UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 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 November 1, 2022: 37,460,041

James River Group Holdings, Ltd.

Form 10-Q

Index

		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets—September 30, 2022 and December 31, 2021	5
	Condensed Consolidated Statements of Income (Loss) and Comprehensive (Loss) Income—Three and Nine Months Ended September 30, 2022 and 2021	7
	Condensed Consolidated Statements of Changes in Shareholders’ Equity—Three and Nine Months Ended September 30, 2022 and 2021	8
	Condensed Consolidated Statements of Cash Flows—Nine Months Ended September30, 2022 and 2021	10
	Notes to Condensed Consolidated Financial Statements	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	33
	Critical Accounting Policies and Estimates	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60
Item 4.	Controls and Procedures	60
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	61
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults Upon Senior Securities	61
Item 4.	Mine Safety Disclosures	61
Item 5.	Other Information	61
Item 6.	Exhibits	61
Signatures		62

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;

•downgrades in the financial strength rating of our regulated insurance subsidiaries 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;

•the impact of a persistent high inflationary environment 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, and our potential inability to demand or maintain adequate collateral to mitigate such risks;

•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) September 30, 2022		December 31, 2021
	(in thousands)
Assets
Invested assets:
Fixed maturity securities, available-for-sale, at fair value (amortized cost: 2022 – $1,839,336; 2021 – $1,643,865)	$	1,639,248	$	1,677,561
Equity securities, at fair value (cost: 2022 – $121,446; 2021 – $95,783)	118,114		108,410
Bank loan participations, at fair value	160,296		156,043
Short-term investments	208,904		136,563
Other invested assets	49,471		51,908
Total invested assets	2,176,033		2,130,485
Cash and cash equivalents	187,544		190,123
Restricted cash equivalents	102,485		102,005
Accrued investment income	13,778		11,037
Premiums receivable and agents’ balances, net	341,655		393,967
Reinsurance recoverable on unpaid losses, net	1,584,836		1,348,628
Reinsurance recoverable on paid losses	110,260		82,235
Prepaid reinsurance premiums	280,739		291,498
Deferred policy acquisition costs	62,883		68,526
Intangible assets, net	35,767		36,039
Goodwill	181,831		181,831
Other assets	127,680		112,176
Total assets	$	5,205,491	$	4,948,550

See accompanying notes.

5

JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (continued)

	(Unaudited) September 30, 2022		December 31, 2021
	(in thousands, except share amounts)
Liabilities and Shareholders’ Equity
Liabilities:
Reserve for losses and loss adjustment expenses	$	2,786,700	$	2,748,473
Unearned premiums	696,452		727,552
Payables to reinsurers	114,064		135,617
Funds held	335,233		97,360
Deferred reinsurance gain	20,773		—
Senior debt	222,300		262,300
Junior subordinated debt	104,055		104,055
Accrued expenses	52,010		57,920
Other liabilities	202,202		89,911
Total liabilities	4,533,789		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; 37,450,438 and 37,373,066 shares issued and outstanding, respectively	7		7
Additional paid-in capital	867,309		862,040
Retained deficit	(165,263)		(166,663)
Accumulated other comprehensive (loss) income	(175,249)		29,978
Total shareholders’ equity	526,804		725,362
Total liabilities, Series A redeemable preferred shares, and shareholders’ equity	$	5,205,491	$	4,948,550

See accompanying notes.

6

 JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES

Condensed Consolidated Statements of (Loss) Income and Comprehensive Loss (Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
					(in thousands, except share amounts)
Revenues
Gross written premiums	$	358,505	$	346,599	$	1,118,155	$	1,100,000
Ceded written premiums	(168,254)		(188,389)		(557,354)		(573,587)
Net written premiums	190,251		158,210		560,801		526,413
Change in net unearned premiums	(62)		12,398		5,474		(22,507)
Net earned premiums	190,189		170,608		566,275		503,906
Net investment income	17,306		15,289		48,278		44,726
Net realized and unrealized (losses) gains on investments	(7,754)		3,983		(29,874)		13,738
Other income	1,488		1,113		3,304		3,170
Total revenues	201,229		190,993		587,983		565,540
Expenses
Losses and loss adjustment expenses	153,008		166,078		409,985		549,578
Other operating expenses	47,584		43,193		146,681		136,414
Other expenses	210		706		578		2,231
Interest expense	4,950		2,227		11,291		6,692
Amortization of intangible assets	90		90		272		272
Total expenses	205,842		212,294		568,807		695,187
(Loss) income before taxes	(4,613)		(21,301)		19,176		(129,647)
Income tax expense (benefit)	8		2,588		5,928		(23,141)
Net (loss) income	(4,621)		(23,889)		13,248		(106,506)
Dividends on Series A preferred shares	(2,625)		—		(6,125)		—
Net (loss) income available to common shareholders	$	(7,246)	$	(23,889)	$	7,123	$	(106,506)
Other comprehensive loss:
Net unrealized losses, net of taxes of $(8,910) and $(28,558) in 2022 and $(1,882) and $(5,517) in 2021	(60,656)		(11,459)		(205,227)		(38,789)
Total comprehensive loss	$	(65,277)	$	(35,348)	$	(191,979)	$	(145,295)
Net (loss) income per common share:
Basic	$	(0.19)	$	(0.64)	$	0.19	$	(3.12)
Diluted	$	(0.19)	$	(0.64)	$	0.19	$	(3.12)
Dividend declared per common share	$	0.05	$	0.30	$	0.15	$	0.90
Weighted-average common shares outstanding:
Basic	37,450,381		37,278,469		37,435,798		34,161,022
Diluted	37,450,381		37,278,469		37,642,656		34,161,022

