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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 June 30, 2022
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 (§232.405 of this chapter) 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, a 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 July 29, 2022: 37,450,264



James River Group Holdings, Ltd.
Form 10-Q
Index
  Page
Number
 
     
 
     
 
5
     
 
7
     
 
8
     
 
     
 
     
     
 
     
     
   
 
     
   
 
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 and financial strength ratings, 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 downgrade in the financial strength rating of our regulated insurance subsidiaries announced May 7, 2021, or further downgrades, impacting our ability to attract and retain insurance and reinsurance business that our subsidiaries write, our competitive position, and our financial condition;
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 persistent high inflationary environment could have a negative impact on our reserves, the values of our investments and investment returns, and our compensation expenses;
exposure to credit risk, interest rate risk and other market risk in our investment portfolio;
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;
our ability to obtain reinsurance coverage at prices and on terms that allow us to transfer risk and adequately protect our Company against financial loss;
losses resulting from reinsurance counterparties failing to pay us on reinsurance claims, insurance companies with whom we have a fronting arrangement failing to pay us for claims, or a former customer with whom we have an indemnification arrangement failing to perform its reimbursement obligations;
inadequacy of premiums we charge to compensate us for our losses incurred;
changes in laws or government regulation, including tax or insurance law and regulations;
the ongoing effect of Public Law No. 115-97, informally titled the Tax Cuts and Jobs Act, which may have a significant effect on us including, among other things, by potentially increasing our tax rate, as well as on our shareholders;
in the event we do not qualify for the insurance company exception to the passive foreign investment company (“PFIC”) rules and are therefore considered a PFIC, there could be material adverse tax consequences to an investor that is subject to U.S. federal income taxation;
the Company or any of its foreign subsidiaries becoming subject to U.S. federal income taxation;
a failure of any of the loss limitations or exclusions we utilize to shield us from unanticipated financial losses or legal exposures, or other liabilities;
3


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;
the potential impact of internal or external fraud, operational errors, systems malfunctions or cyber security incidents;
our ability to manage our growth effectively;
failure to maintain effective internal controls in accordance with Sarbanes-Oxley Act of 2002, as amended (“Sarbanes-Oxley”);
changes in our financial condition, regulations or other factors that may restrict our subsidiaries’ ability to pay us dividends; and
other risks and uncertainties discussed elsewhere in this Quarterly Report.
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 for the year ended December 31, 2021 filed with the SEC on March 1, 2022.
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) June 30,
2022
December 31,
2021
  (in thousands)
Assets    
Invested assets:    
Fixed maturity securities, available-for-sale, at fair value (amortized cost: 2022 – $1,728,217; 2021 – $1,643,865)
$ 1,597,695  $ 1,677,561 
Equity securities, at fair value (cost: 2022 – $97,018; 2021 – $95,783)
98,653  108,410 
Bank loan participations, at fair value 159,885  156,043 
Short-term investments 130,435  136,563 
Other invested assets 51,348  51,908 
Total invested assets 2,038,016  2,130,485 
Cash and cash equivalents 350,740  190,123 
Restricted cash equivalents 102,099  102,005 
Accrued investment income 11,834  11,037 
Premiums receivable and agents’ balances, net 374,465  393,967 
Reinsurance recoverable on unpaid losses, net 1,570,885  1,348,628 
Reinsurance recoverable on paid losses 106,509  82,235 
Prepaid reinsurance premiums 300,890  291,498 
Deferred policy acquisition costs 60,651  68,526 
Intangible assets, net 35,857  36,039 
Goodwill 181,831  181,831 
Other assets 131,498  112,176 
Total assets $ 5,265,275  $ 4,948,550 
 
See accompanying notes.
 

5

JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets (continued)
  
(Unaudited) June 30,
2022
December 31,
2021
  (in thousands, except share amounts)
Liabilities and Shareholders’ Equity    
Liabilities:    
Reserve for losses and loss adjustment expenses $ 2,730,631  $ 2,748,473 
Unearned premiums 723,062  727,552 
Payables to reinsurers 155,645  135,617 
Funds held 353,685  97,360 
Senior debt 222,300  262,300 
Junior subordinated debt 104,055  104,055 
Accrued expenses 55,047  57,920 
Other liabilities 181,566  89,911 
Total liabilities 4,525,991  4,223,188 
Commitments and contingent liabilities
Series A redeemable preferred shares – 2022 and 2021: $0.00125 par value; 20,000,000 shares authorized; 150,000 and no shares issued and outstanding, respectively
144,898  — 
Shareholders’ equity:    
Common shares – 2022 and 2021: $0.0002 par value; 200,000,000 shares authorized; 37,450,264 and 37,373,066 shares issued and outstanding, respectively
Additional paid-in capital 865,081  862,040 
Retained deficit (156,109) (166,663)
Accumulated other comprehensive (loss) income (114,593) 29,978 
Total shareholders’ equity 594,386  725,362 
Total liabilities, Series A redeemable preferred shares, and shareholders’ equity $ 5,265,275  $ 4,948,550 
 
See accompanying notes.

6

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

  Three Months Ended
June 30,
Six Months Ended
June 30,
  2022 2021 2022 2021
  (in thousands, except share amounts)
Revenues        
Gross written premiums $ 399,714  $ 380,146  $ 759,650  $ 753,401 
Ceded written premiums (205,023) (186,542) (389,100) (385,198)
Net written premiums 194,691  193,604  370,550  368,203 
Change in net unearned premiums (8,429) (20,899) 5,536  (34,905)
Net earned premiums 186,262  172,705  376,086  333,298 
Net investment income 14,705  14,348  30,972  29,437 
Net realized and unrealized (losses) gains on investments (17,110) 3,483  (22,120) 9,755 
Other income 949  1,031  1,816  2,057 
Total revenues 184,806  191,567  386,754  374,547 
Expenses      
Losses and loss adjustment expenses 121,369  110,000  256,977  383,500 
Other operating expenses 49,036  45,840  99,097  93,221 
Other expenses —  904  368  1,525 
Interest expense 4,049  2,249  6,341  4,465 
Amortization of intangible assets 91  91  182  182 
Total expenses 174,545  159,084  362,965  482,893 
Income (loss) before taxes 10,261  32,483  23,789  (108,346)
Income tax expense (benefit) 2,597  11,640  5,920  (25,729)
Net income (loss) 7,664  20,843  17,869  (82,617)
Dividends on Series A preferred shares (2,625) —  (3,500) — 
Net income (loss) available to common shareholders $ 5,039  $ 20,843  $ 14,369  $ (82,617)
Other comprehensive (loss) income:      
Net unrealized (losses) gains, net of taxes of $(7,998) and $(19,648) in 2022 and $2,013 and $(3,635) in 2021
(58,600) 15,358  (144,571) (27,330)
Total comprehensive (loss) income $ (50,936) $ 36,201  $ (126,702) $ (109,947)
Net income (loss) per common share:      
Basic $ 0.13  $ 0.61  $ 0.38  $ (2.54)
Diluted $ 0.13  $ 0.60  $ 0.38  $ (2.54)
Dividend declared per common share $ 0.05  $ 0.30  $ 0.10  $ 0.60 
Weighted-average common shares outstanding:      
Basic 37,449,621  34,418,472  37,428,385  32,576,463 
Diluted 37,732,371  34,586,997  37,643,634  32,576,463 

