James River Group Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2024

The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. Factors that could cause such differences are discussed in the sections entitled “Special Note Regarding Forward-Looking Statements”, Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q, and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023. The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2024, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023.

The accompanying condensed consolidated financial statements and related notes have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and include the accounts of James River Group Holdings, Ltd. and its subsidiaries. Unless the context indicates or suggests otherwise, references to “the Company”, “we”, “us” and “our” refer to James River Group Holdings, Ltd. and its subsidiaries.

Our Business

James River Group Holdings, Ltd. is a Bermuda-based holding company. We own and operate a group of specialty insurance companies with the objective of generating compelling returns on tangible equity while limiting underwriting and investment volatility. We seek to accomplish this by earning profits from insurance underwriting and generating meaningful risk-adjusted investment returns while managing our capital.

We report our continuing operations in three reportable segments:

• The Excess and Surplus Lines segment offers commercial excess and surplus lines liability and property insurance in every U.S. state, the District of Columbia, Puerto Rico and the U.S. Virgin Islands through James River Insurance Company and its wholly-owned subsidiary, James River Casualty Company;
• The Specialty Admitted Insurance segment focuses on niche classes within the standard insurance markets with a primary focus on fronting business, where we retain a minority share of the risk and seek to earn fee income by allowing other carriers and producers to use our licensure, ratings, expertise and infrastructure. Through Falls Lake National and its subsidiaries, this segment has admitted licenses and the authority to write excess and surplus lines insurance in 50 states and the District of Columbia and distributes through a variety of sources, including program administrators and managing general agents;
• The Corporate and Other segment consists of the management and treasury activities of our holding companies, interest expense associated with our debt, and expenses of our holding companies, including public company expenses and equity compensation for the group, that are not reimbursed by our insurance segments.

Our discontinued operations include JRG Re, which comprised the remaining operations of the former Casualty Reinsurance segment, and which, prior to the suspension of its underwriting activities in 2023, provided proportional and working layer casualty reinsurance to third parties. On November 8, 2023, the Company entered into a definitive agreement to sell JRG Re. The sale transaction closed on April 16, 2024.

All of the Company’s U.S.-domiciled insurance subsidiaries are party to an intercompany pooling agreement that distributes the net underwriting results among the group companies based on their approximate pro-rata level of statutory capital and surplus to the total Company statutory capital and surplus. We report all segment information in this ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ prior to the effects of intercompany reinsurance, consistent with the manner in which we evaluate the operating performance of our reportable segments.

Our group’s regulated U.S. insurance subsidiaries have a financial strength rating of “A-” (Excellent) from A.M. Best Company.

Key Metrics

We discuss certain key metrics, described below, which we believe provide useful information about our business and the operational factors underlying our financial performance.

Underwriting profit is a non-GAAP measure commonly used in the property and casualty insurance industry to evaluate underwriting performance. We believe that the disclosure of underwriting profit by individual segment and of the Company as a whole is useful to investors, analysts, rating agencies and other users of our financial information in evaluating our performance because our objective is to consistently earn underwriting profits. We evaluate the performance of our segments and allocate resources based primarily on underwriting profit. We define underwriting profit as net earned premiums and gross fee income

(in specific instances when the Company is not retaining insurance risk) less losses and loss adjustment expenses on business from continuing operations not subject to retroactive reinsurance accounting for a loss portfolio transfer (see Loss Portfolio Transfer in Strategic Actions below) and other operating expenses. Other operating expenses include the underwriting, acquisition, and insurance expenses of the operating segments and, for consolidated underwriting profit, the expenses of the Corporate and Other segment. Our definition of underwriting profit may not be comparable to that of other companies. See “Reconciliation of Non-GAAP Measures” for a reconciliation of underwriting profit to income from continuing operations before taxes and for additional information.

Loss ratio, expressed as a percentage, is the ratio of losses and loss adjustment expenses on business from continuing operations not subject to retroactive reinsurance accounting for a loss portfolio transfer to net earned premiums. Our definition of loss ratio may not be comparable to that of other companies. See “Underwriting Performance Ratios” for a reconciliation of underwriting ratios.

Accident year loss ratio, expressed as a percentage, is the ratio of losses and loss adjustment expenses for the current accident year (excluding development on prior accident year reserves) to net earned premiums for the current year (excluding net earned premium adjustments on certain reinsurance treaties with reinstatement premiums associated with prior years).

Expense ratio, expressed as a percentage, is the ratio of other operating expenses net of gross fee income included in other income to net earned premiums.

Combined ratio is a measure of underwriting performance calculated as the sum of the loss ratio and the expense ratio. A combined ratio of less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. Our definition of combined ratio may not be comparable to that of other companies. See “Underwriting Performance Ratios” for a reconciliation of underwriting ratios.

Adjusted net operating income is an internal performance measure used in the management of our operations. We believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Adjusted net operating income is defined as income available to common shareholders excluding a) income (loss) from discontinued operations b) the impact of retroactive reinsurance accounting for a loss portfolio transfer, c) net realized and unrealized gains (losses) on investments, d) certain non-operating expenses such as professional service fees related to certain lawsuits, various strategic initiatives, and the filing of registration statements for the offering of securities, and e) severance costs associated with terminated employees. Adjusted net operating income is a non-GAAP measure and should not be viewed as a substitute for net income calculated in accordance with GAAP. Our definition of adjusted net operating income may not be comparable to that of other companies. See “Reconciliation of Non-GAAP Measures” for a reconciliation of income available to common shareholders to adjusted net operating income.

Tangible equity is defined as shareholders' equity plus mezzanine Series A Preferred Shares (as defined below) and the unrecognized deferred retroactive reinsurance gain on loss portfolio transfers less goodwill and intangible assets, net of amortization. We believe tangible equity is a good measure to evaluate the strength of our balance sheet and to compare returns relative to this measure. Key financial measures that we use to assess our longer term financial performance include the percentage growth in our tangible equity per share and our return on tangible equity. Tangible equity is a non-GAAP measure and should not be viewed as a substitute for shareholders’ equity calculated in accordance with GAAP. Our definition of tangible equity may not be comparable to that of other companies. See “Reconciliation of Non-GAAP Measures” for a reconciliation of shareholders' equity to tangible equity.

Adjusted net operating return on tangible equity is defined as annualized adjusted net operating income expressed as a percentage of the average quarterly tangible equity balances in the respective period.

Tangible equity per share represents tangible equity divided by the sum of total common shares outstanding plus the common shares resulting from an assumed conversion of the outstanding Series A Preferred Shares into common shares (at the conversion price effective as of the last day of the applicable period).

Net retention is defined as the ratio of net written premiums to gross written premiums.

Gross investment yield is annualized investment income before any deductions for fees and expenses, expressed as a percentage of the average beginning and ending carrying values of those investments during the period.

Unless specified otherwise, all references to our defined metrics above in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are for our business from continuing operations that is not subject to retroactive reinsurance accounting for a loss portfolio transfer. Management believes that the lack of economic impact of retroactive reinsurance accounting makes the presentation of our key metrics on business not subject to retroactive reinsurance accounting helpful to the users of our financial information. See “Underwriting Performance Ratios” and “Reconciliation of Non-GAAP Measures.”

Critical Accounting Policies and Estimates

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

The most critical accounting policies involve significant estimates and include those used in determining the reserve for losses and loss adjustment expenses and investment valuation and impairment. For a detailed discussion of each of these policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no significant changes to any of these policies during the current year.

Recent Strategic Actions

Combined Loss Portfolio Transfer and Adverse Development Cover

On July 2, 2024, James River Insurance Company and James River Casualty Company (together, the “Ceding Companies”), two of the Company's principal operating subsidiaries, entered into a Combined Loss Portfolio Transfer and Adverse Development Cover Reinsurance Contract (the “LPT-ADC Agreement”) with State National Insurance Company, Inc. (“State National”). The transaction closed upon signing.

