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, 2018
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 x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging Growth Company o
 
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.  ¨

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 1, 2018: 29,928,137

 



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 may be identified by the fact that they do not relate strictly to historical or current facts. You may identify forward-looking statements in this Quarterly Report by the use of words such as “anticipates,” “estimates,” “expects,” “intends,” “plans”, “seeks” 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 factors, 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 resulting in the sale of fewer policies than expected or an increase in the frequency or severity of claims, or both;
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;
changes in laws or government regulation, including tax or insurance law and regulations;
the recently enacted Public Law No. 115-97, informally titled the Tax Cuts and Jobs Act, may have a significant effect on us including, among other things, by potentially increasing our tax rate, as well as on our shareholders;
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;
a failure of any of the loss limitations or exclusions we utilize to shield us from unanticipated financial losses or legal exposures, or other liabilities;
losses from catastrophic events which substantially exceed our expectations and/or exceed the amount of reinsurance we have purchased to protect us from such events;
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;
our ability to obtain reinsurance coverage at prices and on terms that allow us to transfer risk and adequately protect our company against financial loss;
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;

3


failure to maintain effective internal controls in accordance with Sarbanes-Oxley Act of 2002, as amended (“Sarbanes-Oxley”); and​​
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 1, 2018.

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,
2018
 
December 31,
2017
 
(in thousands)
Assets
 

 
 

Invested assets:
 

 
 

Fixed maturity securities:
 

 
 

Available-for-sale, at fair value (amortized cost:  2018 – $1,039,778; 2017 – $1,008,662)
$
1,021,387

 
$
1,016,098

Trading, at fair value (amortized cost:  2018 – $0; 2017 – $3,801)

 
3,808

Equity securities available-for-sale, at fair value (cost:  2018 – $77,995; 2017 – $75,318)
84,009

 
82,522

Bank loan participations held-for-investment, at amortized cost, net of allowance
253,689

 
238,214

Short-term investments
25,140

 
36,804

Other invested assets
76,813

 
70,208

Total invested assets
1,461,038

 
1,447,654

 
 
 
 
Cash and cash equivalents
267,367

 
163,495

Accrued investment income
9,502

 
8,381

Premiums receivable and agents’ balances, net
341,391

 
352,436

Reinsurance recoverable on unpaid losses
375,535

 
302,524

Reinsurance recoverable on paid losses
13,365

 
11,292

Prepaid reinsurance premiums
101,182

 
91,979

Deferred policy acquisition costs
65,462

 
72,365

Intangible assets, net
38,036

 
38,334

Goodwill
181,831

 
181,831

Other assets
82,667

 
86,404

Total assets
$
2,937,376

 
$
2,756,695

 
See accompanying notes.
 


5

Table of Contents
 

JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets (continued)
  
 
(Unaudited)
June 30,
2018
 
December 31,
2017
 
(in thousands, except share amounts)
Liabilities and Shareholders’ Equity
 

 
 

Liabilities:
 

 
 

Reserve for losses and loss adjustment expenses
$
1,468,353

 
$
1,292,349

Unearned premiums
417,771

 
418,114

Payables to reinsurers
69,812

 
56,268

Senior debt
98,300

 
98,300

Junior subordinated debt
104,055

 
104,055

Accrued expenses
40,342

 
39,295

Other liabilities
49,500

 
53,615

Total liabilities
2,248,133

 
2,061,996

Commitments and contingent liabilities


 


Shareholders’ equity:
 

 
 

Common Shares – 2018 and 2017: $0.0002 par value; 200,000,000 shares authorized; 29,917,821 and 29,696,682 shares issued and outstanding, respectively
6

 
6

Preferred Shares – 2018 and 2017: $0.00125 par value; 20,000,000 shares authorized; no shares issued and outstanding

 

Additional paid-in capital
641,290

 
636,149

Retained earnings
66,677

 
48,198

Accumulated other comprehensive (loss) income
(18,730
)
 
10,346

Total shareholders’ equity
689,243

 
694,699

Total liabilities and shareholders’ equity
$
2,937,376

 
$
2,756,695

 
See accompanying notes.


