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May 10, 2022, 4:19 p.m. EDT

10-Q: JAMES RIVER GROUP HOLDINGS, LTD.

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(EDGAR Online via COMTEX) -- 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", and Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022, 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 on Form 10-Q, and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021.

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 earning profits from insurance and reinsurance underwriting and generating meaningful risk-adjusted investment returns while managing our capital.

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 approaches the insurance market in two ways: as a risk bearing underwriter, and as a "fronting" company. The Company's risk bearing underwriting is focused on niche classes within the standard insurance markets, such as workers' compensation coverage for residential contractors, light manufacturing operations, transportation workers and healthcare workers. In its fronting business, the Specialty Admitted segment works with distributors, such as managing general agents and other producers, by using our licensure, rating and administrative services in order to produce and service insurance policies for reinsurers and other third party risk bearing entities. We charge fees for "fronting" for these capital providers. In some instances, we retain a small percentage of the risk on fronted business, generally 10%-30%. This segment has admitted licenses and the authority to write excess and surplus lines insurance in 50 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) through JRG Reinsurance Company Ltd. ("JRG Re"). 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 Ltd ("Carolina Re") was formed in 2018 to also provide reinsurance to the Company's U.S. based insurance subsidiaries through a quota-share reinsurance agreement, and was also the cedent on an aggregate stop loss reinsurance treaty with JRG Re through December 31, 2021. JRG Re and Carolina Re are both Bermuda-based reinsurance companies.

The Corporate and Other segment consists of the management and treasury activities of our holding companies, interest expense associated with our debt, and expenses of our holding companies, including public company expenses, that are not reimbursed by our insurance segments.

All of our insurance and reinsurance subsidiaries have financial strength ratings of "A-" (Excellent) from A.M. Best Company.

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In preparing the unaudited condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates.

The most critical accounting policies involve significant estimates and include those used in determining the reserve for losses and loss adjustment expenses and investment valuation and impairment. For a detailed discussion of each of these policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes to any of these policies during the current year.

Impact of the COVID-19 Pandemic

For a discussion of the impact of the coronavirus (COVID-19) pandemic and related economic conditions on the Company's results for the year ended December 31, 2021, please see "Part II-Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operation" in our Annual Report. The Company continues to monitor the impact that the ongoing coronavirus (COVID-19) pandemic may be having on the Company's financial condition and results of operations.

Recent Strategic Actions

Issuance of Series A Preferred Shares

The Company closed on the issuance and sale of 150,000 7% Series A Perpetual Cumulative Convertible Preferred Shares, par value $0.00125 per share (the "Series A Preferred Shares") on March 1, 2022 for an aggregate purchase price of $150.0 million, or $1,000 per share, in a private placement. The Series A Preferred Shares are convertible into the Company's common shares at the option of the holder at any time, or at the Company's option under certain circumstances. Dividends on the Series A preferred shares accrue quarterly at the initial rate of 7% of the $1,000 liquidation preference per share (the "Liquidation Preference") per annum, which may be paid in cash, in-kind in common shares or in Series A Preferred Shares, at the Company's election. Dividends accrued on the Series A Preferred Shares in the three months ended March 31, 2022 (which represent the dividends from March 1, 2022, the date of issuance of the Series A Preferred Shares, through March 31, 2022) were $875,000. Please see "Part I-Item 1-Note 12. Series A Preferred Shares" in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q.

Loss Portfolio Transfer Retrocession Agreement

On February 23, 2022, JRG Re entered into a loss portfolio transfer retrocession agreement (the "Retrocession Agreement") with Fortitude Reinsurance Company Ltd. ("FRL") under which FRL reinsures the majority of the reserves in the Company's Casualty Reinsurance segment. Under the terms of the transaction, which closed on March 31, 2022 (the "Retrocession Closing Date"), JRG Re (a) ceded to FRL all existing and future claims for losses arising under certain casualty reinsurance agreements with underlying insurance companies with treaty inception dates ranging from 2011 to 2020 (the "Subject Business"), in each case net of third-party reinsurance and other recoveries, up to an aggregate limit of $400.0 million; (b) continues to manage and retain the benefit of other third-party reinsurance on the Subject Business; (c) paid FRL a reinsurance premium of $335.0 million, $310.0 million of which JRG Re credited to a notional funds withheld account (the "Funds Withheld Account") and $25.0 million of which was paid in cash to FRL; and (d) will pay FRL a 2% per annum crediting rate on the Funds Withheld Account balance on a quarterly basis. The total premium, initial Funds Withheld Account credit, and aggregate limit was adjusted for claims paid from October 1, 2021 to the Retrocession Closing Date. The Casualty Reinsurance segment incurred losses of $11.5 million (including $6.8 million of net adverse reserve development and $4.7 million of current accident year losses) in the three months ended March 31, 2022 associated with the Retrocession Agreement.

