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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 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)
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
 
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
Non-accelerated filer 
Smaller reporting company
Emerging growth company
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 November 5, 2019: 30,405,422
 



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, all 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 taxes 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)
September 30,
2019
 
December 31,
2018
 
(in thousands)
Assets
 

 
 

Invested assets:
 

 
 

Fixed maturity securities, available-for-sale, at fair value (amortized cost: 2019 – $1,338,131; 2018 – $1,199,409)
$
1,377,323

 
$
1,184,202

Equity securities, at fair value (cost:  2019 – $78,906; 2018 – $77,152)
88,840

 
78,385

Bank loan participations held-for-investment, at amortized cost, net of allowance
249,907

 
260,972

Short-term investments
49,884

 
81,966

Other invested assets
65,864

 
72,321

Total invested assets
1,831,818

 
1,677,846

 
 
 
 
Cash and cash equivalents
256,302

 
172,457

Accrued investment income
13,603

 
11,110

Premiums receivable and agents’ balances, net
360,587

 
307,899

Reinsurance recoverable on unpaid losses
614,827

 
467,371

Reinsurance recoverable on paid losses
40,822

 
18,344

Prepaid reinsurance premiums
167,338

 
112,498

Deferred policy acquisition costs
60,970

 
54,450

Intangible assets, net
37,090

 
37,537

Goodwill
181,831

 
181,831

Other assets
95,728

 
95,433

Total assets
$
3,660,916

 
$
3,136,776

 
See accompanying notes.
 


5

Table of Contents
 

JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets (continued)
  
 
(Unaudited)
September 30,
2019
 
December 31,
2018
 
(in thousands, except share amounts)
Liabilities and Shareholders’ Equity
 

 
 

Liabilities:
 

 
 

Reserve for losses and loss adjustment expenses
$
1,941,307

 
$
1,661,459

Unearned premiums
510,109

 
386,473

Payables to reinsurers
131,093

 
61,662

Senior debt
98,300

 
118,300

Junior subordinated debt
104,055

 
104,055

Accrued expenses
57,637

 
51,792

Other liabilities
49,446

 
43,794

Total liabilities
2,891,947

 
2,427,535

Commitments and contingent liabilities


 


Shareholders’ equity:
 

 
 

Common Shares – 2019 and 2018: $0.0002 par value; 200,000,000 shares authorized; 30,401,270 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
655,998

 
645,310

Retained earnings
78,344

 
79,753

Accumulated other comprehensive income (loss)
34,621

 
(15,828
)
Total shareholders’ equity
768,969

 
709,241

Total liabilities and shareholders’ equity
$
3,660,916

 
$
3,136,776

 
See accompanying notes.


6

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


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands, except share amounts)
Revenues
 

 
 

 
 

 
 

Gross written premiums
$
388,228

 
$
279,969

 
$
1,095,565

 
$
871,463

Ceded written premiums
(164,359
)
 
(106,528
)
 
(424,045
)
 
(298,438
)
Net written premiums
223,869

 
173,441

 
671,520

 
573,025

Change in net unearned premiums
(10,495
)
 
31,249

 
(68,880
)
 
40,817

Net earned premiums
213,374

 
204,690

 
602,640

 
613,842

Net investment income
17,878

 
16,410

 
54,844

 
45,801

Net realized and unrealized (losses) gains on investments
(2,357
)
 
467

 
331

 
(407
)
Other income
2,579

 
3,125

 
8,160

 
11,841

Total revenues
231,474

 
224,692

 
665,975

 
671,077

Expenses
 

 
 

 
 

 
 
Losses and loss adjustment expenses
214,084

 
150,387

 
501,064

 
448,754

Other operating expenses
41,692

 
49,180

 
132,287

 
155,714

Other expenses
372

 
(131
)
 
1,055

 
(34
)
Interest expense
2,594

 
2,991

 
8,086

 
8,459

Amortization of intangible assets
149

 
149

 
447

 
447

Total expenses
258,891

 
202,576

 
642,939

 
613,340

(Loss) income before taxes
(27,417
)
 
22,116

 
23,036

 
57,737

Income tax (benefit) expense
(2,250
)
 
2,535

 
5,168

 
5,539

Net (loss) income
(25,167
)
 
