James River Group Holdings Ltd Annual Report 2015

Plain-text annual report

☒☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934☐☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934TABLE OF CONTENTSUNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549FORM 10-KFOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934(Mark One)For the Fiscal Year Ended December 31, 2015orCommission file number 001-36777JAMES RIVER GROUP HOLDINGS, LTD.(Exact name of registrant as specified in its charter)Bermuda98-0585280(State of Incorporation)(IRS Employer Identification No.)Wellesley House, 2 Floor90 Pitts Bay Road, Pembroke, BermudaHM 08(Address of principal executive offices)(Zip Code)Registrant’s telephone number, including area code: (441) 278-4580Securities registered pursuant to Section 12(b) of the Act: Common Shares, par value $0.0002 per share (Title of Class)NASDAQ Global Select Market (Name of Exchange on which Registered)Securities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act. Yes ☐ No ☒Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was requiredto file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or asmaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):Large Accelerated Filer ☐☐Accelerated Filer ☒☒Non-accelerated Filer ☐☐Smaller Reporting Company ☐☐Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒The aggregate market value of the Registrant’s common shares held by non-affiliates of the Registrant as of June 30, 2015,computed by reference to the closing sales price on the NASDAQ Global Select Market on that date, was approximately$359,452,785.The number of the Registrant’s common shares outstanding was 28,941,547 as of March 2, 2016.DOCUMENTS INCORPORATED BY REFERENCE:Portions of the James River Group Holdings, Ltd. Proxy Statement to be filed with the Securities and ExchangeCommission within 120 days after the year covered by this Form 10-K with respect to the 2015 Annual General Meeting ofShareholders are incorporated by reference into Part III hereof.TABLE OF CONTENTSPagendItem 1.BUSINESSItem 1A.RISK FACTORSItem 1B.UNRESOLVED STAFF COMMENTSItem 2.PROPERTIESItem 3.LEGAL PROCEEDINGSItem 4.MINE SAFETY DISCLOSUREItem 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESItem 6.SELECTED FINANCIAL DATAItem 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONSItem 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAItem 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSUREItem 9A.CONTROLS AND PROCEDURESItem 9B.OTHER INFORMATIONItem 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEItem 11.EXECUTIVE COMPENSATIONItem 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERSItem 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCEItem 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESItem 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULESPART I444168686969PART II70707275120122122122123PART III124124124124124124PART IV124124•the inherent uncertainty of estimating reserves and the possibility that incurred losses may be greaterthan our loss and loss adjustment expense reserves;•inaccurate estimates and judgments in our risk management may expose us to greater risks thanintended;•losses from catastrophic events which substantially exceed our expectations and/or exceed the amountof reinsurance we have purchased to protect us from such events;•the potential loss of key members of our management team or key employees and our ability to attractand retain personnel;•adverse economic factors;•a decline in our financial strength rating resulting in a reduction of new or renewal business;•reliance on a select group of brokers and agents for a significant portion of our business and the impactof 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 ourpotential failure to maintain such relationships;•existing or new regulations that may inhibit our ability to achieve our business objectives or subjectus to penalties or suspensions for non-compliance or cause us to incur substantial compliance costs;•a failure of any of the loss limitations or exclusions we employ;•potential effects on our business of emerging claim and coverage issues;•exposure to credit risk, interest rate risk and other market risk in our investment portfolio;•losses in our investment portfolio;•the cyclical nature of the insurance and reinsurance industry, resulting in periods during which wemay experience excess underwriting capacity and unfavorable premium rates;•additional government or market regulation;•the impact of loss settlements made by ceding companies and fronting carriers on our reinsurancebusiness;•a forced sale of investments to meet our liquidity needs;•our ability to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us;TABLE OF CONTENTSUnless the context indicates or suggests otherwise, references in this Annual Report on Form 10-K to “theCompany,” “we,” “us” and “our” refer to James River Group Holdings, Ltd. and its consolidated subsidiaries.SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements. Thesestatements can be identified by the fact that they do not relate strictly to historical or current facts. You canidentify forward-looking statements in this Annual Report by the use of words such as “anticipates,” “estimates,”“expects,” “intends,” “plans” 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,statements relating to our future financial performance, our business prospects and strategy, anticipated financialposition, liquidity and capital needs and other similar matters. These forward-looking statements are based onmanagement’s current expectations and assumptions about future events, which are inherently subject touncertainties, 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-lookingstatements included in this Annual Report as a result of various factors, many of which are beyond our control,including, among others:2•losses resulting from reinsurance counterparties failing to pay us on reinsurance claims or insurancecompanies with whom we have a fronting arrangement failing to pay us for claims;•our underwriters and other associates taking excessive risks;•insufficient capital to fund our operations;•the potential impact of internal or external fraud, operational errors, systems malfunctions orcybersecurity incidents;•our ability to manage our growth effectively;•inadequacy of premiums we charge to compensate us for our losses incurred;•competition within the casualty insurance and reinsurance industry;•an adverse outcome in a legal action that we are or may become subject to in the course of ourinsurance and reinsurance operations;•in the event we do not qualify for the insurance company exception to the passive foreign investmentcompany (“PFIC”) rules and are therefore considered a PFIC;•the Company or our subsidiaries, James River Group Holdings UK Limited, a holding companyincorporated under the laws of England and Wales, or JRG Reinsurance Company, Ltd., a Bermudadomiciled reinsurance company, becoming subject to U.S. federal income taxation;•failure to maintain effective internal controls in accordance with Sarbanes-Oxley Act of 2002;•the ownership of a substantial amount of our outstanding shares by affiliates of D. E. Shaw & Co., L.P.(the “D. E. Shaw Affiliates”) and their resulting ability to exert significant influence over mattersrequiring shareholder approval in a manner that could conflict with the interests of other shareholdersand additionally, the D. E. Shaw Affiliates having certain rights with respect to board representationand approval rights with respect to certain transactions;•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 under “Risk Factors” and elsewhere in this Annual Report.TABLE OF CONTENTSAccordingly, you should read this Annual Report completely and with the understanding that our actualfuture results may be materially different from what we expect.Forward-looking statements speak only as of the date of this Annual Report. Except as expressly requiredunder federal securities laws and the rules and regulations of the Securities and Exchange Commission (the“SEC”), we do not have any obligation, and do not undertake, to update any forward-looking statements toreflect events or circumstances arising after the date of this Annual Report, whether as a result of newinformation or future events or otherwise. You should not place undue reliance on the forward-lookingstatements included in this Annual Report or that may be made elsewhere from time to time by us, or on ourbehalf. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.3Item 1.BUSINESSTABLE OF CONTENTSPART IGeneralJames River Group Holdings, Ltd. is a Bermuda-based insurance holding company. We own and operate agroup of specialty insurance and reinsurance companies founded by members of our management team. For theyear ended December 31, 2015, approximately 73% of our group-wide gross written premiums originated fromthe U.S. excess and surplus (“E&S”) lines market. Substantially all of our business is casualty insurance andreinsurance, and for the year ended December 31, 2015, we derived 98% of our group-wide gross writtenpremiums from casualty insurance and reinsurance. Our objective is to generate compelling returns on tangibleequity, while limiting underwriting and investment volatility. We seek to accomplish this by consistentlyearning profits from insurance and reinsurance underwriting while managing our capital opportunistically. Ourgroup includes three specialty property-casualty insurance and reinsurance segments: Excess and Surplus Lines,Specialty Admitted Insurance and Casualty Reinsurance. In all of our segments, we tend to focus on accountsassociated with small or medium-sized businesses.We write very little property or catastrophe insurance and no property catastrophe reinsurance. For the yearended December 31, 2015, property insurance and reinsurance represented 2% of our gross written premiums.When we do write property insurance, we buy reinsurance to significantly mitigate our risk. We have structuredour reinsurance arrangements so that our estimated net pre-tax loss from a 1/1000 year probable maximum lossevent is no more than $10.0 million on a group-wide basis.We report our business in four segments: Excess and Surplus Lines, Specialty Admitted Insurance, CasualtyReinsurance and Corporate and Other.The Excess and Surplus Lines segment offers E&S commercial lines liability and property insurance inevery U.S. state and the District of Columbia through James River Insurance Company (“James River Insurance”)and its wholly-owned subsidiary, James River Casualty Company (“James River Casualty”). James RiverInsurance and James River Casualty are both non-admitted carriers. Non-admitted carriers writing in the E&Smarket are not bound by most of the rate and form regulations imposed on standard market companies, allowingthem flexibility to change the coverage terms offered and the rate charged without the time constraints andfinancial costs associated with the filing of such changes with state regulators. In 2015, the average account inthis segment generated annual gross written premiums of approximately $19,000. The Excess and Surplus Linessegment distributes primarily through wholesale insurance brokers. Members of our management team haveparticipated in this market for over three decades and have long-standing relationships with the wholesaleagents who place E&S lines accounts. The Excess and Surplus Lines segment produced 54.0% of our grosswritten premiums for the year ended December 31, 2015.The Specialty Admitted Insurance segment focuses on niche classes within the standard insurance markets,such as workers’ compensation coverage for residential contractors, light manufacturing operations,transportation workers and healthcare workers in North Carolina, Virginia, South Carolina, and Tennessee. Thissegment has admitted licenses in 48 states and the District of Columbia. While this segment has historicallyfocused on workers’ compensation business, we are growing our fronting business and our other commerciallines through our program business. We believe we can earn substantial fees in our program and frontingbusiness by writing policies and then transferring all or a substantial portion of the underwriting risk position toother capital providers that pay us a fee for fronting or ceding the business to them. The Specialty AdmittedInsurance segment accepts applications for insurance from a variety of sources, including independent retailagents, program administrators and managing general agents (“MGAs”). The Specialty Admitted Insurancesegment produced 15.9% of our gross written premiums for the year ended December 31, 2015.The Casualty Reinsurance segment consists of JRG Reinsurance Company, Ltd. (“JRG Re”), our Bermudadomiciled reinsurance subsidiary, which provides proportional and working layer casualty reinsurance to thirdparties and to our U.S.-based insurance subsidiaries. The Casualty Reinsurance segment’s underwriting resultsonly include the results of reinsurance written with unaffiliated companies4TABLE OF CONTENTSand does not include the premiums and losses ceded under our internal quota share arrangement describedbelow, which are captured in our Excess and Surplus Lines and Specialty Admitted Insurance segments,respectively. Typically, we structure our reinsurance contracts (also known as treaties) as quota sharearrangements, with loss mitigating features, such as commissions that adjust based on underwriting results. Wefrequently include risk mitigating features in our excess working layer treaties, which allows the cedingcompany to capture a greater percentage of the profits should the business prove more profitable than expected,while providing us with additional premiums should the business incur higher than expected losses. We believethese structures best align our interests with the interests of our cedents. Treaties with loss mitigation featuresincluding sliding scale ceding commissions represented 86% of the gross premiums written by our CasualtyReinsurance segment during 2015. We typically do not assume large individual risks in our CasualtyReinsurance segment, nor do we write property catastrophe reinsurance. Two of the three largest unaffiliatedaccounts written by JRG Re during 2015 were ceded from E&S carriers. The Casualty Reinsurance segmentdistributes through traditional reinsurance brokers. The Casualty Reinsurance segment produced 30.1% of ourgross written premiums for the year ended December 31, 2015.We have intercompany reinsurance agreements under which we cede 70% of the net written premiums ofour U.S. subsidiaries (after taking into account third-party reinsurance) to JRG Re. This business is ceded to JRGRe under a proportional, or quota-share, reinsurance treaty that provides for an arm’s length ceding commission.From a management perspective, the economic results (underwriting profits or losses) of this business that arereflected herein in our Excess and Surplus Lines and Specialty Admitted Insurance reporting segments excludethe effects of both the intercompany quota share and pooling agreements. At December 31, 2015, approximately67% of our cash and invested assets were held in Bermuda, which has a favorable operating environment,including an absence of corporate income or investment taxes. We pay a 1% excise tax on premiums ceded toJRG Re.The Corporate and Other segment consists of the management and treasury activities of our holdingcompanies and interest expense associated with our debt.In 2015, our operating subsidiaries wrote a total of $572.2 million in gross written premiums, allocated bysegment and underlying market as follows:Gross Written Premiums by SegmentGross Written Premiums Year Ended December 31, 2015% of Total(in thousands)Excess and Surplus Lines segment$308,71754.0Specialty Admitted Insurance segment90,97815.9Casualty Reinsurance segment172,49930.1$572,194100.0Gross Written Premiums by MarketNon-admitted markets$416,68672.8Admitted markets155,50827.2$572,194100.0The A.M. Best Company (“A. M. Best”) financial strength rating for our group’s regulated insurancesubsidiaries is “A-” (Excellent), with a “positive outlook.” This rating reflects A.M. Best’s opinion of ourinsurance subsidiaries’ financial strength, operating performance and ability to meet obligations topolicyholders and is not an evaluation directed towards the protection of investors.The financial strength ratings assigned by A.M. Best have an impact on the willingness of brokers andagents to submit applications for insurance to our regulated subsidiaries and on the risk profiles of thesubmissions for insurance that our subsidiaries receive. The “A-” (Excellent), with a “positive outlook” ratingsassigned to our insurance and reinsurance subsidiaries are consistent with our business plans and we believeallow our subsidiaries to actively pursue relationships with the agents and brokers identified in their marketingplans.5%%%%%%%TABLE OF CONTENTSOur HistoryIn 2002, a group of experienced insurance executives with a history of starting and operating profitablespecialty insurance operations created James River Group, Inc. (“James River Group”). James River Group waslisted on the NASDAQ Stock Market (symbol: JRVR) in 2005 and consistently produced attractive underwritingresults. James River Group had two insurance company subsidiaries, James River Insurance and StonewoodInsurance Company (“Stonewood Insurance”). Both of these subsidiaries as well as James River Group are nowsubsidiaries of ours.In 2007, James River Group’s management team decided to enhance James River Group’s long-termprofitability by combining the earnings power of James River Group with the efficiency of an affiliated Bermudadomiciled reinsurer. A group of investors led by affiliates of D. E. Shaw & Co., L.P. acquired James River Group,at which point it ceased trading as a public company. Simultaneously, the investors and management foundedand capitalized JRG Re, and we began the process of building our present company.In December 2014, we completed an initial public offering of our common shares (the “IPO”). Affiliates ofD. E. Shaw & Co., L.P. and The Goldman Sachs Group, Inc. and its affiliate (collectively, the “SellingShareholders”), sold all of the common shares in the IPO. Neither the Company nor any of its management andother owners sold shares in the IPO. The total number of our common shares sold in the IPO by the SellingShareholders, including shares acquired by the underwriters upon exercise of an option to purchase additionalshares, was 11,740,516.Our Competitive StrengthsWe believe we have the following competitive strengths:Proven and Strong Management Team Whose Financial Interests are Aligned with Shareholders. OurChairman and Chief Executive Officer, J. Adam Abram, has a history of forming and managing profitablespecialty insurance companies. Mr. Abram was the founder of Front Royal Group in 1992, which was sold toArgo Group International Holdings Limited (Nasdaq: AGII) in August 2001. In 2002, Mr. Abram formed JamesRiver Group, our predecessor company, which enjoyed strong underwriting profits until it was sold to JamesRiver Group Holdings, Ltd. in December 2007. Mr. Abram has also founded and run successful businesses in thebanking and commercial real estate sectors.Our President and Chief Operating Officer, Robert P. Myron, who has served in various capacities with ourgroup since 2010, has a history of working in a senior management capacity in the insurance and reinsuranceindustries in both the United States and Bermuda. Mr. Myron has significant experience working in finance,underwriting and operations of several different insurance and reinsurance companies over the course of hiscareer.Our Chief Financial Officer, Gregg Davis, has been with our group and its predecessors since 1992 and wasthe Chief Financial Officer of Front Royal Group, working alongside Mr. Abram for almost two decades.The President and Chief Executive Officer of our Excess and Surplus Lines segment, Richard Schmitzer,who has been with our group since July 2009, has a history of working in a senior management capacity in theE&S lines industry. Mr. Schmitzer has significant experience working in underwriting and operations of severaldifferent insurance companies over the course of his career.Dennis Johnson, the President and Chief Executive Officer of our Casualty Reinsurance segment, has a longtrack-record underwriting specialty reinsurance risks, particularly in the small account market where weconcentrate.Steven Hartman, the President and Chief Executive Officer of our Specialty Admitted Insurance segment,has extensive experience as a reinsurance underwriter, and has the experience and industry knowledge to buildout our fronting and program business.Each of Messrs. Abram, Myron, Davis and Schmitzer invested in the IPO. All members of our executivemanagement have equity grants that we believe help align their interests with those of our long-termshareholders.6TABLE OF CONTENTSBroad Underwriting Expertise. We strive to be innovative in tailoring our products to provide solutionsfor our distribution partners and insureds, and we are willing to entertain insuring many types of riskclassifications. As a result, we believe we are a “go to” market for a wide variety of risks. We are able to structuresolutions for our insureds and the wholesale brokers with whom we work because of our deep technical expertiseand experience in the niches and specialties we underwrite.Conservative Risk Management with an Emphasis on Lowering Volatility. We earn our profits by takingunderwriting and investment risk. We underwrite many classes of insurance and invest in many types of assets.We actively seek to avoid underwriting business or making investments that expose us to an unacceptably highrisk of causing large losses.We seek to limit our catastrophic underwriting exposure in all areas, but in particular to property risks andcatastrophic events. Our U.S. primary companies purchase reinsurance from unaffiliated reinsurers to reduce ournet exposure to any one risk or occurrence. In addition, our policy forms and pricing are subject to regular formalanalysis to ensure we are insuring the types of risks we intend and that we are being appropriately compensatedfor taking on those risks. When we write reinsurance, we seek to avoid catastrophic risks and contractually limitthe amount of exposure we have to any one risk or occurrence. We prefer to structure our assumed reinsurancetreaties as proportional or quota share reinsurance, which is generally less volatile than excess of loss orcatastrophe reinsurance. We believe this structure aligns our interests with those of the ceding company.We attempt to improve risk-adjusted returns in our investment portfolio by allocating a portion of ourportfolio to investments where we take measured risks based upon detailed knowledge of certain niche assetclasses. High quality fixed maturity securities make up approximately 65% of our investment portfolio, but weare comfortable allocating a portion of our assets to non-traditional investments. We consider non-traditionalinvestments to include investments that are (1) unrated bond or fixed income securities (2) non-listed equities or(3) investments that generally have less liquidity than rated bond or fixed income securities or listed equities.We characterize these investments as non-traditional. Non-traditional investments held at December 31, 2015and their respective percentage of our total invested assets at such date consist of syndicated bank loans(15.4%), interests in limited liability companies that invest in renewable energy opportunities (2.1%), limitedpartnerships that invest in debt or equity securities (1.4%), and a private debt security (0.4%). While we arewilling to make investments in non-traditional types of investments, we seek to avoid asset classes andinvestments that we do not understand or that could expose us to inappropriate levels of risk. The weightedaverage credit rating of our portfolio of fixed maturity securities, bank loans and redeemable preferred stocks asof December 31, 2015 was “A.” This portfolio had a weighted average duration of approximately 3.5 years forthis portfolio as of December 31, 2015.Talented Underwriters and Operating Leadership. The managers of our 15 underwriting divisions have anaverage of over 25 years of industry experience, substantial subject matter expertise and deep technicalknowledge and have been successful and profitable underwriters for us in the specialty casualty insurance andreinsurance sectors. Our segment presidents have an average of 32 years of experience and all have extensivebackgrounds and histories working in management capacities in specialty casualty insurance and reinsurance.Robust Technology and Data Capture. We seek to ground our underwriting decisions in reliable historicaldata and technical evaluation of risks. Our underwriters utilize intuitive systems and differentiated technologies,many of which are proprietary. We have implemented processes to capture extensive data on our book ofbusiness, before, during and after the underwriting analysis and decision. We use the data we collect to informand, we believe, improve our judgment about similar risks as we refine our underwriting criteria. We use the datawe collect in regular formal review processes for each of our lines of business and significant reinsurance treaties.Focus on Small and Medium-Sized Casualty Niche and Specialty Business. We believe that small andmedium-sized casualty accounts, in niche areas where we focus, are consistently among the most attractivesubsets of the property casualty insurance and reinsurance market. We think the unique characteristics of therisks within these markets require each account to be individually underwritten in an efficient manner. Manycarriers have chosen either to reject business that requires individual underwriting or have attempted toautomate the underwriting of this highly variable business. While we use technology to greatly reduce the7TABLE OF CONTENTScost of individually underwriting these accounts in our Excess and Surplus Lines and Specialty AdmittedInsurance segments, we continue to have our underwriters make individual judgments regarding theunderwriting and pricing of accounts. We believe this approach is more likely to produce consistent results overtime and across markets. In addition, while we believe that the insurance and reinsurance industry is generallyovercapitalized at this time, and that rates in certain property and casualty sectors are “soft” or “softening,” weare currently achieving stable rates and experiencing benign loss trends in our Excess and Surplus Lines andSpecialty Admitted Insurance segments, which represented 69.9% of our gross written premiums for the twelvemonths ended December 31, 2015. We believe that there are compelling opportunities for measured butprofitable growth in many sectors of the insurance markets we target.Active Claims Management. Our U.S.-based primary insurance companies actively manage claims as partof keeping losses and loss adjustment expenses low. We attempt to investigate and settle all covered claimspromptly and thoroughly, which we generally accomplish through direct contact with the insured and otheraffected parties. We have been able to close 90% of claims within three to five years, and as of December 31,2015, our reserves for claims incurred but not reported were approximately 68% of our total net loss reserves.Efficient Operating Platform. Our Bermuda domicile and operations provide for capital flexibility and anefficient tax structure. At December 31, 2015, approximately 67% of our cash and invested assets were held inBermuda, which benefits from a favorable operating environment, including an absence of corporate income orinvestment taxes. We also have a competitive expense ratio, as we carefully manage personnel and all othercosts throughout our group while growing our business. In addition, Bermuda has many advantages as a place ofdomicile, including a large population of experienced insurance executives, a deep market for reinsurancebusiness and a well-established regulatory regime that has fostered the acceptance of Bermuda-based reinsurersby rating agencies and insurance buyers.Our StrategyWe believe our approach to our business will help us achieve our goal of generating compelling returns ontangible equity while limiting volatility in our financial results. This approach involves the following:Generate Consistent Underwriting Profits. We seek to make underwriting profits each and every year. Weattempt to find ways to grow in markets that we believe to be profitable, but are less concerned about growththan maintaining profitability in our underwriting activities (without regard to investment income).Accordingly, we are willing to reduce the premiums we write when we cannot achieve the pricing and contractterms we believe are necessary to meet our financial goals.Maintain a Strong Balance Sheet. Balance sheet integrity is key to our long-term success. In order tomaintain balance sheet integrity, we seek to estimate the amount of future obligations, especially reserves forlosses and loss adjustment expenses, in a consistent and appropriate fashion. Excluding 2012, we have hadfavorable loss reserve development for each prior year period since 2008. From December 31, 2007 through2015, we have experienced $121.5 million of cumulative net favorable reserve development.Focus on Specialty Insurance Markets. By focusing on specialty markets in which our underwriters haveparticular expertise and in which we have fewer competitors than in standard markets, we have greater flexibilityto price and structure our products in accordance with our underwriting strategy. We believe underwritingprofitability can best be achieved through restricting our risk taking on insurance and reinsurance to nicheswhere, because of our expertise, we can distinguish ourselves in the underwriting and pricing process.Use Timely and Accurate Data. We design our internal processing and data collection systems to provideour management team with accurate and relevant information in real-time. Our data warehouse collects premium,commission and claims data, including detailed information regarding policy price, terms, conditions and thenature of the insured’s business. This data allows us to analyze trends in our business, including results byindividual agent or broker, underwriter and class of business and expand or contract our operations quickly inresponse to market conditions. We rely on our information technology systems in this process. Additionally, theclaims staff also contributes to our underwriting operations through its communication of claims information toour underwriters.8TABLE OF CONTENTSRespond Rapidly to Market Opportunities and Challenges. We plan to grow our business to takeadvantage of opportunities in markets in which we believe we can use our expertise to generate consistentunderwriting profits. We seek to measure rates monthly and react quickly to changes in the rates or terms themarket will accept. For the year ended December 31, 2015, our Excess and Surplus Lines segment gross writtenpremiums increased by 22.2% over the same period in 2014. In this favorable pricing environment, we havetaken steps to grow and are increasing gross written premiums across most underwriting divisions in thissegment. In 2015, we enjoyed growth in our General Casualty, Manufacturers and Contractors, Energy, ExcessProperty, Environmental and Allied Health divisions within our Excess and Surplus Lines segment. During thesame period, we felt rates were not generally adequate for risks submitted to our Professional Liability, MedicalProfessionals, and Life Sciences divisions, and we reduced our writings in those divisions. This very specificevaluation of each risk or class of risks is a hallmark of our underwriting.When market conditions have been challenging, or when actual experience has not been as favorable as weanticipated, we have tried to act quickly to evaluate our situation and to make course corrections in order toprotect our profits and preserve tangible equity. Our actions have included reducing our writings when marginstightened and exiting lines or classes of business when we believed the risk of continuing in a line outweighedthe potential rewards from underwriting. We do not hesitate to increase loss estimates when we determine that itis appropriate.Manage Capital Actively. We seek to make “both sides” of our balance sheet generate better than averagerisk-adjusted returns. We invest and manage our capital with a goal of consistently increasing tangible equity forour shareholders and generating attractive returns on tangible equity. We intend to expand our premium volumeand capital base to take advantage of opportunities to earn an underwriting profit or to reduce our premiumvolume and capital base if attractive underwriting opportunities are not available. We expect to finance ourfuture operations with a combination of debt and equity and do not intend to raise or retain more capital than webelieve we can profitably deploy in a reasonable time frame. We may not, however, always be able to raisecapital when needed. We declared $47.8 million of dividends to our shareholders ($1.64 per share) during 2015and $70.0 million of dividends to our shareholders ($2.45 per share) in 2014, as we had excess capital beyondthe level needed to support our insurance operations. In 2013, we repurchased 7.5 million of our common sharesfor a total purchase price of $110.8 million. Our ratings from A.M. Best are very important to us and maintainingthem will be a principal consideration in our decisions regarding capital management.Our StructureThe chart below displays our corporate structure as it pertains to our holding and operating subsidiaries.9TABLE OF CONTENTSBusiness SegmentsExcess and Surplus Lines SegmentWe report our U.S.-based E&S lines of business in our Excess and Surplus Lines segment. We underwritenon-admitted business through our subsidiaries, James River Insurance and James River Casualty, from offices inRichmond, Virginia; Scottsdale, Arizona; and Atlanta, Georgia. James River Insurance is our largest subsidiaryas measured by gross written premiums (54.0% of total gross written premiums for the year ended December 31,2015 came from our Excess and Surplus Lines segment) and has been engaged in E&S insurance for 13 years.James River Insurance has had a consistent record of underwriting profits since its second year of operation. Weadded James River Casualty in 2009 to give us the ability to write E&S risks in Ohio.E&S lines insurance focuses on insureds that generally cannot purchase insurance from standard linesinsurers typically due to perceived risk related to their businesses. Our Excess and Surplus Lines segmentunderwrites property casualty insurance on an E&S lines basis in all states and the District of Columbia. OurExcess and Surplus Lines segment distributes its policies through a network of appointed independentwholesale brokers throughout the United States. In 2015, our Excess and Surplus Lines segment’s gross writtenpremiums grew by 22.2% over 2014. The Excess and Surplus Lines segment produced an average combinedratio of 82.0% from 2009 through 2015.Companies that underwrite on an E&S lines basis operate under a different regulatory structure thanstandard market carriers. E&S lines carriers are generally permitted to craft the terms of the insurance contract tosuit the particular risk they are assuming. Also, E&S lines carriers are, for the most part, free of rate regulation. Incontrast, standard market carriers are generally required to use approved insurance forms and to charge rates thathave been authorized by or filed with state insurance departments. However, as E&S carriers, our insurancesubsidiaries in the Excess and Surplus Lines segment are not backed by any state’s guarantee fund, and in moststates these subsidiaries may only write coverage for an insured after they have been denied coverage by thestandard market and signed declarations stating that the insured is aware that it will not have access to any stateguarantee funds should these subsidiaries be unable to satisfy their obligations.Our Excess and Surplus Lines segment writes policies for a wide range of businesses and does not writepersonal lines insurance. Applications for insurance come through appointed wholesale brokers who aregenerally approached by retail agents after their clients have been rejected by standard markets.With the exception of one small program which had total gross written premiums of approximately$5.5 million for the year ended December 31, 2015, the Excess and Surplus Lines segment does not grant anyunderwriting authority to brokers or agents, and instead, all underwriting decisions are made by one of our over100 underwriters who work within James River Insurance’s twelve underwriting divisions. Policies areindividually underwritten. The leaders of these twelve divisions average 32 years of experience.All claims for business written by the Excess and Surplus Lines segment are managed by its internal claimsdepartment although we do use independent adjusters for inspection of certain claims.10TABLE OF CONTENTSThe chart below identifies the Excess and Surplus Lines segment’s divisions and sets forth the amount ofgross written premiums for the years 2015, 2014, 2013, 2012, and 2011 fiscal years by each division.Gross Written Premiums Year Ended December 31,E&S Division2015Percentage of Total 20152014201320122011($ in thousands)General Casualty$104,74233.9$60,458$22,636$12,674$8,156Manufacturers and Contractors78,31525.472,06358,50946,64838,566Excess Casualty32,45810.531,68832,48929,76120,753Energy30,6239.928,98021,40015,76610,566Allied Health13,5134.49,7079,1488,3919,472Excess Property12,4984.011,79510,9889,2318,228Professional Liability10,0463.310,78410,69510,66411,058Life Sciences8,9172.910,1559,9789,8657,886Small Business6,9162.26,9716,3135,7825,886Environmental4,4371.43,4312,5572,9542,289Medical Professionals3,5851.23,9224,4925,2946,177Sports and Entertainment2,6670.92,7533,1891,6241,970Total$308,717100.0$252,707$192,394$158,654$131,007General Casualty writes primary liability coverage on businesses exposed to premises liability type claims,including: real estate, mercantile and retail operations, apartments and condominiums, daycare facilities, hotelsand motels, restaurants, bars, taverns and schools. We also write commercial auto coverage within this division.The head underwriter in this division has 29 years of experience. We generally write $1.0 million per occurrencein limits, and we retain the entire $1.0 million limit.Manufacturers and Contractors writes primary general liability coverage for a number of classes, includingmanufacturers of consumer, commercial, and industrial products and general and trade contractors. We typicallyissue a $1.0 million per occurrence limit in this division and we retain the entire $1.0 million limit. Theindividual overseeing this division has 33 years of industry experience.Excess Casualty underwrites excess liability coverage for a variety of risk classes, including: manufacturers,contractors, distributors and transportation risks. We typically provide between $1.0 million and $10.0 millionper occurrence limits above a $1.0 million attachment point. Of this amount, we retain up to $1.0 million ofexposure per occurrence and cede the balance to our reinsurers. We write excess liability coverage above ourown primary policies, as well as policies issued by third parties. When we write above others’ policies, we areselective regarding underlying carriers, focusing on the nature of the business, the financial strength of thecarrier, their pricing and their claims handling capabilities. The underwriter who heads this division has 33 yearsof industry experience.Energy writes risks engaged in the business of energy production, distribution or mining, and themanufacture of equipment used in the energy business segment. Examples of classes underwritten by thisdivision include oil and gas exploration companies, oil or gas well drillers, oilfield consultants, oil or gas leaseoperators, oil well servicing companies, oil or gas pipeline construction companies, fireworks manufacturing,mining-related risks, and utility and utility contractors. We typically provide policy limits between $1.0 millionand $5.0 million per occurrence and retain up to $1.0 million on either a primary or excess basis. Theunderwriter leading this division has 44 years of experience in the business.Allied Health underwrites casualty insurance for allied health and social service types of risks, such as long-term care facilities, independent living apartments, group homes, half-way houses and shelters, drug rehab, homehealth care and medical staffing enterprises. We typically provide policy limits between $1.0 million and $5.0million per occurrence and retain up to $1.0 million in limit net. The underwriter11%%%%%%%%%%%%%TABLE OF CONTENTSresponsible for this unit has 24 years of experience in the business. Approximately 90% of the premiums writtenby our Allied Health division from inception through 2015 have been written on a claims made and reportedform. We believe this policy form significantly reduces our long-term exposure in this complicated class ofbusiness.Excess Property writes property risks providing limits in various layers above the primary coverage layer fora variety of classes, including apartments, condominiums, resorts, shopping centers, offices and generalcommercial properties. Typical limits offered range from $5.0 million to $30.0 million. We retain up to the first$5.0 million in any one event or catastrophe. The underwriter leading our Excess Property division has 32 yearsof experience in the industry.Professional Liability writes professional liability coverage for accountants, architects, engineers, lawyersand certain other professions. We typically provide policy limits between $1.0 million and $5.0 million peroccurrence and retain the first $1.0 million net. The individual who directs our professional liability division has24 years of industry experience. All of our professional liability coverage is written on a claims made andreported basis.Life Sciences underwrites general liability, products liability and/or professional liability coverage formanufacturers, distributors and developers of biologics (antibodies & vaccines used for the prevention ofdisease), nutraceuticals (health, nutrition and herbal supplements), human clinical trials, pharmaceuticals(mainly generics and over-the-counters) and medical devices. We typically provide policy limits between$1.0 million and $5.0 million per occurrence and retain up to $1.0 million in limit net. The underwriter at thehead of this division has 33 years of experience in the industry.Small Business concentrates on accounts with annual primary liability insurance premiums of less than$10,000. For these small risks, we limit flexibility in coverage options and pricing to facilitate quick turnaroundand efficient processing. We generally write $1.0 million per occurrence limits and retain the entire amount. Theunderwriter leading this division has 29 years of industry experience.Environmental underwrites contractors’ pollution liability, products pollution liability, site specificpollution liability and consultant’s professional liability coverage on a stand-alone basis and in conjunctionwith the general liability coverage. The underwriter heading our Environmental division has 44 years ofexperience in the business. We generally write environmental coverage for contractors who are not engaged inenvironmental remediation work on an occurrence form. We typically provide policy limits between$1.0 million and $5.0 million per occurrence and retain up to $1.0 million in limit net on a primary or excessbasis.Medical Professionals underwrites non-standard physicians’ professional liability for individuals or smallgroups. Our healthcare business is a mix of both surgical and non-surgical classes. We typically provide between$1.0 million and $3.0 million per occurrence limits and retain up to $1.0 million of exposure per occurrence andcede the balance to our reinsurers. All of the policies written by this division have been issued on a claims madeand reported basis. The underwriter leading this division has 24 years of experience.Sports and Entertainment underwrites primary liability coverage for sports and entertainment related risks,including special events, family entertainment centers, tourist attractions, health clubs and sport teams, leaguesand complexes. Typical limits offered are up to $1.0 million per occurrence, and we retain the entire $1.0 millionlimit. The underwriter at the head of this division has 29 years of experience in the industry.12TABLE OF CONTENTSThe following table identifies the top ten producing states by amount of gross written premium for ourExcess and Surplus Lines segment for the year ended December 31, 2015 and the amount of gross writtenpremium produced by such states for the years ended December 31, 2014, 2013, 2012 and 2011. The table alsoshows the percentage of each states’ gross written premium to total gross written premium in the Excess andSurplus Lines segment for the years ended December 31, 2015, 2014 and 2013.20152014201320122011StateGross Written Premiums% of TotalGross Written Premiums% of TotalGross Written Premiums% of TotalGross Written PremiumsGross Written PremiumsCalifornia$125,34340.6$94,83737.5$56,24129.2$46,888$39,454Texas24,4917.921,6448.616,9638.813,21110,801New York24,3147.919,9707.914,2587.411,7676,445Florida23,8537.717,2956.814,2777.49,6619,218Illinois8,3352.77,2952.96,3183.35,4474,112Pennsylvania7,1352.36,6312.64,2852.24,1584,230Washington7,0692.36,0942.45,0072.64,7793,012New Jersey7,0252.36,4622.66,2373.24,0004,256Louisiana5,3601.75,3232.14,4032.33,6783,553Massachusetts4,8351.63,0101.22,8161.52,1241,376All other states70,95723.064,14625.461,58932.152,94144,550Total$308,717100.0$252,707100.0$192,394100.0$158,654$131,007Marketing and DistributionThe Excess and Surplus Lines segment distributes its products through a select group of licensed E&S linesbrokers that we believe can produce reasonable volumes of quality business for James River Insuranceconsistently. These brokers procure policies for their clients from us as well as from other insurance companies.At December 31, 2015, the segment had authorized 127 broker groups to work with us. The Excess and SurplusLines segment generally makes broker authorizations by brokerage office and underwriting division. With theexception of its small hired and non-owned auto program (combined premiums of approximately $5.5 millionfor 2015) the Excess and Surplus Lines segment does not grant its brokers underwriting or claims authority.Our Excess and Surplus Lines segment selects its brokers based upon management’s review of theexperience, knowledge and business plan of each broker. While many of our Excess and Surplus Lines segment’sbrokers have more than one office, we evaluate each office as if it were a separate entity. Often, our Excess andSurplus Lines segment authorizes some but not all offices owned by a brokerage for specialized lines ofbusiness. Brokers must be able to demonstrate an ability to competently produce both the quality and quantityof business that we seek. Brokers unable to produce consistently profitable business, or who produceunacceptably low volumes of business, may be terminated. Our Excess and Surplus Lines segment’s underwritersregularly visit with brokers in their offices in order to discuss the products that we offer and the needs of thebrokers. We believe the personal relationships we foster with individual brokers and our ability to respond to awide variety of risks placed by these brokers make us an important market for them.Our Excess and Surplus Lines segment’s two largest brokers produced $129.9 million of gross writtenpremiums for the year ended December 31, 2015, representing approximately 42.1% of the Excess and SurplusLines segment’s gross written premiums for 2015. The two largest brokers produced $87.9 million (BB&TInsurance Services) and $42.0 million of gross written premiums for the year ended December 31, 2015,respectively. The top two brokers each accounted for more than 10% of our gross written premiums in thissegment for such year. Our third largest broker produced $29.4 million of gross written premiums in 2015.In 2015 and 2014, our Excess and Surplus Lines segment paid an average commission to producers of16.1% and 17.0%, respectively, of gross written premiums.13%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%TABLE OF CONTENTSUnderwritingOur Excess and Surplus Lines segment’s staff includes over 100 individuals directly employed inunderwriting policies. We believe our internal business processing systems allow us to maintain a high ratio ofunderwriters to total employees.We are very selective about the policies we bind. Our Excess and Surplus Lines segment bindsapproximately 3% of new submissions and one out of every six quotes. We realize all excess and surplus linesapplications have already been rejected by the standard market. If our underwriters cannot reasonably expect tobind coverage at the combination of premiums and coverage that meet our standards, they are encouraged toquickly move on to another prospective opportunity. For the year ended December 31, 2015, we receivedapproximately 166,400 submissions (new and renewal), quoted 37,300 policies and bound 12,300 policies.When we accept risk in our Excess and Surplus Lines segment, we are careful to establish terms that aresuited to the risk and the pricing. As an excess and surplus lines writer, we use our freedom of rate and form inorder to make it possible to take on risks that have already been rejected by admitted carriers who havedetermined they cannot insure these risks on approved forms at filed rates.We attempt to craft policies that offer affordable protection to our insureds by tailoring coverage in waysthat make potential losses more predictable and are intended to reduce claims costs. For example, we frequentlyuse a “punitive damages exclusion” and “defense inside the limits” endorsements, intended to prevent excessivedefense costs; “assault and battery” exclusions or sub limits that are less than the full policy limits which allowsus to quantify and limit our losses more precisely than in policies without the exclusion; and “classificationlimitation” and “specified location” endorsements that limit coverage to known exposures and locations. Wehave no material exposure to asbestos, lead paint, silica, mold, or nuclear, biological, or chemical terrorism.We design our internal processing and data collection systems to provide our management team withaccurate and relevant information in real-time. Our data warehouse collects premium, commission and claimsdata, including detailed information regarding policy price, terms, conditions and the nature of the insured’sbusiness. This data allows us to analyze trends in our business, including results by individual broker,underwriter and class of business and expand or contract our operations quickly in response to marketconditions. We rely on our information technology systems in this process. Additionally, the claims staff alsocontributes to our underwriting operations through its communication of claims information to our underwriters.ClaimsOur Excess and Surplus Lines segment’s claims department consists of approximately 100 claimsprofessionals who have an average of 10 years of claims experience in the property casualty industry as ofDecember 31, 2015.Our excess and surplus lines business generally results in claims from premises/operations liability,professional liability, hired, and non-owned auto liability, auto physical damage, first party property losses andproducts liability. We believe the key to effective claims management is timely and thorough claimsinvestigation. We seek to complete all investigations and adjust reserves appropriately as soon as is practicableafter the receipt of a claim. We seek to manage the number of claims per adjuster to allow adjusters sufficienttime to investigate and resolve claims. Each quarter, senior management reviews each case above a specifiedamount to ensure that the front-line adjuster has recognized and is addressing the key issues in the case and hasadjusted the reserve to the appropriate amount. We keep the settlement authority of front-line adjusters low toensure the practice of having two or more members of the department participate in the decision as to whether tosettle or defend. In addition, cases with unusual damage, liability or policy interpretation issues are subjected topeer reviews on a weekly basis. Members of the underwriting staff participate in this process. Prior to anyscheduled mediation or trial involving a claim, claims personnel conduct further peer review to make sure allissues and exposures have been adequately analyzed. We believe that effective management of litigation avoidsdelays and associated additional costs.Our claims staff also contributes to our underwriting operations through communication of claimsinformation to our underwriters. The Vice President of Claims heads our forms committee, which reviews anddevelops all policy forms and exclusions and is also a member of the underwriting review committee.14•our traditional workers’ compensation business (39.5% of 2015 gross written premiums in thissegment, 50.7% in 2014, 97.3% in 2013, and 100% in 2012; and•program and fronting business written through selected MGAs, insurance carriers, and other producers(60.5% of 2015 gross written premiums in this segment, 49.3% in 2014, 2.7% in 2013, and 0.0% in2012).TABLE OF CONTENTSAs of December 31, 2015, approximately 90% of claims were closed within five years in the Excess andSurplus Lines segment.The calendar year loss ratios for the Excess and Surplus Lines segment for the last nine years were 56.1% for2007, 61.4% for 2008, 62.6% for 2009, 54.9% for 2010, 48.5% for 2011, 52.6% for 2012, 40.4% for 2013,55.2% for 2014, and 54.5% for 2015.Specialty Admitted Insurance SegmentThe Falls Lake Group comprises our other U.S. insurance segment, Specialty Admitted Insurance. Weestablished this segment in 2004 to underwrite workers’ compensation insurance for residential contractors inNorth Carolina. Initially, we only sought licensure in North Carolina. Later, as our plans for this segmentevolved, we sought and obtained additional licensure. The Falls Lake Group Companies are currently licensedto underwrite admitted insurance in 48 states and the District of Columbia. The Falls Lake Group consists ofFalls Lake National Insurance Company (an Ohio domiciled company), Stonewood Insurance Company (a NorthCarolina domiciled company), Falls Lake General Insurance Company (an Ohio domiciled company), and FallsLake Fire and Casualty Company (a California domiciled company).We plan to use our broader licensure and management expertise to earn substantial fee income as well asunderwriting profits. The Specialty Admitted Insurance segment consists of:Traditional Workers’ Compensation BusinessOur individual risk workers’ compensation business remains a regionally focused effort. For the year endedDecember 31, 2015, approximately 70% of our workers’ compensation direct written premiums were in NorthCarolina, 17% were in Virginia, 10% were in South Carolina and 3% were in Tennessee. Due to more favorablemarket conditions currently, we are currently growing this business line. Construction workers as a class,regardless of industry, represented approximately 33% of the direct premiums in force in our workers’compensation book in 2015. Other significant classes include healthcare employees (19%), goods and services(13%), and manufacturing workers (13%). We view our workers’ compensation business as a core competency,and seek to make consistent underwriting profits from it. We also recognize the cyclical nature of this line, andare prepared to contract the business rapidly when rates decline or the regulatory or economic environmentmakes it difficult to contain costs. We distribute our workers’ compensation product through independentagents.Program BusinessAs part of our plan to become less susceptible to admitted market cycles, we have begun to expand intoprogram business. In a program arrangement, we give selected MGAs authority to produce, underwrite andadminister policies that meet our underwriting and pricing guidelines. We enter into these arrangementsselectively with agents who have significant experience and market presence in specialty risks. Seven programswere active and producing business as of December 31, 2015 and had combined gross written premiums of $33.6 million for 2015. The underwriting is subject to regular audit by our staff, and we have electronic access tothe underwriting systems of these agents, which facilitates our real-time supervision of their work. An example ofthe type of risks we take on in these programs is school bus and para transit programs in northeastern states. Wefocus our coverage on casualty risks, although some incidental property insurance is written. We seek to limitour risk generally through reinsurance either on a proportional or excess of loss basis, or both. We generally takeup to $500,000 of loss per occurrence or per risk, net of reinsurance.Under the terms of these program agreements, we pay lower commissions when underwriting profits are lowor lacking and we increase commissions when the business proves particularly profitable. In addition, wetypically build in a substantial “spread” between the commission we earn from our reinsurers15•We provide proportional and working layer reinsurance to unaffiliated U.S.-based insurancecompanies. We underwrote $172.5 million in gross written premiums for the year ended December 31,2015. Of the third-party premiums written by JRG Re, 52% is for general liability coverage (much ofthis business is E&S premium), 19% is workers’ compensation insurance, 16% is personal autocoverage, 8% is commercial auto coverage, and the rest is excess casualty or non-medical professionalliability. We typically structure our reinsurance policies as quota share arrangements with loss and riskmitigating features that align our interest with that of the ceding companies. At December 31, 2015,97% of our third-party treaties are written as “proportional” arrangements and 86% of our treaties aresubject to loss mitigation features. We purchase very little retrocessional coverage in this segment.•We also have a direct intercompany reinsurance agreement under the terms of which 70% of the netwritten premiums of our U.S. subsidiaries (after taking into account third-party reinsurance)TABLE OF CONTENTSand the commissions paid to the MGA. This spread enhances our underwriting returns. We distribute ourprogram business through MGAs and program managers.For initial claims oversight and administration in our program business, we generally outsource frequencylayer claims management to third-party administrators for the first $50,000 of a claim, and then assume directcontrol above this amount.Fronting BusinessOur Specialty Admitted Insurance segment has a small but growing fronting business, also intended toreduce our susceptibility to market cycles (three programs in place as of December 31, 2015, with combinedgross written premiums of $19.7 million for 2015). Fronting means that we issue insurance policies for anotherinsurance entity or capital pool that may not have the licenses or rating to serve its desired market. The issuanceof our policy makes us contractually responsible to the insured in the event they experience a covered loss. Inour fronting business, we expect that claims will be paid by the party for whom we agreed to front. Typically, forthese fronting arrangements, we require a deposit of liquid assets into a collateral trust equal to or greater thanthe amount of any and all receivables that we have from the entity with whom we have written the frontingarrangement. In many instances, we seek and receive collateral in excess of any and all actuarially estimatedreceivables from such company to provide protection against unforeseen adverse performance. We charge fees asa percentage of gross written premiums for issuing these policies. We establish fronting opportunities through avariety of sources, including direct carrier relationships, MGAs and reinsurance brokers.Similar to our program business, for initial claims oversight and administration in our fronting business, wegenerally outsource frequency layer claims management to the insurance entity or capital pool in the frontingarrangement for the first $50,000, and then assume direct control above this amount.As of December 31, 2015, approximately 90.0% of claims were closed within three years in the SpecialtyAdmitted Insurance segment.Our objective over time, is to utilize the combination of fee income and underwriting profits available toour Specialty Admitted Insurance segment to generate returns on tangible equity consistent with results in ourExcess and Surplus Lines segment. Additionally, we expect that this fee income will become material in futureperiods and provide us with a steady revenue stream relatively insulated from the pricing cycles of the admittedinsurance market.Casualty Reinsurance SegmentWe report our business of writing insurance for insurance companies in our Casualty Reinsurance segment.We participate in the reinsurance business through our Bermuda domiciled reinsurance subsidiary, JRG Re,which is a Class 3B reinsurer. JRG Re provides proportional and working layer insurance to third parties and toour U.S.-based insurance subsidiaries. For purposes of management evaluation, this segment’s underwritingresults only include premiums ceded by, and losses incurred with respect to business assumed from unaffiliatedcompanies and does not include premiums and losses ceded under the internal quota share arrangementdescribed below. Business flows to JRG Re from the following two sources:16TABLE OF CONTENTSare ceded to JRG Re in Bermuda. In 2015, our U.S. subsidiaries ceded $208.7 million in premiums toJRG Re. This business is ceded to JRG Re under a proportional, or quota-share, reinsurance treaty thathas an arm’s length ceding commission. We do not pay corporate income tax on earnings (includinginvestment income) in Bermuda. We do, however, pay a 1% U.S. Federal excise tax on premiumsceded to JRG Re.Almost all of the segment’s premiums are for casualty coverages. The Casualty Reinsurance segment writesvery little property business and virtually no reinsurance designed to respond to catastrophic events of any kind.For example, we had a $203,000 loss in our Casualty Reinsurance segment from Superstorm Sandy, whichoccurred in 2012, entirely from one treaty where we reinsured property exposures on motorcycles. During theyear ended December 31, 2015, our Casualty Reinsurance segment generated an underwriting loss of $2.6million when analyzed as a stand-alone entity, without the benefit of the premiums ceded from our Excess andSurplus Lines segment and Specialty Admitted Insurance segment.The Casualty Reinsurance segment conducted business with three brokers that generated $127.6 million ofgross written premiums for the Casualty Reinsurance segment in the year ended December 31, 2015,representing 73.8% of the gross written premiums of the Casualty Reinsurance segment for such year. The threelargest brokers produced $84.9 million (Atlantic Intermediaries), $27.4 million, and $15.3 million of grosswritten premiums for the year ended December 31, 2015, respectively, only the two largest brokers producedmore than 10% of the segment’s gross written premiums for the year.Underwriting profits and investment income earned by our Bermuda reinsurance company are exempt fromU.S. taxation. One effect of the quota share arrangement between our domestic companies and JRG Re is that anincreasing percentage of our assets are located in Bermuda. At December 31, 2015, approximately 67% of ourtotal cash and invested assets were located in Bermuda.Corporate and Other SegmentOur Chairman and Chief Executive Officer, President and Chief Operating Officer and Chief FinancialOfficer and other holding company employees are part of the Corporate and Other segment. This is where we setand direct strategy for the group as a whole as well as high level objectives for each of the three operatingsegments. We make all capital management, capital allocation, treasury functions, information technology andgroup wide risk management decisions in this segment. Our decisions at this level also include reinsurancepurchasing.Financial Information About SegmentsFinancial and other information by segment for the fiscal years ended December 31, 2015, December 31,2014 and December 31, 2013 is set forth in Note 18 to our Consolidated Financial Statements includedelsewhere in this Annual Report.Purchase of ReinsuranceWe routinely purchase reinsurance for our Excess and Surplus Lines and Specialty Admitted Insurancesegments and, less frequently purchase retrocessional coverage for our Casualty Reinsurance segment to reducevolatility by limiting our exposure to large losses and to provide capacity for growth. In a reinsurancetransaction, an insurance company transfers, or cedes, all or part of its exposure in return for a portion of thepremium. In a retrocession transaction, a reinsurer transfers, or cedes, all or part of its exposure in return for aportion of the premium. Our companies remain legally responsible for the entire obligation to policyholders andceding companies, irrespective of any reinsurance or retrocession coverage we may purchase. Typically, we payclaims from our own funds and then seek reimbursement from the reinsurer or retrocessionaire, as applicable.There is credit exposure with respect to losses ceded to the extent that any reinsurer or retrocessionaire is unableor unwilling to meet the obligations ceded by us under reinsurance or retrocessional treaties. The ability tocollect on reinsurance or retrocessional reinsurance is subject to many factors, including the solvency of thecounterparty and their interpretation of contract language and other factors. We currently have no disputes withany reinsurer or retrocessionaire and we are not aware of any credit problems with any of the group’s reinsurers orretrocessionaires.17TABLE OF CONTENTSPurchased Property ReinsuranceOur focus on return on tangible equity leads us to avoid lines of business that are exposed to high degreesof volatility. The Excess and Surplus Lines segment writes a limited book of excess property risks(approximately $12.5 million direct written premiums in 2015). The risks assumed in this book aregeographically dispersed and significantly reinsured to limit losses. The Excess and Surplus Lines segmentretains up to $5.0 million per risk on our excess property book; however, the average retained amount per risk isapproximately $3.2 million. In our Specialty Admitted Insurance segment, we focus on casualty business, but wedo write a limited amount of property insurance, principally through our programs and fronting business. Thefocus in our Casualty Reinsurance segment is also primarily casualty business, but we do have a small amount ofassumed business with property exposure.In our Excess and Surplus Lines segment, we purchased a surplus share reinsurance treaty specificallydesigned to cover property risks. The surplus share treaty along with facultative reinsurance helps ensure thatour net retained limit per risk will be $5.0 million or below. Additionally, we purchased catastrophe reinsuranceof $40.0 million in excess of a $5.0 million retention that is intended to cover the 1,000 year modeled PML onthe segment’s excess property book (in the aggregate). Where the Specialty Admitted Insurance segment incursincidental property risks in its program book of business, the segment is covered for $4.0 million in excess of $1.0 million per occurrence. This is also intended to cover the 1,000 year modeled PML on any propertyexposures the Specialty Admitted Insurance segment assumes. In our Casualty Reinsurance segment, we believethat our maximum loss from a catastrophic event is approximately $1.0 million, and we do not currentlypurchase retrocessional reinsurance coverage for property-catastrophe risks. In aggregate, therefore, we believeour pre-tax group-wide PML from a 1,000 year catastrophic event is approximately $10.0 million, inclusive ofreinstatement premiums payable.Purchased Casualty ReinsuranceIn our Excess and Surplus Lines segment, in four of our divisions we only write $1.0 million per occurrencelimits (Manufacturers & Contractors, General Casualty, Small Business and Sports and Entertainment), and wedo not purchase any reinsurance for these policies. In our other divisions, where we issue policies with largerlimits, we purchase reinsurance in excess of $1.0 million per occurrence.In our Specialty Admitted Insurance segment at December 31, 2015, we retain the first $600,000 peroccurrence in losses on individual risk workers’ compensation policies and are reinsured above that level to$30.0 million per occurrence, with a maximum reinsured recovery of $10.0 million for any one life. On otherlines of business in our program and fronting business, we purchase proportional reinsurance and excess of lossreinsurance to limit our exposure to no more than $500,000 per occurrence.For both our Excess and Surplus Lines segment and our Specialty Admitted Insurance segment, we purchasea clash and contingency reinsurance treaty that covers us for $6.0 million in excess of $2.5 million which wouldcover us, for example, in a situation where we have multiple insureds who have losses from the same event.In our Casualty Reinsurance segment, we currently do not purchase any material retrocessional reinsurance.In prior periods, we have purchased proportional retrocessional coverage for particular situations related tospecific treaties, but have only done so on a limited basis.18(1)These reinsurers are unrated, and we are collateralized for the recoverable amounts.•Loss emergence and insured reporting patterns;•Underlying policy terms and conditions;•Business and exposure mix;•Trends in claim frequency and severity;•Changes in operations;TABLE OF CONTENTSFor 2015, our top ten reinsurers represented 86.5% of our total ceded reinsurance recoverables, and all ofthese reinsurance recoverables were from reinsurers with an A.M. Best rating of “A-” (Excellent) or better or arecollateralized with letters of credit or by a trust agreement. The following table sets forth our ten most significantreinsurers by amount of reinsurance recoverables and the amount of reinsurance recoverables pertaining to eachsuch reinsurer as well as its A.M. Best rating as of December 31, 2015:ReinsurerReinsurance Recoverable as of December 31, 2015A.M. Best Rating December 31, 2015(in thousands)Berkley Insurance Company$33,559A+Swiss Reinsurance America Corporation26,579A+Madison Insurance Company15,261UnratedMountain States Insurance Company9,943B++Pacific Valley Insurance Company8,085UnratedQBE Reinsurance Corporation6,501ALloyd’s Syndicate Number 44723,750ALloyd’s Syndicate Number 20033,600AMunich Reinsurance America3,428A+Safety National Casualty3,254A+Top 10 Total113,960Other17,828Total$131,788Reserve PolicyOver time, many insurance companies have underestimated the cost of future losses associated withinsurance policies issued. We seek to establish reserves that will adequately meet our obligations. We have sixactuaries on staff, and we engage independent actuarial consultants to review our decisions regarding reservestwice a year.When setting our reserves, we use a blend of actuarial techniques that are chosen to reflect the nature of thelines of insurance we underwrite. We seek to be consistent and transparent in establishing our reserves.In many cases, several years may elapse between the occurrence of an insured loss, the reporting of the lossand our eventual payment of the loss. We establish loss and loss adjustment expense reserves for the ultimatepayment of all losses and loss adjustment expenses incurred. We estimate the reserve for losses and lossadjustment expenses using individual case-basis valuations of reported claims. We also use statistical analysesto estimate the cost of losses that have been incurred but not reported to us. These estimates are based onhistorical information and on estimates of future trends that may affect the frequency of claims and changes inthe average cost of claims that may arise in the future. We also consider various factors such as:19(1)(1)•Emerging economic and social trends;•Inflation;•Changes in the regulatory and litigation environments; and•Discussions with third-party actuarial consultants.(1)Casualty Reinsurance segment includes the underwriting results of our assumed crop reinsurance businesswhich was terminated effective December 31, 2012.(2)Includes $17.3 million and $10.5 million of favorable development from the 2014 and 2013 accident year,respectively.(3)Includes $7.9 million of favorable development from the 2011 accident year, $4.2 million from the 2007accident year and $5.0 million from the 2009 accident year.(4)Includes $11.8 million of favorable development from the 2009 accident year, $7.3 million of favorabledevelopment from the 2007 accident year and $5.8 million of favorable development from the 2008accident year.(5)Includes $8.0 million of favorable development from the 2009 accident year, $4.3 million of favorabledevelopment from the 2008 accident year and $4.1 million of favorable development from the 2007accident year.