The LPT-ADC Agreement is effective January 1, 2024 (the “Effective Date”) and applies to the Ceding Companies’ Excess & Surplus Lines segment portfolio losses attaching to premium earned during 2010-2023 (both years inclusive), excluding, among others, losses related to commercial auto policies issued to a former large insured or its affiliates (the “Subject Business”). Pursuant to the LPT-ADC Agreement, (a) State National will reinsure 85% of losses paid on and after the Effective Date in respect of the Subject Business in excess of $716.6 million up to an aggregate limit of $467.1 million (with State National’s share of the aggregate limit being $397.0 million) in exchange for a reinsurance premium paid by the Ceding Companies equal to $313.2 million, (b) the Ceding Companies will continue to manage claims and to manage and collect the benefit of other existing third-party reinsurance on the Subject Business, which third-party reinsurance shall inure to the benefit of the LPT-ADC Agreement, and (c) the Ceding Companies will be entitled to a profit commission of 50% of any favorable development on the business ceded to State National below 104.5% of carried reserves, which profit commission shall not exceed $87.0 million in total. As a result of the E&S LPT and ADC, the Company expects to recognize a reduction in pre-tax income of approximately $44.0 million in the third quarter of 2024.

Review of Strategic Alternatives

On November 10, 2023, the Company announced that its board of directors initiated an exploration of strategic alternatives.

Sale of JRG Re

On November 8, 2023, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Fleming Intermediate Holdings LLC, a Cayman Islands limited liability company (the “Buyer”). Pursuant to the Stock Purchase Agreement, and on the terms and subject to the conditions therein, the Buyer agreed to purchase from the Company all of the common shares of JRG Re. JRG Re comprised the remaining operations of the former Casualty Reinsurance segment, and the sale of JRG Re, which closed on April 16, 2024, resulted in the Company’s disposition of its casualty reinsurance business and related assets.

Pursuant to the terms of the Stock Purchase Agreement, the aggregate purchase price received by the Company, after giving effect to estimated adjustments based on changes in JRG Re’s adjusted net worth between March 31, 2023 and the closing, totaled approximately $291.4 million (the “Closing Date Purchase Price”). The aggregate Closing Date Purchase Price was comprised of (i) $152.4 million paid in cash by the Buyer and (ii) an aggregate $139.0 million dividend and distribution from contributed surplus by JRG Re to the Company. In accordance with the Stock Purchase Agreement, the cash portion of the purchase price was calculated based on an estimated balance sheet of JRG Re as of the date of closing. The estimated balance sheet is subject to final post-closing adjustments, which could result in adjustments to the purchase price. Additionally, the Buyer may pay an additional $2.5 million to the Company in the event that certain conditions outlined in the Stock Purchase Agreement are met on the date that is nine months following the date of closing.

The Buyer delivered a closing statement to the Company, and pursuant to the procedures in the Stock Purchase Agreement, the Company has given its notice of disagreement with the Buyer’s closing statement. In its notice of disagreement, the Company (i) agreed with an $11.4 million downward adjustment to the Closing Date Purchase Price due to losses from JRG Re’s operations between the date of the balance sheet used to produce the estimated closing statement and the Closing Date, which downward adjustment is included in “Other Liabilities” on the Company’s Balance Sheet at June 30, 2024, and (ii) disputed $54.1 million in aggregate downward adjustments to the Closing Date Purchase Price claimed by the Buyer, which the Company believes are unsupported by the facts known to the Company and the terms of the Stock Purchase Agreement. The

Stock Purchase Agreement provides procedures for resolving disputes between the parties regarding the closing statement and it is possible that the resolution of these disputes could result in a significant reduction to the amount of the purchase price.

We have determined that the sale of JRG Re met the criteria to be classified as held for sale at December 31, 2023 and that the sale represents a strategic shift that will have a major effect on the Company's operations. Accordingly, the results of JRG Re's operations have been presented as discontinued operations, and the assets and liabilities of JRG Re at December 31, 2023 have been classified as held for sale and segregated for all periods presented in this interim report on Form 10-Q.

The $139.0 million pre-closing dividend was completed in the first quarter of 2024. It included the forgiveness of $133.2 million owed from JRG Holdings to JRG Re and $5.8 million paid in cash to JRG Holdings. In the fourth quarter of 2023, after giving effect to the pre-closing dividend, we recorded an estimated loss on sale of $80.4 million to write down the carrying value of JRG Re to its estimated fair value based upon the estimated sales price of the transaction less costs to sell and other adjustments in accordance with the Stock Purchase Agreement. In the six months ended June 30, 2024, the estimated loss on the sale was revised to $78.0 million. The year to date loss on disposal of $1.4 million includes the $2.4 million gain for the change in the estimated loss on sale and selling costs incurred of $3.8 million.

Reduction of Workers' Compensation Book

In June 2023, the Company non-renewed its large California workers' compensation program in the Specialty Admitted Insurance segment. This action was taken due to persistent rate pressure and tighter reinsurance capacity. Gross written premiums for the program were $5.9 million and $17.8 million for the three and six months ended June 30, 2024 compared to $25.6 million and $53.3 million in the respective prior year periods.

On September 25, 2023, the Company announced that certain of its subsidiaries entered into an agreement to sell the renewal rights to the Individual Risk Workers’ Compensation (“IRWC”) business in the Specialty Admitted Insurance segment. The transaction included the full operations of the business, including underwriting, loss control and claims, and transfer of the employees supporting the business. The transaction closed on September 29, 2023. Gross written premiums for IRWC were $1.3 million and $3.3 million for the three and six months ended June 30, 2024 compared to $11.4 million and $24.4 million in the respective prior year periods.

The sales of JRG Re and the renewal rights to the IRWC business are aligned with our strategy to focus our resources on core businesses where we have meaningful scale.

RESULTS OF OPERATIONS

The following table summarizes our results:

($ in thousands)

(1) Underwriting profit and adjusted net operating income are non-GAAP measures. See “Reconciliation of Non-GAAP Measures.”

(2) Included in underwriting results for the three and six months ended June 30, 2024 is gross fee income of $5.6 million and $10.9 million, respectively ($5.8 million and $11.5 million in the respective prior year periods).

Three months ended June 30, 2024 and 2023

The Company produced net income from continuing operations of $14.5 million for the three months ended June 30, 2024 compared to $12.1 million for the three months ended June 30, 2023. Adjusted net operating income was $12.7 million compared to $6.6 million in the respective prior year period.

Underwriting profits were $1.2 million and $1.9 million (combined ratios of 99.3% and 98.9%) for the three months ended June 30, 2024 and 2023, respectively. The underwriting results for the respective periods were impacted by $1.2 million and $9.4 million of reinstatement premium in the Excess and Surplus Lines segment. The reinstatement premium reduced net written and net earned premiums, and underwriting profit. The impact of the reinstatement premium was a 0.7 and 5.1 percentage point increase in our combined ratios in the respective quarters.

The loss ratio for the three months ended June 30, 2024 was higher than the prior year period driven by net reserve development on prior accident years (excluding adverse prior year development on the legacy Rasier business subject to the commercial auto loss portfolio transfer and the impact of retroactive reinsurance - see discussion below) which was $10.7 million or 6.5 points adverse in the three months ended June 30, 2024 compared to $721,000 or 0.4 points favorable in the three months ended June 30, 2023. The impact of the higher adverse development on our loss ratio was partially offset by lower reinstatement premium which represented increases of 0.5 and 3.6 percentage points in the respective quarters.

Reserve development of $10.7 million in the E&S segment was primarily related to accident years 2017-2020 for the general liability and excess casualty lines of business. The unfavorable reserve development in the E&S segment for this quarter included $9.7 million that will be subject to the combined loss portfolio transfer and adverse development cover reinsurance transaction ("E&S LPT and ADC"). The E&S LPT and ADC is effective January 1, 2024, but closed on July 2, 2024. As such, any applicable recoveries will be recognized in the third quarter of 2024.

Our expense ratio decreased from 28.2% in the prior year quarter to 26.3% in the current year quarter largely driven by lower reinstatement premium which represented increases of 1.5 and 0.2 percentage points in the respective quarters, and a lower expense ratio for our Specialty Admitted Insurance segment. The Specialty Admitted Insurance segment benefited from lower commissions due to sliding scale and other adjustments on certain programs in the current quarter, as well as lower expenses for compensation and taxes, licenses, and fees following the reductions to our workers' compensation book in the prior year including the non-renewal of a large California workers' compensation program and the sale of the renewal rights to the IRWC business which included the transfer of employees associated with the business.