 
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)
Additional
Paid-in
Capital
Retained
Deficit
Accumulated
Other
Comprehensive
(Loss) Income
Total
  (in thousands, except share amounts)
Balances at March 31, 2022 37,448,314  $ $ 862,904  $ (159,241) $ (55,993) $ 647,677 
Net income —  —  —  7,664  —  7,664 
Other comprehensive loss —  —  —  —  (58,600) (58,600)
Vesting of RSUs 1,950  —  (19) —  —  (19)
Compensation expense under share incentive plans —  —  2,196  —  —  2,196 
Dividends on Series A preferred shares —  —  —  (2,625) —  (2,625)
Dividends on common shares —  —  —  (1,907) —  (1,907)
Balances at June 30, 2022 37,450,264  $ $ 865,081  $ (156,109) $ (114,593) $ 594,386 
Balances at December 31, 2021 37,373,066  $ $ 862,040  $ (166,663) $ 29,978  $ 725,362 
Net income —  —  —  17,869  —  17,869 
Other comprehensive loss —  —  —  —  (144,571) (144,571)
Vesting of RSUs 77,198  —  (941) —  —  (941)
Compensation expense under share incentive plans —  —  3,982  —  —  3,982 
Dividends on Series A preferred shares —  —  —  (3,500) —  (3,500)
Dividends on common shares —  —  —  (3,815) —  (3,815)
Balances at June 30, 2022 37,450,264  $ $ 865,081  $ (156,109) $ (114,593) $ 594,386 

8

JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)


 
  Number of
Common
Shares
Outstanding
Common
Shares (Par)
Additional
Paid-in
Capital
Retained
(Deficit) Earnings
Accumulated
Other
Comprehensive
Income
Total
  (in thousands, except share amounts)
Balances at March 31, 2021 30,774,930  $ $ 663,987  $ (63,576) $ 39,211  $ 639,628 
Net income —  —  —  20,843  —  20,843 
Other comprehensive income —  —  —  —  15,358  15,358 
Issuance of common shares 6,497,500  192,106  —  —  192,107 
Vesting of RSUs 3,132  —  (39) —  —  (39)
Compensation expense under share incentive plans —  —  1,862  —  —  1,862 
Dividends on common shares —  —  —  (11,260) —  (11,260)
Balances at June 30, 2021 37,275,562  $ $ 857,916  $ (53,993) $ 54,569  $ 858,499 
Balances at December 31, 2020 30,649,261  $ $ 664,476  $ 49,227  $ 81,899  $ 795,608 
Net loss —  —  —  (82,617) —  (82,617)
Other comprehensive loss —  —  —  —  (27,330) (27,330)
Issuance of common shares 6,497,500  192,106  —  —  192,107 
Exercise of stock options 16,471  —  159  —  —  159 
Vesting of RSUs 112,330  —  (2,592) —  —  (2,592)
Compensation expense under share incentive plans —  —  3,767  —  —  3,767 
Dividends on common shares —  —  —  (20,603) —  (20,603)
Balances at June 30, 2021 37,275,562  $ $ 857,916  $ (53,993) $ 54,569  $ 858,499 

See accompanying notes.
 
9

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

  Six Months Ended June 30,
  2022 2021
  (in thousands)
Operating activities    
Net cash provided by (used in) operating activities (a) $ 139,321  $ (93,003)
Investing activities    
Securities available-for-sale:    
Purchases – fixed maturity securities (351,715) (273,016)
Sales – fixed maturity securities 158,469  36,591 
Maturities and calls – fixed maturity securities 109,184  142,895 
Purchases – equity securities (6,751) (10,326)
Sales – equity securities 5,171  6,734 
Bank loan participations:    
Purchases (59,450) (71,011)
Sales 32,679  36,059 
Maturities 11,360  23,713 
Other invested assets:    
Purchases —  (10,545)
Return of capital 998  336 
Short-term investments, net 6,128  90,626 
Securities receivable or payable, net 22,042  16,229 
Purchases of property and equipment (3,175) (1,876)
Net cash used in investing activities (75,060) (13,591)
Financing activities    
Senior debt repayments (40,000) — 
Issuance of Series A preferred shares 144,898  — 
Issuance of common shares - public offering —  192,107 
Issuance of common shares under equity incentive plans —  329 
Common share repurchases (941) (2,762)
Dividends on Series A preferred shares (3,500) — 
Dividends on common shares (4,007) (20,804)
Net cash provided by financing activities 96,450  168,870 
Change in cash, cash equivalents, and restricted cash equivalents 160,711  62,276 
Cash, cash equivalents, and restricted cash equivalents at beginning of period 292,128  1,022,180 
Cash, cash equivalents, and restricted cash equivalents at end of period $ 452,839  $ 1,084,456 
Supplemental information    
Interest paid $ 5,455  $ 4,716 
Restricted cash equivalents at beginning of period $ 102,005  $ 859,920 
Restricted cash equivalents at end of period $ 102,099  $ 723,525 
Change in restricted cash equivalents $ 94  $ (136,395)

(a) Cash used in operating activities for the six months ended June 30, 2021 primarily reflects restricted cash equivalents returned to a former insured, per the terms of a collateral trust. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Amounts Recoverable from an Indemnifying Party and Reinsurer on Legacy Commercial Auto Book”. Excluding the restricted cash activity above, cash provided by operating activities was $139.2 million and $43.4 million for the six months ended June 30, 2022 and 2021, respectively.
See accompanying notes.
10

 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 was also the cedent on an aggregate stop loss reinsurance treaty with JRG Re through December 31, 2021.
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, 2021 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, 2021 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.
11

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 $28.6 million and $26.9 million at June 30, 2022 and December 31, 2021, 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. For the six months ended June 30, 2022, our U.S. federal income tax expense was 24.9% of the income before taxes. The effective rate exceeded the 21.0% U.S. statutory rate due to a projected annual loss in Bermuda that does not provide a tax benefit and certain discreet items including excess tax expenses associated with vested restricted share units (“RSUs”) in the six months ended June 30, 2022. The Company had a pre-tax loss of $108.3 million for the six months ended June 30, 2021 and recorded a U.S. federal income tax benefit of $25.7 million. For the six months ended June 30, 2021, our U.S. federal income tax benefit was 23.7% of the loss before taxes. The pre-tax loss was largely driven by the $166.7 million of net adverse reserve development on prior accident years, including $161.2 million of net adverse development from the Excess and Surplus Lines segment that was primarily related to a former commercial auto account.
Adopted Accounting Standards
In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock and became effective for interim and annual periods beginning after December 15, 2021. The Company adopted the new standard concurrent with the issuance of our Series A preferred shares on March 1, 2022. Under ASU 2020-06, embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. The new guidance also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and generally requires them to include the effect of potential share settlement for instruments that may be settled in cash or shares. Adoption of the new standard did not materially impact our financial position, results of operations, or earnings per share for the six months ended June 30, 2022.
12

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)
June 30, 2022        
Fixed maturity securities:        
State and municipal
$ 340,365  $ 938  $ (38,898) $ 302,405 
Residential mortgage-backed
312,407  392  (22,244) 290,555 
Corporate
656,466  215  (49,860) 606,821 
Commercial mortgage and asset-backed
340,434  (18,234) 322,204 
U.S. Treasury securities and obligations guaranteed by the U.S. government
78,545  31  (2,866) 75,710 
Total fixed maturity securities, available-for-sale $ 1,728,217  $ 1,580  $ (132,102) $ 1,597,695 
December 31, 2021        
Fixed maturity securities:        
State and municipal
$ 323,773  $ 12,156  $ (2,212) $ 333,717 
Residential mortgage-backed
246,586  2,384  (2,339) 246,631 
Corporate
711,930  26,119  (5,714) 732,335 
Commercial mortgage and asset-backed
301,247  4,941  (1,700) 304,488 
U.S. Treasury securities and obligations guaranteed by the U.S. government
60,329  653  (592) 60,390 
Total fixed maturity securities, available-for-sale $ 1,643,865  $ 46,253  $ (12,557) $ 1,677,561 
The amortized cost and fair value of available-for-sale investments in fixed maturity securities at June 30, 2022 are summarized, by contractual maturity, as follows:
  Cost or
Amortized
Cost
Fair
Value
  (in thousands)
One year or less $ 65,952  $ 65,352 
After one year through five years 431,295  414,082 
After five years through ten years 325,615  289,925 
After ten years 252,514  215,577 
Residential mortgage-backed 312,407  290,555 
Commercial mortgage and asset-backed 340,434  322,204 
Total $ 1,728,217  $ 1,597,695 
 
Actual maturities may differ for some securities because borrowers have the right to call or prepay obligations with or without penalties.
13

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


The following table shows the Company’s gross unrealized losses and fair value for available-for-sale securities aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:
  Less Than 12 Months 12 Months or More Total
  Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
  (in thousands)
June 30, 2022            
Fixed maturity securities:            
State and municipal $ 264,848  $ (37,476) $ 6,707  $ (1,422) $ 271,555  $ (38,898)
Residential mortgage-backed 207,169  (16,405) 45,750  (5,839) 252,919  (22,244)
Corporate 475,416  (37,398) 68,605  (12,462) 544,021  (49,860)
Commercial mortgage and asset-backed 288,044  (16,986) 23,225  (1,248) 311,269  (18,234)
U.S. Treasury securities and obligations guaranteed by the U.S. government
48,446  (1,212) 17,100  (1,654) 65,546  (2,866)
Total fixed maturity securities, available-for-sale $ 1,283,923  $ (109,477) $ 161,387  $ (22,625) $ 1,445,310  $ (132,102)
December 31, 2021            
Fixed maturity securities:            
State and municipal $ 93,313  $ (2,162) $ 1,150  $ (50) $ 94,463  $ (2,212)
Residential mortgage-backed 140,386  (2,337) 147  (2) 140,533  (2,339)
Corporate 179,078  (4,232) 18,635  (1,482) 197,713  (5,714)
Commercial mortgage and asset-backed 159,289  (1,695) 1,229  (5) 160,518  (1,700)
U.S. Treasury securities and obligations guaranteed by the U.S. government
24,378  (592) —  —  24,378  (592)
Total fixed maturity securities, available-for-sale $ 596,444  $ (11,018) $ 21,161  $ (1,539) $ 617,605  $ (12,557)
 
At June 30, 2022, the Company held fixed maturity securities of 528 issuers that were in an unrealized loss position with a total fair value of $1,445.3 million and gross unrealized losses of $132.1 million. None of the fixed maturity securities with unrealized losses has ever missed, or been delinquent on, a scheduled principal or interest payment. At June 30, 2022, 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 June 30, 2022 had an aggregate fair value of $6.7 million and an aggregate net unrealized loss of $237,000.
The Company reviews its available-for-sale fixed maturities to determine whether unrealized losses 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 gains (losses) on investments. Unrealized losses that are not credit-related are 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 June 30, 2022, December 31, 2021, or June 30, 2021. 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.
14

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


Bank loan participations are measured at fair value pursuant to the Company's election of the fair value option, 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. Applying the fair value option to the bank loan portfolio increases volatility in the Company's financial statements, but management believes it is less subjective and less burdensome to implement and maintain than the requirements of ASU 2016-13. At June 30, 2022, the Company's bank loan portfolio had an aggregate fair value of $159.9 million and unpaid principal of $175.8 million. Investment income on bank loan participations included in net investment income was $2.7 million and $5.1 million for the three and six months ended June 30, 2022, respectively ($2.5 million and $5.4 million for the three and six months ended June 30, 2021, respectively). Net realized and unrealized gains (losses) on investments includes losses of $9.9 million and $12.0 million for the three and six months ended June 30, 2022, respectively (gains of $1.9 million and $5.8 million for the three and six months ended June 30, 2021, respectively). For the three and six months ended June 30, 2022 and 2021, management concluded that none of the unrealized losses were due to credit-related impairments. Losses due to credit-related impairments are 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.
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 June 30, 2022 or December 31, 2021.
15

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


The Company’s net realized and unrealized gains and losses on investments are summarized as follows:
  Three Months Ended
June 30,
Six Months Ended
June 30,
  2022 2021 2022 2021
  (in thousands)
Fixed maturity securities:        
Gross realized gains $ 1,332  $ 135  $ 1,698  $ 1,191 
Gross realized losses (278) (2) (442) (23)
  1,054  133  1,256  1,168 
Bank loan participations:        
Gross realized gains 18  120  113  318 
Gross realized losses (122) (523) (306) (783)
Changes in fair values of bank loan participations (9,791) 2,340  (11,800) 6,250 
  (9,895) 1,937  (11,993) 5,785 
Equity securities:        
Gross realized gains 82  29  111 
Gross realized losses —  (94) (381) (495)
Changes in fair values of equity securities (8,250) 1,415  (10,992) 3,160 
  (8,245) 1,403  (11,344) 2,776 
Short-term investments and other:        
Gross realized gains —  —  — 
Gross realized losses (24) —  (39) — 
Changes in fair values of short-term investments and other —  10  —  21 
  (24) 10  (39) 26 
Total $ (17,110) $ 3,483  $ (22,120) $ 9,755 
  
Realized investment gains or losses are determined on a specific identification basis.
16

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


The Company invests selectively in private debt and equity opportunities. These investments, which together comprise the Company’s other invested assets, are primarily focused in renewable energy, limited partnerships, and bank holding companies.
  Carrying Value Investment Income
  June 30, December 31, Three Months Ended
June 30,
Six Months Ended
June 30,
  2022 2021 2022 2021 2022 2021
  (in thousands)
Renewable energy LLCs (a)
Excess and Surplus Lines $ 25,736  $ 24,211  $ 81  $ —  $ 2,361  $ — 
Corporate & Other 2,853  2,709  15  129  259  (786)
28,589  26,920  96  129  2,620  (786)
Renewable energy notes receivable (b)
Excess and Surplus Lines 2,329  2,329  70  120  140  224 
Corporate & Other 2,911  2,911  87  150  174  280 
5,240  5,240  157  270  314  504 
Limited partnerships (c)
Excess and Surplus Lines 11,318  13,098  (828) 241  (696) 416 
Corporate & Other 1,701  2,150  —  108  —  862 
13,019  15,248  (828) 349  (696) 1,278 
Bank holding companies (d)
Excess and Surplus Lines 4,500  4,500  86  29  172  29 
Corporate & Other —  —  —  57  —  143 
4,500  4,500  86  86  172  172 
Total other invested assets
Excess and Surplus Lines 43,883  44,138  (591) 390  1,977  669 
Corporate & Other 7,465  7,770  102  444  433  499 
$ 51,348  $ 51,908  $ (489) $ 834  $ 2,410  $ 1,168 
 
(a)The Company's Excess and Surplus Lines and Corporate and Other segments own equity interests ranging from 2.6% to 32.6% 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 Non-Executive Chairman has invested in certain of these LLCs. The equity method is used to account for the Company’s LLC investments. Income for the LLCs primarily reflects adjustments to the carrying values of investments in renewable energy projects to their determined fair values. The fair value adjustments are included in revenues for the LLCs. Expenses for the LLCs are not significant and are comprised of administrative and interest expenses. The Company received cash distributions from these investments totaling $951,000 and $266,000 in the six months ended June 30, 2022 and 2021, respectively.
(b)The Company's Excess and Surplus Lines and Corporate and Other segments have invested in notes receivable for renewable energy projects. At June 30, 2022, the Company held two notes issued by an entity for which two of our former directors serve as officers. Interest on the notes, which mature in 2025, is fixed at 12%.
(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, private equity general partnership interests, commercial mortgage-backed securities, and tranches of distressed home loans. Income from the partnerships is recognized under the equity method of accounting. At June 30, 2022, the Company’s Excess and Surplus Lines segment has outstanding commitments to invest another $5.3 million in these limited partnerships.
(d)The Company's Excess and Surplus Lines segment holds $4.5 million of subordinated notes issued by a bank holding company for which the Company’s Non-Executive Chairman was previously the Lead Independent Director and an investor and for which one of the Company’s directors is also an investor (the "Bank Holding Company"). Interest on the notes, which mature on August 12, 2023, is fixed at 7.6% per annum.
17

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


3.    Goodwill and Intangible Assets
On December 11, 2007, the Company completed an acquisition of James River Group by acquiring 100% of the outstanding shares of James River Group common stock, referred to herein as the “Merger”. The transaction was accounted for under the purchase method of accounting, and goodwill and intangible assets were recognized by the Company as a result of the transaction. Goodwill resulting from the Merger was $181.8 million at June 30, 2022 and December 31, 2021.
The gross carrying amounts and accumulated amortization for each major specifically identifiable intangible asset class were as follows: 
    June 30, 2022 December 31, 2021
  Life
(Years)
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
    ($ 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  6,918  11,611  6,736 
Identifiable intangible assets subject to amortization   11,611  6,918  11,611  6,736 
    $ 42,775  $ 6,918  $ 42,775  $ 6,736 
 
4.    Earnings (Loss) Per Share
The following represents a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per common share computations contained in the condensed consolidated financial statements:
Three Months Ended
June 30,
Six Months Ended
June 30,
2022 2021 2022 2021
(in thousands, except share and per share amounts)
Net income (loss) $ 7,664  $ 20,843  $ 17,869  $ (82,617)
Less: Dividends on Series A preferred shares (2,625) —  (3,500) — 
Net income (loss) available to common shareholders $ 5,039  $ 20,843  $ 14,369  $ (82,617)
Weighted average common shares outstanding:
Basic 37,449,621  34,418,472  37,428,385  32,576,463 
Dilutive potential common shares 282,750  168,525  215,249  — 
Diluted 37,732,371  34,586,997  37,643,634  32,576,463 
Earnings (loss) per common share:
Basic $ 0.13  $ 0.61  $ 0.38  $ (2.54)
Dilutive potential common shares —  (0.01) —  — 
Diluted $ 0.13  $ 0.60  $ 0.38  $ (2.54)
For the three and six months ended June 30, 2022, potential common shares of 5,928,132 and 4,089,627, respectively (131,193 and 237,618 in the respective prior year periods), were excluded from the calculation of diluted earnings (loss) per common share as their effects were anti-dilutive.
18

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. Reinsurance recoverables on unpaid losses and loss adjustment expenses are presented gross of an allowance for credit losses on reinsurance balances of $601,000 at June 30, 2022, $604,000 at March 31, 2022, $631,000 at December 31, 2021, and $335,000 at June 30, 2021, March 31, 2021, and December 31, 2020.
  Three Months Ended
June 30,
Six Months Ended
June 30,
  2022 2021 2022 2021
  (in thousands)
Reserve for losses and loss adjustment expenses net of reinsurance recoverables at beginning of period $ 1,131,700  $ 1,534,779  $ 1,399,214  $ 1,386,061 
Add: Incurred losses and loss adjustment expenses net of reinsurance:        
Current year 122,945  113,450  251,749  216,816 
Prior years (1,576) (3,450) 5,228  166,684 
Total incurred losses and loss and adjustment expenses 121,369  110,000  256,977  383,500 
Deduct: Loss and loss adjustment expense payments net of reinsurance:      
Current year 6,832  7,263  9,606  10,456 
Prior years 92,765  126,410  193,620  247,999 
Total loss and loss adjustment expense payments 99,597  133,673  203,226  258,455 
Deduct: Loss reserves ceded in Retrocession Agreement —  —  299,493  — 
Add: Changes in reinsurance recoverable of Retrocession Agreement unrelated to net reserve activity 5,673  —  5,673  — 
Reserve for losses and loss adjustment expenses net of reinsurance recoverables at end of period 1,159,145  1,511,106  1,159,145  1,511,106 
Add: Reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period 1,571,486  935,896  1,571,486  935,896 
Reserve for losses and loss adjustment expenses gross of reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period $ 2,730,631  $ 2,447,002  $ 2,730,631  $ 2,447,002 
  
The Company experienced $1.6 million of net favorable reserve development in the three months ended June 30, 2022 on the reserve for losses and loss adjustment expenses held at December 31, 2021. This reserve development included $32,000 of net favorable development in the Excess and Surplus Lines segment, $1.5 million of net favorable development in the Specialty Admitted Insurance segment, and no development in the Casualty Reinsurance segment.
The Company experienced $3.5 million of net favorable reserve development in the three months ended June 30, 2021 on the reserve for losses and loss adjustment expenses held at December 31, 2020. This reserve development included $7.5 million of net favorable development in the Excess and Surplus Lines segment, $1.0 million of net favorable development in the Specialty Admitted Insurance segment, and $5.0 million of net adverse development in the Casualty Reinsurance segment.
The Company experienced $5.2 million of net adverse reserve development in the six months ended June 30, 2022 on the reserve for losses and loss adjustment expenses held at December 31, 2021. This reserve development included $91,000 of net favorable development in the Excess and Surplus Lines segment, $1.5 million of net favorable development in the Specialty Admitted Insurance segment, and $6.8 million of net adverse development in the Casualty Reinsurance segment that was associated with the Retrocession Agreement (as defined below).
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;
19

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


(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) pays 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.
The Company experienced $166.7 million of net adverse reserve development in the six months ended June 30, 2021 on the reserve for losses and loss adjustment expenses held at December 31, 2020. This reserve development included $161.2 million of net adverse development in the Excess and Surplus Lines segment, including $170.0 million on commercial auto business, almost entirely related to a previously canceled account that has been in runoff since 2019. The reported losses on this terminated commercial auto account meaningfully exceeded our expectations for the three months ended March 31, 2021. We had expected that reported losses would decline as the account moved further into runoff, but the continued heavy reported loss emergence in the first quarter of 2021 indicated more inherent severity than anticipated. In response, we meaningfully adjusted our actuarial methodology, resulting in a significant strengthening of reserves for this account at March 31, 2021. In prior quarters, our actuarial work for this terminated commercial auto account had been based on industry data, pricing data, experience data, average claims severity data, and blended methodologies. However, the continuation of the highly elevated reported losses in the first quarter of 2021 led us to conclude that using only our own loss experience in our paid and incurred reserve projections rather than the array of inputs that we had used in prior quarters, and giving greater weight to incurred methods, would give us a better estimate of ultimate losses on this account. Loss emergence on the terminated commercial auto account in the three months ended June 30, 2021 was in line with our expectations, and accordingly, no additional reserve development was taken in the second quarter of 2021. The Company also experienced $2.0 million of net favorable development in the Specialty Admitted Insurance segment due to favorable development in the workers' compensation business for prior accident years, and $7.5 million of net adverse development in the Casualty Reinsurance segment.
6.    Other Comprehensive (Loss) Income
The following table summarizes the components of other comprehensive (loss) income:
  Three Months Ended
June 30,
Six Months Ended
June 30,
  2022 2021 2022 2021
  (in thousands)
Unrealized (losses) gains arising during the period, before U.S. income taxes $ (65,544) $ 17,504  $ (162,963) $ (29,797)
U.S. income taxes 7,777  (2,018) 19,385  3,435 
Unrealized (losses) gains arising during the period, net of U.S. income taxes (57,767) 15,486  (143,578) (26,362)
Less reclassification adjustment:      
Net realized investment gains 1,054  133  1,256  1,168 
U.S. income taxes (221) (5) (263) (200)
Reclassification adjustment for investment gains realized in net income 833  128  993  968 
Other comprehensive (loss) income $ (58,600) $ 15,358  $ (144,571) $ (27,330)
The Company's invested assets at June 30, 2022 include $1,597.7 million of fixed maturity securities that are classified as available-for-sale and carried at fair value with unrealized gains and losses on these securities reported, net of applicable taxes, as a separate component of accumulated comprehensive (loss) income. In the six months ended June 30, 2022 and 2021, the fair values of our fixed maturity securities were negatively impacted by rising interest rates leading to unrealized losses recognized in other comprehensive loss.
20