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 June 30, 2022	37,450,264	$	7	$	865,081	$	(156,109)	$	(114,593)	$	594,386
Net loss	—	—		—		(4,621)		—		(4,621)
Other comprehensive loss	—	—		—		—		(60,656)		(60,656)
Vesting of RSUs	174	—		—		—		—		—
Compensation expense under share incentive plans	—	—		2,228		—		—		2,228
Dividends on Series A preferred shares	—	—		—		(2,625)		—		(2,625)
Dividends on common shares	—	—		—		(1,908)		—		(1,908)
Balances at September 30, 2022	37,450,438	$	7	$	867,309	$	(165,263)	$	(175,249)	$	526,804
Balances at December 31, 2021	37,373,066	$	7	$	862,040	$	(166,663)	$	29,978	$	725,362
Net income	—	—		—		13,248		—		13,248
Other comprehensive loss	—	—		—		—		(205,227)		(205,227)
Vesting of RSUs	77,372	—		(941)		—		—		(941)
Compensation expense under share incentive plans	—	—		6,210		—		—		6,210
Dividends on Series A preferred shares	—	—		—		(6,125)		—		(6,125)
Dividends on common shares	—	—		—		(5,723)		—		(5,723)
Balances at September 30, 2022	37,450,438	$	7	$	867,309	$	(165,263)	$	(175,249)	$	526,804

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 June 30, 2021	37,275,562	$	7	$	857,916	$	(53,993)	$	54,569	$	858,499
Net loss	—	—		—		(23,889)		—		(23,889)
Other comprehensive loss	—	—		—		—		(11,459)		(11,459)
Issuance of common shares	—	—		—		—		—		—
Exercise of stock options	11,508	—		242		—		—		242
Vesting of RSUs	174	—		—		—		—		—
Compensation expense under share incentive plans	—	—		1,476		—		—		1,476
Dividends on common shares	—	—		—		(11,230)		—		(11,230)
Balances at September 30, 2021	37,287,244	$	7	$	859,634	$	(89,112)	$	43,110	$	813,639
Balances at December 31, 2020	30,649,261	$	6	$	664,476	$	49,227	$	81,899	$	795,608
Net loss	—	—		—		(106,506)		—		(106,506)
Other comprehensive loss	—	—		—		—		(38,789)		(38,789)
Issuance of common shares	6,497,500	1		192,106		—		—		192,107
Exercise of stock options	27,979	—		401		—		—		401
Vesting of RSUs	112,504	—		(2,592)		—		—		(2,592)
Compensation expense under share incentive plans	—	—		5,243		—		—		5,243
Dividends on common shares	—	—		—		(31,833)		—		(31,833)
Balances at September 30, 2021	37,287,244	$	7	$	859,634	$	(89,112)	$	43,110	$	813,639

See accompanying notes.

9

 JAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,
	2022		2021
	(in thousands)
Operating activities
Net cash provided by (used in) operating activities (a)	$	168,129	$	(1,061,314)
Investing activities
Securities available-for-sale:
Purchases – fixed maturity securities	(546,239)		(326,483)
Sales – fixed maturity securities	206,790		118,260
Maturities and calls – fixed maturity securities	143,015		226,280
Purchases – equity securities	(36,850)		(14,339)
Sales – equity securities	11,251		6,757
Bank loan participations:
Purchases	(78,371)		(88,376)
Sales	43,257		48,854
Maturities	17,340		39,058
Other invested assets:
Purchases	—		(11,644)
Return of capital	1,768		610
Short-term investments, net	(72,341)		103,347
Securities receivable or payable, net	52,763		12,365
Purchases of property and equipment	(4,564)		(2,930)
Net cash (used in) provided by investing activities	(262,181)		111,759
Financing activities
Senior debt repayments	(40,000)		—
Issuance of Series A preferred shares (Note 12)	144,898		—
Issuance of common shares - public offering	—		192,107
Issuance of common shares under equity incentive plans	—		571
Common share repurchases	(941)		(2,762)
Dividends on Series A preferred shares	(6,125)		—
Dividends on common shares	(5,879)		(31,990)
Net cash provided by financing activities	91,953		157,926
Change in cash, cash equivalents, and restricted cash equivalents	(2,099)		(791,629)
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	$	290,029	$	230,551
Supplemental information
Interest paid	$	10,746	$	7,473
Restricted cash equivalents at beginning of period	$	102,005	$	859,920
Restricted cash equivalents at end of period	$	102,485	$	10,000
Change in restricted cash equivalents	$	480	$	(849,920)

(a) Cash used in operating activities for the nine months ended September 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 (used in) operating activities was $167.6 million and $(211.4) million for the nine months ended September 30, 2022 and 2021, respectively. The cash used in operating activities excluding the reduction in collateral funds for the nine months ended September 30, 2021 primarily reflects $317.6 million paid to effect a loss portfolio transfer reinsurance transaction in the third quarter.