Investment income grew by $6.7 million or 36.7% in the three months ended June 30, 2024 compared to the same period in the prior year driven by higher yields on fixed maturities and bank loans. Net realized and unrealized (losses) gains on investments for the three months ended June 30, 2024 includes $1.8 million of adverse mark-to-market adjustments on our equity securities and bank loan participations reflecting decreases in their fair values in the period. This compares to $3.6 million of favorable mark-to-market adjustments on equity securities and bank loan participations in the prior year period (see Investing Results below).

The Company entered into a definitive agreement on November 8, 2023 to sell JRG Re. The sale closed on April 16, 2024 and discontinued operations for both periods include the operating results of JRG Re which were a loss of $5.7 million for the period April 1, 2024 to April 16, 2024 compared to income of $3.8 million in the three months ended June 30, 2023. Discontinued operations in the current quarter also includes $2.1 million of certain transaction-related expenses associated with the sale and a reduction in the estimated loss on sale which together resulted in a $1.2 million loss on disposal in the current period.

Adjusted net operating income was higher in the current year quarter primarily due to the higher investment income. Our adjusted net operating return on tangible equity was 10.4% for the three months ended June 30, 2024 compared to a 4.8% return for the three months ended June 30, 2023.

Six Months Ended June 30, 2024 and 2023

The Company produced net income from continuing operations of $38.0 million for the six months ended June 30, 2024 compared to $17.4 million for the six months ended June 30, 2023. Adjusted net operating income was $27.5 million compared to $19.0 million in the respective periods.

Underwriting profits were $9.4 million and $9.2 million (combined ratios of 97.2% and 97.3%) for the six months ended June 30, 2024 and 2023, respectively. Underwriting results for the six month periods include $1.2 million and $12.3 million of reinstatement premium in the Excess and Surplus Lines segment. The reinstatement premium reduced net written and net earned premiums, and underwriting profit. The impact of the reinstatement premium was a 0.3 and 3.4 percentage point increase in our combined ratios in the respective six month periods.

Our loss ratios for the six month periods include net reserve development on prior accident years (excluding adverse prior year development on the legacy Rasier business subject to the commercial auto loss portfolio transfer and the impact of retroactive reinsurance - see discussion below) that was $10.3 million or 3.1 points adverse in the six months ended June 30, 2024 compared to $1.2 million or 0.4 points favorable in the six months ended June 30, 2023. The reinstatement premium also impacted the loss ratios reflecting increases of 0.2 and 2.4 percentage points in the respective six month periods.

Reserve development of $10.7 million in the E&S segment was primarily related to accident years 2017-2020 for the general liability and excess casualty lines of business. The unfavorable reserve development in the E&S segment included $9.7 million that will be subject to the E&S LPT and ADC.

Our expense ratio decreased from 28.0% in the prior year to 27.6% in the current year reflecting the impact of reinstatement premium in the two periods (increases of 1.0 and 0.1 points, respectively) and a lower current year expense ratio for the Specialty Admitted Insurance segment driven by lower commissions and lower expenses for compensation and taxes, licenses, and fees (see discussion in three month section above).

Investment income grew by $10.9 million or 29.7% in the six months ended June 30, 2024 compared to the same period in the prior year driven by higher yields on fixed maturities and bank loans, as well as higher invested assets in our continuing operations following the commutation of an internal quota share arrangement with JRG Re in the second and third quarters of 2023. Interest expense was $1.2 million higher in the six months ended June 30, 2024 compared to the same period in the prior year driven by higher interest rates on our variable rate senior and trust preferred debt. The applicable rates on our debt reset periodically and are structured as SOFR plus a margin or spread.

The Company entered into a definitive agreement on November 8, 2023 to sell JRG Re. The sale closed on April 16, 2024 and discontinued operations for both periods include the operating results of JRG Re which were a loss of $13.6 million for the six months ended June 30, 2024 compared to income of $5.5 million in the six months ended June 30, 2023. The results for discontinued operations include net adverse development of $7.1 million and $4.9 million on treaties not subject to the Casualty Re loss portfolio transfer for the six months ended June 30, 2024 and 2023, respectively. Discontinued operations in the current year also includes $3.8 million of certain transaction-related expenses associated with the sale and a change in the estimate of the loss on sale which together resulted in a $1.4 million loss on disposal in the current year.

Adjusted net operating income increased over the prior year reflecting the higher investment income partially offset by higher interest expense. Declines in tangible equity of 0.1% and tangible equity per share of 2.4% were modest in the current period as positive operating results were mostly offset by unrealized losses on fixed maturities in other comprehensive loss, dividends on both common and preferred shares, and the impact of retroactive reinsurance benefits. Our 11.3% adjusted net operating return on tangible equity for the six months ended June 30, 2024 compares to an 11.9% return for the six months ended June 30, 2023.

Commercial Auto Loss Portfolio Transfer

On September 27, 2021, James River Insurance Company and James River Casualty Company (together, “James River”) entered into a loss portfolio transfer transaction (the “Commercial Auto LPT”) with Aleka Insurance, Inc. (“Aleka”), a captive insurance company affiliate of Rasier LLC, to reinsure substantially all of the Excess and Surplus Lines segment's legacy portfolio of commercial auto policies previously issued to Rasier LLC and its affiliates (collectively, “Rasier”) for which James River is not otherwise indemnified by Rasier. The reinsurance coverage is structured to be fully collateralized, is not subject to an aggregate limit, and is subject to certain exclusions.

Retroactive Reinsurance Accounting

The Company periodically reevaluates the remaining reserves subject to the Commercial Auto LPT, and when recognized adverse prior year development on the subject business causes the cumulative amounts ceded under the loss portfolio transfer to exceed the consideration paid, the loss portfolio transfer moves into a gain position subject to retroactive reinsurance accounting under GAAP. Gains are deferred under retroactive reinsurance accounting and recognized in earnings in proportion to actual paid recoveries under the loss portfolio transfer using the recovery method. While the deferral of gains can introduce volatility in our results in the short-term, over the life of the contract, we would expect no economic impact to the Company as long as the counterparty performs under the contract. The impact of retroactive reinsurance accounting is not indicative of our current and ongoing operations.

For the three and six months ended June 30, 2024, due to adverse paid and reported loss trends on the legacy Rasier business, the Company recognized adverse prior year development of $1.4 million and $1.9 million, respectively ($12.6 million and $53.6 million in the respective prior year periods), on the net reserves subject to the Commercial Auto LPT, resulting in corresponding additional amounts ceded under the Commercial Auto LPT. As a result, the cumulative amounts ceded under the Commercial Auto LPT exceed the consideration paid, putting the Commercial Auto LPT into a gain position. The Company has applied retroactive reinsurance accounting to the loss portfolio transfer. Retroactive reinsurance benefits of $5.1 million and $9.6 million for the three and six months ended June 30, 2024, respectively ($14.8 million and $44.1 million in the respective prior year periods), were recorded in losses and loss adjustment expenses on the Condensed Consolidated Statements of Income and Comprehensive Income (Loss) using the recovery method. The cumulative amounts ceded under the loss portfolio transfer were $458.1 million and $456.2 million as of June 30, 2024 and December 31, 2023, respectively. The deferred retroactive reinsurance gain related to the Commercial Auto LPT separately presented on the Company's Condensed Consolidated Balance Sheets was $13.0 million and $20.7 million at June 30, 2024 and December 31, 2023, respectively.