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


In addition to the $1.1 million and $1.3 million of net realized investment gains on available-for-sale fixed maturities for the three and six months ended June 30, 2022 ($133,000 and $1.2 million for the three and six months ended June 30, 2021, respectively), the Company also recognized net realized and unrealized investment (losses) gains in the respective periods of $(9.9) million and $(12.0) million on its investments in bank loan participations ($1.9 million and $5.8 million in the respective prior year periods) and $(8.2) million and $(11.3) million on its investments in equity securities ($1.4 million and $2.8 million in the respective prior year periods) that was largely related to preferred stock holdings.
7.       Contingent Liabilities
The Company is involved in various legal proceedings, including commercial matters and litigation regarding insurance claims arising in the ordinary course of business as well as an alleged class action lawsuit. In addition, the Company is involved from time to time in legal actions which seek extra-contractual damages, punitive damages or penalties, including claims alleging bad faith in the handling of insurance claims. The Company believes that the outcome of such matters, individually and in the aggregate, is not reasonably likely to have a material adverse effect on its consolidated financial position, results of operations or cash flows.
On July 9, 2021 a purported class action lawsuit was filed in the U.S. District Court, Eastern District of Virginia (the "Court") by Employees' Retirement Fund of the City of Fort Worth against James River Group Holdings, Ltd. and certain of its present and former officers (together, "Defendants"). On September 22, 2021, the Court entered an order appointing Employees' Retirement Fund of the City of Fort Worth and the City of Miami General Employees' and Sanitation Employees' Retirement Trust as co-lead plaintiffs (together, "Plaintiffs"). Plaintiffs' consolidated amended complaint was filed on November 19, 2021 (the "Amended Complaint"), which asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of persons and entities that purchased the Company's stock between February 22, 2019 and October 25, 2021. The Amended Complaint alleges that Defendants failed to make appropriate disclosures concerning the adequacy of reserves for policies that covered Rasier LLC, a subsidiary of Uber Technologies, Inc., and seeks unspecified damages, costs, attorneys’ fees and such other relief as the court may deem proper. The Defendants filed a motion to dismiss on January 18, 2022. Plaintiffs’ opposition to the motion to dismiss was filed on March 4, 2022, and the Defendants’ reply to the Plaintiff's opposition was filed on April 4, 2022. On July 13, 2022, Plaintiffs filed a notice with the Court stating that they intend to seek leave to file an amended complaint no later than August 25, 2022. We believe that Plaintiffs’ claims are without merit and we intend to vigorously defend this lawsuit.
For a description of the potential future impacts of COVID-19 on the Company, see the “The global coronavirus outbreak could harm business and results of operations of the Company” risk factor in Part I—Item IA in our Annual Report on Form 10-K for the year ended December 31, 2021.
The Company’s reinsurance subsidiary, JRG Re, entered into three letter of credit facilities with banks as security to third-party reinsureds on reinsurance assumed by JRG Re. JRG Re has established custodial accounts to secure these letters of credit. Under a $30.0 million facility, $4.6 million of letters of credit were issued through June 30, 2022 which were secured by deposits of $9.1 million. Under a $102.5 million facility, $38.2 million of letters of credit were issued through June 30, 2022 which were secured by deposits of $46.6 million. Under a $100.0 million facility, $22.6 million of letters of credit were issued through June 30, 2022 which were secured by deposits of $30.0 million. JRG Re has also established trust accounts to secure its obligations to selected reinsureds. The total amount deposited in the trust accounts for the benefit of third-party reinsureds was $417.4 million at June 30, 2022.
Amounts Recoverable from an Indemnifying Party and Reinsurer on Legacy Commercial Auto Book
James River Insurance Company and James River Casualty Company (together, “James River”) previously issued a set of commercial auto insurance contracts (the “Rasier Commercial Auto Policies”) to Rasier LLC and its affiliates (collectively, “Rasier”) under which James River pays losses and loss adjustment expenses on the contracts. James River has indemnity agreements with Rasier (non-insurance entities) (collectively, the “Indemnity Agreements”) and is contractually entitled to reimbursement for the portion of the losses and loss adjustment expenses paid on behalf of Rasier under the Rasier Commercial Auto Policies and other expenses incurred by James River. On September 27, 2021, James River entered into a loss portfolio transfer reinsurance agreement (the “LPT Agreement”) with Aleka Insurance, Inc. (“Aleka”), a captive insurance company affiliate of Rasier, to reinsure substantially all of the Rasier Commercial Auto Policies for which James River is not otherwise indemnified by Rasier under the Indemnity Agreements. Under the terms of the LPT Agreement, effective as of July 1, 2021, James River ceded to Aleka approximately $345.1 million of commercial auto liabilities relating to Rasier Commercial Auto Policies written in the years 2013-2019, which amount constituted the reinsurance premium.
21

