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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 March 31, 2020
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 April 28, 2020: 30,520,428
 



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, or decision to terminate, 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, such as natural disasters and terrorist acts, which substantially exceed our expectations and/or exceed the amount of reinsurance we have purchased to protect us from such events;
the effects of the COVID-19 pandemic and associated government actions on our operations and financial  performance;
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;

3


the potential impact of internal or external fraud, operational errors, systems malfunctions or cyber security incidents;
our ability to manage our growth effectively;
inadequacy of premiums we charge to compensate us for our losses incurred;
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, 2020.
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

 

PART 1. FINANCIAL INFORMATION

 Item 1. Financial Statements
 
 
JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets

 
(Unaudited)
March 31,
2020
 
December 31,
2019
 
(in thousands)
Assets
 

 
 

Invested assets:
 

 
 

Fixed maturity securities, available-for-sale, at fair value (amortized cost: 2020 – $1,540,822; 2019 – $1,398,533)
$
1,570,605

 
$
1,433,626

Equity securities, at fair value (cost:  2020 – $77,218; 2019 – $73,244)
71,394

 
80,735

Bank loan participations (2020: at fair value; 2019: held-for-investment, at amortized cost, net of allowance)
202,888

 
260,864

Short-term investments
71,058

 
156,925

Other invested assets
47,697

 
61,210

Total invested assets
1,963,642

 
1,993,360

 
 
 
 
Cash and cash equivalents
291,223

 
206,912

Restricted cash equivalents
1,107,321

 
1,199,164

Accrued investment income
13,781

 
13,597

Premiums receivable and agents’ balances, net
312,842

 
369,462

Reinsurance recoverable on unpaid losses, net
691,669

 
668,045

Reinsurance recoverable on paid losses
42,201

 
33,221

Prepaid reinsurance premiums
205,175

 
178,976

Deferred policy acquisition costs
58,618

 
62,006

Intangible assets, net
36,791

 
36,940

Goodwill
181,831

 
181,831

Other assets
91,716

 
80,891

Total assets
$
4,996,810

 
$
5,024,405

 
See accompanying notes.
 


5

 

JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets (continued)
  
 
(Unaudited)
March 31,
2020
 
December 31,
2019
 
(in thousands, except share amounts)
Liabilities and Shareholders’ Equity
 

 
 

Liabilities:
 

 
 

Reserve for losses and loss adjustment expenses
$
2,043,358

 
$
2,045,506

Unearned premiums
539,564

 
524,377

Payables to reinsurers
109,499

 
108,059

Funds held
1,107,321

 
1,199,164

Senior debt
277,300

 
158,300

Junior subordinated debt
104,055

 
104,055

Accrued expenses
51,808

 
58,416

Other liabilities
43,588

 
47,947

Total liabilities
4,276,493

 
4,245,824

Commitments and contingent liabilities

 

Shareholders’ equity:
 

 
 

Common Shares – 2020 and 2019: $0.0002 par value; 200,000,000 shares authorized; 30,520,428 and 30,424,391 shares issued and outstanding, respectively
6

 
6

Preferred Shares – 2020 and 2019: $0.00125 par value; 20,000,000 shares authorized; no shares issued and outstanding

 

Additional paid-in capital
657,704

 
657,875

Retained earnings
35,412

 
89,586

Accumulated other comprehensive income
27,195

 
31,114

Total shareholders’ equity
720,317

 
778,581

Total liabilities and shareholders’ equity
$
4,996,810

 
$
5,024,405

 
See accompanying notes.


6

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


 
Three Months Ended
March 31,
 
2020
 
2019
 
(in thousands, except share amounts)
Revenues
 

 
 

Gross written premiums
$
283,841

 
$
327,334

Ceded written premiums
(149,187
)
 
(119,593
)
Net written premiums
134,654

 
207,741

Change in net unearned premiums
11,264

 
(17,589
)
Net earned premiums
145,918

 
190,152

Net investment income
20,836

 
19,431

Net realized and unrealized (losses) gains on investments
(58,407
)
 
1,625

Other income
1,937

 
2,919

Total revenues
110,284

 
214,127

Expenses
 

 
 
Losses and loss adjustment expenses
96,856

 
139,927

Other operating expenses
51,621

 
45,752

Interest expense
2,876

 
2,808

Amortization of intangible assets
149

 
149

Total expenses
151,502

 
188,636

(Loss) income before taxes
(41,218
)
 
25,491

Income tax (benefit) expense
(4,403
)
 
2,763

Net (loss) income
(36,815
)
 
22,728

Other comprehensive (loss) income:
 

 
 
Net unrealized (losses) gains, net of taxes of $(1,391) in 2020 and $1,446 in 2019
(3,919
)
 
20,260

Total comprehensive (loss) income
$
(40,734
)
 
$
42,988

Per share data:
 

 
 
Basic (loss) earnings per share
$
(1.21
)
 
$
0.76

Diluted (loss) earnings per share
$
(1.21
)
 
$
0.75

Dividend declared per share
$
0.30

 
$
0.30

Weighted-average common shares outstanding:
 

 
 
Basic
30,476,307

 
30,059,398

Diluted
30,476,307

 
30,472,304


 
See accompanying notes.
 

 

7

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, 2019
30,424,391

 
$
6

 
$

 
$
657,875

 
$
89,586

 
$
31,114

 
$
778,581

Net loss

 

 

 

 
(36,815
)
 

 
(36,815
)
Other comprehensive loss

 

 

 

 

 
(3,919
)
 
(3,919
)
Dividends

 

 

 

 
(9,267
)
 

 
(9,267
)
Vesting of RSUs
96,037

 

 

 
(2,038
)
 

 

 
(2,038
)
Compensation expense under share incentive plans

 

 

 
1,867

 

 

 
1,867

Cumulative effect of fair value option election (see Note 1)

 

 

 

 
(7,827
)
 

 
(7,827
)
Cumulative effect of adoption of ASU No. 2016-13 (see Note 1)

 

 

 

 
(265
)
 

 
(265
)
Balances at March 31, 2020
30,520,428

 
$
6

 
$

 
$
657,704

 
$
35,412

 
$
27,195

 
$
720,317

 
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

 

 
 
 

 
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

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



 
Three Months Ended March 31,
 
2020
 
2019
 
(in thousands)
Operating activities
 

 
 

Net cash (used in) provided by operating activities
$
(65,305
)
 
$
35,450

Investing activities
 

 
 

Securities available-for-sale:
 

 
 

Purchases – fixed maturity securities
(182,205
)
 
(130,362
)
Sales – fixed maturity securities
4,513

 
45,466

Maturities and calls – fixed maturity securities
34,861

 
39,215

Purchases – equity securities
(7,435
)
 
(2,753
)
Sales – equity securities
3,295

 
263

Bank loan participations:
 

 
 

Purchases
(18,408
)
 
(21,746
)
Sales
9,735

 
6,602

Maturities
13,220

 
11,355

Other invested assets:
 

 
 

Purchases
(438
)
 

Return of capital
253

 
260

Redemptions
13,133

 

Short-term investments, net
85,867

 
(10,168
)
Securities receivable or payable, net
(5,770
)
 
14,643

Purchases of property and equipment
(342
)
 
(144
)
Net cash used in investing activities
(49,721
)
 
(47,369
)
Financing activities
 

 
 

Senior debt issuances
119,000

 

Senior debt repayments

 
(20,000
)
Dividends paid
(9,468
)
 
(9,244
)
Issuance of common shares under equity incentive plans

 
2,632

Common share repurchases
(2,038
)
 
(1,374
)
Net cash provided by (used in) financing activities
107,494

 
(27,986
)
Change in cash, cash equivalents, and restricted cash equivalents
(7,532
)
 
(39,905
)
Cash, cash equivalents, and restricted cash equivalents at beginning of period
1,406,076

 
172,457

Cash, cash equivalents, and restricted cash equivalents at end of period
$
1,398,544

 
$
132,552

Supplemental information
 

 
 

Interest paid
$
3,248

 
$
3,339

 
See accompanying notes.
 