6

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


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands, except share amounts)
Revenues
 

 
 

 
 

 
 

Gross written premiums
$
293,378

 
$
281,475

 
$
591,494

 
$
505,654

Ceded written premiums
(104,772
)
 
(73,651
)
 
(191,910
)
 
(139,920
)
Net written premiums
188,606

 
207,824

 
399,584

 
365,734

Change in net unearned premiums
19,604

 
(23,747
)
 
9,568

 
(26,970
)
Net earned premiums
208,210

 
184,077

 
409,152

 
338,764

Net investment income
16,135

 
13,714

 
29,391

 
30,447

Net realized and unrealized (losses) gains on investments
(64
)
 
307

 
(874
)
 
1,354

Other income
3,760

 
4,296

 
8,716

 
8,231

Total revenues
228,041

 
202,394

 
446,385

 
378,796

Expenses
 

 
 

 
 

 
 
Losses and loss adjustment expenses
154,595

 
131,084

 
298,367

 
236,453

Other operating expenses
51,751

 
53,036

 
106,534

 
101,929

Other expenses
93

 
346

 
97

 
232

Interest expense
2,946

 
2,224

 
5,468

 
4,347

Amortization of intangible assets
149

 
149

 
298

 
298

Total expenses
209,534

 
186,839

 
410,764

 
343,259

Income before taxes
18,507

 
15,555

 
35,621

 
35,537

Income tax expense
1,523

 
1,014

 
3,004

 
2,546

Net income
16,984

 
14,541

 
32,617

 
32,991

Other comprehensive (loss) income:
 

 
 

 
 

 
 
Net unrealized (losses) gains, net of taxes of $(183) and $(727) in 2018 and $1,157 and $2,671 in 2017
(6,558
)
 
6,708

 
(25,105
)
 
10,742

Total comprehensive income
$
10,426

 
$
21,249

 
$
7,512

 
$
43,733

Per share data:
 

 
 

 
 

 
 
Basic earnings per share
$
0.57

 
$
0.49

 
$
1.09

 
$
1.12

Diluted earnings per share
$
0.56

 
$
0.48

 
$
1.08

 
$
1.09

Dividend declared per share
$
0.30

 
$
0.30

 
$
0.60

 
$
0.60

Weighted-average common shares outstanding:
 

 
 

 
 

 
 
Basic
29,882,988

 
29,406,877

 
29,823,982

 
29,348,557

Diluted
30,293,933

 
30,307,099

 
30,243,946

 
30,317,585

 
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, 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 RSUs
24,922

 

 
(627
)
 

 

 
(627
)
Compensation expense under share incentive plans

 

 
3,578

 

 

 
3,578

Balances at June 30, 2017
29,467,647

 
$
6

 
$
637,349

 
$
70,495

 
$
11,869

 
$
719,719

Balances at December 31, 2017
29,696,682

 
$
6

 
$
636,149

 
$
48,198

 
$
10,346

 
$
694,699

Net income

 

 

 
32,617

 

 
32,617

Other comprehensive loss

 

 

 

 
(25,105
)
 
(25,105
)
Dividends

 

 

 
(18,109
)
 

 
(18,109
)
Exercise of stock options
177,835

 

 
2,803

 

 

 
2,803

Vesting of RSUs
43,304

 

 
(777
)
 

 

 
(777
)
Compensation expense under share incentive plans

 

 
3,115

 

 

 
3,115

Cumulative effect of adoption of ASU No. 2016-01, net of taxes


 

 

 
4,682

 
(4,682
)
 

Cumulative effect of adoption of ASU No. 2018-02


 

 

 
(711
)
 
711

 

Balances at June 30, 2018
29,917,821

 
$
6

 
$
641,290

 
$
66,677

 
$
(18,730
)
 
$
689,243

 
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,
 
2018
 
2017
 
(in thousands)
Operating activities
 

 
 

Net cash provided by operating activities
$
164,086

 
$
65,326

Investing activities
 

 
 

Securities available-for-sale:
 

 
 

Purchases – fixed maturity securities
(178,600
)
 