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


Each of Rasier and Aleka are required to post collateral under the Indemnity Agreements and the LPT Agreement, respectively:
Pursuant to the Indemnity Agreements, Rasier is required to post collateral equal to 102% of James River's estimate of the amounts that are recoverable or may be recoverable under the indemnity agreements, including, among other things, case loss and loss adjustment expense reserves, IBNR loss and loss adjustment expense reserves, extra contractual obligations and excess policy limits liabilities. The collateral is provided through a collateral trust arrangement (the “Indemnity Trust”) in favor of James River by Aleka. In connection with the execution of the LPT Agreement, James River returned $691.3 million to the Indemnity Trust, representing the remaining balance of the amount withdrawn in October 2019, as was permitted under the indemnification agreements with Rasier and the associated trust agreement. At June 30, 2022, the balance in the Indemnity Trust was $374.3 million, and, together with the balance of the Loss Fund Trust (as defined below) attributable to the Indemnity Agreements as described below, the total balance of collateral securing Rasier’s obligations under the Indemnity Agreements was $443.4 million.
Pursuant to the LPT Agreement, Aleka is required to post collateral equal to 102% of James River's estimate of Aleka's obligations under the LPT Agreement, calculated in accordance with statutory accounting principles. The collateral is provided through a collateral trust arrangement (the “LPT Trust”) established in favor of James River by Aleka. At June 30, 2022, the balance in the LPT Trust was $165.4 million, and, together with the balance of the Loss Fund Trust (as defined below) attributable to the LPT Agreement as described below, the total balance of collateral securing Aleka’s obligations under the LPT Agreement was $193.6 million. At June 30, 2022, the total reinsurance recoverables under the LPT Agreement was $188.9 million (including $170.3 million of unpaid recoverables and $18.6 million of paid recoverables).
In connection with the execution of the LPT Agreement, James River and Aleka entered into an administrative services agreement (the “Administrative Services Agreement”) with a third party claims administrator (the “Administrator”) pursuant to which the Administrator handles the claims on the Rasier Commercial Auto Policies for the remaining life of those claims. The claims paid by the Administrator are reimbursable by James River, and pursuant to the Administrative Services Agreement, James River established a loss fund trust account for the benefit of the Administrator (the “Loss Fund Trust”) to collateralize its claims payment reimbursement obligations. James River funds the Loss Fund Trust using funds withdrawn from the Indemnity Trust, funds withdrawn from the LPT Trust, and its own funds, in each case in an amount equal to the pro rata portion of the required Loss Fund Trust balance attributable to the Indemnity Agreements, the LPT Agreement and James River’s existing third party reinsurance agreements, respectively. At June 30, 2022, the balance in the Loss Fund Trust was $102.1 million, including $69.2 million representing collateral supporting Rasier’s obligations under the Indemnity Agreements and $28.2 million representing collateral supporting Aleka’s obligations under the LPT Agreement. Funds posted to the Loss Fund Trust are classified as restricted cash equivalents on the Company's balance sheets.
While the LPT Agreement brings economic finality to substantially all of the Rasier Commercial Auto Policies, the Company has credit exposure to Rasier and Aleka under the Indemnity Agreements and the LPT Agreement if the estimated losses and expenses of the Rasier Commercial Auto Policies grow at a faster pace than the growth in our collateral balances. In addition, we have credit exposure if our estimates of future losses and loss adjustment expenses and other amounts recoverable under the Indemnity Agreements and the LPT Agreement, which are the basis for establishing the collateral balances, are lower than actual amounts paid or payable. The amount of our credit exposure in any of these instances could be material. To mitigate these risks, we closely and frequently monitor our exposure compared to our collateral held, and we request additional collateral in accordance with the terms of the LPT Agreement and Indemnity Agreements when our analysis indicates that we have uncollateralized exposure.
8.    Segment Information
The Company has four reportable segments: the Excess and Surplus Lines segment, the Specialty Admitted Insurance segment, the Casualty Reinsurance segment, and the Corporate and Other segment. Segment profit (loss) is measured by underwriting profit (loss), which is generally defined as net earned premiums and gross fee income (in specific instances when the Company is not retaining insurance risk) in “other income” in the condensed consolidated statements of income (loss) and comprehensive (loss) income less loss and loss adjustment expenses and other operating expenses of the operating segments. Gross fee income of $900,000 and $1.7 million for the Specialty Admitted Insurance segment was included in other income and in underwriting profit (loss) for the three and six months ended June 30, 2022, respectively ($954,000 and $1.9 million in the respective prior year periods). Segment results are reported prior to the effects of intercompany reinsurance agreements among the Company’s insurance subsidiaries.
22

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


The following table summarizes the Company’s segment results:
  Excess and
Surplus
Lines
Specialty
Admitted
Insurance
Casualty
Reinsurance
Corporate
and
Other
Total
  (in thousands)
Three Months Ended June 30, 2022
Gross written premiums $ 266,635  $ 124,967  $ 8,112  $ —  $ 399,714 
Net earned premiums 137,884  18,141  30,237  —  186,262 
Underwriting profit of operating segments 22,334  1,252  2,059  —  25,645 
Net investment income 3,298  934  10,441  32  14,705 
Interest expense —  —  1,327  2,722  4,049 
Segment revenues 131,659  19,187  33,854  106  184,806 
Segment goodwill 181,831  —  —  —  181,831 
Segment assets 2,096,138  1,135,839  1,999,687  33,611  5,265,275 
Three Months Ended June 30, 2021
Gross written premiums $ 214,014  $ 129,189  $ 36,943  $ —  $ 380,146 
Net earned premiums 117,945  18,595  36,165  —  172,705 
Underwriting profit (loss) of operating segments 26,917  2,138  (3,321) —  25,734 
Net investment income 3,473  766  9,707  402  14,348 
Interest expense —  —  —  2,249  2,249 
Segment revenues 124,018  21,093  45,987  469  191,567 
Segment goodwill 181,831  —  —  —  181,831 
Segment assets 2,211,469  1,034,622  2,120,625  25,100  5,391,816 
Six Months Ended June 30, 2022
Gross written premiums $ 470,917  $ 250,677  $ 38,056  $ —  $ 759,650 
Net earned premiums 269,185  37,459  69,442  —  376,086 
Underwriting profit (loss) of operating segments 43,791  1,461  (6,778) —  38,474 
Net investment income 8,840  1,691  20,154  287  30,972 
Interest expense —  —  1,342  4,999  6,341 
Segment revenues 265,051  39,550  81,725  428  386,754 
Segment goodwill 181,831  —  —  —  181,831 
Segment assets 2,096,138  1,135,839  1,999,687  33,611  5,265,275 
Six Months Ended June 30, 2021          
Gross written premiums $ 395,372  $ 256,225  $ 101,804  $ —  $ 753,401 
Net earned premiums 231,653  34,952  66,693  —  333,298 
Underwriting (loss) profit of operating segments (124,029) 3,404  (4,946) —  (125,571)
Net investment income 7,179  1,588  20,263  407  29,437 
Interest expense —  —  —  4,465  4,465 
Segment revenues 242,814  39,658  91,504  571  374,547 
Segment goodwill 181,831  —  —  —  181,831 
Segment assets 2,211,469  1,034,622  2,120,625  25,100  5,391,816 
  
