
1,807

Other comprehensive income (loss)
$
716

 
$
(1,672
)
 
$
11,458

 
$
26,740

 

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, has entered into 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, $85.6 million of letters of credit were issued through September 30, 2017 which were secured by deposits of $95.8 million. Under a $102.5 million facility, $47.6 million of letters of credit were issued through September 30, 2017 which were secured by deposits of $61.6 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 $269.8 million at September 30, 2017.

On August 2, 2017, the Company, and its wholly-owned subsidiary, JRG Re, together as borrowers, entered into a credit agreement that provides the Company with a revolving line of credit of up to $100.0 million, which may be used for loans and letters of credit made or issued, at the borrowers' option, on a secured or unsecured basis. At September 30, 2017, there were no loans or letters of credit outstanding on the facility.



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


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 September 30, 2017, the cash equivalent collateral held in the collateral trust arrangement was approximately $670.1 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 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 $3.9 million and $2.1 million was included in underwriting profit for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, fee income of $12.0 million and $7.2 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 September 30, 2017
 
 
 
 
 
 
 
 
 
Gross written premiums
$
140,425

 
$
84,838

 
$
113,088

 
$

 
$
338,351

Net earned premiums
123,606

 
19,324

 
59,186

 

 
202,116

Underwriting profit (loss) of insurance segments
9,946

 
851

 
(2,933
)
 

 
7,864

Net investment income
3,727

 
626

 
8,590

 
1,937

 
14,880

Interest expense

 

 

 
2,304

 
2,304

Segment revenues
131,033

 
19,992

 
67,860

 
1,981

 
220,866

Segment goodwill
181,831

 

 

 

 
181,831

Segment assets
821,668

 
405,209

 
1,372,234

 
122,541

 
2,721,652

 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 

 
 

 
 

 
 

 
 

Gross written premiums
$
99,882

 
$
56,119

 
$
104,165

 
$

 
$
260,166

Net earned premiums
81,672

 
13,204

 
38,273

 

 
133,149

Underwriting profit of insurance segments
12,408

 
702

 
133

 

 
13,243

Net investment income
5,236

 
647

 
7,085

 
2,829

 
15,797

Interest expense

 

 

 
2,079

 
2,079

Segment revenues
88,671

 
13,890

 
44,808

 
3,996

 
151,365

Segment goodwill
181,831

 

 

 

 
181,831

Segment assets
728,231

 
261,063

 
1,258,522

 
100,095

 
2,347,911

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
Gross written premiums
$
387,424

 
$
234,073

 
$
222,508

 
$

 
$
844,005

Net earned premiums
334,723

 
53,337

 
152,820

 

 
540,880

Underwriting profit (loss) of insurance segments
30,475

 
2,246

 
(3,863
)
 

 
28,858

Net investment income
10,751

 
1,893

 
23,100

 
9,583

 
45,327

Interest expense

 

 

 
6,651

 
6,651

Segment revenues
357,607

 
55,351

 
176,580

 
10,124

 
599,662

Segment goodwill
181,831

 

 

 

 
181,831

Segment assets
821,668

 
405,209

 
1,372,234

 
122,541

 
2,721,652

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 

 
 

 
 

 
 

 
 

Gross written premiums
$
279,417

 
$
119,007

 
$
165,484

 
$

 
$
563,908

Net earned premiums
217,742

 
36,816

 
114,276

 

 
368,834

Underwriting profit of insurance segments
31,395

 
1,302

 
673

 

 
33,370

Net investment income
13,601

 
1,898

 
20,248

 
2,875

 
38,622

Interest expense

 

 

 
6,294

 
6,294

Segment revenues
239,401

 
39,266

 
134,420

 
4,118

 
417,205

Segment goodwill
181,831

 

 

 

 
181,831

Segment assets
728,231

 
261,063

 
1,258,522

 
100,095

 
2,347,911

  
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
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Underwriting profit (loss) of the insurance segments:
 

 
 

 
 

 
 

Excess and Surplus Lines
$
9,946

 
$
12,408

 
$
30,475

 
$
31,395

Specialty Admitted Insurance
851

 
702

 
2,246

 
1,302

Casualty Reinsurance
(2,933
)
 
133

 
(3,863
)
 
673

Total underwriting profit of insurance segments
7,864

 
13,243

 
28,858

 
33,370

Other operating expenses of the Corporate and Other segment
(6,507
)
 
(4,870
)
 
(19,063
)
 
(15,597
)
Underwriting profit
1,357

 
8,373

 
9,795

 
17,773

Net investment income
14,880

 
15,797

 
45,327

 
38,622

Net realized investment (losses) gains
(171
)
 
210

 
1,183

 
2,376

Amortization of intangible assets
(149
)
 
(149
)
 
(447
)
 
(447
)
Other income and expenses
(24
)
 
123

 
(81
)
 
175

Interest expense
(2,304
)
 
(2,079
)
 
(6,651
)
 
(6,294
)
Income before taxes
$
13,589

 
$
22,275

 
$
49,126

 
$
52,205

 
Underwriting profit (loss) for the three and nine months ended September 30, 2017 reflects $10.0 million of catastrophe losses from Hurricanes Harvey, Irma, and Maria. The Excess and Surplus Lines segment includes $7.3 million of such losses primarily related to property losses in Florida. The Casualty Reinsurance segment includes $2.7 million of losses primarily related to nonstandard auto losses in Texas.

The correction of a contingent commission accrual and related commission expense increased underwriting expenses of the Casualty Reinsurance segment by $0 and $2.0 million in the three and nine months ended September 30, 2017, respectively. In addition, the correction of an expense reimbursement accrual for the Excess and Surplus Lines segment reduced underwriting expenses by $1.3 million and $0 for the three and nine months ended September 30, 2017, respectively. There was also a third quarter adjustment to increase the investment income of the Casualty Reinsurance segment by $480,000 for the three months ended September 30, 2017. Investment income for the Casualty Reinsurance segment had been understated for the three months ended June 30, 2017.

9.    Other Operating Expenses and Other Expenses
 
Other operating expenses consist of the following:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Amortization of policy acquisition costs
$
35,311

 
$
24,761

 
$
94,563

 
$
70,552

Other underwriting expenses of the operating segments
12,442

 
13,948

 
42,563

 
38,583

Other operating expenses of the Corporate and Other segment
6,507

 
4,870

 
19,063

 
15,597

</