19,581

 
17,868

 
52,198

Other comprehensive income (loss):
 

 
 

 
 

 
 
Net unrealized gains (losses), net of taxes of $638 and $3,949 in 2019 and $(407) and $(1,134) in 2018
9,457

 
(4,389
)
 
50,449

 
(29,494
)
Total comprehensive (loss) income
$
(15,710
)
 
$
15,192

 
$
68,317

 
$
22,704

Per share data:
 

 
 

 
 

 
 
Basic (loss) earnings per share
$
(0.83
)
 
$
0.65

 
$
0.59

 
$
1.75

Diluted (loss) earnings per share
$
(0.83
)
 
$
0.64

 
$
0.58

 
$
1.72

Dividend declared per share
$
0.30

 
$
0.30

 
$
0.90

 
$
0.90

Weighted-average common shares outstanding:
 

 
 

 
 

 
 
Basic
30,382,105

 
29,935,216

 
30,230,490

 
29,861,467

Diluted
30,382,105

 
30,380,145

 
30,659,389

 
30,290,183


 
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 June 30, 2019
30,330,675

 
$
6

 
$

 
$
653,151

 
$
112,729

 
$
25,164

 
$
791,050

Net loss

 

 

 

 
(25,167
)
 

 
(25,167
)
Other comprehensive income

 

 

 

 

 
9,457

 
9,457

Dividends

 

 

 

 
(9,218
)
 

 
(9,218
)
Exercise of stock options
70,595

 

 

 
1,068

 

 

 
1,068

Compensation expense under share incentive plans

 

 

 
1,779

 

 

 
1,779

Balances at September 30, 2019
30,401,270

 
$
6

 
$

 
$
655,998

 
$
78,344

 
$
34,621

 
$
768,969

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2018
29,988,460

 
$
6

 
$

 
$
645,310

 
$
79,753

 
$
(15,828
)
 
$
709,241

Net income

 

 

 

 
17,868

 

 
17,868

Other comprehensive income

 

 

 

 

 
50,449

 
50,449

Dividends

 

 

 

 
(27,557
)
 

 
(27,557
)
Exercise of stock options
336,533

 

 

 
6,799

 

 

 
6,799

Vesting of RSUs
76,277

 

 

 
(1,374
)
 

 

 
(1,374
)
Compensation expense under share incentive plans

 

 

 
5,263

 

 

 
5,263

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


 

 

 

 
8,280

 

 
8,280

Balances at September 30, 2019
30,401,270

 
$
6

 
$

 
$
655,998

 
$
78,344

 
$
34,621

 
$
768,969

 
See accompanying notes.


8

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 June 30, 2018
29,917,821

 
$
6

 
$

 
$
641,290

 
$
66,677

 
$
(18,730
)
 
$
689,243

Net income

 

 

 

 
19,581

 

 
19,581

Other comprehensive loss

 

 

 

 

 
(4,389
)
 
(4,389
)
Dividends

 

 

 

 
(9,080
)
 

 
(9,080
)
Exercise of stock options
32,299

 

 

 
372

 

 

 
372

Compensation expense under share incentive plans

 

 

 
1,681

 

 

 
1,681

Balances at September 30, 2018
29,950,120

 
$
6

 
$

 
$
643,343

 
$
77,178

 
$
(23,119
)
 
$
697,408

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2017
29,696,682

 
$
6

 
$

 
$
636,149

 
$
48,198

 
$
10,346

 
$
694,699

Net income

 

 

 

 
52,198

 

 
52,198

Other comprehensive loss

 

 

 

 

 
(29,494
)
 
(29,494
)
Dividends

 

 

 

 
(27,189
)
 

 
(27,189
)
Exercise of stock options
210,134

 

 

 
3,175

 

 

 
3,175

Vesting of RSUs
43,304

 

 

 
(777
)
 

 

 
(777
)
Compensation expense under share incentive plans

 

 

 
4,796

 

 

 
4,796

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 September 30, 2018
29,950,120

 
$
6

 
$

 
$
643,343

 
$
77,178

 
$
(23,119
)
 
$
697,408


See accompanying notes.
 