23

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


The following table reconciles the underwriting profit (loss) of the operating segments by individual segment to consolidated income (loss) before income taxes:
  Three Months Ended
June 30,
Six Months Ended
June 30,
  2022 2021 2022 2021
  (in thousands)
Underwriting profit (loss) of the operating segments:        
Excess and Surplus Lines $ 22,334  $ 26,917  $ 43,791  $ (124,029)
Specialty Admitted Insurance 1,252  2,138  1,461  3,404 
Casualty Reinsurance 2,059  (3,321) (6,778) (4,946)
Total underwriting profit (loss) of operating segments 25,645  25,734  38,474  (125,571)
Other operating expenses of the Corporate and Other segment (8,888) (7,915) (16,762) (15,971)
Underwriting profit (loss) 16,757  17,819  21,712  (141,542)
Net investment income 14,705  14,348  30,972  29,437 
Net realized and unrealized (losses) gains on investments (17,110) 3,483  (22,120) 9,755 
Amortization of intangible assets (91) (91) (182) (182)
Other income and expenses 49  (827) (252) (1,349)
Interest expense (4,049) (2,249) (6,341) (4,465)
Income (loss) before income taxes $ 10,261  $ 32,483  $ 23,789  $ (108,346)

9.    Other Operating Expenses and Other Expenses
Other operating expenses consist of the following:
  Three Months Ended
June 30,
Six Months Ended
June 30,
  2022 2021 2022 2021
  (in thousands)
Amortization of policy acquisition costs $ 23,188  $ 23,403  $ 46,025  $ 44,878 
Other underwriting expenses of the operating segments 16,960  14,522  36,310  32,372 
Other operating expenses of the Corporate and Other segment 8,888  7,915  16,762  15,971 
Total $ 49,036  $ 45,840  $ 99,097  $ 93,221 
Other expenses of $— and $368,000 for the three and six months ended June 30, 2022, respectively ($904,000 and $1.5 million in the respective prior year periods), primarily consist of certain nonoperating expenses including legal fees related to a purported class action lawsuit, legal and other professional fees related to the Company's May 2021 common share offering and various strategic initiatives, and employee severance costs.
10.    Fair Value Measurements
Three levels of inputs are used to measure fair value of financial instruments: (1) Level 1: quoted price (unadjusted) in active markets for identical assets, (2) Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument, and (3) Level 3: inputs to the valuation methodology are unobservable for the asset or liability.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date.
The fair values of fixed maturity securities, equity securities, and bank loan participations have been determined using fair value prices provided by the Company’s investment accounting services provider or investment managers, who utilize internationally recognized independent pricing services. The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g. broker quotes and prices observed for comparable securities). Values for U.S. Treasury and publicly-traded equity securities are generally based on Level 1 inputs which use the market approach
24

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


valuation technique. The values for all other fixed maturity securities (including state and municipal securities and obligations of U.S. government corporations and agencies) and bank loan participations generally incorporate significant Level 2 inputs, and in some cases, Level 3 inputs, using the market approach and income approach valuation techniques. There have been no changes in the Company’s use of valuation techniques since December 31, 2020.
The Company reviews fair value prices provided by its outside investment accounting service provider or investment managers for reasonableness by comparing the fair values provided by the managers to those provided by its investment custodian. The Company also reviews and monitors changes in unrealized gains and losses. The Company has not historically adjusted security prices. The Company obtains an understanding of the methods, models and inputs used by the investment managers and independent pricing services, and controls are in place to validate that prices provided represent fair values. The Company’s control process includes, but is not limited to, initial and ongoing evaluation of the methodologies used, a review of specific securities and an assessment for proper classification within the fair value hierarchy, and obtaining and reviewing internal control reports for our investment manager that obtains fair values from independent pricing services.
Assets measured at fair value on a recurring basis as of June 30, 2022 are summarized below:
  Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Identical
Assets
Level 1
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Total
  (in thousands)
Fixed maturity securities, available-for-sale:        
State and municipal $ —  $ 302,405  $ —  $ 302,405 
Residential mortgage-backed —  290,555  —  290,555 
Corporate —  606,821  —  606,821 
Commercial mortgage and asset-backed —  322,204  —  322,204 
U.S. Treasury securities and obligations guaranteed by the U.S. government
75,356  354  —  75,710 
Total fixed maturity securities, available-for-sale $ 75,356  $ 1,522,339  $ —  $ 1,597,695 
Equity securities:        
Preferred stock —  51,750  —  51,750 
Common stock 43,470  3,433  —  46,903 
Total equity securities $ 43,470  $ 55,183  $ —  $ 98,653 
Bank loan participations $ —  $ 159,885  $ —  $ 159,885 
Short-term investments $ —  $ 130,435  $ —  $ 130,435 
  
25

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


Assets measured at fair value on a recurring basis as of December 31, 2021 are summarized below:
  Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Identical
Assets
Level 1
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Total
  (in thousands)
Fixed maturity securities, available-for-sale:        
State and municipal $ —  $ 333,717  $ —  $ 333,717 
Residential mortgage-backed —  246,631  —  246,631 
Corporate —  732,335  —  732,335 
Commercial mortgage and asset-backed —  304,488  —  304,488 
U.S. Treasury securities and obligations guaranteed by the U.S. government
59,988  402  —  60,390 
Total fixed maturity securities, available-for-sale $ 59,988  $ 1,617,573  $ —  $ 1,677,561 
Equity securities:        
Preferred stock —  63,612  —  63,612 
Common stock 41,244  3,452  102  44,798 
Total equity securities $ 41,244  $ 67,064  $ 102  $ 108,410 
Bank loan participations $ —  $ 156,043  $ —  $ 156,043 
Short-term investments $ —  $ 136,563  $ —  $ 136,563 

A reconciliation of the beginning and ending balances of available-for-sale fixed maturity securities, equity securities, and bank loan participations measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is shown below:
Three Months Ended
June 30,
Six Months Ended
June 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Beginning balance $ —  $ 299  $ 102  $ 980 
Transfers out of Level 3 —  —  —  — 
Transfers in to Level 3 —  —  —  — 
Purchases —  —  —  — 
Sales —  —  (92) (282)