(196,208
)
Sales – fixed maturity securities
65,275

 
33,723

Maturities and calls – fixed maturity securities
81,138

 
128,640

Purchases – equity securities
(5,949
)
 

Sales – equity securities
3,179

 
409

Bank loan participations:
 

 
 

Purchases
(121,285
)
 
(144,172
)
Sales
77,933

 
79,959

Maturities
28,053

 
28,638

Other invested assets:
 

 
 

Purchases
(6,993
)
 
(6,322
)
Return of capital
308

 

Short-term investments, net
11,664

 
9,496

Securities receivable or payable, net
2,015

 
1,205

Purchases of property and equipment
(470
)
 
(1,426
)
Net cash used in investing activities
(43,732
)
 
(66,058
)
Financing activities
 

 
 

Dividends paid
(18,042
)
 
(17,729
)
Issuance of common shares under equity incentive plans
3,900

 
868

Common share repurchases
(1,874
)
 
(3,953
)
Other financing activities
(466
)
 
(467
)
Net cash used in financing activities
(16,482
)
 
(21,281
)
Change in cash and cash equivalents
103,872

 
(22,013
)
Cash and cash equivalents at beginning of period
163,495

 
109,784

Cash and cash equivalents at end of period
$
267,367

 
$
87,771

Supplemental information
 

 
 

Interest paid
$
5,368

 
$
4,329

 
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 two Bermuda-based reinsurance companies 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.
Carolina Re Ltd (“Carolina Re”) was formed in 2018 and provides reinsurance to the Company’s U.S.-based insurance subsidiaries. Carolina Re is a party to a stop loss reinsurance treaty with JRG Re.
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, 2017 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, 2017 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 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

10

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


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 $32.2 million and $32.1 million as of June 30, 2018 and December 31, 2017, 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 June 30, 2018 and 2017, our U.S. federal income tax expense was 8.2% and 6.5% of income before taxes, respectively (8.4% and 7.2% for the six months ended June 30, 2018 and 2017, respectively). 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 (21% in 2018 and 35% in 2017) to income before taxes due primarily to interest income on tax-advantaged state and municipal securities (state and municipal securities represent 12.5% and 12.3% of our available-for-sale securities at June 30, 2018 and 2017, respectively), dividends received income, and excess tax benefits on share based compensation.
Financial results reflect provisional amounts related to the December 2017 enactment of the Tax Cuts and Jobs Act of 2017 (the Tax Act). These provisional estimates are based on the Company’s initial analysis and current interpretation of the legislation. Given the complexity of the legislation, anticipated guidance from the U.S. Treasury, and the potential for additional guidance from the SEC or the Financial Accounting Standards Board (“FASB”), these estimates may be adjusted during 2018.
Adopted Accounting Standards
Effective January 1, 2018, the Company adopted Accounting Standards Update (“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. Judgments required in adopting this update 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. The adoption of ASU 2014-09 had no impact on reported fee income and there was no cumulative effect of initially applying the update.
Effective January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Among other things, this ASU requires 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. Upon adoption on January 1, 2018, the Company made a $4.7 million cumulative-effect adjustment to increase retained earnings and reduce accumulated other comprehensive income. The adoption of ASU 2016-01 did not materially impact the Company's financial position, cash flows, or total comprehensive income. The Company's results of operations were impacted as changes in fair value of equity instruments are now presented in net income rather than other comprehensive (loss) income. For the three and six months ended June 30, 2018, the respective impact on net income was an increase of $451,000 ($0.02 and $0.01 increase in basic and diluted earnings per share, respectively) and a reduction of $922,000 ($0.03 reduction in basic and diluted earnings per share).
Effective January 1, 2018, the Company adopted ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update was issued as a result of the enactment of the Tax Act on December 22, 2017. The ASU allows for the option to reclassify the stranded tax effects resulting from the implementation of the Tax Act out of accumulated other comprehensive income and into retained earnings. As the adoption of ASU 2016-01 in 2018 resulted in the reclassification of the entire unrealized balance on equity securities from accumulated other comprehensive income into retained earnings, only the stranded tax effects on the unrealized balances of fixed income securities were impacted by the adoption of ASU 2018-02. The reclassification resulted in a $711,000 decrease to the Company's retained earnings with a corresponding increase to accumulated other comprehensive income in the first quarter of 2018.

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


Prospective Accounting Standards
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. 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 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.

12

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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)
June 30, 2018
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

State and municipal
$
137,055

 
$
3,590

 
$
(2,272
)
 
$
138,373

Residential mortgage-backed
190,574

 
445

 
(6,268
)
 
184,751

Corporate
439,993

 
1,655

 
(11,303
)
 
430,345

Commercial mortgage and asset-backed
177,286

 
85

 
(2,929
)
 
174,442

Obligations of U.S. government corporations and agencies
5,702

 

 
(13
)
 
5,689

U.S. Treasury securities and obligations guaranteed by the U.S. government
87,143

 
26

 
(1,372
)
 
85,797

Redeemable preferred stock
2,025

 

 
(35
)
 
1,990

Total fixed maturity securities
1,039,778


5,801


(24,192
)

1,021,387

Equity securities
77,995

 
6,675

 
(661
)
 
84,009

Total investments available-for-sale
$
1,117,773


$
12,476


$
(24,853
)

$
1,105,396

December 31, 2017
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

State and municipal
$
139,382

 
$
5,587

 
$
(603
)
 
$
144,366

Residential mortgage-backed
160,379

 
723

 
(2,441
)
 
158,661

Corporate
408,857

 
7,503

 
(2,639
)
 
413,721

Commercial mortgage and asset-backed
182,595

 
714

 
(698
)
 
182,611

Obligations of U.S. government corporations and agencies
35,948

 

 
(101
)
 
35,847

U.S. Treasury securities and obligations guaranteed by the U.S. government
79,476

 
37

 
(639
)
 
78,874

Redeemable preferred stock
2,025

 

 
(7
)
 
2,018

Total fixed maturity securities
1,008,662


14,564


(7,128
)

1,016,098

Equity securities
75,318

 
7,830

 
(626
)
 
82,522

Total investments available-for-sale
$
1,083,980


$
22,394


$
(7,754
)

$
1,098,620

The amortized cost and fair value of available-for-sale investments in fixed maturity securities at June 30, 2018 are summarized, by contractual maturity, as follows:
 
Cost or
Amortized
Cost
 
Fair
Value
 
(in thousands)
One year or less
$
40,895

 
$
40,760

After one year through five years
317,761

 
312,999

After five years through ten years
193,545

 
187,368

After ten years
117,692

 
119,077

Residential mortgage-backed
190,574

 
184,751

Commercial mortgage and asset-backed
177,286

 
174,442

Redeemable preferred stock
2,025

 
1,990

Total
$
1,039,778

 
$
1,021,387

 
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, 2018
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

State and municipal
$
62,247

 
$
(1,800
)
 
$
10,402

 
$
(472
)
 
$
72,649

 
$
(2,272
)
Residential mortgage-backed
91,518

 
(2,123
)
 
76,384

 
(4,145
)
 
167,902

 
(6,268
)
Corporate
292,519

 
(7,730
)
 
57,914

 
(3,573
)
 
350,433

 
(11,303
)
Commercial mortgage and asset-backed
112,250

 
(2,194
)
 
20,388

 
(735
)
 
132,638

 
(2,929
)
Obligations of U.S. government corporations and agencies

 

 
5,689

 
(13
)
 
5,689

 
(13
)
U.S. Treasury securities and obligations guaranteed by the U.S. government
70,158

 
(1,115
)
 
13,397

 
(257
)
 
83,555

 
(1,372
)
Redeemable preferred stock
1,990

 
(35
)
 

 

 
1,990

 
(35
)
Total fixed maturity securities
630,682


(14,997
)

184,174


(9,195
)

814,856


(24,192
)
Equity securities
10,128

 
(262
)
 
5,627

 
(399
)
 
15,755

 
(661
)
Total investments available-for-sale
$
640,810


$
(15,259
)

$
189,801


$
(9,594
)

$
830,611


$
(24,853
)
December 31, 2017
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

State and municipal
$
40,117

 
$
(318
)
 
$
10,662

 
$
(285
)
 