9

 

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, 2019 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, 2019 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.

10

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 $31.3 million and $31.2 million as of March 31, 2020 and December 31, 2019, 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 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 outbreak of the coronavirus pandemic in the first quarter of 2020 led to significant unrealized losses in our investment portfolio that were recognized in earnings. As a result, the Company had a pre-tax loss of $41.2 million for the three months ended March 31, 2020 and recorded a U.S. federal income tax benefit of $4.4 million. For the three months ended March 31, 2019, our U.S. federal income tax expense was 10.8% of income before taxes.
Adopted Accounting Standards
On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using the modified retrospective approach, by which a cumulative-effect adjustment was made to retained earnings as of the date of adoption. This update requires 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 are 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.
In connection with the adoption of this ASU, the Company elected the fair value option in accounting for bank loan participations effective January 1, 2020. The targeted transition relief offered by ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief was applied to 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 are measured at fair value, and changes in unrealized gains and losses in bank loan participations are reported in our income statement as net realized and unrealized (losses) gains on investments. At adoption on January 1, 2020, the Company reduced the carrying value of its bank loan portfolio to fair value through an $8.4 million adjustment with a $7.8 million (net of tax) cumulative effect adjustment to reduce retained earnings.
Upon adoption of this ASU, the Company established an allowance for uncollectible reinsurance balances through a $265,000 (net of tax) cumulative effect adjustment to retained earnings. Because we purchase reinsurance from financially strong reinsurers or we have collateral securing the recoverables, the effect of adoption was not material to our financial position.



11

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, 2020
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

State and municipal
$
173,919

 
$
8,007

 
$
(551
)
 
$
181,375

Residential mortgage-backed
298,904

 
9,366

 
(831
)
 
307,439

Corporate
669,191

 
19,583

 
(3,753
)
 
685,021

Commercial mortgage and asset-backed
274,448

 
3,790

 
(9,259
)
 
268,979

U.S. Treasury securities and obligations guaranteed by the U.S. government
122,335

 
3,688

 

 
126,023

Redeemable preferred stock
2,025

 

 
(257
)
 
1,768

Total fixed maturity securities, available-for-sale
$
1,540,822


$
44,434


$
(14,651
)

$
1,570,605

December 31, 2019
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

State and municipal
$
159,894

 
$
7,949

 
$
(742
)
 
$
167,101

Residential mortgage-backed
261,524

 
3,244

 
(622
)
 
264,146

Corporate
611,304

 
21,306

 
(389
)
 
632,221

Commercial mortgage and asset-backed
249,309

 
3,954

 
(806
)
 
252,457

U.S. Treasury securities and obligations guaranteed by the U.S. government
114,477

 
1,229

 
(39
)
 
115,667

Redeemable preferred stock
2,025

 
9

 

 
2,034

Total fixed maturity securities, available-for-sale
$
1,398,533


$
37,691


$
(2,598
)

$
1,433,626


The amortized cost and fair value of available-for-sale investments in fixed maturity securities at March 31, 2020 are summarized, by contractual maturity, as follows:
 
Cost or
Amortized
Cost
 
Fair
Value
 
(in thousands)
One year or less
$
108,264

 
$
108,823

After one year through five years
472,749

 
484,651

After five years through ten years
253,007

 
260,236

After ten years
131,425

 
138,709

Residential mortgage-backed
298,904

 
307,439

Commercial mortgage and asset-backed
274,448

 
268,979

Redeemable preferred stock
2,025

 
1,768

Total
$
1,540,822

 
$
1,570,605

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

12

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, 2020
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