Premiums

Insurance premiums are earned ratably over the terms of our insurance policies, generally twelve months. The following table summarizes the change in premium volume by component and business segment:

($ in thousands)

Gross written premiums for the Excess and Surplus Lines segment (which represents 68.2% of our consolidated gross written premiums from continuing operations in the six months ended June 30, 2024) were 2.3% higher in the three months ended June 30, 2024 with growth in our casualty underwriting divisions of 5.3% compared to the prior year quarter, and led by General Casualty at 14.6%. Amid moderating rate increases and increased competition, we are remaining selective in our Excess Property portfolio, resulting in a gross written premium decline of 27.9% in that line of business. Year-to-date, gross written premiums for the Excess and Surplus Lines segment declined 1.7% primarily reflecting the non-renewal of a few larger accounts in the first quarter that did not meet our underwriting appetite. Submission growth for Core E&S lines (excluding commercial auto) increased 6.4% over the prior year, but the number of bound policies declined 5.1% and average premium size decreased 13.4%. Renewal rates for the Excess and Surplus Lines segment were up 9.1% and 9.7% compared to the three and six months ended June 30, 2023, respectively. The change in gross written premiums was notable in several divisions as shown below:

($ in thousands)

45

The components of gross written premiums for the Specialty Admitted Insurance segment (which represents 31.8% of our consolidated gross written premiums for the six months ended June 30, 2024) are as follows:

($ in thousands)

Our fronting written premium decreased from the prior year driven by the non-renewal of a large California workers' compensation program in the prior year. Excluding the non-renewed program, our fronting written premium grew by 12.3% and 17.2% for the three and six months ended June 30, 2024, respectively. Our largest fronting relationship represented $53.8 million and $100.5 million (45.1% and 42.5%) of segment gross written premium for the three and six months ended June 30, 2024, respectively, compared to $46.2 million and $80.6 million (33.7% and 30.8%) for the three and six months ended June 30, 2023, respectively. Individual risk workers' compensation premium declined due to the sale of the renewal rights to that business in the prior year third quarter.

Net Retention

Our net premium retention is summarized by segment as follows:

Lower net premium retention for the Excess and Surplus Lines segment was primarily driven by the renewal of a quota share treaty, effective July 1, 2023, that increased premium cessions across all underwriting divisions other than Excess Casualty and resulted in lower retentions for the segment.

The net premium retention for the Specialty Admitted Insurance segment decreased for the three and six months ended June 30, 2024 as fronting business, where we retain a much smaller percentage, represents a greater portion of the book following the sale of the renewal rights to the individual risk workers' compensation business in the prior year third quarter. The net retention on the fronting business was 16.0% and 16.4% for the three and six months ended June 30, 2024 compared to 16.5% and 16.0% for the three and six months ended June 30, 2023. Net retention on the individual risk workers' compensation business was 64.7% and 71.4% for the three and six months ended June 30, 2024 compared to 73.9% and 73.6% for the three and six months ended June 30, 2023.

Segment Results

The following table presents our combined ratios by segment:

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Excess and Surplus Lines Segment

Results for the Excess and Surplus Lines segment are as follows:

($ in thousands)

(1) Underwriting Profit is a non-GAAP Measure. See “Reconciliation of Non-GAAP Measures.”

The Excess and Surplus Lines segment produced underwriting profits of $6.4 million and $10.0 million (combined ratios of 95.4% and 93.3%) in the three months ended June 30, 2024 and 2023, respectively. The underwriting results for the respective periods were impacted by $1.2 million and $9.4 million of reinstatement premium which reduced net written and net earned premiums, and underwriting profit. The impact of the reinstatement premium was a 0.8 and 5.5 percentage point increase in our combined ratios in the respective quarters.

The loss ratio for the three months ended June 30, 2024 was higher than the prior year period driven by net reserve development on prior accident years (excluding adverse prior year development on the legacy Rasier business subject to the commercial auto loss portfolio transfer and the impact of retroactive reinsurance - see discussion above) which was $10.7 million or 7.6 percentage points adverse in the three months ended June 30, 2024 compared to $118,000 or 0.1 percentage points adverse in the three months ended June 30, 2023. The impact of the higher adverse development on our loss ratio was partially offset by lower reinstatement premium which represented increases of 0.6 and 4.1 percentage points in the respective quarters.

The unfavorable reserve development in the E&S segment for the quarter included $9.7 million that is subject to the E&S LPT and ADC. The E&S LPT and ADC is effective January 1, 2024, but closed on July 2, 2024. As such, any applicable recoveries will be recognized in the third quarter of 2024.

For the six months ended June 30, 2024 and 2023, segment underwriting profit was $24.9 million and $27.1 million (combined ratios of 91.3% and 90.9%), respectively. Underwriting results for the six month periods include $1.2 million and $12.3 million of reinstatement premium which reduced net written and net earned premiums, and underwriting profit. The impact of the reinstatement premium was a 0.4 and 3.6 percentage point increase in our combined ratios in the respective six month periods.

The loss ratios for the six month periods include net reserve development on prior accident years (excluding adverse prior year development on the legacy Rasier business subject to the commercial auto loss portfolio transfer and the impact of retroactive reinsurance - see discussion above) that was $10.7 million or 3.7 percentage points adverse in the six months ended June 30, 2024 compared to $206,000 or 0.1 percentage points favorable in the six months ended June 30, 2023. The reinstatement premium also impacted the loss ratios reflecting increases of 0.3 and 2.7 percentage points in the respective six month periods.

The six-month expense ratio increased from 22.4% in the prior year to 23.1% in the current year reflecting the impact of reinstatement premium in the two periods (increases of 0.9 and 0.1 points, respectively) and a higher current year expense ratio mainly due to higher compensation costs.

Specialty Admitted Insurance Segment

Results for the Specialty Admitted Insurance segment are as follows:

($ in thousands)

(1) Underwriting Profit (Loss) is a non-GAAP Measure. See “Reconciliation of Non-GAAP Measures.”

(2) Underwriting results include gross fee income of $5.6 million and $10.9 million for the three and six months ended June 30, 2024, respectively ($5.8 million and $11.5 million in the respective prior year periods).

The Specialty Admitted Insurance segment produced underwriting profits of $3.4 million and $384,000 (combined ratios of 85.0% and 98.4%) in the three months ended June 30, 2024 and 2023, respectively. For the six months ended June 30, 2024, the segment produced an underwriting profit of $4.2 million and combined ratio of 91.4% compared to an underwriting loss of $85,000 and combined ratio of 100.2% in the six months ended June 30, 2023. Net favorable development in our loss estimates for prior accident years was $4,000 and $442,000 (0.0 and 0.9 points) in the three and six months ended June 30, 2024, respectively, compared to $839,000 and $1.0 million (3.5 and 2.3 points) in the three and six months ended June 30, 2023, respectively. The segment expense ratio for the current quarter and year to date benefited from lower commissions driven by sliding scale and other adjustments on certain programs in the current quarter, as well as lower expenses for compensation and taxes, licenses, and fees following the reductions to our workers' compensation book in the prior year including the non-renewal of a large California workers' compensation program and the sale of the renewal rights to the individual risk workers' compensation business which included the transfer of employees associated with the business. The year to date ratio also benefited from the 10.1% higher net earned premiums.

Corporate and Other Segment

Other operating expenses for the Corporate and Other segment include personnel costs associated with the Bermuda and U.S. holding companies, professional fees, share based compensation for the full Company, and various other corporate expenses that were not reimbursed by our subsidiaries, including costs associated with rating agencies and strategic initiatives. The expenses are included in our calculation of consolidated underwriting profit, and in our consolidated expense ratio and combined ratio. Total operating expenses of the Corporate and Other segment were $8.6 million and $19.8 million for the three and six months ended June 30, 2024, respectively ($8.5 million and $17.8 million in the respective prior year periods). The higher year to date expense is related to higher expenses for employee compensation, corporate insurance, and outside professional services.

Investing Results

Net investment income was $24.9 million and $47.6 million for the three and six months ended June 30, 2024, respectively, compared to $18.2 million and $36.7 million in the respective prior year periods. The Company's private investments generated gains of $1.9 million and $1.8 million for the three and six months ended June 30, 2024, respectively, compared to gains of $232,000 and $1.8 million in the corresponding prior year periods. Excluding private investments, our net investment income for the three and six months ended June 30, 2024 increased 27.9% and 31.5% over the prior year periods, respectively, principally due to higher yields on fixed maturities and bank loan participations. The average duration of our portfolio excluding restricted cash equivalents was 2.8 years at June 30, 2024.

Major categories of the Company’s net investment income are summarized as follows:

($ in thousands)

The following table summarizes our annualized gross investment yields:

Of our total cash and invested assets of $2,162.7 million at June 30, 2024 (excluding restricted cash equivalents), $672.5 million represents the cash and cash equivalents portion of the portfolio. The majority of the portfolio, or $1,114.5 million, is comprised 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 income (loss). Also included in our investments are $165.3 million of bank loan participations, $128.6 million of equity securities, $46.0 million of short-term investments, and $35.8 million of other invested assets.

Bank loan participations generally provide a higher yield than our portfolio of fixed maturity securities and are primarily senior, secured floating-rate debt rated “BB”, “B”, or “CCC” by Standard & Poor’s or an equivalent rating from another nationally recognized statistical rating organization, and are therefore below investment grade. 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. They consist of, but are not limited to, term loans, the funded and unfunded portions of revolving credit facilities, and similar loans and investments. 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. At June 30, 2024 and December 31, 2023, the fair market value of these securities was $165.3 million and $156.2 million, respectively.

For the six months ended June 30, 2024, the Company recognized net realized and unrealized investment gains of $2.3 million ($2.3 million of net realized and unrealized investment losses for the three months ended June 30, 2024), including $394,000 of net unrealized losses on bank loan participations, $3.1 million of net unrealized gains for the change in the fair value of equity securities, $730,000 of net realized investment losses on the sale of bank loan participations, $1.4 million of net realized investment gains on the sale of equity securities, $902,000 of net realized investment losses on the sale of fixed maturity securities, and a $207,000 impairment for one fixed maturity security. In the three months ended June 30, 2024, $591,000 of net realized losses were recognized on sales of fixed maturities primarily to fund the premium due under the LPT-ADC Agreement.

For the six months ended June 30, 2023, the Company recognized net realized and unrealized investment gains of $1.8 million ($1.6 million of net realized and unrealized investment gains for the three months ended June 30, 2023), including $4.7 million of net unrealized gains on bank loan participations, $912,000 of net unrealized losses for the change in the fair value of equity securities, $27,000 of net realized investment losses on the sale of fixed maturity securities, $2.7 million of net realized investment losses on the sale of bank loan participations, and $664,000 of net realized investment gains on the sale of equity securities.

In conjunction with its outside investment managers, the Company performs quarterly reviews of all securities within its investment portfolio to determine whether any impairment has occurred. As a result of this review, management concluded that there were no credit-related impairments of fixed maturity securities at June 30, 2024, December 31, 2023, or June 30, 2023. During the three months ended June 30, 2024, management recognized an impairment loss of $207,000 for one fixed maturity security due to the Company’s inability to hold the security until a recovery in its value to the amortized cost basis. For the remainder of securities in an unrealized loss position, management does not intend to sell the securities, 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. At June 30, 2024, 100.0% 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.

The amortized cost and fair value of our available-for-sale fixed maturity securities were as follows:

($ in thousands)

The following table sets forth the composition of the Company’s portfolio of available-for-sale fixed maturity securities by rating as of June 30, 2024:

($ in thousands)

The amortized cost and fair value of our available-for-sale investments in fixed maturity securities summarized by contractual maturity are as follows:

($ in thousands)

50

Other Income and Expense

Other income and expense items netted to expense of $905,000 and $726,000 for the three and six months ended June 30, 2024, respectively. Non-operating expenses were $2.1 million and $2.8 million in the three and six months ended June 30, 2024, respectively, primarily consisting of legal and other professional fees and other expenses related to various strategic initiatives and litigation that the Company is involved in. The non-operating expenses were partially offset by $992,000 and $1.7 million of broker incentive rebates in the Excess and Surplus Lines segment, as well as other miscellaneous income in the respective periods. For the three and six months ended June 30, 2023, other income and expense items netted to expense of $53,000 and $468,000, respectively. Non-operating expenses of $223,000 and $826,000 in the respective periods were partially offset by other miscellaneous income.

Interest Expense

Interest expense was $6.3 million and $12.8 million for the three and six months ended June 30, 2024, respectively ($6.0 million and $11.6 million in the respective prior year periods). The increase over the prior year reflects the impact of rising interest rates on our variable rate senior and trust preferred debt. See “—Liquidity and Capital Resources—Sources and Uses of Funds” for more information regarding our senior bank debt facilities and trust preferred securities.

Amortization of Intangibles and Impairment of Intangible Assets

The Company recorded $91,000 of amortization of intangible assets in each of the three months ended June 30, 2024 and 2023 ($182,000 in each of the six months ended June 30, 2024 and 2023).

Income Tax Expense

Our effective tax rate fluctuates from period to period based on the relative mix of income from continuing operations reported by country and the respective tax rates imposed by each tax jurisdiction. Statutory tax rates are 0% and 21% for Bermuda and the U.S. For the three and six months ended June 30, 2024, our effective tax rate on income from continuing operations was 28.3% and 28.5%, respectively (32.0% and 32.8% in the respective prior year periods). The Company does not receive a U.S. tax deduction for losses in our Bermuda entities. Bermuda had losses in both periods primarily due to Bermuda holding company expenses and interest expense. 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 and expenses on share based compensation.

Reserves

An indicator of reserve strength that we monitor closely is the percentage of our gross and net loss reserves that are comprised of incurred but not reported (“IBNR”) reserves.

The Company’s gross reserve for losses and loss adjustment expenses at June 30, 2024 was $2,720.2 million. Of this amount, 68.5% relates to amounts that are IBNR. This amount was 66.9% at December 31, 2023. The Company’s gross reserves for losses and loss adjustment expenses by segment are summarized as follows:

($ in thousands)

At June 30, 2024, the amount of net reserves (prior to the $744,000 allowance for uncollectible reinsurance recoverables) of $1,301.7 million that related to IBNR was 70.2%. This amount was 72.0% at December 31, 2023. The Company’s net reserves for losses and loss adjustment expenses by segment are summarized as follows:

($ in thousands)

51

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Funds

Our sources of funds consist primarily of premiums written, investment income, reinsurance recoveries, proceeds from sales and redemptions of investments, borrowings on our credit facilities, and the issuance of common and 7% Series A Perpetual Cumulative Convertible Preferred Shares, par value $0.00125 per share (the “Series A Preferred Shares”). We use operating cash flows primarily to pay operating expenses, losses and loss adjustment expenses, reinsurance premiums, and income taxes. Cash flow from operations may differ substantially from net income. The potential for a large claim under an insurance or reinsurance contract means that substantial and unpredictable payments may need to be made within relatively short periods of time.

The following table summarizes our cash flows:

($ in thousands)

Cash provided by operating activities excluding restricted cash equivalents of $59.9 million and $40.3 million for the six months ended June 30, 2024 and 2023, respectively, was driven by the growth in our U.S. segments and the collection of premiums receivable at a quicker rate than payments of loss and loss adjustment expenses. Cash provided by operating activities from continuing operations excluding restricted cash equivalents was $85.0 million and $89.2 million for the six months ended June 30, 2024 and 2023, respectively, compared to cash used in operating activities of discontinued operations of $25.1 million and $48.9 million in the respective periods. We believe the sale of JRG Re, which closed on April 16, 2024, will increase our future cash flows from operations relative to 2023. Proceeds from the sale of JRG Re will support additional growth in our U.S. continuing operations.

Cash provided by investing activities was $356.6 million and $27.1 million for the six months ended June 30, 2024 and 2023, respectively. Included in the current year investing activities is $96.4 million of proceeds received from the sale of JRG Re (net of JRG Re's cash balances sold) and $198.0 million of proceeds from the sales of fixed maturities to provide funding for the premium due under the LPT-ADC Agreement. Cash and cash equivalents (excluding restricted cash equivalents) comprised 31.1% and 11.2% of total cash and invested assets at June 30, 2024 and 2023, respectively. The higher cash at June 30, 2024 reflects the amounts raised to fund the LPT-ADC Agreement in early July 2024. Cash provided by investing activities from continuing operations was $197.1 million for the six months ended June 30, 2024. This compares to cash used in investing activities from continuing operations of $32.5 million for the six months ended June 30, 2023. Cash provided by investing activities of discontinued operations was $63.1 million and $59.6 million in the respective periods. We believe the sale of JRG Re, which closed on April 16, 2024, will increase our future cash flows from operations relative to 2023 which will lead to higher amounts invested and more cash used in investing activities. Proceeds from the sale of JRG Re will support additional growth in our U.S. continuing operations and are expected to be invested which will increase the invested assets of our continuing operations.

Cash used in financing activities of $31.5 million for the six months ended June 30, 2024 includes the $21.5 million repayment of an unsecured loan under the 2017 facility, $3.9 million of dividends paid to common shareholders, $5.3 million of dividends paid on the Series A Preferred Shares, and $837,000 of payroll taxes withheld and remitted on net settlement of RSUs. Cash used in financing activities of $13.3 million for the six months ended June 30, 2023 includes $3.9 million of dividends paid to common shareholders, $7.9 million of dividends paid on the Series A Preferred Shares, and $1.5 million of payroll taxes withheld and remitted on net settlement of RSUs.

The activity in restricted cash equivalents for the six months ended June 30, 2024 and 2023 relates to a former insured, per the terms of a collateral trust. See Amounts Recoverable from an Indemnifying Party and Reinsurer on Legacy Commercial Auto Book below.

Dividends

We are organized as a Bermuda holding company with our operations conducted by our wholly-owned subsidiaries. Accordingly, our holding company may receive cash through loans from banks, issuance of equity and debt securities, corporate service fees or dividends received from our subsidiaries and/or other transactions. Our U.S. holding company may receive cash in a similar manner and also through payments from our subsidiaries pursuant to our U.S. consolidated tax allocation agreement.

The payment of dividends by our subsidiaries to us is limited by statute. In general, the laws and regulations applicable to our domestic insurance subsidiaries limit the aggregate amount of dividends or other distributions that they may declare or pay within any 12-month period without advance regulatory approval. Generally, the limitations are based on the greater of statutory net income for the preceding year or 10.0% of statutory surplus at the end of the preceding year. In addition, insurance regulators have broad powers to prevent reduction of statutory surplus to inadequate levels and could refuse to permit the payment of dividends calculated under any applicable formula. See “Item 1. Business – U.S. Insurance Regulation – State Regulation” in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 29, 2024 for additional information. The maximum amount of dividends available to the U.S. holding company from our U.S. insurance subsidiaries during 2024 without regulatory approval is $107.1 million.

Holders of the Series A Preferred Shares are entitled to a dividend at the initial rate of 7% of the Liquidation Preference per annum, paid in cash, in-kind in common shares or in Series A Preferred Shares, at our election. On the five-year anniversary of the issuance of the Series A Preferred Shares, and each five-year anniversary thereafter, the dividend rate will reset to a rate equal to the five-year U.S. treasury rate plus 5.2%. Dividends accrue and are payable quarterly. Cash dividends of $5.3 million were paid in the six months ended June 30, 2024 including cash dividends paid in January and April for the three month periods ended December 31, 2023 and March 31, 2024. Cash dividends of $2.6 million for the second quarter of 2024 were paid on July 1, 2024. In the six months ended June 30, 2023, cash dividends of $7.9 million were paid including cash dividends paid in January, March, and June for the three month periods ended December 31, 2022, March 31, 2023, and June 30, 2023, respectively.

At June 30, 2024, the Bermuda holding company had $85.8 million of cash and cash equivalents. The U.S. holding company had $16.3 million of cash and invested assets, comprised of cash and cash equivalents of $12.7 million, equities of $3.0 million and other invested assets of $664,000, which are not subject to regulatory restrictions. Additionally, our U.K. intermediate holding company had no invested assets and cash of less than ten thousand dollars at June 30, 2024.

Credit Agreements

At June 30, 2024, the Company had a $257.5 million senior revolving credit facility (as amended or amended and restated, the “2013 Facility”). The 2013 Facility was comprised of the following at June 30, 2024:

• A $212.5 million unsecured revolving facility to meet the working capital needs of the Company. All unpaid principal on the revolver is due at maturity. Interest accrues quarterly and is payable in arrears, currently at 1-month SOFR (the Company, per the terms of the credit agreement, can elect between one, three, or six month interest periods) plus a 0.1% SOFR index adjustment and a SOFR margin which is currently 1.75% and is subject to change according to terms in the credit agreement. At June 30, 2024, the Company had a drawn balance of $185.8 million outstanding on the unsecured revolver.
• A $45.0 million secured revolving facility to issue letters of credit for the benefit of third-party reinsureds. At June 30, 2024, the Company had $36.0 million of letters of credit issued under the secured facility, all of which are collateralized by a back-to-back letter of credit issued by Comerica Bank on behalf of JRG Re.

On July 7, 2023, the Company entered into a Third Amended and Restated Credit Agreement for the 2013 Facility which, among other things, extended the maturity date of such facility until July 7, 2026 and increased the applicable interest rate and letter of credit fees. The 2013 Facility has been amended from time to time, including on April 16, 2024 when the 2013 Facility was amended in connection with the closing of the sale of JRG Re by the Company to (i) release JRG Re as a borrower and release all collateral pledged by JRG Re thereunder, and (ii) decrease the secured revolving facility commitment from $102.5 million to $45.0 million.

The 2013 Facility contains certain financial and other covenants (including minimum net worth, maximum ratio of total adjusted debt outstanding to total capitalization, and financial strength ratings) with which the Company was in compliance at June 30, 2024.

On August 2, 2017, the Company, and its former wholly-owned subsidiary, JRG Re, together as borrowers, entered into a credit agreement (the "2017 Facility") that provided the Company with a revolving line of credit of up to $100.0 million, which may be used for loans and, until April 16, 2024, letters of credit made or issued, at the borrowers' option, on a secured or unsecured basis. Obligations under the 2017 Facility carry a variable rate of interest subject to terms in the credit agreement and will mature 30 days after notice of termination from the lender. The loans made under the revolving line of credit of the 2017 Facility may be used to finance the borrowers' general corporate purposes. Interest accrues and is payable in arrears at variable rates which are subject to change according to terms in the credit agreement. In the three months ended June 30, 2024, the Company repaid $21.5 million of unsecured loans under the facility. At June 30, 2024, there were no loans outstanding and $24.7 million of letters of credit were issued under the facility, all of which are collateralized by a back-to-back letter of credit issued by Comerica Bank on behalf of JRG Re.

The 2017 Facility has been amended from time to time since its inception in 2017, including on April 16, 2024 in connection with the closing of the sale of JRG Re by the Company to (i) release JRG Re as a borrower and release all collateral pledged by JRG Re thereunder, (ii) increase the applicable interest rates, (iii) eliminate the letter of credit portion of the facility, and (iv) to build in an automatic decrease of the facility amount by the amount of each letter of credit outstanding under the 2017 Facility as of the date of the amendment with effect from the date each such letter of credit is cancelled.

The 2017 Facility contains certain financial and other covenants (including minimum net worth, maximum ratio of total adjusted debt outstanding to total capitalization, and financial strength ratings) with which the Company was in compliance at June 30, 2024.

Senior Debt and Trust Preferred Securities

On May 26, 2004, we issued $15.0 million of senior debt due April 29, 2034. The senior debt is not redeemable by the holder or subject to sinking fund requirements. Interest accrues quarterly and is payable in arrears at a floating rate per annum equal to the 3-month SOFR plus 4.11%. This senior debt is redeemable at par prior to its stated maturity at our option in whole or in part. The terms of the senior debt contain certain covenants, with which we are in compliance at June 30, 2024, and which, among other things, restrict our ability to assume senior indebtedness secured by our U.S. holding company’s common stock or its subsidiaries’ capital stock or to issue shares of its subsidiaries’ capital stock.

From May 2004 through January 2008, we sold trust preferred securities through five Delaware statutory trusts sponsored and wholly-owned by the Company or its subsidiaries. Each trust used the net proceeds from the sale of its trust preferred securities to purchase our floating-rate junior subordinated debt.

The following table summarizes the nature and terms of the junior subordinated debt and trust preferred securities outstanding at June 30, 2024 (including the Company’s repurchases of a portion of these trust preferred securities):

($ in thousands)

All of the junior subordinated debt is currently redeemable at 100.0% of the unpaid principal amount at our option.

The junior subordinated debt contains certain covenants with which we are in compliance as of June 30, 2024.

At June 30, 2024 and December 31, 2023, the Company's leverage ratio was 23.6% and 26.0%, respectively. The leverage ratio is defined in our senior credit agreements as the ratio of adjusted consolidated debt to total capital. Adjusted consolidated debt treats trust preferred securities as equity capital up to 15% of total capital. The Series A Preferred Shares represent equity capital for purposes of the leverage ratio calculation under the credit agreements. Total capital is defined as total debt plus tangible equity excluding accumulated other comprehensive income. The maximum leverage ratio permitted by the agreements is 35.0%.