(6)$9.0 million of adverse development on assumed crop business almost entirely from the 2011 accident yearand $7.6 million of adverse development on other assumed business.TABLE OF CONTENTSThe procedures we use to estimate loss reserves assume that past experience, adjusted for the effects ofcurrent developments and anticipated trends, is an appropriate basis for predicting future events. It also assumesthat adequate historical or other data exists upon which to make these judgments. These estimates are by theirnature subjective and imprecise, and ultimate losses and loss adjustment expenses may vary from establishedreserves.Our Reserve Committee consists of our Chief Actuary, our President and Chief Operating Officer, our ChiefFinancial Officer, our Chief Accounting Officer. Additionally, the presidents and chief actuaries of each of ourthree insurance segments assist in the evaluation of reserves in their respective segments. The ReserveCommittee meets quarterly to review the actuarial recommendations made by each chief actuary and uses its bestjudgement to determine the best estimate to be recorded for the reserve for losses and loss adjustment expenseson our quarterly balance sheet.The following table reflects our reserve development by segment during the calendar years 2015 to 2008individually and in aggregate.SegmentExcess and Surplus LinesSpecialty Admitted InsuranceCasualty ReinsuranceGrand TotalCalendar Year2015$25,424$3,531$(12,637$16,318201427,2835,854(5,71927,418201340,7341,410(4,69237,452201220,122(4,898(16,617(1,393201121,0341,712(2,83519,911201010,922(381(8579,68420093,1931,591(1,0673,71720086,4961,875—8,371Cumulative Development$155,208$10,694$(44,424$121,47820(1)(2))(3))(4))(5)))(6)))))))TABLE OF CONTENTSAmong the indicators of reserve strength that we monitor closely are the number of claims outstanding froma given year and the amount of IBNR reserves held on our balance sheet for claims that have been incurred butnot yet reported to us. As a general rule, every known claim has a specific case reserve established against itwhich management believes is adequate to resolve the claim and pay attendant expenses.A significant portion of reported claims from prior policy years were closed at December 31, 2015. Thetable below sets forth the percentage of claims closed by policy year for our Excess and Surplus Lines andSpecialty Admitted Insurance segments for the policy years indicated.Percentage of Claims Closed at December 31, 2015Policy YearExcess and Surplus Lines SegmentSpecialty Admitted Insurance Segment200499.799.8200599.1100.0200699.1100.0200798.9100.0200898.299.9200997.099.8201094.599.7201191.299.2201285.898.4201390.296.6201483.186.0Another indicator of reserve strength that we monitor closely is the percentage of our gross and net lossreserves that are comprised of IBNR reserves. The table below sets forth our IBNR, total gross reserves and thepercentage that IBNR represents of the total gross reserves, in each case by segment and in the aggregate, atDecember 31, 2015. The percentage that IBNR represents of total gross reserves at December 31, 2015 is 68.0%.Gross Reserves at December 31, 2015IBNRTotalIBNR % of Total(in thousands)Excess and Surplus Lines$369,210$468,32678.8Specialty Admitted Insurance38,62576,17950.7Casualty Reinsurance126,519240,81752.5Total$534,354$785,32268.021%%%%%%%%%%%%%%%%%%%%%%%%%%TABLE OF CONTENTSThe table below sets forth our IBNR, total net reserves and the percentage that IBNR represents of the totalnet reserves, in each case by segment and in the aggregate, at December 31, 2015. The percentage that IBNRrepresents of total net reserves at December 31, 2015 is 68.0%, down from 70.3% at December 31, 2014.Net Reserves at December 31, 2015IBNRTotalIBNR % of Total(in thousands)Excess and Surplus Lines$298,251$384,11977.6Specialty Admitted Insurance24,74149,36750.1Casualty Reinsurance121,350220,04855.1Total$444,342$653,53468.0Reserve DevelopmentWe maintain reserves for specific claims incurred and reported, reserves for claims incurred but not reportedand reserves for uncollectible reinsurance when appropriate. Our ultimate liability may be greater or less thancurrent reserves. In the insurance industry, there is always the risk that reserves may prove inadequate. Wecontinually monitor reserves using new information on reported claims and a variety of statistical techniques.Anticipated inflation is reflected implicitly in the reserving process through analysis of cost trends and thereview of historical development. We do not discount our reserves for losses and loss adjustment expenses toreflect estimated present value.The following table presents the development of balance sheet property casualty loss reserves calculated inaccordance with GAAP, as of December 31 in each of the years 2007 through 2015. This table does not presentaccident or policy year development data. The top line of the table shows the gross reserves as of December 31for each of the indicated years and is reconciled to the net reserve by adjusting for reinsurance recoverables. Thisrepresents the estimated amount of net loss and loss adjustment expense arising in the current year and all prioryears that are unpaid at the balance sheet date, including IBNR reserves. The table also shows the re-estimatedamount of the previously recorded reserves as adjusted for new information received as of the end of eachsucceeding year.The estimates change as more information becomes known about the frequency and severity of claims forindividual years. The “net cumulative redundancy” represents the aggregate change to date from the originalestimate on the third line of the table, “reserves for property casualty losses originally stated, net of reinsurance.”The “gross cumulative redundancy” represents the aggregate change to date from the original estimate on thetop line of the table, “gross reserves for property casualty losses.” The table also shows the cumulative net paidamounts as of successive years with respect to the net reserve liability. For example, the liability for losses andloss adjustment expenses net of reinsurance at the end of 2008 for 2008 and all prior years was originallyestimated to be $354.1 million. Seven years later, as of December 31, 2015, this amount was re-estimated to be$280.9 million, of which $264.2 million had been paid, leaving a reserve of $16.7 million for losses and lossadjustment expenses for 2008 and prior years remaining unpaid as of December 31, 2015.22%%%%TABLE OF CONTENTS200720082009201020112012201320142015Gross reserves for propertycasualty losses$394,209$434,588$477,519$511,386$565,955$709,721$646,452$716,296$785,322Reinsurance recoverable98,19080,53480,89489,79389,194175,812119,467127,254131,788Reserves for property casualtylosses originally stated, net ofreinsurance296,019354,054396,625421,593476,761533,909526,985589,042653,534Cumulative net paid losses,1 year later68,05590,36093,118115,667177,325171,925153,000187,2772 years later126,998151,646174,540205,251290,710290,731294,6763 years later160,548196,005226,637255,301360,629386,8004 years later183,317226,552259,706288,513422,7995 years later198,569242,538280,804319,0416 years later206,372253,616300,0927 years later211,662264,1598 years later217,141Net reserves re-estimated as of1 year later287,649350,337386,940401,682478,155496,457490,442560,3452 years later285,316340,284356,758387,183440,108463,459490,0773 years later277,918319,067341,377351,427414,877471,2434 years later260,935308,755311,756328,754420,8835 years later253,269290,705294,324331,9556 years later240,698279,695297,0107 years later233,879280,9508 years later235,541Net cumulative redundancy60,47873,10599,61589,63955,87862,66636,90828,696Net reserves for losses and lossadjustment expenses re-estimated235,541280,950297,010331,954420,883471,243490,077560,345Reinsurance recoverable re-estimated72,02454,46736,91332,72154,397143,99495,595119,212Gross reserves for losses and loss adjustment expenses re-estimated307,566335,417333,923364,676475,280615,236585,672679,557Gross cumulative redundancy86,64499,172143,595146,71190,67494,48460,78036,739Net cumulative redundancy represents the change in the estimate from the original balance sheet date to thedate of the current estimate. For example, the liability for losses and loss adjustment expenses developed a $73.1million redundancy from December 31, 2008 to December 31, 2015. Conditions and trends that have affectedthe development of loss reserves in the past may not necessarily occur in the future. Accordingly, it may not beappropriate to extrapolate future redundancies or deficiencies based on the table. Gross cumulative redundancyis presented before deductions for reinsurance. Gross deficiencies and redundancies may be significantly more orless than net deficiencies and redundancies due to the nature and extent of applicable reinsurance.See Note 6 to the Notes to the Audited Consolidated Financial Statements and the discussion under“Critical Accounting Estimates” for a discussion of estimates and assumptions related to the reserves for lossesand loss adjustment expenses.Investment StrategyOne benefit of reinsuring a portion of our business to a Bermuda affiliate is that we have been able to build,and expect to continue building, a substantial asset base in a domicile where corporate earnings, includinginvestment returns, are not taxed. At December 31, 2015, approximately 67.0% of our cash and invested assetswere held in Bermuda with the remainder held by our U.S. subsidiaries.23TABLE OF CONTENTSThe prolonged low interest rate environment has made it more difficult for insurance companies to earnattractive returns on capital because of reduced investment income. Our premium growth has allowed us to buildour asset base. Cash and invested assets now represent 2.9 times our tangible equity.We attempt to generate better than market average risk-adjusted returns in our investment portfolio bytaking measured risks based upon detailed knowledge of certain niche asset classes. We seek to make “bothsides” of the balance sheet work to generate better than market average risk-adjusted returns. While we arewilling to make investments in non-traditional types of investments, we avoid risks that we do not understandwell, as well as structures or situations we think could cause substantial loss of capital.The majority of our investment portfolio is invested in what we refer to as our Core Portfolio of investmentgrade fixed income securities. This portfolio provides predictable income with low risk of principal loss. Weseek to augment the return on the Core Portfolio by investing in bank loans, higher yielding securities andprivate investments. We designed these strategies to improve our investment return and are focused onopportunistic investing in areas where we believe our management, directors or employees have expertise orunderstanding of the risk and return of the investment.Our strategy is designed to earn higher returns than an investment grade fixed income strategy alone whilemaintaining a high overall credit rating and investing in asset classes and allocations that are consistent with theinsurance regulatory and rating agency framework within which we operate. We generally focus on securitiesthat provide some current income.A summary of our investment portfolio at December 31, 2015 is as follows:December 31, 2015PortfolioBook ValueMarket ValueCarrying ValueBook Yield% of Carrying Value($ in millions)Core$859.1$863.4$863.42.4865.8Bank Loans247.3230.3241.95.3418.4Incremental Yield137.1142.8142.85.8510.9Private Investments63.9NA4.9Total1,312.0100.0Less cash and cash equivalents in Coreand Bank Loans(67.7Total Invested Assets$1,244.3We have generally managed our overall portfolio to a duration of 3 to 5 years. At December 31, 2015, theaverage duration of our investment portfolio, excluding bank loans, was 4.3 years, and the duration for bankloans is 0.2 years (since nearly all of them have floating rates of interest), resulting in an approximate durationfor the entire portfolio of 3.5 years.Core PortfolioThe Core Portfolio consists of cash and investment grade fixed income securities. Our objective in the CorePortfolio is to earn attractive risk-adjusted returns with a low risk of loss of principal. We use a third-partymanager(s) to manage the Core Portfolio.Bank LoansThe Bank Loan portfolio primarily consists of investments in participations in syndicated bank loans, butmay also include a small allocation of bonds. Bank loans in our portfolio are generally senior secured loans withan average credit quality of “B” and floating interest rates based on spreads over LIBOR. We believe bank loansare an attractive asset class because (1) floating-rate loans help to reduce our risk of loss in the event of risinginterest rates, (2) the loans are generally senior secured, (3) the asset class has a history of relatively highrecovery rates in the event of default, (4) the portfolio provides an attractive yield and24%%%%%%%%)TABLE OF CONTENTS(5) the maturities of the loans are relatively short (average of 5 years). We invest in this asset class by owningindividual loan participations that are carried at amortized cost less any loan loss allowance. We have over fiveyears of experience in investing in this asset class through a third-party manager.Incremental Yield PortfolioThe Incremental Yield Portfolio consists of investments in low investment grade and below investmentgrade bonds, preferred stocks, dividend paying common equities and publicly-traded partnerships. The averagecredit quality of the fixed income securities in this portfolio as of December 31, 2015 is BBB. We generallyinvest in fixed income securities where we believe that risk of default is low relative to the potential yield on thesecurities. Historically, we made significant purchases of below investment grade securities that were trading at adiscount to par. More recently as such opportunities are limited, we have been opportunistically investing inhigh yield securities where we believe we have expertise or an understanding of the risk. We own preferredstocks, generally in the financial services industry. In some instances, we will purchase common equitysecurities and master limited partnerships. However, these purchases are generally used as an effective means toget access to some high yielding asset class. As of December, 2015, only $10.9 million of the Incremental YieldPortfolio is invested in common equities and master limited partnerships. The Incremental Yield Portfolio wasinitiated in 2010.Private Investment PortfolioWe make selective investments in private debt or equity securities in areas where we see significantopportunity or attractive risk and return characteristics. We focus on investments where we believe we have anunderstanding of the risk and opportunity and have the ability to monitor them closely. At December 31, 2015,we held ten private investments and one publicly-traded equity investment with a total carrying value of $63.9million. Our portfolio consists of investments in wind and solar energy, banking, and small cap equities, loans ofmiddle market private equity sponsored companies, and equity tranches of collateralized loan obligations(CLOs). We are opportunistic in our private investment strategy and our portfolio may grow or shrink based onthe opportunities available to us. Despite being only 4.9% of our portfolio, we believe our Private InvestmentPortfolio has added meaningful returns to our tangible equity. Our Private Investment strategy has significantrisk and not all investments are successful. As a result, we intentionally keep this portfolio as a small portion ofthe overall investment portfolio.Our recent total returns on our portfolio are as follows:201320142015Trailing 3 years Ended 2015Core(1.303.111.160.98Bank Loans8.951.15(1.002.94Incremental1.4110.577.266.35Total1.003.761.472.07Total returns are calculated as the realized or unrealized gain or loss of an asset plus interest and dividendspaid while the asset is held.We consider a portion of our investment portfolio to be invested in non-traditional investments. Weconsider non-traditional investments to include investments that are (1) not rated bond or fixed incomesecurities (2) non-listed equities or (3) investments that generally have less liquidity than rated bond or fixedincome securities or listed equities. Non-traditional investments held at December 31, 2015 and their respectivepercentage of our total invested assets at such date consist of syndicated bank loans (15.4%), interests in limitedliability companies that invest in renewable energy opportunities (2.1%), limited partnerships that invest in debtor equity securities (1.4%), and private debt securities (0.9%). We will continue to actively review opportunitiesto invest in non-traditional assets and may invest in additional non-traditional assets in the future.Our invested assets totaled $1,244.3 million as of December 31, 2015. The weighted average credit rating ofour portfolio of fixed maturity securities, bank loans and redeemable preferred stocks as of December 31, 2015was “A”. We have intentionally maintained a cautious interest rate risk position by25)%%%%%%)%%%%%%%%%%TABLE OF CONTENTShaving an average duration of approximately 3.5 years at December 31, 2015. This duration represents anincrease from our duration at December 31, 2014 and 2013. Based on the current duration of 3.5 years, a 1.0%increase in interest rates would result in a pretax decline in the market value of our portfolio of approximately$43.3 million.Insurance Cycle Management and GrowthThe insurance and reinsurance business is cyclical in nature, with “hard” and “soft” cycles. Hard marketsoccur when insurance underwriters limit their exposure in a line of business or across their entire portfolio. Whenunderwriters exercise restraint, insurance buyers are forced to pay more to induce underwriters to cover theirrisks. A hard market can also be created by economic expansions when capital committed to backing insurancepolicies does not grow as fast as the demand for insurance. There is generally a correlation between interest ratesand the willingness of insurance companies to commit their capital to writing insurance. When fixed incomeyields are low, insurance companies need to raise insurance prices to improve underwriting results in order tooffset loss of investment income.We are currently in a growth phase for our U.S. primary operations. In both our Excess and Surplus Linesand Specialty Admitted Insurance segments, we are experiencing growth in premiums driven by stable rates aswell as increases in policy count and exposures. The table below shows the changes in gross written premiumswe have experienced in our operating segments from 2013 through 2015.201520142013Gross Written Premiums$% Change$% Change$% Change($ in thousands)Excess and Surplus Lines$308,71722.2$252,70731.3$192,39421.3Specialty Admitted Insurance90,97853.259,380188.320,594(43.9Casualty Reinsurance172,499(16.5206,68032.9155,530(47.6Total$572,19410.3$518,76740.8$368,518(25.1In years prior to those presented, the business written at our U.S. primary operations has, at times, beensubject to “soft” market conditions, reflected both in price decreases and reduced underlying exposures. Therecession in the United States from 2008 to 2010 was a significant driver of these soft market conditions.Our Excess and Surplus Lines segment is the most sensitive to hard and soft markets. We have, therefore,sought to diversify this business by geography, line of business and also revenue stream. From 2006 to 2010, wereduced the gross written premiums in this business from $249.1 million to $116.1 million, or 53.4%. While wehave been growing this business, and achieving increasing or stable rates for several periods throughDecember 31, 2015, there will likely be periods in the future where our growth moderates, stagnates or turnsnegative.We believe, however, that our Excess and Surplus Lines segment will be able to make an underwritingprofit regardless of the state of the underwriting cycle. This belief has been borne out by our historical results inthis segment which has had a weighted average combined ratio of 82.8% for the period from January 1, 2008through December 31, 2015.Traditionally, admitted insurance lines have been very susceptible to market cycles. We believe this trendis continuing. We seek to isolate ourselves from these trends in our Specialty Admitted Insurance segment bywriting lines of business we believe are slightly less competitive, by prudently purchasing reinsurance and bybeing willing to dramatically reduce our writings when market conditions warrant.A material portion of the profitability we seek to achieve from our program and fronting business will comefrom fee income that is generated via policies that are issued by our insurance companies and then mostly orwholly reinsured to third parties. Because we earn substantial fees from underwriting business on which weretain little or no insurance risk, this business can be profitable to us even in soft market conditions. We havewritten $55.0 million of gross written premiums for fronting and program business for 2015 ($12.4 million on anet basis), and we expect that this fee income will become material in future periods and provide us with a steadyrevenue stream that will be relatively insulated from conditions in the admitted insurance market.26%%%%%)%)%%)%%%)%TABLE OF CONTENTSIn the Casualty Reinsurance segment, we have the ability to manage the cycle by growing or shrinking ourbusiness according to market conditions and the corresponding prices and terms being offered for theassumption of specific risks. We have a small team of seven people in Bermuda who underwrite and administerthe business written by JRG Re in Bermuda. Accordingly, our overhead is low and does not necessitate usgrowing this business from its current size.CompetitionWe compete in a variety of markets against a variety of competitors depending on the nature of the risk andcoverage being underwritten. The competition for any one account may range from large international firms tosmaller regional companies in the domiciles in which we operate. To remain competitive, our strategy includes,among other measures: (1) focusing on rate adequacy and underwriting discipline, (2) leveraging ourdistribution network, (3) controlling expenses, (4) maintaining financial strength and issuer credit ratings and (5)providing quality services to agents and policyholders.Excess and Surplus LinesCompetition within the E&S lines marketplace comes from a wide range of carriers. In addition to matureE&S companies that operate nationwide, there is competition from carriers formed in recent years. The Excessand Surplus Lines segment may also compete with national and regional carriers from the standard marketwilling to underwrite selected accounts on an admitted basis. Competitors in this segment include ScottsdaleInsurance Company (Nationwide Mutual Group), Markel Corporation, Burlington Insurance Group, AXISCapital Holdings Limited, Arch Capital Group Ltd., Admiral Insurance Co. (W. R. Berkley Corporation),Lexington Insurance Company (American International Group, Inc.), Mt. Hawley Insurance Company (RLICorporation), Colony Specialty Insurance Company (Argo Group International Holdings, Ltd.), and HoustonCasualty Company (a subsidiary of Tokio Marine).Specialty Admitted InsuranceDue to the diverse nature of the products offered by the Specialty Admitted Insurance segment, competitioncomes from various sources. The majority of the competition for our workers’ compensation bsuiness comes fromregional companies or regional subsidiaries of national carriers in the domiciles in which they operate. Nationalcarriers tend to compete for program accounts along all product lines. Competitors in our workers’ compensationbusiness include Builders Mutual Insurance Company, Accident Fund, W. R. Berkley Corporation, AmericanInterstate Insurance Company (AMERISAFE, Inc.), and Amtrust. Competition for our fronting business includesState National Group, Republic Insurance Group, QBE, Allied World, and Amtrust.Casualty ReinsuranceThe reinsurance industry is highly competitive. We expect to compete with major reinsurers, most of whichare well-established, have a significant operating history and strong financial strength ratings and havedeveloped long-standing client relationships. Competitors in this segment include Maiden Holdings, Ltd.,Hamilton Re, Ltd., PartnerRe Ltd. and Third Point Reinsurance Ltd.RegulationBermuda Insurance RegulationThe Insurance Act 1978 and related rules and regulations (the “Insurance Act”) which regulates theinsurance business of JRG Re provides that no person shall carry on insurance business in or from withinBermuda unless registered as an insurer under the Insurance Act by the Bermuda Monetary Authority (the“BMA”). The BMA is required by the Insurance Act to determine whether the applicant is a fit and proper bodyto be engaged in the insurance business and, in particular, whether it has, or has available to it, adequateknowledge and expertise. The registration of an applicant as an insurer is subject to its complying with the termsof its registration and such other conditions as the BMA may impose at any time.27TABLE OF CONTENTSThe Insurance Act does not distinguish between insurers and reinsurers; companies are registered under theInsurance Act as “insurers”. The Insurance Act uses the defined term “insurance business” to include reinsurance.The Insurance Act imposes solvency and liquidity standards on Bermuda insurance companies, as well asauditing and reporting requirements. The Insurance Act also grants to the BMA powers to supervise, investigateand intervene in the affairs of insurance companies.Certain significant aspects of the Bermuda insurance regulatory framework applicable to Class 3B insurersare set forth below.Classification of InsurersThe Insurance Act distinguishes between insurers carrying on long-term business, insurers carrying ongeneral business and insurers carrying on special purpose business. There are six classifications of insurerscarrying on general business, ranging from Class 1 insurers (pure captives) to Class 4 insurers (large commercialunderwriters). JRG Re is licensed as a Class 3B insurer and is regulated as such under the Insurance Act.Classification as a Class 3B insurerA body corporate is registrable as a Class 3B insurer where (1) 50% or more of its net premiums written or(2) 50% or more of its net loss and loss expense provisions, represent unrelated business and its total netpremiums written from unrelated business are $50.0 million or more.Minimum Paid-Up Share CapitalA Class 3B insurer is required to maintain fully paid up share capital of at least $120,000.Principal Office and Principal RepresentativeA Class 3B insurer is required to maintain a head and a principal office in Bermuda and to appoint andmaintain a principal representative in Bermuda. For the purposes of the Insurance Act, the principal office ofJRG Re is located at Wellesley House, 2 Floor, 90 Pitts Bay Road, Pembroke, HM 08, Bermuda. JRG Re’sprincipal representative is Kevin B. Copeland, the Chief Financial Officer of JRG Re.Without a reason acceptable to the BMA, a Class 3B insurer may not terminate the appointment of itsprincipal representative, and the principal representative may not cease to act as such, unless 30 days’ notice inwriting to the BMA is given of the intention to do so.It is the duty of the principal representative to forthwith notify the BMA when the principal representativereaches the view that there is a likelihood of the Class 3B insurer becoming insolvent or when the principalrepresentative has knowledge or reasonable grounds for believing that a reportable “event” has occurred.Examples of a reportable “event” include a failure by the Class 3B insurer to comply substantially with acondition imposed upon it by the BMA relating to a solvency margin or a liquidity or other ratio, a significantloss reasonably likely to cause the Class 3B insurer to fail to comply with its enhanced capital requirement(discussed below) and the occurrence of a material change (as such term is defined under the Insurance Act) in itsbusiness operations.Within 14 days of such notification to the BMA, the principal representative must furnish the BMA with awritten report setting out all the particulars of the case that are available to the principal representative.Where there has been a significant loss which is reasonably likely to cause the Class 3B insurer to fail tocomply with its enhanced capital requirement, the principal representative must also furnish the BMA with acapital and solvency return reflecting an enhanced capital requirement prepared using post-loss data. Theprincipal representative must provide this within 45 days of notifying the BMA regarding the loss.Furthermore, where a notification has been made to the BMA regarding a material change, the principalrepresentative has 30 days from the date of such notification to furnish the BMA with unaudited interimstatutory financial statements in relation to such period as the BMA may require, together with a generalbusiness solvency certificate in respect of those statements.28ndTABLE OF CONTENTSLoss Reserve SpecialistA Class 3B insurer is required to appoint an individual approved by the BMA to be its loss reservespecialist. In order to qualify as an approved loss reserve specialist, the applicant must be an individual qualifiedto provide an opinion in accordance with the requirements of the Insurance Act and the BMA must be satisfiedthat the individual is fit and proper to hold such an appointment.A Class 3B insurer is required to submit annually an opinion of its approved loss reserve specialist with itscapital and solvency return. The loss reserve specialist’s opinion must state, among other things, whether or notthe aggregate amount of technical provisions shown in the statutory economic balance sheet as at the end of therelevant financial year (i) meets the requirements of the Insurance Act and (ii) makes reasonable provision for thetotal technical provisions of the insurer under the terms of its insurance contracts and agreements.Annual Financial StatementsA Class 3B insurer must prepare and submit, on an annual basis, both audited GAAP (as defined below) andstatutory financial statements.The Insurance Act prescribes rules for the preparation and substance of statutory financial statements (whichinclude, in statutory form, an economic balance sheet, income statement, a statement of economic capital andsurplus and notes thereto). The statutory financial statements include detailed information and analysisregarding premiums, claims, reinsurance and investments of the insurer.In addition, a Class 3B insurer is also required to prepare and submit to the BMA financial statements whichhave been prepared under generally accepted accounting principles or international financial reportingstandards (“GAAP financial statements”). The Class 3B insurer’s annual GAAP financial statements, and theauditor’s report thereon, and the statutory financial statements are required to be filed with the BMA within fourmonths from the end of the relevant financial year (unless specifically extended with the approval of the BMA).The statutory financial statements do not form a part of the public records maintained by the BMA but the GAAPfinancial statements are available for public inspection.Declaration of ComplianceAt the time of filing its statutory financial statements, a Class 3B insurer is also required to deliver to theBMA a declaration of compliance, in such form and with such content as may be prescribed by the BMA,declaring whether or not the Class 3B insurer has, with respect to the preceding financial year (i) complied withall requirements of the minimum criteria applicable to it, (ii) complied with the minimum margin of solvency asat its financial year end, (iii) complied with the applicable enhanced capital requirements as at its financial yearend, and (iv) observed any limitations, restrictions or conditions imposed upon issuance of its license, ifapplicable. The declaration of compliance is required to be signed by two directors of the Class 3B insurer, andif the Class 3B insurer has failed to comply with any of the requirements referenced in (i) through (iii) above orobserve any limitations, restrictions or conditions imposed upon issuance of its license, if applicable, the Class3B insurer will be required to provide the BMA with particulars of such failure in writing. A Class 3B insurershall be liable to a civil penalty by way of a fine for failure to comply with a duty imposed on it in connectionwith the delivery of the declaration of compliance.Annual Statutory Financial Return and Annual Capital and Solvency ReturnA Class 3B insurer is required to file with the BMA a statutory financial return no later than four monthsafter its financial year end (unless specifically extended with the approval of the BMA).The statutory financial return includes, among other matters, the statutory financial statements and thecalculations for the Class 3B insurer’s minimum solvency margin and liquidity ratio.In addition, each year a Class 3B insurer is also required to file with the BMA a capital and solvency returnalong with its annual statutory financial return. The prescribed form of capital and solvency return comprises theClass 3B insurer’s Bermuda Solvency Capital Requirement (“BSCR”) model or an approved internal capitalmodel in lieu thereof (more fully described below), various schedules and the opinion of the loss reservespecialist.29TABLE OF CONTENTSNeither the statutory financial return nor the capital and solvency return is available for public inspection.Quarterly Financial StatementsA Class 3B insurer is required to prepare and file quarterly financial returns with the BMA on or before thelast day of the months of May, August and November of each year. The quarterly financial returns consist of (i)quarterly unaudited financial statements for each financial quarter (which must minimally include a balancesheet and income statement and must also be recent and not reflect a financial position that exceeds twomonths), and (ii) a list and details of material intra-group transactions that the Class 3B insurer is a party to andthe Class 3B insurer’s risk concentrations, which would also include, among other things, details surroundingreinsurance and retrocession arrangements, the 10 largest exposures to counterparties and any other counterpartyexposures exceeding 10% of the Class 3B insurer’s statutory capital and surplus.Public DisclosuresPursuant to recent amendments to the Insurance Act all commercial insurers and insurance groups arerequired to prepare and file with the BMA, and also publish on their website, a financial condition report. TheBMA has discretion to approve modifications and exemptions to the public disclosure rules on application byan insurer if, among other things, the BMA is satisfied that the disclosure of certain information will result in acompetitive disadvantage or compromise confidentiality obligations of the insurer.Independent Approved AuditorA Class 3B insurer must appoint an independent auditor who will audit and report on the Class 3B insurer’sGAAP financial statements and provide audit assurance that its statutory financial statements were derived fromits GAAP financial statements, each of which are required to be filed annually with the BMA.Non-insurance BusinessNo Class 3B insurer may engage in non-insurance business unless that non-insurance business is ancillaryto its core business. Non-insurance business means any business other than insurance business and includescarrying on investment business, managing an investment fund as operator, carrying on business as a fundadministrator, carrying on banking business, underwriting debt or securities or otherwise engaging in investmentbanking, engaging in commercial or industrial activities and carrying on the business of management, sales orleasing of real property.Enhanced Capital Requirements and Minimum Solvency MarginA Class 3B insurer is required to maintain available statutory economic capital and surplus at a level equalto or in excess of its enhanced capital requirement (“ECR”) which is established by reference to either the BSCRmodel or an approved internal capital model.The BSCR model is a risk-based capital model which provides a method for determining a Class 3Binsurer’s capital requirements (statutory economic capital and surplus) by taking into account the riskcharacteristics of different aspects of the Class 3B insurer’s business. The BSCR formulas establish capitalrequirements for eight categories of risk: fixed income investment risk, equity investment risk, interestrate/liquidity risk, premium risk, reserve risk, credit risk, catastrophe risk and operational risk. For each category,the capital requirement is determined by applying factors to asset, premium, reserve, creditor, probablemaximum loss and operation items, with higher factors applied to items with greater underlying risk and lowerfactors for less risky items.While not specifically referred to in the Insurance Act, the BMA has also established a target capital level(“TCL”) for each Class 3B insurer equal to 120% of its ECR. While a Class 3B insurer is not currently requiredto maintain its statutory economic capital and surplus at this level, the TCL serves as an early warning tool forthe BMA, and failure to maintain statutory capital at least equal to the TCL will likely result in increasedregulatory oversight.30TABLE OF CONTENTSAny Class 3B insurer which at any time fails to meet its applicable enhanced capital requirement shall,upon becoming aware of that failure, or of having reason to believe that such a failure has occurred, immediatelynotify the BMA in writing, and within 14 days of such notification, file with the BMA a written reportcontaining particulars of the circumstances leading to the failure and a plan detailing the manner, specificactions to be taken and time within which the Class 3B insurer intends to rectify the failure. Within 45 days ofbecoming aware of that failure, or of having reason to believe that such a failure has occurred, a Class 3B insurershall furnish the BMA with (i) unaudited statutory economic balance sheets and unaudited interim statutoryfinancial statements prepared in accordance with GAAP covering such period as the BMA may require; (ii) theopinion of a loss reserve specialist in relation to total general business insurance technical provisions as set outin the statutory economic balance sheet, where applicable; (iii) a general business solvency certificate in respectof the financial statements; and (iv) a capital and solvency return reflecting an enhanced capital requirementprepared using post failure data where applicable.Prior to January 1, 2016, a Class 3B insurer was required to have general business assets that exceed thevalue of its general business liabilities by an amount greater than the amount prescribed by the Insurance Act asits Minimum Solvency Margin (“MSM”). The MSM that a Class 3B insurer was required to maintain withrespect to its general business was the greater of (i) $1.0 million, or (ii) 20% of the first $6.0 million of netpremiums written; if in excess of $6.0 million, the figure is $1.2 million plus 15% of net premiums written inexcess of $6.0 million (iii) 15% of the aggregate of loss and loss expense provisions and other insurancereserves, or (iv) 25% of the ECR as reported at the end of the relevant year. The BMA is in the process of revisingthe provisions of the Insurance Act relating to the MSM, but it is anticipated that there will be no materialchanges.If at any time a Class 3B insurer fails to meet its MSM requirements, it must, upon becoming aware of suchfailure, immediately notify the BMA and, within 14 days thereafter, file a written report with the BMAcontaining particulars of the circumstances that gave rise to the failure and setting out its plan detailing specificactions to be taken and the expected timeframe in which the Class 3B insurer intends to rectify the failure.Eligible CapitalTo enable the BMA to better assess the quality of a Class 3B insurer’s capital resources, the Class 3B insureris required to disclose the makeup of its capital in accordance with the recently introduced “3-tiered eligiblecapital system”. Under this system, all of the Class 3B insurer’s capital instruments will be classified as eitherbasic or ancillary capital which in turn will be classified into one of three tiers based on their “loss absorbency”characteristics. Highest quality capital will be classified Tier 1 Capital, and lesser quality capital will beclassified as either Tier 2 Capital or Tier 3 Capital. Under this regime, up to certain specified percentages of Tier1, Tier 2 and Tier 3 Capital may be used to support a Class 3B insurer’s MSM, ECR and TCL.The characteristics of the capital instruments that must be satisfied to qualify as Tier 1, Tier 2 and Tier 3Capital are set out in the Insurance (Eligible Capital) Rules 2012, and amendments thereto. Under these rules,Tier 1, Tier 2 and Tier 3 Capital may, until January 1, 2026, include capital instruments that do not satisfy therequirement that the instrument be non-redeemable or settled only with the issuance of an instrument of equal orhigher quality upon a breach, or if it would cause a breach, of the ECR.Minimum Liquidity RatioThe Insurance Act provides a minimum liquidity ratio for general business insurers. Prior to January 2016, aClass 3B insurer engaged in general business was required to maintain the value of its relevant assets at not lessthan 75% of the amount of its relevant liabilities. Relevant assets included cash and time deposits, quotedinvestments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued,accounts and premiums receivable, reinsurance balances receivable, funds held by ceding reinsurers, and anyother assets which the BMA, on application in any particular case made to it with reasons, accepts in that case.Certain categories of assets which, unless specifically permitted by the BMA, did not automatically qualifyas relevant assets, such as unquoted equity securities, investments in and advances to affiliates and real estateand collateral loans.31TABLE OF CONTENTSThe relevant liabilities were total general business insurance reserves and total other liabilities less deferredincome tax and sundry liabilities (by interpretation, those not specifically defined) and letters of credit andguarantees. The BMA is in the process of revising the provisions of the Insurance Act relating to the minimumliquidity, but it is anticipated that there will be no material changes.Code of ConductThe Insurance Code of Conduct (the “Insurance Code”) prescribes the duties, standards, procedures andsound business principles which must be complied with by all companies registered under the Insurance Act.Failure to comply with the requirements of the Insurance Code will be taken into account by the BMA indetermining whether an insurer is conducting its business in a sound and prudent manner as prescribed by theInsurance Act, may result in the BMA exercising its powers of intervention and investigation (see below) andwill be a factor in calculating the operational risk charge under the insurer’s BSCR or approved internal model.Restrictions on Dividends and DistributionsA Class 3B insurer is prohibited from declaring or paying a dividend if it is in breach of its MSM, ECR orminimum liquidity ratio or if the declaration or payment of such dividend would cause such a breach. Where aClass 3B insurer fails to meet its MSM or minimum liquidity ratio on the last day of any financial year, it isprohibited from declaring or paying any dividends during the next financial year without the approval of theBMA.In addition, a Class 3B insurer is prohibited from declaring or paying in any financial year dividends ofmore than 25% of its total statutory capital and surplus (as shown on its previous financial year’s statutorybalance sheet), unless it files (at least seven days before payment of such dividends) with the BMA an affidavitsigned by at least two directors (one of whom must be a Bermuda resident director if any of the Class 3Binsurer’s directors are resident in Bermuda) and the principal representative stating that it will continue to meetits solvency margin and minimum liquidity ratio. Where such an affidavit is filed, it shall be available for publicinspection at the offices of the BMA.Reduction of CapitalNo general business insurer may reduce its total statutory capital by 15% or more, as set out in its previousyear’s financial statements, unless it has received the prior approval of the BMA. Total statutory capital consistsof the insurer’s paid in share capital, and its contributed surplus (sometimes called additional paid in capital)and any other fixed capital designated by the BMA as statutory capital (such as letters of credit).A Class 3B insurer seeking to reduce its statutory capital by 15% or more, as set out in its previous year’sfinancial statements, is also required to submit an affidavit signed by at least two directors (one of whom must bea Bermuda-resident director if any of the Class 3B insurer’s directors are resident in Bermuda) and the principalrepresentative stating that the proposed reduction will not cause it to fail its relevant margins and such otherinformation as the BMA may require. Where such an affidavit is filed, it shall be available for public inspectionat the offices of the BMA.Supervision, Investigation and InterventionThe BMA may, by notice in writing served on a registered person or a designated insurer, require theregistered person or designated insurer to provide such information and/or documentation as the BMA mayreasonably require with respect to matters that are likely to be material to the performance of its supervisoryfunctions under the Insurance Act. In addition, it may require the auditor, underwriter, accountant or any otherperson with relevant professional skill of such registered person or a designated insurer to prepare a report onany aspect pertaining thereto. In the case of a report, the person so appointed shall immediately give the BMAwritten notice of any fact or matter of which he becomes aware or which indicates to him that any conditionattaching to his registration under the Insurance Act is not or has not, or may not be or may not have, beenfulfilled and that such matters are likely to be material to the32TABLE OF CONTENTSperformance of its functions under the Insurance Act. If it appears to the BMA to be desirable in the interests ofthe clients of a registered person or relevant insurance group, the BMA may also exercise these powers inrelation to subsidiaries, parent companies and other affiliates of the registered person or designated insurer.If the BMA deems it necessary to protect the interests of the policyholders or potential policyholders of aninsurer or insurance group, it may appoint one or more competent persons to investigate and report on thenature, conduct or state of the insurer’s or the insurance group’s business, or any aspect thereof, or the ownershipor control of the insurer or insurance group. If the person so appointed thinks it necessary for the purposes of hisinvestigation, he may also investigate the business of any person who is or has been, at any relevant time, amember of the insurance group or of a partnership of which the person being investigated is a member. In thisregard, it shall be the duty of every person who is or was a controller, officer, employee, agent, banker, auditor,accountant, barrister, attorney or insurance manager to produce to the person appointed such documentation ashe may reasonably require for the purpose of the investigation, and to attend and answer questions relevant tothe investigation and to otherwise provide such assistance as may be necessary in connection therewith.Where the BMA suspects that a person has failed to properly register under the Insurance Act or that aregistered person or designated insurer has failed to comply with a requirement of the Insurance Act or that aperson is not, or is no longer, a fit and proper person to perform functions in relation to a regulated activity, itmay, by notice in writing, carry out an investigation into such person (or any other person connected thereto). Inconnection therewith, the BMA may require every person who is or was a controller, officer, employee, agent,banker, auditor, accountant, barrister, attorney or insurance manager to make a report and produce suchdocuments in his care, custody and control and to attend before the BMA to answer questions relevant to theBMA’s investigation and to take such actions as the BMA may direct. The BMA may also enter any premises forthe purposes of carrying out its investigation and may petition the court for a warrant if (i) it believes a personhas failed to comply with a notice served on him, (ii) there are reasonable grounds for suspecting theincompleteness of any information, or documentation produced in response to such notice, or (iii) that itsdirections will not be complied with or that any relevant documents would be removed, tampered with ordestroyed.If it appears to the BMA that the business of the registered insurer is being conducted in a way that there is asignificant risk of the insurer becoming insolvent or unable to meet its obligations to its policyholders, or thatthe insurer is in breach of the Insurance Act or any conditions imposed upon its registration, or the minimumcriteria stipulated in the Insurance Act is not or has not been fulfilled in respect of a registered insurer, or that aperson has become a controller without providing the BMA with the appropriate notice or in contravention of anotice of objection, or the registered insurer is in breach of its ECR, the BMA may issue such directions as itdeems desirable for safeguarding the interests of the policyholders or potential policyholders of the insurer orthe insurance group. The BMA may, among other things, direct an insurer (i) not to take on any new insurancebusiness, (ii) not to vary any insurance contract if the effect would be to increase its liabilities, (iii) not to makecertain investments, (iv) to realize certain investments, (v) to maintain or transfer to the custody of a specifiedbank, certain assets, (vi) not to declare or pay any dividends or other distributions or to restrict the making ofsuch payments, (vii) to limit its premium income, (viii) not to enter into any specified transaction with anyspecified persons or persons of a specified class, (ix) to provide such written particulars relating to the financialcircumstances of the insurer as the BMA thinks fit, (x) to obtain the opinion of a loss reserve specialist and tosubmit it to the BMA, and (xi) to remove a controller or officer.Fit and Proper ControllerThe BMA maintains supervision over the controllers of all registered insurers in Bermuda.A controller includes (i) the managing director of the registered insurer or its parent company, (ii) the chiefexecutive of the registered insurer or of its parent company, (iii) a 10%, 20%, 33% or 50% shareholdercontroller, and (iv) any person in accordance with whose directions or instructions the directors of the registeredinsurer or of its parent company are accustomed to act.The definition of shareholder controller is set out in the Insurance Act, but generally refers to (i) a personwho holds 10% or more of the shares carrying rights to vote at a shareholders’ meeting of the33TABLE OF CONTENTSregistered insurer or its parent company, (ii) a person who is entitled to exercise 10% or more of the voting powerat any shareholders’ meeting of such registered insurer or its parent company, or (iii) a person who is able toexercise significant influence over the management of the registered insurer or its parent company by virtue ofits shareholding or its entitlement to exercise, or control the exercise of, the voting power at any shareholders’meeting.A shareholder controller that owns 10% or more, but less than 20% of the shares as described above isdefined as a 10% shareholder controller. A shareholder controller that owns 20% or more, but less than 33% ofthe shares as described above is defined as a 20% shareholder controller. A shareholder controller that owns 33%or more but less than 50% of the shares as described above is defined as a 33% shareholder controller. Ashareholder controller that owns 50% or more of the shares as described above is defined as a 50% shareholdercontroller.As the shares of JRG Re’s parent company are traded on a recognized stock exchange, a person whobecomes a 10%, 20%, 33% or 50% shareholder controller of the insurer, shall, within 45 days, notify the BMA inwriting that he or she has become such a controller. A shareholder controller of such an insurer shall serve noticein writing on the BMA within 45 days of reducing or disposing of shares such that it ceases to be a 50%, 33%,20% or 10% shareholder controller.Any person who fails to give any such notice is guilty of an offence and shall be liable on summaryconviction to a fine of $25,000.The BMA may file a notice of objection to any person who has become a controller of any descriptionwhere it appears that such person is not or is no longer, a fit and proper person to be a controller of the registeredinsurer. Before issuing a notice of objection, the BMA is required to serve upon the person concerned apreliminary written notice stating the BMA’s intention to issue formal notice of objection and the reasons forwhich it appears that the person is not or no longer considered a fit and proper person. Upon receipt of thepreliminary written notice, the person served may, within 28 days, file written representations with the BMA,which shall be taken into account by the BMA in making their final determination. Any person who continuesto be a controller of any description after having received a notice of objection shall be guilty of an offense andshall be liable on summary conviction to a fine of $25,000 (and a continuing fine of $500 per day for each daythat the offense is continuing) or, if convicted on indictment, to a fine of $100,000 or two years in prison orboth.Notification of Material ChangesAll registered insurers are required to give notice to the BMA of their intention to effect a material changewithin the meaning of the Insurance Act. For the purposes of the Insurance Act, the following changes arematerial: (i) the transfer or acquisition of insurance business being part of a scheme falling within, or anytransaction relating to a scheme of arrangement under, Section 25 of the Insurance Act or Section 99 of theCompanies Act of Bermuda, 1981 (the “Companies Act”), (ii) the amalgamation with or acquisition of anotherfirm, (iii) engaging in unrelated business that is retail business, (iv) the acquisition of a controlling interest in anundertaking that is engaged in non-insurance business which offers services and products to persons who are notaffiliates of the insurer, (v) outsourcing all or substantially all of the company’s actuarial, risk managementcompliance and internal audit functions, (vi) outsourcing all or a material part of an insurer’s underwritingactivity, (vii) the transfer other than by way of reinsurance of all or substantially all of a line of business; (viii)the expansion into a material new line of business, (ix) the sale of an insurer, and (x) outsourcing the role of thechief executive or senior executive performing the duties of underwriting, actuarial, risk management,compliance, internal audit, finance or investment matters.No registered insurer shall take any steps to give effect to a material change unless it has first served noticeon the BMA that it intends to effect such material change, and before the end of 30 days, either the BMA hasnotified such company in writing that it has no objection to such change or that period has lapsed without theBMA having issued a notice of objection.Before issuing a notice of objection, the BMA is required to serve upon the person concerned a preliminarywritten notice stating the BMA’s intention to issue a formal notice of objection. Upon receipt of the preliminarywritten notice, the person served may, within 28 days, file written representations with the BMA which shall betaken into account by the BMA in making their final determination.34TABLE OF CONTENTSNotification by Registered Person of Change of Controllers and OfficersA Class 3B insurer is required to give written notice to the BMA of the fact that a person has become, orceased to be, a controller or officer of the Class 3B insurer within 45 days of becoming aware of such fact. Anofficer in relation to a registered insurer means a director, chief executive or senior executive performing dutiesof underwriting, actuarial, risk management, compliance, internal audit, finance or investment matters.Disclosure of InformationIn addition to powers under the Insurance Act to investigate the affairs of an insurer, the BMA may requirecertain information from an insurer (or certain other persons) to be produced to the BMA. Further, the BMA hasbeen given powers to assist other regulatory authorities, including foreign insurance regulatory authorities, withtheir investigations involving insurance and reinsurance companies in Bermuda if it is satisfied that theassistance being requested is in connection with the discharge of regulatory responsibilities and that suchcooperation is in the public interest. The grounds for disclosure are limited and the Insurance Act provides forsanctions for breach of the statutory duty of confidentiality.Cancellation of Insurer’s RegistrationAn insurer’s registration may be cancelled by the BMA on certain grounds specified in the Insurance Act.Failure by the insurer to comply with its obligations under the Insurance Act, or if the BMA believes that theinsurer has not been carrying on business in accordance with sound insurance principles, would be suchgrounds.Certain Other Bermuda Law ConsiderationsCorporate Bermuda Law ConsiderationsAlthough James River Group Holdings, Ltd. is incorporated in Bermuda, it is designated as a non-residentfor Bermuda exchange control purposes by the BMA. Pursuant to its non-resident status, James River GroupHoldings, Ltd. may engage in transactions in currencies other than the Bermuda dollar, and there are norestrictions on its ability to transfer funds (other than funds denominated in Bermuda dollars) in and out ofBermuda or to pay dividends to non-residents who are holders of its common shares in currencies other than theBermuda dollar.In accordance with Bermuda law, share certificates are issued only in the names of corporations, otherseparate legal entities or individuals. In the case of an applicant acting in a special capacity (for example, as anexecutor or trustee), certificates may, at the request of the applicant, record the capacity in which the applicant isacting. Notwithstanding the recording of any such special capacity, we are not bound to investigate or incur anyresponsibility in respect of the proper administration of any such estate or trust. We will take no notice of anytrust applicable to any of our common shares whether or not we have notice of such trust.Each of James River Group Holdings, Ltd. and JRG Re is incorporated in Bermuda as an “exemptedcompany.” Under Bermuda law, exempted companies are companies formed for the purpose of conductingbusiness outside Bermuda from a principal place of business in Bermuda. As a result, they are exempt fromBermuda laws restricting the percentage of share capital that may be held by non-Bermudians, but they may notparticipate in certain business transactions, including: (i) the acquisition or holding of land in Bermuda exceptthat required for their business held by way of lease or tenancy for a term not exceeding 50 years or, with theconsent of the Minister of Economic Development granted in his discretion, land by way of lease or tenancy fora term not exceeding 21 years in order to provide accommodation or recreational facilities for its officers andemployees, (ii) the taking of mortgages on land in Bermuda to secure an amount in excess of B.D.$50,000without the consent of the relevant Ministers, (iii) the acquisition of any bonds or debentures secured by anyland in Bermuda, other bonds or debentures issued by the Bermuda government or a public authority, or (iv) thecarrying on of business of any kind in Bermuda, except in furtherance of their business carried on outsideBermuda or under license granted by the Minister of Economic Development. JRG Re is a licensed insurer inBermuda, and so it may carry on activities from Bermuda that are related to and in support of its insurancebusiness.35TABLE OF CONTENTSEach of James River Group Holdings, Ltd. and JRG Re must comply with the provisions of the CompaniesAct regulating the payment of dividends and making distributions from contributed surplus. A company maynot declare or pay a dividend, or make a distribution out of contributed surplus, if there are reasonable groundsfor believing that (i) it is, or would after the payment be, unable to pay its liabilities as they become due, or (ii)the realizable value of the assets would thereby be less than its liabilities. In addition, certain provisions of theInsurance Act will limit our ability to pay dividends.Under the Companies Act, where a Bermuda company issues shares at a premium (that is, for a price abovethe par value), whether for cash or otherwise, a sum equal to the aggregate amount or value of the premium onthose shares must be transferred to an account called “the share premium account.” The provisions of theCompanies Act relating to the reduction of the share capital of a company apply as if the share premium accountwere paid up share capital of that company, except for certain matters such as: (i) paying up unissued shares tobe issued as fully paid bonus shares, (ii) writing off preliminary expenses, commissions or offering a discount onany issue of shares or (iii) providing for the premiums payable on redemption of shares. The paid up share capitalmay not be reduced if, on the date the reduction is to be effected, there are reasonable grounds for believing thatthe company is, or after the reduction would be, unable to pay its liabilities as they become due. See “—Restrictions on Dividends and Distributions”.Exempted companies, such as James River Group Holdings, Ltd. and JRG Re must comply with Bermudaresident representation provisions under the Companies Act. We do not believe that such compliance will resultin any material expense to us.Securities may be offered or sold in Bermuda only in compliance with the provisions of the InvestmentBusiness Act 2003 and the Exchange Control Act 1972 and related regulations of Bermuda which regulate thesale of securities in Bermuda. In addition, specific permission is required from the BMA, pursuant to theprovisions of the Exchange Control Act 1972 and related regulations, for all issuances and transfers of securitiesof Bermuda companies, other than in cases where the BMA has granted a general permission. The BMA, in itspolicy dated June 1, 2005, provides that where any equity securities, which would include our common shares,of a Bermuda company are listed on an appointed stock exchange (the NASDAQ Stock Market is deemed to bean appointed stock exchange under Bermuda law), general permission is given for the issue and subsequenttransfer of any securities of the company from and to a non-resident, for as long as any equity securities of thecompany remain so listed.We have received consent from the BMA to issue, grant, create, sell and transfer freely any of our shares,stock, bonds, notes (other than promissory notes), debentures, debenture stock, units under a unit trust scheme,shares in an oil royalty, options, warrants, coupons, rights and depository receipts to and among persons who areeither resident or non-resident of Bermuda for exchange control purposes.Bermuda Work Permit ConsiderationsUnder Bermuda law, non-Bermudians (other than spouses of Bermudians and individuals holdingpermanent resident’s certificates or working resident’s certificates) may not engage in any gainful occupation inBermuda without the appropriate governmental standard work permit.Standard work permits can be obtained for a one-, two-, three-, four- or five-year period. Where a standardwork permit is being applied for, it is a requirement that the job must be advertised for three days (within aneight-day period) in the local newspaper. Should no Bermudian (or spouse of a Bermudian or holder of apermanent resident’s certificate or working resident’s certificate) meet the minimum standards as stipulated inthe advertisement, the employer may then apply for a standard work permit for the non-Bermudian. Employersmust complete a Recruitment Disclosure Form and provide information, including the qualifications of allapplicants. The Department of Immigration will compare the qualifications and experience of any Bermudianapplicants (or spouse of a Bermudian or holder of a permanent resident’s certificate or working resident’scertificate) to that stipulated in the advertisement and to the non-Bermudian to be satisfied that the role couldnot have been filled by a Bermudian (or spouse of a Bermudian or holder of a permanent resident’s certificate orworking resident’s certificate). In addition to the advertising, there are also many other documents that arerequired prior to the Department of Immigration making their decision.36TABLE OF CONTENTSIf the position for which the standard work permit is being applied is that of a Chief Executive Officer orSenior Executive, the Minister of Home Affairs may, on occasion, waive the requirement to advertise.If an employer wishes to change an employee’s job title, provided that the job description, duties,remuneration and benefits remain unchanged, the employer does not need to advertise or obtain the permissionof the Minister of Home Affairs to do this, but it must inform the Department of Immigration and pay thenecessary fee after the change has occurred.If an employer wishes to promote an employee currently on a work permit from his current job to anotherwithin the same business, the permission of the Minister of Home Affairs must first be obtained. The employerwill need to provide evidence of internal recruitment efforts and consideration of internal Bermudian candidates.A temporary work permit can take up to 10 working days to process and a standard work permit can take upto four weeks to process.U.S. Insurance RegulationState RegulationOur U.S. insurance subsidiaries are subject to extensive regulation and supervision by their state ofdomicile, as well as those states in which they do business. The purpose of such regulation and supervision isprimarily to provide safeguards for policyholders, rather than to protect the interests of shareholders. Theinsurance laws of the various states establish regulatory agencies with broad administrative powers, includingthe power to grant or revoke operating licenses and regulate trade practices, investments, premium rates, depositsof securities, the form and content of financial statements and insurance policies, dividend limitations,cancellation and non-renewal of policies, accounting practices and the maintenance of specified reserves andcapital for the protection of policyholders.The payment of dividends by our subsidiaries to us is limited by statute. In general, the laws andregulations applicable to our domestic insurance subsidiaries limit the aggregate amount of dividends or otherdistributions that they may declare or pay within any 12 month period without advance regulatory approval. InOhio, the domiciliary state of James River Insurance, Falls Lake General Insurance Company (formerlyStonewood General Insurance Company) (“Falls Lake General”) and Falls Lake National Insurance Company(formerly Stonewood National Insurance Company) (“Falls Lake National”), this limitation is the greater ofstatutory net income for the preceding calendar year or 10% of the statutory surplus at the end of the precedingcalendar year, provided that such dividends may only be paid out of the earned surplus of each of the companieswithout obtaining regulatory approvals. In North Carolina, the domiciliary state of Stonewood Insurance, thislimitation is the greater of statutory net income excluding realized capital gains for the preceding calendar yearor 10% of the statutory surplus at the end of the preceding calendar year, provided that such dividends may onlybe paid out of unassigned surplus without obtaining regulatory approval. In Virginia, the domiciliary state ofJames River Casualty Company, this limitation is the greater of statutory net income excluding realized capitalgains of the preceding calendar year or 10% of the statutory surplus at the end of the preceding calendar year,provided that such dividends may only be paid out of unassigned surplus without obtaining regulatoryapproval. In California, the domiciliary state of Falls Lake Fire and Casualty Company, this limitation is thegreater of statutory net income for the preceding calendar year or 10% of the statutory surplus at the end of thepreceding calendar year, provided that such dividends may only be paid out of unassigned surplus withoutobtaining regulatory approval. Moreover, as a condition to obtaining its license in California, Falls Lake Fireand Casualty Company provided a commitment to the California Department of Insurance that it would not payany shareholder dividends for a five year period commencing January 1, 2016. In addition, insurance regulatorshave broad powers to prevent reduction of statutory surplus to inadequate levels and could refuse to permit thepayment of dividends calculated under any applicable formula.Premium rate regulation varies greatly among jurisdictions and lines of insurance. In most states in whichour subsidiaries write insurance, premium rates for the various lines of insurance are subject to either priorapproval or limited review upon implementation. States require rates for property casualty insurance that areadequate, not excessive, and not unfairly discriminatory.37TABLE OF CONTENTSOur insurance subsidiaries are required to file quarterly and annual reports with the appropriate regulatoryagency in its state of domicile and with The National Association of Insurance Commissioners (“NAIC”) basedon applicable statutory regulations, which differ from U.S. generally accepted accounting principles. Theirbusiness and accounts are subject to examination by such agencies at any time.Many jurisdictions have laws and regulations that limit an insurer’s ability to withdraw from a particularmarket. For example, states may limit an insurer’s ability to cancel or non-renew policies. Furthermore, certainstates prohibit an insurer from withdrawing one or more lines of business from the states, except pursuant to aplan approved by the state insurance department. Laws and regulations that limit cancellation and non-renewaland that subject program withdrawals to prior approval requirements may restrict our ability to exit unprofitablemarketplaces in a timely manner.State laws governing insurance holding companies and insurance companies also impose standards oncertain transactions between related companies, which include, among other requirements, that all transactionsbe fair and reasonable, that an insurer’s surplus as regards policyholders be reasonable and adequate in relationto its liabilities and that expenses and payments be allocated to the appropriate party in accordance withcustomary accounting practices. These transactions between related companies include transfers of assets, loans,reinsurance agreements, service agreements, certain dividend payments by the insurance companies and certainother material transactions. In 2012, the NAIC adopted significant changes to the insurance holding companyact and regulations (the “NAIC Amendments”). The NAIC Amendments, when adopted by the various states, aredesigned to respond to perceived gaps in the regulation of insurance holding company systems in the UnitedStates. One of the major changes is a requirement that an insurance holding company system’s ultimatecontrolling person submit annually to its lead state insurance regulator an “enterprise risk report” that identifiesactivities, circumstances or events involving one or more affiliates of an insurer that, if not remedied properly,are likely to have a material adverse effect upon the financial condition or liquidity of the insurer or itsinsurance holding company system as a whole. Other changes include (i) requiring a controlling person tosubmit prior notice to its domiciliary insurance regulator of its divestiture of control, (ii) having detailedminimum requirements for cost sharing and management agreements between an insurer and its affiliates and(iii) expanding the types of agreements between an insurer and its affiliates to be filed with its domiciliaryinsurance regulator. The NAIC Amendments must be adopted by the individual state legislatures and insuranceregulators in order to be effective. Each of California, North Carolina, Ohio, and Virginia, the states in which ourU.S. Insurance subsidiaries are domiciled, include this enterprise risk report. In addition, in 2012 the NAICadopted the Risk Management and Own Risk and Solvency Assessment Model Act (the “ORSA Model Act”).The ORSA Model Act, when adopted by the various states, will require an insurance holding company system’sChief Risk Officer to submit at least annually to its lead state insurance regulator an Own Risk and SolvencyAssessment Summary Report (“ORSA”). The ORSA is a confidential internal assessment appropriate to thenature, scale and complexity of an insurer, conducted by that insurer of the material and relevant risks identifiedby the insurer associated with an insurer’s current business plan and the sufficiency of capital resources tosupport those risks. The ORSA Model Act must be adopted by the individual state legislatures and insuranceregulators in order to be effective. Each of California, Ohio, and Virginia, the states in which several of our U.S.Insurance subsidiaries are domiciled, adopted and require an ORSA filing, while North Carolina has yet to adoptthis requirement into its insurance laws.The insurance holding company laws and regulations of the states in which our insurance companies aredomiciled also generally require that before a person can acquire direct or indirect control of an insurerdomiciled in the state, and in some cases prior to divesting its control, prior written approval must be obtainedfrom the insurer’s domiciliary state insurance regulator. In addition to insurance holding company laws andregulations, under the Organizational Permit issued by the California Department of Insurance to Falls Lake Fireand Casualty Company, Falls Lake Fire and Casualty Company, as a new insurer, was required to enter into anagreement with Falls Lake National Insurance Company restricting the transfer of Falls Lake Fire and CasualtyCompany’s shares. Under the Organizational Permit and the Agreement Restricting Shares, Falls Lake Nationalcannot directly or indirectly transfer the shares of Falls Lake Fire and Casualty Company to anyone without theprior written approval of the California Department of Insurance. These laws and the similar conditionsapplicable to Falls Lake Fire and Casualty Company’s shares may discourage potential acquisition proposalsand may delay, deter or prevent an investment in or a change of control involving us, or one or more of ourregulated subsidiaries, including transactions that our38TABLE OF CONTENTSmanagement and some or all of our shareholders might consider desirable. Pursuant to applicable laws andregulations, “control” over an insurer is generally presumed to exist if any person, directly or indirectly, owns,controls, holds the power to vote or holds proxies representing, 10 percent or more of the voting securities ofthat insurer. Indirect ownership includes ownership of the Company’s common shares.Under state insurance guaranty fund laws, insurance companies doing business in a state can be assessed forcertain obligations of insolvent insurance companies to such insolvent companies’ policyholders and claimants.Maximum assessments allowed in any one year generally vary between one percent and two percent of annualpremiums written in that state, but it is possible that caps on such assessments could be raised if there arenumerous or large insolvencies. In most states, guaranty fund assessments are recoverable either through futurepolicy surcharges or offsets to state premium tax liabilities.The admitted market is subject to more state regulation than the E&S market, particularly with regard to rateand form filing requirements, restrictions on the ability to exit lines of business, premium tax payments andmembership in various state associations, such as guaranty funds. Some states have deregulated their commercialinsurance markets. We cannot predict the effect that further deregulation would have on our business, financialcondition or results of operations.The state insurance regulators utilize a risk-based capital model to help assess the capital adequacy ofinsurance companies and identify insurers that are in, or are perceived as approaching, financial difficulty. Thismodel establishes minimum capital needs based on the risks applicable to the operations of the individualinsurer. The risk-based capital requirements for property casualty insurance companies measure three major areasof risk: asset risk, credit risk and underwriting risk. Companies having less statutory surplus than required by therisk-based capital requirements are subject to varying degrees of regulatory scrutiny and intervention,depending on the severity of the inadequacy. At December 31, 2015, the Company’s U.S.-based insurancesubsidiaries had total adjusted statutory capital of $176.9 million, which is in excess of the minimum risk-basedcapital requirement.From time to time, states consider and/or enact laws that may alter or increase state authority to regulateinsurance companies and insurance holding companies. States also consider and/or enact laws that impact thecompetitive environment and marketplace for property casualty insurance.Federal RegulationThe U.S. federal government generally has not directly regulated the insurance industry except for certainareas of the market, such as insurance for flood, nuclear and terrorism risks. However, the federal government hasundertaken initiatives or considered legislation in several areas that may impact the insurance industry,including tort reform, corporate governance and the taxation of reinsurance companies. The Dodd-Frank WallStreet Reform and Consumer Protection Act (the “Dodd-Frank Act”) established the Federal Insurance Officewhich is authorized to study, monitor and report to Congress on the insurance industry and to recommend thatthe Financial Stability Oversight Council (“FSOC”) designate an insurer as an entity posing risks to the U.S.financial stability in the event of the insurer’s material financial distress or failure. In December 2013, theFederal Insurance Office issued a report on alternatives to modernize and improve the system of insuranceregulation in the United States, including by increasing national uniformity through either a federal charter oreffective action by the states. In addition, legislation has been introduced from time to time that, if enacted,could result in the federal government assuming a more direct role in the regulation of the insurance industry,including federal licensing in addition to or in lieu of state licensing and reinsurance for natural catastrophes.Changes to federal legislation and administrative policies in several areas, including changes in federal taxation,can also significantly impact the insurance industry and us.On January 12, 2015, the Terrorism Risk Insurance Act of 2002 and its successors, the Terrorism RiskInsurance Extension Act of 2005 and the Terrorism Risk Insurance Program Reauthorization Act of 2007(collectively, the “Terrorism Acts”), were extended until 2020. Under the Terrorism Acts, commercial propertyand casualty insurers, in exchange for making terrorism insurance available, may be entitled to be reimbursed bythe Federal Government for a portion of their aggregate losses. As required by the Terrorism Acts, we offerpolicyholders in specific lines of commercial insurance the option to elect terrorism coverage.39TABLE OF CONTENTSIn order for a loss to be covered under the Terrorism Acts, the loss must meet the aggregate industry lossminimum and must be the result of an act of terrorism as certified by the Secretary of the Treasury. Beginning in2016, insurers participating in the Terrorism Acts will be required to provide information regarding insurancecoverage for terrorism losses, including; (i) lines of business with exposure to such losses, (ii) premiums earnedon such coverage, (iii) geographical location of exposures, (iv) pricing of such coverage, (v) the take-up rate forsuch coverage, and (vi) the amount of private reinsurance for acts of terrorism purchased.Geographic InformationFor each of the years ended December 31, 2015, 2014 and 2013, 100% of our gross written premiums andnet earned premiums were generated from policies issued to U.S.-based insureds.EmployeesAs of December 31, 2015, we had 367 employees located in the United States and eight employees locatedin Bermuda. All of our employees are full time. Our employees are not subject to any collective bargainingagreement and we are not aware of any current efforts to implement such an agreement. We believe we havegood working relations with our employees.Intellectual PropertyWe hold U.S. federal service mark registration of our corporate logo and several other company trademarkregistrations or applications for registration with the U.S. Patent and Trademark Office. Such registrations protectour intellectual property from confusingly similar use. We monitor our trademarks and service marks and protectthem from unauthorized use as necessary.We use licensed and proprietary systems and technologies in our underwriting. The licenses have terms thatexpire at various times through 2028. We believe that we can utilize other available systems and technologies inthe event that the licenses are not renewed upon their expiration.Available InformationWe file annual reports on Form 10-K, current reports on Form 8-K, quarterly reports on Form 10-Q and otherinformation with the SEC. Members of the public may read and copy materials that we file with the SEC at theSEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Members of the public may alsoobtain information on the Public Reference Room by calling the SEC at 1-800-732-0330. The SEC alsomaintains an Internet web site that contains reports, proxy and information statements and other informationregarding issuers, including us, that file electronically with the SEC. The address of that site ishttp://www.sec.gov. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports onForm 8-K and other information filed by us with the SEC are available, without charge, on our Internet web site,http://www.jrgh.net, as soon as reasonably practicable after they are filed electronically with the SEC. Copies arealso available, without charge, by writing to us at James River Group Holdings, Ltd., Wellesley House, 2 Floor,90 Pitts Bay Road, Pembroke, HM 08, Bermuda. The information on our website is not a part of this AnnualReport.40nd•When we write “occurrence” policies in our Excess and Surplus Lines segment, we are obligated topay covered claims, up to the contractually agreed amount, for any covered loss that occurs while thepolicy is in force. Accordingly, claims may arise many years after a policy has lapsed. Approximately85.9% of our net casualty loss reserves in this segment are associated with “occurrence form” policiesat December 31, 2015.•Even when a claim is received (irrespective of whether the policy is a “claims made” or “occurrence”basis form), it may take considerable time to fully appreciate the extent of the covered loss suffered bythe insured and, consequently, estimates of loss associated with specific claims can increase over time.•New theories of liability are enforced retroactively from time to time by courts. See also “The effect ofemerging claim and coverage issues on our business is uncertain.”•Volatility in the financial markets, economic events and other external factors may result in anincrease in the number of claims and the severity of the claims reported. In addition, elevatedinflationary conditions would, among other things, cause loss costs to increase.•If claims became more frequent, even if we had no liability for those claims, the cost of evaluatingthese potential claims could escalate beyond the amount of the reserves we have established. As weenter new lines of business, or as a result of new theories of claims, we may encounter an increase inclaims frequency and greater claims handling costs than we had anticipated.•We regularly enter new lines of insurance, and as a consequence, we sometimes have to make estimatesof future losses for risk classes with which we do not have a great deal of experience. This lack ofexperience may contribute to making errors of judgment when establishing reserves.TABLE OF CONTENTSItem 1A. RISK FACTORSYou should carefully consider the following risks, together with the cautionary statement under the caption“Special Note Regarding Forward-Looking Statements” above and the other information included in thisAnnual Report. The risks described below are not the only ones we face. Additional risks that are currentlyunknown to us or that we currently consider immaterial may also impair our business or materially adverselyaffect our financial condition or results of operations. If any of the following risks actually occurs, our business,financial condition or results of operation could be materially adversely affected.Risks Related to Our Business and IndustryOur actual incurred losses may be greater than our loss and loss adjustment expense reserves, which couldhave a material adverse effect on our financial condition and results of operations.Our financial condition and results of operations depend upon our ability to assess accurately the potentiallosses and loss adjustment expenses under the terms of the insurance policies or reinsurance contracts weunderwrite. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate ofwhat we expect the ultimate settlement and administration of claims will cost us, and our ultimate liability maybe greater or less than current reserves. These estimates are based on our assessment of facts and circumstancesthen known, as well as estimates of future trends in claim severity, claim frequency, judicial theories of liabilityand other factors. These variables are affected by both internal and external events that could increase ourexposure to losses, including changes in actuarial projections, claims handling procedures, inflation, climatechange, economic and judicial trends, and legislative changes. We continually monitor reserves using newinformation on reported claims and a variety of statistical techniques.In the insurance and reinsurance industry, there is always the risk that reserves may prove inadequate, andactual results always differ from our reserve estimates. It is possible for insurance and reinsurance companies tounderestimate the cost of claims. Our estimates could prove to be low, and this underestimation could have amaterial adverse effect on our financial strength.Among the uncertainties we encounter in establishing our reserves for losses and related expenses inconnection with our insurance businesses are:41•The increased lapse of time from the occurrence of an event to the reporting of the claim and theultimate resolution or settlement of the claim.•The diversity of development patterns among different types of reinsurance treaties.•The necessary reliance on the ceding company for information regarding claims.TABLE OF CONTENTSIn addition, reinsurance reserve estimates are typically subject to greater uncertainty than insurance reserveestimates, primarily due to reliance on the original underwriting decisions made by the ceding company. As aresult, we are subject to the risk that our ceding companies may not have adequately evaluated the risksreinsured by us and the premiums ceded may not adequately compensate us for the risks we assume. Otherfactors resulting in additional uncertainty in establishing reinsurance reserves include:If any of our insurance or reinsurance reserves should prove to be inadequate for the reasons discussedabove, or for any other reason, we will be required to increase reserves, resulting in a reduction in our net incomeand shareholders’ equity in the period in which the deficiency is identified. Future loss experience substantiallyin excess of established reserves could also have a material adverse effect on future earnings and liquidity andfinancial rating, which would affect our ability to attract business and could affect our ability to retain or hirequalified personnel.Our risk management is based on estimates and judgments that are subject to significant uncertainties.Our approach to risk management relies on subjective variables that entail significant uncertainties. Forexample, we rely heavily on estimates of probable maximum losses for certain events that are generated bycomputer-run models. In addition, we rely on historical data and scenarios in managing credit and interest raterisks in our investment portfolio. These estimates, models, data and scenarios may not produce accuratepredictions and consequently, we could incur losses both in the risks we underwrite and to the value of ourinvestment portfolio.Small changes in assumptions, which depend heavily on our judgment and foresight, can have a significantimpact on the modeled outputs. Although we believe that these probabilistic measures provide a meaningfulindicator of the relative risk of certain events and changes to our business over time, these measures do notpredict our actual exposure to, nor guarantee our successful management of, future losses that could have amaterial adverse effect on our financial condition and results of operations.If we are unable to retain key management and employees or recruit other qualified personnel, we may bematerially adversely affected.We believe that our future success depends, in large part, on our ability to retain our experiencedmanagement team and key employees. For instance, our specialty insurance operations require the services of anumber of highly experienced employees, including underwriters, to source quality business and analyze andmanage our risk exposure. There can be no assurance that we can attract and retain the necessary employees toconduct our business activities on a timely basis or at all. Our competitors may offer more favorablecompensation arrangements to our key management or employees to incentivize them to leave our Company.Furthermore, our competitors may make it more difficult for us to hire their personnel by offering excessivecompensation arrangements to certain employees to induce them not to leave their current employment andbringing litigation against employees who do leave (and possibly us as well) to join us. Although we haveemployment agreements with all of our executive officers, we do not have employment agreements with oursenior underwriters or claims personnel. We do not have key person insurance on the lives of any of our keymanagement personnel. Our inability to attract and retain qualified personnel when available and the loss ofservices of key personnel could have a material adverse effect on our financial condition and results ofoperations.Adverse economic factors, including recession, inflation, periods of high unemployment or lower economicactivity could result in the sale of fewer policies than expected or an increase in frequency or severity of claimsand premium defaults or both, which, in turn, could affect our growth and profitability.Factors, such as business revenue, economic conditions, the volatility and strength of the capital marketsand inflation can all affect the business and economic environment. These same factors affect our ability togenerate revenue and profits. In an economic downturn that is characterized by higher42•if we change our business practices from our organizational business plan in a manner that no longersupports our A.M. Best’s rating;•if unfavorable financial, regulatory or market trends affect us, including excess market capacity;•if our losses exceed our loss reserves;•if we have unresolved issues with government regulators;•if we are unable to retain our senior management or other key personnel;•if our investment portfolio incurs significant losses; or•if A.M. Best alters its capital adequacy assessment methodology in a manner that would adverselyaffect our rating.TABLE OF CONTENTSunemployment, declining spending and reduced corporate revenues, the demand for insurance products isadversely affected, which directly affects our premium levels and profitability. Negative economic factors mayalso affect our ability to receive the appropriate rate for the risk we insure with our policyholders and mayadversely affect the number of policies we can write, including with respect to our opportunities to underwriteprofitable business. In an economic downturn, our customers may have less need for insurance coverage, cancelexisting insurance policies, modify their coverage, self insure their risks, or not renew with us. Existingpolicyholders may exaggerate or even falsify claims to obtain higher claims payments. These outcomes wouldreduce our underwriting profit to the extent these factors are not reflected in the rates we charge.We underwrite a significant portion of our insurance in (i) the Excess and Surplus Lines segment inCalifornia, Texas, Florida, New York, Illinois and New Jersey, (ii) the individual risk workers’ compensationbusiness of the Specialty Admitted Insurance segment in North Carolina, Virginia, South Carolina andTennessee, and (iii) the program and fronting business of the Specialty Admitted Insurance segment in Texas,New York, New Mexico and Florida. Any economic downturn in any such state could have a material adverseeffect on our financial condition and results of operations.A decline in our financial strength rating may result in a reduction of new or renewal business.Companies, insurers and reinsurance brokers use ratings from independent ratings agencies as an importantmeans of assessing the financial strength and quality of reinsurers. A.M. Best has assigned a financial strengthrating of “A-” (Excellent) with a “positive outlook,” which is the fourth highest of 15 ratings that A.M. Bestissues, to each of James River Insurance, James River Casualty, Falls Lake National, Falls Lake General,Stonewood Insurance and JRG Re. A.M. Best assigns ratings that are intended to provide an independentopinion of an insurance or reinsurance company’s ability to meet its obligations to policyholders and suchratings are not an evaluation directed to investors. A.M. Best periodically reviews our rating and may revise itdownward or revoke it at its sole discretion based primarily on its analysis of our balance sheet strength(including capital adequacy and loss and loss adjustment expense reserve adequacy), operating performance andbusiness profile. Factors that could affect such an analysis include but are not limited to:These and other factors could result in a downgrade of our rating. A downgrade of our rating could causeour current and future brokers and agents, retail brokers and insureds to choose other, more highly-ratedcompetitors. A downgrade of this rating could also increase the cost or reduce the availability of reinsurance tous.In addition, in view of the earnings and capital pressures recently experienced by many financialinstitutions, including insurance companies, it is possible that rating organizations will heighten the level ofscrutiny that they apply to such institutions, will increase the frequency and scope of their credit reviews, willrequest additional information from the companies that they rate and may increase the capital and otherrequirements employed in the rating organizations’ models for maintenance of certain ratings levels. It ispossible that such reviews of us may result in adverse ratings consequences, which could have a material adverseeffect on our financial condition and results of operations. A downgrade below “A-” or withdrawal43•the Excess and Surplus Lines segment conducted business with two brokers that produced anaggregate of $129.9 million in gross written premiums, or 42.1% of that segment’s gross writtenpremiums for the year;•the Specialty Admitted Insurance segment conducted business with two agencies that produced anaggregate $29.7 million in gross written premiums, representing 32.6% of that segment’s gross writtenpremiums for the year; and•the Casualty Reinsurance segment conducted business with two brokers that generated $112.3 millionof gross written premiums, or 65.1% of that segment’s gross written premiums for the year.TABLE OF CONTENTSof any rating could severely limit or prevent us from writing new and renewal insurance or reinsurance contracts.See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidityand Capital Resources – Ratings.”We distribute products through a select group of brokers and agents, several of which account for a significantportion of our business, and there can be no assurance that such relationships will continue, or if they docontinue, that the relationship will be on favorable terms to us. In addition, reliance on brokers and agentssubjects us to their credit risk.We distribute our products through a select group of brokers and agents. In 2015:We cannot assure you that the relationship with any of these brokers will continue. Even if the relationshipsdo continue, they may not be on terms that are profitable for us. The termination of a relationship with one ormore significant brokers or agents could result in lower direct written premiums and could have a materialadverse effect on our results of operations or business prospects.There is a trend toward consolidation among brokers and agents who produce our business. As brokers andagents consolidate and competition among them declines, they may seek and receive higher commissions.Increases in commissions could reduce our underwriting profit.Certain premiums from policyholders, where the business is produced by brokers or agents, are collecteddirectly by the brokers or agents and forwarded to our insurance subsidiaries. In certain jurisdictions, when theinsured pays its policy premium to brokers or agents for payment on behalf of our insurance subsidiaries, thepremiums might be considered to have been paid under applicable insurance laws and regulations. Accordingly,the insured would no longer be liable to us for those amounts, whether or not we have actually received thepremiums from that broker or agent. Consequently, we assume a degree of credit risk associated with brokers andagents. Where necessary, we review the financial condition of potential new brokers and agents before we agreeto transact business with them. Although failures by brokers and agents to remit premiums have not beenmaterial to date, there may be instances where brokers and agents collect premiums but do not remit them to usand we may be required under applicable law to provide the coverage set forth in the policy despite the absenceof premiums.Because the possibility of these events depends in large part upon the financial condition and internaloperations of our brokers and agents (which in most cases is not public information), we are not able to quantifythe exposure presented by this risk. If we are unable to collect premiums from brokers and agents in the future,underwriting profits may decline and our financial condition and results of operations could be materially andadversely affected.We are subject to extensive regulation, which may materially adversely affect our ability to achieve ourbusiness objectives. In addition, if we fail to comply with these regulations, we may be subject to penalties,including fines and suspensions, which may materially adversely affect our financial condition and results ofoperations.Our admitted insurance and reinsurance subsidiaries are subject to extensive regulation, primarily byCalifornia (the domiciliary state for Falls Lake Fire and Casualty Company), Ohio (the domiciliary state forJames River Insurance, Falls Lake National and Falls Lake General), North Carolina (the domiciliary state forStonewood Insurance), Virginia (the domiciliary state for James River Casualty), Bermuda (the domicile of JRGRe), and to a lesser degree, the other jurisdictions in the United States in which we operate. Most44TABLE OF CONTENTSinsurance regulations are designed to protect the interests of insurance policyholders, as opposed to the interestsof shareholders. These regulations generally are administered by a department of insurance in each state andrelate to, among other things, authorizations to write certain lines of business, capital and surplus requirements,reserve requirements, rate and form approvals, investment and underwriting limitations, affiliate transactions,dividend limitations, cancellation and non-renewal of policies, changes in control, solvency and a variety ofother financial and non-financial aspects of our business. These laws and regulations are regularly re-examinedand any changes in these laws and regulations or new laws may be more restrictive, could make it moreexpensive to conduct business or otherwise materially adversely affect our operations. State insurancedepartments and the BMA also conduct periodic examinations of the affairs of insurance companies andreinsurance companies and require the filing of annual and other reports relating to financial condition, holdingcompany issues and other matters. These regulatory requirements may impose timing and expense or otherconstraints that could materially adversely affect our ability to achieve some or all of our business objectives.In addition, regulatory authorities have broad discretion to deny or revoke licenses for various reasons,including the violation of regulations. For example, an insurer’s registration may be cancelled by the BMA oncertain grounds specified in the Insurance Act, including failure by the insurer to comply with its obligationsunder the Insurance Act, or if the BMA believes that the insurer has not been carrying on business in accordancewith sound insurance principles. In some instances, where there is uncertainty as to applicability, we followpractices based on our interpretations of regulations or practices that we believe are generally followed by theindustry. These practices may turn out to be different from the interpretations of regulatory authorities. If we donot have the requisite licenses and approvals or do not comply with applicable regulatory requirements,insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of ouractivities or otherwise penalize us. This could materially adversely affect our ability to operate our business.The admitted market is subject to more state regulation than the E&S market, particularly with regard to rateand form filing requirements, restrictions on the ability to exit lines of business, premium tax payments andmembership in various state associations, such as guaranty funds. Some states have deregulated their commercialinsurance markets. We cannot predict the effect that further deregulation would have on our business, financialcondition or results of operations.The NAIC has developed a system to test the adequacy of statutory capital of U.S.-based insurers, known asrisk-based capital or “RBC,” that many states have adopted. This system establishes the minimum amount ofrisk-based capital necessary for an insurer to support its overall business operations. It identifies propertycasualty insurers that may be inadequately capitalized by looking at certain inherent risks of each insurer’sassets and liabilities and its mix of net written premiums. Insurers falling below a calculated threshold may besubject to varying degrees of regulatory action, including supervision, rehabilitation or liquidation. Failure tomaintain adequate risk-based capital at the required levels could materially adversely affect the ability of ourinsurance subsidiaries to maintain regulatory authority to conduct their business. See “Business – U.S. InsuranceRegulation – State Regulation.”In addition, the various state insurance regulators have increased their focus on risks within an insurer’sholding company system that may pose enterprise risk to the insurer. In 2012, the NAIC adopted the NAICAmendments. The NAIC Amendments, when adopted by the various states, are designed to respond to perceivedgaps in the regulation of insurance holding company systems in the United States. One of the major changes is arequirement that an insurance holding company system’s ultimate controlling person submit annually to its leadstate insurance regulator an “enterprise risk report” that identifies activities, circumstances or events involvingone or more affiliates of an insurer that, if not remedied properly, are likely to have a material adverse effectupon the financial condition or liquidity of the insurer or its insurance holding company system as a whole.Other changes include (i) requiring a controlling person to submit prior notice to its domiciliary insuranceregulator of a divestiture of control, (ii) having detailed minimum requirements for cost sharing and managementagreements between an insurer and its affiliates and (iii) expanding the types of agreements between an insurerand its affiliates to be filed with its domiciliary insurance regulator. The NAIC Amendments must be adopted bythe individual state legislatures and insurance regulators in order to be effective. Each of California, NorthCarolina, Ohio and Virginia, the states in which our U.S. insurance subsidiaries are domiciled, include thisenterprise risk report requirement.45TABLE OF CONTENTSIn 2012, the NAIC also adopted the Own Risk and Solvency Assessment (“ORSA”) Model Act. The ORSAModel Act, when adopted by the various states, will require an insurance holding company system’s Chief RiskOfficer to submit annually to its lead state insurance regulator an ORSA. The ORSA is a confidential internalassessment appropriate to the nature, scale and complexity of an insurer, conducted by that insurer of thematerial and relevant risks identified by the insurer associated with an insurer’s current business plan and thesufficiency of capital resources to support those risks. The ORSA Model Act must be adopted by the individualstate legislatures and insurance regulators in order to be effective. Each of California, Ohio and Virginia, thestates in which several of our U.S. insurance subsidiaries are domiciled, adopted and require an ORSA filing,while North Carolina has yet to adopt this requirement into its insurance laws.We cannot predict with certainty the effect any enacted, proposed or future state or federal regulation orNAIC initiative may have on the conduct of our business. Furthermore, there can be no assurance that theregulatory requirements applicable to our business will not become more stringent in the future or result inmaterially higher cost than current requirements. Changes in regulation of our business may materially reduceour profitability, limit our growth or otherwise adversely affect our operations.The failure of any of the loss limitations or exclusions we employ, or changes in other claims or coverageissues, could have a material adverse effect on our financial condition or results of operations.Although we seek to mitigate our loss exposure through a variety of methods, the future is inherentlyunpredictable. It is difficult to predict the timing, frequency and severity of losses with statistical certainty. It isnot possible to completely eliminate our exposure to unforecasted or unpredictable events and, to the extent thatlosses from such risks occur, our financial condition and results of operations could be materially adverselyaffected.For instance, various provisions of our policies, such as limitations or exclusions from coverage or choice offorum, which have been negotiated to limit our risks, may not be enforceable in the manner we intend. At thepresent time, we employ a variety of endorsements to our policies that limit exposure to known risks. As industrypractices and legal, judicial, social and other conditions change, unexpected and unintended issues related toclaims and coverage may emerge. These issues may materially adversely affect our business by either extendingcoverage beyond the underwriting intent or by increasing the size or number of claims.In addition, we design our E&S lines’ policy terms to manage our exposure to expanding theories of legalliability like those which have given rise to claims for lead paint, asbestos, mold, construction defects andenvironmental matters. Many of the policies we issue also include conditions requiring the prompt reporting ofclaims to us and entitle us to decline coverage in the event of a violation of that condition. Also, many of ourpolicies limit the period during which a policyholder may bring a claim under the policy, which in many cases isshorter than the statutory period under which such claims can be brought against our policyholders. While theseexclusions and limitations help us assess and reduce our loss exposure and help eliminate known exposures tocertain risks, it is possible that a court or regulatory authority could nullify or void an exclusion or legislationcould be enacted modifying or barring the use of such endorsements and limitations. These types ofgovernmental actions could result in higher than anticipated losses and loss adjustment expenses, which couldhave a material adverse effect on our financial condition or results of operations. In some instances, thesechanges may not become apparent until some time after we have issued insurance policies that are affected bythe changes. As a result, the full extent of liability under our insurance contracts may not be known for manyyears after a contract is issued.The effect of emerging claim and coverage issues on our business is uncertain.As industry practices and legal, judicial, social and other environmental conditions change, unexpectedand unintended issues related to claims and coverage may emerge. These issues may materially adversely affectour business by either broadening coverage beyond our underwriting intent or by increasing the number or sizeof claims. In some instances, these changes may not become apparent until some time after we have issuedinsurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability underour insurance or reinsurance contracts may not be known for many years after a contract is issued.46•Asbestos liability applied to manufacturers of products and contractors who installed those products;•Apportionment of liability for settlement assigned to subcontractors who may have been involved inmundane tasks (such as installing sheetrock in a home); and•Court decisions, such as the 1995 Montrose decision in California, that read policy exclusionsnarrowly so as to expand coverage, thereby requiring insurers to create and write new exclusions.TABLE OF CONTENTSThree examples of unanticipated risks that affected the insurance industry are:We have exposure to losses arising from unpredictable natural disasters, terrorist acts, and other catastrophicevents. Claims from these events could reduce our earnings and cause volatility in our results of operations.We have exposure to losses arising from unpredictable natural disasters, terrorist acts, and other catastrophicevents. Natural disasters, terrorist acts, and other catastrophes can cause losses in a variety of ourproperty/casualty lines and generally result in an increase in the number of claims filed as well as the amount ofcompensation sought by claimants. The incidence and severity of catastrophes and terrorist acts are inherentlyunpredictable. The extent of losses from catastrophes is a function of the frequency of loss events, the totalamount of insured exposure in the area affected by each event and the severity of the events. Claims fromcatastrophic events could reduce our earnings and cash flows, cause volatility in our results of operations andcash flows for any fiscal period or materially impact our financial condition.We may have exposure to losses from terrorism for which we are required by law to provide coverageregarding such losses.U.S. insurers are required by state and federal law to offer coverage for terrorism in certain commercial lines,including workers’ compensation. As discussed under “Item 1. Business – Regulation – U.S. InsuranceRegulation – Federal Regulation,” the Terrorism Risk Insurance Act, or TRIA, as extended by the Terrorism RiskInsurance Program Reauthorization Act of 2015, or TRIPRA, requires commercial property and casualtyinsurance companies to offer coverage for acts of terrorism, whether foreign or domestic, and established afederal assistance program through the end of 2020 to help cover claims related to future terrorism-related losses.The impact of any terrorist act is unpredictable, and the ultimate impact on us would depend upon the nature,extent, location and timing of such an act. We reinsure a portion of the terrorism risk we retain under theprogram, and have no material exposure to an act stemming from nuclear, biological or chemical terrorism.Our investment portfolio is subject to significant market and credit risks, which could result in a materialadverse impact on our financial condition or results of operations.Our results of operations depend, in part, on the performance of our investment portfolio. We seek to hold adiversified portfolio of investments that is managed by professional investment advisory management firms inaccordance with our investment policy and periodically reviewed by our Investment Committee. However, ourinvestments are subject to general economic conditions and market risks as well as risks inherent to particularsecurities.Our primary market risk exposures are to changes in interest rates and equity prices. See “Quantitative andQualitative Disclosures About Market Risk.” In recent years, interest rates have been at or near historic lows. Aprotracted low interest rate environment would continue to place pressure on net investment income,particularly related to fixed income securities and short-term investments, which, in turn, may materiallyadversely affect our operating results. Future increases in interest rates could cause the values of our fixedincome securities portfolios to decline, with the magnitude of the decline depending on the duration of ourportfolio and the amount by which interest rates increase. Some fixed income securities have call or prepaymentoptions, which represent possible reinvestment risk in declining rate environments. Other fixed incomesecurities such as mortgage-backed and asset-backed securities carry prepayment risk or, in a rising interest rateenvironment, may not pre-pay as quickly as expected. In addition, individual securities in our fixed incomesecurities portfolio are subject to credit risk and default. Downgrades in the credit ratings of fixed maturities canhave a significant negative effect on the market valuation of such securities.47TABLE OF CONTENTSThe severe downturn in the public debt and equity markets beginning in 2008 resulted in significantrealized and unrealized losses in our investment portfolio. In the event of another financial crisis, we could incursubstantial realized and unrealized investment losses in future periods, which would have a material adverseimpact on our financial condition, results of operations, debt and financial strength ratings, insurancesubsidiaries’ capital liquidity and ability to access capital markets.The value of our investment portfolio is subject to the risk that certain investments may default or becomeimpaired due to deterioration in the financial condition of one or more issuers of the securities held, or due todeterioration in the financial condition of an insurer that guarantees an issuer’s payments of such investments.Such defaults and impairments could reduce our net investment income and result in realized investment losses.We hold investments in publicly-traded syndicated bank loans (15.4% of the carrying value of our investedassets as of December 31, 2015). Most of these loans are issued to sub-investment grade borrowers. While thisclass of investment has been profitable for us, a severe downturn in the markets could affect the value of theseinvestments, including the possibility that we would suffer substantial losses on this portfolio. As ofDecember 31, 2015, the fair value of our investments in publicly traded syndicated bank loans was $180.1million.As of December 31, 2015, we held equity and debt investments of $26.0 million and $6.5 million,respectively, in non-public limited liability companies that have invested in renewable energy investments.These investments were sponsored and are managed by an affiliate of one of our principal shareholders. Weinvested in the equity and debt of these projects because we anticipate earning attractive risk-adjusted returnsfrom these investments. However, our investments in these projects are illiquid and the ultimate results fromthese investments may be unknown for some time.We also invest in marketable equity securities. These securities are carried on the balance sheet at fairmarket value and are subject to potential losses and declines in market value. Our invested assets also includeinterests in limited partnerships and privately held debt investments totaling $22.0 million at December 31,2015. These investments were designed to provide diversification of risk and enhance the return on the overallportfolio. However, these investments entail substantial risks and are generally illiquid. Our investment portfoliois subject to increased valuation uncertainties when investment markets are illiquid. The valuation ofinvestments is more subjective when markets are illiquid, thereby increasing the risk that the estimated fair value( i.e., the carrying amount) does not reflect prices at which actual transactions would occur.Risks for all types of securities are managed through application of our investment policy, whichestablishes investment parameters that include (but are not limited to) maximum percentages of investment incertain types of securities and minimum levels of credit quality, which we believe are within guidelinesestablished by the NAIC, BMA and various state insurance departments, as applicable.Although we seek to preserve our capital, we cannot be certain that our investment objectives will beachieved, and results may vary substantially over time. In addition, although we seek to employ investmentstrategies that are not correlated with our insurance and reinsurance exposures, losses in our investment portfoliomay occur at the same time as underwriting losses and, therefore, exacerbate the adverse effect of the losses onus.The insurance and reinsurance business is historically cyclical, and we may experience periods with excessunderwriting capacity and unfavorable premium rates, which could materially adversely affect our business.Historically, insurers and reinsurers have experienced significant fluctuations in operating results due tocompetition, frequency and severity of catastrophic events, levels of capacity, adverse trends in litigation,regulatory constraints, general economic conditions and other factors. We have experienced these types offluctuations during our Company’s short history. The supply of insurance and reinsurance is related toprevailing prices, the level of insured losses and the level of capital available to the industry that, in turn, mayfluctuate in response to changes in rates of return on investments being earned in the insurance and reinsuranceindustry. As a result, the insurance and reinsurance business historically has been a cyclical industrycharacterized by periods of intense price competition due to excessive underwriting capacity as well as periodswhen shortages of capacity increased premium levels. Demand for insurance and48TABLE OF CONTENTSreinsurance depends on numerous factors, including the frequency and severity of catastrophic events, levels ofcapacity, the introduction of new capital providers, general economic conditions and underwriting results ofprimary insurers. All of these factors fluctuate and may contribute to price declines generally in the insuranceand reinsurance industry.We cannot predict with certainty whether market conditions will improve, remain constant or deteriorate.Negative market conditions may impair our ability to underwrite insurance and reinsurance at rates we considerappropriate and commensurate relative to the risk assumed. If we cannot underwrite insurance or reinsurance atappropriate rates, our ability to transact business will be materially and adversely affected. Any of these factorscould lead to a material adverse effect on our business, financial condition and results of operations.We may become subject to additional government or market regulation which may have a material adverseimpact on our business.Market disruptions like those experienced during the credit-driven financial market collapse in 2008, aswell as the dramatic increase in the capital allocated to alternative asset management during recent years, haveled to increased governmental as well as self-regulatory scrutiny of the insurance industry in general. Inaddition, certain legislation proposing greater regulation of the industry is periodically considered by governingbodies of some jurisdictions, and the credit-driven equity market collapse may increase the likelihood that someincreased regulation of the industry is mandated.Because we are a Bermuda company, we are subject to changes in Bermuda law and regulation that mayhave a material adverse impact on our operations, including through the imposition of tax liability or increasedregulatory supervision. In addition, we will be exposed to any changes in the political environment in Bermuda.Our business could be materially adversely affected by changes in state laws, including those relating toasset and reserve valuation requirements, surplus requirements, limitations on investments and dividends,enterprise risk and risk-based capital requirements and, at the federal level, by laws and regulations that mayaffect certain aspects of the insurance industry, including proposals for preemptive federal regulation. The U.S.federal government generally has not directly regulated the insurance industry except for certain areas of themarket, such as insurance for flood, nuclear and terrorism risks. However, the federal government has undertakeninitiatives or considered legislation in several areas that may affect the insurance industry, including tort reform,corporate governance and the taxation of reinsurance companies. The Dodd-Frank Act also established theFederal Insurance Office, which is authorized to study, monitor and report to Congress on the insurance industryand to recommend that the FSOC designate an insurer as an entity posing risks to U.S. financial stability in theevent of the insurer’s material financial distress or failure. In December 2013, the Federal Insurance Office issueda report on alternatives to modernize and improve the system of insurance regulation in the United States,including increasing national uniformity through either a federal charter or effective action by the states. Anyadditional regulations established as a result of the Dodd-Frank Act or actions in response to the FederalInsurance Office Report could increase our costs of compliance or lead to disciplinary action. In addition,legislation has been introduced from time to time that, if enacted, could result in the federal governmentassuming a more direct role in the regulation of the insurance industry, including federal licensing in addition toor in lieu of state licensing and reinsurance for natural catastrophes. We are unable to predict whether anylegislation will be enacted or any regulations will be adopted, or the effect any such developments could haveon our business, financial condition or results of operations.The Bermuda insurance and reinsurance regulatory framework has become subject to increased scrutiny inmany jurisdictions. As a result, the BMA has implemented and imposed additional requirements on thecompanies it regulates, as part of its efforts to achieve equivalence under Solvency II, the European Unionregulatory regime that was enacted in November 2009 which imposes new solvency and governancerequirements across all European Union Member States. Although Solvency II was originally supposed to havebecome effective by November 1, 2012, a proposed Omnibus II directive was to set revised dates fortransposition and implementation of Solvency II by the European Union Member States. However, there havebeen a series of delays in the European Parliament vote to approve the Omnibus II Directive. Accordingly,further delay in the implementation of Solvency II is likely, but the extent and nature of the49TABLE OF CONTENTSdelay is uncertain. The Solvency II Directive is expected to come into force as of January 1, 2016. Over thecourse of the last several years, Bermuda introduced a number of legislative and regulatory changes to itsinsurance regulatory regime to position itself to be granted full equivalence under Solvency II. On November 26,2015, via delegated act, the European Commission granted Bermuda full equivalence in all areas of Solvency IIfor an indefinite period of time. The European Commission’s decision will now be reviewed by the EuropeanParliament and European Council, over the next 90 day period (plus a possible three month extension). Thedecision to approve or reject the delegated act granting Bermuda full equivalency is expected to occur on orbefore the end of the first quarter of 2016. If and when approved, Bermuda’s jurisdictional equivalency will beretroactive to January 2016.It is impossible to predict what, if any, changes in the regulations applicable to us, the markets in which weoperate, trade and invest or the counterparties with which we do business may be instituted in the future. Anysuch regulation could have a material adverse impact on our business.Our reinsurance business is subject to loss settlements made by ceding companies and fronting carriers, whichcould materially adversely affect our performance.Where JRG Re enters into assumed reinsurance contracts with third parties, all loss settlements made by theceding company will be unconditionally binding upon us, provided they are within the terms of the underlyingpolicies and within the terms of the relevant contract. While we believe the ceding companies will settle suchclaims in good faith, we are bound to accept the claims settlements agreed to by the ceding companies. Underthe underlying policies, each ceding company typically bears the burden of proving that a contractual exclusionapplies to a loss, and there may be circumstances where the facts of a loss are insufficient to support theapplication of an exclusion. In such circumstances, we assume such losses under the reinsured policies, whichcould materially adversely affect our performance.Our operating results have in the past varied from quarter to quarter and may not be indicative of our long-term prospects.Our operating results are subject to fluctuation and have historically varied from quarter to quarter. Weexpect our quarterly results to continue to fluctuate in the future due to a number of factors, including thegeneral economic conditions in the markets where we operate, the frequency of occurrence or severity ofcatastrophic or other insured events, fluctuating interest rates, claims exceeding our loss reserves, competition inour industry, deviations from expected renewal rates of our existing policies and contracts, adverse investmentperformance and the cost of reinsurance and retrocessional coverage.In particular, we seek to underwrite products and make investments to achieve favorable returns on tangibleequity over the long term. In addition, our opportunistic nature and focus on long-term growth in tangibleequity may result in fluctuations in total premiums written from period to period as we concentrate onunderwriting contracts that we believe will generate better long-term, rather than short-term, results.Accordingly, our short-term results of operations may not be indicative of our long-term prospects.We could be forced to sell investments to meet our liquidity requirements.We invest the premiums we receive from our insureds and ceding companies until they are needed to paypolicyholder claims or until they are recognized as profits. Consequently, we seek to manage the duration of ourinvestment portfolio based on the duration of our loss and loss adjustment expense reserves to ensure sufficientliquidity and avoid having to liquidate securities to fund claims. Risks such as inadequate loss and lossadjustment reserves or unfavorable trends in litigation could potentially result in the need to sell investments tofund these liabilities. Such sales could result in significant realized losses depending on the conditions of thegeneral market, interest rates and credit issues with individual securities.We may be unable to obtain reinsurance coverage at reasonable prices or on terms that provide us adequateprotection.We purchase reinsurance in many of our lines of business to help manage our exposure to insurance andreinsurance risks that we underwrite and to reduce volatility in our results. In addition, JRG Re has managed itsrisk through retrocession arrangements with third-party reinsurers. A retrocession is a practice whereby areinsurer cedes risk to one or more other reinsurers.50TABLE OF CONTENTSThe availability and cost of reinsurance are subject to prevailing market conditions, both in terms of priceand available capacity, each of which can affect our business volume and profitability. The availability ofreasonably affordable reinsurance is a critical element of our business plan. One important way we utilizereinsurance is to reduce volatility in claims payments by limiting our exposure to losses from large risks.Another way we use reinsurance is to purchase substantial protection against concentrated losses when we enternew markets. As a result, our ability to manage volatility and avoid significant losses, expand into new marketsor grow by offering insurance to new kinds of enterprises may be limited by the unavailability of reasonablypriced reinsurance. We may not be able to obtain reinsurance on acceptable terms or from entities withsatisfactory creditworthiness. In such event, if we are unwilling to accept the terms or credit risk of potentialreinsurers, we would have to reduce the level of our underwriting commitments, which would reduce ourrevenues.Many reinsurance companies have begun to exclude certain coverages from, or alter terms in, thereinsurance contracts we enter into with them. Some exclusions relate to risks that we cannot in turn excludefrom the policies we write due to business or regulatory constraints. In addition, reinsurers are imposing terms,such as lower per occurrence and aggregate limits, on direct insurers that do not wholly cover the risks written bythese direct insurers. As a result, we, like other direct insurance companies, write insurance policies which tosome extent do not have the benefit of reinsurance protection. These gaps in reinsurance protection expose us togreater risk and greater potential losses. For example, certain reinsurers have excluded coverage for terrorist actsor priced such coverage at unreasonably high rates. Many direct insurers, including us, have written policieswithout terrorist act exclusions and in many cases we cannot exclude terrorist acts because of regulatoryconstraints. We may, therefore, be exposed to potential losses as a result of terrorist acts. See also “Business — Purchase of Reinsurance.”We are subject to credit risk with regard to our reinsurance counterparties and insurance companies withwhich we have a fronting arrangement.Although reinsurance makes the assuming reinsurer liable to us to the extent of the risk ceded, we are notrelieved of our primary liability to our insureds as the direct insurer. At December 31, 2015, reinsurancerecoverable on unpaid losses from our three largest reinsurers was $75.4 million in the aggregate and represented57.2% of the total balance. Additionally, prepaid reinsurance premiums ceded to three reinsurers atDecember 31, 2015 was $25.4 million in the aggregate, or 57.6% of the total balance. At December 31, 2015, allof our material reinsurance recoverable amounts are from companies with A.M. Best ratings of “A-” or better orcollateralized by the reinsurer, but we cannot be sure that our reinsurers will pay all reinsurance claims on atimely basis or at all. For example, reinsurers may default in their financial obligations to us as the result ofinsolvency, lack of liquidity, operational failure, fraud, asserted defenses based on agreement wordings or theprinciple of utmost good faith, asserted deficiencies in the documentation of agreements or other reasons. Thefailure of a reinsurer to pay us does not lessen our contractual obligations to insureds. If a reinsurer fails to paythe expected portion of a claim or claims, our net losses might increase substantially and materially adverselyaffect our financial condition. Any disputes with reinsurers regarding coverage under reinsurance contractscould be time-consuming, costly and uncertain of success.Downgrades to the credit ratings of our reinsurance counterparties may result in the reduction of ratingagency capital credit provided by those reinsurance contracts and could, therefore, result in a downgrade of ourown credit ratings. In addition, under the reinsurance regulations, in many states where our U.S. insurancesubsidiaries are domiciled, certain reinsurers are required to collateralize their obligations to us and to the extentthey do not do so, our ability for regulators to recognize this reinsurance will be impaired. We evaluate eachreinsurance claim based on the facts of the case, historical experience with the reinsurer on similar claims andexisting case law and include any amounts deemed uncollectible from the reinsurer in our reserve foruncollectible reinsurance. See also “Business – Purchase of Reinsurance.”Similarly, in our fronting business, which we conduct through our Specialty Admitted Insurance segment,we are primarily liable to the insureds because we have issued the policies. While we customarily require acollateral trust arrangement to secure the obligations of the insurance entity for which we are fronting, we do notobtain collateral in every instance and in situations where we do obtain collateral for the51•fund liquidity needs caused by underwriting or investment losses;•replace capital lost in the event of significant reinsurance losses or adverse reserve developments;•satisfy letters of credit or guarantee bond requirements that may be imposed by our clients or byregulators;•meet rating agency or regulatory capital requirements; or•respond to competitive pressures.TABLE OF CONTENTSobligations of the other insurance entity, it is possible that the collateral could be insufficient to cover allclaims. In that event, we would be contractually entitled to recovery from the entity for which we are fronting,but it is possible that, for any of a variety of reasons, the other party could default in its obligations. See also“Business – Business Segments – Specialty Admitted Insurance Segment – Fronting Business.”We, or agents we have appointed, may act based on inaccurate or incomplete information regarding theaccounts we underwrite, or such agents may exceed their authority or commit fraud when binding policies onour behalf.We, and our MGAs and other agents who have the ability to bind our policies, rely on information providedby insureds or their representatives when underwriting insurance policies. While we may make inquiries tovalidate or supplement the information provided, we may make underwriting decisions based on incorrect orincomplete information. It is possible that we will misunderstand the nature or extent of the activities orfacilities and the corresponding extent of the risks that we insure because of our reliance on inadequate orinaccurate information.In addition, in the Specialty Admitted Insurance segment, MGAs and other agents have the authority tobind policies on our behalf. If any such agents exceed their authority or engage in fraudulent activities, ourfinancial condition and results of operations could be materially adversely affected.Our associates could take excessive risks, which could negatively affect our financial condition and business.As an insurance enterprise, we are in the business of binding certain risks. The associates who conduct ourbusiness, including executive officers and other members of management, underwriters, sales managers,investment professionals, product managers, sales agents, and other associates, as well as managing generalagents, do so in part by making decisions and choices that involve exposing us to risk. These include decisionssuch as setting underwriting guidelines and standards, product design and pricing, determining which businessopportunities to pursue and other decisions. We endeavor, in the design and implementation of ourcompensation programs and practices, to avoid giving our associates incentives to take excessive risks.Associates may, however, take such risks regardless of the structure of our compensation programs and practices.Similarly, although we employ controls and procedures designed to monitor associates’ business decisions andprevent us from taking excessive risks, these controls and procedures may not be effective. If our associates takeexcessive risks, the impact of those risks could have a material adverse effect on our financial condition andbusiness operations.We may require additional capital in the future, which may not be available or available only on unfavorableterms.Our future capital requirements depend on many factors, including our ability to write new and renewalbusiness successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our abilityto underwrite depends largely upon the expected quality of our claims paying process and our perceivedfinancial strength as estimated by potential insureds, brokers, other intermediaries and independent ratingagencies. To the extent that our existing capital is insufficient to fund our future operating requirements, coverclaim losses, or satisfy ratings agencies in order to maintain a satisfactory rating, we may need to raise additionalcapital in the future through offerings of debt or equity securities or otherwise to:52TABLE OF CONTENTSAny equity or debt financing, if available at all, may be on terms that are unfavorable to us. Further, anyadditional capital raised through the sale of equity could dilute your ownership interest in the Company andwould likely cause the value of our shares to decline. Additional capital raised through the issuance of debt mayresult in creditors having rights, preferences and privileges senior or otherwise superior to those of the holders ofour shares and may limit our flexibility in operating our business and make it more difficult to obtain capital inthe future. Disruptions, uncertainty, or volatility in the capital and credit markets may also limit our access tocapital required to operate our business. If we are not able to obtain adequate capital, or obtain it on favorableterms, our business, financial condition and results of operations could be materially adversely affected.We rely on our systems and employees, and those of certain third-party vendors and service providers inconducting our operations, and certain failures, including internal or external fraud, operational errors,systems malfunctions, or cyber-security incidents, could materially adversely affect our operations.We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders,clerical and recordkeeping errors and computer or telecommunications systems malfunctions. Our businessesdepend on our ability to process a large number of increasingly complex transactions. If any of our operational,accounting, or other data processing systems fail or have other significant shortcomings, we could be materiallyadversely affected. Similarly, we depend on our employees and could be materially adversely affected if one ormore of our employees causes a significant operational breakdown or failure, either as a result of human error orintentional sabotage or fraudulent manipulation of our operations or systems.Third parties with whom we do business, including vendors that provide services or security solutions forour operations, could also be sources of operational and information security risk to us, including frombreakdowns, failures, or capacity constraints of their own systems or employees. Any of these occurrences coulddiminish our ability to operate one or more of our businesses, or cause financial loss, potential liability toinsureds, inability to secure insurance, reputational damage or regulatory intervention, which could materiallyadversely affect us.We rely on our multiple proprietary operating systems as well as operating systems of third-party providersto issue policies, pay claims, run modeling functions and complete various internal processes. We may besubject to disruptions of such operating systems arising from events that are wholly or partially beyond ourcontrol, which may include, for example, electrical or telecommunications outages, natural or man-madedisasters, such as earthquakes, hurricanes, floods or tornados, or events arising from terrorist acts. Suchdisruptions may give rise to losses in service to insureds and loss or liability to us. In addition, there is the riskthat our controls and procedures as well as our business continuity, disaster recovery and data security systemsprove to be inadequate. The computer systems and network systems we and others use could be vulnerable tounforeseen problems. These problems may arise in both our internally developed systems and the systems ofthird-party service providers. In addition, our computer systems and network infrastructure present security risksand could be susceptible to hacking, computer viruses or data breaches. Any such failure could affect ouroperations and could materially adversely affect our results of operations by requiring us to expend significantresources to correct the defect, as well as by exposing us to litigation or losses not covered by insurance.Although we have business continuity plans and other safeguards in place, our business operations may bematerially adversely affected by significant and widespread disruption to our physical infrastructure or operatingsystems and those of third-party service providers that support our business.Our operations rely on the secure processing, transmission and storage of confidential information in ourcomputer systems and networks. Our technologies, systems and networks may become the target of cyber-attacksor information security breaches that could result in the unauthorized release, gathering, monitoring, misuse,loss or destruction of our or our insureds’ or reinsured’s confidential, proprietary and other information, orotherwise disrupt our or our insureds’, reinsured’s or other third parties’ business operations, which in turn mayresult in legal claims, regulatory scrutiny and liability, reputational damage, the incurrence of costs to eliminateor mitigate further exposure and the loss of customers. Although to date we have not experienced any materiallosses relating to cyber-attacks or other information security breaches, there can be no assurance that we will notsuffer such losses in the future. Our risk and exposure53•An increase in capital-raising by companies in our lines of business, which could result in new entrantsto our markets and an excess of capital in the industry;•The deregulation of commercial insurance lines in certain states and the possibility of federalregulatory reform of the insurance industry, which could increase competition from standard carriersfor our E&S lines of insurance business; and•Changing practices caused by the Internet may lead to greater competition in the insurance business.Among the possible changes are shifts in the way in which E&S lines insurance is purchased.•We currently depend largely on the wholesale distribution model for our Excess and Surplus Linessegment’s premiums. If the wholesale distribution model were to be significantly altered by changes inthe way E&S lines risks were marketed, including, without limitation, through use of the Internet, itcould have a material adverse effect on our premiums, underwriting results and profits.TABLE OF CONTENTSto these matters remains heightened because of, among other things, the evolving nature of these threats and theoutsourcing of some of our business operations. As a result, cyber-security and the continued development andenhancement of our controls, processes and practices designed to protect our systems, computers, software, dataand networks from attack, damage or unauthorized access remain a priority. As cyber-threats continue to evolve,we may be required to expend significant additional resources to continue to modify or enhance our protectivemeasures or to investigate and remediate any information security vulnerabilities.Disruptions or failures in the physical infrastructure or operating systems that support our businesses andcustomers, or cyber-attacks or security breaches of the networks, systems or devices that our customers use toaccess our products and services could result in customer attrition, regulatory fines, penalties or intervention,reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any ofwhich could materially adversely affect our financial condition or results of operations.We may not be able to manage our growth effectively.We intend to grow our business in the future, which could require additional capital, systems developmentand skilled personnel. We cannot assure you that we will be able to meet our capital needs, expand our systemsand our internal controls effectively, allocate our human resources optimally, identify and hire qualifiedemployees or incorporate effectively the components of any businesses we may acquire in our effort to achievegrowth. The failure to manage our growth effectively could have a material adverse effect on our business,financial condition and results of operations.We operate in a highly competitive environment and we may not continue to be able to compete effectivelyagainst larger or more well-established business rivals.We face competition from other specialty insurance companies, standard insurance companies andunderwriting agencies, as well as from diversified financial services companies that are larger than we are andthat have greater financial, marketing and other resources than we do. Some of these competitors also havelonger experience and more market recognition than we do in certain lines of business. In addition, it may bedifficult or prohibitively expensive for us to implement technology systems and processes that are competitivewith the systems and processes of these larger companies.In particular, competition in the insurance and reinsurance industry is based on many factors, includingprice of coverage, the general reputation and perceived financial strength of the company, relationships withbrokers, terms and conditions of products offered, ratings assigned by independent rating agencies, speed ofclaims payment and reputation, and the experience and reputation of the members of our underwriting team inthe particular lines of insurance and reinsurance we seek to underwrite. See “Business – Competition.”A number of new, proposed or potential legislative or industry developments could further increasecompetition in our industry. These developments include:54•collect and properly analyze a substantial volume of data from our insureds;•develop, test and apply appropriate actuarial projections and rating formulas;•closely monitor and timely recognize changes in trends; and•project both frequency and severity of our insureds’ losses with reasonable accuracy.•insufficient or unreliable data;•incorrect or incomplete analysis of available data;•uncertainties generally inherent in estimates and assumptions;•our failure to implement appropriate actuarial projections and rating formulas or other pricingmethodologies;•regulatory constraints on rate increases;•our failure to accurately estimate investment yields and the duration of our liability for loss and lossadjustment expenses; and•unanticipated court decisions, legislation or regulatory action.TABLE OF CONTENTSThere is no assurance that we will be able to continue to compete successfully in the insurance orreinsurance markets. Increased competition in these markets could result in a change in the supply and/ordemand for insurance or reinsurance, affect our ability to price our products at risk-adequate rates, affect ourability to retain business with existing customers, or underwrite new business on favorable terms. If thisincreased competition so limits our ability to transact business, our operating results could be materiallyadversely affected.If we are unable to underwrite risks accurately and charge competitive yet profitable rates to ourpolicyholders, our business, financial condition and results of operations will be materially adversely affected.In general, the premiums for our insurance policies are established at the time a policy is issued and,therefore, before all of our underlying costs are known. Like other insurance companies, we rely on estimates andassumptions in setting our premium rates. Establishing adequate premium rates is necessary, together withinvestment income, to generate sufficient revenue to offset losses, loss adjustment expenses and otherunderwriting costs and to earn a profit. If we do not accurately assess the risks that we assume, we may not chargeadequate premiums to cover our losses and expenses, which would materially adversely affect our results ofoperations and our profitability. Alternatively, we could set our premiums too high, which could reduce ourcompetitiveness and lead to lower revenues.Pricing involves the acquisition and analysis of historical loss data and the projection of future trends, losscosts and expenses, and inflation trends, among other factors, for each of our products in multiple risk tiers andmany different markets. In order to accurately price our policies, we:We seek to implement our pricing accurately in accordance with our assumptions. Our ability to undertakethese efforts successfully and, as a result, accurately price our policies, is subject to a number of risks anduncertainties, including:If actual renewals of our existing contracts do not meet expectations, our premiums written in future years andour future results of operations could be materially adversely affected.Most of our contracts are written for a one-year term. In our financial forecasting process, we makeassumptions about the renewal of our prior year’s contracts. The insurance and reinsurance industries havehistorically been cyclical businesses with intense competition, often based on price. If actual renewals do notmeet expectations or if we choose not to write a renewal because of pricing conditions, our premiums written infuture years and our future operations would be materially adversely affected.55TABLE OF CONTENTSWe may change our underwriting guidelines or our strategy without shareholder approval.Our management has the authority to change our underwriting guidelines or our strategy without notice toour shareholders and without shareholder approval. As a result, we may make fundamental changes to ouroperations without shareholder approval, which could result in our pursuing a strategy or implementingunderwriting guidelines that may be materially different from the strategy or underwriting guidelines describedin the section titled “Business” or elsewhere in this Annual Report.Litigation and legal proceedings against our subsidiaries could have a material adverse effect on our business,financial condition and/or results of operations.As an insurance and reinsurance holding company, our subsidiaries are named as defendants in variouslegal actions in the ordinary course of business. We believe that the outcome of presently pending matters,individually and in the aggregate, will not have a material adverse effect on our consolidated financial position.However, the outcomes of lawsuits cannot be predicted and, if determined adversely, could require us to paysignificant damage amounts or to change aspects of our operations, which could have a material adverse effecton our financial results.Changes in accounting practices and future pronouncements may materially affect our reported financialresults.Developments in accounting practices may require us to incur considerable additional expenses to comply,particularly if we are required to prepare information relating to prior periods for comparative purposes or toapply the new requirements retroactively. The impact of changes in current accounting practices and futurepronouncements cannot be predicted but may affect the calculation of net income, shareholders’ equity andother relevant financial statement line items.In particular, the U.S. Financial Accounting Standards Board (the “FASB”) and the InternationalAccounting Standards Board (the “IASB” and together with the FASB, the “Boards”) continue to work jointlyon an insurance contract project, although the Boards acknowledge that the resulting standards will notconverge. The Boards both issued proposals during 2013 regarding accounting and reporting updates andguidance for insurance contracts which could result in a material change from the current insurance accountingmodels towards more fair value-based models. The FASB decided that the core accounting framework willremain essentially unchanged for property casualty insurers, although the required financial statementsdisclosures will be enhanced.Additionally, the Boards continue to develop a comprehensive model for accounting and reporting offinancial instruments, which may lead to further recognition of fair value changes through net income andchanges in the way impairments are measured. Changes resulting from these two projects could have asignificant impact on the earnings of insurance industry participants. There remains uncertainty with respect tothe final outcome of these two projects.Further, our U.S. insurance subsidiaries are required to comply with statutory accounting principles(“SAP”). SAP and various components of SAP (such as actuarial reserving methodology) are subject to constantreview by the NAIC and its task forces and committees, as well as state insurance departments, in an effort toaddress emerging issues and otherwise improve financial reporting. Various proposals are pending beforecommittees and task forces of the NAIC, some of which, if enacted, could have negative effects on insuranceindustry participants. The NAIC continuously examines existing laws and regulations in the United States. Wecannot predict whether or in what form such reforms will be enacted and, if so, whether the enacted reforms willpositively or negatively affect us.In addition, the NAIC Accounting Practices and Procedures manual provides that state insurancedepartments may permit insurance companies domiciled in their jurisdiction to depart from SAP by grantingthem permitted accounting practices. We cannot predict whether or when the insurance departments of the statesof domicile of our competitors may permit them to utilize advantageous accounting practices that depart fromSAP, the use of which may not be permitted by the insurance departments of the states of domicile of our U.S.insurance subsidiaries. Further, we cannot assure that future changes to SAP or components of SAP or the grantof permitted accounting practices to our competitors will not have a negative impact on us.56TABLE OF CONTENTSOur ability to implement our business strategy could be delayed or adversely affected by Bermuda employmentrestrictions relating to the ability to obtain and retain work permits for key employees in Bermuda.Under Bermuda law, non-Bermudians (other than spouses of Bermudians) may not engage in any gainfuloccupation in Bermuda without an appropriate governmental work permit. Our success may depend in part onthe continued services of key employees in Bermuda. A work permit may be granted or renewed upon showingthat, after proper public advertisement, no Bermudian (or spouse of a Bermudian or a holder of a permanentresident’s certificate or holder of a working resident’s certificate) is available who meets the minimum standardsreasonably required by the employer. A work permit is issued with an expiry date (up to ten years) and noassurances can be given that any work permit will be issued or, if issued, renewed upon the expiration of therelevant term. If work permits are not obtained or are not renewed for our principal employees, we would losetheir services, which could materially affect our businesses.If California, North Carolina, Ohio, or Virginia significantly increase the assessments our insurancecompanies are required to pay, our financial condition and results of operations will suffer.Our insurance companies are subject to assessments in California (the domiciliary state for Falls Lake Fireand Casualty Company), North Carolina (the domiciliary state for Stonewood Insurance), Ohio (the domiciliarystate for James River Insurance, Falls Lake National and Falls Lake General) and Virginia (the domiciliary statefor James River Casualty), for various purposes, including the provision of funds necessary to fund theoperations of the various insurance departments and the state funds that pay covered claims under certainpolicies written by impaired, insolvent or failed insurance companies. These assessments are generally set basedon an insurer’s percentage of the total premiums written in the insurer’s state within a particular line of business.As our U.S.-based insurance subsidiaries grow, our share of any assessments may increase. We cannot predictwith certainty the amount of future assessments because they depend on factors outside our control, such asinsolvencies of other insurance companies. Significant assessments could result in higher than expectedoperating expenses and have a material adverse effect on our financial condition or results of operations.Our use of third-party claims administrators in certain lines of business may result in higher losses and lossadjustment expenses.Historically, our Excess and Surplus Lines and Specialty Admitted Insurance segments handled all claimsusing employed staff. As we have entered new lines of business, we now use third-party claims administratorsand contract employees to administer claims subject to the supervision of our employed staff. It is possible thatthese contract employees and third-party claims administrators may achieve less desirable results on claims thanhas historically been the case for our internal staff, which could result in significantly higher losses and lossadjustment expenses in those lines of business.Risks Related to TaxationThe Company, JRG Re and James River Group Holdings UK Limited may be subject to U.S. federal incometaxation.The Company and JRG Re are each incorporated under the laws of Bermuda. James River Group HoldingsUK Limited (“James River UK”) is incorporated under the laws of England and Wales. We believe that our non-U.S. holding companies and JRG Re’s activities, as contemplated, will not cause them to be treated as engagingin a U.S. trade or business and will not cause them to be subject to current U.S. federal income taxation on theirnet income. However, there are no definitive standards provided by the Internal Revenue Code of 1986, asamended (the “Code”), regulations or court decisions as to the specific activities that constitute being engagedin the conduct of a trade or business within the United States, and any such determination is essentially factualin nature and must be made annually. The U.S. Internal Revenue Service (the “IRS”) could successfully assertthat our non-U.S. holding companies or JRG Re (or both) are engaged in a trade or business in the United Statesor, under the applicable income tax treaty, are engaged in a trade or business in the United States through apermanent establishment, and thus are subject to current U.S. federal income taxation. If our non-U.S. holdingcompanies or JRG Re were deemed to be engaged in a trade or business in the United States (or, under theapplicable income tax treaty, were deemed to be so engaged through a permanent establishment), our non-U.S.holding companies or JRG Re, as57TABLE OF CONTENTSapplicable, would become subject to U.S. federal income tax on income “effectively connected” (or treated aseffectively connected) with the U.S. trade or business and would become subject to the “branch profits” tax onearnings and profits that are both effectively connected with the U.S. trade or business and deemed repatriatedout of the United States. Any such federal tax liability could materially adversely affect our results of operations.U.S. persons who own our shares may be subject to U.S. federal income taxation on our undistributed earningsand may recognize ordinary income upon disposition of shares.If we are considered a passive foreign investment company as defined in Section 1297(a) of the Code(“PFIC”) for U.S. federal income tax purposes, a U.S. person who owns any of our shares could be subject toadverse tax consequences, including becoming subject to a greater tax liability than might otherwise apply andto tax on amounts in advance of when tax would otherwise be imposed, in which case your investment could bematerially adversely affected. In addition, if we were considered a PFIC, upon the death of any U.S. individualowning shares, such individual’s heirs or estate would not be entitled to a “step-up” in the basis of the sharesthat might otherwise be available under U.S. federal income tax laws. We believe that we are not and have notbeen, and currently do not expect to become, a PFIC for U.S. federal income tax purposes. Our belief that we arenot and have not been a PFIC is based, in part, on the fact that the PFIC rules include provisions intended toprovide an exception for bona fide insurance companies predominantly engaged in an insurance business.However, the scope of this exception is not entirely clear, especially in its application to holding companiesindirectly engaged in an insurance business, and other than recently issued proposed regulations, there are noadministrative pronouncements, judicial decisions or current regulations that provide guidance as to theapplication of the PFIC rules to insurance companies. Under the recently proposed regulations, we would meetthe exception for bona fide insurance companies provided that our investment income is from assets held by usto meet obligations under insurance, annuity, or reinsurance contracts. However, the IRS is continuing to seekcomment on how to determine the portion of a company’s assets that are held to meet obligations under suchinsurance, annuity, or reinsurance contracts. New regulations or pronouncements interpreting or clarifying theserules may be forthcoming. We cannot predict what impact, if any, such guidance would have on an investor thatis subject to U.S. federal income taxation. As a result, we cannot assure you that we will not be deemed a PFIC bythe IRS. If we were considered a PFIC, it could have material adverse tax consequences for an investor that issubject to U.S. federal income taxation.U.S. persons who, directly or indirectly or through attribution rules, own 10% or more of the voting powerof our shares (“U.S. 10% shareholders”), may be subject to the controlled foreign corporation (the “CFC”) rules.Under these rules, if a foreign corporation is a CFC for an uninterrupted period of 30 days or more, each U.S.10% shareholder must annually include in its taxable income its pro rata share of the CFC’s “subpart F income,”even if no distributions are made. In general (subject to the special rules applicable to “related person insuranceincome” described below), for purposes of taking into account insurance income, a foreign insurance companywill be treated as a CFC only if U.S. 10% shareholders collectively own more than 25% of the total combinedvoting power or total value of the company’s shares at any point during any year. While JRG Re is a CFC, webelieve that the restrictions in our bye-laws placed on the voting power of our shares should generally preventshareholders who acquire shares from being treated as U.S. 10% shareholders of a CFC. Our existing shareholderswho beneficially owned in excess of 10% of our common shares prior to and immediately following the IPO arenot subject to this limitation. We cannot assure you, however, that these rules will not apply to you. If you are aU.S. person we strongly urge you to consult your own tax advisor concerning the CFC rules.Related Person Insurance Income. If (a) our gross income attributable to insurance or reinsurance policiespursuant to which the direct or indirect insureds are our direct or indirect U.S. shareholders or persons related tosuch U.S. shareholders equals or exceeds 20% of our gross insurance income in any taxable year; and (b) director indirect insureds and persons related to such insureds own directly or indirectly 20% or more of the votingpower or value of our shares (together, the “RPII Test”), a U.S. person who owns any of our shares directly orindirectly on the last day of such taxable year would most likely be required to include its allocable share of ourrelated person insurance income for such taxable year in its income, even if no distributions are made. We do notbelieve that the 20% gross insurance income threshold58TABLE OF CONTENTShas been met or will be met. However, we cannot assure you that this will be the case. Consequently, we cannotassure you that a person who is a direct or indirect U.S. shareholder will not be required to include amounts in itsincome in respect of related person insurance income in any taxable year.Dispositions of Our Shares. If a U.S. shareholder is treated as disposing of shares in a CFC of which it is aU.S. 10% shareholder, or of shares in a foreign insurance corporation that has related person insurance incomeand in which U.S. persons collectively own 25% or more of the voting power or value of the company’s sharecapital, any gain from the disposition will generally be treated as a dividend to the extent of the U.S.shareholder’s portion of the corporation’s undistributed earnings and profits, as the case may be, that wereaccumulated during the period that the U.S. shareholder owned the shares. In addition, the shareholder will berequired to comply with certain reporting requirements, regardless of the amount of shares owned by the direct orindirect U.S. shareholder.U.S. tax-exempt organizations who own our shares may recognize unrelated business taxable income.A U.S. tax-exempt organization may recognize unrelated business taxable income if a portion of our subpartF insurance income is allocated to it. In general, subpart F insurance income will be allocated to a tax-exemptorganization owning (or treated as owning) our shares if we are a CFC as discussed above and it is a U.S. 10%shareholder or we earn related person insurance income and we satisfy the RPII Test. We cannot assure you thatU.S. persons holding our shares (directly or indirectly) will not be allocated subpart F insurance income. U.S.tax-exempt organizations should consult their own tax advisors regarding the risk of recognizing unrelatedbusiness taxable income as a result of the ownership of our shares.We may become subject to U.S. withholding and information reporting requirements under the ForeignAccount Tax Compliance Act (“FATCA”) provisions.The FATCA provisions of the Code generally impose a 30% withholding tax regime with respect to(i) certain U.S. source income (including interest and dividends) and gross proceeds from any sale or otherdisposition (after December 31, 2016) of property that can produce U.S. source interest or dividends(“withholdable payments”) and (ii) “passthru payments” (generally, withholdable payments and payments thatare attributable to withholdable payments) made by foreign financial institutions (“FFIs”). As a general matter,FATCA was designed to require U.S. persons’ direct and indirect ownership of certain non-U.S. accounts andnon-U.S. entities to be reported to the IRS. The application of the FATCA withholding rules were phased inbeginning June 30, 2014, with withholding on foreign passthru payments made by FFIs taking effect no earlierthan 2017.The Bermuda government has signed a “Model 2” intergovernmental agreement (“IGA”) with the UnitedStates to implement FATCA. If we or JRG Re (or both) is treated as an FFI for the purposes of FATCA, under IGA,we or JRG Re (or both) will be directed to ‘register’ with the IRS and enabled to comply with the requirements ofFATCA, including due diligence, reporting and withholding. Among these requirements, we or JRG Re will berequired to provide information regarding our or its U.S. direct or indirect owners and to comply with otherreporting, verification, due diligence and other procedures. Assuming registration and compliance pursuant toIGA, an FFI would be treated as FATCA compliant and not subject to withholding. An FFI that satisfies theeligibility, information reporting and other requirements of an IGA generally is not subject to the regularFATCA reporting and withholding obligations discussed below.Under the IGA between the United States and Bermuda, a foreign insurance company (or foreign holdingcompany of an insurance company) that issues or is obligated to make payments with respect to a cash value orannuity contract is an FFI. Insurance companies, like ours, that issue only property casualty insurance contracts,or that only issue life insurance contracts lacking cash value (or that provide for limited cash value) generallywould not be considered FFIs under the IGA. However, a holding company may be treated as an FFI if it isformed in connection with or availed of by a collective investment vehicle, mutual fund, exchange traded fund,hedge fund, venture capital fund, leveraged buyout fund or any similar investment vehicle established with aninvestment strategy of investing, reinvesting or trading in financial assets. Moreover, a company may be treatedas an FFI if its gross income is primarily attributable to investing, reinvesting or trading in financial assets andthe entity is managed by an FFI, or the entity functions or holds itself out as an investment vehicle establishedwith an investment strategy of investing, reinvesting or trading in financial assets. There can be no certainty asto whether we or JRG Re will be treated as a FFI under FATCA.59TABLE OF CONTENTSEven if we and JRG Re are not treated as FFIs, then depending on whether our shares are treated as“regularly traded on one or more established securities markets” under the FATCA rules and whether the incomeand assets of JRG Re meet the requirements for the treatment of JRG Re as an “active NFFE” (non-financialforeign entity), withholdable payments paid to the us or JRG Re may be subject to a 30% withholding tax unlesswe and/or JRG Re provide information regarding its U.S. direct or indirect owners.Potential additional application of the Federal Insurance Excise Tax.The IRS, in Revenue Ruling 2008-15, has formally announced its position that the U.S. federal insuranceexcise tax (the “FET”) is applicable (at a 1% rate on premiums) to all reinsurance cessions or retrocessions ofrisks by non-U.S. insurers or reinsurers to non-U.S. reinsurers where the underlying risks are either (i) risks of aU.S. entity or individual located wholly or partly within the United States or (ii) risks of a non-U.S. entity orindividual engaged in a trade or business in the United States which are located within the United States (the“U.S. Situs Risks”), even if the FET has been paid on prior cessions of the same risks. The legal andjurisdictional basis for, and the method of enforcement of, the IRS’s position is unclear, and the Circuit Court forthe District of Columbia recently held that the FET does not apply to retrocession contracts. We have notdetermined if the FET should be applicable with respect to risks ceded to us by, or by us to, a non-U.S. insurancecompany. If the FET is applicable, it should apply at a 1% rate on premiums for all U.S. Situs Risks ceded to usby a non-U.S. insurance company, or by us to a non-U.S. insurance company, even though the FET also appliesat a 1% rate on premiums ceded to us with respect to such risks.Change in U.S. tax laws may be retroactive and could subject us and/or U.S. persons who own our shares toU.S. income taxation on our undistributed earnings.The tax laws and interpretations thereof regarding whether a company is engaged in a U.S. trade or business,is a CFC, has related party insurance income or is a PFIC are subject to change, possibly on a retroactive basis.There are currently only proposed regulations regarding the application of the passive foreign investmentcompany rules to an insurance company and the regulations regarding related party insurance income are inproposed form. New regulations or pronouncements interpreting or clarifying such rules may be forthcomingfrom the IRS. We are not able to predict if, when or in what form such guidance will be provided and whethersuch guidance will have a retroactive effect.If reinsurance premiums paid by our U.S. subsidiaries to JRG Re or the interest rates and terms of loans madeby our U.S. subsidiaries to us do not reflect arm’s-length terms, the IRS could seek to recharacterize thepayments in a way that is unfavorable to us.In light of the recent announcements by the U.S. Department of Treasury (the “Treasury Department”) withregard to “inversion” transactions, it is possible that as a Bermuda domiciled company owning U.S. subsidiaries,we may face greater scrutiny from U.S. tax authorities. Items identified by the Treasury Department and variouscommentators as areas of possible scrutiny by the Treasury Department or the IRS include the terms ofintercompany reinsurance agreements and loans between U.S. subsidiaries and foreign parents. We have in placeboth intercompany loans from our U.S. subsidiaries to our parent company and intercompany reinsuranceagreements. We believe the terms of these transactions are appropriate and reflect arms-length terms and areconsistent with all applicable rules and regulations. It is possible, however, that the Treasury Department or theIRS may review our intercompany agreements and successfully assert, under Section 482 of the Code, that theyare not on an arm-length basis and that as a result, we owe taxes on account of past or future periods.You may be required to report foreign bank accounts and “Specified Foreign Financial Assets.”U.S. persons holding our common shares should consider their possible obligation to file a FinCEN Form114 Report of Foreign Bank and Financial Accounts with respect to their shares. Additionally, such U.S. andnon-U.S. persons should consider their possible obligations to report annually certain information with respectto us with their U.S. federal income tax returns. Shareholders should consult their tax advisors with respect tothese or other reporting requirements that may apply with respect to their ownership of our common shares.60•our operating and financial performance and prospects;•our quarterly or annual earnings or earnings estimates, or those of other companies in our industry;•failure to meet external expectations or management guidance;•exposure to capital market risks related to changes in interest rates, realized investment losses, creditspreads, equity prices, foreign exchange rates and performance of insurance-linked investments;•our creditworthiness, financial condition, performance and prospects;•our dividend policy and whether dividends on our common shares have been, and are likely to be,declared and paid from time to time;•actual or anticipated growth rates relative to our competitors;•perceptions of the investment opportunity associated with our common shares relative to otherinvestment alternatives;TABLE OF CONTENTSReduced tax rates for qualified dividend income may not be available in the future.We believe that the dividends paid on the common shares should qualify as “qualified dividend income” aslong as the common shares are listed on a national securities exchange. Qualified dividend income received bynon-corporate U.S. persons is generally eligible for long-term capital gain rates. There has been proposedlegislation before the U.S. Senate and House of Representatives that would exclude shareholders of certainforeign corporations from this advantageous tax treatment. If such legislation were to become law, non-corporateU.S. persons would no longer qualify for the reduced tax rate on the dividends paid by us.Our non-U.K. companies may be subject to U.K. tax that may have a material adverse effect on our operatingresults.We intend to operate in such a manner so that none of our companies other than our intermediate holdingcompany incorporated in the United Kingdom should be resident in the U.K. for tax purposes or have apermanent establishment in the U.K. Accordingly, we expect that none of our companies other than James RiverUK should be subject to U.K. taxation. However, since applicable law and regulations do not conclusivelydefine the activities that constitute conducting business in the U.K. through a permanent establishment, the U.K.Inland Revenue might contend successfully that one or more of our other companies is conducting business inthe U.K. through a permanent establishment in the U.K.We may become subject to taxes in Bermuda after March 31, 2035, which may have a material adverse effecton our results of operations and your investment.The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966 of Bermuda,as amended, has given us an assurance that if any legislation is enacted in Bermuda that would impose taxcomputed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the natureof estate duty or inheritance tax, then the imposition of any such tax will not be applicable to us or any of ouroperations, shares, debentures or other obligations until March 31, 2035, except insofar as such tax applies topersons ordinarily resident in Bermuda or to any taxes payable by us in respect of real property owned or leasedby us in Bermuda. We cannot assure you that we will not be subject to any Bermuda tax after March 31, 2035.Risks Related to Ownership of Our Common SharesThe price of our common shares may fluctuate significantly and you could lose all or part of your investment.Volatility in the market price of our common shares may prevent you from being able to sell your commonshares at or above the price you paid for your common shares. The market price for our shares could fluctuatesignificantly for various reasons, including, without limitation:61•speculation by the investment community regarding our business;•future announcements concerning our business or our competitors’ businesses;•the public’s reaction to our press releases, other public announcements and filings with the SEC;•changes in accounting standards, policies, guidance, interpretations or principles;•market and industry perception of our success, or lack thereof, in pursuing our strategy;•strategic actions by us or our competitors, such as acquisitions, restructurings, significant contracts orjoint ventures;•catastrophes that are perceived by investors as affecting the insurance and reinsurance market ingeneral;•changes in government regulation;•potential characterization of us as a PFIC;•general market, economic and political conditions;•changes in conditions or trends in our industry, geographies or customers;•arrival and departure of key personnel;•the number of common shares that are publicly traded;•sales of shares by us, our directors, executive officers or principal shareholders; and•adverse resolution of litigation against us.TABLE OF CONTENTSIn addition, stock markets, including the NASDAQ Stock Market, have experienced price and volumefluctuations that have affected and continue to affect the market prices of equity securities issued by manycompanies, including companies in our industry. In the past, some companies that have had volatile marketprices for their securities have been subject to class action or derivative lawsuits. The filing of a lawsuit againstus, regardless of the outcome, could have a negative effect on our business, as it could result in substantial legalcosts and a diversion of management’s attention and resources.As a result of the factors described above, shareholders may not be able to resell their shares at or abovetheir purchase price or may not be able to resell them at all. These market and industry factors may materiallyreduce the market price of our common shares, regardless of our operating performance.If securities or industry analysts downgrade our common shares or publish misleading or unfavorable researchabout our business, our share price and trading volume could decline.The trading market for our common shares is influenced in part on the research and reports that securities orindustry analysts publish about us or our business. If one or more of these analysts downgrades our shares orpublishes misleading or unfavorable research about our business, our share price would likely decline. If one ormore of these analysts ceases coverage of our Company or fails to publish reports on us regularly, demand forour shares could decrease, which could cause our share price or trading volume to decline.For as long as we are an emerging growth company, we will not be required to comply with certain reportingrequirements, including those relating to accounting standards and disclosure about our executivecompensation, that apply to other public companies.We are an “emerging growth company” as that term is defined in the Jumpstart Our Business Startups Act orJobs Act. In this Annual Report, we have taken advantage of, and we plan in future filings with the SEC tocontinue to take advantage of, certain exemptions from various reporting requirements that are applicable topublic companies that are emerging growth companies, including (i) not being required to comply with theauditor attestation requirements of Section 404(b) of Sarbanes-Oxley Act of 2002, as amended (“Sarbanes-Oxley”), (ii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxystatements and (iii) exemptions from the requirements of (a) holding a62TABLE OF CONTENTSnon-binding advisory vote on executive compensation and (b) shareholder approval of any golden parachutepayments not previously approved. We do not know if some investors will find our common shares lessattractive as a result of our taking advantage of certain of these exemptions. The result may be a less activetrading market for our common shares and our share price may be more volatile.We may take advantage of these reporting exemptions until we are no longer an emerging growth company.We will continue to be an emerging growth company until the earliest to occur of (i) the last day of the fiscalyear during which we had total annual gross revenues of at least $1 billion (as indexed for inflation), (ii) the lastday of the fiscal year following the fifth anniversary of the date of our IPO, or December 31, 2019, (iii) the dateon which we have, during the previous three-year period, issued more than $1 billion in non-convertible debtand (iv) the date on which we are deemed to be a “large accelerated filer,” as defined under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”).Failure to maintain effective internal controls in accordance with Sarbanes-Oxley could have a materialadverse effect on our business and share price.As a public company with SEC reporting obligations, we are required to document and test our internalcontrol procedures to satisfy the requirements of Section 404(b) of Sarbanes-Oxley, which require annualassessments by management of the effectiveness of our internal control over financial reporting. We are anemerging growth company, and thus we are exempt from the auditor attestation requirement of Section 404(b) ofSarbanes-Oxley until such time as we no longer qualify as an emerging growth company. Regardless of whetherwe qualify as an emerging growth company, we will still need to maintain substantial control systems andprocedures in order to satisfy the reporting requirements under the Exchange Act and applicable requirements,among other items.During the course of our assessment, we may identify deficiencies that we are unable to remediate in atimely manner. Testing and maintaining our internal control over financial reporting may also divertmanagement’s attention from other matters that are important to the operation of our business. We may not beable to conclude on an ongoing basis that we have effective internal control over financial reporting inaccordance with Section 404(b) of Sarbanes-Oxley. If we conclude that our internal control over financialreporting is not effective, we cannot be certain as to the timing of completion of our evaluation, testing andremediation actions or its effect on our operations. Moreover, any material weaknesses or other deficiencies inour internal control over financial reporting may impede our ability to file timely and accurate reports with theSEC. Any of the above could cause investors to lose confidence in our reported financial information or ourcommon share listing on the NASDAQ Stock Market to be suspended or terminated, which could have anegative effect on the trading price of our shares.Affiliates of D. E. Shaw & Co., L.P. own and have voting power over a substantial amount of our outstandingscommon shares, which allows them to have significant influence over matters requiring shareholder approval,in addition to the right to appoint up to two directors and to approve certain transactions.D. E. Shaw CF-SP Franklin, L.L.C., D. E. Shaw Oculus Portfolios, L.L.C. and D. E. Shaw CH-SP Franklin(collectively, the “D. E. Shaw Affiliates”), affiliates of D. E. Shaw & Co., L.P., beneficially own approximately48.5% of our outstanding common shares in the aggregate. The D. E. Shaw Affiliates have granted irrevocablevoting proxies to our Chief Executive Officer, President and Chief Operating Officer, Chief Financial Officer anda director to bring the D. E. Shaw Affiliates’ aggregate voting power over our outstanding common shares to42% of our outstanding common shares. Based upon such ownership, the D. E. Shaw Affiliates have significantinfluence over all matters requiring shareholder approval, including the election of directors (subject to aprohibition on the D. E. Shaw Affiliates right to vote in the election of at least half of our directors as long asthey collectively beneficially own more than 20% of the outstanding common shares), determination ofsignificant corporate actions, amendments to our organizational documents, and the approval of any businesstransaction, such as a merger or other sale of us or our assets, in a manner that could conflict with the interests ofother shareholders. In addition, D. E. Shaw & Co., L.P. acts as an investment advisor to the D. E. Shaw Affiliatesand may earn investment and management fees from the investment of the D. E. Shaw Affiliates in the Companywhich may influence their decision with respect to any proposed change of control of the Company. The D. E.Shaw Affiliates may also delay or prevent a change of control, even if such a change of control would benefit ourother shareholders.63TABLE OF CONTENTSAdditionally, our bye-laws provide that for so long as the D. E. Shaw Affiliates collectively beneficiallyown shares representing at least (i) 25% of the outstanding common shares, the D. E. Shaw Affiliates have theright to designate two directors to the board of directors and (ii) 10% (but less than 25%) of the outstandingcommon shares, the D. E. Shaw Affiliates have the right to designate one director to the board of directors. Ourboard consists of eight directors or such number in excess thereof as our board of directors may determine withthe consent of at least one of the directors designated by the D.E. Shaw Affiliates (for so long as the D.E. ShawAffiliates collectively beneficially own more than 20% of the outstanding common shares). Also, untilDecember 17, 2017, as long as the D. E. Shaw Affiliates collectively beneficially own shares representing at least20% of the outstanding common shares and subject to certain limited exceptions, the consent or affirmative voteof a director designated by the D. E. Shaw Affiliates is required for us to take certain actions, including sellingthe Company or all or substantially all its assets and removing or appointing our chairman of the board, chiefexecutive officer, chief operating officer and chief financial officer. Accordingly, the D. E. Shaw Affiliates havesubstantial influence over us.Further, Bryan Martin and David Zwillinger, members of our board of directors, are affiliates of the D. E.Shaw Affiliates. As directed, Messrs. Martin and Zwillinger will continue to have significant influence over ourmanagement, business plans and policies. The significant concentration of share ownership of our commonshares and affiliation of two of our directors with the D. E. Shaw Affiliates, collectively, our largest shareholder,and the other rights that the D. E. Shaw Affiliates maintain may materially adversely affect the trading price ofour common shares due to investors’ perception that conflicts of interest may exist or arise.Our bye-laws permit D. E. Shaw & Co., L.P. and its affiliates (including the D. E. Shaw Affiliates) and non-employee members of our board of directors to compete with us, which may result in conflicts of interest.Our bye-laws provide that no shareholder, or any of its affiliates or members of our board of directors (otherthan those who are our officers, managers or employees), has any duty to (i) communicate or present to theCompany any investment or business opportunity or prospective transaction or arrangement in which theCompany may have any interest or expectancy or (ii) refrain from engaging, directly or indirectly, in the samebusiness activities or similar business activities or lines of business in which we operate. D. E. Shaw & Co., L.P.and its affiliates (including the D. E. Shaw Affiliates) are in the business of making investments in companiesand our bye-laws will not restrict them from acquiring and holding interests in businesses that compete directlyor indirectly with us. For example, certain affiliates of D. E. Shaw & Co., L.P. are currently engaged in thereinsurance business. D. E. Shaw & Co., L.P., its affiliates and non-employee directors may also pursueacquisition opportunities that may be complementary to our business and, as a result, those acquisitionopportunities may not be available to us. These potential conflicts of interest could have a material adverseeffect on our business, financial condition, results of operations or prospects if we are not able to pursueattractive corporate opportunities because they are allocated by one or more of the D. E. Shaw Affiliates tothemselves or their other affiliates instead of being presented to us.We depend upon dividends and distributions from our subsidiaries, and we may be unable to distributedividends to our shareholders to the extent we do not receive dividends from our subsidiaries.We are a holding company that has no substantial operations of our own and, accordingly, we rely primarilyon cash dividends or distributions from our operating subsidiaries to pay our operating expenses and anydividends that we may pay to shareholders. The payment of dividends by our insurance and reinsurancesubsidiaries is limited under the laws and regulations of its applicable domicile. These regulations stipulate themaximum amount of annual dividends or other distributions available to shareholders without prior approval ofthe relevant regulatory authorities. As a result of such regulations, we may not be able to pay our operatingexpenses as they become due and our payment of future dividends to shareholders may be limited.The payment of dividends by our subsidiaries to us is limited by statute. In general, the laws andregulations applicable to our U.S. insurance subsidiaries limit the aggregate amount of dividends or otherdistributions that they may declare or pay Falls Lake General, Falls Lake National and within any 12 monthperiod without advance regulatory approval. In Ohio, the domiciliary state of James River Insurance, this64TABLE OF CONTENTSlimitation is the greater of statutory net income for the preceding calendar year or 10% of the statutory surplus atthe end of the preceding calendar year, provided that such dividends may only be paid out of earned surplus ofeach of the companies, without obtaining regulatory approval. In North Carolina, the domiciliary state ofStonewood Insurance, this limitation is the greater of statutory net income excluding realized capital gains forthe preceding calendar year or 10% of the statutory surplus at the end of the preceding calendar year, providedthat such dividends may only be paid out of unassigned surplus without obtaining regulatory approval. InVirginia, the domiciliary state of James River Casualty, this limitation is the greater of statutory net incomeexcluding realized capital gains for the preceding calendar year or 10% of the statutory surplus at the end of thepreceding calendar year, provided that such dividends may only be paid out of unassigned surplus withoutobtaining regulatory approval. In California, the domiciliary state of Falls Lake Fire and Casualty Company, thislimitation is the greater of statutory net income for the preceding calendar year or 10% of the statutory surplus atthe end of the preceding calendar year, provided that such dividends may only be paid out of unassigned surpluswithout obtaining regulatory approval. Moreover, as a condition to obtaining its license in California, FallsLake Fire and Casualty Company provided a commitment to the California Department of Insurance that itwould not pay any shareholder dividends for a five year period commencing January 1, 2016 without priorwritten approval. In addition, insurance regulators have broad powers to prevent reduction of statutory surplus toinadequate levels and could refuse to permit the payment of dividends calculated under any applicable formula.See “Business — Regulation — U.S. Insurance Regulation” for more information. In addition, dividends paid byour U.S. subsidiaries to our U.K. holding company are subject to a 5% withholding tax by the IRS. Under U.K.domestic law, no withholding tax is applied to dividends paid by U.K. tax resident companies.JRG Re, which is domiciled in Bermuda, is registered as a Class 3B insurer under the Insurance Act. TheInsurance Act, the conditions listed in the insurance license and the applicable approvals issued by the BMAprovide that JRG Re is required to maintain a minimum statutory solvency margin of $73.7 million as ofDecember 31, 2015. See “Business — Regulation — Bermuda Insurance Regulation — Enhanced CapitalRequirements and Minimum Solvency Margin” for more information. A Class 3B insurer is prohibited fromdeclaring or paying a dividend if it fails to meet, before or after declaration or payment of such dividend, its: (i)requirements under the Companies Act, 1981, (ii) minimum solvency margin, (iii) enhanced capital requirementor (iv) minimum liquidity ratio. If a Class 3B insurer fails to meet its minimum solvency margin or minimumliquidity ratio on the last day of any financial year, it is prohibited from declaring or paying any dividendsduring the next financial year without the approval of the BMA. In addition, JRG Re, as a Class 3B insurer isprohibited from declaring or paying in any financial year dividends of more than 25% of its total statutorycapital and surplus (as shown on its previous financial year’s statutory balance sheet) unless it files (at leastseven days before payment of such dividends) with the BMA an affidavit signed by at least 2 directors (one ofwhom must be a Bermuda resident director if any of the insurer’s directors are resident in Bermuda) and theprincipal representative stating that it will continue to meet its solvency margin and minimum liquidity ratio.Where such an affidavit is filed, it shall be available for public inspection at the offices of the BMA. See“Business — Regulation — Bermuda Insurance Regulation — Restrictions on Dividends and Distributions” formore information.The inability of our subsidiaries to pay dividends or make distributions to us, including as a result ofregulatory or other restrictions, may prevent us from paying our expenses or paying dividends to ourshareholders.We cannot assure you that we will declare or pay dividends on our common shares in the future.In 2015, we paid a total of $0.64 in quarterly dividends per share and a special dividend of $1.00 per share.Any determination to declare or pay future dividends to our shareholders will be at the discretion of our board ofdirectors and will depend on a variety of factors, including (i) our financial condition, liquidity, results ofoperations (including our ability to generate cash flow in excess of expenses and our expected or actual netincome), retained earnings and collateral and capital requirements, (ii) general business conditions, (iii) legal,tax and regulatory limitations, (iv) contractual prohibitions and other restrictions, (v) the effect of a dividend ordividends upon our financial strength ratings and (vi) any other factors that our board of directors deemsrelevant. See “Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases Of Equity Securities — Dividends.”65•the total voting power of any U.S. person owning more than 9.5% of our common shares will bereduced to 9.5% of the total voting power of our common shares, excluding the D. E. Shaw Affiliates,The Goldman Sachs Group, Inc. and its affiliated shareholders (collectively, “Goldman Sachs”);•our board of directors has the authority to issue preferred shares without shareholder approval, whichcould be used to dilute the ownership of a potential hostile acquiror;•our shareholders may only remove directors for cause and so long as the D. E. Shaw Affiliates have theright to designate directors, the directors designated by the D. E. Shaw Affiliates may only be replacedby the D. E. Shaw Affiliates;•there are advance notice requirements for shareholders with respect to director nominations andactions to be taken at annual meetings;•until the third anniversary of the completion of the IPO (December 17, 2017), and so long as the D. E.Shaw Affiliates collectively beneficially own shares representing at least 20% of the outstandingcommon shares, the sale of the Company (subject to certain limited exceptions) will require theconsent of a director designated by the D. E. Shaw Affiliates; and•under Bermuda law, for so long as JRG Re is registered under the Insurance Act, the BMA may objectto a person holding more than 10%, 20%, 33% or 50% of our common shares if it appears to the BMAthat the person is not or is no longer fit and proper to be such a holder (See “– There are regulatorylimitations on the ownership and transfer of our common shares.”).TABLE OF CONTENTSDividends paid by our U.S. subsidiaries to James River UK may not be eligible for benefits under the U.S.-U.K.income tax treaty.Under U.S. federal income tax law, dividends paid by a U.S. corporation to a non-U.S. shareholder aregenerally subject to a 30% withholding tax, unless reduced by treaty. The income tax treaty between the UnitedKingdom and the United States (the “U.K. Treaty”) reduces the rate of withholding tax on certain dividends to5%. Were the IRS to contend successfully that James River UK is not eligible for benefits under the U.K. Treaty,any dividends paid by James River Group, Inc., our U.S. holding company, to James River UK would be subjectto the 30% withholding tax. Such a result would substantially reduce the amount of dividends that ourshareholder may receive.Future issuances or sales or the possibility of future issuances or sales of our common shares may cause thetrading price of our common shares to decline and could impair our ability to raise capital throughsubsequent equity offerings.Future sales of our common shares in the public markets, or the perception that these sales may occur, couldcause the market price of our common shares to significantly decline and could materially impair our ability toraise capital through the sale of additional common shares. In addition, there are outstanding options topurchase 2,058,085 common shares and 234,922 shares subject to restricted stock units as of December 31,2015. Actual sales or the prospect of sales by our present shareholders, including the D. E. Shaw Affiliates, mayhave a negative effect on the market price of our common shares, and it may be difficult for you to sell yourshares at a time and price that you deem appropriate.Our bye-laws and provisions of Bermuda law may impede or discourage a change of control transaction,which could deprive our investors of the opportunity to receive a premium for their shares.Our bye-laws and provisions of Bermuda law to which we are subject contain provisions that coulddiscourage, delay or prevent “change of control” transactions or changes in our board of directors andmanagement that certain shareholders may view as beneficial or advantageous. These provisions include, amongothers:The foregoing factors, as well as the significant share ownership by principal shareholders could impede amerger, takeover or other business combination, which could reduce the market value of our shares.66TABLE OF CONTENTSWe may repurchase your common shares without your consent.Under our bye-laws and subject to Bermuda law, we have the option, but not the obligation, to require ashareholder, other than The D.E. Shaw Affiliates and Goldman Sachs, to sell to us at fair market value theminimum number of common shares which is necessary to avoid or cure any adverse tax consequences ormaterially adverse legal or regulatory treatment to us, our subsidiaries or our shareholders if our board ofdirectors reasonably determines, in good faith, that failure to exercise our option would result in such adverseconsequences or treatment.Bermuda law differs from the laws in effect in the United States and may afford less protection to holders ofour shares.We are organized under the laws of Bermuda. As a result, our corporate affairs are governed by theCompanies Act, which differs in some material respects from laws typically applicable to U.S. corporations andshareholders, including the provisions relating to interested directors, amalgamations, mergers and acquisitions,takeovers, shareholder lawsuits and indemnification of directors. Generally, the duties of directors and officers ofa Bermuda company are owed to the company only. Shareholders of Bermuda companies typically do not haverights to take action against directors or officers of the company and may only do so in limited circumstances.Class actions are not available under Bermuda law. The circumstances in which derivative actions may beavailable under Bermuda law are substantially more proscribed and less clear than they would be to shareholdersof U.S. corporations. The Bermuda courts, however, would ordinarily be expected to permit a shareholder tocommence an action in the name of a company to remedy a wrong to the company where the act complained ofis alleged to be beyond the corporate power of the company or illegal, or would result in the violation of thecompany’s memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermudacourt to acts that are alleged to constitute a fraud against minority shareholders or, for instance, where an actrequires the approval of a greater percentage of the company’s shareholders than that which actually approved it.When the affairs of a company are being conducted in a manner that is oppressive or prejudicial to theinterests of some shareholders, one or more shareholders may apply to the Supreme Court of Bermuda, whichmay make such order as it sees fit, including an order regulating the conduct of the company’s affairs in thefuture or ordering the purchase of the shares of any shareholders by other shareholders or by the company.Additionally, under our bye-laws and as permitted by Bermuda law, each shareholder has waived any claim orright of action against our directors or officers for any action taken by directors or officers in the performance oftheir duties, except for actions involving fraud or dishonesty. In addition, the rights of holders of our commonshares and the fiduciary responsibilities of our directors under Bermuda law are not as clearly established asunder statutes or judicial precedent in existence in jurisdictions in the United States, particularly the State ofDelaware. Therefore, holders of our common shares may have more difficulty protecting their interests thanwould shareholders of a corporation incorporated in a jurisdiction within the United States.There are regulatory limitations on the ownership and transfer of our common shares.Common shares may be offered or sold in Bermuda only in compliance with the provisions of theCompanies Act and the Bermuda Investment Business Act 2003, which regulates the sale of securities inBermuda. In addition, the BMA must approve all issues and transfers of shares of a Bermuda exempted company.However, the BMA has, pursuant to its statement of June 1, 2005 (the “Public Notice”), gave its generalpermission under the Exchange Control Act 1972 (and related regulations) for the issue and free transfer ofEquity Securities (as such term is defined in the Public Notice) of Bermuda companies to and among personswho are non-residents of Bermuda for exchange control purposes as long as Equity Securities of such companyare listed on an appointed stock exchange, which includes the NASDAQ Stock Market. This general permissionwill apply to our common shares, but would cease to apply if we were to cease to be listed on the NASDAQStock Market.In connection with the IPO, we received consent from the BMA to issue, and transfer freely any of ourshares, options, warrants, depository receipts, rights loan notes, debt instruments or other securities to and amongpersons who are either residents or non-residents of Bermuda for exchange control purposes.67TABLE OF CONTENTSThe Insurance Act requires that, in respect of a company whose shares are listed on a stock exchangerecognized by the BMA, any person who becomes a holder of at least 10%, 20%, 33% or 50% of the shares of aninsurance or reinsurance company or its parent company must notify the BMA in writing within 45 days ofbecoming such a holder. Further, a shareholder of such an insurer must serve notice in writing on the BMAwithin 45 days of reducing or disposing of shares such that it ceases to be a 50%, 33%, 20, or 10%, shareholder.This requirement will apply to us as long as our shares are listed on the NASDAQ Stock Market or another stockexchange recognized by the BMA. The BMA may, by written notice, object to a person holding 10%, 20%, 33%or 50% of our common shares if it appears to the BMA that the person is not fit and proper to be such a holder.The BMA may require the holder to reduce its shareholding in us and may direct, among other things, that thevoting rights attaching to its shares shall not be exercisable. A person that does not comply with such a notice ordirection from the BMA will be guilty of an offense.JRG Re is also required to notify the BMA in writing in the event any person has become or has ceased tobe a controller or an officer of it (an officer includes a director, chief executive or senior executive performingduties of underwriting, actuarial, risk management, compliance, internal audit, finance or investment matters).Except in connection with the settlement of trades or transactions entered into through the facilities of theNASDAQ Stock Market, our board of directors may generally require any shareholder or any person proposing toacquire our shares to provide the information required under our bye-laws. If any such shareholder or proposedacquiror does not provide such information, or if our board of directors has reason to believe that anycertification or other information provided pursuant to any such request is inaccurate or incomplete, our board ofdirectors may decline to register any transfer or to effect any issuance or purchase of shares to which such requestis related.In addition, the insurance holding company laws and regulations of the states in which our insurancecompanies are domiciled generally require that, before a person can acquire direct or indirect control of aninsurer domiciled in the state, and in some cases prior to divesting its control, prior written approval must beobtained from the insurer’s domiciliary state insurance regulator. In addition to insurance holding company lawsand regulations, under the Organizational Permit issued by the California Department of Insurance to Falls LakeFire and Casualty Company, Falls Lake Fire and Casualty Company, as a new insurer, was required to enter intoan agreement with Falls Lake National Insurance Company restricting the transfer of Falls Lake Fire andCasualty Company’s shares. Under the Organizational Permit and the Agreement Restricting Shares, Falls LakeNational cannot directly or indirectly transfer the shares of Falls Lake Fire and Casualty Company to anyonewithout the prior written approval of the California Department of Insurance. These laws and the similarconditions applicable to Falls Lake Fire and Casualty Company’s shares may discourage potential acquisitionproposals and may delay, deter or prevent an investment in or a change of control involving us, or one or moreof our regulated subsidiaries, including transactions that our management and some or all of shareholders mightconsider desirable. Pursuant to applicable laws and regulations, “control” over an insurer is generally presumedto exist if any person, directly or indirectly, owns, controls, holds the power to vote or holds proxiesrepresenting, 10% or more of the voting securities of that reinsurer or insurer. Indirect ownership includesownership of the Company’s common shares.Item 1B. UNRESOLVED STAFF COMMENTSNot applicable.Item 2. PROPERTIESWe lease office space in Bermuda, where our principal executive office is located and our casualtyreinsurance segment is based. We also lease offices in (1) Chapel Hill, North Carolina, where our U.S. holdingcompany, James River Group is based, (2) Raleigh, North Carolina, where we conduct business in our SpecialtyAdmitted Insurance segment and (3) Richmond, Virginia, Scottsdale, Arizona and Atlanta, Georgia for theconduct of business in our Excess and Surplus Lines segment. We believe that our facilities are adequate for ourcurrent needs and that suitable additional or substitute space will be available as needed.68TABLE OF CONTENTSItem 3. LEGAL PROCEEDINGSWe are party to legal proceedings which arise in the ordinary course of business. We believe that theoutcome of such matters, individually and in the aggregate, will not have a material adverse effect on ourconsolidated financial position, results of operations or cash flows.Item 4. MINE SAFETY DISCLOSURENot applicable.69Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESTABLE OF CONTENTSPART IIMarket InformationOur common shares began trading on the NASDAQ Global Select Market under the symbol “JRVR” onDecember 12, 2014. Prior to that time, there was no public market for our common shares. The following tablesets forth the high and low sales prices for our common shares as reported by the NASDAQ Global Select Marketfor the period indicated:Fiscal Year 2014HighLowFourth Quarter (beginning December 12, 2014)$23.38$20.46Fiscal Year 2015HighLowFirst Quarter$24.74$20.61Second Quarter$26.08$21.91Third Quarter$28.77$24.63Fourth Quarter$34.58$26.23As of February 29, 2016, there were approximately 12 holders of record of our common shares.DividendsWe paid a dividend of $0.16 per share during each quarter of 2015, as well as a special dividend of $1.00per share during the fourth quarter of 2015. In August 2014, we declared a cash dividend of $2.45 per sharepayable to shareholders of record as of June 30, 2014.We are a holding company that has no substantial operations of our own, and we rely primarily on cashdividends or distributions from our subsidiaries to pay our operating expenses and dividends to shareholders.The payment of dividends by our insurance and reinsurance subsidiaries is limited under the laws andregulations of their respective domicile. These regulations stipulate the maximum amount of annual dividendsor other distributions available to shareholders without prior approval of the relevant regulatory authorities.Additionally, dividends from our U.S. subsidiaries to our U.K. intermediate holding company are subject to a 5%withholding tax by the IRS. Under U.K. domestic law, no withholding tax is applied to dividends paid by U.K.tax resident companies. As a result of such regulations, or a change in applicable tax law, we may not be able topay our operating expenses as they become due and our payment of future dividends to shareholders may belimited. See “Risk Factors – Risks Related to our Business and Industry – We depend upon dividends anddistributions from our subsidiaries, and we may be unable to distribute dividends to our shareholders to theextent we do not receive dividends from our subsidiaries,” and “ – Dividends paid by our U.S. subsidiaries toJames River UK may not be eligible for benefits under the U.S.-U.K. income tax treaty.”The declaration, payment and amount of future dividends is subject to the discretion of our board ofdirectors. Our board of directors will give consideration to various risks and uncertainties, including thosediscussed under the headings “Risk Factors” and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and elsewhere in this Annual Report when determining whether to declareand pay dividends, as well as the amount thereof. Our board of directors may take into account a variety offactors when determining whether to declare any future dividends, including (1) our financial condition,liquidity, results of operations (including our ability to generate cash flow in excess of expenses and ourexpected or actual net income), retained earnings and collateral and capital requirements, (2) general businessconditions, (3) legal, tax and regulatory limitations, (4) contractual prohibitions and other restrictions, (5) theeffect of a dividend or dividends upon our financial strength ratings and (6) any other factors that our board ofdirectors deems relevant.70Copyright© 2016 Russell Investment Group. All rights reserved.TABLE OF CONTENTSPerformance GraphThe following performance graph compares the cumulative total shareholder return of an investment in (i)our common shares, (ii) the Russell 2000 and (iii) a composite peer group selected by us consisting of Amerisafe,Inc., AmTrust Financial Services, Inc., Arch Capital Group Ltd., Argo Group International Holdings, Ltd, MarkelCorporation, The Navigators Group, Inc., Onebeacon Insurance Group, Ltd., RLI Corp., State NationalCompanies, Inc. and W. R. Berkley Corporation, for the period from December 12, 2014 (the date our commonshares commenced trading on the NASDAQ Global Select Market) through December 31, 2015.The graph assumes an initial investment of $100 and the reinvestment of dividends, if any. Such returns arebased on historical results and are not intended to suggest future performance. The companies in the peer groupare weighted by market capitalization.12/12/1412/31/1412/31/15James River Group Holdings, Ltd.100.00107.11166.93Russell 2000100.00104.65100.03Peer Group100.00101.66120.60The performance graph and related information shall not be deemed “soliciting material” or to be “filed”with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the ExchangeAct, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated byreference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act, except to theextent that we specifically incorporate it by reference into such filing.71Item 6SELECTED FINANCIAL DATATABLE OF CONTENTSThe following tables present selected historical financial information of James River Group Holdings, Ltd.derived from our consolidated balance sheets as of December 31, 2015, 2014, 2013 and 2012, and the relatedconsolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flowsfor each of the four years in the period ended December 31, 2015, which have been audited by Ernst & Young,LLP, and our unaudited condensed consolidated balance sheet as of December 31, 2011 and the relatedconsolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flowsfor the year ended December 31, 2011. The unaudited condensed consolidated financial statements have beenprepared on the same basis as the audited consolidated financial statements. In the opinion of our management,the unaudited condensed consolidated financial statements presented in the tables below reflect all adjustments,consisting of only normal and recurring adjustments, necessary for a fair presentation of our consolidatedfinancial position and results of operations as of the dates and for the periods indicated.You should read this selected financial data along with the consolidated financial statements andaccompanying notes included elsewhere in this Annual Report, as well as the section of this Annual Reporttitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”Year Ended December 31,20152014201320122011Operating Results:Gross written premiums$572,194$518,767$368,518$491,931$490,821Ceded written premiums(101,162(68,684(43,352(139,622(57,752Net written premiums$471,032$450,083$325,166$352,309$433,069Net earned premiums$461,205$396,212$328,078$364,568$337,105Net investment income44,83543,00545,37344,29748,367Net realized investment (losses)gains(4,547(1,33612,6198,91520,899Other income3,4281,122222130226Total revenues504,921439,003386,292417,910406,597Losses and loss adjustmentexpenses279,016237,368184,486264,496233,479Other operating expenses157,803133,055114,804126,884115,378Other expenses73016,0126773,350592Interest expense6,9996,3476,7778,2668,132Amortization of intangible assets5975972,4702,8482,848Impairment of intangible assets———4,299—Total expenses445,145393,379309,214410,143360,429Income before income tax expense59,77645,62477,0787,76746,168Income tax expense (benefit)6,2799399,741(8977,695Net income$53,497$44,685$67,337$8,664$38,473Net operating income$61,090$58,424$58,918$7,935$22,352Earnings per Share:Basic$1.87$1.57$2.21$0.24$1.08Diluted$1.82$1.55$2.21$0.24$1.06Weighted — average sharesoutstanding — diluted29,334,91828,810,30130,500,80035,733,35035,718,00072(1)(2)))))))))(3)(4)(1)The amount received or to be received for insurance policies written or assumed by us during a specificperiod of time without reduction for acquisition costs, reinsurance costs or other deductions.(2)The amount of written premiums ceded to (reinsured by) other insurers.(3)Net income represents income from continuing operations for all periods presented.(4)Net operating income is a non-GAAP measure. We define net operating income as net income excludingnet realized investment gains and losses, expenses related to due diligence costs for various merger andacquisition activities, severance costs associated with terminated employees, impairment charges ongoodwill and intangible assets, gains on extinguishment of debt, expenses on a leased building we aredeemed to own for accounting purposes, and professional services and other expenses associated withsecurities offerings and the payment of special dividends. We use net operating income as an internalperformance measure in the management of our operations because we believe it gives our managementand other users of our financial information useful insight into our results of operations and our underlyingbusiness performance. Net operating income should not be viewed as a substitute for net income inaccordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations — Reconciliation of Non-GAAP Measures” for a reconciliation of net operating income tonet income in accordance with GAAP.(5)The loss ratio is the ratio, expressed as a percentage, of losses and loss adjustment expenses to net earnedpremiums, net of the effects of reinsurance.TABLE OF CONTENTSAt or for the Year Ended December 31,20152014201320122011Balance Sheet Data:Cash and invested assets$1,350,697$1,310,628$1,217,078$1,235,537$1,162,966Reinsurance recoverables143,086128,979120,477176,86391,073Goodwill and intangible assets221,359221,956222,553225,023233,827Total assets2,055,4971,959,2921,806,7932,025,3811,752,605Reserve for losses and loss adjustmentexpenses785,322716,296646,452709,721565,955Unearned premiums301,104277,579218,532239,055223,613Senior debt88,30088,30058,00035,00035,000Junior subordinated debt104,055104,055104,055104,055104,055Total liabilities1,374,4591,271,3711,105,3031,241,341990,230Total stockholders’ equity681,038687,921701,490784,040762,375GAAP Underwriting Ratios:Loss ratio60.559.956.272.669.3Expense ratio33.533.435.034.834.2Combined ratio94.093.391.2107.4103.5Other Data:Tangible equity$459,679$465,965$478,937$559,017$528,548Tangible equity per common shareoutstanding$15.88$16.33$16.78$15.52$14.80Debt to total capitalization ratio22.021.918.815.115.4Regulatory capital and surplus$601,436$593,580$580,267$596,272$587,518Net written premiums to surplus ratio0.80.80.60.60.773(5)%%%%%(6)%%%%%(7)%%%%%(8)(9)%%%%%(10)(11)(6)The expense ratio is the ratio, expressed as a percentage, of other operating expenses to net earnedpremiums.(7)The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100%generally indicates an underwriting profit. A combined ratio over 100% generally indicates anunderwriting loss.(8)Tangible equity is shareholders’ equity less goodwill and intangible assets.(9)The ratio, expressed as a percentage, of total indebtedness for borrowed money to the sum of totalindebtedness for borrowed money and shareholders’ equity.(10)For our U.S. insurance subsidiaries, the excess of assets over liabilities as determined in accordance withstatutory accounting principles as determined by the NAIC. For our Bermuda reinsurer, shareholders’equity in accordance with U.S. generally accepted accounting principles (“GAAP”).(11)We believe this measure is useful in evaluating our insurance subsidiaries’ operating leverage. It may notbe comparable to the definition of net written premiums to surplus ratio for other companies.TABLE OF CONTENTS74Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONSTABLE OF CONTENTSThe following discussion and analysis contains forward-looking statements and involves numerous risksand uncertainties, including those described under the heading “Risk Factors.” Actual results may differmaterially from those contained in any forward-looking statements. You should read this discussion andanalysis together with our audited consolidated financial statements and related notes included elsewhere inthis 10-K.OverviewJames River Group Holdings, Ltd. is a Bermuda-based insurance holding company. We own and operate agroup of specialty insurance and reinsurance companies with the objective of generating compelling returns ontangible equity while limiting volatility. We seek to do this by earning profits from insurance underwritingwhile opportunistically investing our capital to grow tangible equity for our shareholders.For the year ended December 31, 2015, 73.0% of our group-wide gross written premiums originated fromthe U.S. E&S lines market. We also have a specialty admitted insurance business in the United States. We intendto concentrate substantially all of our underwriting in casualty insurance and reinsurance, and for the year endedDecember 31, 2015, we derived 98.0% of our group-wide gross written premiums from casualty insurance andreinsurance. We focus on specialty markets in which our underwriters have particular expertise and where wehave long-standing distribution relationships; maintaining a strong balance sheet by maintaining appropriatereserves; monitoring reinsurance recoverables carefully; managing our investment portfolio actively withouttaking undue risk; using technology to monitor trends in our business; responding rapidly to marketopportunities and challenges; and actively managing our capital.We report our business in four segments: Excess and Surplus Lines, Specialty Admitted Insurance, CasualtyReinsurance and Corporate and Other.The Excess and Surplus Lines segment offers E&S commercial lines liability and property insurance inevery U.S. state and the District of Columbia through James River Insurance and its wholly-owned subsidiary,James River Casualty. James River Insurance and James River Casualty are both non-admitted carriers. Non-admitted carriers writing in the E&S market are not bound by most of the rate and form regulations imposed onstandard market companies, allowing them flexibility to change the coverage terms offered and the rate chargedwithout the time constraints and financial costs associated with the rate and form filing process. In 2015, theaverage account in this segment generated annual gross written premiums of approximately $19,000. The Excessand Surplus Lines segment distributes primarily through wholesale insurance brokers. Members of ourmanagement team have participated in this market for over three decades and have long-standing relationshipswith the wholesale agents who place E&S lines accounts. The Excess and Surplus Lines segment produced54.0% of our gross written premiums for the year ended December 31, 2015.The Specialty Admitted Insurance segment focuses on niche classes within the standard insurance markets,such as workers’ compensation coverage for residential contractors, light manufacturing operations,transportation workers and healthcare workers in North Carolina, Virginia, South Carolina, and Tennessee. Thissegment has admitted licenses in 48 states and the District of Columbia. While this segment has historicallyfocused on workers’ compensation business, we are growing our fronting business and our other commerciallines through our program business. We believe we can earn substantial fees in our program and frontingbusiness by writing policies and then transferring all or a substantial portion of the underwriting risk position toother capital providers that pay us a fee for fronting or ceding the business to them. The Specialty AdmittedInsurance segment distributes through a variety of sources, including independent retail agents, programadministrators and MGAs. The Specialty Admitted Insurance segment produced 15.9% of our gross writtenpremiums for the year ended December 31, 2015.The Casualty Reinsurance segment consists of JRG Re, our Bermuda domiciled reinsurance subsidiary,which provides proportional and working layer casualty reinsurance to third parties and to our U.S.-basedinsurance subsidiaries. The Casualty Reinsurance segment’s underwriting results presented herein include onlythe results of reinsurance written with unaffiliated companies and do not include the75TABLE OF CONTENTSpremiums and losses ceded under our internal quota share arrangement described below, which are captured inour Excess and Surplus Lines and Specialty Admitted Insurance segments, respectively. Typically, we structureour reinsurance contracts as quota share arrangements, with loss mitigating features, such as commissions thatadjust based on underwriting results. We frequently include risk mitigating features in our excess working layertreaties, which allows the ceding company to capture a greater percentage of the profits should the businessprove more profitable than expected, or alternatively provides us with additional premiums should the businessincur higher than expected losses. We believe these structures allow us to participate in the risk side-by-sidewith the ceding company and best align our interests with the interests of our cedents. Treaties with lossmitigation features including sliding scale ceding commissions represented 86% of the gross premiums writtenby our Casualty Reinsurance segment during 2015. We typically do not assume large individual risks in ourCasualty Reinsurance segment, nor do we write property catastrophe reinsurance. Two of the three largestunaffiliated accounts written by JRG Re in 2015 were ceded from E&S carriers. The Casualty Reinsurancesegment distributes through traditional reinsurance brokers. The Casualty Reinsurance segment produced 30.1%of our gross written premiums for the year ended December 31, 2015.We have direct intercompany reinsurance agreements under which we cede 70% of the pooled net writtenpremiums of our U.S. subsidiaries (after taking into account third-party reinsurance) to JRG Re. This business isceded to JRG Re under a proportional, or quota-share, reinsurance treaty that provides for an arm’s length cedingcommission. Notwithstanding the intercompany agreement, we exclude the effects of this agreement for thepresentation of the Excess and Surplus Lines and Specialty Admitted Insurance reporting segments includedherein. At December 31, 2015, approximately 67.4% of our cash and invested assets were held in Bermuda,which benefits from a favorable operating environment, including an absence of corporate income or investmenttaxes. We pay a 1% excise tax on premiums ceded to JRG Re by our U.S.-based insurance subsidiaries.The Corporate and Other segment consists of the management and treasury activities of our holdingcompanies and interest expense associated with our debt.The A.M. Best financial strength rating for our group’s regulated insurance subsidiaries is “A-” (Excellent),with a “positive outlook.” This rating reflects A.M. Best’s opinion of our insurance subsidiaries’ financialstrength, operating performance and ability to meet obligations to policyholders and is not an evaluationdirected towards the protection of investors.Critical Accounting Policies and EstimatesWe identified the accounting estimates below as critical to the understanding of our financial position andresults of operations. Critical accounting estimates are defined as those estimates that are both important to theportrayal of our financial condition and results of operations and which require us to exercise significantjudgment. We use significant judgment concerning future results and developments in applying these criticalaccounting estimates and in preparing our consolidated financial statements. These judgments and estimatesaffect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of material contingentassets and liabilities. Actual results may differ materially from the estimates and assumptions used in preparingthe consolidated financial statements. We evaluate our estimates regularly using information that we believe tobe relevant. For a detailed discussion of our accounting policies, see the Notes to Consolidated FinancialStatements included in this Form 10-K.Reserve for Losses and Loss Adjustment ExpensesThe reserve for losses and loss adjustment expenses represents our estimated ultimate cost of all reportedand unreported losses and loss adjustment expenses incurred and unpaid at the balance sheet date. We do notdiscount this reserve. We estimate the reserve using individual case-basis valuations of reported claims andstatistical analyses. We believe that the use of judgment is necessary to arrive at a best estimate for the reservefor losses and loss adjustment expenses given the long-tailed nature of the business we write and the limitedoperating experience of the Casualty Reinsurance segment and of the program and fronting business in theSpecialty Admitted Insurance segment. In applying this judgement, we generally establish reserves that areabove our internal actuaries’ estimate. As such, we seek to establish reserves that will ultimately prove to beadequate. If we have indications that claims frequency or severity exceeds our initial76TABLE OF CONTENTSexpectations, we increase our reserves for losses and loss adjustment expenses. Conversely, when claimsfrequency and severity trends are more favorable than initially anticipated, we reduce our reserves for losses andloss adjustment expenses once we have sufficient data to confirm the validity of the favorable trends.Our Excess and Surplus Lines and Specialty Admitted Insurance segments generally are notified of lossesby our insureds or their brokers. Based on the information provided, we establish case reserves by estimating theultimate losses from the claim, including administrative costs associated with the ultimate settlement of theclaim. Our claims department personnel use their knowledge of the specific claim along with internal andexternal experts, including underwriters and legal counsel, to estimate the expected ultimate losses.Our Casualty Reinsurance segment generally establishes case reserves based on reports received fromceding companies or their brokers. For excess of loss contracts, we are typically notified of insurance losses onspecific contracts, and we record case reserves based on the estimated ultimate losses on each claim. Forproportional contracts, we typically receive aggregated claims information and record case reserves based onthat information.We also use statistical analyses to estimate the cost of losses and loss adjustment expenses that have beenincurred but not reported to us (“IBNR”). Those estimates are based on our historical information, industryinformation and estimates of future trends that may affect the frequency of claims and changes in the averagecost of claims (severity) that may arise in the future.The Company’s gross reserve for losses and loss adjustment expenses at December 31, 2015 was$785.3 million. Of this amount, 68.0% relates to IBNR. The Company’s gross reserve for losses and lossadjustment expenses by segment are summarized as follows:Gross Reserves at December 31, 2015CaseIBNRTotalIBNR %of Total($ in thousands)Excess and Surplus Lines$99,116$369,210$468,32678.8Specialty Admitted Insurance37,55438,62576,17950.7Casualty Reinsurance114,298126,519240,81752.5Total$250,968$534,354$785,32268.0The Company’s net reserve for losses and loss adjustment expenses at December 31, 2015 was $653.5million. Of this amount, 68.0% relates to IBNR. The Company’s net reserve for losses and loss adjustmentexpenses by segment are summarized as follows:Net Reserves at December 31, 2015CaseIBNRTotalIBNR %of Total($ in thousands)Excess and Surplus Lines$85,868$298,251$384,11977.6Specialty Admitted Insurance24,62624,74149,36750.1Casualty Reinsurance98,698121,350220,04855.1Total$209,192$444,342$653,53468.0Our Reserve Committee consists of our Chief Actuary, Chief Executive Officer, Chief Operating Officer,Chief Financial Officer, and Chief Accounting Officer. Additionally, the presidents and chief actuaries of each ofour three operating segments assist in the evaluations of their respective segments. The Reserve Committeemeets quarterly to review the actuarial recommendations made by each chief actuary and uses its best judgmentto determine the best estimate to be recorded for the reserve for losses and loss adjustment expenses on ourbalance sheet. The Reserve Committee believes that using judgment to supplement the actuarialrecommendations is necessary to arrive at a best estimate given the nature of the business that we write and thelimited operating experience of the Casualty Reinsurance segment and the program and fronting business in theSpecialty Admitted Insurance segment.77%%%%%%%%TABLE OF CONTENTSThe process of estimating the reserve for losses and loss adjustment expenses requires a high degree ofjudgment and is subject to a number of variables. In establishing the quarterly actuarial recommendation for thereserve for losses and loss adjustment expenses, our internal actuaries estimate an initial expected ultimate lossratio for each of our product lines by accident year (or for our Casualty Reinsurance segment, on a contract bycontract basis). Input from our underwriting and claims departments, including premium pricing assumptionsand historical experience, are considered by our internal actuaries in estimating the initial expected loss ratios.Our actuaries generally utilize five actuarial methods in their estimation process for the reserve for losses andloss adjustment expenses. These five methods utilize, to varying degrees, the initial expected loss ratio, detailedstatistical analysis of past claims reporting and payment patterns, claims frequency and severity, paid lossexperience, industry loss experience, and changes in market conditions, policy forms, exclusions, and exposures.The five actuarial methods that we use in our reserve estimation process are:Expected Loss MethodThe Expected Loss Method multiplies earned premiums by an initial expected loss ratio.Incurred Loss Development MethodThe Incurred Loss Development method uses historical loss reporting patterns to estimate future lossreporting patterns. In this method, our actuaries apply historical loss reporting patterns to develop incurred lossdevelopment factors that are applied to current reported losses to calculate expected ultimate losses.Paid Loss Development MethodThe Paid Loss Development method is similar to the incurred loss development method, but it useshistorical loss payment patterns to estimate future loss payment patterns. In this method, our actuaries applyhistorical loss payment patterns to develop paid loss development factors that are applied to current paid lossesto calculate expected ultimate losses.Bornhuetter-Ferguson Incurred Loss Development MethodThe Bornhuetter-Ferguson Incurred Loss Development method divides the projection of ultimate lossesinto the portion that has already been reported and the portion that has yet to be reported. The portion that hasyet to be reported is estimated as the product of premiums earned for the accident year, the initial expectedultimate loss ratio and an estimate of the percentage of ultimate losses that are unreported at the valuation date.Bornhuetter-Ferguson Paid Loss Development MethodThe Bornhuetter-Ferguson Paid Loss Development method is similar to the Bornhuetter-Ferguson IncurredLoss Development Method, except this method divides the projection of ultimate losses into the portion that hasalready been paid and the portion that has yet to be paid. The portion that has yet to be paid is estimated as theproduct of premiums earned for the accident year, the initial expected ultimate loss ratio and an estimate of thepercentage of ultimate losses that are unpaid at the valuation date.Different reserving methods are appropriate in different situations, and our actuaries use their judgment andexperience to determine the weighting of the methods detailed above to use for each accident year and each lineof business and, for our Casualty Reinsurance segment, on a contract by contract basis. For example, the currentaccident year has very little incurred and paid loss development data on which to base reserve projections. As aresult, we rely heavily on the Expected Loss Method in estimating reserves for the current accident year. Wegenerally set our initial expected loss ratio for the current accident year consistent with our pricing assumptions.We believe that this is a reasonable and appropriate reserving assumption for the current accident year since ourpricing assumptions are actuarially driven and since we expect to make an acceptable return on the new businessthat we write. If actual loss emergence is better than our initial expected loss ratio assumptions, we willexperience favorable development and if it is worse than our initial expected loss ratio assumptions, we willexperience adverse development. Conversely, sufficient incurred and paid loss development is available for ouroldest accident years, so more weight is78TABLE OF CONTENTSgiven to the Incurred Loss Development Method and the Paid Loss Development Method than the ExpectedLoss Method. The Bornhuetter-Ferguson Incurred Loss Development and Paid Loss Development Methodsblend features of the Expected Loss Method and the Incurred and Paid Loss Development Methods. TheBornhuetter-Ferguson Methods are typically used for the more recent prior accident years.In applying these methods to develop an estimate of the reserve for losses and loss adjustment expenses, ourinternal actuaries use judgment to determine three key parameters for each accident year and line of business:the initial expected loss ratios, the incurred and paid loss development factors and the weighting of the fiveactuarial methods to be used for each accident year and line of business. For the Excess and Surplus Lines andSpecialty Admitted Insurance segments, the actuary performs a study on each of these parameters annually in thethird quarter and makes recommendations for the initial expected loss ratios, the incurred and paid lossdevelopment factors and the weighting of the five actuarial methods by accident year and line of business.Members of the Reserve Committee review and approve the parameter review actuarial recommendations, andthese approved parameters are used in the reserve estimation process for the next four quarters at which time anew parameter study is performed. For the Reinsurance segment, periodic assessments are made on a contract bycontract basis with the goal of keeping the initial expected loss ratios and the incurred and paid lossdevelopment factors as constant as possible until sufficient evidence presents itself to support adjustments.Method weights are generally less rigid for the Casualty Reinsurance segment given the heterogeneous nature ofthe various contracts, and the potential for significant changes in mix of business within individual treaties.We engage an independent internationally recognized actuarial consulting firm to review our reserves forlosses and loss adjustment expenses twice each year, once prior to closing the third quarter and once for theclosing of the fourth quarter. This independent actuarial consulting firm prepares its own estimate of our reservefor loss and loss adjustment expenses, and we compare their estimate to the reserve for losses and loss adjustmentexpenses reviewed and approved by the Reserve Committee in order to gain additional comfort on the adequacyof our reserves.The table below quantifies the impact of extreme reserve deviations from our expected value atDecember 31, 2015. The total carried net reserve for losses and loss adjustment expenses is displayed alongside5th, 50th and 95th percentiles of likely ultimate net reserve outcomes. The estimates of these percentiles are aresult of a reserve variability analysis using a simulation approach.Sensitivity5th Pct.50th Pct.Carried95th Pct.