State and municipal
$
33,372

 
$
(551
)
 
$

 
$

 
$
33,372

 
$
(551
)
Residential mortgage-backed
27,670

 
(830
)
 
27

 
(1
)
 
27,697

 
(831
)
Corporate
157,118

 
(3,749
)
 
1,251

 
(4
)
 
158,369

 
(3,753
)
Commercial mortgage and asset-backed
109,143

 
(6,962
)
 
37,859

 
(2,297
)
 
147,002

 
(9,259
)
Redeemable preferred stock
1,768

 
(257
)
 

 

 
1,768

 
(257
)
Total fixed maturity securities, available-for-sale
$
329,071


$
(12,349
)

$
39,137


$
(2,302
)

$
368,208


$
(14,651
)
December 31, 2019
 

 
 

 
 

 
 

 
 

 
 

Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

State and municipal
$
30,028

 
$
(741
)
 
$
667

 
$
(1
)
 
$
30,695

 
$
(742
)
Residential mortgage-backed
23,632

 
(78
)
 
37,363

 
(544
)
 
60,995

 
(622
)
Corporate
45,550

 
(365
)
 
9,933

 
(24
)
 
55,483

 
(389
)
Commercial mortgage and asset-backed
46,434

 
(406
)
 
56,720

 
(400
)
 
103,154

 
(806
)
U.S. Treasury securities and obligations guaranteed by the U.S. government
8,474

 
(22
)
 
7,168

 
(17
)
 
15,642

 
(39
)
Total fixed maturity securities, available-for-sale
$
154,118


$
(1,612
)

$
111,851


$
(986
)

$
265,969


$
(2,598
)

 
The outbreak of the coronavirus pandemic in the first quarter of 2020 and uncertainty around the extent of its economic impact caused severe declines in financial markets which are reflected in the fair values of our investments. At March 31, 2020, the Company held fixed maturity securities of 147 issuers that were in an unrealized loss position with a total fair value of $368.2 million and gross unrealized losses of $14.7 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, 2020, 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 March 31, 2020 had an aggregate fair value of $5.6 million and an aggregate net unrealized gain of $17,000.
The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2020. This update changed the impairment model for available-for-sale fixed maturities and requires the Company to determine whether unrealized losses on available-for-sale fixed maturities are due to credit-related factors. An allowance for credit losses is established for any credit-related impairments, limited to the amount by which fair value is below amortized cost. Changes in the allowance for credit losses are recognized in earnings and included in net realized and unrealized (losses) gains on investments. Unrealized losses that are not credit-related will continue to be recognized in other comprehensive income.
The Company considers the extent to which fair value is below amortized cost in determining whether a credit-related loss exists. The Company also considers the credit quality rating of the security, with a special emphasis on securities downgraded below investment grade. A comparison is made between the present value of expected future cash flows for a security and its amortized cost. If the present value of future expected cash flows is less than amortized cost, a credit loss is presumed to exist and an allowance for credit losses is established. Management may conclude that a qualitative analysis is sufficient to support its conclusion that the present value of the expected cash flows equals or exceeds a security’s amortized cost. As a result of this review, management concluded that there were no credit-related impairments of fixed maturity securities at March 31, 2020. 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.