9

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



 
Nine Months Ended September 30,
 
2019
 
2018
 
(in thousands)
Operating activities
 

 
 

Net cash provided by operating activities
$
213,787

 
$
251,913

Investing activities
 

 
 

Securities available-for-sale:
 

 
 

Purchases – fixed maturity securities
(327,725
)
 
(367,279
)
Sales – fixed maturity securities
102,030

 
82,498

Maturities and calls – fixed maturity securities
85,921

 
113,980

Purchases – equity securities
(4,975
)
 
(6,274
)
Sales – equity securities
3,131

 
3,180

Bank loan participations:
 

 
 

Purchases
(73,102
)
 
(165,878
)
Sales
41,707

 
98,739

Maturities
34,303

 
43,139

Other invested assets:
 

 
 

Purchases

 
(6,993
)
Return of capital
1,477

 
260

Redemptions
7,016

 

Short-term investments, net
32,082

 
(3,415
)
Securities receivable or payable, net
10,673

 
3,064

Purchases of property and equipment
(442
)
 
(595
)
Net cash used in investing activities
(87,904
)
 
(205,574
)
Financing activities
 

 
 

Senior debt repayment
(20,000
)
 

Dividends paid
(27,463
)
 
(27,024
)
Issuance of common shares under equity incentive plans
7,961

 
4,296

Common share repurchases
(2,536
)
 
(1,898
)
Other financing activities

 
(791
)
Net cash used in financing activities
(42,038
)
 
(25,417
)
Change in cash and cash equivalents
83,845

 
20,922

Cash and cash equivalents at beginning of period
172,457

 
163,495

Cash and cash equivalents at end of period
$
256,302

 
$
184,417

Supplemental information
 

 
 

Interest paid
$
9,510

 
$
8,380

 
See accompanying notes.
 



10

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, a Virginia domiciled 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.

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


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 and purpose, and the Company’s relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE. The Company reassesses its VIE determination with respect to an entity on an ongoing basis.
The Company holds interests in VIEs through certain equity method investments included in “other invested assets” in the accompanying condensed consolidated balance sheets. The Company has determined that it should not consolidate any of the VIEs as it is not the primary beneficiary in any of the relationships. Although the investments resulted in the Company holding variable interests in the entities, they did not empower the Company to direct the activities that most significantly impact the economic performance of the entities. The Company’s investments related to these VIEs totaled $31.6 million and $29.8 million as of September 30, 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 nine months ended September 30, 2019 and 2018, our U.S. federal income tax expense was 22.4% and 9.6% 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. The effective tax rate for the nine months ended September 30, 2019 was elevated due to changes in reserve estimates between accident years in the commercial auto business, and the related impact on the mix of income reported by country.
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 increase retained earnings by $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 September 30, 2019, right-of-use assets and lease liabilities were $16.2 million and $17.1 million, respectively. Operating lease costs were $1.3 million and $3.8 million in the three and nine months ended September 30, 2019, respectively, compared to $1.3 million and $3.5 million in the respective prior year periods. The weighted-average discount rate and weighted average remaining lease term for operating leases was 4.3% and 5.5 years, respectively, as of September 30, 2019.

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


The table below summarizes maturities of the Company’s operating lease liabilities as of September 30, 2019, which reconciles to total lease liabilities included in other liabilities on the Company’s condensed consolidated balance sheet:
Years ending December 31,
(in thousands)

2019
$
959

2020
3,680

2021
3,491

2022
3,293

2023
3,099

Thereafter
4,706

Total lease payments
19,228

Less imputed interest
(2,159
)
Total operating lease liabilities
$
17,069


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 requires the recognition of credit losses when 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 is reflected in 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. The Company plans to adopt the ASU on January 1, 2020 using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the date of adoption. The Company is finalizing its implementation process for the adoption of this ASU and the evaluation of what effects the new standard will have on the Company’s financial statements.
This ASU will have the greatest impact on our portfolio of bank loan participations and on our allowance for uncollectible reinsurance balances. In connection with the adoption of this ASU, we expect to elect the fair value option in accounting for bank loan participations effective January 1, 2020. We also expect to use the targeted transition relief offered by ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief to also elect the fair value option to account for bank loan participations already held at the January 1, 2020 date of adoption. Under the fair value option, bank loan participations will be measured at fair value, and changes in unrealized gains and losses in bank loan participations will be reported in our income statement as net realized and unrealized gains (losses) on investments.
Upon adoption of this ASU, we anticipate that we will establish an allowance for uncollectible reinsurance balances, but because we purchase reinsurance from financially strong reinsurers or we have collateral securing the recoverables, we do not expect that the effect of adoption will be material to our financial position.