(in thousands)Reserve for losses and loss adjustment expenses$562,726$638,442$653,534$714,159Changes in reserves(90,808(15,092—60,625The impact of recording the net reserve for losses and loss adjustment expenses at the highest value fromthe sensitivity analysis above would be to increase losses and loss adjustment expenses incurred by $60.6million, reduce after-tax net income by $52.1 million, reduce shareholders’ equity by $52.1 million and reduceshareholders’ tangible equity by $52.1 million, in each case at or for the period ended December 31, 2015.The impact of recording the net reserve for losses and loss adjustment expenses at the lowest value from thesensitivity analysis above would be to reduce losses and loss adjustment expenses incurred by $90.8 million,increase after-tax net income by $78.1 million, increase shareholders’ equity by $78.1 million, and increasetangible equity by $78.1 million, in each case at or for the year ended December 31, 2015. Such changes in thenet reserve for losses and loss adjustment expenses would not have an immediate impact on our liquidity, butwould affect cash flow and investment income in future periods as the incremental or reduced amount of lossesare paid and investment assets adjusted to reflect the level of paid claims.Loss reserve estimates are subject to a high degree of variability due to the inherent uncertainty of ultimateclaims settlement values. In recording our best estimate of our reserve for losses and loss adjustment expenses,our Reserve Committee typically selects an amount above the actuarial recommendation due to the inherentvariation associated with our reserve estimates and the likelihood that there are unforeseen or under-valuedliabilities in the actuarial recommendations. We believe that the79))TABLE OF CONTENTSinsurance that we write is subject to above-average variation in reserve estimates. The Excess and Surplus Linesmarket is subject to high policyholder turnover and changes in underlying mix of exposures. This turnover andchange in underlying mix of exposures can cause actuarial estimates based on prior experience to be less reliablethan estimates for more stable, admitted books of business. As a casualty insurer, losses on our policies oftentake a number of years to develop, making it difficult to estimate the ultimate losses associated with thisbusiness. Judicial and regulatory bodies have frequently interpreted insurance contracts in a manner thatexpands coverage beyond that which was contemplated at the time that the policy was issued. In addition, manyof our policies are issued on an occurrence basis, and plaintiff’s attorneys frequently seek coverage beyond thepolicies’ original intent. The difficulty in pinpointing actual ultimate losses and loss adjustment expenses(“LAE”) is illustrated by the fact that at December 31, 2015, 77.6% of our net reserve for losses and lossadjustment expenses in the Excess and Surplus Lines segment is for claims that have not been reported.Our reserves are driven by a number of important assumptions, including litigation and regulatory trends,legislative activity, climate change, social and economic patterns and claims inflation assumptions. Our reserveestimates reflect current inflation in legal claims’ settlements and assume we will not be subject to losses fromsignificant new legal liability theories. Our reserve estimates also assume that we will not experience significantlosses from mass torts and that we will not incur losses from future mass torts not known to us today. While it isnot possible to predict the impact of changes in the litigation environment, if new mass torts or expanded legaltheories of liability emerge, our cost of claims may differ substantially from our reserves. Our reserve estimatesassume that there will not be significant changes in the regulatory and legislative environment. The impact ofpotential changes in the regulatory or legislative environment is difficult to quantify in the absence of specific,significant new regulation or legislation. In the event of significant new regulation or legislation, we willattempt to quantify its impact on our business but no assurance can be given that our attempt to quantify suchinputs will be accurate or successful.Historically, our reserve selections for the Excess and Surplus Lines segment gave more weight to industryindications due to our limited operating history. When we reviewed the Excess and Surplus Lines segment’sreserve parameters in 2013, we had ten years of accumulated historical data of the Company to analyze, and wefelt that we had enough Company history to give more weight to our own experience. Our initial expected lossratios and our paid loss development factors and incurred loss development factors were adjusted to moreclosely resemble our own internal indications. Method weights were also changed as management, inconsultation with our actuaries, deemed appropriate. These changes had the cumulative effect of reducing ourthen best estimate for the reserve for losses and loss adjustment expenses.IBNR reserve estimates are inherently less precise than case reserve estimates. A 5% change in net IBNRreserves at December 31, 2015 would equate to a $22.2 million change in the reserve for losses and lossadjustment expenses at such date, a $20.5 million change in after-tax net income, a 3.0% change inshareholders’ equity and a 4.5% change in tangible equity, in each case at or for the year ended December 31,2015.Although we believe that our reserve estimates are reasonable, it is possible that our actual loss experiencemay not conform to our assumptions. Specifically, our actual ultimate loss ratio could differ from our initialexpected loss ratio or our actual reporting and payment patterns could differ from our expected reporting andpayment patterns, which are based on our own data and industry data. Accordingly, the ultimate settlement oflosses and the related loss adjustment expenses may vary significantly from the estimates included in ourfinancial statements. We regularly review our estimates and adjust them as necessary as experience develops oras new information becomes known to us. Such adjustments are included in current operations.A $16.3 million redundancy developed in 2015 on the reserve for losses and loss adjustment expenses heldat December 31, 2014. This favorable reserve development included $25.4 million of favorable development inthe Excess and Surplus Lines segment. The Excess and Surplus Lines segment favorable development included$17.3 million of favorable development from the 2014 accident year, and $10.5 million of favorabledevelopment from the 2013 accident year. This favorable development occurred because our actuarial studies atDecember 31, 2015 for the Excess and Surplus Lines segment indicated that our loss experience for our shorter-tailed general casualty division for the 2014 accident year is below our80TABLE OF CONTENTSinitial expected ultimate loss ratios. The actuarial studies at December 31, 2015 also showed that the experienceon our casualty business excluding our shorter-tailed general casualty business continued to be below our initialexpected ultimate loss ratios driven by favorable 2015 calendar year emergence (45.4% calendar year loss ratiocompared to our expected calendar year loss ratio of 48.1%). Favorable reserve development in the SpecialtyAdmitted Insurance segment was $3.5 million, and primarily came from accident years 2011 through 2013, aslosses on our workers’ compensation business written prior to 2013 continued to develop more favorably thanwe had anticipated. In addition, $12.6 million of adverse development occured in the Casualty Reinsurancesegment, with the majority of this adverse development coming from three reinsurance relationships from the2011, 2012, and 2013 underwriting years that experienced higher loss development in 2015 than expected.A $27.4 million redundancy developed in 2014 on the reserve for losses and loss adjustment expenses heldat December 31, 2013. This favorable reserve development included $27.3 million of favorable development inthe Excess and Surplus Lines segment. The Excess and Surplus Lines segment favorable development included$7.9 million of favorable development from the 2011 accident year, $5.0 million of favorable development fromthe 2009 accident year, and $4.2 million of favorable development from the 2007 accident year. This favorabledevelopment occurred because our actuarial studies at December 31, 2014 for the Excess and Surplus Linessegment indicated that our loss experience on our mature casualty business continued to be below our initialexpected ultimate loss ratios driven by favorable 2014 calendar year emergence (33.1% calendar year loss ratiocompared to our expected calendar year loss ratio of 42.4%). Favorable reserve development in the SpecialtyAdmitted Insurance segment was $5.9 million, and primarily came from accident years 2007 through 2012, aslosses on our workers’ compensation business written prior to 2013 continued to develop more favorably thanwe had anticipated. In addition, $5.7 million of adverse development occured in the Casualty Reinsurancesegment, with the majority of this adverse development coming from one reinsurance contract from the 2011underwriting year that experienced higher loss development in 2014 than expected.A $37.5 million net redundancy developed during the year ended December 31, 2013 on the reserve forlosses and loss adjustment expenses held at December 31, 2012. This favorable reserve development included$40.7 million of favorable development in the Excess and Surplus Lines segment, including $11.7 million offavorable development on casualty lines from the 2009 accident year, $7.5 million of favorable developmentfrom the 2007 accident year and $5.7 million of favorable development from the 2008 accident year. Thisfavorable development occurred because our actuarial studies at December 31, 2013 for the Excess and SurplusLines segment indicated that our loss experience on our mature casualty business continued to be below ourinitial expected ultimate loss ratios. The $40.7 million of favorable reserve development for the Excess andSurplus Lines segment was driven by favorable 2013 calendar year emergence (42.0% calendar year loss ratiocompared to our expected calendar year loss ratio of 50.0%), significant favorable indications within the 2009accident year (which had $11.8 million of favorable net reserve development in 2012), and the impact ofadjustments to our actuarial assumptions that gave more weight to our own patterns and experience. In addition,we saw a significant reduction in defense and cost containment costs per closed claim in 2013, as a result of aconcerted effort by our claims staff to manage costs and consolidate service providers. Favorable reservedevelopment on direct business written in the Specialty Admitted Insurance segment was $1.4 million,including favorable development of $1.3 million from the 2012 accident year. The reserve strengthening in theSpecialty Admitted Insurance segment at December 31, 2012 was in recognition of inadequate premium ratelevels in 2012, 2011, and 2010, which ultimately proved to be redundant in 2013. In addition, $4.7 million ofadverse development occurred in the Casualty Reinsurance segment, with $1.0 million of adverse developmenton assumed crop business from the 2012 and 2011 accident years and $3.7 million of adverse development onother assumed business, primarily from the 2011 accident year. We terminated all assumed crop business atDecember 31, 2012. Of the $3.7 million of adverse development on non-crop-related assumed business, $3.5million related to the 2011 and 2012 contracts with one cedent.81TABLE OF CONTENTSInvestment Valuation and ImpairmentWe carry fixed maturity and equity securities classified as “available-for-sale” at fair value, and unrealizedgains and losses on such securities, net of any deferred taxes, are reported as a separate component ofaccumulated other comprehensive income. Fixed maturity securities purchased for short-term resale areclassified as “trading” and are carried at fair value with unrealized gains and losses included in earnings as acomponent of investment income. We do not have any securities classified as “held-to-maturity.”We evaluate our available-for-sale investments regularly to determine whether there have been declines invalue that are other-than-temporary. Our outside investment managers assist us in this evaluation. When wedetermine that a security has experienced an other-than-temporary impairment, the impairment loss isrecognized as a realized investment loss.We consider a number of factors in assessing whether an impairment is other-than-temporary, including (1)the amount and percentage that current fair value is below cost or amortized cost, (2) the length of time that thefair value has been below cost or amortized cost and (3) recent corporate developments or other factors that mayimpact an issuer’s near term prospects. In addition, for fixed maturity securities, we also consider the creditquality ratings for the securities, with a special emphasis on securities downgraded to below investment grade.We also consider our intent to sell available-for-sale fixed maturity securities in an unrealized loss position, andif it is “more likely than not” that we will be required to sell these securities before a recovery in fair value totheir amortized cost or cost basis. For equity securities, we evaluate the near-term prospects of these investmentsin relation to the severity and duration of the impairment, and we consider our ability and intent to hold theseinvestments until they recover their fair value. As a starting point for our evaluation, we compare the fair valueof each available-for-sale security to its amortized cost or cost to identify any securities with a fair value lessthan cost or amortized cost. At December 31, 2014, the Company held two municipal bonds issued by theCommonwealth of Puerto Rico. These bonds are backed by future sales tax revenues in Puerto Rico. PuertoRico’s weak economic conditions and heavy debt burden, combined with the passage of new legislation thatallows public corporations to defer or reduce payments on outstanding debt, heightened the risk of default onthe bonds. We concluded that the bonds, which have been downgraded to below investment grade, were other-than-temporarily impaired, and we recognized impairment losses of $1.4 million on these bonds for the yearended December 31, 2014. We recognized an additional $660,000 impairment loss on these bonds in 2015before selling them during the second quarter of 2015. We concluded that none of the other fixed maturitysecurities in an unrealized loss position at December 31, 2015 had experienced an other-than temporaryimpairment. At December 31, 2015, all but three of our fixed maturity securities (with an aggregate unpaidprincipal balance of $12.0 million) had a fair value greater than 80.0% of their cost or amortized cost. Weconcluded that these three fixed maturity securities were not other-than-temporarily impaired at December 31,2015 based in part on the fact that they had never missed a scheduled principal or interest payment, and thatthey were rated investment grade by a nationally recognized statistical rating organization.We also determined that a credit allowance was needed at December 31, 2015 and 2014 on two loans issuedby companies that produce and supply power to Puerto Rico. Accordingly, we established credit allowancestotaling $414,000 and $752,000 at December 31, 2015 and 2014, respectively.We concluded that none of the equity securities in our portfolio at December 31, 2015 or 2014 hadexperienced an other-than-temporary impairment. We recognized an impairment loss of $804,000 for the yearended December 31, 2013 on an equity security in our portfolio, as we had the intent to sell this security atDecember 31, 2013 and it was in an $804,000 unrealized loss position on that date.Bank loan participations are managed by a specialized outside investment manager and are generally statedat their outstanding unpaid principal balances net of unamortized premiums or discounts and net of anyallowance for credit losses.We maintain the allowance for credit losses at a level we believe is adequate to absorb estimated probablecredit losses. Our periodic evaluation of the adequacy of the allowance is based on consultations and the adviceof our specialized investment manager, known and inherent risks in the portfolio, adverse situations that mayaffect the borrowers’ ability to repay, the estimated value of any underlying collateral,82TABLE OF CONTENTScurrent economic conditions and other relevant factors. The Company has recorded an allowance equal to thedifference between the fair value and the amortized cost of bank loans that it has determined to be impaired as apractical expedient for an estimate of probable future cash flows to be collected on those bank loans. As astarting point for our evaluation, we compare the carrying value of each loan to its fair value to identify anyloans that had a fair value less than its carrying value.During 2014 and 2015, we had a number of our bank loans to oil and gas companies in the energy sector.The market value of these loans declined significantly in 2015 in response to declining energy prices. Wedetermined that a credit allowance of $3.9 million was needed at December 31, 2015 on two of our bank loansto companies in the energy sector with oil and gas exposure. At December 31, 2015, our exposure to bank loansof oil and gas companies consisted of eight loans with a carrying value of $15.8 million and a market value of $11.7 million.Fair values are measured in accordance with ASC 820, Fair Value Measurements. The guidance establishesa framework for measuring fair value and a three-level hierarchy based upon the quality of inputs used tomeasure fair value. The three levels of the fair value hierarchy are: (1) Level 1: quoted price (unadjusted) inactive markets for identical assets, (2) Level 2: inputs to the valuation methodology include quoted prices forsimilar assets and liabilities in active markets, and inputs that are observable for the asset or liability, eitherdirectly or indirectly, for substantially the full term of the instrument and (3) Level 3: inputs to the valuationmethodology are unobservable for the asset or liability.The fair values of fixed maturity securities and equity securities have been determined using fair valueprices provided by our investment manager, who utilizes internationally recognized independent pricingservices. The prices provided by the independent pricing services are generally based on observable market datain active markets (e.g. broker quotes and prices observed for comparable securities). Values for U.S. Treasury andpublicly-traded equity securities are generally based on Level 1 inputs which use the market approach valuationtechnique. The values for all other fixed maturity securities (including state and municipal securities andobligations of U.S. government corporations and agencies) generally incorporate significant Level 2 inputs, andin some cases, Level 3 inputs, using the market approach and income approach valuation techniques.The fair values of cash and cash equivalents and short-term investments approximate their carrying valuesdue to their short-term maturity.In the determination of the fair value for bank loan participations and certain high yield bonds, theCompany’s investment manager endeavors to obtain data from multiple external pricing sources. Externalpricing sources may include brokers, dealers and price data vendors that provide a composite price based onprices from multiple dealers. Such external pricing sources typically provide valuations for normal institutionalsize trading units of such securities using methods based on market transactions for comparable securities, andvarious relationships between securities, as generally recognized by institutional dealers. For investments inwhich the investment manager determines that only one external pricing source is appropriate or if only oneexternal price is available, the investment is generally recorded based on such price.Investments for which external sources are not available or are determined by the investment manager notto be representative of fair value are recorded at fair value as determined by the investment manager. Indetermining the fair value of such investments, the investment manager considers one or more of the followingfactors: type of security held, convertibility or exchangeability of the security, redeemability of the security(including the timing of redemptions), application of industry accepted valuation models, recent tradingactivity, liquidity, estimates of liquidation value, purchase cost and prices received for securities with similarterms of the same issuer or similar issuers. At December 31, 2015, there were bank loan participations with anunpaid principal balance of $5.3 million and a carrying value of $4.6 million for which external sources wereunavailable to determine fair value. At December 31, 2014, there were bank loan participations with an unpaidprincipal balance of $14.1 million and a carrying value of $12.7 million for which external sources wereunavailable to determine fair value.We review fair value prices provided by our outside investment managers for reasonableness by comparingthe fair values provided by the managers to those provided by our investment custodian. We also review andmonitor changes in unrealized gains and losses. We obtain an understanding of the methods,83TABLE OF CONTENTSmodels and inputs used by our investment managers and independent pricing services, and controls are in placeto validate that prices provided represent fair values. Our control process includes, but is not limited to, initialand ongoing evaluation of the methodologies used, a review of specific securities and an assessment for properclassification within the fair value hierarchy, and obtaining and reviewing internal control reports for ourinvestment manager that obtains fair values from independent pricing services.Goodwill and Intangible AssetsAt December 31, 2015, we have $181.8 million of goodwill and $39.5 million of net intangible assets onour consolidated balance sheet, primarily resulting from the acquisition of James River Group inDecember 2007.The goodwill reported on the December 31, 2015 balance sheet is an asset of the Excess and Surplus Linessegment only. Goodwill is tested annually for impairment in the fourth quarter of each calendar year, or morefrequently if events or changes in circumstances indicate that the carrying amount of the Company’s reportingunits, including goodwill, may exceed their fair values. The Company first assesses qualitative factors indetermining whether it is necessary to perform the quantitative goodwill impairment test. Only if managementdetermines that it is more likely than not that the fair value of a reporting unit is less than the carrying valuebased on qualitative factors would it be required to perform the quantitative goodwill impairment test. Ifmanagement concludes that quantitative goodwill impairment testing is required, the fair value of the reportingunits is determined using a combination of a market approach and an income approach which projects the futurecash flows produced by the reporting units and discounts those cash flows to their present value. The projectionof future cash flows is necessarily dependent upon assumptions about the future levels of income as well asbusiness trends, prospects, market and economic conditions. The results of the two approaches are weighted todetermine the fair value of each reporting unit. When the fair value is less than the carrying value of the netassets of the reporting unit, including goodwill, an impairment loss is charged to earnings. To determine theamount of any goodwill impairment, the implied fair value of reporting unit goodwill is compared to thecarrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as theamount of goodwill recognized in a business combination is determined. That is, the fair value of a reportingunit is assigned to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as ifthe reporting unit had been acquired in a business combination. The excess of the fair value of a reporting unitover the amounts assigned to its assets and liabilities is the implied fair value of goodwill. The Company’sannual testing performed in the fourth quarters of 2015, 2014 and 2013 indicated that no impairment ofgoodwill had occurred.Intangible assets are initially recognized and measured at fair value. Specifically identified intangibleassets with indefinite lives include trademarks and state insurance licenses and authorities. Intangible assets withindefinite useful lives are reviewed for impairment at least annually. In evaluating whether there has beenimpairment to the intangible asset, management determines the fair value of the intangible asset and comparesthe resulting fair value to the carrying value of the intangible asset. If the carrying value exceeds the fair value,the intangible asset is written down to fair value, and the impairment is reported through earnings. During thefourth quarters of 2015, 2014 and 2013, the indefinite-lived intangible assets for trademarks and insurancelicenses and authorities were tested for impairment. There were no impairments recognized in 2015, 2014 or2013. The relief from royalty method which we utilized in our evaluation of the value of our trademarks requiresa number of assumptions including the projected gross written premium base against which the royalty savingsrate is applied, the size of the royalty rate to be applied, the discount rate and the terminal value (if any) of thetrademarks at the end of the projection period.Other specifically identified intangible assets with lives ranging from 7.0 to 27.5 years includerelationships with customers and brokers. These intangible assets are amortized on a straight-line basis over theirestimated useful lives. The Company evaluates intangible assets with definite lives for impairment whenimpairment indicators are noted that indicate that the carrying value of these assets may not be recoverable. Ifindicators of impairment are present, fair value is calculated using estimated future cash flows expected to begenerated from the use of those assets. An impairment loss is recognized only if the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived assetor asset group is not recoverable if it exceeds the sum of the84TABLE OF CONTENTSundiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group.That assessment is based on the carrying amount of the asset or asset group at the date it is tested forrecoverability. An impairment loss is measured as the amount by which the carrying amount of a long-lived assetor asset group exceeds its fair value. Intangible assets for customer and broker relationships that have specificlives and are subject to amortization were reviewed for impairment during the fourth quarters of 2015, 2014 and2013. There were no impairments recognized in 2015, 2014 or 2013.Assumed Reinsurance PremiumsAssumed reinsurance written premiums include amounts reported by brokers and ceding companies,supplemented by the Company’s own estimates of premiums when reports have not been received. Premiums onthe Company’s excess of loss and pro rata reinsurance contracts are estimated when the business is underwritten.For excess of loss contracts, the deposit premium, as defined in the contract, is generally recorded as an estimateof premiums written at the inception date of the treaty. Estimates of premiums written under pro rata contracts arerecorded in the period in which the underlying risks are expected to begin and are based on informationprovided by the brokers and the ceding companies.Reinsurance premium estimates are reviewed by management periodically. Any adjustment to theseestimates is recorded in the period in which it becomes known. The impact of any premium adjustments on netincome is offset by corresponding changes to related policy acquisition costs and losses and loss adjustmentexpenses. For the years ended December 31, 2015, 2014 and 2013, these adjustments were immaterial.Reinsurance premiums assumed are earned over the terms of the underlying policies or reinsurancecontracts. Contracts and policies written on a “losses occurring” basis cover claims that may occur during theterm of the contract or policy, which is typically 12 months. Accordingly, the premiums are earned evenly overthe term. Contracts which are written on a “risks attaching” basis cover claims which attach to the underlyinginsurance policies written during the terms of such contracts. Premiums earned on such contracts usually extendbeyond the original term of the reinsurance contract, typically resulting in recognition of premiums earned overa 24-month period in proportion to the level of underlying exposure.Certain of the Company’s reinsurance contracts include provisions that adjust premiums or acquisitionexpenses based upon the experience under the contracts. Premiums written and earned, as well as relatedacquisition expenses, are recorded based upon the projected experience under the contracts.Recent Accounting PronouncementsIn May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue fromContracts with Customers (Topic 606), which creates a new comprehensive revenue recognition standard thatwill serve as a single source of revenue guidance for all companies in all industries. The guidance applies to allcompanies that either enter into contracts with customers to transfer goods or services or enter into contracts forthe transfer of nonfinancial assets, unless those contracts are within the scope of other standards, such asinsurance contracts. Under this guidance, a company will recognize revenue when it transfers promised goods orservices to customers in an amount that reflects the consideration to which the company expects to be entitled inexchange for those goods or services. In doing so, companies will need to use more judgment and make moreestimates than under the current guidance. These may include indentifying performance obligations in thecontract, estimating the amount of variable consideration to include in the transaction price and allocating thetransaction price to each separate performance obligation. ASU No. 2014-09 becomes effective for the Companyduring the first quarter of 2018 and must be applied retrospectively. The Company is currently evaluating ASUNo. 2014-09 to determine the potential impact that adopting this standard will have on its consolidatedfinancial statements.In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to theConsolidation Analysis. ASU No. 2015-02 changes the analysis that a reporting entity must perform todetermine whether entities should be consolidated if they are deemed variable interest entities. It is effective forannual reporting periods, and interim periods within those years, beginning after December 15, 2015. TheCompany is currently evaluating the impact of the adoption of ASU No. 2015-02, but adoption is not expectedto have a material effect on our consolidated financial statements.85(1)Net retention is defined as the ratio of net written premiums to gross written premiums.(2)See “— Reconciliation of Non-GAAP Measures” for further detail.(3)Underwriting profit includes fee income of $4.5 million and $1.8 million for the year ended December 31,2015 and 2014, respectively.TABLE OF CONTENTSIn May 2015, the FASB issued ASU No. 2015-09, Insurance (Topic 944), Disclosures about Short-DurationContracts. ASU No. 2015-09 requires additional disclosures about short-duration contracts. The disclosures willfocus on the liability for the reserves for losses and loss adjustment expenses. ASU No. 2015-09 is effective forannual periods beginning after December 15, 2015 and interim periods within annual periods beginning afterDecember 15, 2016. The Company is currently evaluating the impact of the adoption of ASU No. 2015-09 on itsconsolidated financial statements.Year Ended December 31, 2015 Compared to Year Ended December 31, 2014The following table summarizes our results for the years ended December 31, 2015 and 2014:Year Ended December 31,20152014% Change($ in thousands)Gross written premiums$572,194$518,76710.3Net retention82.386.8—Net written premiums$471,032$450,0834.7Net earned premiums$461,205$396,21216.4Losses and loss adjustment expenses(279,016(237,36817.5Other operating expenses(154,620(132,17217.0Underwriting profit 27,56926,6723.4Net investment income44,83543,0054.3Net realized investment losses(4,547(1,336240.3Other income2452392.5Other expenses(730(16,012(95.4Interest expense(6,999(6,34710.3Amortization of intangible assets(597(597—Income before taxes59,77645,62431.0Income tax expense(6,279(939568.7Net income$53,497$44,68519.7Net operating income$61,090$58,4244.6Ratios:Loss ratio60.559.9—Expense ratio33.533.4—Combined ratio94.093.3—We had an underwriting profit of $27.6 million for the year ended December 31, 2015. This compares to anunderwriting profit of $26.7 million for the prior year. On a consolidated basis, the Company recognized $16.3million of net favorable reserve development for the year ended December 31, 2015 and $27.4 million offavorable reserve development for the year ended December 31, 2014.86%(1)%%%%))%))%(2),(3)%%))%%)))%))%))%))%%%%%%%%%•The results of operations include $4.5 million of net realized investment losses for the year endedDecember 31, 2015 and $1.3 million of net realized investment losses for the year ended December 31,2014. Net realized investment losses in 2015 were primarily from the sale of fixed maturity securitiesand bank loan participations. We sold fixed maturity securities and bank loan participations in 2015to fund the $47.8 million dividends to our common shareholders in 2015. Also included in netrealized investment losses in 2015 are $3.9 million of impairment losses on two bank loans to oil andgas companies in the energy sector whose market values had declined significantly in response todeclining energy prices. Net realized investment losses in 2014 include $2.0 million of impairmentlosses related to our $10.3 million investment exposure to fixed maturity securities and bank loanparticipations issued by entities in the Commonwealth of Puerto Rico.•Other expenses for the year ended December 31, 2014 included $14.9 million of expenses associatedwith our initial public offering expenses including $2.8 million of legal fees, $2.0 million of audit andfiling related fees, and $10.2 million associated with the conversion of awards under a previous equityincentive plan.•The results of operations for the years ended December 31, 2015 and 2014 also include $730,000 and$1.1 million, respectively, of other expenses. Other expenses for 2015 include $284,000 of legal, tax,and other professional services related to the formation of James River UK, the December 2015dividend, and a securities registration statement. Other expenses for 2014 include $183,000 of duediligence costs for various merger and acquisition activities which were not consummated. Otherexpenses for 2015 and 2014 include $276,000 and $299,000, respectively, of expenses associatedwith a related party leasing arrangement for a minority-interest in a real estate limited partnershippursuant to which we were deemed to be an owner for accounting purposes. Other expenses for 2015and 2014 also include $170,000 and $600,000 of employee severance costs.•Interest expense for the years ended December 31, 2015 and 2014 includes $661,000 and $659,000,respectively, relating to finance expenses in connection with a minority interest in a real estatepartnership pursuant to which we are deemed an owner for accounting purposes. The debt isnonrecourse to us and was not arranged by us. See Note 1 to the Notes to the Audited ConsolidatedFinancial Statements for additional information with respect to our minority interest.TABLE OF CONTENTSThe results of operations for the years ended December 31, 2015 and 2014 included certain non-recurringitems that are significant to the operating results of the Company. These items (on a pre-tax basis) include:We define net operating income as net income excluding certain non-operating expenses such as netrealized investment gains and losses, expenses related to due diligence costs for various merger and acquisitionactivities, professional service fees related to the filing of a registration statement for our initial public offering,severance costs associated with terminated employees, and interest expense on a leased building that we aredeemed to own for accounting purposes. We use net operating income as an internal performance measure in themanagement of our operations because we believe it gives our management and other users of our financialinformation useful insight into our results of operations and our underlying business performance. Net operatingincome should not be viewed as a substitute for net income calculated in accordance with GAAP, and ourdefinition of net operating income may not be comparable to that of other companies.87TABLE OF CONTENTSOur income before taxes and net income for the years ended December 31, 2015 and 2014 reconcile to ournet operating income as follows:Year Ended December 31,20152014IncomeBeforeTaxesNetIncomeIncomeBeforeTaxesNetIncome(in thousands)Income as reported$59,776$53,497$45,624$44,685Initial public offering costs——14,93013,223Net realized investment losses (gains)4,5474,0901,336(890Other expenses7305741,082977Dividend withholding taxes—2,500——Interest expense on leased building the Company isdeemed to own for accounting purposes661429659429Net operating income$65,714$61,090$63,631$58,424The combined ratio is a measure of underwriting performance and represents the relationship of incurredlosses, loss adjustment expenses and other operating expenses to net earned premiums. Our combined ratio forthe year ended December 31, 2015 was 94.0%. A combined ratio of less than 100% indicates an underwritingprofit, while a combined ratio greater than 100% reflects an underwriting loss. It included $16.3 million, or 3.5percentage points, of net favorable reserve development on direct and assumed business underwritten by theCompany on prior accident years, including $25.4 million of favorable reserve development from the Excessand Surplus Lines segment and $3.5 million of favorable reserve development from the Specialty AdmittedInsurance segment partially offset by $12.6 million of adverse development from the Casualty Reinsurancesegment.Our combined ratio for the year ended December 31, 2014 was 93.3%. The combined ratio for the yearended December 31, 2014 included $27.4 million, or 6.9 percentage points, of net favorable reservedevelopment on direct and assumed business underwritten by the Company on prior accident years, including$27.3 million of favorable reserve development from the Excess and Surplus Lines segment and $5.9 million offavorable reserve development from the Specialty Admitted Insurance segment offset by $5.7 million of adversedevelopment from the Casualty Reinsurance segment.All of the Company’s U.S. domiciled insurance subsidiaries are party to an intercompany poolingagreement that distributes the net underwriting results among the group companies based on their approximatelevel of statutory capital and surplus. Additionally, each of the Company’s U.S. domiciled insurance subsidiariesis a party to a quota share reinsurance agreement that cedes 70% of their premiums and losses to JRG Re. Wereport all segment information in this “Management’s Discussion and Analysis of Financial Condition andResults of Operations” prior to the effects of intercompany reinsurance, consistent with the manner in which weevaluate the operating performance of our reportable segments.Expense RatiosOur expense ratio was 33.5% and 33.4% for the years ended December 31, 2015 and 2014, respectively.The expense ratio for 2015 reflects the 16.4% increase in our net earned premiums compared to the prior yearwithout a proportional increase in other operating expenses, offset by the additional costs of being a publicly-traded company for a full year in 2015.PremiumsInsurance premiums are earned ratably over the terms of our insurance policies, generally twelve months.Reinsurance premiums assumed are earned over the terms of the underlying policies or reinsurance contracts.Contracts and policies written on a “losses occurring” basis cover claims that may occur during the term of thecontract or policy, which is typically twelve months. Contracts which are written on a “risks88)•General Casualty division (representing 33.9% of this segment’s 2015 business) which increased$44.1 million (or 73.0%) over the prior year. Our commercial auto business was a component of thisincrease. Gross written premiums from our commercial auto business were $67.2 million for 2015 and$34.5 million in 2014.•Manufacturers and Contractors division (representing 25.4% of this segment’s 2015 business) whichincreased $6.3 million (or 8.7%) for the year ended December 31, 2015 over the prior year; and•Energy division (representing 9.9% of this segment’s 2015 business) which increased $1.6 million (or5.7%) over the prior year.TABLE OF CONTENTSattaching” basis cover claims which attach to the underlying insurance policies written during the terms of suchcontracts. Premiums earned on such contracts usually extend beyond the original term of the reinsurancecontract, typically resulting in recognition of premiums earned over a 24-month period in proportion to the levelof underlying exposure.The following table summarizes the change in premium volume by component and business segment:Year Ended December 31,20152014% Change($ in thousands)Gross written premiums:Excess and Surplus Lines$308,717$252,70722.2Specialty Admitted Insurance90,97859,38053.2Casualty Reinsurance172,499206,680(16.5$572,194$518,76710.3Net written premiums:Excess and Surplus Lines$253,285$208,12421.7Specialty Admitted Insurance44,91736,22824.0Casualty Reinsurance172,830205,731(16.0$471,032$450,0834.7Net earned premiums:Excess and Surplus Lines$240,878$195,78623.0Specialty Admitted Insurance42,20628,44948.4Casualty Reinsurance178,121171,9773.6$461,205$396,21216.4Our net premium retention by segment is as follows:Year Ended December 31,20152014Excess and Surplus Lines82.082.4Specialty Admitted Insurance49.461.0Casualty Reinsurance100.299.5Total82.386.8For the Excess and Surplus Lines segment (which represents 54.0% of our gross written premiums for theyear ended December 31, 2015), gross written premiums for the year ended December 31, 2015 increased 22.2%over the prior year. The average annual gross written premiums per policy decreased 21.8% over the prior year.However, policy submissions for new business were 3.1% higher for the year ended December 31, 2015 than theyear ended December 31, 2014. The gross written premiums increase was most notable in the following divisionswithin the Excess and Surplus Lines segment:89%%)%%%%)%%%%%%%%%%%%%%TABLE OF CONTENTSFor the Specialty Admitted Insurance segment (which represents 15.9% of our gross written premiums forthe year ended December 31, 2015) during the year ended December 31, 2015, gross written premiums increased53.2% compared to the prior year. Gross written premiums for 2015 included $55.0 million ($12.4 million on anet basis) from program and fronting business where there had been $29.3 million ($9.0 million on a net basis) ofgross written premiums in 2014. We did not begin writing program and fronting business until the fourth quarterof 2013. We cede a significant portion of the specialty admitted program and fronting business to third-partyreinsurers. As a result, neither our net written premiums nor level of assumed risk for this segment has increasedat a rate which corresponds to the increase in our gross written premiums. Workers’ compensation gross writtenpremiums also increased 19.4% for 2015 over 2014.It is our policy to audit payroll for each expired workers’ compensation insurance policy in the SpecialtyAdmitted Insurance segment to determine the difference between the original estimated payroll at the time thepolicy was written and the final actual payroll of the insured after the policy is completed. Audit premiumsincreased both written and earned premiums for the year ended December 31, 2015 by $1.6 million (in the prioryear, audit premiums increased both written and earned premiums by $1.0 million). Additionally, gross writtenpremiums for the years ended December 31, 2015 and 2014 included $1.9 million and $1.7 million,respectively, of assumed premiums from our allocation of the North Carolina involuntary workers’ compensationpool.The components of the increase in gross written premiums for the Specialty Admitted Insurance segment areas follows:Year Ended December 31,20152014% Change($ in thousands)Workers’ compensation premiums$32,464$27,40018.5Audit premiums on workers’ compensation policies1,6061,00360.1Allocation of involuntary workers’ compensation pool1,8991,72510.1Total workers’ compensation premium35,96930,12819.4Specialty admitted program and fronting business55,00929,25288.1Total$90,978$59,38053.2For the Casualty Reinsurance segment (which represents 30.1% of our gross written premiums for the yearended December 31, 2015), gross written premiums decreased 16.5%, from $206.7 million for the year endedDecember 31, 2014 to $172.5 million for the year ended December 31, 2015. The Casualty Reinsurance segmentgenerally writes large casualty-focused treaties that are expected to have lower volatility relative to property andcatastrophe treaties. We rarely write stand-alone property reinsurance. When treaties that include propertyexposure are written, it is done with relatively low catastrophe sub-limits.The decrease in written premiums in 2015 from 2014 is primarily attributable to the very competitiveenvironment for reinsurance. Despite the decrease in gross written and net written premiums for 2015, our netearned premiums (which tend to smooth out quarter-to-quarter variances) had a 3.6% increase over the prior year.Net RetentionThe net premium retention for the Company decreased from 86.8% to 82.3% for the years endedDecember 31, 2014 and 2015, respectively. The decrease in retention is due primarily to the Specialty AdmittedInsurance segment, which saw a decline in its net premium retention from 61.0% for the year endedDecember 31, 2014 to 49.4% for the year ended December 31, 2015. The decrease is driven by the segment’sprogram and fronting business. Program and fronting business generally has a much lower net premium retentionthan our workers’ compensation business which we write on an admitted basis. For the year ended December 31,2015, the net retention on the segment’s program and fronting business was 22.6%, while the net retention onthe workers’ compensation business was 90.4%. This compares to net retention on the segment’s program andfronting of 30.7% and a retention of the workers’ compensation business of 90.5% for year ended December 31,2014.90%%%%%%(1)See “— Reconciliation of Non-GAAP Measures.”(2)Underwriting results include fee income of $3.2 million and $883,000 for the years ended December 31,2015 and 2014, respectively.TABLE OF CONTENTSUnderwriting ResultsThe following table compares our combined ratios by segment:Year Ended December 31,20152014Excess and Surplus Lines80.282.1Specialty Admitted Insurance97.599.9Casualty Reinsurance101.499.6Total94.093.3Excess and Surplus Lines SegmentResults for the Excess and Surplus Lines segment are as follows:Year Ended December 31,% Change20152014($ in thousands)Gross written premiums$308,717$252,70722.2Net written premiums$253,285$208,12421.7Net earned premiums$240,878$195,78623.0Losses and loss adjustment expenses(131,221(108,14621.3Underwriting expenses(62,050(52,54418.1Underwriting profit$47,607$35,09635.6Ratios:Loss ratio54.555.2—Expense ratio25.826.8—Combined ratio80.282.1—Combined Ratio. The combined ratio of the Excess and Surplus Lines segment for the year endedDecember 31, 2015 was 80.2%, comprised of a loss ratio of 54.5% and an expense ratio of 25.8%. The combinedratio for the year ended December 31, 2014 was 82.1%, comprised of a loss ratio of 55.2% and an expense ratioof 26.8%.Loss Ratio. The loss ratio of 54.5% for the year ended December 31, 2015 includes $25.4 million, or 10.6percentage points, of net favorable development in our loss estimates for prior accident years. The loss ratio of55.2% for the year ended December 31, 2014 includes $27.3 million, or 13.9 percentage points, of net favorabledevelopment in our loss estimates for prior accident years. The significant favorable reserve development in thissegment reflects benign loss activity and continuing positive loss trends. Our actuarial studies indicated that ourloss experience on our shorter-tailed general casualty business for the 2014 accident year is better than ourinitial expected ultimate loss ratios and that the loss experience on the remainder of our casualty businesscontinued to be below our initial expected ultimate loss ratios.Expense Ratio. The expense ratio decreased from 26.8% in 2014 to 25.8% in 2015. The decrease in theexpense ratio is primarily attributable to the increase in net earned premiums without a proportional increase inthe total amount of operating expenses.Underwriting Profit. As a result of the items discussed above, underwriting profit of the Excess andSurplus Lines segment increased 35.6%, from $35.1 million for the year ended December 31, 2014 to$47.6 million for the year ended December 31, 2015.91%%%%%%%%%%%))%))%(1), (2)%%%%%%%(1)See “— Reconciliation of Non-GAAP Measures.”(2)Underwriting profit includes fee income of $1.3 million and $873,000 for the years ended December 31,2015 and 2014, respectively.TABLE OF CONTENTSSpecialty Admitted Insurance SegmentResults for the Specialty Admitted Insurance segment are as follows:Year Ended December 31,% Change20152014($ in thousands)Gross written premiums$90,978$59,38053.2Net written premiums$44,917$36,22824.0Net earned premiums$42,206$28,44948.4Losses and loss adjustment expenses(25,623(15,17968.8Underwriting expenses(15,509(13,23717.2Underwriting profit$1,074$33—Ratios:Loss ratio60.753.4—Expense ratio36.746.5—Combined ratio97.599.9—Combined Ratio. The combined ratio of the Specialty Admitted Insurance segment for the year endedDecember 31, 2015 was 97.5%, comprised of a loss ratio of 60.7% and an expense ratio of 36.7%. This comparesto the combined ratio in the prior year of 99.9%, comprised of a loss ratio of 53.4% and an expense ratio of46.5%.Loss Ratio. The loss ratio for the year ended December 31, 2015 of 60.7% included $3.5 million, or 8.4percentage points of net favorable development on prior accident years. The loss ratio for the year endedDecember 31, 2014 of 53.4% included $5.9 million, or 20.6 percentage points, of net favorable development onprior accident years. The favorable development in both 2015 and 2014 reflects the fact that actual lossemergence of the workers’ compensation book for accident years 2012 and prior has been better than expectedwhen we took actions to strengthen reserves for the book during the year ended December 31, 2012.Expense Ratio. The expense ratio of 36.7% for the year ended December 31, 2015 decreased from 46.5% inthe prior year. The higher expense ratio in the prior year for this segment relates to infrastructure and personnelcosts associated with the ramp up of this segment’s program and fronting business. The gross written premiumson this program and fronting business were $55.0 million and $29.3 million for the years ended December 31,2015 and 2014, respectively. Many of the infrastructure and personnel costs necessary to produce andadminister this business (by necessity) precede the production and earning of these premiums. We believe theexpense ratio for this segment will continue to decline as this segment increases premium volume in its newbusinesses and territories during 2016 and in future periods.Underwriting Profit. As a result of the items discussed above, the underwriting profit improved from$33,000 for the year ended December 31, 2014 to $1.1 million for the year ended December 31, 2015.92%%%))%))%(1), (2)%%%%%%(1)See “— Reconciliation of Non-GAAP Measures.”TABLE OF CONTENTSCasualty Reinsurance SegmentResults for the Casualty Reinsurance segment are as follows:Year Ended December 31,% Change20152014($ in thousands)Gross written premiums$172,499$206,680(16.5Net written premiums$172,830$205,731(16.0Net earned premiums$178,121$171,9773.6Losses and loss adjustment expenses(122,172(114,0437.1Underwriting expenses(58,507(57,2672.2Underwriting profit (loss)$(2,558$667—Ratios:Loss ratio68.666.3—Expense ratio32.833.3—Combined ratio101.499.6—The Casualty Reinsurance segment focuses on lower volatility, proportional reinsurance which requireslarger ceding commissions resulting in a higher commission expense than in our other segments.Combined Ratio. The combined ratio of the Casualty Reinsurance segment for the year endedDecember 31, 2015 was 101.4%, comprised of a loss ratio of 68.6% and an expense ratio of 32.8%. Thiscompares to the combined ratio in the prior year of 99.6%, comprised of a loss ratio of 66.3% and an expenseratio of 33.3%.Loss Ratio. The loss ratio for the year ended December 31, 2015 of 68.6% included $12.6 million, or 7.1percentage points, of adverse reserve development in our loss estimates for prior accident years. The loss ratio forthe year ended December 31, 2014 of 66.3% included $5.7 million, or 3.3 percentage points, of net adversereserve development in our loss estimates for the prior accident years.Expense Ratio. The expense ratio of the Casualty Reinsurance segment decreased from 33.3% for the yearended December 31, 2014 to 32.8% for the year ended December 31, 2015, principally as a result of the higherloss ratios effect on our sliding scale commission expenses.Underwriting Results. As a result of the items discussed above, the underwriting loss for the CasualtyReinsurance segment for the year ended December 31, 2015 was $2.6 million compared to an underwriting profitof $667,000 for the year ended December 31, 2014.Other Operating ExpensesIn addition to the underwriting, acquisition and insurance expenses of the Excess and Surplus Linessegment, the Specialty Admitted Insurance segment and the Casualty Reinsurance segment discussedpreviously, other operating expenses also includes the expenses of the Corporate and Other segment.Corporate and Other SegmentOther operating expenses for the Corporate and Other segment include personnel costs associated with theBermuda and U.S. holding companies, professional fees and various other corporate expenses that are includedin the calculation of our expense ratio and combined ratio. Accordingly, other operating expenses of theCorporate and Other segment represent the expenses of both the Bermuda and U.S. holding companies that werenot reimbursed by our subsidiaries, including costs associated with potential acquisitions and other strategicinitiatives. These costs vary from period to period based on the status of these initiatives.93)%)%%))%))%(1))%%%%%%TABLE OF CONTENTSFor the years ended December 31, 2015 and 2014, the total operating expenses of the Corporate and Othersegment were $18.6 million and $9.1 million, respectively. The variance from the prior year principally relatesto share-based compensation related expenses.Investing ResultsNet investment income was $44.8 million for the year ended December 31, 2015 compared to $43.0 millionin the prior year. The increase in net investment income was primarily attributable to growth in our cash andinvested assets. Cash and invested assets increased $40.1 million or 3.1% in 2015 (from $1,310.6 million atDecember 31, 2014 to $1,350.7 million at December 31, 2015) due to our profitability, a 4.7% increase in netwritten premiums, and our positive cash flows from operations. Dividend payments of $70.0 million onSeptember 30, 2014 and $47.4 million in 2015 reduced our investable assets. Additionally, net investmentincome was affected by an increase in the approximate duration of our portfolio (from 3.1 years at December 31,2014 to 3.5 years at December 31, 2015) and declining portfolio yields, which partially offset some of theincrease associated with the higher asset base.Major categories of the Company’s net investment income are summarized as follows:Year Ended December 31,20152014(in thousands)Fixed maturity securities$24,178$22,861Bank loan participations13,43213,809Equity securities4,4444,103Other invested assets5,9475,690Cash, cash equivalents, and short-term investments672116Trading losses(9(32Gross investment income48,66446,547Investment expense(3,829(3,542Net investment income$44,835$43,005The following table summarizes our investment returns:Year Ended December 31,20152014Annualized gross investment yield on:Average cash and invested assets3.73.7Average fixed maturity securities3.43.5Annualized tax equivalent yield on:Average fixed maturity securities3.53.6Of our total cash and invested assets of $1,350.7 million at December 31, 2015, $106.4 million representsthe cash and cash equivalents portion of the portfolio. The majority of the portfolio, or $973.8 million, iscomprised of fixed maturity and equity securities that are classified as available-for-sale and carried at fair valuewith unrealized gains and losses on these securities reported, net of applicable taxes, as a separate component ofaccumulated comprehensive income or loss. Also included in our investments are $191.7 million of bank loanparticipations, $54.5 million of other invested assets, $19.3 million of short-term investments, and $5.0 millionof fixed maturity securities classified as trading and held at the U.S. holding company. Our trading portfolio iscarried at fair value with changes to the value reported as net investment income in our consolidated incomestatement.The $191.7 million of bank loan participations are classified as held-for-investment and reported atamortized cost, net of an allowance for credit losses of $4.3 million. The allowance for credit losses atDecember 31, 2015 was primarily related to two Puerto Rico loans and two energy sector loans (the94))))%%%%%%TABLE OF CONTENTSallowance for credit losses was $752,000 at December 31, 2014 and was related to two Puerto Rico loans).Changes in this credit allowance are included in realized gains or losses. These bank loan participations areprimarily senior, secured floating-rate debt which are generally rated “BB,” “B,” or “CCC” by Standard & Poor’sor an equivalent rating from another nationally recognized statistical rating organization, and are thereforebelow 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 secondarymarkets. They consist of, but are not limited to, term loans, the funded and unfunded portions of revolving creditloans, and similar loans and investments. At December 31, 2015 and 2014, the fair market value of thesesecurities was $180.1 million and $231.3 million, respectively.The Company invests selectively in private debt and equity opportunities. These investments comprise theCompany’s other invested assets and are primarily focused in renewable energy, limited partnerships, and bankholding companies. Equity interests in various renewable energy LLCs managed by an affiliate of theCompany’s largest shareholder, the D.E. Shaw Affiliates, generated investment income of $3.9 million and $5.2million for the years ended December 31, 2015 and 2014, respectively. These investments had a carrying valueof $26.0 million at December 31, 2015. Investments in bridge loans for renewable energy projects, primarilywith affiliates of D.E. Shaw, had investment income of $3.1 million for the year ended December 31, 2015compared to none in 2014. During 2015, the Company invested a total of $36.3 million in these notes andreceived maturities and repayments totaling $30.8 million. The Company has invested in several limitedpartnerships that invest in concentrated portfolios of high yield bonds of companies undergoing financial stress,publicly-traded small cap equities, loans of middle market private equity sponsored companies, and equitytranches of collateralized loan obligations (CLOs). Losses from these partnerships were $1.5 million and$128,000 for the years ended December 31, 2015 and 2014, respectively. Together, these limited partnershipshad a carrying value of $17.5 million at December 31, 2015. Income from the Company’s investments inrenewable energy LLCs and limited partnerships is recognized under the equity method of accounting. TheCompany also holds $4.5 million of subordinated notes issued by a bank holding company affiliated with theChairman and Chief Executive Officer of the Company. Interest income from the notes was $343,000 for theyears ended December 31, 2015 and 2014.Market values of energy sector holdings were negatively impacted in 2015 by declining oil and gas prices.Net realized investment losses of $4.5 million for the year ended December 31, 2015 were principally related toimpairments of two energy loans totaling $3.9 million and $3.6 million of net realized losses on sales of bankloans, mostly in the energy sector. Sales of fixed maturities and equities, a portion of which were used to fundthe special dividend in the fourth quarter, generated net realized gains of $2.0 million and $1.0 million,respectively, offsetting some of the energy sector losses. For the year ended December 31, 2014, we recognizednet realized investment losses of $1.3 million. The realized losses included $2.0 million in impairment lossesrelated to our investment exposure to entities located in the Commonwealth of Puerto Rico.In conjunction with its outside investment managers, the Company performs quarterly reviews of allsecurities within its investment portfolio to determine whether any impairment has occurred. The Companypreviously held two municipal bonds issued by the Commonwealth of Puerto Rico. Puerto Rico’s weakeconomic conditions and heavy debt burden heightened the risk of default on the bonds and managementconcluded that the bonds, which had been downgraded to below investment grade, were other-than-temporarilyimpaired, at June 30, 2014. The Company recognized impairment losses of $660,000 and $1.4 million on thesebonds for the years ended December 31, 2015, and 2014, respectively. The bonds were sold during the secondquarter of 2015 and a net realized gain of $22,000 was recognized on the sales.The Company holds participations in two loans issued by companies that produce and supply power toPuerto Rico through power purchase agreements with Puerto Rico Electric Power Authority (“PREPA”), a publiccorporation and governmental agency of the Commonwealth of Puerto Rico. PREPA’s credit strength and abilityto make timely payments has been impacted by the economic conditions in Puerto Rico, thus raising doubtabout the companies’ ability to meet the debt obligations held by the Company. Management concluded thatthe loans were impaired at December 31, 2014 and established an allowance for credit losses on the loans of $752,000. At December 31, 2015, the allowance for credit losses on these loans was $414,000. The loans had acarrying value of $3.9 million at December 31, 2015 and unpaid principal of $4.6 million.95TABLE OF CONTENTSDuring 2014 and 2015 we had a number of the Company’s bank loans to oil and gas companies in theenergy sector. The market values of these loans have declined significantly in response to declining energyprices. In total, the Company had eight loans to oil and gas companies in the energy sector with a carrying valueof $15.8 million and a market value of $11.7 million at December 31, 2015. Management concluded that twoof these loans were impaired as of December 31, 2015, and accordingly, an allowance for credit losses of $3.9million was established on the loans. After recording this impairment, the loans had a carrying value of $1.7million at December 31, 2015 and unpaid principal of $5.8 million. Management also concluded that one non-energy sector loan held at December 31, 2015 should be considered impaired and an allowance for credit lossesof $34,000 was established on the loan. After recording this impairment, the loan had a carrying value of $689,000 at December 31, 2015 and unpaid principal of $722,000. There was no allowance for credit losses onthese loans at December 31, 2014.At December 31, 2015, our available-for-sale investment portfolio of fixed maturity and equity securitieshad net unrealized gains of $6.5 million representing 0.7% of the cost or amortized cost of the portfolio.Additionally, at December 31, 2015, 86.6% of our fixed maturity security portfolio was rated “A-” or better byStandard & Poor’s or had an equivalent rating from another nationally recognized statistical rating organization.Fixed maturity securities with ratings below investment grade by Standard & Poor’s or another nationallyrecognized statistical rating organization at December 31, 2015 had an aggregate fair value of $9.4 million andan aggregate net unrealized loss of $5.2 million.The amortized cost and fair value of our investments in available-for-sale securities were as follows:December 31, 2015December 31, 2014Cost or Amortized CostFair Value% of Total Fair ValueCost or Amortized CostFair Value% of Total Fair Value($ in thousands)Fixed maturity securities:State and municipal$95,864$103,45710.6$90,715$99,04612.0Residential mortgage-backed137,308136,88714.1113,997115,24914.0Corporate368,961363,16837.3261,574267,88232.5Commercial mortgage and asset-backed130,231130,69613.4111,056113,34113.7Obligations of U.S. government corporationsand agencies89,73490,1639.3100,376101,27512.3U.S. Treasury securities and obligationsguaranteed by the U.S. government73,32273,2557.558,17358,2697.1Redeemable preferred stock2,0252,0340.22,0251,9010.2Total897,445899,66092.4737,916756,96391.8Equity securities:Preferred stock50,63154,0925.545,14949,6016.0Common stock19,19920,0192.119,19918,3042.2Total69,83074,1117.664,34867,9058.2Total investments$967,275$973,771100.0$802,264$824,868100.0The following table sets forth the composition of the Company’s portfolio of fixed maturity securities (bothavailable-for-sale and trading) by rating as of December 31, 2015:Standard & Poor’s or Equivalent DesignationFair Value% of Total($ in thousands)AAA$128,51714.2AA411,69845.5A242,93226.9BBB112,20512.4BB4,6500.5Below BB and unrated4,7040.5Total$904,706100.096%%%%%%%%%%%%%%%%%%%%%%%%%%TABLE OF CONTENTSAt December 31, 2015, our portfolio of available-for-sale fixed maturity securities contained corporatefixed maturity securities with a fair value of $363.2 million. A summary of these securities by industry segmentis shown below as of December 31, 2015:IndustryFair Value% of Total($ in thousands)Industrials and other$243,46767.0Financial62,48517.2Utilities57,21615.8Total$363,168100.0Corporate available-for-sale fixed maturity securities include public traded securities and privately placedbonds is shown below as of December 31, 2015:Public/PrivateFair Value% of Total($ in thousands)Publicly traded$335,15192.3Privately placed28,0177.7Total$363,168100.0In addition to the $973.8 million of available-for-sale securities, the Company holds $191.7 million ofbank loan participations, $5.0 million of fixed maturity securities classified as trading (which are held at our U.S.holding company), $19.3 million of short-term investments, and other invested assets of $54.5 million for a totalinvested asset balance at December 31, 2015 of $1,244.3 million.The amortized cost and fair value of our available-for-sale investments in fixed maturity securitiessummarized by contractual maturity are as follows:December 31, 2015Amortized CostFair Value% of Total Fair Value($ in thousands)Due in:One year or less$86,769$87,0969.7After one year through five years289,078286,13531.8After five years through ten years115,835115,45912.8After ten years136,199141,35315.7627,881630,04370.0Residential mortgage-backed137,308136,88715.2Commercial mortgage and asset-backed130,231130,69614.5Redeemable preferred stock2,0252,0340.3Total$897,445$899,660100.0At December 31, 2015, the Company had no investments in securitizations of alternative-A mortgages, sub-prime mortgages, or collateralized debt obligations.Other ExpensesOther expenses for the years ended December 31, 2015 and 2014 were $730,000 and $16.0 million,respectively. In 2015, these expenses include $170,000 of severance expenses, $276,000 of expenses associatedwith a minority interest in a real estate limited partnership pursuant to which we were deemed to be an owner foraccounting purposes, and $284,000 of legal, tax, and other professional services related to the formation ofJames River UK, the December 2015 dividend, and a securities registration statement. In 2014, other expensesincluded $14.9 million of expenses associated with our initial public offering, $600,000 of employee severancecosts, $183,000 of due diligence expenses related to an acquisition that was not consummated, and $299,000 ofexpenses associated with a related party leasing agreement where we were deemed to be the owner foraccounting purposes.97%%%%%%%%%%%%%TABLE OF CONTENTSInterest ExpenseInterest expense was $7.0 million and $6.3 million for the years ended December 31, 2015 and 2014,respectively. See “— Liquidity and Capital Resources — Sources and Uses of Funds” for information regardingour senior bank debt facility and trust preferred securities.Amortization of IntangiblesThe Company recorded $597,000 of amortization of intangibles for each of the years ended December 31,2015 and 2014, respectively.Goodwill and ImpairmentWe test goodwill and other intangible assets in each operating segment for impairment at least annually.The fair value of the reporting units is determined by weighting the results of a discounted cash flow analysisand a valuation derived from a market-based approach. Intangible assets are valued using variousmethodologies. The projection of future cash flows is dependent upon assumptions on the future levels ofincome as well as business trends, prospects and market and economic conditions.We perform this assessment to determine whether there has been any impairment in the value of goodwill orintangible assets by comparing its fair value to the net carrying value of the reporting units. If the carrying valueexceeds its estimated fair value, an impairment loss is recognized and the asset is written down accordingly.The Company completed its impairment tests and fair value analyses for goodwill and other intangibleassets during the fourth quarter. No impairment was present for the years ended December 31, 2015 or 2014.Income Tax ExpenseOur effective tax rate fluctuates from period to period based on the relative mix of income reported bycountry and the respective tax rates imposed by each tax jurisdiction. For U.S.-sourced income, our U.S. federalincome tax expense differs from the amounts computed by applying the federal statutory income tax rate toincome before taxes due primarily to interest income on tax-advantaged state and municipal securities (state andmunicipal securities represented 10.6% and 12.0% of our available-for-sale securities at December 31, 2015 and2014, respectively), dividends received income, and tax credits on certain renewable energy investments.Income taxes for 2015 included $2.5 million of U.S. withholding taxes on an intercompany dividend paid fromthe U.S. holding company to our U.K. intermediate holding company. For the years ended December 31, 2015and 2014, our effective tax rate was 10.5% and 2.1%, respectively. Our 2014 effective tax rate was reduced bycertain energy tax credits received on some of our equity investments in companies involved in the productionof alternative energy (included in “Other Invested Assets” in our Consolidated Balance Sheets).98(1)Net retention is defined as the ratio of net written premiums to gross written premiums.(2)See “— Reconciliation of Non-GAAP Measures” for further detail.(3)Underwriting profit for the year ended December 31, 2014 includes $1.8 million of fee income.•The results of operations include $1.3 million of net realized investment losses for the year endedDecember 31, 2014 and $12.6 million of net realized investment gains for the year endedDecember 31, 2013. Net realized investment losses in 2014 include $2.0 million of impairment lossesrelated to our investment exposure to fixed maturity securities and bank loan participations issued byentities in the Commonwealth of Puerto Rico. Net realized investment losses in 2013 were primarilyfrom the sale of fixed maturity securities and bank loan participations. We sold securities in 2013 tofund the $110.8 million repurchase of our common shares and to shorten the duration of our portfolioto reduce our exposure to interest rate risk.TABLE OF CONTENTSYear Ended December 31, 2014 Compared to Year Ended December 31, 2013The following table summarizes our results for the years ended December 31, 2014 and 2013:Year Ended December 31,% Change20142013($ in thousands)Gross written premiums$518,767$368,51840.8Net retention86.888.2—Net written premiums$450,083$325,16638.4Net earned premiums$396,212$328,07820.8Losses and loss adjustment expenses(237,368(184,48628.7Other operating expenses(132,172(114,80415.1Underwriting profit26,67228,788(7.4Net investment income43,00545,373(5.2Net realized investment (losses) gains(1,33612,619—Other income2392227.7Other expenses(16,012(677—Interest expense(6,347(6,777(6.3Amortization of intangible assets(597(2,470(75.8Income before taxes45,62477,078(40.8Income tax expense(939(9,741(90.4Net income$44,685$67,337(33.6Net operating income$58,424$58,918(0.8Ratios:Loss ratio59.956.2—Expense ratio33.435.0—Combined ratio93.391.2—We had an underwriting profit of $26.7 million for the year ended December 31, 2014. This compares to anunderwriting profit of $28.8 million for the prior year. On a consolidated basis, the Company recognized $27.4million of net favorable reserve development for the year ended December 31, 2014 and $37.5 million offavorable reserve development for the year ended December 31, 2013.The results of operations for the years ended December 31, 2014 and 2013 included certain non-recurringitems that are significant to the operating results of the Company. These items (on a pre-tax basis) include:99%(1)%%%%))%))%(2))%)%)%)))))%)))%)%)))%)%)%%%%%%%•Other expenses for the year ended December 31, 2014 included $14.9 million of expenses associatedwith our initial public offering expenses including $2.8 million of legal fees, $2.0 million of audit andfiling related fees, and $10.2 million associated with the conversion of awards under a previous equityincentive plan.•The results of operations for the years ended December 31, 2014 and 2013 also include $1.1 millionand $677,000, respectively, of other expenses. Other expenses for 2014 and 2013 include $183,000and $392,000, respectively, of due diligence costs for various merger and acquisition activities whichwere not consummated. Other expenses for 2014 and 2013 also include $299,000 and $285,000,respectively, of expenses associated with a related party leasing arrangement. Other expenses for 2014also include $600,000 of employee severance costs.•Interest expense for the years ended December 31, 2014 and 2013 includes $659,000 and $663,000,respectively, relating to finance expenses in connection with a minority interest in real estate pursuantto which we are deemed the accounting owner. The debt is nonrecourse to us and was not arranged byus. See Note 1 to the Notes to the Audited Consolidated Financial Statements for additionalinformation with respect to our minority interest.TABLE OF CONTENTSOur income before taxes and net income for the years ended December 31, 2014 and 2013 reconcile to ournet operating income as follows:Year Ended December 31,20142013Income Before TaxesNet IncomeIncome Before TaxesNet Income(in thousands)Income as reported$45,624$44,685$77,078$67,337Initial public offering costs14,93013,223——Net realized investment (gains) losses1,336(890(12,619(9,427Other expenses1,082977677577Interest expense on leased building the Company isdeemed to own for accounting purposes659429663431Net operating income$63,631$58,424$65,799$58,918Our combined ratio for the year ended December 31, 2014 was 93.3%. It included $27.4 million, or 6.9percentage points, of net favorable reserve development on direct and assumed business underwritten by theCompany on prior accident years, including $27.3 million of favorable reserve development from the Excessand Surplus Lines segment and $5.9 million of favorable reserve development from the Specialty AdmittedInsurance segment partially offset by $5.7 million of adverse development from the Casualty Reinsurancesegment.Our combined ratio for the year ended December 31, 2013 was 91.2%. The combined ratio for the yearended December 31, 2013 included $37.5 million, or 11.4 percentage points, of net favorable reservedevelopment on direct and assumed business underwritten by the Company on prior accident years, including$40.7 million of favorable reserve development from the Excess and Surplus Lines segment and $1.4 million offavorable reserve development from the Specialty Admitted Insurance segment offset by $4.7 million of adversedevelopment from the Casualty Reinsurance segment.Expense RatiosOur expense ratio was 33.4% and 35.0% for the years ended December 31, 2014 and 2013, respectively.The reduction in the expense ratio for 2014 from the prior year is primarily attributable to the 20.8% increase inour net earned premiums compared to the prior year without a proportional increase in other operating expenses.100)))•General Casualty division (representing 23.9% of this segment’s 2014 business) which increased$37.8 million (or 167.1%) over the prior year. Our TNC business was a component of this increase.Gross written premiums from our TNC business were $32.0 million for 2014 and $2.5 million in 2013.•Manufacturers and Contractors division (representing 28.5% of this segment’s 2014 business) whichincreased $13.6 million (or 23.2%) for the year ended December 31, 2014 over the prior year; and•Energy division (representing 11.5% of this segment’s 2014 business) which increased $7.6 million(or 35.4%) over the prior year.TABLE OF CONTENTSPremiumsThe following table summarizes the change in premium volume by component and business segment:Year Ended December 31,% Change20142013($ in thousands)Gross written premiums:Excess and Surplus Lines$252,707$192,39431.3Specialty Admitted Insurance59,38020,594188.3Casualty Reinsurance206,680155,53032.9$518,767$368,51840.8Net written premiums:Excess and Surplus Lines$208,124$155,06434.2Specialty Admitted Insurance36,22818,16999.4Casualty Reinsurance205,731151,93335.4$450,083$325,16638.4Net earned premiums:Excess and Surplus Lines$195,786$141,82638.0Specialty Admitted Insurance28,44917,90858.9Casualty Reinsurance171,977168,3442.2$396,212$328,07820.8Our net premium retention by segment is as follows:Year Ended December 31,20142013Excess and Surplus Lines82.480.6Specialty Admitted Insurance61.088.2Casualty Reinsurance99.597.7Total86.888.2For the Excess and Surplus Lines segment (which represents 48.7% of our gross written premiums for theyear ended December 31, 2014), gross written premiums for the year ended December 31, 2014 increased 31.3%over the prior year. The average annual gross written premiums per policy increased 4.4% over the prior year.Additionally, policy submissions were 3.9% higher for the year ended December 31, 2014 than the year endedDecember 31, 2013. The gross written premiums increase was most notable in the following divisions within theExcess and Surplus Lines segment:For the Specialty Admitted Insurance segment (which represents 11.5% of our gross written premiums forthe year ended December 31, 2014) during the year ended December 31, 2014, gross written premiums increased188.3% compared to the prior year. Gross written premiums for 2014 included $29.3 million ($9.0 million on anet basis) from program and fronting business where there had been $566,000 of gross101%%%%%%%%%%%%%%%%%%%%TABLE OF CONTENTSwritten premiums in 2013, as we did not begin writing program and fronting business until the fourth quarter of2013. We cede a significant portion of the specialty admitted program and fronting business to third-partyreinsurers. As a result, neither our net written premiums nor level of assumed risk for this segment has increasedat a rate which corresponds to the increase in our gross written premiums. Workers’ compensation gross writtenpremiums also increased 50.4% for 2014 over 2013.Audit premiums increased both written and earned premiums for the year ended December 31, 2014 by $1.0million (in the prior year, audit premiums increased both written and earned premiums by $517,000).Additionally, gross written premiums for the years ended December 31, 2014 and 2013 included $1.7 millionand $1.4 million, respectively, of assumed premiums from our allocation of the North Carolina involuntaryworkers’ compensation pool.The components of the increase in gross written premiums for the Specialty Admitted Insurance segment areas follows:Year Ended December 31,% Change20142013($ in thousands)Workers’ compensation premiums$27,400$18,13051.1Audit premiums on workers’ compensation policies1,00351794.0Allocation of involuntary workers’ compensation pool1,7251,38124.9Total workers’ compensation premium30,12820,02850.4Specialty admitted program and fronting business29,252566—Total$59,380$20,594188.3For the Casualty Reinsurance segment (which represents 39.8% of our gross written premiums for the yearended December 31, 2014), gross written premiums increased 32.9%, from $155.5 million for the year endedDecember 31, 2013 to $206.7 million for the year ended December 31, 2014. The Casualty Reinsurance segmentgenerally writes large casualty-focused treaties that are expected to have lower volatility relative to property andcatastrophe treaties. We rarely write stand-alone property reinsurance. When treaties that include propertyexposure are written, it is done with relatively low catastrophe sub-limits.The increase in written premiums in 2014 over 2013 is primarily attributable to $51.9 million of writtenpremium increases on our three largest treaties that have produced favorable historical underwriting results. Inaddition, we received $26.2 million of written premiums from new treaties written during 2014. Despite thesignificant increase in gross written and net written premiums for 2014, our net earned premiums (which tend tosmooth out quarter-to-quarter variances) were effectively flat, with a 2.2% increase over the prior year.Net RetentionThe net premium retention for the Company decreased from 88.2% to 86.8% for the years endedDecember 31, 2013 and 2014, respectively. The decrease in retention is due primarily to the Specialty AdmittedInsurance segment, which saw a decline in its net premium retention from 88.2% for the year endedDecember 31, 2013 to 61.0% for the year ended December 31, 2014. The decrease is driven by the segment’sprogram and fronting business, which we began writing in the fourth quarter of 2013. Program and frontingbusiness generally has a much lower net premium retention than our workers’ compensation business which wewrite on an admitted basis. For the year ended December 31, 2014, the net retention on the segment’s programand fronting business was 30.7%, while the net retention on the workers’ compensation business was 90.5%.This compares to net retention on the workers’ compensation business of 88.7% for year ended December 31,2013. There was only $566,000 of program and fronting business premiums written in this segment during 2013.102%%%%%(1)See “— Reconciliation of Non-GAAP Measures.”