13

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


Management concluded that none of the fixed maturity securities with an unrealized loss at December 31, 2019 had experienced an other-than-temporary impairment. 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.
In connection with the adoption of ASU 2016-13, the Company elected the fair value option in accounting for bank loan participations effective January 1, 2020. The targeted transition relief offered by ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief was applied to 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 are measured at fair value, and changes in unrealized gains and losses in bank loan participations are reported in our income statement as net realized and unrealized gains (losses) on investments. At adoption on January 1, 2020, the Company applied the amendments on a modified retrospective basis, reducing the carrying value of its bank loan portfolio to fair value through an $8.4 million adjustment with a $7.8 million (net of tax) cumulative effect adjustment to reduce retained earnings.
Applying the fair value option to the bank loan portfolio will increase volatility in the Company's financial statements, but management believes it is less subjective and less burdensome to implement and maintain than ASU 2016-13, which would have otherwise been required. At March 31, 2020, the Company's bank loan portfolio had an aggregate fair value of $202.9 million and unpaid principal of $260.2 million. Interest income on bank loan participations included in net investment income was $4.1 million and $5.1 million for the three months ended March 31, 2020 and 2019, respectively. Net realized and unrealized (losses) gains on investments includes losses of $43.9 million related to changes in unrealized gains and losses on bank loan participations in the three months ended March 31, 2020 and management concluded that $5.0 million of those losses were due to credit-related impairments. Losses due to credit-related impairments were determined based upon consultations and advice from the Company's specialized investment manager and consideration of any adverse situations that could affect the borrower's ability to repay, the estimated value of underlying collateral, and other relevant factors.
Prior to the election of the fair value option on January 1, 2020, bank loan participations were classified as held-for-investment and carried at amortized cost net of any allowance for credit losses. Under the prior accounting method, management concluded that seven loans from six issuers in the Company's bank loan portfolio were impaired at December 31, 2019. At December 31, 2019, the impaired loans had a carrying value of $6.9 million, unpaid principal of $14.3 million, and an allowance for credit losses of $7.2 million, $5.1 million of which related to two loans from one issuer who was experiencing liquidity concerns resulting from revenue declines and poor growth prospects in its most profitable segment. Management concluded that two of the loans in the Company’s 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.
Bank loan participations generally provide a higher yield than our portfolio of fixed maturities and 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.
Interest income on bank loan participations is accrued on the unpaid principal balance, and discounts and premiums on bank loan participations are amortized to income using the interest method. 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, 2020 or December 31, 2019.
The average recorded investment in impaired bank loans was $2.2 million during the three months ended March 31, 2019. No investment income was recognized during the period that the loans were impaired and net realized investment losses of $1.5 million were recorded in the three months ended March 31, 2019 for changes in the fair value of impaired bank loans.


14

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,
 
2020
 
2019
 
(in thousands)
Fixed maturity securities:
 

 
 

Gross realized gains
$
215

 
$
177

Gross realized losses
(1
)
 
(405
)
 
214


(228
)
Bank loan participations:
 

 
 

Gross realized gains
103

 
13

Gross realized losses
(1,309
)
 
(1,692
)
Changes in fair values of bank loan participations
(43,947
)
 

 
(45,153
)

(1,679
)
Equity securities:
 

 
 

Gross realized gains

 

Gross realized losses
(170
)
 
(18
)
Changes in fair values of equity securities
(13,315
)
 
3,549

 
(13,485
)

3,531

Short-term investments and other:
 

 
 

Gross realized gains
18

 
1

Gross realized losses
(1
)
 

 
17


1

Total
$
(58,407
)

$
1,625


  
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,
 
2020
 
2019
 
2020
 
2019
 
(in thousands)
Renewable energy LLCs (a)
$
31,305

 
$
31,219

 
$
834

 
$
921

Renewable energy notes receivable (b)
2,680

 
8,750

 
166

 
328

Limited partnerships (c)
9,212

 
16,741

 
(569
)
 
2,069

Bank holding companies (d)
4,500

 
4,500

 
86

 
86

Total other invested assets
$
47,697


$
61,210


$
517


$
3,404

 
(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 former directors served as officers, and the Company’s Chairman and Chief Executive Officer ("CEO") 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 $747,000 and $253,000 in the three months ended March 31, 2020 and 2019, respectively.