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 from January 1, 2018 through December 31, 2021 provided reinsurance to the Company’s U.S.-based insurance subsidiaries. During the three months ended September 30, 2022, Carolina Re commuted the majority of the outstanding obligations ceded under the intercompany quota share reinsurance agreements back to the Company’s U.S.-based insurance subsidiaries with effect from January 1, 2022. 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 $28.2 million and $26.9 million at September 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 nine months ended September 30, 2022, our U.S. federal income tax expense was 30.9% 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 nine months ended September 30, 2022. The Company had a pre-tax loss of $129.6 million for the nine months ended September 30, 2021 and recorded a U.S. federal income tax benefit of $23.1 million. For the nine months ended September 30, 2021, our U.S. federal income tax benefit was 17.8% of the loss before taxes. The pre-tax loss was largely driven by the $210.8 million of net adverse reserve development on prior accident years, including $190.7 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 nine months ended September 30, 2022.

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JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (continued)

2.    Investments

The Company’s available-for-sale fixed maturity securities are summarized as follows:

	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
September 30, 2022
Fixed maturity securities:
State and municipal	$	377,410	$	346	$	(56,859)	$	320,897
Residential mortgage-backed	388,386		241		(39,700)		348,927
Corporate	669,209		32		(75,284)		593,957
Commercial mortgage and asset-backed	328,022		—		(24,177)		303,845
U.S. Treasury securities and obligations guaranteed by the U.S. government	76,309		—		(4,687)		71,622
Total fixed maturity securities, available-for-sale	$	1,839,336	$	619	$	(200,707)	$	1,639,248
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 September 30, 2022 are summarized, by contractual maturity, as follows:

	Cost or Amortized Cost		Fair Value
	(in thousands)
One year or less	$	50,179	$	48,892
After one year through five years	439,524		409,673
After five years through ten years	351,577		300,364
After ten years	281,648		227,547
Residential mortgage-backed	388,386		348,927
Commercial mortgage and asset-backed	328,022		303,845
Total	$	1,839,336	$	1,639,248

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

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JAMES RIVER GROUP HOLDING, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (continued)

The following table shows the Company’s gross unrealized losses and fair value for available-for-sale securities aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

	Less Than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in thousands)
September 30, 2022
Fixed maturity securities:
State and municipal	$	274,536	$	(46,950)	$	36,950	$	(9,909)	$	311,486	$	(56,859)
Residential mortgage-backed	265,562		(24,678)		76,678		(15,022)		342,240		(39,700)
Corporate	455,140		(46,851)		129,401		(28,433)		584,541		(75,284)
Commercial mortgage and asset-backed	247,461		(16,433)		56,107		(7,744)		303,568		(24,177)
U.S. Treasury securities and obligations guaranteed by the U.S. government	50,551		(1,950)		21,071		(2,737)		71,622		(4,687)
Total fixed maturity securities, available-for-sale	$	1,293,250	$	(136,862)	$	320,207	$	(63,845)	$	1,613,457	$	(200,707)
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 September 30, 2022, the Company held fixed maturity securities of 573 issuers that were in an unrealized loss position with a total fair value of $1,613.5 million and gross unrealized losses of $200.7 million. None of the fixed maturity securities with unrealized losses has ever missed, or been delinquent on, a scheduled principal or interest payment. At September 30, 2022, 99.8% of the Company’s fixed maturity security portfolio was rated “BBB-” or better (“investment grade”) by Standard & Poor’s or received an equivalent rating from another nationally recognized rating agency. Fixed maturity securities with ratings below investment grade by Standard & Poor’s or another nationally recognized rating agency at September 30, 2022 had an aggregate fair value of $2.6 million and an aggregate net unrealized loss of $250,000.

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 September 30, 2022, December 31, 2021, or September 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 September 30, 2022, the Company's bank loan portfolio had an aggregate fair value of $160.3 million and unpaid principal of $178.8 million. Investment income on bank loan participations included in net investment income was $3.4 million and $8.4 million for the three and nine months ended September 30, 2022, respectively ($2.8 million and $8.2 million for the three and nine months ended September 30, 2021, respectively). Net realized and unrealized gains (losses) on investments includes losses on bank loan participations of $2.2 million and $14.2 million for the three and nine months ended September 30, 2022, respectively (gains of $195,000 and $6.0 million for the three and nine months ended September 30, 2021, respectively). For the three and nine months ended September 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 September 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 September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(in thousands)
Fixed maturity securities:
Gross realized gains	$	1	$	3,170	$	1,699	$	4,361
Gross realized losses	(973)		(3)		(1,415)		(27)
	(972)		3,167		284		4,334
Bank loan participations: