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 March 31, 2019
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 every Interactive Data File required to be submitted 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Names of each exchange on which registered
Common Shares, par value $0.0002 per share
JRVR
NASDAQ Global Select Market
Number of shares of the registrant's common shares outstanding at May 1, 2019: 30,163,234
 



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;
losses resulting from reinsurance counterparties failing to pay us on reinsurance claims, insurance companies with whom we have a fronting arrangement failing to pay us for claims, or an insured group of companies with whom we have an indemnification arrangement failing to perform their reimbursement obligations;
changes in laws or government regulation, including tax or insurance law and regulations;
the ongoing effect of Public Law No. 115-97, informally titled the Tax Cuts and Jobs Act, which 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;
the potential impact of internal or external fraud, operational errors, systems malfunctions or cyber security incidents;
our ability to manage our growth effectively;

3


inadequacy of premiums we charge to compensate us for our losses incurred;
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 February 27, 2019.
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)
March 31,
2019
 
December 31,
2018
 
(in thousands)
Assets
 

 
 

Invested assets:
 

 
 

Fixed maturity securities, available-for-sale, at fair value (amortized cost: 2019 – $1,244,427; 2018 – $1,199,409)
$
1,250,926

 
$
1,184,202

Equity securities, at fair value (cost:  2019 – $79,623; 2018 – $77,152)
84,405

 
78,385

Bank loan participations held-for-investment, at amortized cost, net of allowance
263,318

 
260,972

Short-term investments
92,134

 
81,966

Other invested assets
74,465

 
72,321

Total invested assets
1,765,248

 
1,677,846

 
 
 
 
Cash and cash equivalents
132,552

 
172,457

Accrued investment income
11,836

 
11,110

Premiums receivable and agents’ balances, net
351,724

 
307,899

Reinsurance recoverable on unpaid losses
508,655

 
467,371

Reinsurance recoverable on paid losses
34,372

 
18,344

Prepaid reinsurance premiums
127,734

 
112,498

Deferred policy acquisition costs
56,318

 
54,450

Intangible assets, net
37,388

 
37,537

Goodwill
181,831

 
181,831

Other assets
91,593

 
95,433

Total assets
$
3,299,251

 
$
3,136,776

 
See accompanying notes.
 


5

Table of Contents
 

JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets (continued)
  
 
(Unaudited)
March 31,
2019
 
December 31,
2018
 
(in thousands, except share amounts)
Liabilities and Shareholders’ Equity
 

 
 

Liabilities:
 

 
 

Reserve for losses and loss adjustment expenses
$
1,730,307

 
$
1,661,459

Unearned premiums
420,601

 
386,473

Payables to reinsurers
91,469

 
61,662

Senior debt
98,300

 
118,300

Junior subordinated debt
104,055

 
104,055

Accrued expenses
48,903

 
51,792

Other liabilities
51,319

 
43,794

Total liabilities
2,544,954

 
2,427,535

Commitments and contingent liabilities


 


Shareholders’ equity:
 

 
 

Common Shares – 2019 and 2018: $0.0002 par value; 200,000,000 shares authorized; 30,162,045 and 29,988,460 shares issued and outstanding, respectively
6

 
6

Preferred Shares – 2019 and 2018: $0.00125 par value; 20,000,000 shares authorized; no shares issued and outstanding

 

Additional paid-in capital
648,242

 
645,310

Retained earnings
101,617

 
79,753

Accumulated other comprehensive income (loss)
4,432

 
(15,828
)
Total shareholders’ equity
754,297

 
709,241

Total liabilities and shareholders’ equity
$
3,299,251

 
$
3,136,776

 
See accompanying notes.


6

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


 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands, except share amounts)
Revenues
 

 
 

Gross written premiums
$
327,334

 
$
298,116

Ceded written premiums
(119,593
)
 
(87,138
)
Net written premiums
207,741

 
210,978

Change in net unearned premiums
(17,589
)
 
(10,036
)
Net earned premiums
190,152

 
200,942

Net investment income
19,431

 
13,256

Net realized and unrealized gains (losses) on investments
1,625

 
(810
)
Other income
2,919

 
4,956

Total revenues
214,127

 
218,344

Expenses
 

 
 
Losses and loss adjustment expenses
139,927

 
143,772

Other operating expenses
45,752

 
54,783

Other expenses

 
4

Interest expense
2,808

 
2,522

Amortization of intangible assets
149

 
149

Total expenses
188,636

 
201,230

Income before taxes
25,491

 
17,114

Income tax expense
2,763

 
1,481

Net income
22,728

 
15,633

Other comprehensive income (loss):
 

 
 
Net unrealized gains (losses), net of taxes of $1,446 in 2019 and $(544) in 2018
20,260

 
(18,547
)
Total comprehensive income (loss)
$
42,988

 
$
(2,914
)
Per share data:
 

 
 
Basic earnings per share
$
0.76

 
$
0.53

Diluted earnings per share
$
0.75

 
$
0.52

Dividend declared per share
$
0.30

 
$
0.30

Weighted-average common shares outstanding:
 

 
 
Basic
30,059,398

 
29,764,320

Diluted
30,472,304

 
30,193,303


 
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
 
Common
Shares (Par)
 
Preferred
Shares
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
(in thousands, except share amounts)
Balances at December 31, 2017
29,696,682

 
$
6

 
$

 
$
636,149

 
$
48,198

 
$
10,346

 
$
694,699

Net income

 

 

 

 
15,633

 

 
15,633

Other comprehensive loss

 

 

 

 

 
(18,547
)
 
(18,547
)
Dividends

 

 

 

 
(9,049
)
 

 
(9,049
)
Exercise of stock options
127,196

 

 

 
2,355

 

 

 
2,355

Vesting of RSUs
42,827

 

 

 
(776
)
 

 

 
(776
)
Compensation expense under share incentive plans

 

 

 
1,455

 

 

 
1,455

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 March 31, 2018
29,866,705

 
$
6

 
$

 
$
639,183

 
$
58,753

 
$
(12,172
)
 
$
685,770

Balances at December 31, 2018
29,988,460

 
$
6

 
$

 
$
645,310

 
$
79,753

 
$
(15,828
)
 
$
709,241

Net income

 

 

 

 
22,728

 

 
22,728

Other comprehensive income

 

 

 

 

 
20,260

 
20,260

Dividends

 

 

 

 
(9,144
)
 

 
(9,144
)
Exercise of stock options
98,975

 

 

 
2,632

 

 

 
2,632

Vesting of RSUs
74,610

 

 

 
(1,374
)
 

 

 
(1,374
)
Compensation expense under share incentive plans

 

 

 
1,674

 

 

 
1,674

Adoption of ASU No. 2016-02, derecognition of build-to-suit lease, (see Note 1)


 

 

 

 
8,280

 

 
8,280

Balances at March 31, 2019
30,162,045

 
$
6

 
$

 
$
648,242

 
$
101,617

 
$
4,432

 
$
754,297

 
See accompanying notes.
 

8

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



 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Operating activities
 

 
 

Net cash provided by operating activities
$
35,450

 
$
48,461

Investing activities
 

 
 

Securities available-for-sale:
 

 
 

Purchases – fixed maturity securities
(130,362
)
 
(118,652
)
Sales – fixed maturity securities
45,466

 
26,392

Maturities and calls – fixed maturity securities
39,215

 
45,245

Purchases – equity securities
(2,753
)
 
(5,949
)
Sales – equity securities
263

 
766

Bank loan participations:
 

 
 

Purchases
(21,746
)
 
(66,059
)
Sales
6,602

 
35,708

Maturities
11,355

 
11,427

Other invested assets:
 

 
 

Purchases

 
(4,992
)
Return of capital
260

 

Short-term investments, net
(10,168
)
 
10,569

Securities receivable or payable, net
14,643

 
12,576

Purchases of property and equipment
(144
)
 
(275
)
Net cash used in investing activities
(47,369
)
 
(53,244
)
Financing activities
 

 
 

Senior debt repayment
(20,000
)
 

Dividends paid
(9,244
)
 
(9,074
)
Issuance of common shares under equity incentive plans
2,632

 
2,862

Common share repurchases
(1,374
)
 
(1,283
)
Other financing activities

 
(171
)
Net cash used in financing activities
(27,986
)
 
(7,666
)
Change in cash and cash equivalents
(39,905
)
 
(12,449
)
Cash and cash equivalents at beginning of period
172,457

 
163,495

Cash and cash equivalents at end of period
$
132,552

 
$
151,046

Supplemental information
 

 
 

Interest paid
$
3,339

 
$
2,509

 
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 five 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, and Falls Lake Fire and Casualty Company, a California domiciled company. Falls Lake National and its subsidiaries primarily write specialty admitted fronting and program business and individual risk workers' compensation insurance.
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, through December 31, 2017, to the Company’s U.S.-based insurance subsidiaries.
Carolina Re Ltd (“Carolina Re”) was formed in 2018 and as of January 1, 2018 provides reinsurance to the Company’s U.S.-based insurance subsidiaries. Carolina Re is also the cedent on 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, 2018 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, 2018 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 $30.5 million and $29.8 million as of March 31, 2019 and December 31, 2018, 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 March 31, 2019 and 2018, our U.S. federal income tax expense was 10.8% and 8.7% of income before taxes, 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 to income before taxes due primarily to interest income on tax-advantaged state and municipal securities, dividends received income, and excess tax benefits on share based compensation.
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 Cuts and Jobs Act of 2017 ("TCJA"). The ASU allows for the option to reclassify the stranded tax effects resulting from the implementation of the TCJA out of accumulated other comprehensive income and into retained earnings. 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 in connection with the Company's adoption of this ASU.
Adopted Accounting Standards
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). This update requires 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. The Company adopted the new standard using a modified retrospective transition method, applying the transition provisions at the beginning of the period of adoption. The Company elected the package of practical expedients permitted under the transition guidance within the new standard and did not elect to use hindsight in determining the lease term. Upon adoption of the new standard, the Company derecognized assets of $22.6 million and liabilities of $30.9 million associated with a lease that was designated as build-to-suit under the previous guidance, and recorded a cumulative-effect adjustment to retained earnings of $8.3 million.
The Company recorded right-of-use assets of $17.2 million and lease liabilities of $17.8 million at adoption of the new standard associated with operating leases for office space in Bermuda, North Carolina, Virginia, Arizona, and Georgia. The new standard did not materially impact the Company's results of operations, earnings per share, or cash flows, and did not impact compliance under the covenants of our current credit agreements.
At March 31, 2019, right-of-use assets and lease liabilities were $16.4 million and $17.3 million, respectively. Operating lease costs were $1.2 million in the three months ended March 31, 2019 compared to $1.0 million in the prior year period. The weighted-average discount rate and weighted average remaining lease term for operating leases was 4.3% and 6.0 years, respectively, as of March 31, 2019.
The table below summarizes maturities of the Company’s operating lease liabilities as of March 31, 2019, which reconciles to total lease liabilities included in other liabilities on the Company’s condensed consolidated balance sheet.