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        RESULTS OF OPERATIONS
        The following table summarizes our results:
                                                                                 Three Months Ended
                                                                                     March 31,                  %
                                                                                           2022               2021                Change
                                                                                               ($ in thousands)
        Gross written premiums                                                         $ 359,936          $  373,255                  (3.6) %
        Net retention (1)                                                                   48.9  %             46.8  %
        Net written premiums                                                           $ 175,859          $  174,599                   0.7  %
        Net earned premiums                                                            $ 189,824          $  160,593                  18.2  %
        Losses and loss adjustment expenses                                             (135,608)           (273,500)                (50.4) %
        Other operating expenses                                                         (49,261)            (46,454)                  6.0  %
        Underwriting profit (loss) (2), (3)                                                4,955            (159,361)                    -
        Net investment income                                                             16,267              15,089                   7.8  %
        Net realized and unrealized (losses) gains on investments                         (5,010)              6,272                     -
        Other income and expense                                                            (301)               (522)                (42.3) %
        Interest expense                                                                  (2,292)             (2,216)                  3.4  %
        Amortization of intangible assets                                                    (91)                (91)                    -  %
        Income (loss) before taxes                                                        13,528            (140,829)                    -
        Income tax expense (benefit)                                                       3,323             (37,369)                    -
        Net income (loss)                                                              $  10,205          $ (103,460)                    -
        Dividends on Series A Preferred Shares                                         $    (875)         $        -                     -
        Net income (loss) to common shareholders                                       $   9,330          $ (103,460)                    -
        Adjusted net operating income (loss) (4)                                       $  13,867          $ (108,795)                    -
        Ratios:
        Loss ratio                                                                          71.4  %            170.3  %
        Expense ratio                                                                       26.0  %             28.9  %
        Combined ratio                                                                      97.4  %            199.2  %
        Accident year loss ratio (5)                                                        67.9  %             64.4  %
        (1)Net retention is defined as the ratio of net written premiums to gross
        written premiums.
        (2)Underwriting profit (loss) is a non-GAAP measure. See "Reconciliation of
        Non-GAAP Measures" for a reconciliation to income (loss) before taxes and for
        additional information.
        (3)Included in underwriting results for the three months ended March 31, 2022
        and 2021 is gross fee income of $5.6 million and $5.1 million, respectively.
        (4)Adjusted net operating income (loss) is a non-GAAP measure. See
        "Reconciliation of Non-GAAP Measures" for a reconciliation to net income (loss)
        and for additional information.
        (5)Accident year loss ratio is defined as the ratio of losses and loss
        adjustment expenses for the current accident year (excluding development on
        prior accident year reserves) to net earned premiums.
        Three Months Ended March 31, 2022 and 2021
        


The Company had an underwriting profit of $5.0 million for the three months ended March 31, 2022 compared to an underwriting loss of $159.4 million for the same period in the prior year. Underwriting results for the three months ended March 31, 2022 include $11.5 million of incurred losses (including $6.8 million of net adverse reserve development and $4.7 million of current accident year losses) in the Casualty Reinsurance segment associated with the Retrocession Agreement. Underwriting results for the three months ended March 31, 2021 include $170.1 million of net adverse reserve development on prior accident years, including $168.7 million of net adverse development from the Excess and Surplus Lines segment almost entirely related to a previously canceled commercial auto account (see underwriting results of the Excess and Surplus Lines segment below for further discussion).

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Net realized and unrealized investment (losses) gains of $(5.0) million and $6.3 million for the three months ended March 31, 2022 and 2021, respectively. The net realized and unrealized investment losses for the three months ended March 31, 2022 include $(2.7) million and $(2.0) million of unrealized losses related to changes in unrealized gains and losses on equity securities and bank loan participations, respectively ($1.7 million and $3.9 million of unrealized gains for the three months ended March 31, 2021, respectively). See "- Investing Results" for more information on these realized and unrealized investment gains.

Other expenses were $347,000 and $621,000 for the three months ended March 31, 2022 and 2021, respectively, and include legal fees related to a purported class action lawsuit, certain legal and professional consulting fees related to various strategic initiatives, and employee severance costs.

We define adjusted net operating income (loss) as income (loss) available to common shareholders excluding net realized and unrealized (losses) gains on investments, and certain non-operating expenses such as professional service fees related to a purported class action lawsuit, various strategic initiatives, and the filing of registration statements for the offering of securities, and severance costs associated with terminated employees. We use adjusted net operating income (loss) as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Adjusted net operating income (loss) should not be viewed as a substitute for net income (loss) calculated in accordance with GAAP, and our definition of adjusted net operating income (loss) may not be comparable to that of other companies.

Our income (loss) before taxes and net income (loss) reconcile to our adjusted net operating income (loss) as follows:







                                                                               Three Months Ended March 31,
                                                                       2022                                  2021
                                                             Income                                Loss
                                                             Before              Net              Before                Net
                                                              Taxes            Income              Taxes               Loss
                                                                                     ($ in thousands)
        Income (loss) available to common shareholders     $ 12,653          $  9,330          $ (140,829)         $ (103,460)
        Net realized and unrealized investment losses
        (gains)                                               5,010             4,190              (6,272)             (5,751)
        Other expenses                                          347               347                 527                 416
        Adjusted net operating income (loss)               $ 18,010          $ 13,867          $ (146,574)         $ (108,795)
        


Combined Ratios

The combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and other operating expenses to net earned premiums. Our combined ratio for the three months ended March 31, 2022 was 97.4%. A combined ratio of less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. The combined ratio for the three months ended March 31, 2022 includes $6.8 million, or 3.6 percentage points, of net adverse reserve development on prior accident years, including $59,000 of net favorable reserve development from the Excess and Surplus Lines segment, $63,000 of net adverse reserve development from the Specialty Admitted Insurance segment, and $6.8 million of net adverse reserve development from the Casualty Reinsurance segment associated with the Retrocession Agreement. In addition to the $6.8 million of net adverse reserve development, the Casualty Reinsurance segment also incurred $4.7 million of current accident year losses associated with the Retrocession Agreement in the three months ended March 31, 2022. In total, the $11.5 million of incurred losses associated with the Retrocession Agreement represented 6.1 percentage points of the consolidated combined ratio for the three months ended March 31, 2022.

The combined ratio for the three months ended March 31, 2021 was 199.2%. The combined ratio for the three months ended March 31, 2021 includes $170.1 million, or 105.9 percentage points, of net adverse reserve development on prior accident years, including $168.7 million of net adverse reserve development from the Excess and Surplus Lines segment (see underwriting results of the Excess and Surplus Lines segment for further discussion), $1.0 million of net favorable reserve development from the Specialty Admitted Insurance segment, and $2.5 million of net adverse reserve development from the Casualty Reinsurance segment.

All of the Company's U.S.-domiciled insurance subsidiaries are party to an intercompany pooling agreement that distributes the net underwriting results among the group companies based on their approximate pro-rata level of statutory capital and surplus to the total Company statutory capital and surplus. Additionally, each of the Company's U.S.-domiciled insurance subsidiaries is a party to a quota share reinsurance agreement that in periods prior to January 1, 2018 ceded 70% of

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Expense Ratios

Our expense ratio decreased from 28.9% for three months ended March 31, 2021 to 26.0% for the three months ended March 31, 2022, driven primarily by higher net earned premiums across all of our segments. The expense ratio for the Excess and Surplus Lines segment decreased from 20.1% in the prior year quarter to 19.0% in the current quarter, reflecting a 15.5% increase in net earned premiums including in lines that have meaningful ceding commissions. The Excess and Surplus Lines segment is our largest segment and makes up 69.2% of consolidated net earned premiums for the three months ended March 31, 2022 compared to 70.8% for three months ended March 31, 2021. The expense ratio for the Specialty Admitted Insurance segment decreased from 26.6% in the prior year quarter to 19.0% in the current quarter driven by a 26.8% increase in net earned premiums for the fronting business and increased gross fee income ($5.6 million in the current quarter compared to $5.1 million in the prior year quarter). Net earned premiums in the Casualty Reinsurance segment increased 28.4% over the prior year, and this, combined with lower compensation expenses and more favorable commission slide adjustments, produced a lower current year expense ratio (32.6% in the current quarter compared to 36.5% in the prior year).

Premiums

Insurance premiums are earned ratably over the terms of our insurance policies, generally twelve months. Reinsurance premiums assumed are earned over the terms of the underlying policies or reinsurance contracts. Reinsurance contracts written on a "losses occurring" basis cover claims that may occur during the term of the contract or underlying insurance policy, which is typically twelve months. Reinsurance contracts which are written on a "risks attaching" basis cover claims which attach to the underlying insurance policies written during the terms of such contracts. Premiums earned on such contracts usually extend beyond the original term of the reinsurance contract, typically resulting in recognition of premiums earned over a 24-month period or more in proportion to the level of underlying exposure.

The following table summarizes the change in premium volume by component and business segment:







                                                       Three Months Ended
                                                           March 31,                  %
                                                                     2022           2021         Change
                                                                       ($ in thousands)
        Gross written premiums:
        Excess and Surplus Lines                                  $ 204,282      $ 181,358        12.6  %
        Specialty Admitted Insurance                                125,710        127,036        (1.0) %
        Casualty Reinsurance                                         29,944         64,861       (53.8) %
                                                                  $ 359,936      $ 373,255        (3.6) %
        Net written premiums:
        Excess and Surplus Lines                                  $ 125,710      $ 108,433        15.9  %
        Specialty Admitted Insurance                                 20,205         22,005        (8.2) %
        Casualty Reinsurance                                         29,944         44,161       (32.2) %
                                                                  $ 175,859      $ 174,599         0.7  %
        Net earned premiums:
        Excess and Surplus Lines                                  $ 131,301      $ 113,708        15.5  %
        Specialty Admitted Insurance                                 19,318         16,357        18.1  %
        Casualty Reinsurance                                         39,205         30,528        28.4  %
                                                                  $ 189,824      $ 160,593        18.2  %
        


Gross written premiums for the Excess and Surplus Lines segment (which represents 56.8% of our consolidated gross written premiums in the three months ended March 31, 2022) increased 12.6% from the corresponding three month period in the prior year. Policy submissions for Core E&S lines (excluding commercial auto) were roughly even with the prior year, but our ratio of bound policies to quoted policies improved generating 7.3% more bound policies in the three months ended March 31, 2022 than in the three months ended March 31, 2021. The total number of policies in force for the segment increased 18.3%

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                                                                         Three Months Ended
                                                                             March 31,                  %
                                                                                       2022           2021         Change
                                                                                               ($ in thousands)
        Excess Casualty                                                             $  70,182      $  68,401        2.6  %
        Manufacturers & Contractors                                                    35,799         31,855       12.4  %
        General Casualty                                                               34,395         29,379       17.1  %
        Energy                                                                         12,030         10,771       11.7  %
        Excess Property                                                                 9,804          6,859       42.9  %
        Small Business                                                                  9,048          7,462       21.3  %
        Life Sciences                                                                   6,824          5,700       19.7  %
        Environmental                                                                   3,890          2,714       43.3  %
        Sports & Entertainment                                                          2,820          1,556       81.2  %
        All other Core E&S divisions                                                   11,085         10,873        1.9  %
        Total Core E&S divisions                                                      195,877        175,570       11.6  %
        Commercial Auto                                                                 8,405          5,788       45.2  %
        Excess and Surplus Lines gross written premium                              $ 204,282      $ 181,358       12.6  %
        


The components of gross written premiums for the Specialty Admitted Insurance segment (which represents 34.9% of our consolidated gross written premiums for the three months ended March 31, 2022) are as follows:







                                                                        Three Months Ended
                                                                            March 31,                  %
                                                                                      2022           2021         Change
                                                                                              ($ in thousands)
        . . .
        


May 10, 2022

COMTEX_406990368/2041/2022-05-10T16:18:54

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