(2)Underwriting profit for the year ended December 31, 2014 includes fee income of $833,000.TABLE OF CONTENTSUnderwriting ResultsThe following table compares our combined ratios by segment:Year Ended December 31,20142013Excess and Surplus Lines82.169.3Specialty Admitted Insurance99.9121.6Casualty Reinsurance99.6101.5Total93.391.2Excess and Surplus Lines SegmentResults for the Excess and Surplus Lines segment are as follows:Year Ended December 31,% Change20142013($ in thousands)Gross written premiums$252,707$192,39431.3Net written premiums$208,124$155,06434.2Net earned premiums$195,786$141,82638.0Losses and loss adjustment expenses(108,146(57,25088.9Underwriting expenses(52,544(41,05328.0Underwriting profit$35,096$43,523(19.4Ratios:Loss ratio55.240.4—Expense ratio26.828.9—Combined ratio82.169.3—Combined Ratio. The combined ratio of the Excess and Surplus Lines segment for the year endedDecember 31, 2014 was 82.1%, comprised of a loss ratio of 55.2% and an expense ratio of 26.8%. The combinedratio for the year ended December 31, 2013 was 69.3%, comprised of a loss ratio of 40.4% and an expense ratioof 28.9%.Loss Ratio. The loss ratio of 55.2% for the year ended December 31, 2014 includes $27.3 million, or 13.9percentage points, of net favorable development in our loss estimates for prior accident years. The loss ratio of40.4% for the year ended December 31, 2013 includes $40.7 million, or 28.7 percentage points, of net favorabledevelopment in our loss estimates for prior accident years. The significant favorable reserve development in thissegment reflects benign loss activity and continuing positive loss trends.Expense Ratio. The expense ratio decreased from 28.9% in 2013 to 26.8% in 2014. The decrease in theexpense ratio is primarily attributable to the increase in net earned premiums without a proportional increase inthe total amount of operating expenses.Underwriting Profit. As a result of the items discussed above, underwriting profit of the Excess andSurplus Lines segment decreased 19.4%, from $43.5 million for the year ended December 31, 2013 to$35.1 million for the year ended December 31, 2014.103%%%%%%%%%%%))%))%(1))%%%%%%%(1)See “— Reconciliation of Non-GAAP Measures.”(2)Underwriting results for the year ended December 31, 2014 include fee income of $873,000.TABLE OF CONTENTSSpecialty Admitted Insurance SegmentResults for the Specialty Admitted Insurance segment are as follows:Year Ended December 31,% Change20142013($ in thousands)Gross written premiums$59,380$20,594188.3Net written premiums$36,228$18,16999.4Net earned premiums$28,449$17,90858.9Losses and loss adjustment expenses(15,179(12,06625.8Underwriting expenses(13,237(9,71036.3Underwriting profit (loss)$33$(3,868—Ratios:Loss ratio53.467.4—Expense ratio46.554.2—Combined ratio99.9121.6—Combined Ratio. The combined ratio of the Specialty Admitted Insurance segment for the year endedDecember 31, 2014 was 99.9%, comprised of a loss ratio of 53.4% and an expense ratio of 46.5%. This comparesto the combined ratio in the prior year of 121.6%, comprised of a loss ratio of 67.4% and an expense ratio of54.2%. The substantial improvement in the loss ratio for the year ended December 31, 2014 reflects a significantincrease in premium rates, more selectivity in accounts and classes of business we underwrite, and the effects of aground-up review of our agency network — all of which began in the third quarter of 2012.Loss Ratio. The loss ratio for the year ended December 31, 2014 of 53.4% included $5.9 million, or 20.6percentage points of net favorable development on prior accident years. The loss ratio for the year endedDecember 31, 2013 of 67.4% included $1.4 million, or 7.9 percentage points, of net favorable development onprior accident years. The favorable development in both 2014 and 2013 reflects the fact that actual lossemergence of the workers’ compensation book for accident years 2012 and prior has been better than expectedwhen we took actions to strengthen reserves for the book during the year ended December 31, 2012.Expense Ratio. The expense ratio of 46.5% for the year ended December 31, 2014 decreased from 54.2% inthe prior year. The high expense ratio in this segment for both periods relates to infrastructure and personnelcosts associated with the ramp up of this segment’s program and fronting business. The gross written premiumson this program and fronting business were $29.3 million for the year ended December 31, 2014 (during theprior year there had been only $566,000). Many of the infrastructure and personnel costs necessary to produceand administer this business (by necessity) precede the production and earning of these premiums.Underwriting Loss. As a result of the items discussed above, the underwriting results improved from anunderwriting loss of $3.9 million for the year ended December 31, 2013 to an underwriting gain of $33,000 forthe year ended December 31, 2014.104%%%))%))%(1))%%%%%%(1)See “— Reconciliation of Non-GAAP Measures.”TABLE OF CONTENTSCasualty Reinsurance SegmentResults for the Casualty Reinsurance segment are as follows:Year Ended December 31,% Change20142013($ in thousands)Gross written premiums$206,680$155,53032.9Net written premiums$205,731$151,93335.4Net earned premiums$171,977$168,3442.2Losses and loss adjustment expenses(114,043(115,170(1.0Underwriting expenses(57,267(55,7342.8Underwriting profit (loss)$667$(2,560—Ratios:Loss ratio66.368.4—Expense ratio33.333.1—Combined ratio99.6101.5—The Casualty Reinsurance segment focuses on lower volatility, proportional reinsurance which requireslarger ceding commissions resulting in a higher commission expense than in our other segments.Combined Ratio. The combined ratio of the Casualty Reinsurance segment for the year endedDecember 31, 2014 was 99.6%, comprised of a loss ratio of 66.3% and an expense ratio of 33.3%. This comparesto the combined ratio in the prior year of 101.5%, comprised of a loss ratio of 68.4% and an expense ratio of33.1%.Loss Ratio. The loss ratio for the year ended December 31, 2014 of 66.3% included $5.7 million, or 3.3percentage points, of adverse reserve development in our loss estimates for prior accident years. The loss ratio forthe year ended December 31, 2013 of 68.4% included $4.7 million, or 2.8 percentage points, of net adversereserve development in our loss estimates for the prior accident years.Expense Ratio. The expense ratio of the Casualty Reinsurance segment increased slightly from 33.1% forthe year ended December 31, 2013 to 33.3% for the year ended December 31, 2014.Underwriting Results. As a result of the items discussed above, the underwriting results for the CasualtyReinsurance segment improved from an underwriting loss of $2.6 million for the year ended December 31, 2013to an underwriting profit of $667,000 for the year ended December 31, 2014.ReservesThe Company’s gross reserve for losses and loss adjustment expenses at December 31, 2014 was$716.3 million. Of this amount, 71.5% relates to amounts that are incurred but not reported. The Company’sgross reserve for losses and loss adjustment expenses by segment are summarized as follows:Gross Reserves at December 31, 2014CaseIBNRTotalIBNR% of Total($ in thousands)Excess and Surplus Lines$78,966$353,260$432,22681.7Specialty Admitted Insurance25,79128,75354,54452.7Casualty Reinsurance99,692129,834229,52656.6Total$204,449$511,847$716,29671.5105%%%)))%))%(1))%%%%%%%%%%TABLE OF CONTENTSThe Company’s net reserve for losses and loss adjustment expenses at December 31, 2014 was$589.0 million. Of this amount, 70.3% related to amounts that were incurred but not reported. The Company’sreserve for losses and loss adjustment expenses net of ceded reinsurance by segment are summarized as follows:Net Reserves at December 31, 2014CaseIBNRTotalIBNR % of Total($ in thousands)Excess and Surplus Lines$70,499$269,119$339,61879.2Specialty Admitted Insurance22,15922,52944,68850.4Casualty Reinsurance82,118122,618204,73659.9Total$174,776$414,266$589,04270.3Other Operating ExpensesIn addition to the underwriting, acquisition and insurance expenses of the Excess and Surplus Linessegment, the Specialty Admitted Insurance segment and the Casualty Reinsurance segment discussedpreviously, other operating expenses also includes the expenses of the Corporate and Other segment.Corporate and Other SegmentOther operating expenses for the Corporate and Other segment include personnel costs associated with theBermuda and U.S. holding companies, professional fees and various other corporate expenses that are includedin the calculation of our expense ratio and combined ratio. Accordingly, other operating expenses of theCorporate and Other segment represent the expenses of both the Bermuda and U.S. holding companies that werenot reimbursed by our subsidiaries, including costs associated with potential acquisitions and other strategicinitiatives. These costs vary from period to period based on the status of these initiatives.For the years ended December 31, 2014 and 2013, the total operating expenses of the Corporate and Othersegment were $9.1 million and $8.3 million, respectively. The variance from the prior year principally relates toshare-based compensation related expenses.Investing ResultsOur cash and invested assets increased $93.5 million or 7.7% in 2014 (from $1,217.1 million atDecember 31, 2013 to $1,310.6 million at December 31, 2014) due to our profitability, a 38.4% increase in netwritten premiums, and our positive cash flows from operations. Net investment income was $43.0 million for theyear ended December 31, 2014 compared to $45.4 million in the prior year. The reduction in net investmentincome primarily reflects lower portfolio yields which were impacted by the continuing low interest rateenvironment in 2014 and the $70.0 million dividend paid to shareholders in 2014 offset in part by positiveoperating cash flows in 2014.106%%%%TABLE OF CONTENTSMajor categories of the Company’s net investment income are summarized as follows:Year Ended December 31,20142013(in thousands)Fixed maturity securities$22,861$24,896Bank loan participations13,80914,406Equity securities4,1034,308Other invested assets5,6905,123Cash, cash equivalents, and short-term investments116120Trading losses(32(226Gross investment income46,54748,627Investment expense(3,542(3,254Net investment income$43,005$45,373Net investment income from the Company’s renewable energy investments, included in “other investedassets” above, was $5.2 million and $4.3 million for the years ended December 31, 2014 and 2013, respectively.These investments are interests in certain limited liability companies that are managed by an affiliate of ourlargest shareholders, the D.E. Shaw Affiliates, and together, the carrying value of these investments was $25.1million at December 31, 2014. Our interests in these companies are classified as “other invested assets” and theequity method is being used to account for the investments.The following table summarizes our investment returns:Year Ended December 31,20142013Annualized gross investment yield on:Average cash and invested assets3.74.0Average fixed maturity securities3.53.9Annualized tax equivalent yield on:Average fixed maturity securities3.64.0Of our total cash and invested assets of $1,310.6 million at December 31, 2014, $73.4 million representsthe cash and cash equivalents portion of the portfolio. The majority of the portfolio, or $824.9 million, iscomprised of fixed maturity and equity securities that are classified as available-for-sale and carried at fair valuewith unrealized gains and losses on these securities reported, net of applicable taxes, as a separate component ofaccumulated comprehensive income or loss. Also included in our investments is $131.9 million of short-terminvestments, $33.6 million of other invested assets and $7.4 million of fixed maturity securities classified astrading and held at the U.S. holding company. Our trading portfolio is carried at fair value with changes to thevalue reported as net investment income in our condensed consolidated income statement.Included in our investment portfolio are $239.5 million of bank loan participations, which are classified asheld-for-investment and reported at amortized cost, net of an allowance for credit losses of $752,000 relatedexclusively to Puerto Rico loans as detailed herein (the allowance for credit losses was $242,000 atDecember 31, 2013). Changes in this credit allowance are included in realized gains or losses. These bank loanparticipations are primarily senior, secured floating-rate debt which are rated “B” or “BB” by Standard & Poor’sor an equivalent rating from another nationally recognized statistical rating organization, and are thereforebelow 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 secondarymarkets. They consist of, but are not limited to, term loans, the funded and unfunded portions of revolving creditloans, and similar loans and investments. At December 31, 2014 and 2013, the fair market value of thesesecurities was $231.3 million and $200.6 million, respectively.107))))%%%%%%TABLE OF CONTENTSFor the year ended December 31, 2014, we recognized net realized investment losses of $1.3 million. Therealized losses included $2.0 million in impairment losses related to our investment exposure to entities locatedin the Commonwealth of Puerto Rico. For the year ended December 31, 2013, we recognized net realizedinvestment gains of $12.6 million principally from the sale of fixed maturity securities and bank loanparticipations. We sold securities in 2013 to fund the $110.8 million repurchase of our common shares and toshorten the duration of our portfolio to reduce our exposure to interest rate risk.In conjunction with its outside investment managers, the Company performs quarterly reviews of allsecurities within its investment portfolio to determine whether any impairment has occurred. In connection withthis review, the Company wrote down two municipal bonds issued by Puerto Rico that were other thantemporarily impaired at June 30, 2014. Puerto Rico’s weak economic conditions and heavy debt burden,combined with the passage of new legislation that allows public corporations to defer or reduce payments onoutstanding debt, has heightened the risk of default on these bonds. The Company recognized impairment lossesof $1.4 million on the bonds for the year ended December 31, 2014. The impaired securities have a carryingvalue of $3.4 million and a fair value of $3.2 million at December 31, 2014 after the impairment noted above.We determined that the securities had not experienced an other than temporary impairment at December 31,2014, as we deemed the small decline in value since June 30, 2014 to be temporary.At December 31, 2014, the Company holds participations in two loans issued by companies that produceand sell electricity subject to power purchase agreements with PREPA. PREPA is a public corporation andgovernmental agency of the Commonwealth of Puerto Rico. To date, the loans are current with respect tocontractual payments of principal and interest. However, PREPA’s credit strength has been affected by theeconomic conditions in Puerto Rico, thus raising doubt about the Company’s continuing ability to collectamounts owed by PREPA in order to continue to make full and timely payments on the debt obligations held bythe Company. PREPA has been downgraded by Moody’s to “Caa2” and by S&P to “B-.” PREPA’s debt hasrecently traded at a significant discount to par with very high yields. Additionally, Puerto Rico passedlegislation that would allow PREPA to restructure and potentially default on its debt. It is unclear how the powercontracts would be treated under a PREPA restructuring. Management concluded that the loans were impairedand recorded losses of $607,000 to establish an allowance for credit losses on the loans. The impaired loanshave a carrying value of $7.1 million at December 31, 2014 and unpaid principal of $8.4 million.For the year ended December 31, 2013, the Company determined that no other-than-temporary impairmenthad occurred on any of its fixed maturity securities. We concluded that one of the equity securities with anunrealized loss at December 31, 2013 experienced an other-than-temporary impairment, and accordingly, theCompany recorded an impairment loss of $804,000 in 2013. For our portfolio of bank loan participations, werecognized an impairment loss of $121,000 on one loan for the year ended December 31, 2013.At December 31, 2014, our available-for-sale investment portfolio of fixed maturity and equity securitieshad net unrealized gains of $22.6 million representing 2.8% of the cost or amortized cost of the portfolio.Additionally, at December 31, 2014, 85.8% of our fixed maturity security portfolio was rated “A-” or better byStandard & Poor’s or had an equivalent rating from another nationally recognized statistical rating organization.Fixed maturity securities with ratings below investment grade by Standard & Poor’s or another nationallyrecognized statistical rating organization at December 31, 2014 had an aggregate fair value of $37.7 millionand an aggregate unrealized loss of $918,000.The average duration of our investment portfolio, excluding bank loans, was 3.8 years at December 31,2014. The duration for bank loans is less than one year, resulting in an approximate duration for the entireportfolio of 3.1 years.108TABLE OF CONTENTSThe amortized cost and fair value of our investments in available-for-sale securities were as follows:December 31, 2014December 31, 2013Cost or Amortized CostFair Value% of Total Fair ValueCost or Amortized CostFair Value% of Total Fair Value($ in thousands)Fixed maturity securities:State and municipal$90,715$99,04612.0$74,678$76,14610.4Residential mortgage-backed113,997115,24914.0101,35298,56913.5Corporate261,574267,88232.5245,139251,51734.5Commercial mortgage and asset-backed111,056113,34113.781,05483,96511.5Obligations of U.S. government corporations andagencies100,376101,27512.3104,153104,96114.4U.S. Treasury securities and obligations guaranteed by the U.S. government58,17358,2697.146,43546,3116.3Redeemable preferred stock2,0251,9010.22,0251,6490.2Total737,916756,96391.8654,836663,11890.8Equity securities:Preferred stock45,14949,6016.037,01637,0425.1Common stock19,19918,3042.230,11329,7654.1Total64,34867,9058.267,12966,8079.2Total investments$802,264$824,868100.0$721,965$729,925100.0The following table sets forth the composition of the Company’s portfolio of fixed maturity securities (bothavailable-for-sale and trading) by rating as of December 31, 2014:Standard & Poor’s or Equivalent DesignationFair Value% of Total($ in thousands)AAA$107,52014.1AA387,62250.7A160,73221.0BBB70,7689.2BB14,9622.0Below BB and unrated22,7473.0Total$764,351100.0At December 31, 2014, our portfolio of fixed maturity securities contained corporate fixed maturitysecurities (both available-for-sale and trading) with a fair value of $272.4 million. A summary of these securitiesby industry segment is shown below as of December 31, 2014:IndustryFair Value% of Total($ in thousands)Industrials and other$191,51370.3Financial55,38820.3Utilities25,5109.4Total$272,411100.0109%%%%%%%%%%%%%%%%%%%%%%%%%%%%TABLE OF CONTENTSCorporate fixed maturity securities (both available-for-sale and trading) include public traded securities andprivately placed bonds is shown below as of December 31, 2014:Public/PrivateFair Value% of Total($ in thousands)Publicly traded$233,57885.7Privately placed38,83314.3Total$272,411100.0In addition to the $824.9 million of available-for-sale securities, the Company holds other invested assetsof $33.6 million, $7.4 million of fixed maturity securities classified as trading (which are held at our U.S.holding company), short-term investments of $131.9 million and $239.5 million of bank loan participations fora total invested asset balance at December 31, 2014 of $1,237.2 million.The amortized cost and fair value of our available-for-sale investments in fixed maturity securitiessummarized by contractual maturity are as follows:December 31, 2014Amortized CostFair Value% of Total Fair Value($ in thousands)Due in:One year or less$37,479$37,6835.0After one year through five years291,559293,87538.8After five years through ten years58,65262,5308.3After ten years123,148132,38417.5510,838526,47269.6Residential mortgage-backed113,997115,24915.2Commercial mortgage and asset-backed111,056113,34115.0Redeemable preferred stock2,0251,9010.2Total$737,916$756,963100.0At December 31, 2014, the Company held one security with a fair value of $26,000 in securitizations ofalternative-A mortgages which is performing and rated “investment grade” by the established ratings agencies.The Company has no investments in sub-prime mortgages or collateralized debt obligations at December 31,2014.Other ExpensesOther expenses for the years ended December 31, 2014 and 2013 were $16.0 million and $677,000,respectively. In 2014, other expenses included $14.9 million of expenses associated with our initial publicoffering, $600,000 of employee severance costs, $183,000 of due diligence expenses related to an acquisitionthat was not consummated, and $299,000 of expenses associated with a minority interest in a real estate limitedpartnership pursuant to which we were deemed to be an owner for accounting purposes. In 2013, these expensesinclude $392,000 of due diligence expenses related to an acquisition that was not consummated and $285,000of expenses associated with our minority interest in the real estate limited partnership.Interest ExpenseInterest expense was $6.3 million and $6.8 million for the years ended December 31, 2014 and 2013,respectively. Interest for the James River Capital Trust IV was fixed at 7.51% until March 15, 2013 at which timeit became variable at 3-month LIBOR plus 3.1%. Similarly, interest for Franklin Holdings II (Bermuda) CapitalTrust I was fixed at 7.97% until June 15, 2013 at which time it became variable at 3-month LIBOR plus 4.0%.110%%%%%%%%%%%TABLE OF CONTENTSSee “— Liquidity and Capital Resources — Sources and Uses of Funds” for information regarding oursenior bank debt facility and trust preferred securities.Amortization of IntangiblesThe Company recorded $597,000 and $2.5 million of amortization of intangibles for the years endedDecember 31, 2014 and 2013, respectively. The significant decrease in amortization relates to certain intangibleassets arising from an acquisition in December 2007 that had a six-year useful life and became fully amortizedduring the prior year.Goodwill and ImpairmentWe test goodwill and other intangible assets in each operating segment for impairment at least annually.The fair value of the reporting units is determined by weighting the results of a discounted cash flow analysisand a valuation derived from a market-based approach. Intangible assets are valued using variousmethodologies. The projection of future cash flows is dependent upon assumptions on the future levels ofincome as well as business trends, prospects and market and economic conditions.We perform this assessment to determine whether there has been any impairment in the value of goodwill orintangible assets by comparing its fair value to the net carrying value of the reporting units. If the carrying valueexceeds its estimated fair value, an impairment loss is recognized and the asset is written down accordingly.The Company completed its impairment tests and fair value analyses for goodwill and other intangibleassets during the fourth quarter. No impairment was present for the years ended December 31, 2014 or 2013.Income Tax ExpenseOur effective tax rate fluctuates from period to period based on the relative mix of income reported bycountry and the respective tax rates imposed by each tax jurisdiction. For U.S.-sourced income, our U.S. federalincome tax expense differs from the amounts computed by applying the federal statutory income tax rate toincome before taxes due primarily to interest income on tax-advantaged state and municipal securities (state andmunicipal securities represented 12.0% and 10.4% of our available-for-sale securities at December 31, 2014 and2013, respectively), dividends received income, and tax credits on certain renewable energy investments. For theyears ended December 31, 2014 and 2013, our U.S. federal income tax provision was 2.1% and 12.6%,respectively, of income before taxes. The lower effective tax rate in 2014 reflects lower U.S. pre-tax income in2014 resulting from initial public offering costs associated with the conversion of a previous equity plan, themajority of which related to U.S. domiciled employees. In addition, our 2014 effective tax rate was reduced bycertain energy tax credits received on some of our equity investments in companies involved in the productionof alternative energy (included in “Other Invested Assets” in our Consolidated Balance Sheets).Liquidity and Capital ResourcesSources and Uses of FundsWe are organized as a Bermuda holding company with our operations conducted by our wholly-ownedsubsidiaries. Accordingly, our holding company may receive cash through loans from banks, issuance of equityand 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 oursubsidiaries 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 andregulations applicable to our domestic insurance subsidiaries limit the aggregate amount of dividends or otherdistributions 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% ofstatutory surplus at the end of the preceding year. In addition, insurance regulators have broad powers to preventreduction of statutory surplus to inadequate levels and could refuse to permit the111•A $62.5 million secured revolving facility used by JRG Re to issue letters of credit for the benefit ofthird-party reinsureds. This portion of our credit facility is secured by our investment securities.•A $62.5 million unsecured revolving facility to meet the working capital needs of the Company. Allunpaid principal on the revolver is due at maturity. Interest accrues quarterly and is payable in arrearsat 3-month LIBOR plus a margin, which is subject to change depending upon our total outstandingdebt to capitalization.TABLE OF CONTENTSpayment of dividends calculated under any applicable formula. See Item 1 — U.S. Insurance Regulation — StateRegulation” for additional information. Pursuant to Bermuda regulations, the maximum amount of dividend andreturn of capital available to be paid by a reinsurer is determined pursuant to a formula. See Item 1 “Regulation — Bermuda Insurance Regulation — Restrictions on Dividends and Distributions” for additional information.Under this formula, the maximum amount of dividends and return on capital available to us from JRG Re in2016 is calculated to be approximately $89.4 million. However, this dividend amount is subject to annualenhanced solvency requirement calculations which we believe may decrease this available dividend amount.Additionally, the maximum amount of dividends available to the U.S. holding company from our U.S. insurancesubsidiaries during 2016 without regulatory approval is $19.8 million.At December 31, 2015, our Bermuda holding company had $2.0 million of cash and cash equivalent assets.At December 31, 2014, our Bermuda holding company had $623,000 of cash and invested assets. AtDecember 31, 2015, our U.S. holding company had $66.0 million of cash and invested assets, comprised of cashand cash equivalents of $7.1 million, fixed maturity securities of $5.0 million, $8.4 million of equity securities,other invested assets of $32.7 million, and short-term investments of $12.8 million, which are not subject toregulatory restrictions. Additionally, our U.K. intermediate holding company had no invested assets atDecember 31, 2015 and cash of less than one thousand dollars. At December 31, 2014, our U.S. holdingcompany had $73.2 million of cash and invested assets, comprised of cash and cash equivalents of $23.7million, fixed maturity securities of $7.4 million, $6.5 million of equity securities, $33.6 million of otherinvested assets, and short-term investments of $1.9 million, all of which are not subject to regulatoryrestrictions. Payments of dividends from our U.S. holding company to the Company through our U.K.intermediate holding company are currently subject to a 5% withholding tax.Our net written premiums to surplus ratio (defined as net written premiums to regulatory capital and surplus)is reviewed by management as well as our rating agency as a component of leverage and efficiency of deployedcapital. Our net written premiums to surplus ratio was 0.8x, 0.8x, and 0.6x for the years ended December 31,2015, 2014, and 2013, respectively.In May 2004, we issued $15.0 million of senior debt due April 29, 2034, with net proceeds to us of $14.5million. The senior debt is not redeemable by the holder or subject to sinking fund requirements. Interest accruesquarterly and is payable in arrears at a floating rate per annum equal to the 3-month LIBOR plus 3.85%. Thissenior debt is redeemable at par prior to its stated maturity at our option in whole or in part. The terms of thissenior debt contain certain covenants, with which we are in compliance and which, among other things, restrictour ability to assume senior indebtedness secured by our U.S. holding company’s common stock or itssubsidiaries’ capital stock or to issue shares of its subsidiaries’ capital stock.On June 5, 2013, we closed on a three-year $125.0 million senior revolving credit facility which matures onJune 5, 2016. The Company and JRG Re are the borrowers on the senior revolving credit facility. The seniorrevolving credit facility was initially comprised of:On September 24, 2014, we closed on an amendment to the senior revolving credit facility which, amongother things, included an increase in the size of the unsecured revolving facility from $62.5 million to $112.5million and extended the maturity date from June 5, 2016 to September 24, 2019. The amendment also reducedthe interest rate applicable to borrowings under the revolver such that the current LIBOR margin dropped from2.25% to 2.00%. On May 20, 2015, under a provision of the credit agreement, we requested, and the lenderssubsequently agreed, to increase the secured revolving facility by $40.0 million to a total capacity of $102.5million. At December 31, 2015, the Company had $35.1 million of letters of credit issued under the $102.5million secured facility and a drawn balance of $73.3 million outstanding on the $112.5 million unsecuredfacility.112TABLE OF CONTENTSWe closed on a second amendment to the senior revolving credit facility that was effective December 15,2015, which, among other things, accommodated our organization and capitalization of an intermediate holdingcompany in the United Kingdom. Additionally, we closed on a third amendment to the senior revolving creditfacility that was effective December 30, 2015, which adjusted certain financial covenants. In connection withthe December 15, 2015 amendment, the intermediate holding company entered into a payment guaranty of ourobligations under the senior revolving credit facility.The senior revolving credit facility contains certain financial and other covenants (including risk-basedcapital, minimum shareholders’ equity levels, maximum ratios of total debt outstanding to total capitalizationand minimum fixed charge coverage ratios) with which the Company was in compliance at December 31, 2015.In 2015, we declared $47.8 million of dividends payable to our shareholders. These dividends (and therelated $2.5 million of U.S. dividend withholding tax) were funded with a $47.5 million dividend receivedthrough our U.K. intermediate holding company and a $4.8 million dividend received from JRG Re.In August 2014, we declared a dividend payable to our shareholders of record as of June 30, 2014, in theaggregate amount of $70.0 million, which we financed with a $50.0 million dividend paid to the Company byJRG Re and approximately $20.0 million in additional borrowings under our senior revolving credit facility.We sold trust preferred securities through five Delaware statutory trusts sponsored and wholly-owned by theCompany or its subsidiaries. Each trust used the net proceeds from the sale of its trust preferred securities topurchase our floating-rate junior subordinated debt.The following table summarizes the nature and terms of the junior subordinated debt and trust preferredsecurities outstanding at December 31, 2015 (including the Company’s repurchase of a portion of these TrustPreferred Securities described herein):James River Capital Trust IJames River Capital Trust IIJames River Capital Trust IIIJames River Capital Trust IVFranklin Holdings II (Bermuda) Capital Trust I($ in thousands)Issue dateMay 26, 2004December 15, 2004June 15, 2006December 11, 2007January 10, 2008Principal amount of trust preferredsecurities$7,000$15,000$20,000$54,000$30,000Principal amount of junior subordinated debt$7,217$15,464$20,619$55,670$30,928Carrying amount of junior subordinated debt net of repurchases$7,217$15,464$20,619$44,827$15,928Maturity date of junior subordinateddebt, unless accelerated earlierMay 24, 2034December 15, 2034June 15, 2036December 15, 2037March 15, 2038Trust common stock$217$464$619$1,670$928Interest rate, per annumThree-Month LIBOR plus 4.0%Three-Month LIBOR plus 3.4%Three-Month LIBOR plus 3.0%Three-Month LIBOR plus 3.1%Three-Month LIBOR plus 4.0%All of the junior subordinated debt is 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 ofDecember 31, 2015. All of these securities are currently redeemable at par.At December 31, 2015 and December 31, 2014, the ratio of total debt outstanding to total capitalization(defined as total debt plus total shareholders’ equity) was 22.0% and 21.9%, respectively. Having debt as part ofour capital structure allows us to generate a higher return on equity and greater book value per share results thanwe could by using equity capital alone.Ceded ReinsuranceOur insurance subsidiaries enter into reinsurance contracts to limit our exposure to potential losses arisingfrom large risks and to provide additional capacity for growth. Our reinsurance is contracted under113(1)For policies with an occurrence limit of $1.0 million or higher, the excess casualty treaty is set such thatour retention is $1.0 million or less. For policies where we also write an underlying primary casualty policy,the net excess casualty limit is added to our retention on the primary casualty coverage, which results in atotal retention of $2.0 million or less on any one risk.(2)Only for policies where we do not write the underlying primary professional liability policy.(3)The property catastrophe reinsurance treaty has a limit of $40.0 million with one reinstatement.TABLE OF CONTENTSexcess of loss and quota share reinsurance contracts. In excess of loss reinsurance, the reinsurer agrees to assumeall or a portion of the ceding company’s losses in excess of a specified amount. The premiums payable to thereinsurer are negotiated by the parties based on their assessment of the amount of risk being ceded to thereinsurer because the reinsurer does not share proportionately in the ceding company’s losses. In quota sharereinsurance, the reinsurer agrees to assume a specified percentage of the ceding company’s losses arising out of adefined class of business in exchange for a corresponding percentage of premiums. For the years endedDecember 31, 2015, 2014 and 2013, our net retention was 82.3%, 86.8% and 88.2%, respectively.For certain casualty underwriting divisions of the Excess and Surplus Lines segment, we do not believe thatthe purchase of reinsurance is necessary since our total exposure to any one claim is a maximum of $1.0 million.The underwriting divisions that do not require reinsurance are Manufacturers and Contractors, General Casualty,Sports and Entertainment, and Small Business. These underwriting divisions comprise 62.4% of the Excess andSurplus Lines segment’s gross written premiums for the year ended December 31, 2015.The following is a summary of our ceded reinsurance in place as of December 31, 2015:Line of BusinessCompany RetentionCasualtyPrimary Specialty CasualtyUp to $1.0 million per occurrence, subject to a $1.0 million aggregatedeductibleExcess CasualtyUp to $1.0 million per occurrenceProfessional LiabilityUp to $1.0 million per occurrencePropertyUp to $5.0 million per eventIn our Excess and Surplus Lines segment, we purchased a surplus share reinsurance treaty that was effectiveJuly 1, 2015 and was specifically designed to cover property risks. The surplus share treaty along withfacultative reinsurance helps ensure that our net retained limit per risk will be $5.0 million or below.On July 1, 2015, we renewed a clash and contingency reinsurance treaty to cover both the Excess andSurplus Lines and Specialty Admitted Insurance segments in the event of a claims incident involving more thanone of our insureds. The treaty covers $6.0 million in excess of a $2.5 million retention for loss occurrenceswithin the treaty term. This coverage has two reinstatements in the event we exhaust any of the coverage.In our Excess and Surplus Lines segment, we write a small book of excess property insurance but we do notwrite primary property insurance. We use catastrophe modeling software to analyze the risk of severe losses fromhurricanes and earthquakes on our exposure. We utilize the model in our risk selection, pricing, and to manageour overall portfolio probable maximum loss (“PML”) accumulations. A PML is an estimate of the amount wewould expect to pay in any one catastrophe event within a given annual probability of occurrence (i.e. a returnperiod or loss exceedance probability). Based upon our modeling, a $45.0 million gross catastrophe loss wouldexceed our 1,000 year PML. In the event of a $45.0 million gross property catastrophe loss to the Company, weestimate our pre-tax cost at approximately $8.1 million, including reinstatement premiums and net retentions. Inaddition to this retention, we would retain any losses in excess of our reinsurance coverage limits.Our Specialty Admitted Insurance segment enters into reinsurance contracts to limit our exposure topotential losses arising from large risks, to protect against the aggregation of several risks in a common lossoccurrence, to provide additional capacity for growth and to support new program and fronting business114(1)(2)(3)•purchases quota share reinsurance for 50% of the first $600,000 for workers’ compensation programbusiness;•purchases individual risk workers’ compensation excess of loss coverage for $400,000 in excess of$600,000, $4.0 million in excess of $1.0 million, $5.0 million in excess of $5.0 million, $10.0million in excess of $10.0 million with a maximum on any one life of $12.0 million, and $10.0million in excess of $20.0 million with a maximum on any one life of $10.0 million;•purchases property catastrophe reinsurance for $4.0 million in excess of $1.0 million to manage itsincidental property exposure to an approximate 1,000 year PML; and•purchases program specific quota share reinsurance between 50.0% and 100.0% of the primary risklayer and up to 100.0% of the excess layer.TABLE OF CONTENTSinitiatives. This segment purchases reinsurance for at least 50% of the exposed limits on specialty admittedproperty-casualty business. On a program-by-program basis, the Specialty Admitted Insurance segment:In our Casualty Reinsurance segment, we also have limited property catastrophe exposure. We believe thatthis exposure would not exceed $1.0 million on any one event.In the aggregate, we believe our pre-tax group-wide PML from a 1000 year catastrophe event would notexceed $10.0 million, inclusive of reinstatement premiums payable.Reinsurance contracts do not relieve us from our obligations to policyholders. The failure of a reinsurer tohonor its obligations could result in losses to us, and therefore, we establish allowances for amounts considereduncollectible. At December 31, 2015 and 2014, there was no allowance for such uncollectible reinsurancerecoverables. The Company generally seeks to purchase reinsurance from reinsurers with A.M. Best financialstrength ratings of “A-” (Excellent) or better.At December 31, 2015, we had reinsurance recoverables on unpaid losses of $131.8 million andreinsurance recoverables on paid losses of $11.3 million. At December 31, 2014, we had reinsurancerecoverables on unpaid losses of $127.3 million and reinsurance recoverables on paid losses of $1.7 million.All material reinsurance recoverable amounts are from companies with A.M. Best ratings of “A-” or better, orcollateral has been posted by the reinsurer for our benefit.The following table sets forth our most significant reinsurers by amount of reinsurance recoverables and theamount of reinsurance recoverables pertaining to each such reinsurer as well as its A.M. Best rating as ofDecember 31, 2015:ReinsurerReinsurance Recoverable as of December 31, 2015A.M. Best Rating December 31, 2015(in thousands)Berkley Insurance Company$33,559A+Swiss Reinsurance America Corporation26,579A+Madison Insurance Company15,261UnratedMountain States Insurance Company9,943B++Pacific Valley Insurance Company8,085UnratedQBE Reinsurance Corporation6,501ALloyds Syndicate Number 44723,750ALloyds Syndicate Number 20033,600AMunich Reinsurance America3,428A+Safety National Casualty3,254A+Top 10 Total113,960Other17,828Total$131,788115(1)(1)(1)These reinsurers are unrated. All material reinsurance recoverable amounts from these reinsurers arecollateralized.TABLE OF CONTENTSShare RepurchaseOn April 3, 2013, the Company repurchased 7,500,000 common shares for a total purchase price of $110.8million.Cash FlowsOur sources of operating funds consist primarily of premiums written, investment income, reinsurancerecoveries and proceeds from offerings of debt and equity securities and from sales and redemptions ofinvestments. We use the operating cash flows primarily to pay operating expenses, losses and loss adjustmentexpenses, and income taxes. Cash flow from operations may differ substantially from net income. The potentialfor a large claim under an insurance or reinsurance contract means that substantial and unpredictable paymentsmay need to be made within relatively short periods of time.Year Ended December 31,201520142013(in thousands)Cash and cash equivalents provided by (used in):Operating activities$116,391$130,393$105,638Investing activities(34,163(174,87746,755Financing activities(49,205(40,737(89,583Change in cash and cash equivalents$33,023$(85,221$62,810Cash used in investing activities in 2015 reflects our efforts to enhance the yield in our investmentportfolio by investing available cash and cash equivalents into higher yielding fixed maturity securities. Cashand cash equivalents comprised 7.9% of total cash and invested assets at December 31, 2015. Cash used infinancing activities in 2015 is primarily due to the $47.4 million of dividends to shareholders in 2015. Thesedividends (and the related $2.5 million of U.S. dividend withholding taxes) were funded with a $47.5 milliondividend received through our U.K. intermediate holding company and a $4.8 million dividend received fromJRG Re.Cash used in investing activities in 2014 reflects our efforts to enhance the yield in our investmentportfolio by investing available cash and cash equivalents into higher yielding fixed maturity securities andbank loan participations. Cash and cash equivalents comprised 5.6% of total cash and invested assets atDecember 31, 2014. Net cash used in financing activities in 2014 is a result of the $70.0 million dividend toshareholders in 2014. A portion of this dividend was funded by additional borrowings on our unsecuredrevolving credit facility of $20.0 million. In addition, we drew down an additional $10.0 million on ourunsecured revolving credit facility in December 2014 to provide additional operating flexibility at the Bermudaholding company.Cash provided by investing activities increased in 2013 as investments were sold to generate cash for theCompany’s repurchase of its common shares. Cash and cash equivalents comprised 13.0% of total cash andinvested assets at December 31, 2013. The financing activities in 2013 include the $110.8 million to repurchasethe Company’s common shares. Also, the Company drew $43.0 million on its new senior revolving creditfacility to repay the $20.0 million balance outstanding on its previous credit facility and to repay the $22.2million of promissory notes issued in conjunction with the repurchase of our shares in April 2013.RatingsThe A.M. Best financial strength rating for our group’s regulated insurance subsidiaries is “A-” (Excellent),with a “positive outlook.” This rating reflects A.M. Best’s opinion of our insurance subsidiaries’ financialstrength, operating performance and ability to meet obligations to policyholders and116))))))TABLE OF CONTENTSis not an evaluation directed towards the protection of investors. A.M. Best assigns ratings to both insurance andreinsurance companies, which generally range from “A++” (Superior) to “S” (Suspended). The rating for ouroperating companies of “A-” (Excellent) is the fourth highest rating issued by A.M. Best and is assigned toinsurers that have, in A.M. Best’s opinion, an excellent ability to meet their ongoing obligations topolicyholders.The financial strength ratings assigned by A.M. Best have an impact on the ability of our regulatedsubsidiaries to attract and retain agents and brokers and on the risk profiles of the submissions for insurance thatour subsidiaries receive. The “A-” (Excellent), with a “positive outlook” ratings assigned to our insurance andreinsurance subsidiaries are consistent with our business plans and we believe allow our subsidiaries to activelypursue relationships with the agents and brokers identified in their marketing plans.Equity AwardsFor the years ended December 31, 2015, 2014 and 2013, the Company recognized $3.7 million, $589,000and $647,000, respectively, of share-based compensation expense. The amount of unrecognized share-basedcompensation expense to be recognized over the remaining weighted-average service period of 2.4 years atDecember 31, 2015 is $7.5 million. In 2015, 1,047,500 options were exercised at a weighted average exerciseprice of $15.66 per share. There were no option exercises during the years ended December 31, 2014 or 2013.The Company granted 10,627 non-qualified share options at an exercise price of $24.32 per option during2015. The Company granted 993,518 non-qualified share options in conjunction with its initial public offeringduring December 2014, each with an exercise price of $21.00 per option. The Company also granted 340,474restricted stock units (“RSUs”) in December 2014. The RSUs vest over one to five years. The Company granted50,000 non-qualified share options during the year ended December 31, 2013 at exercise prices ranging from$15.65 to $18.01 per option. In addition, 55,000 and 171,250 fully vested options with exercise prices of $15.65 lapsed or were forfeited during 2014 and 2013, respectively.Contractual Obligations and CommitmentsThe following table illustrates our contractual obligations and commercial commitments by due date as ofDecember 31, 2015:Payments Due by PeriodTotalLess than 1 year1 – 3 years3 – 5 yearsMore than 5 years(in thousands)Reserve for losses and loss adjustment expenses$785,322$225,758$265,568$62,436$231,560Long-term debt:Senior debt88,300——73,30015,000Junior subordinated debt104,055———104,055Operating lease obligations29,5453,3556,7036,21113,276Interest on debt obligations105,5956,79313,54910,64274,611Financing obligations28,5737501,217——Total$1,141,390$236,656$287,037$152,589$438,502The reserve for losses and loss adjustment expenses represent management’s estimate of the ultimate cost ofsettling losses. As more fully discussed in “— Critical Accounting Policies — Reserves for Losses and LossAdjustment Expenses” above, the estimation of losses is based on various complex and subjective judgments.Actual losses paid may differ, perhaps significantly, from the reserve estimates reflected in our consolidatedfinancial statements. Similarly, the timing of payment of our estimated losses is not fixed and there may besignificant changes in actual payment activity. The assumptions used in estimating the likely payments due byperiod are based on our historical claims payment experience and industry payment patterns, but due to theinherent uncertainty in the process of estimating the timing of such payments, there is a risk that the amountspaid in any such period can be significantly different from the amounts disclosed above.117(1)Underwriting profit includes fee income of $4.5 million, $1.8 million, and $0 for the years endedDecember 31, 2015, 2014, and 2013, respectively.TABLE OF CONTENTSFinancing obligations represent obligations for a build-to-suit lease relating to an investment by theCompany for a minority interest in a real estate limited partnership pursuant to which we were deemed to be anowner for accounting purposes. At the termination of the lease, no payment will be required for the Company tosettle the obligation. Instead, the Company will surrender the building that is the subject of the lease at leasetermination.The amounts in the above table represent our gross estimates of known liabilities as of December 31, 2015and do not include any allowance for claims for future events within the time period specified. Accordingly, it ishighly likely that the total amounts paid out in the time periods shown will be greater than those indicated inthe table.Interest on debt obligations was calculated using the LIBOR rate as of December 31, 2015 with theassumption that interest rates would remain flat over the remainder of the period that the debt was outstanding.Off-Balance Sheet ArrangementsWe do not have any off-balance sheet arrangements.Reconciliation of Non-GAAP MeasuresReconciliation of Underwriting Profit (Loss)We believe that the disclosure of underwriting profit (loss) by individual segment and of the Company as awhole is useful to investors, analysts, rating agencies and other users of our financial information in evaluatingour performance because our objective is to consistently earn underwriting profits. We evaluate the performanceof our segments and allocate resources based primarily on underwriting profit (loss). Our definition ofunderwriting profit (loss) may not be comparable to that of other companies.The following table reconciles the underwriting profit (loss) by individual segment and of the Company asa whole to consolidated income before U.S. federal income taxes for the years ended December 31, 2015, 2014and 2013.Year Ended December 31,201520142013(in thousands)Underwriting profit (loss) of the operating segments:Excess and Surplus Lines$47,607$35,096$43,523Specialty Admitted Insurance1,07433(3,868Casualty Reinsurance(2,558667(2,560Total underwriting profit (loss) of the operating segments46,12335,79637,095Other operating expenses of the Corporate and Other segment(18,554(9,124(8,307Underwriting profit27,56926,67228,788Net investment income44,83543,00545,373Net realized investment (losses) gains(4,547(1,33612,619Other income245239222Other expenses(730(16,012(677Interest expense(6,999(6,347(6,777Amortization of intangible assets(597(597(2,470Income before taxes$59,776$45,624$77,078118))))))(1))))))))))))TABLE OF CONTENTSReconciliation of Net Operating IncomeWe define net operating income as net income excluding certain non-operating expenses such as netrealized investment gains and losses, expenses related to due diligence costs for various merger and acquisitionactivities, severance costs associated with terminated employees, and interest expenses on a leased building thatwe are deemed to own for accounting purposes. We use net operating income as an internal performance measurein the management of our operations because we believe it gives our management and other users of ourfinancial information useful insight into our results of operations and our underlying business performance. Netoperating income should not be viewed as a substitute for net income calculated in accordance with GAAP, andour definition of net operating income may not be comparable to that of other companies.Our income before taxes and net income for the years ended December 31, 2015, 2014 and 2013 reconcileto our net operating income as follows:Year Ended December 31,201520142013Income Before TaxesNet IncomeIncome Before TaxesNet IncomeIncome Before TaxesNet Income(in thousands)Income as reported$59,776$53,497$45,624$44,685$77,078$67,337Net realized investment losses (gains)4,5474,0901,336(890(12,619(9,427Initial Public Offering costs——14,93013,223——Other expenses7305741,082977677577Dividend withholding taxes—2,500————Interest expense on leased building the Company isdeemed to own for accounting purposes661429659429663431Impairment of intangible assets——————Net operating income$65,714$61,090$63,631$58,424$65,799$58,918Return on Tangible EquityOne of our key financial measures that we use to assess our longer term financial performance is ourpercentage growth in tangible equity per share and return on tangible equity. For the twelve months endedDecember 31, 2015 our tangible equity decreased 1.3% from $466.0 million at December 31, 2014 to$459.7 million at December 31, 2015. Absent the $47.8 million in dividends to shareholders in 2015, ourtangible book value grew 8.9% for the year. Using a five quarter average methodology to determine our averageshareholders’ equity, our operating return on tangible shareholders’ equity was 13.0% for the year endedDecember 31, 2015 and 12.2% for the year ended December 31, 2014.We define tangible equity as the sum of shareholders’ equity less goodwill and intangible assets (net ofamortization). Our definition of tangible equity may not be comparable to that of other companies, and it shouldnot be viewed as a substitute for shareholders’ equity calculated in accordance with GAAP. We use tangibleequity internally to evaluate the strength of our balance sheet and to compare returns relative to this measure.The following table reconciles shareholders’ equity to tangible equity as of December 31, 2015, 2014 and 2013:As of December 31,201520142013(in thousands)Shareholders’ equity$681,038$687,921$701,490Less:Goodwill181,831181,831181,831Intangible assets39,52840,12540,722Tangible equity$459,679$465,965$478,937119)))Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKTABLE OF CONTENTSMarket risk is the risk of economic losses due to adverse changes in the estimated fair value of a financialinstrument as the result of changes in equity prices, interest rates, foreign currency exchange rates andcommodity prices. Our consolidated balance sheets include assets and liabilities with estimated fair values thatare subject to market risk. Our primary market risks have been equity price risk associated with investments inequity securities and interest rate risk associated with investments in fixed maturities. We do not have materialexposure to foreign currency exchange rate risk or commodity risk.Interest Rate RiskOur fixed maturity and preferred stock investments and borrowings are subject to interest rate risk. Increasesand decreases in interest rates typically result in decreases and increases, respectively, in the fair value of thesefinancial instruments.The majority of our investable assets come from premiums paid by policyholders. These funds are investedpredominantly in high quality corporate, government and municipal bonds with relatively short durations. Theinvestment portfolio has an average duration of approximately 3.5 years at December 31, 2015 and fixedmaturity securities in the portfolio have an average rating by at least one nationally recognized ratingorganization of “AA-”. See Note 2 to the Notes to the Audited Consolidated Financial Statements for disclosureof contractual maturity dates of our fixed maturity portfolio. The changes in the estimated fair value of the fixedmaturity portfolio classified as available-for-sale are presented as a component of shareholders’ equity inaccumulated other comprehensive income, net of taxes.We work to manage the impact of interest rate fluctuations on our fixed maturity and preferred stockportfolio. The effective duration is managed with consideration given to the estimated duration of our liabilities.We have investment guidelines that set targets for average duration and maturity.Our investment manager employs a model to estimate the effect of interest rate risk on the fair values of ourfixed maturity and preferred stock securities and our bank loan participations. Our bank loan participations areprimarily floating-rate debt, so their fair values are less sensitive to changes in interest rates than our fixedmaturity and preferred stock securities. The model estimates the impact of interest rate changes on a wide rangeof factors, including duration and prepayment. Fair values of borrowings are estimated based on the net presentvalue of cash flows, using a representative set of possible future interest rate scenarios. The model requires thatnumerous assumptions be made about the future. To the extent that any of the assumptions are invalid, incorrectestimates could result. The usefulness of a single point-in-time model is limited, as it is unable to accuratelyincorporate the full complexity of market interactions.120TABLE OF CONTENTSThe following table summarizes our interest rate risk and shows the effect of hypothetical changes ininterest rates as of December 31, 2015. The selected hypothetical changes do not indicate what could be thepotential best or worst case scenarios.As of December 31, 2015Estimated Fair ValueHypothetical Change in Interest Rates (bp=basis points)Estimated Fair Value after Hypothetical Change in Interest RatesEstimated Hypothetical Percentage Increase (Decrease) in Fair Value($ in thousands)Total fixed maturity and preferredstock investments$958,798200 bp decrease$1,030,7087.5100 bp decrease998,8764.2100 bp increase916,611(4.4200 bp increase876,533(8.6Bank Loan Participations$180,086200 bp decrease$185,9213.2100 bp decrease182,9311.6100 bp increase178,933(0.6200 bp increase178,609(0.8Liabilities$164,133200 bp decrease$159,188(3.0100 bp decrease161,819(1.4100 bp increase166,1811.2200 bp increase167,9962.4Equity Price RiskA portion of our portfolio is invested in equity securities, which have historically produced higher long-term returns relative to fixed maturities. We own preferred stocks, generally in the financial services industry,and common stocks. The changes in the estimated fair value of the equity securities portfolio are presented as acomponent of shareholders’ equity in accumulated other comprehensive income, net of taxes. See Note 2 to theNotes to the Audited Consolidated Financial Statements for disclosure of gross unrealized gains and losses byinvestment category.At December 31, 2015, our equity securities portfolio was concentrated in terms of the number of issuersand industries. Such concentrations can lead to higher levels of price volatility.The following table summarizes our equity price risk and shows the effect of a hypothetical 35% increase ordecrease in the fair value of our equity securities portfolio as of December 31, 2015. We believe that this rangerepresents a reasonably likely scenario, as the largest annual increases and decreases in the S&P 500 Index in thepast twenty-five years were 34.1% (1995) and (38.5%) (2008), respectively. The selected hypothetical changesdo not indicate what could be the potential best or worst case scenarios.As of December 31, 2015Estimated Fair ValueHypothetical Price ChangeEstimated Fair Value after Hypothetical Change in Prices($ in thousands)Equity securities$74,11135% increase$100,05035% decrease48,172121%%)%)%%%)%)%)%)%%%Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAItem 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSUREItem 9A.CONTROLS AND PROCEDURESTABLE OF CONTENTSThe report of our independent registered public accounting firm and our Consolidated Financial Statementsand required Financial Statement Schedules are filed pursuant to this Item 8 and are included later in this report.See Index to Financial Statements and Schedules on page F-1.Not applicable.Evaluation of Disclosure Controls and ProceduresWe maintain disclosure controls and procedures that are designed to ensure that information required to bedisclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms, and that such information isaccumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and ChiefFinancial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. In connectionwith the preparation of this Annual Report on Form 10-K, our management carried out an evaluation, under thesupervision and with the participation of our management, including the CEO and CFO, as of December 31,2015, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term isdefined under Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, our CEO andCFO concluded that our disclosure controls and procedures were effective as of December 31, 2015.Management’s Annual Report on Internal Control over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financialreporting for the Company, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.Our internal control over financial reporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. Internal control over financial reporting includes those policiesand procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflectthe transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accountingprinciples, and that our receipts and expenditures are being made only in accordance with authorizations of ourmanagement and directors; and provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use or disposition of our assets that could have a material effect on our financialstatements. Because of its inherent limitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate.Management has conducted an assessment, including testing, of the effectiveness of our internal controlover financial reporting as of December 31, 2015. In making its assessment of internal control over financialreporting, management used the criteria in Internal Control — Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Company’smanagement has concluded that, as of December 31, 2015, the Company’s internal control over financialreporting was effective.This Annual Report on Form 10-K does not include an attestation report from our registered publicaccounting firm regarding internal control over financial reporting due to an exemption established by theJumpstart our Business Startups Act, or Jobs Act, for “emerging growth companies.”Changes in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) that occurred during our quarter ended December 31, 2015 that havematerially affected, or are reasonably likely to materially affect, our internal control over financial reporting.122Item 9B.OTHER INFORMATIONTABLE OF CONTENTSThe 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, nomatter how well conceived and operated, can provide only reasonable, not absolute, assurance that theobjectives of the control system will be attained.None.123Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEItem 11.EXECUTIVE COMPENSATIONItem 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERSItem 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCEItem 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESItem 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULESTABLE OF CONTENTSPART IIIThe information required by Item 10 is incorporated by reference to the definitive James River GroupHoldings, Ltd. Proxy Statement to be filed with the SEC not later than 120 days after the end of the fiscal yearcovered by this Annual Report on Form 10-K.The information required by Item 11 is incorporated by reference to the definitive James River GroupHoldings, Ltd. Proxy Statement to be filed with the SEC not later than 120 days after the end of the fiscal yearcovered by this Annual Report on Form 10-K.The information required by Item 12 is incorporated by reference to the definitive James River GroupHoldings, Ltd. Proxy Statement to be filed with the SEC not later than 120 days after the end of the fiscal yearcovered by this Annual Report on Form 10-K.The information required by Item 13 is incorporated by reference to the definitive James River GroupHoldings, Ltd. Proxy Statement to be filed with the SEC not later than 120 days after the end of the fiscal yearcovered by this Annual Report on Form 10-K.The information required by Item 14 is incorporated by reference to the definitive James River GroupHoldings, Ltd. Proxy Statement to be filed with the SEC not later than 120 days after the end of the fiscal yearcovered by this Annual Report on Form 10-K.PART IV(a) (1) and (2) Financial Statements and Financial Statement Schedules.See “Index to Financial Statements and Schedules” on Page F-1.(3) ExhibitsSee “Exhibit Index” on Page 124.124TABLE OF CONTENTSSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.JAMES RIVER GROUP HOLDINGS, LTD.By:/s/ J. Adam AbramJ. Adam Abram Chief Executive Officer and ChairmanMarch 10, 2016Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and on the dates indicated.NAMETITLEDATE/s/ J. Adam AbramJ. Adam AbramChief Executive Officer andChairman of the Board(Principal Executive Officer)March 10, 2016/s/ Robert P. MyronRobert P. MyronPresident, Chief Operating Officer and DirectorMarch 10, 2016/s/ Gregg T. DavisGregg T. DavisChief Financial Officer(Principal Financial Officer)March 10, 2016/s/ Michael E. CrowMichael E. CrowPrincipal Accounting OfficerMarch 10, 2016/s/ Bryan MartinBryan MartinDirectorMarch 10, 2016/s/ Jerry R. MastersJerry R. MastersDirectorMarch 10, 2016/s/ Michael T. OakesMichael T. OakesDirectorMarch 10, 2016/s/ R.J. Pelosky, Jr.R.J. Pelosky, Jr.DirectorMarch 10, 2016/s/ Thomas R. SandlerThomas R. SandlerDirectorMarch 10, 2016/s/ David ZwillingerDavid ZwillingerDirectorMarch 10, 2016125TABLE OF CONTENTSEXHIBIT INDEXExhibit NumberDescription3.1Certificate of Incorporation of James River Group Holdings, Ltd. (incorporated by reference toExhibit 3.1 of the Registration Statement on Form S-1, Registration No. 333-199958, filed with theCommission on November 7, 2014)3.2Certificate of Incorporation on Change of Name (incorporated by reference to Exhibit 3.2 of theRegistration Statement on Form S-1, Registration No. 333-199958, filed with the Commission onNovember 7, 2014)3.3Memorandum of Association of James River Group Holdings, Ltd. (incorporated by reference toExhibit 3.3 of the Registration Statement on Form S-1, Registration No. 333-199958, filed with theCommission on November 7, 2014)3.4Certificate of Deposit of Memorandum of Increase of Share Capital, dated December 24, 2007(incorporated by reference to Exhibit 3.4 of the Registration Statement on Form S-1, RegistrationNo. 333-199958, filed with the Commission on November 7, 2014)3.5Certificate of Deposit of Memorandum of Increase of Share Capital, dated October 7, 2009(incorporated by reference to Exhibit 3.5 of the Registration Statement on Form S-1, RegistrationNo. 333-199958, filed with the Commission on November 7, 2014)3.6Third Amended and Restated Bye-Laws of James River Group Holdings, Ltd. (incorporated byreference to Exhibit 3.6 to the Annual Report on Form 10-K filed on March 12, 2015, CommissionFile No. 001-36777)4.1Form of Certificate of Common Shares (incorporated by reference to Exhibit 4.1 of Amendment No.1 to the Registration Statement on Form S-1, Registration No. 333-199958, filed with theCommission on November 24, 2014)4.2Indenture, dated as of May 26, 2004, by and between James River Group, Inc. and WilmingtonTrust Company, as Trustee, relating to Floating Rate Senior Debentures Due 2034+4.3Indenture, dated as of May 26, 2004, by and between James River Group, Inc. and WilmingtonTrust Company, as Trustee, relating to Floating Rate Junior Subordinated Debentures Due 2034+4.4Amended and Restated Declaration of Trust of James River Capital Trust I, dated as of May 26,2004, by and among James River Group, Inc., as Sponsor, Wilmington Trust Company, asInstitutional Trustee and Delaware Trustee, the Regular Trustees (as defined therein), and theholders, from time to time, of undivided beneficial interests in James River Capital Trust I+4.5Preferred Securities Guarantee Agreement, dated as of May 26, 2004, by James River Group, Inc., asGuarantor, and Wilmington Trust Company, as Preferred Guarantee Trustee, for the benefit of theholders of James River Capital Trust I+4.6Indenture, dated as of December 15, 2004, by and between James River Group, Inc. andWilmington Trust Company, as Trustee, relating to Floating Rate Junior Subordinated DeferrableInterest Debentures Due 2034+4.7Amended and Restated Declaration of Trust of James River Capital Trust II, dated as ofDecember 15, 2004, by and among James River Group, Inc., as Sponsor, Wilmington TrustCompany, as Institutional Trustee and Delaware Trustee, the Administrators (as defined therein),and the holders, from time to time, of undivided beneficial interests in the James River CapitalTrust II+4.8Guarantee Agreement, dated as of December 15, 2004, by James River Group, Inc., as Guarantor,and Wilmington Trust Company, as Guarantee Trustee, for the benefit of the holders, from time totime, of the capital securities of James River Capital Trust II+4.9Indenture, dated June 15, 2006, by and between James River Group, Inc. and Wilmington TrustCompany, as Trustee, relating to Floating Rate Junior Subordinated Deferrable Interest DebenturesDue 2036+126TABLE OF CONTENTSExhibit NumberDescription4.10Amended and Restated Declaration of Trust of James River Capital Trust III, dated as of June 15,2006, by and among James River Group, Inc., as Sponsor, Wilmington Trust Company, asInstitutional Trustee and Delaware Trustee, the Administrators (as defined therein) and the holders,from time to time, of undivided beneficial interests in the James River Capital Trust III+4.11Guarantee Agreement dated as of June 15, 2006, by James River Group, Inc., as Guarantor, andWilmington Trust Company, as Guarantee Trustee, for the benefit of the holders, from time to time,of the capital securities of James River Capital Trust III+4.12Indenture dated December 11, 2007, by and between James River Group, Inc. and WilmingtonTrust Company, as Trustee, relating to Fixed/Floating Rate Junior Subordinated Deferrable InterestDebentures Due 2037+4.13Amended and Restated Declaration of Trust dated December 11, 2007, by and among James RiverGroup, Inc., as Sponsor, Wilmington Trust Company, as Institutional Trustee and Delaware Trusteeand the Administrators (as defined therein) and the holders, from time to time, of undividedbeneficial interests in James River Capital Trust IV+4.14Guarantee Agreement dated as of December 11, 2007, by James River Group, Inc., as Guarantor,and Wilmington Trust Company, as Guarantee Trustee, for the benefit of the holders, from time totime, of the capital securities of James River Capital Trust IV+4.15Indenture dated as of January 10, 2008, among James River Group Holdings, Ltd. and WilmingtonTrust Company, as Trustee relating to Fixed/Floating Rate Junior Subordinated Deferrable InterestDebentures Due 2038+4.16Amended and Restated Declaration of Trust dated as of January 10, 2008, by and among JamesRiver Group Holdings, Ltd., as Sponsor, Wilmington Trust Company, as Institutional Trustee andDelaware Trustee and the Administrators (as defined therein) for the benefit of the holders, fromtime to time, of undivided beneficial interest in Franklin Holdings II (Bermuda) Capital Trust I+4.17Guarantee Agreement dated as of January 10, 2008, by and among James River Group Holdings,Ltd., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee, for the benefit of theholders, from time to time, of the capital securities of Franklin Holdings II (Bermuda) Capital TrustI+10.1Credit Agreement, dated as of June 5, 2013, among James River Group Holdings, Ltd., JRGReinsurance Company, Ltd., the lenders named therein, and KeyBank National Association, asAdministrative Agent and Letter of Credit Issuer (incorporated by reference to Exhibit 10.1 of theRegistration Statement on Form S-1, Registration No. 333-199958, filed with the Commission onNovember 7, 2014)10.2Continuing Guaranty of Payment, dated as of June 5, 2013, by James River Group, Inc., asGuarantor, pursuant to Credit Agreement, dated as of June 5, 2013, among James River GroupHoldings, Ltd. and JRG Reinsurance Company Ltd., KeyBank National Association, asAdministrative Agent and as Letter of Credit Issuer, and certain Lender parties (incorporated byreference to Exhibit 10.2 of the Registration Statement on Form S-1, Registration No. 333-199958,filed with the Commission on November 7, 2014)10.3First Amendment to Credit Agreement, dated as of September 24, 2014, among James River GroupHoldings, Ltd., JRG Reinsurance Company, Ltd., the lenders named therein, and KeyBank NationalAssociation, as Administrative Agent and Letter of Credit Issuer (incorporated by reference toExhibit 10.3 of the Registration Statement on Form S-1, Registration No. 333-199958, filed withthe Commission on November 7, 2014)10.4Second Amendment to Credit Agreement, dated as of December 15, 2015, among James RiverGroup Holdings, Ltd., JRG Reinsurance Company, Ltd., the lenders named therein, and KeyBankNational Association, as Administrative Agent and Letter of Credit Issuer10.5Continuing Guaranty of Payment, dated as of December 15, 2015, by James River Group127TABLE OF CONTENTSExhibit NumberDescriptionHoldings UK Limited, pursuant to Credit Agreement, dated as of June 5, 2013, among James RiverGroup Holdings, Ltd. and JRG Reinsurance Company Ltd., KeyBank National Association, asAdministrative Agent and as Letter of Credit Issuer, and certain Lender parties10.6Third Amendment to Credit Agreement, dated as of December 30, 2015, among James River GroupHoldings, Ltd., JRG Reinsurance Company, Ltd., the lenders named therein, and Key BankNational Association, as Administrative Agent10.7Form of Shareholder Indemnification Agreement, dated as of December 11, 2007, entered into byJames River Group Holdings, Ltd. and James River Group, Inc., and each of (1) D. E. Shaw CF-SPFranklin, L.L.C., D. E. Shaw CH-SP Franklin, L.L.C., and D. E. Shaw Oculus Portfolios, L.L.C., (2)The Goldman Sachs Group, Inc., (3) Sunlight Capital Ventures, LLC and Sunlight Capital PartnersII, LLC and (4) Lehman Brothers Offshore Partners Ltd. (incorporated by reference to Exhibit 10.6of the Registration Statement on Form S-1, Registration No. 333-199958, filed with theCommission on November 7, 2014)10.8Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.7of Amendment No. 1 to the Registration Statement on Form S-1, Registration No. 333-199958,filed with the Commission on November 24, 2014)10.9Amended and Restated James River Group Holdings, Ltd. Equity Incentive Plan (incorporated byreference to Exhibit 10.8 of the Registration Statement on Form S-1, Registration No. 333-199958,filed with the Commission on November 7, 2014)*10.10Form of Stock Option Agreement (Amended and Restated James River Group Holdings, Ltd.Equity Incentive Plan) (incorporated by reference to Exhibit 10.9 of the Registration Statement onForm S-1, Registration No. 333-199958, filed with the Commission on November 7, 2014)*10.11First Amendment to the Amended and Restated James River Group Holdings, Ltd. Equity IncentivePlan (incorporated by reference to Exhibit 10.10 of Amendment No. 1 to the RegistrationStatement on Form S-1, Registration No. 333-199958, filed with the Commission on November 24,2014)*10.12James River Group Holdings, Ltd. 2014 Long-Term Incentive Plan (incorporated by reference toExhibit 10.11 of Amendment No. 1 to the Registration Statement on Form S-1, Registration No.333-199958, filed with the Commission on November 24, 2014)*10.13Form of Nonqualified Share Option Agreement (James River Group Holdings, Ltd. 2014 Long-Term Incentive Plan) (incorporated by reference to Exhibit 10.12 of Amendment No. 1 to theRegistration Statement on Form S-1, Registration No. 333-199958, filed with the Commission onNovember 24, 2014)*10.14Form of Restricted Share Award Agreement (James River Group Holdings, Ltd. 2014 Long-TermIncentive Plan) (incorporated by reference to Exhibit 10.13 of Amendment No. 1 to theRegistration Statement on Form S-1, Registration No. 333-199958, filed with the Commission onNovember 24, 2014)*10.15Form of Restricted Share Unit Award Agreement (James River Group Holdings, Ltd. 2014 Long-Term Incentive Plan) (incorporated by reference to Exhibit 10.14 of Amendment No. 3 to theRegistration Statement on Form S-1, Registration No. 333-199958, filed with the Commission onDecember 9, 2014)*10.16James River Group Holdings, Ltd. 2014 Non-Employee Director Incentive Plan (incorporated byreference to Exhibit 10.15 of Amendment No. 1 to the Registration Statement on Form S-1,Registration No. 333-199958, filed with the Commission on November 24, 2014)*10.17Form of Restricted Share Award Agreement (James River Group Holdings, Ltd. 2014 Non-Employee Director Incentive Plan) (incorporated by reference to Exhibit 10.16 of Amendment No.1 to the Registration Statement on Form S-1, Registration No. 333-199958, filed with theCommission on November 24, 2014)*10.18Form of Restricted Share Unit Award Agreement (James River Group Holdings, Ltd. 2014128*Denotes a management contract or compensatory plan or arrangement.+Exhibit not filed with the Securities and Exchange Commission pursuant to Item 601(b)(4)(iii) ofRegulation S-K. The Company will furnish a copy to the SEC upon request.TABLE OF CONTENTSExhibit NumberDescriptionNon-Employee Director Incentive Plan) (incorporated by reference to Exhibit 10.17 of AmendmentNo. 3 to the Registration Statement on Form S-1, Registration No. 333-199958, filed with theCommission on December 9, 2014)*10.19James River Management Company, Inc. Leadership Recognition Program (incorporated byreference to Exhibit 10.18 of Amendment No. 1 to the Registration Statement on Form S-1,Registration No. 333-199958, filed with the Commission on November 24, 2014)*10.20Amended and Restated Employment Agreement dated November 18, 2014 among James RiverGroup Holdings, Ltd., James River Group, Inc. and J. Adam Abram (incorporated by reference toExhibit 10.19 of Amendment No. 1 to the Registration Statement on Form S-1, Registration No.333-199958, filed with the Commission on November 24, 2014)*10.21Amended and Restated Employment Agreement dated November 18, 2014 among James RiverGroup Holdings, Ltd. and Robert P. Myron (incorporated by reference to Exhibit 10.20 ofAmendment No. 1 to the Registration Statement on Form S-1, Registration No. 333-199958, filedwith the Commission on November 24, 2014)*10.22Amended and Restated Employment Agreement dated November 18, 2014 by and between JamesRiver Group Holdings, Ltd., James River Group Inc. and Gregg T. Davis (incorporated by referenceto Exhibit 10.21 to the Annual Report on Form 10-K filed on March 12, 2015, Commission FileNo. 001-36777)*10.23Employment Agreement dated November 9, 2011 by and between James River InsuranceCompany, James River Management Company, Inc. and Richard Schmitzer (incorporated byreference to Exhibit 10.21 of Amendment No. 1 to the Registration Statement on Form S-1,Registration No. 333-199958, filed with the Commission on November 24, 2014)*10.24James River Management Company, Inc. Leadership Recognition Program Award Letter datedSeptember 30, 2011 to Richard Schmitzer (incorporated by reference to Exhibit 10.22 ofAmendment No. 1 to the Registration Statement on Form S-1, Registration No. 333-199958, filedwith the Commission on November 24, 2014)*10.25Consulting Agreement dated November 18, 2014 by and between James River Group Holdings,Ltd. and Conifer Group, Inc. (incorporated by reference to Exhibit 10.23 of Amendment No. 1 tothe Registration Statement on Form S-1, Registration No. 333-199958, filed with the Commissionon November 24, 2014)*10.26Registration Rights Agreement, dated as of December 17, 2014, by and among (1) James RiverGroup Holdings, Ltd.; (2) (a) D. E. Shaw CH-SP Franklin, L.L.C., a Delaware limited liabilitycompany, D. E. Shaw CF-SP Franklin, L.L.C., a Delaware limited liability company, and D. E. ShawOculus Portfolios, L.L.C., a Delaware limited liability company; and (b) The Goldman SachsGroup, Inc., a Delaware corporation, and Goldman Sachs JRVR Investors Offshore, L.P., a CaymanIslands exempted limited partnership and (3) the persons identified as “Management Investors” onthe signature pages thereto (incorporated by reference to Exhibit 10.25 to the Annual Report onForm 10-K filed on March 12, 2015, Commission File No. 001-36777)21.1List of subsidiaries of James River Group Holdings, Ltd.23.1Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm31.1Chief Executive Officer Certification pursuant to Rule 13a-14(a)/15d-14(a)31.2Chief Financial Officer Certification pursuant to Rule 13a-14(a)/15d-14(a)32Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.129Schedule ISummary of InvestmentsSchedule IICondensed Financial Information of RegistrantSchedule IIISupplementary Insurance InformationSchedule IVReinsuranceSchedule VValuation and Qualifying AccountsSchedule VISupplementary Information Concerning Property Casualty Insurance OperationsTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIESINDEX TO FINANCIAL STATEMENTS AND SCHEDULESPageReport of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets as of December 31, 2015 and 2014F-3Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31,2015, 2014 and 2013F-5Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2015,2014 and 2013F-6Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013F-7Notes to Consolidated Financial Statements for the Years Ended December 31, 2015, 2014 and 2013F-8F-50F-51F-55F-56F-57F-58F-1TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Report of Independent Registered Public Accounting FirmThe Board of Directors and Shareholders of James River Group Holdings, Ltd.We have audited the accompanying consolidated balance sheets of James River Group Holdings, Ltd. andsubsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income andcomprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the periodended December 31, 2015. Our audits also included the financial statement schedules listed in the Index at Item15(a). These financial statements and schedules are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements and schedules based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement. We were not engaged to perform anaudit of the Company’s internal control over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internalcontrol over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, ona test basis, evidence supporting the amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, theconsolidated financial position of James River Group Holdings, Ltd. and subsidiaries at December 31, 2015 and2014, and the consolidated results of their operations and their cash flows for each of the three years in theperiod ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in ouropinion, the related financial statement schedules, when considered in relation to the basic financial statementstaken as a whole, present fairly in all material respects the information set forth therein./s/ Ernst & Young LLPRichmond, Virginia March 10, 2016F-2TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Balance SheetsDecember 31,20152014(in thousands)AssetsInvested assets:Fixed maturity securities:Available-for-sale, at fair value (amortized cost: 2015 – $897,445; 2014 – $737,916)$899,660$756,963Trading, at fair value (amortized cost: 2015 – $5,053; 2014 – $7,324)5,0467,388Equity securities available-for-sale, at fair value (cost: 2015 – $69,830; 2014 – $64,348)74,11167,905Bank loan participations held-for-investment, at amortized cost, net ofallowance191,700239,511Short-term investments19,270131,856Other invested assets54,50433,622Total invested assets1,244,2911,237,245Cash and cash equivalents106,40673,383Accrued investment income8,0687,273Premiums receivable and agents’ balances, net176,685162,527Reinsurance recoverable on unpaid losses131,788127,254Reinsurance recoverable on paid losses11,2981,725Prepaid reinsurance premiums44,14629,445Deferred policy acquisition costs60,75460,202Intangible assets, net39,52840,125Goodwill181,831181,831Income tax receivable2,0944,198Deferred tax assets, net468451Other assets48,14033,633Total assets$2,055,497$1,959,292See accompanying notes.F-3TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Balance SheetsDecember 31,20152014(in thousands, except share amounts)Liabilities and shareholders’ equityLiabilities:Reserve for losses and loss adjustment expenses$785,322$716,296Unearned premiums301,104277,579Payables to reinsurers19,86719,272Senior debt88,30088,300Junior subordinated debt104,055104,055Accrued expenses29,47631,107Other liabilities46,33534,762Total liabilities1,374,4591,271,371Commitments and contingent liabilitiesShareholders’ equity:Common Shares – $0.0002 par value; 200,000,000 shares authorized.2015 and 2014: 28,941,547 and 28,540,350 shares issued andoutstanding, respectively66Preferred Shares – 2015 and 2014: $0.00125 par value; 20,000,000 sharesauthorized; no shares issued and outstanding——Additional paid-in capital630,820628,236Retained earnings47,02641,323Accumulated other comprehensive income3,18618,356Total shareholders’ equity681,038687,921Total liabilities and shareholders’ equity$2,055,497$1,959,292See accompanying notes.F-4TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive IncomeYear Ended December 31,201520142013(in thousands, except share amounts)Revenues:Gross written premiums$572,194$518,767$368,518Ceded written premiums(101,162(68,684(43,352Net written premiums471,032450,083325,166Change in net unearned premiums(9,827(53,8712,912Net earned premiums461,205396,212328,078Net investment income44,83543,00545,373Net realized investment (losses) gains(4,547(1,33612,619Other income3,4281,122222Total revenues504,921439,003386,292Expenses:Losses and loss adjustment expenses279,016237,368184,486Other operating expenses157,803133,055114,804Other expenses73016,012677Interest expense6,9996,3476,777Amortization of intangible assets5975972,470Total expenses445,145393,379309,214Income before income taxes59,77645,62477,078Income tax expense (benefit):Current5,3574,7007,260Deferred922(3,7612,4816,2799399,741Net income$53,497$44,685$67,337Other comprehensive income:Net unrealized (losses) gains, net of taxes of $(939) in 2015,$3,489 in 2014 and $(8,713) in 2013(15,17011,155(39,245Total comprehensive income$38,327$55,840$28,092Per share data:Basic earnings per share$1.87$1.57$2.21Diluted earnings per share$1.82$1.55$2.21Dividend declared per share$1.64$2.45$—Weighted-average common shares outstanding:Basic28,662,05128,540,35030,442,950Diluted29,334,91828,810,30130,500,800See accompanying notes.F-5))))))))))TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders’ EquityNumber of Common Shares OutstandingCommon Shares (Par)Preferred SharesAdditional Paid-in CapitalRetained Earnings (Deficit)Accumulated Other Comprehensive IncomeTotal James River Group Holdings, Ltd. Shareholders’ EquityNon- Controlling InterestTotal Shareholders’ Equity(in thousands, except share amounts)Balances at December 31, 201236,030,000$7$—$738,020$(701$46,446$783,772$268$784,040Net income————67,337—67,337—67,337Other comprehensive loss—————(39,245(39,245—(39,245Common shares repurchase (Note 10)—(1—(110,759——(110,760—(110,760Repurchase of non-controlling interest(Note 12)(7,500,000——(321——(321(208(529Exchange of subsidiary common sharesfor common shares (Note 10)10,350——60——60(60—Compensation expense under shareincentive plan———647——647—647Balances at December 31, 201328,540,350$6$—$627,647$66,636$7,201$701,490$—$701,490Net income————44,685—44,685—44,685Other comprehensive income—————11,15511,155—11,155Dividends————(69,998—(69,998—(69,998Compensation expense under shareincentive plan———589——589—589Balances at December 31, 201428,540,350$6$—$628,236$41,323$18,356$687,921$—$687,921Net income————53,497—53,497—53,497Other comprehensive loss—————(15,170(15,170—(15,170Dividends——(47,794—(47,794—(47,794Exercise of stock options and relatedexcess tax benefits341,264——(15——(15—(15Vesting of RSUs and related excess taxbenefits59,933——(1,136——(1,136—(1,136Compensation expense under shareincentive plans———3,735——3,735—3,735Balances at December 31, 201528,941,547$6$—$630,820$47,026$3,186$681,038$—$681,038See accompanying notes.F-6)))))))))))))))))))))))))))))TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Statements of Cash FlowsYear Ended December 31,201520142013(in thousands)Operating activitiesNet income$53,497$44,685$67,337Adjustments to reconcile net income to net cash provided by operating activities:Deferred policy acquisition costs(98,302(99,181(68,516Amortization of policy acquisition costs97,75085,18371,648Net realized investment losses (gains)4,5471,336(12,619Distributions from equity method investments2,8853,9042,637Income from equity method investments(2,468(5,163(4,620Trading securities purchases, sales, and maturities, net2,3199,8081,518Deferred U.S. federal income tax expense (benefit)922(3,7612,481Provision for depreciation and amortization2,0042,7603,567Share based compensation expense3,735589647Change in operating assets and liabilities:Reserve for losses and loss adjustment expenses69,02669,844(63,269Unearned premiums23,52559,047(20,523Premiums receivable and agents’ balances(14,158(26,638114,985Reinsurance balances(28,213(24,30227,050Payable to insurance companies4,170(4,090(22,126Other(4,84816,3725,441Net cash provided by operating activities116,391130,393105,638Investing activitiesSecurities available-for-sale:Purchases – fixed maturity securities(393,168(161,951(226,292Purchases – equity securities(18,519(8,133(16,207Sales – fixed maturity securities110,12228,101260,182Maturities and calls – fixed maturity securities122,79147,77560,480Sales – equity securities14,06816,6121,127Bank loan participations:Purchases(109,107(272,902(273,249Sales113,391157,863150,724Maturities37,38875,18598,518Other invested asset – purchases(52,663(6,800(16,525Other invested asset – return of capital237—246Other invested asset – disposals1,3749,470—Other invested asset – maturities and repayments30,753——Securities receivable or payable, net(2,1041,332330Short-term investments, net112,586(60,3388,130Other(1,312(1,091(709Net cash (used in) provided by investing activities(34,163(174,87746,755Financing activitiesSenior debt issuances10,00030,30043,000Senior debt repayments(10,000—(20,000Dividends paid(47,405(69,998—Issuances of common shares under equity incentive plans1,730——Common share repurchases(6,461—(110,760Non-Controlling Interest – Subsidiary common share repurchases (Note 12)——(529Excess tax benefits from equity incentive plan transactions3,580——Other financing activities(649(1,039(1,294Net cash used in financing activities(49,205(40,737(89,583Change in cash and cash equivalents33,023(85,22162,810Cash and cash equivalents at beginning of year73,383158,60495,794Cash and cash equivalents at end of year$106,406$73,383$158,604Supplemental informationIncome taxes (refunded) paid, net$(2,827$7,933$5,820Interest paid$7,342$6,682$7,625See accompanying notes.F-7)))))))))))))))))))))))))))))))))))))))))))))))))))1.Accounting Policies•James River Group Holdings UK Limited (“James River UK”) is an insurance holding company formedin 2015 in the United Kingdom (“U.K.”). The Company contributed James River Group, Inc. (“JamesRiver 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 ownsall 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 andmaintains all of the outstanding debt in the U.S.•James River Insurance Company (“James River Insurance”) is an Ohio domiciled excess and surpluslines insurance company that, with its wholly-owned insurance subsidiary, James River CasualtyCompany, 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 insurancecompany which wholly owns Stonewood Insurance Company (“Stonewood Insurance”), a NorthCarolina domiciled company, Falls Lake General Insurance Company, an Ohio domiciled company,and Falls Lake Fire and Casualty Company, a California domiciled company. Falls Lake Nationalbegan writing specialty admitted program business in late 2013. Falls Lake Fire and CasualtyCompany will begin operations in 2016.•Stonewood Insurance is a workers’ compensation insurance company that writes insurance primarilyfor the residential construction and light manufacturing industries. Stonewood Insurance writesworkers’ compensation coverage in North Carolina, Virginia, South Carolina, and Tennessee.•JRG Reinsurance Company, Ltd. (“JRG Re”) was formed in 2007 and commenced operations in 2008.JRG Re, a Bermuda domiciled reinsurer, provides non-catastrophe casualty reinsurance to U.S. thirdparties and to the Company’s U.S.-based insurance subsidiaries.TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended December 2015, 2014, and 2013OrganizationJames 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 managinginsurance and reinsurance entities.The Company owns six insurance companies based in the United States (“U.S.”) focused on specialtyinsurance niches and a Bermuda-based reinsurance company as described below:Basis of Presentation and Principles of ConsolidationThe consolidated financial statements are prepared in accordance with U.S. generally accepted accountingprinciples (“GAAP”), which vary in some respects from statutory accounting practices (“SAP”) which areprescribed or permitted by the various state insurance departments in the U.S. or by insurance regulators inBermuda. The accompanying consolidated financial statements include the accounts and operations of theCompany and its subsidiaries. All significant intercompany transactions and balances have been eliminated.Estimates and AssumptionsPreparation of the consolidated financial statements in conformity with GAAP requires management tomake estimates and assumptions that affect the amounts reported in the consolidated financial statements andaccompanying disclosures. Those estimates are inherently subject to change, and actual results may ultimatelydiffer from those estimates.F-81.Accounting Policies (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 Fixed Maturity and Equity SecuritiesFixed maturity and equity securities classified as “available-for-sale” are carried at fair value, andunrealized gains and losses on such securities, net of any deferred taxes, are reported as a separate component ofaccumulated other comprehensive income. Fixed maturity securities purchased for short-term resale areclassified as “trading” and are carried at fair value with unrealized gains and losses included in earnings as acomponent of net investment income. The Company does not have any securities classified as “held-to-maturity”.Fair value generally represents quoted market value prices for securities traded in the public marketplace orprices analytically determined using bid or closing prices for securities not traded in the public marketplace.Premiums and discounts on mortgage-backed securities and asset-backed securities are amortized oraccrued using the constant yield method which considers anticipated prepayments at the date of purchase. Tothe extent that the estimated lives of such securities change as a result of changes in estimated prepayment rates,the adjustments are included in net investment income using the retrospective method.Realized investment gains or losses are determined on a specific identification basis. Interest income isrecognized as earned, and dividend income is recognized on the ex-dividend date.The Company evaluates its available-for-sale investments regularly to determine whether there are declinesin value that are other-than-temporary. The Company’s outside investment managers assist the Company in thisevaluation. When the Company determines that a security has experienced an other-than-temporary impairment,the impairment loss is recognized as a realized investment loss. The factors that the Company considers inevaluating whether such an other-than-temporary impairment has occurred include the amount and percentagethat fair value is below amortized cost or cost and the length of time that fair value has been below amortizedcost or cost. For fixed maturity securities, the Company considers the credit quality rating of the security, with aspecial emphasis on securities downgraded below investment grade. Management does not intend to sellavailable-for-sale fixed maturity 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 fair value to their amortized costbasis occurs. For equity securities, management evaluates the near-term prospects of these investments inrelation to the severity and duration of the impairment, and the Company’s ability and intent to hold theseinvestments until a recovery of fair value occurs.Bank Loan Participations Held-for-Investment and Allowance for Credit LossesBank loan participations held-for-investment are managed by a specialized outside investment managerand are generally stated at their outstanding unpaid principal balances net of unamortized premiums ordiscounts and net of any allowance for credit losses. Interest income is accrued on the unpaid principal balance.Discounts and premiums are amortized to income using the interest method.Generally, the accrual of interest on a bank loan participation is discontinued when the contractualpayment of principal or interest has become 90 days past due or management has serious doubts about furthercollectability of principal or interest. A bank loan participation may remain on accrual status if it is in theprocess of collection and is either guaranteed or well secured. Interest received on nonaccrual loans generally isreported as investment income. There were no bank loans on nonaccrual status at December 31, 2015 or 2014.Generally, bank loan participations are restored to accrual status when the obligation is brought current, hasperformed in accordance with the contractual terms for a reasonable period of time, and the ultimatecollectability of the total contractual principal and interest is no longer in doubt.F-91.Accounting Policies (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 The allowance for credit losses is maintained at a level believed adequate by management to absorbestimated probable credit losses. Management’s periodic evaluation of the adequacy of the allowance is basedon consultations and advice of the Company’s specialized investment manager, known and inherent risks in theportfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of anyunderlying collateral, current economic conditions, and other relevant factors. When an observable market pricefor a loan is available, the Company has recorded an allowance equal to the difference between the fair valueand the amortized cost of bank loans that it has determined to be impaired as a practical expedient for anestimate of probable future cash flows to be collected on those bank loans. If an observable market price for aloan is not available, the Company records an allowance equal to the difference between the present value ofexpected future cash flows discounted at the loan’s effective interest rate and the amortized cost of the loan.Bank loans are charged off against the allowance after all means of collection have been exhausted and thepotential for recovery is considered remote.Other Invested AssetsOther invested assets at December 31, 2015 and 2014 include the Company’s interests in private debt andequity investments. The investments are primarily focused in renewable energy, limited partnerships, and bankholding companies. Equity interests in various limited liability companies (“LLCs”) and limited partnerships areaccounted for under the equity method, as the Company has determined that the equity method best reflects itseconomic interest in the underlying equity investment. For certain note agreements, original discounts andcommitment fees received are recognized over the terms of the notes under the effective interest method.Short-Term InvestmentsShort-term investments are carried at cost, which approximates fair value. Short-term investments havematurities greater than three months but less than one year at the date of purchase.Cash EquivalentsThe Company considers highly liquid investments with maturities of three months or less at the date ofpurchase to be cash equivalents.Direct Written PremiumsDirect written premiums are earned on a pro rata basis over the terms of the policies, generally 12 months.The portion of premiums written applicable to the unexpired terms of the policies in force is recorded asunearned premiums. Policies are accounted for on an individual basis, with no aggregation by counterparty.Assumed Reinsurance PremiumsAssumed reinsurance written premiums include amounts reported by brokers and ceding companies,supplemented by the Company’s own estimates of premiums when reports have not been received. Premiums onthe Company’s excess of loss and pro rata reinsurance contracts are estimated when the business is underwritten.For excess of loss contracts, the deposit premium, as defined in the contract, is generally recorded as an estimateof premiums written at the inception date of the treaty. Estimates of premiums written under pro rata contracts arerecorded in the period in which the underlying risks are expected to begin and are based on informationprovided by the brokers and the ceding companies.Reinsurance premium estimates are reviewed by management periodically. Any adjustment to theseestimates is recorded in the period in which it becomes known.F-101.Accounting Policies (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 Reinsurance premiums assumed are earned over the terms of the underlying policies or reinsurancecontracts. Contracts and policies written on a “losses occurring” basis cover claims that may occur during theterm of the contract or policy, which is typically 12 months. Accordingly, the premium is earned evenly over theterm. Contracts which are written on a “risks attaching” basis cover claims which attach to the underlyinginsurance policies written during the terms of such contracts. Premiums earned on such contracts usually extendbeyond the original term of the reinsurance contract, typically resulting in recognition of premiums earned overa 24-month period in proportion to the level of underlying exposure. Contracts are accounted for on anindividual basis, with no aggregation by counterparty.Premiums Receivable and Agents’ Balances, NetPremiums receivable and agents’ balances are carried at face value net of any allowance for doubtfulaccounts, which approximates fair value. The allowance for doubtful accounts represents an estimate of amountsconsidered uncollectible based on the Company’s assessment of the collectability of receivables that are pastdue. Receivables greater than 90 days past due were $2.6 million and $1.8 million at December 31, 2015 and2014, respectively. The allowance for doubtful accounts was $2.8 million and $2.0 million at December 31,2015 and 2014, respectively. Bad debt expense was $1.1 million for the year ended December 31, 2015,$812,000 for the year ended December 31, 2014, and $459,000 for the year ended December 31, 2013.Receivables written off against the allowance for doubtful accounts totaled $268,000 for the year endedDecember 31, 2015, $528,000 for the year ended December 31, 2014, and $978,000 for the year endedDecember 31, 2013. Account balances are charged off against the allowance after all means of collection havebeen exhausted and the potential for recovery is considered remote.Deferred Policy Acquisition CostsCosts which are incrementally or directly related to the successful acquisition of new or renewal insurancebusiness are deferred. These deferred costs are primarily commissions to agents, ceding commissions paid onreinsurance assumed, premium taxes, and the portion of underwriting fixed compensation and payroll relatedfringe benefits directly related to an insurance contract that has been acquired, net of ceding commissionsrelated to reinsurance ceded. Amortization of such policy acquisition costs is charged to expense in proportionto premium earned over the estimated policy life. To the extent that unearned premiums on existing policies arenot adequate to cover projected related costs and expenses, deferred policy acquisition costs are charged toearnings. The Company considers anticipated investment income in determining whether a premium deficiencyexists.Reinsurance and Adjustable Features of Insurance and Reinsurance ContractsCertain premiums and losses are ceded to other insurance companies or assumed from other insurancecompanies under various excess of loss and quota-share reinsurance contracts. The Company enters into cededreinsurance contracts to limit its exposure to large losses, to limit exposure on new lines of insurance written bythe Company, and to provide additional capacity for growth.Premiums, commissions, and losses and loss adjustment expenses on reinsured business are accounted foron a basis consistent with that used in accounting for the original policies issued and the terms of thereinsurance contracts. Reinsurance recoverables and prepaid reinsurance premiums are reported as assets. Otheramounts payable to insurance companies and reinsurers or receivable from insurance companies and reinsurersare netted where the right of offset exists. The Company receives ceding commissions in connection with certainceded reinsurance. The ceding commissions are recorded as a reduction of other operating expenses.Certain reinsurance contracts of the Casualty Reinsurance segment include provisions that adjust premiumsor acquisition expenses based upon the experience under the contracts. Premiums written and earned, as well asrelated acquisition expenses are recorded based upon the projected experience under the contracts.F-111.Accounting Policies (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 The Company’s Specialty Admitted Insurance segment writes insurance under specialty admitted programand fronting arrangements. The program and fronting arrangements may contain contractual provisions thatadjust acquisition expenses based upon loss experience under the contracts. The specialty admitted programsand fronting arrangements are significantly reinsured. These reinsurance contracts may also contain provisionsthat adjust premiums or acquisition expenses based upon the loss experience under the contracts.Other IncomeOther income is principally comprised of fee income earned on policies for which the Company has noexposure to underwriting risk. Net fee income of $3.2 million, $883,000, and $0 is included in other income forthe years ended December 31, 2015, 2014, and 2013, respectively. Fees are earned on a pro rata basis over theservice period of the underlying business. Policies are accounted for on an individual basis, with no aggregationby counterparty.Income TaxesDeferred tax assets and deferred tax liabilities are provided for the future tax consequences attributable totemporary differences between the financial statement carrying amounts of assets and liabilities and theirrespective U.S. tax bases. Deferred tax assets and liabilities are measured using enacted U.S. corporate tax ratesexpected to apply to taxable income in the years in which those temporary differences are expected to berecovered or settled. Deferred tax assets are reduced by a valuation allowance only when management believes itis more likely than not that some, or all, of the deferred tax assets will not be realized.GoodwillGoodwill is tested annually for impairment in the fourth quarter of each calendar year, or more frequently ifevents or changes in circumstances indicate that the carrying amount of the Company’s reporting units,including goodwill, may exceed their fair values. The Company first assesses qualitative factors in determiningwhether it is necessary to perform the quantitative goodwill impairment test. Only if management determinesthat it is more likely than not that the fair value of a reporting unit is less than the carrying value based onqualitative factors would it be required to perform the quantitative goodwill impairment test. If managementconcludes that quantitative goodwill impairment testing is required, the fair value of the reporting units isdetermined using a combination of a market approach and an income approach which projects the future cashflows produced by the reporting units and discounts those cash flows to their present value. The projection offuture cash flows is necessarily dependent upon assumptions on the future levels of income as well as businesstrends, prospects, market, and economic conditions. The results of the two approaches are weighted to determinethe fair value of each reporting unit. When the fair value is less than the carrying value of the net assets of thereporting unit, including goodwill, an impairment loss is charged to operations. To determine the amount of anygoodwill impairment, the implied fair value of reporting unit goodwill is compared to the carrying amount ofthat goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwillrecognized in a business combination is determined. That is, the fair value of a reporting unit is assigned to all ofthe assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit hadbeen acquired in a business combination. The excess of the fair value of a reporting unit over the amountsassigned to its assets and liabilities is the implied fair value of goodwill.Intangible Assets, NetIntangible assets are initially recognized and measured at fair value. Specifically identified intangibleassets with indefinite lives include trademarks and state insurance licenses and authorities. Other specificallyidentified intangible assets with lives ranging from 7.0 to 27.5 years represent relationships with brokers. Theseintangible assets are amortized on a straight-line basis over their estimated useful lives.F-121.Accounting Policies (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 Intangible assets with indefinite useful lives are reviewed for impairment at least annually. In evaluatingwhether there has been impairment to the intangible asset, management determines the fair value of theintangible asset and compares the resulting fair value to the carrying value of the intangible asset. If the carryingvalue exceeds the fair value, the intangible asset is written down to fair value, and the impairment is reportedthrough earnings. The Company evaluates intangible assets with definite lives for impairment when impairmentindicators are noted.Impairment of Long-Lived AssetsLong-lived assets with finite lives are tested for impairment whenever recognized events or changes incircumstances indicate the carrying value of these assets may not be recoverable. If indicators of impairment arepresent, fair value is calculated using estimated future cash flows expected to be generated from the use of thoseassets. An impairment loss is recognized only if the carrying amount of a long-lived asset or asset group is notrecoverable and exceeds its fair value. The carrying amount of a long-lived asset or asset group is notrecoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventualdisposition of the asset or asset group. That assessment is based on the carrying amount of the asset or assetgroup at the date it is tested for recoverability. An impairment loss is measured as the amount by which thecarrying amount of a long-lived asset or asset group exceeds its fair value.Property and Equipment, NetProperty and equipment, which is included in “other assets” in the accompanying consolidated balancesheets, is reported at cost less accumulated depreciation and is depreciated principally on a straight-line basisover the estimated useful lives of the depreciable assets, generally three to ten years.In the event the Company has been deemed the owner for accounting purposes of construction projects inlease arrangements, the estimated construction costs incurred to date are recorded as assets in property andequipment, net and included in “other assets” in the accompanying consolidated balance sheets. Uponoccupancy of facilities under lease, the Company assesses whether arrangements qualify for sales recognitionunder the sale-leaseback accounting guidance. If the Company continues to be the deemed owner for accountingpurposes, the cost of the building is depreciated over its estimated useful life.Reserve for Losses and Loss Adjustment ExpensesThe reserve for losses and loss adjustment expenses represents the estimated ultimate cost of all reportedand unreported losses and loss adjustment expenses incurred and unpaid at the balance sheet date. TheCompany does not discount this reserve. The process of estimating the reserves for losses and loss adjustmentexpenses requires a high degree of judgment and is subject to a number of variables. The reserve for losses andloss adjustment expenses is estimated using individual case-basis valuations and statistical analyses. Thoseestimates are subject to the effects of trends in loss severity and frequency.The Company utilizes various actuarially-accepted reserving methodologies in determining the continuumof expected outcomes for its reserves. These methodologies utilize various inputs, including management’sinitial expected loss ratio (the ratio of losses and loss adjustment expenses incurred to net earned premiums),expected reporting patterns and payment patterns for losses and loss adjustment expenses (based on insuranceindustry data and the Company’s own experience), and the Company’s actual paid and reported losses and lossadjustment expenses. An internal actuary reviews these results and (after applying appropriate professionaljudgment and other actuarial techniques that are considered necessary) presents recommendations to theCompany’s management. Management uses this information and its judgment to make decisions on the finalrecorded reserve for losses and loss adjustment expenses. Management believes that the use of judgment isnecessary to arrive at a best estimate for the reserve forF-131.Accounting Policies (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 losses and loss adjustment expenses given the long-tailed nature of the business generally written by theCompany and the limited operating experience of the Casualty Reinsurance segment and of the program andfronting business in the Specialty Admitted Insurance segment.Catastrophes of significant magnitude, including hurricanes and earthquakes, involve complex coverageissues. In estimating the reserve for losses and loss adjustment expenses for these catastrophes, management usescase reserve estimates based on information obtained from site inspections by the Company’s adjustors and theterms of coverage provided in the policies. Management estimates reserves for incurred but not reported claimsfor these catastrophes using judgment based on an assessment of the Company’s property insurance exposureswhere the catastrophes occur and the Company’s progress in settling claims.Although management believes that the reserve for losses and loss adjustment expenses is reasonable, it ispossible that the Company’s actual incurred losses and loss adjustment expenses will not develop in a mannerconsistent with the assumptions inherent in the determination of these reserves. Specifically, the Company’sactual ultimate loss ratio could differ from management’s initial expected loss ratio and/or the Company’s actualreporting patterns for losses could differ from the expected reporting patterns. Accordingly, the ultimatesettlement of losses and the related loss adjustment expenses may vary significantly from the estimates includedin the Company’s consolidated financial statements. These estimates are reviewed continually by managementand are adjusted as necessary as experience develops or new information becomes known; such adjustments areincluded in current operations.Share Based CompensationThe Company expenses the fair value of share equity awards over the vesting period of the award on astraight-line basis. The Black-Scholes-Merton option pricing model is used to value the options granted (seeNote 11). As the share based compensation expense is incurred, a corresponding increase to additional paid-incapital in shareholders’ equity is recognized. Share based compensation expense is reflected in “other operatingexpenses” in the accompanying consolidated statements of income and comprehensive income.Financing ObligationsIn a lease arrangement where the Company made a minority investment in a partnership that was involvedin the construction of a building, the Company was deemed the owner for accounting purposes during theconstruction period. The Company recorded an asset for the amount of the total project costs and the relatedfinancing obligation is included in “other liabilities” in the accompanying consolidated balance sheets. Onceconstruction was completed, the Company determined the arrangement did not qualify for sale-lease backtreatment. Accordingly, the Company continues to reduce the obligation over the lease term as payments aremade and depreciates the asset over its useful life. The Company does not report rent expense for the portion ofthe rent payment determined to be related to the assets which are owned for accounting purposes. Rather, thisportion of the rent payment under the lease is recognized as a reduction of the financing obligation and asinterest expense.Variable Interest EntitiesEntities that do not have sufficient equity at risk to allow the entity to finance its activities withoutadditional financial support or in which the equity investors, as a group, do not have the characteristic of acontrolling financial interest are referred to as variable interest entities (“VIE”). A VIE is consolidated by thevariable interest holder that is determined to have the controlling financial interest (primary beneficiary) as aresult of having both the power to direct the activities of a VIE that most significantly impact the VIE’sF-141.Accounting Policies (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 economic performance and the obligation to absorb losses or right to receive benefits from the VIE that couldpotentially be significant to the VIE. The Company determines whether it is the primary beneficiary of an entitysubject 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 VIEon the date it becomes initially involved in the VIE. The Company reassesses its VIE determination with respectto an entity on an ongoing basis.The Company holds interests in VIEs through certain equity method investments included in “otherinvested assets” in the accompanying consolidated balance sheets. The Company has determined that it shouldnot consolidate any of the VIEs as it is not the primary beneficiary in any of the relationships. Although theinvestments resulted in the Company holding variable interests in the entities, they did not empower theCompany to direct the activities that most significantly impact the economic performance of the entities. TheCompany’s investments related to these VIEs totaled $26.0 million and $25.1 million as of December 31, 2015and 2014, respectively, representing the Company’s maximum exposure to loss.Earnings Per ShareBasic earnings per share excludes dilution and is computed by dividing income available to commonshareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings pershare reflects the dilution that could occur if securities or other contracts to issue common shares or commonshare equivalents were exercised or converted into common shares as calculated using the treasury stockmethod. When inclusion of common share equivalents increases the earnings per share or reduces the loss pershare, the effect on earnings is anti-dilutive, and the diluted net earnings or net loss per share is computedexcluding these common share equivalents.The following represents a reconciliation of the numerator and denominator of the basic and dilutedearnings per share computations contained in the consolidated financial statements.Income (Numerator)Weighted-Average Common Shares (Denominator)Earnings Per Share(in thousands, except per share data)Year ended December 31, 2015Basic$53,49728,662,051$1.87Common share equivalents—672,867(0.05Diluted$53,49729,334,918$1.82Year ended December 31, 2014Basic$44,68528,540,350$1.57Common share equivalents—269,951(0.02Diluted$44,68528,810,301$1.55Year ended December 31, 2013Basic$67,33730,442,950$2.21Common share equivalents—57,850—Diluted$67,33730,500,800$2.21Common share equivalents relate to our stock options and restricted stock units (“RSU’s”).For the year ended December 31, 2015, all common share equivalents are dilutive. For the years endedDecember 31, 2014, and 2013, common share equivalents of 1,358,992 shares and 25,000 shares, respectively,are excluded from the calculations of diluted earnings per share as their effects are anti-dilutive.F-15))1.Accounting Policies (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 Prospective Accounting StandardsIn May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue fromContracts with Customers (Topic 606), which creates a new comprehensive revenue recognition standard thatwill serve as a single source of revenue guidance for all companies in all industries. The guidance applies to allcompanies that either enter into contracts with customers to transfer goods or services or enter into contracts forthe transfer of nonfinancial assets, unless those contracts are within the scope of other standards, such asinsurance contracts. Under this guidance, a company will recognize revenue when it transfers promised goods orservices to customers in an amount that reflects the consideration to which the company expects to be entitled inexchange for those goods or services. In doing so, companies will need to use more judgment and make moreestimates than under the current guidance. These may include identifying performance obligations in thecontract, estimating the amount of variable consideration to include in the transaction price and allocating thetransaction price to each separate performance obligation. ASU No. 2014-09 becomes effective for the Companyduring the first quarter of 2018 and must be applied retrospectively. The Company is currently evaluating ASUNo. 2014-09 to determine the potential impact that adopting this standard will have on its consolidatedfinancial statements.In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to theConsolidation Analysis. ASU 2015-02 changes the analysis that a reporting entity must perform to determinewhether entities should be consolidated if they are deemed variable interest entities. It is effective for annualreporting periods, and interim periods within those years, beginning after December 15, 2015. The Company iscurrently evaluating the impact of the adoption of ASU 2015-02, but adoption is not expected to have a materialeffect on its consolidated financial statements.In May 2015, the FASB issued ASU 2015-09, Insurance (Topic 944), Disclosures about Short-DurationContracts. ASU 2015-09 requires additional disclosures about short-duration contracts. The disclosures willfocus on the liability for the reserves for losses and loss adjustment expenses. ASU 2015-09 is effective forannual periods beginning after December 15, 2015 and interim periods within annual periods beginning afterDecember 15, 2016. The Company is currently evaluating the impact of the adoption of ASU 2015-09 on itsconsolidated financial statements.F-162.InvestmentsTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 The Company’s available-for-sale investments are summarized as follows:Cost or Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value(in thousands)December 31, 2015Fixed maturity securities:State and municipal$95,864$7,728$(135$103,457Residential mortgage-backed137,3081,718(2,139136,887Corporate368,9613,988(9,781363,168Commercial mortgage and asset-backed130,231890(425130,696Obligations of U.S. government corporations and agencies89,734698(26990,163U.S. Treasury securities and obligations guaranteed by the U.S. government73,322165(23273,255Redeemable preferred stock2,0259—2,034Total fixed maturity securities897,44515,196(12,981899,660Equity securities69,8305,512(1,23174,111Total investments available-for-sale$967,275$20,708$(14,212$973,771December 31, 2014Fixed maturity securities:State and municipal$90,715$8,509$(178$99,046Residential mortgage-backed113,9972,661(1,409115,249Corporate261,5748,742(2,434267,882Commercial mortgage and asset-backed111,0562,429(144113,341Obligations of U.S. government corporations and agencies100,3761,431(532101,275U.S. Treasury securities and obligations guaranteed by the U.S. government58,173289(19358,269Redeemable preferred stock2,025—(1241,901Total fixed maturity securities737,91624,061(5,014756,963Equity securities64,3485,182(1,62567,905Total investments available-for-sale$802,264$29,243$(6,639$824,868The amortized cost and fair value of available-for-sale investments in fixed maturity securities atDecember 31, 2015 are summarized, by contractual maturity, as follows:Amortized CostFair Value(in thousands)One year or less$86,769$87,096After one year through five years289,078286,135After five years through ten years115,835115,459After ten years136,199141,353Residential mortgage-backed137,308136,887Commercial mortgage and asset-backed130,231130,696Redeemable preferred stock2,0252,034Total$897,445$899,660Actual maturities may differ for some securities because borrowers have the right to call or prepayobligations with or without penalties.F-17)))))))))))))))))))2.Investments (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 The following table shows the Company’s gross unrealized losses and fair value for available-for-salesecurities aggregated by investment category and the length of time that individual securities have been in acontinuous unrealized loss position:Less Than 12 Months12 Months or MoreTotalFair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses(in thousands)December 31, 2015Fixed maturity securities:State and municipal$9,492$(135$—$—$9,492$(135Residential mortgage-backed39,895(46540,656(1,67480,551(2,139Corporate177,149(5,2816,433(4,500183,582(9,781Commercial mortgage and asset-backed74,518(33911,437(8685,955(425Obligations of U.S. governmentcorporations and agencies43,907(2314,012(3847,919(269U.S. Treasury securities and obligationsguaranteed by the U.S. government49,452(2132,186(1951,638(232Total fixed maturity securities394,413(6,66464,724(6,317459,137(12,981Equity securities4,196(1725,704(1,0599,900(1,231Total investments available-for-sale$398,609$(6,836$70,428$(7,376$469,037$(14,212December 31, 2014Fixed maturity securities:State and municipal$3,197$(176$247$(2$3,444$(178Residential mortgage-backed2,072(247,594(1,40749,666(1,409Corporate25,885(23522,353(2,19948,238(2,434Commercial mortgage and asset-backed23,894(1188,742(2632,636(144Obligations of U.S. governmentcorporations and agencies202—48,029(53248,231(532U.S. Treasury securities and obligationsguaranteed by the U.S. government13,055(2419,383(16932,438(193Redeemable preferred stock—–1,901(1241,901(124Total fixed maturity securities68,305(555148,249(4,459216,554(5,014Equity securities1,361(20510,621(1,42011,982(1,625Total investments available-for-sale$69,666$(760$158,870$(5,879$228,536$(6,639The Company held available-for-sale securities of 113 issuers that were in an unrealized loss position atDecember 31, 2015 with a total fair value of $469.0 million and gross unrealized losses of $14.2 million. Noneof the fixed maturity securities with unrealized losses has ever missed, or been delinquent on, a scheduledprincipal or interest payment.F-18))))))))))))))))))))))))))))))))))))))))))))))))))))))2.Investments (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 At December 31, 2015, 86.6% of the Company’s fixed maturity security portfolio was rated “A-” or betterby Standard & Poor’s or received an equivalent rating from another nationally recognized rating agency. Fixedmaturity securities with ratings below investment grade by Standard & Poor’s or another nationally recognizedrating agency at December 31, 2015 had an aggregate fair value of $9.4 million and an aggregate net unrealizedloss of $5.2 million.The Company previously held two municipal bonds issued by the Commonwealth of Puerto Rico. PuertoRico’s weak economic conditions and heavy debt burden heightened the risk of default on the bonds andmanagement concluded that the bonds, which had been downgraded to below investment grade, were other-than-temporarily impaired at June 30, 2014. The Company recognized impairment losses of $660,000 and $1.4million on these bonds for the years ended December 31, 2015, and 2014, respectively. There was no suchimpairment on these bonds at December 31, 2013. The bonds were sold during the second quarter of 2015 and anet realized gain of $22,000 was recognized on the sales.Management concluded that none of the other fixed maturity securities with an unrealized loss atDecember 31, 2015, 2014, and 2013 experienced an other-than-temporary impairment. Management does notintend to sell available-for-sale securities in an unrealized loss position, and it is not “more likely than not” thatthe Company will be required to sell these securities before a recovery in their value to their amortized cost basisoccurs. Management also concluded that none of the equity securities with an unrealized loss at December 31,2015 and 2014 experienced an other-than-temporary impairment. Management concluded that one of the equitysecurities with an unrealized loss at December 31, 2013 experienced an other-than-temporary impairment, andaccordingly, the Company recorded an impairment loss of $804,000 in 2013. Management concluded that theremaining equity securities with an unrealized loss at December 31, 2013 had not experienced an other-than-temporary impairment. Management has evaluated the near-term prospects of these equity securities in relationto the severity and duration of the impairment, and management has the ability and intent to hold thesesecurities until a recovery of their fair value.Bank loan participations generally 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 debtrated “BB”, “B”, or “CCC” by Standard & Poor’s or an equivalent rating from another nationally recognizedrating agency. These bank loans include assignments of, and participations in, performing and non-performingsenior corporate debt generally acquired through primary bank syndications and in secondary markets. Bankloans 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 loanswere acquired that the Company would be able to collect all contractually required payments receivable.The Company holds participations in two loans maturing in 2016 and 2017, that were issued by companiesthat produce and supply power to Puerto Rico through power purchase agreements with Puerto Rico ElectricPower Authority (“PREPA”), a public corporation and governmental agency of the Commonwealth of PuertoRico. PREPA’s credit strength and ability to make timely payments has been impacted by the economicconditions in Puerto Rico, thus raising doubt about the companies’ ability to meet the debt obligations held bythe Company. Management concluded that the loans were impaired at December 31, 2014 and established anallowance for credit losses on the loans of $752,000. After recording this impairment, these loans had a carryingvalue of $7.1 million at December 31, 2014 and unpaid principal of $8.4 million. At December 31, 2015, theallowance for credit losses on these loans was $414,000. The loans had a carrying value of $3.9 million atDecember 31, 2015 and unpaid principal of $4.6 million. There was no such impairment on these loans atDecember 31, 2013.A number of the Company’s bank loans are to oil and gas companies in the energy sector. The marketvalues of these loans declined significantly in the fourth quarter of 2014 in response to declining energyF-192.Investments (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 prices. The declines in market values continued into 2015 and, after discussions with our independentinvestment manager, management decided to sell certain energy sector loans where there was an increased riskassociated with the issuer’s ability to meet all principal and interest obligations as they became due. AtDecember 31, 2015, the Company’s remaining oil and gas exposure in the bank loan portfolio was in eight loanswith a carrying value of $15.8 million and an unrealized loss of $4.1 million. All of these loans are current atDecember 31, 2015. Management concluded that two of these loans were impaired as of December 31, 2015, andaccordingly, an allowance for credit losses of $3.9 million was established on the loans. After recording thisimpairment, the loans had a carrying value of $1.7 million at December 31, 2015 and unpaid principal of $5.8million. Management also concluded that one non-energy sector loan held at December 31, 2015 was impairedand an allowance for credit losses of $34,000 was established on the loan. After recording this impairment, theloan had a carrying value of $689,000 at December 31, 2015 and unpaid principal of $722,000. There was noallowance for credit losses on these loans at December 31, 2014, or 2013.At December 31, 2013, investments in bank loan participations considered impaired were $246,000, net ofthe related allowance for credit losses on such bank loan participations of $242,000. The unpaid principalbalance on these bank loan participations was $488,000 at December 31, 2013.The average recorded investment in impaired bank loans was $6.7 million, $3.7 million, and $307,000,during the years ended December 31, 2015, 2014, and 2013, respectively, and investment income of $229,000,$106,000, and $32,000, was recognized during the time that the loans were impaired. The Company recordedrealized losses of $3.4 million, $607,000, and $121,000 during the years ended December 31, 2015, 2014, and2013, respectively, for changes in the fair value of impaired bank loans.At December 31, 2015, unamortized discounts on bank loan participations were $7.1 million, andunamortized premiums on bank loan participations were $35,000. At December 31, 2014, unamortized discountson bank loan participations were $3.8 million, and unamortized premiums on bank loan participations were$26,000.F-202.Investments (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 Major categories of the Company’s net investment income are summarized as follows:Year Ended December 31,201520142013(in thousands)Fixed maturity securities$24,178$22,861$24,896Bank loan participations13,43213,80914,406Equity securities4,4444,1034,308Other invested assets5,9475,6905,123Cash, cash equivalents, short-term investments, and other672116120Trading losses(9(32(226Gross investment income48,66446,54748,627Investment expense(3,829(3,542(3,254Net investment income$44,835$43,005$45,373Changes in unrealized gains or losses on securities held for trading are recorded as trading gains or losseswithin net investment income. Net investment income for the year ended December 31, 2015 included $9,000 ofnet trading losses of which $7,000 of net trading losses related to securities still held at December 31, 2015. Netinvestment income for the year ended December 31, 2014 included $32,000 of net trading losses of which$60,000 of net trading losses related to securities still held at December 31, 2014. Net investment income for theyear ended December 31, 2013 included $226,000 of net trading losses of which $180,000 of net trading lossesrelated to securities still held at December 31, 2013.The Company’s realized gains and losses on investments are summarized as follows:Year Ended December 31,201520142013(in thousands)Fixed maturity securities:Gross realized gains$2,197$522$14,347Gross realized losses(826(1,502(2,8231,371(98011,524Equity securities:Gross realized gains1,0418813Gross realized losses(10(842(8041,031(754(791Bank loan participations:Gross realized gains1,2692,1782,549Gross realized losses(8,258(1,211(675(6,9899671,874Short-term investments and other:Gross realized gains541,37112Gross realized losses(14(1,940—40(56912Total$(4,547$(1,336$12,619F-21))))))))))))))))))))))))2.Investments (continued) (a)The Company’s Corporate and Other segment owns equity interests ranging from 2.7% to 33.3% in variousLLCs whose principal objective is capital appreciation and income generation from owning and operatingrenewable energy production facilities (wind and solar). The LLCs are managed by an affiliate of theCompany’s largest shareholder and the Company’s Chairman and Chief Executive Officer has invested incertain of these LLCs. The equity method is used to account for the Company’s LLC investments. Incomefor the LLCs primarily reflects adjustments to the carrying values of investments in renewable energyprojects to their determined fair values. The fair value adjustments are included in revenues for the LLCs.Expenses for the LLCs are not significant and are comprised of administrative and interest expenses. TheCompany received cash distributions from these investments totaling $3.1 million and $3.9 million for theyears ended December 31, 2015 and 2014, respectively. In March 2014, the Company sold its interest inone of the LLCs for $5.9 million and a $1.9 million realized loss was recognized on the sale. Prior to thesale, investment income of $3.6 million was recognized on this investment in the three months endedMarch 31, 2014.(b)The Company owns investments in bridge loans for renewable energy projects. The notes, all with affiliatesof the Company’s largest shareholder, generally mature in less than one year and carry primarily variablerates of interest ranging from 7.3% to 15.0%. Original discounts and commitment fees received arerecognized over the terms of the notes under the effective interest method. During the year endedDecember 31, 2015, the Company invested a total of $36.3 million in these notes and received maturitiesand repayments totaling $30.8 million.TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 The following table summarizes the change in the Company’s available-for-sale gross unrealized gains orlosses by investment type:Year Ended December 31,201520142013(in thousands)Change in gross unrealized gains (losses):Fixed maturity securities$(16,832$10,765$(41,677Equity securities7243,879(6,281Total$(16,108$14,644$(47,958The Company invests selectively in private debt and equity opportunities. These investments, whichtogether comprise the Company’s other invested assets, are primarily focused in renewable energy, limitedpartnerships, and bank holding companies.Investment IncomeCarrying ValueYear Ended December 31,December 31,20152014201520142013(in thousands)(in thousands)Category:Renewable energy LLCs$26,001$25,119$3,936$5,234$4,310Renewable energy bridge financing notes6,500—3,136——Limited partnerships17,5034,003(1,468(128131Bank holding companies4,5004,500343400275Other ———184407Total other invested assets$54,504$33,622$5,947$5,690$5,123F-22)))))(a)(b)(c)))(d)(e)2.Investments (continued) (c)The Company owns investments in limited partnerships that invest in concentrated portfolios of high yieldbonds of companies undergoing financial stress, publicly-traded small cap equities, loans of middle marketprivate equity sponsored companies, and equity tranches of collateralized loan obligations (CLOs). Incomefrom the partnerships is recognized under the equity method of accounting. The Company’s Corporate andOther segment held investments in limited partnerships of $2.2 million and $4.0 million at December 31,2015 and 2014, and recognized investment losses of $510,000 and $128,000 for the years ended December31, 2015 and 2014, respectively, and investment income of $131,000 for the year ended December 31,2013. The Chairman and Chief Executive Officer of the Company is an investor in one limited partnershipheld by the Corporate & Other segment. The Company’s Excess and Surplus Lines segment holdsinvestments in limited partnerships of $15.3 million at December 31, 2015. Investment losses of $958,000were recognized on the investments for the year ended December 31, 2015. At December 31, 2015, theCompany’s Excess and Surplus Lines segment has an outstanding commitment to invest another $3.6million in a limited partnership that invests in loans of middle market private equity sponsored companies.(d)Net investment income for the years ended December 31, 2014 and 2013 includes $57,000 and $143,000,respectively, related to a previously held equity investment in a bank holding company (“PredecessorBank Holding Company”). On July 4, 2014, the Predecessor Bank Holding Company merged with and intoanother bank holding company (the “Surviving Bank Holding Company”). In exchange for its shares of thePredecessor Bank Holding Company, the Company received $354,000 in cash and $6.4 million of commonshares in the Surviving Bank Holding Company, and the realized investment gain on the exchange was$1.4 million. The common shares of the Surviving Bank Holding Company are carried as available for-saleequity securities as they are publicly-traded and the Company does not have significant influence over theSurviving Bank Holding Company.(e)For the years ended December 31, 2014 and 2013, income of $184,000 and $415,000, respectively, wasrecognized on a $3.3 million note agreement with two property development companies. The note, whichcarried a fixed interest rate of 11.10%, was repaid in full on July 3, 2014. The Bank Holding Company alsoentered into note agreements with the same property development companies.TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 The Company also holds $4.5 million of subordinated notes issued by a company that was substantiallyowned by the Predecessor Bank Holding Company (the “Bank Affiliate”). The $4.5 million of subordinatednotes issued by the Bank Affiliate became debt of the Surviving Bank Holding Company. Interest on thenotes, which mature on August 12, 2023, is fixed at 7.6% per annum. Interest income on the notes was$343,000 in both years ended December 31, 2015 and 2014.The Chairman and Chief Executive Officer of the Company previously served as Chairman of thePredecessor Bank Holding Company and the Bank Affiliate. Effective July 4, 2014, the Company’sChairman and Chief Executive Officer became the Lead Independent Director of the Surviving BankHolding Company. The Chairman and Chief Executive Officer of the Company is a former investor in thePredecessor Bank Holding Company and is now an investor in the Surviving Bank Holding Company.Additionally, one of the Company’s directors is a former investor in the Bank Holding Company and isnow an investor in the Surviving Bank Holding Company. In addition, this director was a lender to theBank Affiliate and is now a lender to the Surviving Bank Holding Company. The Company’s ChiefFinancial Officer is a former investor in the Predecessor Bank Holding Company and the Surviving BankHolding Company.On December 19, 2014, the Company purchased a $1.0 million certificate of deposit issued by theSurviving Bank Holding Company. The certificate of deposit, which matures on December 19, 2016, is carriedas a short-term investment. Interest income of $5,000 was recognized on this investment for the year endedDecember 31, 2015.F-232.Investments (continued) 3.Deferred Policy Acquisition Costs4.Goodwill and Intangible AssetsTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 Two of the Company’s directors are also directors of First Wind Capital, LLC (“First Wind”), which is anaffiliate of the Company’s largest shareholder. At December 31, 2014, the Company held fixed maturitysecurities with a fair value of $12.6 million issued by First Wind. These securities were called in March 2015,resulting in a realized gain of $845,000. Also at December 31, 2014, the Company held a bank loanparticipation with a carrying value of $4.6 million from an affiliate of First Wind. The loan was repaid in full inJanuary 2015.The Company maintains fixed maturity securities, short-term investments, and cash and cash equivalentsamounting to $401.1 million at December 31, 2015 in trust accounts or on deposit as collateral for outstandingletters of credit issued as security to third-party reinsureds on reinsurance assumed by JRG Re.At December 31, 2015 and 2014, investments with a fair value of $16.2 million and $16.0 million,respectively, were on deposit with state insurance departments to satisfy regulatory requirements.At December 31, 2015, the Company held no investments in securitizations of alternative-A mortgages orsub-prime mortgages.An analysis of deferred policy acquisition costs is as follows:Year Ended December 31,201520142013(in thousands)Balance at beginning of period$60,202$46,204$49,336Policy acquisition costs deferred:Commissions90,34293,64663,958Underwriting and other issue expenses7,9605,5354,55898,30299,18168,516Amortization of policy acquisition costs(97,750(85,183(71,648Net change55213,998(3,132Balance at end of period$60,754$60,202$46,204On December 11, 2007, the Company completed an acquisition of James River Group by acquiring 100%of the outstanding shares of James River Group common stock, referred to herein as the “Merger”. Thetransaction was accounted for under the purchase method of accounting, and goodwill and intangible assetswere recognized by the Company as a result of the transaction.All of the Company’s goodwill is an asset of the Excess and Surplus Lines segment. The Company’s annualtesting performed in the fourth quarter of 2015, 2014 and 2013 indicated that no impairment of goodwill hadoccurred. The carrying amount of goodwill at December 31, 2015 and 2014 was $181.8 million. Accumulatedgoodwill impairment losses were $99.6 million at December 31, 2015 and 2014.Specifically identifiable intangible assets were acquired in the Merger. During the fourth quarters of 2015,2014 and 2013, the indefinite-lived intangible assets for trademarks and insurance licenses and authorities weretested for impairment. Intangible assets for customer and broker relationships that have specific lives and aresubject to amortization were also reviewed for impairment. There were no impairments recognized in 2015,2014, or 2013.F-24))))4.Goodwill and Intangible Assets (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 The gross carrying amounts and accumulated amortization for each major specifically identifiableintangible asset class were as follows:Weighted-Average Life (Years)December 31,20152014Gross Carrying AmountAccumulated AmortizationGross Carrying AmountAccumulated Amortization(in thousands)TrademarksIndefinite$22,200$—$22,200$—Insurance licenses and authoritiesIndefinite9,164—9,164—Identifiable intangibles not subject toamortization31,364—31,364—Broker relationships24.611,6113,44711,6112,850Identifiable intangible assets subject toamortization11,6113,44711,6112,850$42,975$3,447$42,975$2,850Future estimated amortization of specifically identifiable intangible assets as of December 31, 2015 is asfollows (in thousands):2016$5972017597201859720195972020538Thereafter5,237Total$8,163The table below summarizes the changes in the net carrying values of intangible assets by segment for2015:December 31, 2014 Net Carrying ValueAmortizationImpairment LossesDecember 31, 2015 Net Carrying Value(in thousands)Excess and Surplus LinesTrademarks$19,700$—$ —$19,700Insurance licenses and authorities4,900——4,900Broker relationships7,413(362—7,05132,013(362—31,651Specialty Admitted InsuranceTrademarks2,500——2,500Insurance licenses and authorities4,265——4,265Broker relationships1,347(235—1,1128,112(235—7,877Total identifiable intangible assets$40,125$(597$—$39,528F-25)))))4.Goodwill and Intangible Assets (continued) 5.Property and Equipment, NetTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 The table below summarizes the changes in the net carrying values of intangible assets by segment for2014:December 31, 2013 Net Carrying ValueAmortizationImpairment LossesDecember 31, 2014 Net Carrying Value(in thousands)Excess and Surplus LinesTrademarks$19,700$—$—$19,700Insurance licenses and authorities4,900——4,900Broker relationships7,775(362—7,41332,375(362—32,013Specialty Admitted InsuranceTrademarks2,500——2,500Insurance licenses and authorities4,265——4,265Broker relationships1,582(235—1,3478,347(235—8,112Total identifiable intangible assets$40,722$(597$—$40,125Amortization of intangible assets was $2.3 million for the Excess and Surplus Lines segment and $168,000for the Specialty Admitted Insurance segment for the year ended December 31, 2013.Property and equipment, net of accumulated depreciation, consists of the following:December 31,20152014(in thousands)Building, leased for which the Company has been deemed the owner foraccounting purposes (Note 22)$29,940$29,917Electronic data processing hardware and software3,4813,353Furniture and equipment2,1831,893Property and equipment, cost basis35,60435,163Accumulated depreciation(11,615(10,186Property and equipment, net$23,989$24,977F-26)))))))6.Reserve for Losses and Loss Adjustment ExpensesTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 The following table provides a reconciliation of the beginning and ending reserve balances for losses andloss adjustment expenses, net of reinsurance, to the gross amounts reported in the consolidated balance sheets:Year Ended December 31,201520142013(in thousands)Reserve for losses and loss adjustment expenses net of reinsurancerecoverables at beginning of period$589,042$526,985$533,909Add: Incurred losses and loss adjustment expenses net of reinsurance:Current year295,334264,786221,938Prior years(16,318(27,418(37,452Total incurred losses and loss and adjustment expenses279,016237,368184,486Deduct: Loss and loss adjustment expense payments net of reinsurance:Current year31,95725,94219,485Prior years182,567149,369171,925Total loss and loss adjustment expense payments214,524175,311191,410Reserve for losses and loss adjustment expenses net of reinsurancerecoverables at end of period653,534589,042526,985Add: Reinsurance recoverables on unpaid losses and loss adjustmentexpenses at end of period131,788127,254119,467Reserve for losses and loss adjustment expenses gross of reinsurancerecoverables on unpaid losses and loss adjustment expenses at end ofperiod$785,322$716,296$646,452The foregoing reconciliation shows that a $16.3 million redundancy developed in 2015 on the reserve forlosses and loss adjustment expenses held at December 31, 2014. This favorable reserve development included$25.4 million of favorable development in the Excess and Surplus Lines segment. The Excess and Surplus Linessegment favorable development included $17.3 million of favorable development from the 2014 accident year,and $10.5 million of favorable development from the 2013 accident year. This favorable development occurredbecause our actuarial studies at December 31, 2015 for the Excess and Surplus Lines segment indicated that ourloss experience for our shorter-tailed general casualty division book for the 2014 accident year is below ourinitial expected ultimate loss ratios. The actuarial studies at December 31, 2015 also showed that the experienceon our other casualty business continues to be below our initial expected ultimate loss ratios. Favorable reservedevelopment written in the Specialty Admitted Insurance segment was $3.5 million and primarily came fromaccident years 2011 through 2013, as losses on our workers’ compensation business written prior to 2014continued to develop more favorably than we had anticipated. In addition, $12.6 million of adversedevelopment occurred in the Casualty Reinsurance segment, with a majority of this adverse developmentcoming from three reinsurers principally in the 2011, 2012, and 2013 underwriting years that experienced higherloss development in 2015 than expected.The foregoing reconciliation shows that a $27.4 million redundancy developed in 2014 on the reserve forlosses and loss adjustment expenses held at December 31, 2013. This favorable reserve development included$27.3 million of favorable development in the Excess and Surplus Lines segment. The Excess and Surplus Linessegment favorable development included $7.9 million of favorable development from the 2011 accident year,$5.0 million of favorable development from the 2009 accident year, and $4.2 million of favorable developmentfrom the 2007 accident year. This favorable development occurred because ourF-27)))6.Reserve for Losses and Loss Adjustment Expenses (continued) 7.ReinsuranceTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 actuarial studies at December 31, 2014 for the Excess and Surplus Lines segment indicated that our lossexperience on our maturing casualty business continues to be below our initial expected ultimate loss ratios.Favorable reserve development written in the Specialty Admitted Insurance segment was $5.9 million andprimarily came from accident years 2007 through 2012, as losses on our workers’ compensation business writtenprior to 2013 continued to develop more favorably than we had anticipated. In addition, $5.7 million of adversedevelopment occurred in the Casualty Reinsurance segment, with a majority of this adverse developmentcoming from one reinsurance relationship from the 2011 underwriting year that experienced higher lossdevelopment in 2014 than expected.The foregoing reconciliation shows that a $37.5 million redundancy developed in 2013 on the reserve forlosses and loss adjustment expenses held at December 31, 2012. This favorable reserve development included$40.7 million of favorable development in the Excess and Surplus Lines segment, including $11.7 million offavorable development on casualty lines from the 2009 accident year, $7.5 million of favorable developmentfrom the 2007 accident year, and $5.7 million of favorable development from the 2008 accident year. Thisfavorable development occurred because our actuarial studies at December 31, 2013 for the Excess and SurplusLines segment indicated that our loss experience on our maturing casualty business continues to be below ourinitial expected ultimate loss ratios. Favorable reserve development on direct business written in the SpecialtyAdmitted Insurance segment was $1.4 million, including favorable development of $1.3 million from the 2012accident year. In addition, $4.7 million of adverse development occurred in the Casualty Reinsurance segment,with $1.0 million of adverse development on assumed crop business from the 2012 and 2011 accident years and$3.7 million of adverse development on other assumed business, primarily from the 2011 accident year.The Company has not provided insurance coverage that could reasonably be expected to produce materiallevels of asbestos claims activity. In addition, management does not believe that the Company is exposed to anyenvironmental liability claims other than those which it has specifically underwritten and priced as anenvironmental exposure. Any asbestos or environmental exposure on policies issued by Fidelity Excess andSurplus Insurance Company, the predecessor to James River Insurance, prior to July 1, 2003 is subject to both areinsurance and a trust agreement (see Note 7).The Company’s insurance subsidiaries remain liable to policyholders if its reinsurers are unable to meettheir contractual obligations under applicable reinsurance agreements. To minimize exposure to significantlosses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers andmonitors concentrations of credit risk. The Company’s reinsurance contracts generally require reinsurers that arenot authorized as reinsurers under U.S. state insurance regulations or that experience rating downgrades fromrating agencies below specified levels to fund their share of the Company’s ceded outstanding losses and lossadjustment expense reserves, typically through the use of irrevocable and unconditional letters of credit. Infronting arrangements, which the Company conducts through its Specialty Admitted Insurance segment, we aresubject to credit risk with regard to insurance companies who act as reinsurers for us in such arrangements. Wecustomarily require a collateral trust arrangement to secure the obligations of the insurance entity for whom weare fronting.At December 31, 2015, the Company had reinsurance recoverables on unpaid losses of $131.8 million andreinsurance recoverables on paid losses of $11.3 million. All of these reinsurance recoverables are fromcompanies with A.M. Best Company ratings of “A-” (Excellent) or better, or are collateralized with letters ofcredit or by a trust agreement. The Company has a reinsurance agreement that is secured by a trust agreementwith American Empire Surplus Lines Insurance Company (“American Empire”) and an irrevocable andunconditional guarantee by Great American Insurance Company, an affiliate of American Empire. AtDecember 31, 2015, the fair value of assets in the trust was $695,000 and reinsurance recoverables fromAmerican Empire were $316,000.F-287.Reinsurance (continued) 8.Senior Debt•A $62.5 million secured revolving facility to be utilized by JRG Re to issue letters of credit for thebenefit of third-party reinsureds.