11

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


Years ending December 31,
(in thousands)

2019
$
2,863

2020
3,622

2021
3,432

2022
2,639

2023
2,376

Thereafter
4,706

Total lease payments
19,638

Less imputed interest
(2,330
)
Total operating lease liabilities
$
17,308

Prospective Accounting Standards
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 fixed maturity securities are summarized as follows:
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in thousands)
March 31, 2019
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

State and municipal
$
136,472

 
$
5,185

 
$
(315
)
 
$
141,342

Residential mortgage-backed
225,702

 
1,257

 
(3,415
)
 
223,544

Corporate
548,772

 
6,482

 
(2,760
)
 
552,494

Commercial mortgage and asset-backed
204,612

 
1,233

 
(1,328
)
 
204,517

U.S. Treasury securities and obligations guaranteed by the U.S. government
126,844

 
600

 
(449
)
 
126,995

Redeemable preferred stock
2,025

 
9

 

 
2,034

Total fixed maturity securities, available-for-sale
$
1,244,427


$
14,766


$
(8,267
)

$
1,250,926

December 31, 2018
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

State and municipal
$
147,160

 
$
3,422

 
$
(1,287
)
 
$
149,295

Residential mortgage-backed
208,869

 
577

 
(5,337
)
 
204,109

Corporate
534,024

 
1,516

 
(10,772
)
 
524,768

Commercial mortgage and asset-backed
199,528

 
310

 
(2,813
)
 
197,025

U.S. Treasury securities and obligations guaranteed by the U.S. government
107,803

 
235

 
(845
)
 
107,193

Redeemable preferred stock
2,025

 

 
(213
)
 
1,812

Total fixed maturity securities, available-for-sale
$
1,199,409


$
6,060


$
(21,267
)

$
1,184,202

The amortized cost and fair value of available-for-sale investments in fixed maturity securities at March 31, 2019 are summarized, by contractual maturity, as follows:
 
Cost or
Amortized
Cost
 
Fair
Value
 
(in thousands)
One year or less
$
39,494

 
$
39,447

After one year through five years
438,067

 
440,339

After five years through ten years
229,483

 
231,221

After ten years
105,044

 
109,824

Residential mortgage-backed
225,702

 
223,544

Commercial mortgage and asset-backed
204,612

 
204,517

Redeemable preferred stock
2,025

 
2,034

Total
$
1,244,427

 
$
1,250,926

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

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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)
March 31, 2019
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

State and municipal
$

 
$

 
$
29,279

 
$
(315
)
 
$
29,279

 
$
(315
)
Residential mortgage-backed
6,153

 
(3
)
 
131,841

 
(3,412
)
 
137,994

 
(3,415
)
Corporate
8,471

 
(41
)
 
199,649

 
(2,719
)
 
208,120

 
(2,760
)
Commercial mortgage and asset-backed
61,747

 
(568
)
 
65,718

 
(760
)
 
127,465

 
(1,328
)
U.S. Treasury securities and obligations guaranteed by the U.S. government
6,692

 
(4
)
 
45,323

 
(445
)
 
52,015

 
(449
)
Total fixed maturity securities, available-for-sale
$
83,063


$
(616
)

$
471,810


$
(7,651
)

$
554,873


$
(8,267
)
December 31, 2018
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

State and municipal
$
19,733

 
$
(284
)
 
$
47,018

 
$
(1,003
)
 
$
66,751

 
$
(1,287
)
Residential mortgage-backed
49,180

 
(743
)
 
105,778

 
(4,594
)
 
154,958

 
(5,337
)
Corporate
243,384

 
(5,089
)
 
155,902

 
(5,683
)
 
399,286

 
(10,772
)
Commercial mortgage and asset-backed
106,423

 
(1,229
)
 
51,805

 
(1,584
)
 
158,228

 
(2,813
)
U.S. Treasury securities and obligations guaranteed by the U.S. government
17,618

 
(51
)
 
54,201

 
(794
)
 
71,819

 
(845
)
Redeemable preferred stock
1,812

 
(213
)
 

 

 
1,812

 
(213
)
Total fixed maturity securities, available-for-sale
$
438,150


$
(7,609
)

$
414,704


$
(13,658
)

$
852,854


$
(21,267
)
 
The Company held securities of 163 issuers that were in an unrealized loss position at March 31, 2019 with a total fair value of $554.9 million and gross unrealized losses of $8.3 million. None of the fixed maturity securities with unrealized losses has ever missed, or been delinquent on, a scheduled principal or interest payment.
At March 31, 2019, 99.5% 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 March 31, 2019 had an aggregate fair value of $6.8 million and an aggregate net unrealized gain of $23,000.
Management concluded that three fixed maturity securities from one issuer that we intend to sell at a loss in the second quarter were impaired as of March 31, 2019. The Company recorded impairment losses on these securities of $271,000 in the three months ended March 31, 2019. Management concluded that none of the fixed maturity securities with an unrealized loss at December 31, 2018 experienced an other-than-temporary impairment. For fixed maturity securities available-for-sale that are not other-than-temporarily impaired at March 31, 2019, management does not intend to sell the 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 concluded that two of the loans in the Company's bank loan portfolio were impaired at March 31, 2019. At March 31, 2019, the impaired loans had a carrying value of $4.4 million, unpaid principal of $5.9 million, and an allowance for credit losses of $1.5 million. Management concluded that none of the loans in the Company's bank loan portfolio were impaired at December 31, 2018. The aggregate allowance for credit losses on impaired loans was $300,000 at March 31, 2018 and $3.2 million at December 31, 2017.
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, a public corporation and governmental agency of the Commonwealth of Puerto Rico. Management concluded that an allowance

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


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.
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 March 31, 2019 or December 31, 2018.
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. When an observable market price for a loan is available, the Company has recorded 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 $2.2 million and $3.4 million during the three months ended March 31, 2019 and 2018, respectively. Investment income of $0 and $20,000, respectively, was recognized during the time within those periods that the loans were impaired. The Company recorded net realized investment losses of $1.5 million and net realized investment gains of $3,000 in the three months ended March 31, 2019 and 2018, respectively, for changes in the fair value of impaired bank loans.


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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
March 31,
 
2019
 
2018
 
(in thousands)
Fixed maturity securities:
 

 
 

Gross realized gains
$
177

 
$
22

Gross realized losses
(405
)
 
(223
)
 
(228
)

(201
)
Bank loan participations:
 

 
 

Gross realized gains
13

 
1,220

Gross realized losses
(1,692
)
 
(100
)
 
(1,679
)

1,120

Equity securities:
 

 
 

Gross realized gains

 

Gross realized losses
(18
)
 
(15
)
Changes in fair values of equity securities
3,549

 
(1,710
)
 
3,531


(1,725
)
Short-term investments and other:
 

 
 

Gross realized gains
1

 

Gross realized losses

 
(4
)
 
1


(4
)
Total
$
1,625


$
(810
)
  
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
 
March 31,
 
December 31,
 
Three Months Ended
March 31,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Renewable energy LLCs (a)
$
30,462

 
$
29,795

 
$
921

 
$
1,211

Renewable energy notes receivable (b)
8,750

 
8,750

 
328

 
297

Limited partnerships (c)
30,753

 
29,276

 
2,069

 
226

Bank holding companies (d)
4,500

 
4,500

 
86

 
86

Total other invested assets
$
74,465


$
72,321


$
3,404


$
1,820

 
(a)
The Company’s Corporate and Other segment owns equity interests ranging from 2.6% to 32.2% 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 entity for which two of our directors serve as officers, 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 $253,000 and $1.2 million in the three months ended March 31, 2019 and 2018, respectively.
(b)
The Company's Corporate and Other segment has invested in notes receivable for renewable energy projects. At March 31, 2019, the Company holds an $8.8 million note issued by an entity for which two of our directors serve as officers. Interest on

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


the note, which matures in 2021, is fixed at 15.0%. Interest income on the note was $328,000 and $297,000 for the three months ended March 31, 2019 and 2018, respectively.
(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 $3.6 million at March 31, 2019. The Company recognized investment income of $481,000 and investment losses of $125,000 on the investment for the three months ended March 31, 2019 and 2018, respectively. The Company’s Excess and Surplus Lines segment holds investments in limited partnerships of $27.2 million at March 31, 2019. Investment income of $1.6 million and $351,000 was recognized on the investments for the three months ended March 31, 2019 and 2018, respectively. At March 31, 2019, the Company’s Excess and Surplus Lines segment has outstanding commitments to invest another $625,000 in these limited partnerships.
(d)
The Company's Corporate and Other segment holds $4.5 million of subordinated notes issued by a bank holding company for which the Company’s Non-Executive Chairman was previously the Lead Independent Director and an investor and for which one of the Company’s directors was an investor and is currently a lender (the "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 in both the three months ended March 31, 2019 and 2018, respectively.
At March 31, 2019 and December 31, 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 $3.8 million at March 31, 2019, is classified as an available-for-sale fixed maturity.
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 March 31, 2019 and December 31, 2018.
The gross carrying amounts and accumulated amortization for each major specifically identifiable intangible asset class were as follows: 
 
 
 
March 31, 2019
 
December 31, 2018
 
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
 
8,964

 

 
8,964

 

Identifiable intangibles not subject to amortization
 
 
31,164

 

 
31,164

 

Broker relationships
24.6
 
11,611

 
5,387

 
11,611

 
5,238

Identifiable intangible assets subject to amortization
 
 
11,611

 
5,387

 
11,611

 
5,238

 
 
 
$
42,775

 
$
5,387

 
$
42,775

 
$
5,238

 

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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
March 31,
 
2019
 
2018
 
(in thousands, except share and per share amounts)
Net income to shareholders
$
22,728

 
$
15,633

 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic
30,059,398

 
29,764,320

Common share equivalents
412,906

 
428,983

Diluted
30,472,304

 
30,193,303

 
 
 
 
Earnings per share:
 
 
 
Basic
$
0.76

 
$
0.53

Common share equivalents
(0.01
)
 
(0.01
)
Diluted
$
0.75

 
$
0.52

Common share equivalents relate to our outstanding equity awards (stock options and restricted share units ("RSUs")). For the three months ended March 31, 2019 and 2018, common share equivalents of 171,509 and 192,817 shares, respectively, were excluded from the calculations of diluted earnings per share as their effects were anti-dilutive.

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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
March 31,
 
2019
 
2018
 
(in thousands)
Reserve for losses and loss adjustment expenses net of reinsurance recoverables at beginning of period
$
1,194,088

 
$
989,825

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

 
 

Current year
138,959

 
146,382

Prior years
968

 
(2,610
)
Total incurred losses and loss and adjustment expenses
139,927

 
143,772

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

Current year
4,679

 
12,177

Prior years
107,684

 
83,117

Total loss and loss adjustment expense payments
112,363

 
95,294

Reserve for losses and loss adjustment expenses net of reinsurance recoverables at end of period
1,221,652

 
1,038,303

Add: Reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period
508,655

 
331,245

Reserve for losses and loss adjustment expenses gross of reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period
$
1,730,307

 
$
1,369,548

  
The Company experienced $1.0 million of adverse reserve development in the three months ended March 31, 2019 on the reserve for losses and loss adjustment expenses held at December 31, 2018. This reserve development included $10,000 of favorable development in the Excess and Surplus Lines segment. The Specialty Admitted Insurance segment experienced $2.0 million of favorable development due to favorable development in the workers' compensation business for prior accident years. The Company also experienced $3.0 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 $2.6 million of favorable reserve development in the three months ended March 31, 2018 on the reserve for losses and loss adjustment expenses held at December 31, 2017. This reserve development included $1.1 million of favorable development in the Excess and Surplus Lines segment, primarily from the 2016 and 2017 accident years. The Specialty Admitted Insurance segment experienced $1.3 million of favorable development, primarily due to favorable development in the workers' compensation business for the 2014 through 2016 accident years. The Company also experienced $176,000 of favorable development in the Casualty Reinsurance segment.


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


6.    Other Comprehensive Income (Loss)
The following table summarizes the components of other comprehensive income (loss):
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands)
Unrealized gains (losses) arising during the period, before U.S. income taxes
$
21,478

 
$
(19,292
)
U.S. income taxes
(1,447
)
 
544

Unrealized gains (losses) arising during the period, net of U.S. income taxes
20,031

 
(18,748
)
Less reclassification adjustment:
 
 
 

Net realized investment losses
(228
)
 
(201
)
U.S. income taxes
(1
)
 

Reclassification adjustment for investment (gains) losses realized in net income
(229
)
 
(201
)
Other comprehensive income (loss)
$
20,260

 
$
(18,547
)
In addition to the $228,000 and $201,000 of net realized investment losses on available-for-sale fixed maturity securities for the three months ended March 31, 2019 and 2018, respectively, the Company also recognized $1.7 million of net realized investment losses and $1.1 million of net realized investment gains in the respective periods on its investments in bank loan participations, and $3.5 million of net realized gains and $1.7 million of net realized losses in the respective periods for the change in fair values of equity securities.
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 $75.0 million facility, $49.4 million of letters of credit were issued through March 31, 2019 which were secured by deposits of $61.8 million. Under a $102.5 million facility, $68.0 million of letters of credit were issued through March 31, 2019 which were secured by deposits of $93.5 million. Under a $100.0 million facility, $5.3 million of letters of credit were issued through March 31, 2019 which were secured by deposits of $10.5 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 $290.1 million at March 31, 2019.
The Company is a party 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. The 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 March 31, 2019, the cash equivalent collateral held in the collateral trust arrangement was approximately $1,156.0 million, which exceeds the amount of claims receivable and unpaid reported losses and loss adjustment expenses outstanding. The Company has 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.

20

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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 $2.7 million and $4.8 million was included in underwriting profit for the three months ended March 31, 2019 and 2018, respectively. 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:
 
Excess and
Surplus
Lines
 
Specialty
Admitted
Insurance
 
Casualty
Reinsurance
 
Corporate
and
Other
 
Total
 
(in thousands)
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
Gross written premiums
$
186,549

 
$
102,953

 
$
37,832

 
$

 
$
327,334

Net earned premiums
141,672

 
12,360

 
36,120

 

 
190,152

Underwriting profit of insurance segments
13,102

 
1,623

 
327

 

 
15,052

Net investment income
5,544

 
897

 
11,172

 
1,818

 
19,431

Interest expense

 

 

 
2,808

 
2,808

Segment revenues
152,437

 
13,736

 
46,010

 
1,944

 
214,127

Segment goodwill
181,831

 

 

 

 
181,831

Segment assets
1,013,069

 
706,451

 
1,517,142

 
62,589

 
3,299,251

 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 

 
 

 
 

 
 

 
 

Gross written premiums
$
167,486

 
$
87,401

 
$
43,229

 
$

 
$
298,116

Net earned premiums
129,971

 
13,340

 
57,631

 

 
200,942

Underwriting profit of insurance segments
11,299

 
1,623

 
1,744

 

 
14,666

Net investment income
3,042

 
711

 
8,017

 
1,486

 
13,256

Interest expense

 

 

 
2,522

 
2,522

Segment revenues
137,327

 
13,955

 
65,526

 
1,536

 
218,344

Segment goodwill
181,831

 

 

 

 
181,831

Segment assets
909,963

 
495,096

 
1,368,872

 
88,079

 
2,862,010

  

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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
March 31,
 
2019
 
2018
 
(in thousands)
Underwriting profit of the insurance segments:
 

 
 

Excess and Surplus Lines
$
13,102

 
$
11,299

Specialty Admitted Insurance
1,623

 
1,623

Casualty Reinsurance
327

 
1,744

Total underwriting profit of insurance segments
15,052

 
14,666

Other operating expenses of the Corporate and Other segment
(7,906
)
 
(7,431
)
Underwriting profit
7,146

 
7,235

Net investment income
19,431

 
13,256

Net realized and unrealized gains (losses) on investments
1,625

 
(810
)
Amortization of intangible assets
(149
)
 
(149
)
Other income and expenses
246

 
104

Interest expense
(2,808
)
 
(2,522
)
Income before taxes
$
25,491

 
$
17,114

9.    Other Operating Expenses and Other Expenses
Other operating expenses consist of the following:
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands)
Amortization of policy acquisition costs
$
18,621

 
$
30,198

Other underwriting expenses of the operating segments
19,225

 
17,154

Other operating expenses of the Corporate and Other segment
7,906

 
7,431

Total
$
45,752

 
$
54,783

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, 2017.
The Company reviews fair value prices provided by its outside investment managers for reasonableness by comparing the fair values provided by the managers to those provided by its investment custodian. The Company also reviews and monitors changes in unrealized gains and losses. The Company has not historically adjusted security prices. The Company obtains an understanding of the methods, models and inputs used by the investment managers and independent pricing services, and controls are in place to validate that prices provided represent fair values. The Company’s control process includes, but is not limited to, initial and ongoing evaluation of the methodologies used, a review of specific securities and an assessment for proper classification within the fair value hierarchy, and obtaining and reviewing internal control reports for our investment manager that obtains fair values from independent pricing services.

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


Assets measured at fair value on a recurring basis as of March 31, 2019 are summarized below:
 
Fair Value Measurements Using
 
Quoted Prices
in Active
Markets for
Identical
Assets
Level 1
 
Significant
Other
Observable
Inputs
Level 2
 
Significant
Unobservable
Inputs
Level 3
 
Total
 
(in thousands)
Fixed maturity securities, available-for-sale:
 

 
 

 
 

 
 

State and municipal
$

 
$
141,342

 
$

 
$
141,342

Residential mortgage-backed

 
223,544

 

 
223,544

Corporate

 
552,494

 

 
552,494

Commercial mortgage and asset-backed

 
204,517

 

 
204,517

U.S. Treasury securities and obligations guaranteed by the U.S. government
126,472

 
523

 

 
126,995

Redeemable preferred stock

 
2,034

 

 
2,034

Total fixed maturity securities, available-for-sale
$
126,472

 
$
1,124,454

 
$

 
$
1,250,926

Equity securities:
 

 
 

 
 

 
 

Preferred stock

 
65,148

 

 
65,148

Common stock
18,323

 
757

 
177

 
19,257

Total equity securities
$
18,323

 
$
65,905

 
$
177

 
$
84,405

Short-term investments
$

 
$
92,134

 
$

 
$
92,134

  
Assets measured at fair value on a recurring basis as of December 31, 2018 are summarized below:
 
Fair Value Measurements Using
 
Quoted Prices
in Active
Markets for
Identical
Assets
Level 1
 
Significant
Other
Observable
Inputs
Level 2
 
Significant
Unobservable
Inputs
Level 3
 
Total
 
(in thousands)
Fixed maturity securities, available-for-sale:
 

 
 

 
 

 
 

State and municipal
$

 
$
149,295

 
$

 
$
149,295

Residential mortgage-backed

 
204,109

 

 
204,109

Corporate

 
524,768

 

 
524,768

Commercial mortgage and asset-backed

 
192,797

 
4,228

 
197,025

U.S. Treasury securities and obligations guaranteed by the U.S. government
106,651

 
542

 

 
107,193

Redeemable preferred stock

 
1,812

 

 
1,812

Total fixed maturity securities, available-for-sale
$
106,651

 
$
1,073,323

 
$
4,228

 
$
1,184,202

Equity securities:
 

 
 

 
 

 
 

Preferred stock

 
60,740

 

 
60,740

Common stock
16,674

 
757

 
214

 
17,645

Total equity securities
$
16,674

 
$
61,497

 
$
214

 
$
78,385

Short-term investments
$
1,250

 
$
80,716

 
$

 
$
81,966

 
The Company held one available-for-sale fixed maturity security at December 31, 2018 for which the fair value was determined using significant unobservable inputs (Level 3). A market approach using prices in trades of comparable securities was utilized to determine a fair value of $4.2 million for the security at December 31, 2018. A principal payment of $456,000 was received on the available-for-sale fixed maturity security in the three months ended March 31, 2019. The Company was able to obtain a quoted price from a pricing vendor for the available-for-sale fixed maturity security at March 31, 2019 and it was transferred to Level 2.

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


At March 31, 2019 and December 31, 2018, the Company held one equity security for which the fair value was determined using significant unobservable inputs (Level 3). A market approach using prices in trades of comparable securities was utilized to determine a fair value for the security of $177,000 at March 31, 2019 and $214,000 at December 31, 2018. There were no purchases or sales involving Level 3 securities for the three months ended March 31, 2019 or 2018. There were no transfers involving Level 3 securities for the three months ended March 31, 2018.
Transfers out of Level 3 occur when the Company is able to obtain reliable prices from pricing vendors for securities for which the Company was previously unable to obtain reliable prices. Transfers in to Level 3 occur when the Company is unable to obtain reliable prices for securities from pricing vendors and instead must use broker price quotes to value the securities.
There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2019 or 2018. The Company recognizes transfers between levels at the beginning of the reporting period.
There were no realized gains or losses included in earnings for the three months ended March 31, 2019 attributable to the change in unrealized gains or losses relating to Level 3 assets valued at fair value on a recurring basis that are still held at March 31, 2019.
The Company measures certain bank loan participations at fair value on a non-recurring basis during the year as part of the Company’s impairment evaluation when loans are determined by management to be impaired.
Assets measured at fair value on a nonrecurring basis are summarized below:
 
Fair Value Measurements Using
 
Quoted Prices
In Active
Markets for
Identical Assets
Level 1
 
Significant
Other
Observable
Inputs
Level 2
 
Significant
Unobservable
Inputs
Level 3
 
Total
 
(in thousands)
March 31, 2019
 

 
 

 
 

 
 

Bank loan participations held-for-investment
$

 
$

 
$
4,394

 
$
4,394

December 31, 2018
 

 
 

 
 

 
 

Bank loan participations held-for-investment
$

 
$

 
$

 
$

 
Bank loan participations held-for-investment that were determined to be impaired were written down to their fair value of $4.4 million at March 31, 2019. Management concluded that none of the bank loan participations held-for-investment were impaired as of December 31, 2018.
In the determination of the fair value for bank loan participations and certain high yield bonds, the Company’s investment manager endeavors to obtain data from multiple external pricing sources. External pricing sources may include brokers, dealers and price data vendors that provide a composite price based on prices from multiple dealers. Such external pricing sources typically provide valuations for normal institutional size trading units of such securities using methods based on market transactions for comparable securities, and various relationships between securities, as generally recognized by institutional dealers. For investments in which the investment manager determines that only one external pricing source is appropriate or if only one external price is available, the relevant investment is generally recorded at fair value based on such price.
Investments for which external sources are not available or are determined by the investment manager not to be representative of fair value are recorded at fair value as determined by the Company, with input from its investment managers and valuation specialists as considered necessary. In determining the fair value of such investments, the Company considers one or more of the following factors: type of security held, convertibility or exchangeability of the security, redeemability of the security (including the timing of redemptions), application of industry accepted valuation models, recent trading activity, liquidity, estimates of liquidation value, purchase cost, and prices received for securities with similar terms of the same issuer or similar issuers. At March 31, 2019 and December 31, 2018, there were no investments for which external sources were unavailable to determine fair value.

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


The carrying values and fair values of financial instruments are summarized below:
 
March 31, 2019
 
December 31, 2018
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
(in thousands)
Assets
 

 
 

 
 

 
 

Fixed maturity securities, available-for-sale
$
1,250,926

 
$
1,250,926

 
$
1,184,202

 
$
1,184,202

Equity securities
84,405

 
84,405

 
78,385

 
78,385

Bank loan participations held-for-investment
263,318

 
257,298

 
260,972

 
250,697

Cash and cash equivalents
132,552

 
132,552

 
172,457

 
172,457

Short-term investments
92,134

 
92,134

 
81,966

 
81,966

Other invested assets – notes receivable
13,250

 
18,701

 
13,250

 
18,687

Liabilities
 

 
 

 
 

 
 

Senior debt
98,300

 
100,038

 
118,300

 
118,317

Junior subordinated debt
104,055

 
120,815

 
104,055

 
117,057

 
The fair values of fixed maturity securities and equity securities have been determined using quoted market prices for securities traded in the public market or prices using bid or closing prices for securities not traded in the public marketplace. The fair values of cash and cash equivalents and short-term investments approximate their carrying values due to their short-term maturity.
The fair values of other invested assets-notes receivable, senior debt, and junior subordinated debt at March 31, 2019 and December 31, 2018 were determined by calculating the present value of expected future cash flows under the terms of the note agreements or debt agreements, as applicable, discounted at an estimated market rate of interest at March 31, 2019 and December 31, 2018, respectively.
The fair values of bank loan participations held-for-investment, senior debt, and junior subordinated debt at March 31, 2019 and December 31, 2018 were determined using inputs to the valuation methodology that are unobservable (Level 3).
11.    Capital Stock and Equity Awards
The Company issued 173,585 common shares in the three months ended March 31, 2019 with 98,975 of the new shares related to stock option exercises and 74,610 of the new shares related to vesting of RSUs. The total common shares outstanding increased from 29,988,460 at December 31, 2018 to 30,162,045 at March 31, 2019.
The Company declared the following dividends during the first three months of 2019 and 2018:
Date of Declaration
 
Dividend per Common Share
 
Payable to Shareholders of Record on
 
Payment Date
 
Total Amount
 
 
 
 
 
 
 
 
 
2019
 
 
 
 
 
 
 
 
February 20, 2019
 
$
0.30

 
March 11, 2019
 
March 29, 2019
 
$
9.1
 million
 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
February 22, 2018
 
$
0.30

 
March 12, 2018
 
March 30, 2018
 
$
9.0
  million
Included in the total dividends for the three months ended March 31, 2019 and 2018 are $107,000 and $99,000 of dividend equivalents on unvested RSUs, respectively. The balance of dividends payable on unvested RSUs was $457,000 at March 31, 2019 and $557,000 at December 31, 2018.
Equity Incentive Plans
The Company’s shareholders have approved various equity incentive plans, including the Amended and Restated 2009 Equity Incentive Plan (the “Legacy Plan”), the 2014 Long Term Incentive Plan (“2014 LTIP”), and the 2014 Non-Employee Director Incentive Plan (“2014 Director Plan”) (collectively, the “Plans”). All awards issued under the Plans are issued at the discretion of the Board of Directors. Under the Legacy Plan, employees received non-qualified stock options. Options are outstanding under the Legacy Plan; however, no additional awards may be granted.

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


Employees are eligible to receive non-qualified stock options, incentive stock options, share appreciation rights, performance shares, restricted shares, RSUs, and other awards under the 2014 LTIP. The maximum number of shares available for issuance under the 2014 LTIP is 4,171,150, and at March 31, 2019, 1,575,796 shares are available for grant.
Non-employee directors of the Company are eligible to receive non-qualified stock options, share appreciation rights, performance shares, restricted shares, RSUs, and other awards under the 2014 Director Plan. The maximum number of shares available for issuance under the 2014 Director Plan is 50,000, and at March 31, 2019, 8,594 shares are available for grant.
Generally, awards issued under the 2014 LTIP and 2014 Director Plan vest immediately in the event that an award recipient is terminated without Cause (as defined in the applicable plans), and in the case of the 2014 LTIP for Good Reason (as defined in the applicable plans), at any time following a Change in Control (as defined in the applicable plans).
Options
The following table summarizes option activity:
 
Three Months Ended March 31,
 
2019
 
2018
 
Shares
 
Weighted-
Average
Exercise
Price
 
Shares
 
Weighted-
Average
Exercise
Price
Outstanding:
 

 
 

 
 

 
 

Beginning of period
1,115,324

 
$
29.02

 
1,479,236

 
$
27.81

Granted

 
$

 

 
$

Exercised
(125,349
)
 
$
29.47

 
(142,129
)
 
$
20.14

Forfeited
(3,759
)
 
$
36.37

 

 
$

End of period
986,216

 
$
28.94

 
1,337,107

 
$
28.63

Exercisable, end of period
926,166

 
$
28.07

 
983,508

 
$
26.06


All of the outstanding options vest over two to four years and have a contractual life of seven years from the original date of grant. All of the outstanding options have an exercise price equal to the fair value of the underlying shares at the date of grant. The weighted-average remaining contractual life of the options outstanding and options exercisable at March 31, 2019 was 3.4 years and 3.3 years, respectively.
RSUs
The following table summarizes RSU activity:
 
Three Months Ended March 31,
 
2019
 
2018
 
Shares
 
Weighted-
Average
Grant Date
Fair Value
 
Shares
 
Weighted-
Average
Grant Date
Fair Value
 
 
 
 
 
 

 
 

Unvested, beginning of period
300,142

 
$
39.22

 
178,882

 
$
37.93

Granted
167,295

 
$
42.07

 
214,907

 
$
39.81

Vested
(109,545
)
 
$
39.93

 
(62,714
)
 
$
40.90

Forfeited
(1,398
)
 
$
40.26

 

 
$

Unvested, end of period
356,494

 
$
40.33

 
331,075

 
$
38.59

The vesting period of RSUs granted to employees range from one to five years and vest ratably over the respective vesting period, and the majority vest in three years. All RSUs granted to date to non-employee directors had a one year vesting period. The holders of RSUs are entitled to dividend equivalents. The dividend equivalents are settled in cash at the same time that the underlying RSUs vest and are subject to the same risk of forfeiture as the underlying shares. The fair value of the RSUs granted is based on the market price of the underlying shares at the date of grant.

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


Compensation Expense
Share based compensation expense is recognized on a straight line basis over the vesting period. The amount of expense and related tax benefit is summarized below:
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands)
Share based compensation expense
$
1,674

 
$
1,455

U.S. tax benefit on share based compensation expense
200

 
173

As of March 31, 2019, the Company had $13.7 million of unrecognized share based compensation expense expected to be charged to earnings over a weighted-average period of 2.2 years.
12.    Subsequent Events
On April 30, 2019, the Board of Directors declared a cash dividend of $0.30 per common share. The dividend is payable on June 28, 2019 to shareholders of record on June 10, 2019.
On April 30, 2019, the Board of Directors granted awards under the 2014 LTIP to the Company’s employees. RSUs for 11,261 shares were awarded with a fair value on the date of grant of $42.22 per share. The RSUs vest over three years.
At the 2019 Annual General Meeting of Shareholders of the Company (the “Annual Meeting”) held on April 30, 2019, the Company's shareholders approved an amendment to the James River Group Holdings, Ltd. 2014 Non-Employee Director Incentive Plan (the “Non-Employee Director Plan”). The Board of Directors of the Company had previously approved the amendment. The amendment increases the number of the Company's common shares authorized for issuance under the Non-Employee Director Plan by 100,000 shares. No other modifications were made to the Non-Employee Director Plan.







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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. Factors that could cause such differences are discussed in the sections entitled “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q, or “Quarterly Report”, and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report, and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018.
 The accompanying condensed consolidated financial statements and related notes have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and include the accounts of James River Group Holdings, Ltd. and its subsidiaries. Unless the context indicates or suggests otherwise, references to “the Company”, “we”, “us” and “our” refer to James River Group Holdings, Ltd. and its subsidiaries.
Our Business
James River Group Holdings, Ltd. is a Bermuda-based holding company. We own and operate a group of specialty insurance and reinsurance companies with the objective of generating compelling returns on tangible equity while limiting underwriting and investment volatility. We seek to accomplish this by consistently earning profits from insurance and reinsurance underwriting and generating meaningful risk-adjusted investment returns while managing our capital opportunistically.
Our underwriting profit for the three months ended March 31, 2019 was $7.1 million. In the prior year, for the same period, we had an underwriting profit of $7.2 million.
We are organized into four reportable segments, which are separately managed business units:
The Excess and Surplus Lines segment offers commercial excess and surplus lines liability and property insurance in every U.S. state, the District of Columbia, Puerto Rico and the U.S. Virgin Islands through James River Insurance Company and its wholly-owned subsidiary, James River Casualty Company;
The Specialty Admitted Insurance segment focuses on niche classes within the standard insurance markets, such as workers’ compensation coverage for residential contractors, light manufacturing operations, transportation workers and healthcare workers and fronting business, where we retain a small percentage of the risk and seek to earn fee income by allowing other carriers and producers to use our licensure, ratings and infrastructure. This segment has admitted licenses and the authority to write excess and surplus lines insurance in 49 states and the District of Columbia;
The Casualty Reinsurance segment primarily provides proportional and working layer casualty reinsurance to third parties (primarily through reinsurance intermediaries) and stop loss reinsurance to Carolina Re Ltd (“Carolina Re”), through JRG Reinsurance Company Ltd. (“JRG Re”), both Bermuda-based reinsurance companies. JRG Re has also in the past provided reinsurance to the Company's U.S. based insurance subsidiaries through a quota-share reinsurance agreement; Carolina Re was formed in 2018 to do this as well; and