15

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


(b)
The Company's Corporate and Other segment has invested in notes receivable for renewable energy projects. At December 31, 2019, the Company held an $8.8 million note issued by an entity for which two of our former directors serve as officers. During the three months ended March 31, 2020, the Company received repayment of $6.1 million of the original note principal. Interest on the note, which matures in 2021, is fixed at 15.0%. Interest income on the note was $166,000 and $328,000 for the three months ended March 31, 2020 and 2019, 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, 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 $2.7 million at March 31, 2020. The Company recognized investment losses of $710,000 and investment income of $481,000 on the investment for the three months ended March 31, 2020 and 2019, respectively. The Company’s Excess and Surplus Lines segment holds investments in limited partnerships of $6.5 million at March 31, 2020. Investment income of $141,000 and $1.6 million was recognized on the investments for the three months ended March 31, 2020 and 2019, respectively.
(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 Chairman and CEO 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 holder of the subordinated notes (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, 2020 and 2019, respectively.
At March 31, 2020 and December 31, 2019, 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 $2.3 million at March 31, 2020, 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, 2020 and December 31, 2019.
The gross carrying amounts and accumulated amortization for each major specifically identifiable intangible asset class were as follows: 
 
 
 
March 31, 2020
 
December 31, 2019
 
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

 
5,984

 
11,611

 
5,835

Identifiable intangible assets subject to amortization
 
 
11,611

 
5,984

 
11,611

 
5,835

 
 
 
$
42,775

 
$
5,984

 
$
42,775

 
$
5,835


 

16

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,
 
2020
 
2019
 
(in thousands, except share and per share amounts)
Net (loss) income to shareholders
$
(36,815
)
 
$
22,728

 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic
30,476,307

 
30,059,398

Common share equivalents

 
412,906

Diluted
30,476,307

 
30,472,304

 
 
 
 
(Loss) earnings per share:
 
 
 
Basic
$
(1.21
)
 
$
0.76

Common share equivalents

 
(0.01
)
Diluted
$
(1.21
)
 
$
0.75


For the three months ended March 31, 2020 and 2019, common share equivalents of 309,443 and 171,509 shares, respectively, were excluded from the calculations of diluted earnings per share as their effects were anti-dilutive.

17

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,
 
2020
 
2019
 
(in thousands)
Reserve for losses and loss adjustment expenses net of reinsurance recoverables at beginning of period
$
1,377,461

 
$
1,194,088

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

 
 

Current year
95,982

 
138,959

Prior years
874

 
968

Total incurred losses and loss and adjustment expenses
96,856

 
139,927

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

Current year
4,271

 
4,679

Prior years
118,357

 
107,684

Total loss and loss adjustment expense payments
122,628

 
112,363

Reserve for losses and loss adjustment expenses net of reinsurance recoverables at end of period
1,351,689

 
1,221,652

Add: Reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period
691,669

 
508,655

Reserve for losses and loss adjustment expenses gross of reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period
$
2,043,358

 
$
1,730,307


  
The Company experienced $874,000 of adverse reserve development in the three months ended March 31, 2020 on the reserve for losses and loss adjustment expenses held at December 31, 2019. This reserve development included $3,000 of favorable development in the Excess and Surplus Lines segment, $1.0 million of favorable development in the Specialty Admitted Insurance segment due to favorable development in the workers' compensation business for prior accident years, and $1.9 million of adverse development in the Casualty Reinsurance segment.
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.

18

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


6.    Other Comprehensive (Loss) Income
The following table summarizes the components of other comprehensive (loss) income:
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in thousands)
Unrealized (losses) gains arising during the period, before U.S. income taxes
$
(5,096
)
 
$
21,478

U.S. income taxes
1,378

 
(1,447
)
Unrealized (losses) gains arising during the period, net of U.S. income taxes
(3,718
)
 
20,031

Less reclassification adjustment:
 
 
 

Net realized investment gains (losses)
214

 
(228
)
U.S. income taxes
(13
)
 
(1
)
Reclassification adjustment for investment gains (losses) realized in net income
201

 
(229
)
Other comprehensive (loss) income
$
(3,919
)
 
$
20,260


In addition to the $