Ceded Reinsurance

Our insurance segments enter into reinsurance contracts to limit our exposure to potential losses arising from large risks, to protect against the aggregation of several risks in a common loss occurrence, and to provide additional capacity for growth. Our reinsurance is contracted under excess of loss and proportional quota share reinsurance contracts. In excess of loss reinsurance, the reinsurer agrees to assume all or a portion of the ceding company’s losses in excess of a specified amount. The premiums payable to the reinsurer are negotiated by the parties based on their assessment of the amount of risk being ceded to the reinsurer because the reinsurer does not share proportionately in the ceding company’s losses. In proportional quota share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company’s losses arising out of a defined class of business in exchange for a corresponding percentage of premiums. The Company also utilizes facultative reinsurance to reduce the amount of exposure it retains on individual accounts according to its guidelines for accepting risk across various industry segments, locations and types of exposure. For the three months ended June 30, 2024 and 2023, our net premium retention was 44.0% and 48.3%, respectively. For the six months ended June 30, 2024 and 2023, our net premium retention was 43.0% and 48.4%, respectively.

The following is a summary of our Excess and Surplus Lines segment’s ceded reinsurance in place as of June 30, 2024:

(1) Excluding Excess Casualty.

(2) Total exposure to any one claim is generally $690,000.

(3) The property catastrophe reinsurance treaty has a limit of $20.0 million per event with one reinstatement.

We use catastrophe modeling software to analyze the risk of severe losses from hurricanes and earthquakes on our exposure. We utilize the model in our risk selection, pricing, and to manage our overall portfolio probable maximum loss (“PML”) accumulations. A PML is an estimate of the amount we would expect to pay in any one catastrophe event within a given annual probability of occurrence (i.e. a return period or loss exceedance probability).

In our Excess and Surplus Lines segment, we write a small book of excess property insurance, but we do not write primary property insurance. The Excess and Surplus Lines segment has a specific proportional quota share treaty in effect to cover property risks. The proportional quota share treaty along with facultative reinsurance helps ensure that our net retained limit per risk will be $5.0 million or less.

Also in our Excess and Surplus Lines segment, a specialty casualty treaty providing $9.0 million in excess of $2.0 million coverage is subject to reinstatement premiums for treaty years spanning July 1, 2017 through July 1, 2022.

Based upon the modeling of our Excess and Surplus Lines and Specialty Admitted segments, it would take an event greater than the 1 in 1,000 year PML to exhaust our $20.0 million property catastrophe reinsurance. In the event of a catastrophe loss exhausting our $20.0 million property catastrophe reinsurance, we estimate our pre-tax cost would not exceed 2.5% of shareholders’ equity, including reinstatement premiums and net retentions. In addition to this retention, we would retain any losses in excess of our reinsurance coverage limits.

The Commercial Auto LPT with Aleka reinsures substantially all of the Excess and Surplus Lines segment’s legacy portfolio of commercial auto policies previously issued to Rasier. See “Amounts Recoverable from an Indemnifying Party and Reinsurer on the Legacy Commercial Auto Book” below for further information on this reinsurance agreement.

The following is a summary of our Specialty Admitted Insurance segment’s ceded reinsurance in place as of June 30, 2024:

Our Specialty Admitted Insurance segment purchases reinsurance for at least 50% of the exposed limits on specialty admitted property-casualty business. The segment enters into reinsurance contracts for the fronting and program business. While the segment focuses on casualty business, incidental property risk is incurred in the fronting and program business. The segment is covered for $20.0 million in excess of $5.0 million per occurrence to manage its property exposure to an approximate 1 in 1,000 year PML.

In the aggregate, we believe our pre-tax group-wide PML from a 1 in 1,000 year property catastrophe event would not exceed 2.5% of shareholders’ equity, inclusive of reinstatement premiums payable.

We also had a contingency clash reinsurance treaty to cover both the Excess and Surplus Lines and Specialty Admitted Insurance segments in the event of a claim incident involving more than one of our insureds in addition to Extra Contractual and Excess Policy Limits protection. The treaty covered $10.0 million in excess of a $2.0 million retention for loss occurrences within the treaty term. This coverage was put into runoff effective July 1, 2022.

Effective January 1, 2020, we purchased an additional $10.0 million in claims made coverage for excess policy limits and extra contractual obligations exposures above the clash and contingency treaty for the period 2014 to its expiration on December 31, 2022. This treaty had one reinstatement.

The Company’s insurance segments remain liable to policyholders if its reinsurers are unable to meet their contractual obligations under applicable reinsurance agreements. We establish an allowance for credit losses for our current estimate of uncollectible reinsurance recoverables. At June 30, 2024, the allowance for credit losses on reinsurance recoverables was $744,000. To minimize exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk. The Company generally seeks to purchase reinsurance from reinsurers with A.M. Best financial strength ratings of “A-” (Excellent) or better. The Company’s reinsurance contracts generally require reinsurers that are not authorized as reinsurers under U.S. state insurance regulations or that experience rating downgrades from rating agencies below specified levels to fund their share of the Company’s ceded outstanding losses and loss adjustment expense reserves, typically through the use of irrevocable and unconditional letters of credit. In fronting arrangements, which the Company conducts through its Specialty Admitted Insurance segment, we are subject to credit risk with regard to insurance companies who act as reinsurers for us in such arrangements. We require collateral, in the form of a trust arrangement or letter of credit, to secure the obligations of the insurance entity for whom we are fronting.

At June 30, 2024, we had reinsurance recoverables on unpaid losses of $1,417.8 million (net of a $744,000 allowance for credit losses) and reinsurance recoverables on paid losses of $160.6 million, and all material recoverable amounts were from companies with A.M. Best ratings of “A-" (Excellent) or better, or are collateralized by the reinsurer for our benefit through letters of credit or funds on deposit in trust accounts.

Amounts Recoverable from an Indemnifying Party and Reinsurer on Legacy Commercial Auto Book

James River previously issued a set of commercial auto insurance contracts to Rasier (the “Rasier Commercial Auto Policies”) 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 “Commercial Auto LPT”) with Aleka 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 Commercial Auto LPT, 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.

Each of Rasier and Aleka is required to post collateral under the Indemnity Agreements and the Commercial Auto LPT, 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 Commercial Auto LPT, 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, 2024, the balance in the Indemnity Trust was $99.6 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 $117.0 million.
• Pursuant to the Commercial Auto LPT, Aleka is required to post collateral equal to 102% of James River's estimate of Aleka's obligations under the Commercial Auto LPT, calculated in accordance with statutory actuarial principles and based on reserves recorded in the Company's statutory financial statements. The collateral is provided through a collateral trust arrangement (the “LPT Trust”) established in favor of James River by Aleka. At June 30, 2024, the balance in the LPT Trust was $45.4 million, and, together with the balance of the Loss Fund Trust (as defined below) attributable to the Commercial Auto LPT as described below, the total balance of collateral securing Aleka’s obligations under the Commercial Auto LPT was $53.1 million. At June 30, 2024, the total reinsurance recoverables under the Commercial Auto LPT was $52.4 million.

In connection with the execution of the Commercial Auto LPT, 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 Commercial Auto LPT and James River’s existing third party reinsurance agreements, respectively. At June 30, 2024, the balance in the Loss Fund Trust was $28.0 million, including $17.4 million representing collateral supporting Rasier’s obligations under the Indemnity Agreements and $7.7 million representing collateral supporting Aleka’s obligations under the Commercial Auto LPT. Funds posted to the Loss Fund Trust are classified as restricted cash equivalents on the Company's balance sheet.

While the Commercial Auto LPT 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 Commercial Auto LPT 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 Commercial Auto LPT, 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 Commercial Auto LPT and Indemnity Agreements when our analysis indicates that we have uncollateralized exposure.

Ratings

The A.M. Best financial strength rating for our group’s regulated U.S. insurance subsidiaries is “A-” (Excellent) with a negative outlook. This rating reflects A.M. Best’s opinion of our insurance subsidiaries’ financial strength, operating performance and ability to meet obligations to policyholders and is not an evaluation directed towards the protection of investors. The rating for our U.S. operating insurance companies of “A-” (Excellent) is the fourth highest rating of the thirteen ratings issued by A.M. Best and is assigned to insurers that have, in A.M. Best’s opinion, an excellent ability to meet their ongoing obligations to policyholders.