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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)
September 30, 2019
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

State and municipal
$
145,016

 
$
9,460

 
$
(89
)
 
$
154,387

Residential mortgage-backed
245,315

 
2,849

 
(951
)
 
247,213

Corporate
603,524

 
21,887

 
(231
)
 
625,180

Commercial mortgage and asset-backed
230,417

 
5,221

 
(434
)
 
235,204

U.S. Treasury securities and obligations guaranteed by the U.S. government
111,834

 
1,538

 
(40
)
 
113,332

Redeemable preferred stock
2,025

 

 
(18
)
 
2,007

Total fixed maturity securities, available-for-sale
$
1,338,131


$
40,955


$
(1,763
)

$
1,377,323

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 September 30, 2019 are summarized, by contractual maturity, as follows:
 
Cost or
Amortized
Cost
 
Fair
Value
 
(in thousands)
One year or less
$
76,678

 
$
77,005

After one year through five years
459,889

 
470,945

After five years through ten years
205,048

 
214,952

After ten years
118,759

 
129,997

Residential mortgage-backed
245,315

 
247,213

Commercial mortgage and asset-backed
230,417

 
235,204

Redeemable preferred stock
2,025

 
2,007

Total
$
1,338,131

 
$
1,377,323

 
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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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)
September 30, 2019
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

State and municipal
$
14,250

 
$
(87
)
 
$
667

 
$
(2
)
 
$
14,917

 
$
(89
)
Residential mortgage-backed
21,623

 
(34
)
 
60,059

 
(917
)
 
81,682

 
(951
)
Corporate
17,310

 
(149
)
 
29,627

 
(82
)
 
46,937

 
(231
)
Commercial mortgage and asset-backed
18,225

 
(70
)
 
52,823

 
(364
)
 
71,048

 
(434
)
U.S. Treasury securities and obligations guaranteed by the U.S. government
105

 
(1
)
 
16,030

 
(39
)
 
16,135

 
(40
)
Redeemable preferred stock
2,007

 
(18
)
 

 

 
2,007

 
(18
)
Total fixed maturity securities, available-for-sale
$
73,520


$
(359
)

$
159,206


$
(1,404
)

$
232,726


$
(1,763
)
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 76 issuers that were in an unrealized loss position at September 30, 2019 with a total fair value of $232.7 million and gross unrealized losses of $1.8 million. None of the fixed maturity securities with unrealized losses has ever missed, or been delinquent on, a scheduled principal or interest payment.
At September 30, 2019, 99.6% of the Company’s fixed maturity security portfolio was rated “BBB-” or better (“investment grade”) by Standard & Poor’s or received an equivalent rating from another nationally recognized rating agency. Fixed maturity securities with ratings below investment grade by Standard & Poor’s or another nationally recognized rating agency at September 30, 2019 had an aggregate fair value of $5.3 million and an aggregate net unrealized gain of $79,000.
At March 31, 2019, management concluded that three fixed maturity securities from one issuer that we intended to sell at a loss in the second quarter were impaired. 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 September 30, 2019 or December 31, 2018 had experienced an other-than-temporary impairment. For fixed maturity securities available-for-sale that are not other-than-temporarily impaired at September 30, 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 five loans from four issuers in the Company's bank loan portfolio were impaired at September 30, 2019. At September 30, 2019, the impaired loans had a carrying value of $6.4 million, unpaid principal of $12.3 million, and an allowance for credit losses of $5.9 million, $4.2 million of which related to two loans from one issuer who is experiencing liquidity concerns resulting from revenue declines and poor growth prospects in its most profitable segment. Management concluded that none of the loans in the Company's bank loan portfolio were impaired at September 30, 2018 or December 31, 2018. The aggregate allowance for credit losses on impaired loans was $3.2 million at December 31, 2017.

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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, a public corporation and governmental agency of the Commonwealth of Puerto Rico. Management concluded that an allowance for credit losses should be established