$
50,779

 
$
(603
)
Residential mortgage-backed
50,447

 
(261
)
 
84,193

 
(2,180
)
 
134,640

 
(2,441
)
Corporate
113,464

 
(846
)
 
66,954

 
(1,793
)
 
180,418

 
(2,639
)
Commercial mortgage and asset-backed
53,965

 
(244
)
 
25,299

 
(454
)
 
79,264

 
(698
)
Obligations of U.S. government corporations and agencies
3,024

 
(1
)
 
32,154

 
(100
)
 
35,178

 
(101
)
U.S. Treasury securities and obligations guaranteed by the U.S. government
50,760

 
(430
)
 
26,707

 
(209
)
 
77,467

 
(639
)
Redeemable preferred stock
2,018

 
(7
)
 

 

 
2,018

 
(7
)
Total fixed maturity securities
313,795


(2,107
)

245,969


(5,021
)

559,764


(7,128
)
Equity securities
5,859

 
(65
)
 
5,665

 
(561
)
 
11,524

 
(626
)
Total investments available-for-sale
$
319,654


$
(2,172
)

$
251,634


$
(5,582
)

$
571,288


$
(7,754
)
 
The Company held securities of 219 issuers that were in an unrealized loss position at June 30, 2018 with a total fair value of $830.6 million and gross unrealized losses of $24.9 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, 2018, 100.0% 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.
Management concluded that none of the fixed maturity securities with an unrealized loss at June 30, 2018 or December 31, 2017 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.
At December 31, 2017, management concluded that one equity security, based on the severity and duration of the impairment, had experienced an other-than-temporary impairment. Accordingly, the Company recorded an impairment loss of $1.5 million in 2017. Management concluded that none of the other equity securities with an unrealized loss at December 31, 2017 experienced an other-than-temporary impairment.

14

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


At December 31, 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. Management concluded that an allowance for credit losses should be established on the loan at December 31, 2017 to reduce its carrying value to $0. In the first quarter of 2018, the full outstanding principal on the loan was repaid and the Company recognized a realized gain of $807,000 on the repayment.
Management concluded that certain loans in the Company's bank loan portfolio were impaired as of June 30, 2018. The aggregate allowance for credit losses was $1.2 million at June 30, 2018 on impaired loans from three issuers with a total carrying value of $2.2 million and unpaid principal of $3.5 million. At December 31, 2017, the aggregate allowance for credit losses was $3.2 million on impaired loans from five issuers with a total carrying value of $5.1 million and unpaid principal of $8.4 million. The aggregate allowance for credit losses on impaired loans was $705,000 at June 30, 2017 and $943,000 at December 31, 2016.
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, 2018 or December 31, 2017.
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.
The average recorded investment in impaired bank loans was $3.7 million and $5.0 million during the six months ended June 30, 2018 and 2017, respectively. Investment income of $65,000 and $179,000, respectively, was recognized during the time within those periods that the loans were impaired. The Company recorded net realized investment losses of $896,000 and $893,000 in the three and six months ended June 30, 2018, respectively, for changes in the fair value of impaired bank loans ($42,000 of net realized investment losses and $135,000 of net realized investment gains in the three and six months ended June 30, 2017, respectively).
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 and six months ended June 30, 2018 includes $1,000 and $4,000 of net trading losses, respectively, all relating to securities sold during the three and six months ended June 30, 2018.

15

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


The Company’s net realized and unrealized gains and losses on investments are summarized as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Fixed maturity securities:
 

 
 

 
 

 
 

Gross realized gains
$
360

 
$
18

 
$
382

 
$
356

Gross realized losses
(252
)
 
(31
)
 
(475
)
 
(327
)
 
108


(13
)

(93
)

29

Bank loan participations:
 

 
 

 
 

 
 

Gross realized gains
360

 
471

 
1,580

 
1,607

Gross realized losses
(1,006
)
 
(150
)
 
(1,106
)
 
(689
)
 
(646
)

321


474


918

Equity securities:
 

 
 

 
 

 
 

Gross realized gains

 

 

 
409

Gross realized losses
(47
)
 

 
(62
)
 

Changes in fair values of equity securities
521

 

 
(1,189
)
 

 
474




(1,251
)

409

Short-term investments and other:
 

 
 

 
 

 
 

Gross realized gains

 

 

 

Gross realized losses

 
(1
)
 
(4
)
 
(2
)
 


(1
)

(4
)

(2
)
Total
$
(64
)

$
307


$
(874
)

$
1,354

  
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.
 
Carrying Value
 
Investment Income
 
June 30,
 
December 31,
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Renewable energy LLCs (a)
$
32,204

 
$
32,063

 
$
530

 
$
1,521

 
$
1,741

 
$
7,115

Renewable energy notes receivable (b)
8,750

 
7,278

 
328

 
49

 
625

 
49

Limited partnerships (c)
31,359

 
26,367

 
1,092

 
703

 
1,319

 
1,085

Bank holding companies (d)
4,500

 
4,500

 
86

 
86

 
172

 
172

Total other invested assets
$
76,813


$
70,208


$
2,036


$
2,359


$
3,857


$
8,421

 
(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 and the Company’s Non-Executive Chairman 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 $2.1 million and $3.6 million in the six months ended June 30, 2018 and 2017, respectively.
(b)
The Company has invested in notes receivable for renewable energy projects. At June 30, 2018, the Company holds an $8.8 million note issued by an affiliate of the Company. Interest on the note, which matures in 2021, is fixed at 15.0%. Interest income

16

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


on the note was $328,000 and $625,000 for the three and six months ended June 30, 2018, respectively ($49,000 for the three and six months ended June 30, 2017).
(c)
The Company owns investments in limited partnerships that invest in concentrated portfolios including publicly-traded small cap equities, loans of middle market private equity sponsored companies, equity tranches of collateralized loan obligations (CLOs), and tranches of distressed home loans. 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 $3.2 million at June 30, 2018. The Company recognized investment income of $333,000 and $208,000 on the investment for the three and six months ended June 30, 2018, respectively ($152,000 and $220,000 for the three and six months ended June 30, 2017, respectively). The Company’s Excess and Surplus Lines segment holds investments in limited partnerships of $28.1 million at June 30, 2018. Investment income of $759,000 and $1.1 million was recognized on the investments for the three and six months ended June 30, 2018, respectively ($551,000 and $865,000 for the three and six months ended June 30, 2017, respectively). At June 30, 2018, the Company’s Excess and Surplus Lines segment has outstanding commitments to invest another $625,000 in these limited partnerships.
(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 $86,000 and $172,000, respectively, in both the three and six months ended June 30, 2018 and 2017. The Company’s Non-Executive Chairman 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, 2018, the Company held an investment in a CLO where one of the underlying loans was issued by the bank holding company. The investment, with a carrying value of $4.7 million at June 30, 2018, is classified as an available-for-sale fixed maturity.
The Company previously held common shares issued by the bank holding company. 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.
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, 2018, is carried as a short-term investment. Interest income of $3,000 was recognized on this investment for the six months ended June 30, 2018 and 2017.

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, 2018 and December 31, 2017.
The gross carrying amounts and accumulated amortization for each major specifically identifiable intangible asset class were as follows: 
 
 
 
June 30, 2018
 
December 31, 2017
 
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

 
4,939

 
11,611

 
4,641

Identifiable intangible assets subject to amortization
 
 
11,611

 
4,939

 
11,611

 
4,641

 
 
 
$
42,975

 
$
4,939

 
$
42,975

 
$
4,641

 

17

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
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands, except share and per share amounts)
Net income to shareholders
$
16,984

 
$
14,541

 
$
32,617

 
$
32,991

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
29,882,988

 
29,406,877

 
29,823,982

 
29,348,557

Common share equivalents
410,945

 
900,222

 
419,964

 
969,028

Diluted
30,293,933

 
30,307,099

 
30,243,946

 
30,317,585

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.57

 
$
0.49

 
$
1.09

 
$
1.12

Common share equivalents
(0.01
)
 
(0.01
)
 
(0.01
)
 
(0.03
)
Diluted
$
0.56

 
$
0.48

 
$
1.08

 
$
1.09

Common share equivalents relate to stock options and restricted share units (“RSU’s”). For the three and six months ended June 30, 2018, common share equivalents of 182,246 and 187,502 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, 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.

18

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
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Reserve for losses and loss adjustment expenses net of reinsurance recoverables at beginning of period
$
1,038,303

 
$
791,781

 
$
989,825

 
$
761,128

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

 
 

 
 

 
 

Current year
152,371

 
129,369

 
298,753

 
238,152

Prior years
2,224

 
1,715

 
(386
)
 
(1,699
)
Total incurred losses and loss and adjustment expenses
154,595

 
131,084

 
298,367

 
236,453

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

 
 

 
 
 
 

Current year
20,577

 
13,908

 
32,754

 
17,606

Prior years
79,503

 
69,449

 
162,620

 
140,467

Total loss and loss adjustment expense payments
100,080

 
83,357

 
195,374

 
158,073

Reserve for losses and loss adjustment expenses net of reinsurance recoverables at end of period
1,092,818

 
839,508

 
1,092,818

 
839,508

Add: Reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period
375,535

 
221,553

 
375,535

 
221,553

Reserve for losses and loss adjustment expenses gross of reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period
$
1,468,353

 
$
1,061,061

 
$
1,468,353

 
$
1,061,061

  
The Company experienced $2.2 million of adverse reserve development in the three months ended June 30, 2018 on the reserve for losses and loss adjustment expenses held at December 31, 2017. This reserve development included $58,000 of favorable development in the Excess and Surplus Lines segment, primarily from $1.9 million of favorable development on the property catastrophe losses from the September 2017 storms coupled with adverse development in commercial auto business and favorable development in other core Excess and Surplus Lines. The Specialty Admitted Insurance segment experienced $167,000 of favorable development, primarily due to favorable development in the workers' compensation business for prior accident years, partially offset by adverse development on certain terminated program business. The Company also experienced $2.4 million of adverse development in the Casualty Reinsurance segment primarily related to losses from risk profiles and treaty structures that the Company no longer writes.
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. The Specialty Admitted Insurance segment experienced $949,000 of adverse development, primarily due to adverse development in the programs business. 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 $386,000 of favorable reserve development in the six months ended June 30, 2018 on the reserve for losses and loss adjustment expenses held at December 31, 2017. This reserve development included $1.2 million of favorable development in the Excess and Surplus Lines segment, primarily from $1.9 million of favorable development on the property catastrophe losses from the September 2017 storms coupled with adverse development in commercial auto business and favorable development in other core Excess and Surplus Lines. The Specialty Admitted Insurance segment experienced $1.5 million of favorable development, primarily due to favorable development in the workers' compensation business for prior accident years, partially offset by adverse development on certain terminated program business. The Company also experienced $2.3 million of adverse development in the Casualty Reinsurance segment primarily related to losses from risk profiles and treaty structures that the Company no longer writes.

19

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


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. The Specialty Admitted Insurance segment experienced $907,000 of adverse development, primarily due to adverse development in the programs business which were partially offset by favorable development in the workers' compensation business. 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.
6.    Other Comprehensive (Loss) Income
The following table summarizes the components of other comprehensive (loss) income:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Unrealized (losses) gains arising during the period, before U.S. income taxes
$
(6,633
)
 
$
7,853

 
$
(25,925
)
 
$
13,851

U.S. income taxes
155

 
(1,156
)
 
699

 
(2,792
)
Unrealized (losses) gains arising during the period, net of U.S. income taxes
(6,478
)
 
6,697

 
(25,226
)
 
11,059

Less reclassification adjustment:
 

 
 

 
 
 
 

Net realized investment losses (gains)
108

 
(12
)
 
(93
)
 
438

U.S. income tax expenses
(28
)
 
1

 
(28
)
 
(121
)
Reclassification adjustment for investment losses (gains) realized in net income
80

 
(11
)
 
(121
)
 
317

Other comprehensive (loss) income
$
(6,558
)
 
$
6,708

 
$
(25,105
)
 
$
10,742

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 three 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, $45.5 million of letters of credit were issued through June 30, 2018 which were secured by deposits of $59.0 million. Under a $102.5 million facility, $100.2 million of letters of credit were issued through June 30, 2018 which were secured by deposits of $126.3 million. Under a $100.0 million facility, $6.9 million of letters of credit were issued through June 30, 2018 which were secured by deposits of $10.0 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 $271.8 million at June 30, 2018.
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, 2018, the cash equivalent collateral held in the collateral trust arrangement was approximately $944.8 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 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.

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


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. Gross fee income of the Excess and Surplus Lines segment is included in that segment’s underwriting profit. Gross fee income of $3.7 million and $4.2 million was included in underwriting profit for the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, gross fee income of $8.5 million and $8.1 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.

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


The following table summarizes the Company’s segment results:
 
Excess and
Surplus
Lines
 
Specialty
Admitted
Insurance
 
Casualty
Reinsurance
 
Corporate
and
Other
 
Total
 
(in thousands)
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Gross written premiums
$
165,398

 
$
97,100

 
$
30,880

 
$

 
$
293,378

Net earned premiums
139,127

 
14,266

 
54,817

 

 
208,210

Underwriting profit of insurance segments
10,117

 
988

 
1,729

 

 
12,834

Net investment income
4,350

 
839

 
9,662

 
1,284

 
16,135

Interest expense

 

 

 
2,946

 
2,946

Segment revenues
147,012

 
15,436

 
64,254

 
1,339

 
228,041

Segment goodwill
181,831

 

 

 

 
181,831

Segment assets
907,314

 
566,196

 
1,378,305

 
85,561

 
2,937,376

 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Gross written premiums
$
332,884

 
$
184,501

 
$
74,109

 
$

 
$
591,494

Net earned premiums
269,098

 
27,606

 
112,448

 

 
409,152

Underwriting profit of insurance segments
21,416

 
2,611

 
3,473

 

 
27,500

Net investment income
7,392

 
1,550

 
17,679

 
2,770

 
29,391

Interest expense

 

 

 
5,468

 
5,468

Segment revenues
284,339

 
29,391

 
129,780

 
2,875

 
446,385

Segment goodwill
181,831

 

 

 

 
181,831

Segment assets
907,314

 
566,196

 
1,378,305

 
85,561

 
2,937,376

 
 
 
 
 
 
 
 
 
 
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

  

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


The following table reconciles the underwriting profit (loss) of the operating segments by individual segment to consolidated income before taxes:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Underwriting profit of the insurance segments:
 

 
 

 
 

 
 

Excess and Surplus Lines
$
10,117

 
$
11,729

 
$
21,416

 
$
20,529

Specialty Admitted Insurance
988

 
553

 
2,611

 
1,395

Casualty Reinsurance
1,729

 
(2,023
)
 
3,473

 
(930
)
Total underwriting profit of insurance segments
12,834

 
10,259

 
27,500

 
20,994

Other operating expenses of the Corporate and Other segment
(7,307
)
 
(6,095
)
 
(14,738
)
 
(12,556
)
Underwriting profit
5,527

 
4,164

 
12,762

 
8,438

Net investment income
16,135

 
13,714

 
29,391

 
30,447

Net realized investment (losses) gains
(64
)
 
307

 
(874
)
 
1,354

Amortization of intangible assets
(149
)
 
(149
)
 
(298
)
 
(298
)
Other income and expenses
4

 
(257
)
 
108

 
(57
)
Interest expense
(2,946
)
 
(2,224
)
 
(5,468
)
 
(4,347
)
Income before taxes
$
18,507

 
$
15,555

 
$
35,621

 
$
35,537

 
9.    Other Operating Expenses and Other Expenses
Other operating expenses consist of the following:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Amortization of policy acquisition costs
$
28,672

 
$
31,614

 
$
58,870

 
$
59,252

Other underwriting expenses of the operating segments
15,772

 
15,327

 
32,926

 
30,121

Other operating expenses of the Corporate and Other segment
7,307

 
6,095

 
14,738

 
12,556

Total
$
51,751

 
$
53,036

 
$
106,534

 
$
101,929

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 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, 2016.
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

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


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.