The financial strength ratings assigned by A.M. Best have an impact on the ability of our regulated subsidiaries to attract and retain agents and brokers and on the risk profiles of the submissions for insurance that our subsidiaries receive. We believe the “A-” (Excellent) ratings assigned to our U.S. insurance subsidiaries allow our subsidiaries to actively pursue relationships with the agents and brokers identified in their marketing plans.

Series A Preferred Shares

The Company closed on the issuance and sale of 150,000 Series A Preferred Shares on March 1, 2022 for an aggregate purchase price of $150.0 million, or $1,000 per share, in a private placement. The Series A Preferred Shares are convertible into the Company’s common shares at the option of the holder at any time, or at the Company’s option under certain circumstances. Dividends on the Series A Preferred Shares accrue quarterly at the initial rate of 7% of the Liquidation Preference per annum, which may be paid in cash, in-kind in common shares or in Series A Preferred Shares, at the Company’s election.

EQUITY

Total common shares outstanding increased from 37,641,563 at December 31, 2023 to 37,825,767 at June 30, 2024, reflecting 184,204 common shares issued in the six months ended June 30, 2024 related to vesting of RSUs.

Share Based Compensation Expense

The Company recognized $1.6 million and $4.2 million of share based compensation expense in the three and six months ended June 30, 2024, respectively ($2.3 million and $5.0 million in the respective prior year periods). As of June 30, 2024, the Company had $10.0 million of unrecognized share based compensation expense expected to be charged to earnings over a weighted-average period of 1.9 years.

Equity Incentive Plans

Options

The following table summarizes option activity:

The options outstanding at December 31, 2023 lapsed in the six months ended June 30, 2024. At June 30, 2024, no options remain outstanding.

RSUs

The following table summarizes RSU activity:

Outstanding RSUs granted to employees generally vest ratably over a three-year vesting period in the case of time-vest RSUs and cliff vest at the end of a three-year performance period in the case of PRSUs. RSUs granted to non-employee directors generally have a one year vesting period. The RSUs granted in 2024 and 2023 include 231,492 and 91,818 PRSU awards, respectively. The number of PRSUs is based upon the probable outcome of performance conditions.

Underwriting Performance Ratios

The following table provides the underwriting performance ratios of the Company's continuing operations inclusive of the business subject to retroactive reinsurance accounting for a loss portfolio transfer. There is no economic impact to the Company over the life of a loss portfolio transfer contract so long as any additional losses subject to the contract are within the limit of the loss portfolio transfer and the counterparty performs under the contract. Retroactive reinsurance accounting is not indicative of our current and ongoing operations. Management believes that providing loss ratios and combined ratios on business not subject to retroactive reinsurance accounting for loss portfolio transfers gives the users of our financial statements useful information in evaluating our current and ongoing operations.

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RECONCILIATION OF NON-GAAP MEASURES

See “Key Metrics” above for descriptions of why management believes the following Non-GAAP measures provide useful information about our financial condition and results of operation.

Reconciliation of Underwriting Profit

We define underwriting profit as net earned premiums and gross fee income (in specific instances when the Company is not retaining insurance risk) less losses and loss adjustment expenses on business from continuing operations not subject to retroactive reinsurance accounting for loss portfolio transfers and other operating expenses. Other operating expenses include the underwriting, acquisition, and insurance expenses of the operating segments and, for consolidated underwriting profit, the expenses of the Corporate and Other segment. Our definition of underwriting profit may not be comparable to that of other companies.

The following table reconciles the underwriting profit (loss) of the operating segments by individual segment to consolidated income from continuing operations before income taxes:

(in thousands)

(1) Included in underwriting results for the three and six months ended June 30, 2024 is gross fee income of $5.6 million and $10.9 million, respectively ($5.8 million and $11.5 million in the respective prior year periods).

Reconciliation of Adjusted Net Operating Income

Adjusted net operating income is defined as income available to common shareholders excluding a) income (loss) from discontinued operations, b) the impact of retroactive reinsurance accounting for a loss portfolio transfer, c) net realized and unrealized gains (losses) on investments, d) certain non-operating expenses such as professional service fees related to a class action lawsuit, various strategic initiatives, and the filing of registration statements for the offering of securities, and e) severance costs associated with terminated employees. Adjusted net operating income should not be viewed as a substitute for net income calculated in accordance with GAAP, and our definition of adjusted net operating income may not be comparable to that of other companies.

Our income available to common shareholders reconciles to our adjusted net operating income as follows:

($ in thousands)

($ in thousands)

Tangible Equity and Tangible Equity per Share

Tangible equity is defined as shareholders' equity plus mezzanine Series A Preferred Shares and the unrecognized deferred retroactive reinsurance gain on loss portfolio transfers less goodwill and intangible assets, net of amortization. Tangible equity per share represents tangible equity divided by the sum of total common shares outstanding plus the common shares resulting from an assumed conversion of the outstanding Series A Preferred Shares into common shares (at the conversion price effective as of the last day of the applicable period). Our definitions of tangible equity and tangible equity per share may not be comparable to that of other companies, and they should not be viewed as a substitute for shareholders’ equity and shareholders’ equity per share calculated in accordance with GAAP.

The following table reconciles shareholders’ equity to tangible equity as of June 30, 2024, December 31, 2023, and June 30, 2023:

($ in thousands, except share amounts)

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Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign currency exchange rates and commodity prices. Our consolidated balance sheets include assets and liabilities with estimated fair values that are subject to market risk. Our primary market risks have been interest rate risk associated with investments in fixed maturities and equity price risk associated with investments in equity securities. We do not have material exposure to foreign currency exchange rate risk or commodity risk.

There have been no material changes in market risk from the information provided in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2023.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required disclosure. In connection with the preparation of this quarterly report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our CEO and CFO, as of June 30, 2024, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2024.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

The effectiveness of any system of controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that our controls and procedures will detect all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained.

There have been no material changes in our risk factors in the quarter ended June 30, 2024 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, except as follows:

We are involved in disputes relating to the Stock Purchase Agreement and the sale of JRG Re to Fleming, which closed on April 16, 2024. An adverse outcome to these matters may have a material adverse effect on our financial position

In accordance with the Stock Purchase Agreement, the cash portion of the purchase price (the "Closing Date Purchase Price") received by the Company for the sale of JRG Re on April 16, 2024 (the “Closing Date”) was calculated based on an estimated closing statement, which in turn was based on an estimated balance sheet of JRG Re. Under the Stock Purchase Agreement, the estimated closing statement is subject to a post-closing adjustment process between the Company and Fleming to produce a final closing statement based on a final balance sheet of JRG Re as of the Closing Date. This adjustment process could result in a change to the purchase price paid by Fleming on the Closing Date.

Fleming delivered a closing statement to the Company, and pursuant to the procedures in the Stock Purchase Agreement, the Company has given notice of its disagreement with Fleming’s closing statement. In its notice of disagreement, the Company (i) agreed with an $11.4 million downward adjustment to the Closing Date Purchase Price due to the losses recorded on JRG Re's operations between the date of the balance sheet used to produce the estimated closing statement and the Closing Date, which downward adjustment is included in "Other Liabilities" on the Company's Balance Sheet at June 30, 2024, and (ii) disputed $54.1 million in aggregate downward adjustments to the Closing Date Purchase Price claimed by Fleming, which the Company believes are unsupported by the facts known to the Company and the terms of the Stock Purchase Agreement. The Stock Purchase Agreement provides procedures for resolving disputes between the parties regarding the closing statement and it is possible that the resolution of these disputes could result in a significant reduction to the amount of the purchase price.

As described in Part II, Item 1., Legal Proceedings, we are involved in litigation with Fleming regarding the Stock Purchase Agreement and related matters. The outcome of the disputes over the post-closing adjustment and the litigation with Fleming cannot be predicted and, if determined adversely, could require us to repay a significant portion of the purchase price paid by Fleming on the Closing Date, as well as significant damage amounts, which could have a material adverse effect on our financial position.