•A $62.5 million unsecured revolving facility to meet the working capital needs of the Company. Allunpaid principal on the revolver is due at maturity. Interest accrues quarterly and is payable in arrearsat LIBOR plus a margin of 2.0%, which is subject to change according to terms in the creditagreement.TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 At December 31, 2015, reinsurance recoverables on unpaid losses from the Company’s three largestreinsurers were $33.6 million, $26.6 million, and $15.3 million, representing 57.2% of the total balance.At December 31, 2015, prepaid reinsurance premiums ceded to three reinsurers totaled $11.6 million, $7.3million, and $6.6 million, representing 57.5% of the total balance.Under the terms of a reinsurance agreement with Infinity Insurance Company in connection with theCompany’s acquisition of two “shell” insurance companies in 2011, all liabilities resulting from direct andassumed business written by the “shell” insurance companies through December 31, 2011 are ceded to InfinityInsurance Company.Premiums written, premiums earned, and losses and loss adjustment expenses incurred are summarized asfollows:Year Ended December 31,201520142013(in thousands)Written premiums:Direct$395,816$310,161$211,607Assumed176,378208,606156,911Ceded(101,162(68,684(43,352Net$471,032$450,083$325,166Earned premiums:Direct$367,340$281,676$196,351Assumed181,326178,045192,690Ceded(87,461(63,509(60,963Net$461,205$396,212$328,078Losses and loss adjustment expenses:Direct$201,755$144,178$73,948Assumed127,276118,515141,340Ceded(50,015(25,325(30,802Net$279,016$237,368$184,486On June 5, 2013, the Company closed on a three year $125.0 million senior revolving credit facility (the“Facility”). James River Group Holdings, Ltd. and JRG Re are borrowers on the Facility. A portion of theproceeds from the Facility were used to pay off the $20.0 million balance of the previous senior facility. The newFacility was initially comprised of:F-29)))))))))8.Senior Debt (continued) •assume or permit to exist any indebtedness that is secured by any encumbrance on the capital stock ofJames River Group or any of its subsidiaries which is senior to the Senior Debt; or•issue, sell, transfer or otherwise dispose of any shares of, securities convertible into, or warrants rightsor options to subscribe for or purchase shares of, capital stock of any subsidiary.9.Junior Subordinated DebtTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 The Company amended its senior revolving credit facility (the “Facility”) on September 24, 2014. Theamendment expanded the total facility to $175.0 million by increasing the unsecured portion of the revolvingfacility to $112.5 million, extended the maturity date of the facility to September 24, 2019, and modified certainother terms of the agreement including the schedule used to determine the rate of interest on borrowings underthe facility. On May 20, 2015, under a provision of the credit agreement, the Company requested, and thelenders subsequently agreed, to increase the secured revolving facility by $40.0 million to a total capacity of $102.5 million. A second amendment to the Facility on December 15, 2015 added James River UK, the newlyformed intermediate holding company, as a Guarantor in the agreement. At December 31, 2015, the Companyhad $35.1 million of letters of credit issued under the $102.5 million secured facility and a drawn balance of $73.3 million outstanding on the $112.5 million unsecured revolver. A subsidiary of the Surviving BankHolding Company is one of the lenders for the Facility, with a $12.0 million commitment allocation on the total$215.0 million facility.The Company closed on a second amendment to the senior revolving credit facility that was effectiveDecember 15, 2015, which, among other things, accommodated the organization and capitalization of anintermediate holding company in the United Kingdom. Additionally, the Company closed on a thirdamendment to the senior revolving credit facility that was effective December 30, 2015, which adjusted certainfinancial covenants. In connection with the December 15, 2015 amendment, the intermediate holding companyentered into a payment guaranty of the Company’s obligations under the senior revolving credit facility.This debt contains certain financial and other covenants with which the Company is in compliance atDecember 31, 2015.On May 26, 2004, James River Group issued $15.0 million of unsecured, floating rate senior debentures(the “Senior Debt”), due April 29, 2034 unless accelerated earlier, through an indenture. The Senior Debt is notredeemable by the holder and is not subject to sinking fund requirements. Interest accrues quarterly and ispayable in arrears at a per annum rate of the three-month LIBOR on the Determination Date (as defined in theindenture) plus 3.85%. The Senior Debt is redeemable prior to its stated maturity in whole or in part, at theoption of James River Group.The terms of the indenture generally provide that so long as the Senior Debt is outstanding, neither JamesRiver Group nor any of its subsidiaries may:James River Group is in compliance with all covenants of the indenture at December 31, 2015.Interest payable is included in “accrued expenses” in the accompanying consolidated balance sheets.The Company issued trust preferred securities (“Trust Preferred Securities”) through James River CapitalTrust I, James River Capital Trust II, James River Capital Trust III, James River Capital Trust IV, and FranklinHoldings II (Bermuda) Capital Trust I, (each, a “Trust”; collectively, the “Trusts”). These Delaware statutorytrusts are sponsored and wholly-owned by the Company. Each Trust was created solely for the purpose of issuingthe Trust Preferred Securities.Each Trust used proceeds from the sale of its Trust Preferred Securities to purchase the Company’s floatingrate junior subordinated debentures (the “Junior Subordinated Debt”) issued to the Trust under an indenture(each, an “Indenture”; collectively, the “Indentures”). The Junior Subordinated Debt is the soleF-309.Junior Subordinated Debt (continued) 10.Capital StockTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 asset of each Trust, and the Trust Preferred Securities are the sole liabilities of each Trust. The Companypurchased all of the outstanding common stock of the Trusts, and the investment in the Trusts is included in“other assets” in the accompanying consolidated balance sheets.The following table summarizes the nature and terms of the Junior Subordinated Debt and Trust PreferredSecurities:James River Capital Trust IJames River Capital Trust IIJames River Capital Trust IIIJames River Capital Trust IVFranklin Holdings II (Bermuda) Capital Trust I($ in thousands)Issue dateMay 26, 2004December 15, 2004June 15, 2006December 11, 2007January 10, 2008Principal amount of Trust Preferred Securities$7,000$15,000$20,000$54,000$30,000Principal amount of Junior Subordinated Debt$7,217$15,464$20,619$55,670$30,928Carrying amount of Junior Subordinated Debt net of repurchases$7,217$15,464$20,619$44,827$15,928Maturity date of Junior Subordinated Debt, unless accelerated earlierMay 24, 2034December 15, 2034June 15, 2036December 15, 2037March 15, 2038Trust common stock$217$464$619$1,670$928Interest rate, per annumThree-Month LIBOR plus 4.0%Three-Month LIBOR plus 3.4%Three-Month LIBOR plus 3.0%Three-Month LIBOR plus 3.1%Three-Month LIBOR plus 4.0%Redeemable at 100% of principal amount at option of the Company on or afterMay 24, 2009December 15, 2009June 15, 2011March 15, 2013June 15, 2013Interest on the Trust Preferred Securities and interest paid to the Trusts on the Junior Subordinated Debt ispayable quarterly in arrears at a per annum rate as described in the table above. The Company has the right todefer interest payments on the Junior Subordinated Debt for up to five years without triggering an event ofdefault.The Trust Preferred Securities are subject to mandatory redemption in a like amount (a) upon repayment ofall of the Junior Subordinated Debt on the stated maturity date, (b) contemporaneously with the optionalprepayment of all of the Junior Subordinated Debt in conjunction with a special event (as defined), and (c) fiveyears or more after the issue date, contemporaneously with the optional prepayment, in whole or in part, of theJunior Subordinated Debt. The Indentures contain certain covenants which the Company is in compliance withas of December 31, 2015.Interest payable is included in “accrued expenses” on the accompanying consolidated balance sheets.On November 6, 2014, the Company filed a registration statement on Form S-1 with the Securities andExchange Commission for the purpose of making an initial public offering of common stock of James RiverGroup Holdings, Ltd. (the “Offering”). On December 9, 2014, all of the Company’s Class A common shares wereconverted to common shares (the “Recapitalization”) on a 1 for 50 basis (the “Stock Split”). The Company’sauthorized share capital following the Recapitalization and the Stock Split consists ofF-3110.Capital Stock (continued) 11.Equity AwardsTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 200,000,000 common shares, par value $0.0002 per share (28,540,350 shares issued and outstanding) and20,000,000 undesignated preferred shares, par value $0.00125 per share (no shares issued or outstanding). Theaccompanying consolidated financial statements and notes to the consolidated financial statements giveretroactive effect to the Recapitalization and the Stock Split for all periods presented.2015 share activity includes issuances from stock option exercises and RSU vesting, increasing the numberof common shares outstanding to 28,941,547 at December 31, 2015.On November 20, 2013, in connection with the merger of Franklin Holdings II (Bermuda), Ltd. (“FranklinHoldings II”) into the Company, Franklin Holdings II’s sole minority shareholder transferred 6,000 FranklinHoldings II Class A common shares to the Company in exchange for the issuance of 10,350 common shares onOctober 22, 2013 (see Note 12).On April 3, 2013, the Company repurchased 7,500,000 outstanding common shares at a price per share of $14.77, for a total purchase price of $110.8 million. Of this amount, $88.6 million was paid in cash and $22.2million was paid with promissory notes. The principal amount of these promissory notes and all accrued interestamounts due were repaid in full on June 5, 2013. Interest on the notes was 2.5% per annum.The Company has 4,284,900 common shares reserved for future issuance upon exercise of equity awards.The Board of Directors declared the following cash dividends in 2015:Date of DeclarationDividend per Common SharePayable to Shareholders of Record onPayment DateTotal AmountFebruary 17, 2015$0.16March 16, 2015March 31, 2015$4.6 millionMay 5, 2015$0.16June 15, 2015June 30, 2015$4.6 millionAugust 5, 2015$0.16September 14, 2015September 30, 2015$4.7 millionNovember 3, 2015$0.16December 14, 2015December 28, 2015$4.7 millionNovember 3, 2015$1.00December 14, 2015December 28, 2015$29.2 millionTotal$1.64$47.8 millionIncluded in the dividends are $558,000 of dividend equivalents on RSU’s, of which $385,000 were payableas of December 31, 2015.On August 27, 2014, the Board of Directors of the Company declared a cash dividend of $2.45 per share onits outstanding common shares payable to shareholders of record as of June 30, 2014. The cash dividend totaled$70.0 million and was funded through a $50.0 million dividend paid to the Company by its reinsurancesubsidiary, JRG Re, and by additional borrowings on its unsecured revolving credit facility of $20.0 million.No dividends were declared in 2013.Equity Incentive PlansThe Company’s shareholders have approved various equity incentive plans, including the Amended andRestated 2009 Equity Incentive Plan (the “Legacy Plan”), the 2014 Long Term Incentive Plan (“2014 LTIP”),and the 2014 Non-Employee Director Incentive Plan (“2014 Director Plan”) (collectively, the “Plans”). Allawards issued under the Plans are issued at the discretion of the Board of Directors. Under the Legacy Plan,employees received non-qualified stock options. Options are outstanding under the Legacy Plan; however, noadditional awards may be granted.F-3211.Equity Awards (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 Employees are eligible to receive non-qualified stock options, incentive stock options, share appreciationrights, performance shares, restricted shares, restricted share units (“RSUs”), and other awards under the 2014LTIP. The maximum number of shares available for issuance under the 2014 LTIP is 3,171,150, and atDecember 31, 2015, 1,843,481 shares are available for grant.Non-employee directors of the Company are eligible to receive non-qualified stock options, shareappreciation rights, performance shares, restricted shares, restricted share units, and other awards under the 2014Director Plan. The maximum number of shares available for issuance under the 2014 Director Plan is 50,000, andat December 31, 2015, 42,860 shares are available for grant.All options issued under the Legacy Plan vest in the event of a change in control. Generally, awards issuedunder the 2014 LTIP and 2014 Director Plan vest immediately in the event that an award recipient is terminatedwithout Cause (as defined), and in the case of the 2014 LTIP for Good Reason (as defined), during the 12-monthperiod following a Change in Control (as defined).OptionsThe following table summarizes the option activity for the periods ended December 31, 2015, 2014, and2013:Year Ended December 31,201520142013SharesWeighted- Average Exercise PriceSharesWeighted- Average Exercise PriceSharesWeighted- Average Exercise PriceOutstanding:Beginning of year3,104,768$17.272,166,250$15.512,287,500$15.50Granted10,627$24.32993,518$21.0050,000$16.83Exercised(1,047,500$15.66————Forfeited(9,810$21.00————Lapsed——(55,000$15.65(171,250$15.65End of year2,058,085$18.113,104,768$17.272,166,250$15.51Exercisable, end of year1,217,903$16.851,751,249$15.511,570,100$15.54All of the outstanding options vest over three or four years and have a contractual life of seven years fromthe original date of grant. All of the outstanding options have an exercise price greater than or equal to the fairvalue of the underlying shares at the date of grant. For 2015 and 2014, the fair value of the underlying share wasequal to the market price. For 2013, management determined the fair value of an underlying share based on avariety of information including an appraisal by an independent third-party that utilized a combination of amarket approach and a discounted cash flow analysis which projected the future cash flows of the Company anddiscounted those cash flows to the present value.The intrinsic value of each option is determined based on the difference between the fair value of theunderlying share and the exercise price of the underlying option. The total intrinsic value of options exercisedduring 2015 was $12.8 million. There were no options exercised in 2014 or 2013. The aggregate intrinsic valueof options outstanding at December 31, 2015, 2014, and 2013 was $31.8 million, $17.1 million, and $5.4million, respectively. The aggregate intrinsic value of options exercisable at December 31, 2015, 2014, and2013 was $20.3 million, $12.7 million and $3.9 million, respectively. The fair value used for calculatingintrinsic values was $33.54, $22.76, and $18.01 at December 31, 2015, 2014, and 2013, respectively.F-33))))11.Equity Awards (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 The weighted-average remaining contractual life of the options outstanding and options exercisable atDecember 31, 2015 is 4.2 years and 3.4 years, respectively. The weighted-average fair value of options grantedduring 2015, 2014, and 2013 was $4.31, $3.99, and $3.62, respectively. The value of the options granted wasestimated at the date of grant using the Black-Scholes-Merton option pricing model using the followingassumptions:Year Ended December 31,201520142013Range of risk-free interest rates1.541.530.77% – 1.50%Dividend yield4.002.000.00Expected share price volatility25.0025.0026.00Expected life5.0 years5.0 years5.0 yearsThe risk-free interest rate assumption is based on the five-year U.S. Treasury rate at the date of the grant. Thedividend yield assumption is based upon dividends expected to be declared over the life of the options at thedate of grant. The share price volatility assumption is based upon historical data for property/casualtycompanies which the Company deems to be its peers. The expected life is determined using the simplifiedmethod, which factors in the average of the midpoint and the contractual term of each tranche in determining asingle expected life. The simplified method is used as the Company does not have sufficient historical exercisedata to estimate an expected term.The Black-Scholes-Merton option pricing model was developed for use in estimating the fair value oftraded options that have no vesting restrictions and are fully transferable. In addition, option valuation modelsrequire the input of highly subjective assumptions including expected share price volatility. Because theCompany’s share options have characteristics significantly different from those of traded options and becausechanges in the subjective input assumptions can materially affect the fair value estimate, the existing models donot necessarily provide a reliable single measure of the fair value of such share options.RSUsThe following table summarizes the RSU activity for the years ended December 31, 2015 and 2014:Year Ended December 31,20152014SharesWeighted-Average Grant Date Fair ValueSharesWeighted-Average Grant Date Fair ValueUnvested, beginning of year340,474$21.00——Granted——340,474$21.00Vested(105,552$21.00——Unvested, end of year234,922$21.00340,474$21.00The vesting period of RSUs granted to employees range from three to five years and vest ratably over therespective vesting period. All RSUs granted to date to non-employee directors had a one year vesting period.The total fair value of shares vested in 2015 was $3.5 million. The holders of RSUs are entitled to dividendequivalents. The dividend equivalents are settled at the same time that the underlying RSUs vest and are subjectto the same risk of forfeiture as the underlying shares. The fair value of the RSUs granted is based on the marketprice of the underlying shares.F-34%%%%%%%%)11.Equity Awards (continued) 12.Non-Controlling Interest — Subsidiary Common Shares and Share Options13.Income TaxesTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 Compensation ExpenseShare based compensation expense is recognized on a straight line basis over the vesting period. Theamount of expense and related tax benefit is summarized below:December 31,201520142013(in thousands)Share based compensation expense$3,735$589$647U.S. tax benefit on share based compensation expense$1,025$135$139As of December 31, 2015, the Company had $7.5 million of unrecognized share based compensationexpense expected to be charged to earnings over a weighted-average period of 2.4 years.On April 3, 2013, Franklin Holdings II repurchased 20,766 of its outstanding Class A common shares at aprice per share of $25.4748, for a total cash purchase price of $529,000.On October 22, 2013, Franklin Holdings II’s sole minority shareholder transferred 6,000 Franklin HoldingsII Class A common shares to the Company (see Note 10).Under current Bermuda law, James River Group Holdings, Ltd. and its Bermuda based subsidiary are notrequired to pay any Bermuda taxes on their income or capital gains. The Company has received an undertakingfrom the Minister of Finance in Bermuda that, in the event of any taxes being imposed, the Company will beexempt from taxation in Bermuda until March 2035.Distributions from the Company’s U.S. subsidiaries to its U.K. intermediate holding company, James RiverUK, are subject to a 5% dividend withholding tax. James River Group paid a $50.0 million dividend to JamesRiver UK during 2015 and remitted $2.5 million of dividend withholding taxes to the U.S. tax authorities for theyear ending December 31, 2015.The Company’s U.S. subsidiaries are subject to federal, state and local corporate income taxes, and othertaxes applicable to U.S. corporations. The Company’s U.S.-domiciled subsidiaries file a consolidated U.S.federal income tax return. The Company’s U.S.-based subsidiaries are generally no longer subject to income taxexamination by U.S. income tax authorities for the tax years ending before January 1, 2012.The expected income tax provision computed from pre-tax income at the weighted-average tax rate hasbeen calculated as the sum of the pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicableFederal statutory tax rate. Federal statutory tax rates of 0% and 35% have been used for Bermuda and the U.S.,respectively. U.S. income before Federal income taxes was $15.2 million, $9.0 million, and $31.1 million for theyears ending December 31, 2015, 2014, and 2013, respectively. A reconciliation of the difference between theCompany’s Federal income tax provision on U.S. income and the expected Federal tax provision on U.S. incomeusing the weighted-average tax rate as well as a reconciliation to total tax expense is as follows:F-3513.Income Taxes (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 Year Ended December 31,201520142013(in thousands)Expected Federal income tax expense$5,317$3,166$10,906Tax-exempt investment income(858(751(769Dividends received deduction(867(740(583Tax credits on renewable energy investments—(2,033—Other379897187Federal income tax expense$3,971$539$9,741U.S. state income tax (benefit) expense(192400—U.S. dividend withholding tax2,500——Total income tax expense$6,279$939$9,741The significant components of the net deferred tax asset at the current prevailing corporate income tax rateare summarized as follows:December 31,20152014(in thousands)Deferred tax assets:Accrued compensation expenses$5,318$5,673Reserve for losses and loss adjustment expenses4,8615,112Unearned premiums2,4742,130Share based compensation1,9482,856Allowance for doubtful accounts972695Deferred policy acquisition costs593123Property and equipment2,2211,771AMT credit430—Invested asset impairments891824Other2,2091,851Total deferred tax assets21,91721,035Deferred tax liabilities:Intangible assets12,57312,592Net unrealized gains3,3104,248Deferred gain on extinguishment of debt318424Equity method investments4,7842,897Other464423Total deferred tax liabilities21,44920,584Net deferred tax assets$468$451Deferred income taxes have not been accrued with respect to certain undistributed earnings of foreignsubsidiaries. If the earnings were to be distributed, as dividends or otherwise, such amounts may be subject towithholding taxation in the jurisdiction of the paying entity. The Company asserts that U.S. unremitted earningsas of December 31, 2015 will be permanently reinvested in the U.S. and, accordingly, no provision forwithholding taxes arising in respect to U.S. unremitted earnings has been made.F-36))))))))13.Income Taxes (continued) 14.Other Operating Expenses and Other Expenses15.Employee BenefitsTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 The Company had no reserve for future tax contingencies or liabilities (“unrecognized tax benefits”) atDecember 31, 2015 or 2014.The U.S. imposes a 1% excise tax on reinsurance premiums paid to non-U.S. reinsurers with respect to riskslocated in the U.S. The rates of tax are established based on the nature of the risk, unless reduced by anapplicable U.S. tax treaty. For the years ended December 31, 2015, 2014, and 2013, the Company paid $1.9million, $1.4 million, and $1.4 million, respectively, of federal excise taxes on its intercompany reinsurancetransactions. The Company also paid excise taxes of $1.7 million, $1.8 million, and $2.6 million for the yearsended December 31, 2015, 2014, and 2013, respectively, on written premiums assumed from third-party insurerswith respect to risks located in the U.S. These excise taxes are reflected as “other operating expenses” in theCompany’s consolidated income statements.Other operating expenses consist of the following:Year Ended December 31,201520142013(in thousands)Amortization of policy acquisition costs$97,750$85,183$71,648Other underwriting expenses of the insurance segments41,49938,74834,849Other operating expenses of the Corporate and Other segment18,5549,1248,307Total$157,803$133,055$114,804Other expenses in the accompanying financial statements for the year ended December 31, 2015 were$730,000 and included $276,000 associated with a related party leasing agreement (Note 22), $170,000 ofseverance expenses, and $284,000 of legal, tax, and other professional services related to the formation of JamesRiver UK, the December 2015 intercompany dividend, and a securities registration statement.Other expenses of $16.0 million for the year ended December 31, 2014 includes $10.2 million of expensesrelated to a cash bonus pool approved by the Company’s directors and shareholders for certain officers andemployees that became effective with the consummation of the Offering. Also included in other expenses for theyear ended December 31, 2014 were $4.3 million of legal, audit and other professional services related to theCompany’s Offering, $399,000 of other Offering related expenses, $600,000 of employee severance expenses,$183,000 of due diligence costs for various merger and acquisition activities which were not consummated, and$299,000 of expenses associated with a related party leasing agreement (Note 22).Other expenses of $677,000 for the year ended December 31, 2013 includes $392,000 of due diligenceexpenses related to an acquisition that was not consummated and $285,000 of expenses associated with a relatedparty leasing agreement (Note 22).The Company and its subsidiaries offer savings plans (the “Savings Plans”) which qualify under Section401(k) of the U.S. Internal Revenue Code. Participants may contribute certain percentages of their pre-tax salaryto the Savings Plans subject to statutory limitations. The Company and its subsidiaries match employeecontributions at various rates up to a maximum contribution of 6.0% of the participant’s earnings subject tocertain statutory limits. For the years ended December 31, 2015, 2014, and 2013, the expense associated with theSavings Plans totaled $1.6 million, $1.3 million, and $1.1 million, respectively.F-3716.Commitments and Contingent LiabilitiesTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 The Company is a party to various lawsuits arising in the ordinary course of its operations. The Companybelieves that the ultimate resolution of these matters will not materially impact its financial position, cash flows,or results of operations.The Company leases certain office space under operating leases that expire at various times and are subjectto renewal options at market rates prevailing at the time of renewal. Rental expense for such leases was $2.6million, $2.4 million, and $2.2 million for the years ended December 31, 2015, 2014, and 2013, respectively.As of December 31, 2015, future minimum payments under non-cancelable operating leases for office spaceare as follows (in thousands):2016$3,35520173,39520183,30820193,21920202,992Thereafter13,276$29,545Included in the future minimum lease payments is $23.8 million related to the building constructed andowned by a partnership in which the Company has a minority investment (see Note 22).The Company’s Specialty Admitted Insurance segment entered into an agreement to lease certain policymanagement software. The five year lease began January 1, 2015 and total payments under the lease are $2.2million spread evenly at $440,000 per year.The Company’s reinsurance subsidiary, JRG Re, entered into two letter of credit facilities with banks assecurity to third-party reinsureds on reinsurance assumed by JRG Re. JRG Re has established custodial accountsto secure these letters of credit. Under a $100.0 million facility, $96.9 million of letters of credit were issuedthrough December 31, 2015 which were secured by deposits of $111.3 million. Under a $102.5 million facility,$35.1 million of letters of credit were issued through December 31, 2015 which were secured by deposits of $48.5 million. JRG Re has also established trust accounts to secure its obligations to selected reinsureds. Thetotal amount deposited in the trust accounts for the benefit of third-party reinsureds was $241.4 million atDecember 31, 2015 (see Note 2).F-3817.Other Comprehensive Income (Loss)18.Segment InformationTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 The following table summarizes the components of other comprehensive (loss) income:Year Ended December 31,201520142013(in thousands)Unrealized (losses) gains arising during the period, before U.S. income taxes$(13,707$12,910$(37,225U.S. income taxes517(2,8205,854Unrealized (losses) gains arising during the period, net of U.S. income taxes(13,19010,090(31,371Less reclassification adjustment:Net realized investment gains (losses)2,402(1,73410,733U.S. income taxes(422669(2,859Reclassification adjustment for investment gains (losses) realized in netincome1,980(1,0657,874Other comprehensive (loss) income$(15,170$11,155$(39,245In addition to the $2.4 million of realized investment gains on available-for-sale securities for the yearended December 31, 2015, the Company recognized $7.0 million of realized investment losses on itsinvestments in bank loan participations in 2015.In addition to the $1.7 million of realized investment losses on available-for-sale securities for the yearended December 31, 2014, the Company recognized $967,000 of realized investment gains on its investments inbank loan participations and $569,000 of realized investment losses on its short-term and other invested assetsin 2014.In addition to the $10.7 million of realized investment gains on available-for-sale securities for the yearended December 31, 2013, the Company recognized $1.9 million of realized investment gains on itsinvestments in bank loan participations in 2013.The Company has four reportable segments, three of which are separately managed business units and thefourth (“Corporate and Other”) includes the Company’s remaining operations. The Excess and Surplus Linessegment primarily offers commercial excess and surplus lines liability and excess property insurance products.The Specialty Admitted Insurance segment offers workers’ compensation insurance coverage as well as specialtyadmitted program and fronting business. The Casualty Reinsurance segment offers commercial liability and non-catastrophe property reinsurance to U.S. insurance companies and to the Company’s U.S.-based insurancesubsidiaries. The Corporate and Other segment consists of certain management and treasury activities of JamesRiver Group, James River UK, and JRG Holdings as well as interest expense associated with senior debt andJunior Subordinated Debt, and investment income from investments classified as trading or other invested assets.The accounting policies of the reportable segments are the same as those described in the summary of significantaccounting policies.Segment revenues for each reportable segment consist of net earned premiums, net investment income, andrealized investment gains (losses). Segment profit (loss) for each reportable segment is measured by underwritingprofit (loss), which is generally defined as net earned premiums less losses and loss adjustment expenses andother operating expenses of the operating segments. Fee income and expenses of the Excess and Surplus Linessegment are included in that segment’s underwriting profit (loss). Net fee income of $3.2F-39)))))))))))18.Segment Information (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 million and $883,000 was included in underwriting profit for the years ended December 31, 2015 and 2014,respectively. Segment results are reported prior to the effects of the intercompany reinsurance agreementsbetween the Company’s insurance subsidiaries. All gross written premiums and net earned premiums for allperiods presented were generated from policies issued to U.S. based insureds.Excess and Surplus LinesSpecialty Admitted InsuranceCasualty ReinsuranceCorporate and OtherTotal(in thousands)As of and for the Year Ended December 31, 2015Gross written premiums$308,717$90,978$172,499$—$572,194Net earned premiums240,87842,206178,121—461,205Segment revenues255,52944,791197,5867,015504,921Net investment income13,4272,31622,7066,38644,835Interest expense———6,9996,999Underwriting profit (loss) of operatingsegments47,6071,074(2,558—46,123Segment goodwill181,831———181,831Segment assets671,143173,0941,108,278102,9822,055,497As of and for the Year Ended December 31, 2014Gross written premiums$252,707$59,380$206,680$—$518,767Net earned premiums195,78628,449171,977—396,212Segment revenues208,77830,896193,9095,420439,003Net investment income14,0832,32020,7455,85743,005Interest expense———6,3476,347Underwriting profit of operating segments35,09633667—35,796Segment goodwill181,831———181,831Segment assets684,838124,5031,035,084114,8671,959,292As of and for the Year Ended December 31, 2013Gross written premiums$192,394$20,594$155,530$—$368,518Net earned premiums141,82617,908168,344—328,078Segment revenues165,43121,582193,7525,527386,292Net investment income15,4892,60121,9075,37645,373Interest expense———6,7776,777Underwriting profit (loss) of operatingsegments43,523(3,868(2,560—37,095Segment goodwill181,831———181,831Segment assets651,24992,700967,98294,8621,806,793F-40)))18.Segment Information (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 The following table reconciles the underwriting profit (loss) of insurance segments by individual segmentto income from continuing operations before taxes:Year Ended December 31,201520142013(in thousands)Underwriting profit (loss) of the operating segments:Excess and Surplus Lines$47,607$35,096$43,523Specialty Admitted Insurance1,07433(3,868Casualty Reinsurance(2,558667(2,560Total underwriting profit (loss) of operating segments46,12335,79637,095Other operating expenses of the Corporate and Other segment(18,554(9,124(8,307Underwriting profit (loss)27,56926,67228,788Net investment income44,83543,00545,373Net realized investment (losses) gains(4,547(1,33612,619Other income245239222Other expenses(730(16,012(677Interest expense(6,999(6,347(6,777Amortization of intangible assets(597(597(2,470Income before income taxes$59,776$45,624$77,078The Company currently has 14 underwriting divisions, including 12 in the Excess and Surplus Linessegment, one in the Specialty Admitted Insurance segment, and one in the Casualty Reinsurance segment. Eachunderwriting division focuses on a specific industry group or coverage.Gross written premiums by segment and underwriting division are presented below:Year Ended December 31,201520142013(in thousands)Manufacturers and Contractors$78,315$72,063$58,509Excess Casualty32,45831,68832,489Allied Health13,5139,7079,148General Casualty104,74260,45822,636Professional Liability10,04610,78410,695Energy30,62328,98021,400Excess Property12,49811,79510,988Medical Professionals3,5853,9224,492Life Sciences8,91710,1559,978Environmental4,4373,4312,557Sports and Entertainment2,6672,7533,189Small Business6,9166,9716,313Total Excess and Surplus Lines segment308,717252,707192,394Specialty Admitted Insurance segment90,97859,38020,594Casualty Reinsurance segment172,499206,680155,530Total$572,194$518,767$368,518The Company does business with two brokers that generated $87.9 million and $42.0 million of grosswritten premiums for the Excess and Surplus Lines segment for the year ended December 31, 2015,F-41)))))))))))))))))18.Segment Information (continued) 19.Fair Value MeasurementsTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 representing 15.4% (BB&T Insurance Services) and 7.3% of consolidated gross written premiums and 28.5% and13.6% of the Excess and Surplus Lines segment’s gross written premiums, respectively. The Company hasagency contracts with various branches within the aforementioned brokers. No other broker generated 10.0% ormore of the gross written premiums for the Excess and Surplus Lines segment for the year ended December 31,2015.The Company does business with two agencies that generated $15.4 million and $14.3 million of grosswritten premiums for the Specialty Admitted Insurance segment for the year ended December 31, 2015,representing 2.7% and 2.5% of the consolidated gross written premiums and 16.9% and 15.7% of the SpecialtyAdmitted Insurance segment’s gross written premiums. No other agency generated 10.0% or more of the grosswritten premiums for the Specialty Admitted Insurance segment for the year ended December 31, 2015.The Company does business with two brokers that generated $84.9 million and $27.4 million of grosswritten premiums for the Casualty Reinsurance segment for the year ended December 31, 2015, representing14.8% (Atlantic Intermediaries) and 4.8% of consolidated gross written premiums and 49.2% and 15.9% of theCasualty Reinsurance segment’s gross written premiums, respectively. No other broker generated 10.0% or moreof the gross written premiums for the Casualty Reinsurance segment for the year ended December 31, 2015. TheCasualty Reinsurance segment assumed business from four unaffiliated ceding companies that generated $79.3million, $29.9 million, $24.8 million, and $20.2 million of gross written premiums for the year endedDecember 31, 2015, representing 13.9% (State National Insurance Company), 5.2%, 4.3%, and 3.5% ofconsolidated gross written premiums and 45.9%, 17.3%, 14.4%, and 11.7% of the Casualty Reinsurancesegment’s gross written premiums, respectively.Three levels of inputs are used to measure fair value of financial instruments: (1) Level 1: quoted price(unadjusted) in active markets for identical assets, (2) Level 2: inputs to the valuation methodology includequoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset orliability, either directly or indirectly, for substantially the full term of the instrument, and (3) Level 3: inputs tothe valuation methodology are unobservable for the asset or liability.Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liabilityin the principal or most advantageous market in an orderly transaction between market participants on themeasurement date.To measure fair value, the Company obtains quoted market prices for its investment securities from itsoutside investment managers. If a quoted market price is not available, the Company uses prices of similarsecurities. Values for U.S. Treasury and publicly-traded equity securities are generally based on Level 1 inputswhich use the market approach valuation technique. The values for all other fixed maturity securities (includingstate and municipal securities and obligations of U.S. government corporations and agencies) generallyincorporate significant Level 2 inputs, and in some cases, Level 3 inputs, using the market approach and incomeapproach valuation techniques. There have been no changes in the Company’s use of valuation techniques sinceDecember 31, 2013.The Company reviews fair value prices provided by its outside investment managers for reasonableness bycomparing the fair values provided by the managers to those provided by our investment custodian. TheCompany also reviews and monitors changes in unrealized gains and losses. The Company has not historicallyadjusted security prices. The Company obtains an understanding of the methods, models and inputs used by theinvestment managers and independent pricing services, and controls are in place to validate that prices providedrepresent fair values. The Company’s control process includes, but is notF-4219.Fair Value Measurements (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 limited to, initial and ongoing evaluation of the methodologies used, a review of specific securities and anassessment for proper classification within the fair value hierarchy, and obtaining and reviewing internal controlreports for our investment manager that obtains fair values from independent pricing services.Assets measured at fair value on a recurring basis as of December 31, 2015 are summarized below:Fair Value Measurements UsingQuoted Prices in Active Markets for Identical Assets Level 1Significant Other Observable Inputs Level 2Significant Unobservable Inputs Level 3Total(in thousands)Available-for-sale securitiesFixed maturity securities:State and municipal$—$103,457$—$103,457Residential mortgage-backed—136,887—136,887Corporate—363,168—363,168Commercial mortgage and asset-backed—125,6965,000130,696Obligations of U.S. government corporations andagencies—90,163—90,163U.S. Treasury securities and obligations guaranteed by the U.S. government72,542713—73,255Redeemable preferred stock—2,034—2,034Total fixed maturity securities72,542822,1185,000899,660Equity securities:Preferred stock—54,092—54,092Common stock19,285734—20,019Total equity securities19,28554,826—74,111Total available-for-sale securities$91,827$876,944$5,000$973,771Trading securities:Fixed maturity securities$1,244$3,802$—$5,046Short-term investments$2,926$16,344$—$19,270F-4319.Fair Value Measurements (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 Assets measured at fair value on a recurring basis as of December 31, 2014 are summarized below:Fair Value Measurements UsingQuoted Prices in Active Markets for Identical Assets Level 1Significant Other Observable Inputs Level 2Significant Unobservable Inputs Level 3Total(in thousands)Available-for-sale securitiesFixed maturity securities:State and municipal$—$99,046$ —$99,046Residential mortgage-backed—115,249—115,249Corporate—267,882—267,882Commercial mortgage and asset-backed—113,341—113,341Obligations of U.S. government corporations andagencies—101,275—101,275U.S. Treasury securities and obligations guaranteed by the U.S. government56,8911,378—58,269Redeemable preferred stock—1,901—1,901Total fixed maturity securities56,891700,072—756,963Equity securities:Preferred stock—49,601—49,601Common stock17,570734—18,304Total equity securities17,57050,335—67,905Total available-for-sale securities$74,461$750,407$—$824,868Trading securities:Fixed maturity securities$—$7,388$—$7,388Short-term investments$58,507$73,349$—$131,856A reconciliation of the beginning and ending balances of available-for-sale fixed maturity securitiesmeasured at fair value on a recurring basis using significant unobservable inputs (Level 3) is shown below:Year Ended December 31,201520142013(in thousands)Beginning balance$ —$ —$ —Transfers out of Level 3———Transfers in to Level 3———Purchases5,000——Sales———Amortization of discount———Total gains or losses (realized/unrealized):———Included in earnings———Included in other comprehensive income———Ending balance$5,000$—$—F-4419.Fair Value Measurements (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 At December 31, 2015, the Company held one available-for-sale fixed maturity security for which the fairvalue was determined using significant unobservable inputs (Level 3). A market approach using prices in tradesof comparable securities was utilized to determine a fair value of $5.0 million for the security at December 31,2015.Transfers out of Level 3 occur when the Company is able to obtain reliable prices from pricing vendors forwhich the Company was previously unable to obtain reliable prices. Transfers in to Level 3 occur when theCompany is unable to obtain reliable prices for securities from pricing vendors and instead must use broker pricequotes.There were no transfers between Level 1 and Level 2 during 2015, 2014 or 2013. The Company recognizestransfers between levels at the beginning of the reporting period.There were no realized gains or losses included in earnings for the year ended December 31, 2015attributable to the change in unrealized gains or losses relating to Level 3 assets valued at fair value on arecurring basis that are still held at December 31, 2015.The Company measures certain bank loan participations at fair value on a non-recurring basis during theyear as part of the Company’s impairment evaluation when loans are determined by management to be impaired.Assets measured at fair value on a nonrecurring basis are summarized below:Fair Value Measurements UsingQuoted Prices in Active Markets for Identical Assets Level 1Significant Other Observable Inputs Level 2Significant Unobservable Inputs Level 3Total(in thousands)December 31, 2015Bank loan participations held-for-investment$ —$ —$2,342$2,342There were no assets measured at fair value on a nonrecurring basis at December 31, 2014.At December 31, 2015, bank loan participations held for investment that were determined to be impairedwere written down to their fair value of $2.3 million.In the determination of the fair value for bank loan participations and certain high yield bonds, theCompany’s investment manager endeavors to obtain data from multiple external pricing sources. Externalpricing sources may include brokers, dealers and price data vendors that provide a composite price based onprices from multiple dealers. Such external pricing sources typically provide valuations for normal institutionalsize trading units of such securities using methods based on market transactions for comparable securities, andvarious relationships between securities, as generally recognized by institutional dealers. For investments inwhich the investment manager determines that only one external pricing source is appropriate or if only oneexternal price is available, the relevant investment is generally recorded at fair value based on such price.Investments for which external sources are not available or are determined by the investment manager notto be representative of fair value are recorded at fair value as determined by the Company, with input from itsinvestment managers and valuation specialists as considered necessary. In determining the fair value of suchinvestments, the Company considers one or more of the following factors: type of security held, convertibility orexchangeability of the security, redeemability of the security (including the timing of redemptions), applicationof industry accepted valuation models, recent trading activity, liquidity, estimatesF-4519.Fair Value Measurements (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 of liquidation value, purchase cost, and prices received for securities with similar terms of the same issuer orsimilar issuers. At December 31, 2015, there were bank loan participations with an unpaid principal balance of $5.3 million and a carrying value of $4.6 million for which external sources were unavailable to determine fairvalue. At December 31, 2014, there were bank loan participations with an unpaid principal balance of $14.1million and a carrying value of $12.7 million for which external sources were unavailable to determine fairvalue.The carrying values and fair values of financial instruments are summarized below:December 31,20152014Carrying ValueFair ValueCarrying ValueFair Value(in thousands)AssetsAvailable-for-sale:Fixed maturity securities$899,660$899,660$756,963$756,963Equity securities74,11174,11167,90567,905Trading:Fixed maturity securities5,0465,0467,3887,388Bank loan participations held-for-investment191,700180,086239,511231,251Cash and cash equivalents106,406106,40673,38373,383Short-term investments19,27019,270131,856131,856Other invested assets – notes receivable11,00012,5484,5006,410LiabilitiesSenior debt88,30079,53988,30079,850Junior subordinated debt104,05584,594104,05589,100The fair values of fixed maturity securities and equity securities have been determined using quoted marketprices for securities traded in the public market or prices using bid or closing prices for securities not traded inthe public marketplace. The fair values of cash and cash equivalents and short-term investments approximatetheir carrying values due to their short-term maturity.The fair values of other invested assets-notes receivable, senior debt, and Junior Subordinated Debt atDecember 31, 2015 and 2014 were determined by calculating the present value of expected future cash flowsunder the terms of the note agreements or debt agreements, as applicable, discounted at an estimated market rateof interest at December 31, 2015 and 2014, respectively. For notes receivable maturing within one year, carryingvalue was used to approximate fair value.The fair values of bank loan participations held-for-investment, senior debt, and junior subordinated debt atDecember 31, 2015 and 2014 were determined using inputs to the valuation methodology that are unobservable(Level 3).F-4620.Statutory Matters21.Dividend RestrictionsTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 U.S.U.S. state insurance laws and regulations prescribe accounting practices for determining statutory netincome and capital and surplus for insurance companies. In addition, state regulators may permit statutoryaccounting practices that differ from prescribed practices. Statutory accounting practices prescribed or permittedby regulatory authorities for the Company’s insurance subsidiaries differ from U.S. GAAP. The principaldifferences between SAP and GAAP as they relate to the financial statements of the Company’s insurancesubsidiaries are (a) policy acquisition costs are expensed as incurred under SAP, whereas they are deferred andamortized under GAAP, (b) certain assets are not admitted for purposes of determining surplus under SAP, (c) theclassification and carrying amounts of investments in certain securities are different under SAP and GAAP, and(d) the criteria for providing asset valuation allowances and the methodologies used to determine the amountthereof are different under SAP and GAAP. Combined net income, statutory capital and surplus and minimumrequired statutory capital and surplus, as determined in accordance with statutory accounting practices, for theU.S. insurance subsidiaries as of December 31, 2015, 2014, and 2013 and for the years then ended aresummarized as follows:201520142013(in thousands)Statutory net income$14,747$14,872$24,857Statutory capital and surplus176,884207,813208,369Minimum required statutory capital and surplus25,00021,25021,250Risk-Based Capital (“RBC”) requirements promulgated by the National Association of InsuranceCommissioners require property/casualty insurers to maintain minimum capitalization levels determined basedon formulas incorporating various business risks of the insurance subsidiaries. As of December 31, 2015, theinsurance subsidiaries’ adjusted capital and surplus exceeds their authorized control level RBC.BermudaUnder the Bermuda Insurance Act, 1978 and related regulations, JRG Re is required to maintain certainsolvency and liquidity levels. The minimum statutory solvency margin required at December 31, 2015 wasapproximately $73.7 million. Actual statutory capital and surplus at December 31, 2015 was $357.7 million.JRG Re had statutory net income of $54.3 million for 2015, $35.0 million for 2014, and $52.6 million for 2013.JRG Re had shareholders’ equity of $424.6 million on a GAAP basis at December 31, 2015. The principaldifference between statutory capital and surplus and shareholders’ equity presented in accordance with GAAPare deferred acquisition costs, which are non-admitted assets for Bermuda statutory purposes.JRG Re maintains a Class 3B license and thus must maintain a minimum liquidity ratio in which the valueof its relevant assets is not less than 75.0% of the amount of its relevant liabilities for general business. Relevantassets include cash and cash equivalents, fixed maturities, alternative investments, accrued interest income,premiums receivable, losses recoverable from reinsurers, and funds withheld. The relevant liabilities includetotal general business insurance reserves and total other liabilities, less sundry liabilities. As of December 31,2015, the Company met the minimum liquidity ratio requirement.U.S.The insurance statutes of the U.S.-based insurance subsidiaries’ states of domicile limit the amount ofdividends that they may pay annually without first obtaining regulatory approval. Generally, the limitations arebased on the greater of statutory net income for the preceding year or 10.0% of statutory surplus at theF-4721.Dividend Restrictions (continued) 22.Other Related Party TransactionsTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 end of the preceding year. The maximum amount of dividends available to James River Group from its U.S.insurance subsidiaries during 2016 without regulatory approval is $19.8 million. However, U.S. insuranceregulators have broad powers to prevent the reduction of statutory surplus to inadequate levels and could refuseto permit the payment of dividends.There is no tax treaty between Bermuda and the U.S. Accordingly, the payment of any dividends by theCompany’s U.S.-based subsidiaries directly to a Bermuda-based entity is subject to U.S. taxes at a 30.0% taxrate. JRG Holdings has determined that earnings of its U.S. subsidiaries have been and will be indefinitelyreinvested in U.S. operations. Distributions from the Company’s U.S.-based subsidiaries to its U.K. intermediateholding company, James River UK, are subject to a 5% dividend withholding tax.BermudaBermuda regulations limit the amount of dividends and return of capital paid by a regulated entity. A class3B insurer is prohibited from declaring or paying a dividend if it is in breach of its minimum solvency margin,its enhanced capital requirement, or its minimum liquidity ratio, or if the declaration or payment of suchdividend would cause such a breach. Pursuant to Bermuda regulations, the maximum amount of dividends andreturn of capital available to be paid by a reinsurer is determined pursuant to a formula. Under this formula, themaximum amount of dividends and return of capital available to the Company from JRG Re during 2016 iscalculated to be approximately $89.4 million. However, this dividend amount is subject to annual enhancedsolvency requirement calculations which we believe may decrease this available dividend amount.As of December 31, 2015, JRG Holdings had consolidated retained earnings of $47.0 million, all of whichwas available for the payment of dividends to shareholders.The Company leases a commercial office building which houses the Company’s Richmond, Virginiaoperations under the terms of a non-cancelable lease from an entity with which it is affiliated. As a result ofbeing deemed the owner for accounting purposes, the building is recorded as an asset and the related financingobligation is recorded as a liability on the accompanying consolidated balance sheets. Since the arrangementdid not qualify for sale-lease back treatment upon completion of the asset’s construction, the Companycontinues to reduce the obligation over the lease term as payments are made and depreciates the asset over itsuseful life. Both the financing obligation and the lease had initial 10-year terms which started in 2007. In 2015,the term of the lease and financing obligation were extended until 2026. The arrangements provide for 2.0%fixed annual rent increases.The Chairman of the Board and Chief Executive Officer of the Company owns a plane that the Companyperiodically leases. Total fees paid by the Company for the use of this plane were $211,000, $690,000, and$228,000 for 2015, 2014, and 2013, respectively.Prior to the Company’s Offering, the Company had various compensation arrangements with one of theCompany’s Independent Directors. Pursuant to these agreements, the director was paid $250,000 and $256,000in director fees, Investment Committee Chairman service fees, and investment and other business consulting feesfor 2014, and 2013, respectively. Upon the Company’s Offering, the Company entered into a consultingagreement (the “Consulting Agreement”) with this director. Under the terms of the Consulting Agreement, thedirector received $150,000 in 2015 for investment and other business consulting services. The ConsultingAgreement is for one year and automatically renews for a one year term unless written notice is provided 30 daysprior to the expiration of the term.F-4823.Subsequent Events24.Unaudited Selected Quarterly Financial DataTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2015, 2014, and 2013 On February 16, 2016, the Board of Directors declared a cash dividend of $0.20 per share. The dividend ispayable on March 28, 2016 to shareholders of record on March 14, 2016.On February 16, 2016, the Board of Directors granted awards under the 2014 LTIP to the Company’semployees and directors. Non-qualified stock options for 706,203 shares were granted with an exercise price of $32.07 per share and three year vesting period. RSUs for 58,660 shares were also awarded with a fair value on thedate of grant of $32.07 per share. The RSUs vest over one to three year periods, depending on the award.The following is a summary of the unaudited quarterly results of operations:2015 Quarter2015FirstSecondThirdFourthYear(in thousands, except per share data)Gross written premiums$131,258$184,011$148,236$108,689$572,194Total revenues126,467120,227133,123125,104504,921Net income9,37712,48918,96112,67053,497Comprehensive income13,326(2,51620,5476,97038,327Earnings per share:Basic$0.33$0.44$0.66$0.44$1.87Diluted$0.32$0.43$0.64$0.43$1.822014 Quarter2014FirstSecondThirdFourthYear(in thousands, except per share data)Gross written premiums$147,241$96,960$171,415$103,151$518,767Total revenues99,695106,796111,817120,695439,003Net income9,1389,51317,1688,86644,685Comprehensive income14,91115,24412,74812,93755,840Earnings per share:Basic$0.32$0.33$0.60$0.31$1.57Diluted$0.32$0.33$0.60$0.31$1.55F-49)(1)Differences between the amounts in this column and the amounts in the consolidated balance sheet are dueto this schedule excluding investments in related parties.TABLE OF CONTENTSSCHEDULE IJAMES RIVER GROUP HOLDINGS, LTD.Summary of Investments — Other than Investments in Related PartiesType of InvestmentCost or Amortized CostFair ValueAmount at which shown on Balance Sheet(in thousands)Fixed maturity securities, available-for-sale:State and municipal$95,864$103,457$103,457Residential mortgage-backed137,308136,887136,887Corporate368,961363,168363,168Commercial mortgage and asset-backed130,231130,696130,696Obligations of U.S. government corporations and agencies89,73490,16390,163U.S. Treasury securities and obligations guaranteed by the U.S.government73,32273,25573,255Redeemable preferred stock2,0252,0342,034Total fixed maturity securities, available-for-sale897,445899,660899,660Fixed maturity securities, trading5,0535,0465,046Equity securities, available-for-salePreferred Stock50,63154,09254,092Common Stock12,74711,65211,652Total equity securities, available-for-sale63,37865,74465,744Bank loan participations, held-for-investment, net of allowance191,700180,086191,700Short-term investments18,27018,27018,270Other invested assets15,349Total invested assets$1,195,769See accompany notes.F-50(1)TABLE OF CONTENTSSCHEDULE IIJ AMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIESCondensed Financial Information of RegistrantBalance Sheets (Parent Company)December 31,20152014(in thousands)AssetsCash and cash equivalents$1,976$623Investment in subsidiaries891,627893,365Due from subsidiaries—247Other assets2,1522,450Total assets$895,755$896,685Liabilities and shareholders’ equityLiabilities:Accrued expenses$3,243$4,473Senior debt73,30073,300Junior subordinated debt15,92815,928Notes payable to subsidiary100,000100,000Due to subsidiaries20,54114,884Other liabilities1,705179Total liabilities214,717208,764Commitments and contingent liabilitiesShareholders’ equity:Class A common shares66Additional paid-in capital630,820628,236Retained earnings47,02641,323Accumulated other comprehensive income3,18618,356Total shareholders’ equity681,038687,921Total liabilities and shareholders’ equity$895,755$896,685See accompany notes.F-51TABLE OF CONTENTSSCHEDULE IIJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIESCondensed Financial Information of RegistrantStatements of Income and Comprehensive Income (Parent Company)Year Ended December 31,201520142013(in thousands)Revenues:Management fees from subsidiaries$—$2,600$2,600Other income4040—Total revenues402,6402,600Expenses:Other operating expenses8,2545,2044,746Other expenses2847,353389Interest expense3,6873,0991,638Total expenses12,22515,6566,773Loss before equity in net income of subsidiaries(12,185(13,016(4,173Equity in net income of subsidiaries65,68257,70171,510Net income$53,497$44,685$67,337Other comprehensive (loss) income:Equity in other comprehensive (losses) earnings of subsidiaries(15,17011,155(39,245Total comprehensive income$38,327$55,840$28,092See accompany notes.F-52)))))TABLE OF CONTENTSSCHEDULE IIJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIESCondensed Financial Information of RegistrantStatements of Cash Flows (Parent Company)Year Ended December 31,201520142013Operating activitiesNet income$53,497$44,685$67,337Adjustments to reconcile net income to net cash (used in) provided byoperating activities:Provision for depreciation and amortization157203129Share based compensation expense3,735589647Equity in undistributed earnings of subsidiaries(65,682(57,701(71,510Changes in operating assets and liabilities:5,95212,4432,213Net cash (used in) provided by operating activities(2,341219(1,184Investing activitiesDividends from subsidiaries52,25050,000—Purchases of property and equipment——(3Net cash provided by (used in) investing activities52,25050,000(3Financing activitiesDividends paid(47,405(69,998—Merger with subsidiary——217Senior debt issuance10,00030,30043,000Senior debt repayments(10,000——Subsidiary note issuance——100,000Subsidiary note repayment——(11,000Contribution to subsidiary—(10,000(20,000Debt issue costs paid—(412(649Issuances of common shares under equity incentive plans1,730——Common share repurchases(6,461—(110,760Excess tax benefits from equity incentive plan transactions3,580——Net cash (used in) provided by financing activities(48,556(50,110808Change in cash and cash equivalents1,353109(379Cash and cash equivalents at beginning of period623514893Cash and cash equivalents at end of period$1,976$623$514Supplemental informationInterest paid$4,337$3,733$1,970See accompany notes.F-53))))))))))))))))))))TABLE OF CONTENTSSCHEDULE IIJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIESCondensed Financial Information of RegistrantNotes to Condensed Financial Statements1. Accounting PoliciesOrganizationJames River Group Holdings, Ltd. (the “Company”) is an exempted holding company registered inBermuda, organized for the purpose of acquiring and managing insurance and reinsurance entities.Basis of PresentationThe accompanying condensed financial statements have been prepared using the equity method. Under theequity method, the investment in consolidated subsidiaries is stated at cost plus equity in undistributed earningsof consolidated subsidiaries since the date of acquisition. These condensed financial statements should be readin conjunction with the Company’s consolidated financial statements.Estimates and AssumptionsPreparation of the financial statements in conformity with GAAP requires management to make estimatesand assumptions that affect the amounts reported in the financial statements and accompanying disclosures.Those estimates are inherently subject to change, and actual results may ultimately differ from those estimates. F-54TABLE OF CONTENTSSCHEDULE IIIJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIESSupplementary Insurance Information(in thousands)Deferred Policy Acquisition CostsReserve for Losses and Loss Adjustment ExpensesUnearned PremiumsNet Earned PremiumsNet Investment IncomeLosses and Loss Adjustment ExpensesAmortization of Policy Acquisition CostsOther Operating ExpensesNet Written PremiumsDecember 31, 2015Excess and Surplus Lines$15,266$468,438$114,369$240,878$13,427$131,221$42,069$65,233$253,285Specialty Admitted2,18476,17940,62242,2062,31625,6234,45515,50944,917Casualty Reinsurance43,304240,705146,113178,12122,706122,17251,22658,507172,830Corporate and Other————6,386——18,554—Total$60,754$785,322$301,104$461,205$44,835$279,016$97,750$157,803$471,032December 31, 2014Excess and Surplus Lines$14,146$432,220$100,554$195,786$14,083$108,146$33,464$53,427$208,124Specialty Admitted1,83854,54425,29528,4492,32015,1793,30613,23736,228Casualty Reinsurance44,218229,532151,730171,97720,745114,04348,41357,267205,731Corporate and Other————5,857—–9,124—Total$60,202$716,296$277,579$396,212$43,005$237,368$85,183$133,055$450,083December 31, 2013Excess and Surplus Lines$11,435$378,967$89,630$141,826$15,489$57,250$23,518$41,053$155,064Specialty Admitted94958,9067,50017,9082,60112,0662,2129,71018,169Casualty Reinsurance33,820208,579121,402168,34421,907115,17045,91855,734151,933Corporate and Other————5,376——8,307—Total$46,204$646,452$218,532$328,078$45,373$184,486$71,648$114,804$325,166 F-55TABLE OF CONTENTSSCHEDULE IVJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIESReinsuranceDirect AmountCeded to Other CompaniesAssumed from Other CompaniesNet AmountPercentage of Amount Assumed to NetYear Ended December 31, 2015Excess and Surplus Lines Written Premiums$308,713$55,432$4$253,285—Specialty Admitted Written Premiums87,10346,0613,87544,9178.6Casualty Reinsurance Written Premiums—(331172,499172,83099.8Total Written Premiums$395,816$101,162$176,378$471,03237.4Year Ended December 31, 2014Excess and Surplus Lines Written Premiums$252,707$44,583$—$208,124—Specialty Admitted Written Premiums57,45423,1521,92636,2285.3Casualty Reinsurance Written Premiums—949206,680205,731100.5Total Written Premiums$310,161$68,684$208,606$450,08346.3Year Ended December 31, 2013Excess and Surplus Lines Written Premiums$192,394$37,330$—$155,064—Specialty Admitted Written Premiums19,2132,4251,38118,1697.6Casualty Reinsurance Written Premiums—3,597155,530151,933102.4Total Written Premiums$211,607$43,352$156,911$325,16648.3 F-56%)%%%%%%%%TABLE OF CONTENTSSCHEDULE VJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIESValuation and Qualifying AccountsBalance at Beginning of PeriodAdditions Amounts Charged to ExpenseDeductions Amounts Written Off or DisposalsBalance at End of PeriodYear Ended December 31, 2015Allowance for Doubtful Accounts$1,985$1,061$(268$2,778Allowance for Credit Losses on Bank Loans7523,896(3384,310Total$2,737$4,957$(606$7,088Year Ended December 31, 2014Allowance for Doubtful Accounts$1,701$812$(528$1,985Allowance for Credit Losses on Bank Loans242752(242752Total$1,943$1,564$(770$2,737Year Ended December 31, 2013Allowance for Doubtful Accounts$2,220$459$(978$1,701Allowance for Credit Losses on Bank Loans121121—242Total$2,341$580$(978$1,943 F-57))))))))TABLE OF CONTENTSSCHEDULE VIJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIESSupplementary Information Concerning Property Casualty Insurance OperationsYear Ended December 31,201520142013(in thousands)Deferred policy acquisition costs$60,754$60,202$46,204Reserve for losses and loss adjustment expenses785,322716,296646,452Unearned premiums301,104277,579218,532Net earned premiums461,205396,212328,078Net investment income44,83543,00545,373Losses and loss adjustment expenses incurred:Current year295,334264,786221,938Prior year(16,318(27,418(37,452Total losses and loss adjustment expenses incurred279,016237,368184,486Amortization of policy acquisition costs97,75085,18371,648Paid losses and loss adjustment expenses, net of reinsurance214,524175,311191,410Net written premiums471,032450,083325,166 F-58))) Exhibit 10.4 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this “Second Amendment”) is made and entered into as of the 15th day of December,2015, by and among: (i) JAMES RIVER GROUP HOLDINGS, LTD., a Bermuda company (the former company name of which is Franklin Holdings(Bermuda), Ltd.), and JRG REINSURANCE COMPANY LTD., a regulated insurance company domiciled in Bermuda (each a “Borrower” and,collectively, the “Borrowers”); (ii) THE FINANCIAL INSTITUTIONS as signatory lender parties hereto and their successors and assigns (each a “Lender” and,collectively, the “Lenders”); and (iii) KEYBANK NATIONAL ASSOCIATION, a national banking association, in its capacities as “Administrative Agent”, and “Letter ofCredit Issuer” under the Credit Agreement (defined below) Recitals: A. The Borrowers, the Lenders, the Letter of Credit Issuer and the Administrative Agent and certain other parties are the parties to that certainCredit Agreement dated as of June 5, 2013, as amended by a First Amendment dated September 24, 2014, a Waiver Letter dated February 6, 2015 and aCommitment Acceptance Agreement dated May 20, 2015 (collectively, the “Credit Agreement”), pursuant to which, inter alia, the Lenders agreed, subject tothe terms and conditions thereof, to advance Loans (as this and other capitalized terms used herein and not otherwise defined herein are defined in the CreditAgreement) to the Borrowers; and the Letter of Credit Issuer agreed, subject to the terms and conditions thereof, to issue Letters of Credit. B. The Borrowers have requested the Lenders to agree to certain other amendments to the Credit Agreement. Agreements: NOW, THEREFORE, in consideration of the foregoing Recitals and the mutual agreements hereinafter set forth, the Borrowers, the Lenders, the Letter of Credit Issuer and the Administrative Agent, intending to be legally bound, herebyagree as follows: 1. Amendments to Credit Agreement. Subject to the terms and conditions of this Second Amendment, including, without limitation, Paragraph2, below: (a) The definition of “Guarantor” in Section 1.01 (Defined Terms) of the Credit Agreement is hereby amended and restated in its entirety toprovide as follows: “Guarantor” means, as of the Second Amendment Effective Date, each of James River UK and, until, if ever, James River becomes aBorrower upon and subject to the provisions of Section 2.04, James River, it being understood and agreed that after, if ever, James River becomes aBorrower as aforesaid, all references to the “Guarantors” shall be deemed to refer to James River UK. (b) The definition of “Holdings II” in Section 1.01 (Defined Terms) of the Credit Agreement is hereby deleted in its entirety. (c) The last sentence of the definition of “Material Subsidiary” in Section 1.01 (Defined Terms) of the Credit Agreement is hereby amended andrestated in its entirety to provide as follows: As of the Second Amendment Effective Date, James River, JRG Reinsurance, James River Insurance, Stonewood Insurance and James River UKconstitute the Material Subsidiaries. (d) The following new defined terms are added to Section 1.01 (Defined Terms) of the Credit Agreement in the appropriate alphabetical order: “James River UK” means James River Group Holdings UK Limited, a private limited company incorporated under the Laws of Englandand Wales that, from and after the Second Amendment Effective Date will be a wholly-owned Subsidiary of the Parent. * * * “Second Amendment” means the Second Amendment to Credit Agreement dated as of November 18, 2015 among the parties to thisAgreement as of such date. “Second Amendment Effective Date” means the “Second Amendment Effective Date” as that term is defined in the Second Amendment. 2 (e) Section 6.03(a) (Fundamental Changes) of the Credit Agreement is hereby amended and restated in its entirety to provide as follows: (a) No Loan Party shall, nor shall it permit any of its Material Subsidiaries to, enter into any transaction of merger or consolidation oramalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), unless it is a Permitted Acquisition; provided thatJames River UK may dissolve or merge with the Parent so long as each and all of the following is satisfied: (i) the Parent shall have delivered to theAdministrative Agent written notice of such merger or dissolution and the intended date of consummation thereof at least twenty (20) Business Daysin advance of such intended date of consummation, (ii) such notice is accompanied with copies of the definitive documentation that will effect suchmerger or dissolution, (iii) no Default exists on the date of such notice and on the date of such consummation, (iv) after giving effect to such mergeror dissolution, the Parent shall own 100% of all of the issued and outstanding Equity Interests of each of James River and any other Person that isthen a Subsidiary of James River UK, (v) in the case of a merger, the Parent is the surviving Person, (vi) the Parent shall have caused to be deliveredto the Administrative Agent and the Lenders such opinions of counsel as the Administrative Agent may reasonably request, and (vii) theAdministrative Agent shall not have received from the Required Lenders on or before three (3) Business Days prior to such intended date ofconsummation written notice that such Required Lenders have determined in their good faith judgment that such merger or dissolution impairs orotherwise adversely affects any right or interest of the Lenders hereunder or under any other Loan Document. (f) Clause (iv) of Section 6.04(a) (Investments, Loans, Advances, Guarantees and Acquisitions) of the Credit Agreement is hereby amended andrestated in its entirety to provide as follows: (iv) Investments by a Loan Party and its Material Subsidiaries in their respective Subsidiaries; provided that the Loan Parties’ Investments in ForeignSubsidiaries acquired or formed after the Effective Date that are not organized under the Laws of Bermuda (exclusive of the Parent’s Investment inJames River UK upon and subject to the terms and conditions of the Second Amendment) shall not exceed $10,000,000 in the aggregate as to allLoan Parties in any Fiscal Year; (g) On the Second Amendment Effective Date, the Parent shall contribute to the capital of James River UK all of the issued and outstandingEquity Interests of James River (collectively, the “James River Equity”). 2. Amendment Effective Date; Conditions Precedent. The amendments set forth in Paragraph 1, above, shall not be effective unless and untilthe date on which all of the following 3 conditions precedent have been satisfied (such date of effectiveness being the “Second Amendment Effective Date”): (a) Officer’s Certificate. On the Second Amendment Effective Date, after giving effect to the amendments set forth in Paragraph 1, above, andthe contribution by the Parent of the James River Equity to the capital of James River UK (i) there shall exist no Default, and a Financial Officer or otherexecutive officer of each Borrower, on behalf of such Borrower, shall have delivered to the Administrative Agent written confirmation thereof dated as of theSecond Amendment Effective Date, (ii) the representations and warranties of the Borrowers under Article 3 of the Credit Agreement and under Paragraph 3 ofthis Second Amendment shall have been reaffirmed in writing by each Borrower as being true and correct in all material respects as of the Second AmendmentEffective Date (unless and to the extent that any such representation and warranty is stated to relate solely to an earlier date, in which case such representationand warranty shall have been true and correct in all material respects as of such earlier date), and (iii) each Borrower shall have reaffirmed in writing that theRegulatory Condition Satisfaction remains effective. (b) Second Amendment. The Administrative Agent or the Special Counsel (defined below) shall have received from each Borrower and theRequired Lenders either (i) a counterpart of this Second Amendment signed on behalf of such party or (ii) written evidence satisfactory to the AdministrativeAgent (which may include telecopy or email transmission of a signed signature page of this Second Amendment) that such party has signed a counterpart ofthis Second Amendment. (c) Corporate Authorization. Each Borrower shall have delivered to the Administrative Agent a copy, certified by its Secretary or AssistantSecretary (or equivalent 4 officer otherwise named), of resolutions of its Board of Directors (or equivalent body otherwise named) authorizing the execution and delivery of this SecondAmendment and the transactions contemplated hereby, together with the names and signatures of the officers of such Borrower executing or attesting to thisSecond Amendment, in form and substance reasonably satisfactory to the Administrative Agent. (d) James River UK Guaranty. James River UK shall have (i) executed and delivered to the Administrative Agent a Payment Guaranty in theform of Attachment 1 hereto and (ii) delivered to the Administrative Agent (a) its certificate of incorporation (or equivalent document otherwise named)certified by the Applicable Governmental Authority and its by-laws (or equivalent document otherwise named) certified by its Secretary or AssistantSecretary (or equivalent officer otherwise named), (b) a certificate of good standing (or equivalent document otherwise named) for James River UK certifiedby the office of the applicable Governmental Authority of the jurisdiction of its organization or formation, (c) a certificate of qualification (or equivalentdocument otherwise named) to transact business as a foreign company or other entity in every other jurisdiction where its failure so to qualify could have aMaterial Adverse Effect, and (d) a copy, certified by its Secretary or Assistant Secretary (or equivalent officer otherwise named), of resolutions of its Board ofDirectors (or equivalent body otherwise named) authorizing the execution and delivery of such Payment Guaranty, together with the names and signatures ofits officers executing or attesting to such Payment Guaranty, in form and substance reasonably satisfactory to the Administrative Agent. (e) James River Confirmation. James River shall have executed and delivered to the Administrative Agent a confirmation of its PaymentGuaranty in form and substance reasonably 5 satisfactory to the Administrative Agent, accompanied by such certifications regarding good standing and authorization as the Administrative Agent mayreasonably request. (f) Opinions. The Borrowers shall have caused their and James River UK’s special counsel, Bryan Cave LLP, to deliver favorable opinions ofcounsel in favor of the Lenders, the Letter of Credit Issuer and the Administrative Agent, all in form and substance reasonably acceptable to theAdministrative Agent. (g) Agent Expenses. The Borrowers shall have paid or caused to be paid to the Administrative Agent all fees and other amounts due andpayable on or prior to the Second Amendment Effective Date, including, to the extent invoiced, reimbursement or payment of all reasonable out-of-pocketexpenses (including fees, charges and disbursements of the Special Counsel) required to be reimbursed or paid by the Borrowers hereunder, under any otherLoan Document or under said fee letter agreement. (h) Legal Matters. All legal matters incident to this Second Amendment and the consummation of the transactions contemplated hereby shall bereasonably satisfactory to Squire Patton Boggs (US) LLP, Cleveland, Ohio, special counsel to the Administrative Agent (the “Special Counsel”). Notwithstanding the foregoing, if the Second Amendment Effective Date has not occurred on or before December 15, 2015, this Second Amendment shall notbecome effective and shall be deemed of no further force and effect. 3. Additional Representations and Warranties. Without limiting the effect of Paragraph 2(a)(ii) above, the Borrowers represent and warrant tothe Lenders, the Letter of Credit Issuer and the Administrative Agent that (i) James River UK is not subject to any Applicable Insurance Code or ApplicableInsurance Regulatory Authority, (ii) the contribution of 6 the James River Equity to the capital of James River UK does not require the consent or approval of the Applicable Insurance Regulatory Authority of anyInsurance Subsidiary of James River, (iii) the contribution of the James River Equity to the capital of James River UK does not cause to exist or arise anyrestriction, diminution or other impairment under any Applicable Insurance Code of any Insurance Subsidiary of James River to such Insurance Subsidiary’sright to pay Restricted Payments to the Person that is its direct parent, and (iv) no restriction or other impairment (other than customary corporate Laws ofgeneral application against impairment of capital) exists under the Laws of England and Wales, the United States of America, or Bermuda (or any state,province or other political subdivision thereof) to James River UK’s right to pay Restricted Payments to the Parent. 4. No Other Modifications. Except as expressly provided in this Second Amendment, all of the terms and conditions of the Credit Agreementand the other Loan Documents remain unchanged and in full force and effect. 5. Confirmation of Obligations; Release. Each Borrower hereby affirms as of the date hereof all of its respective Debt and other obligations toeach of the Lender Parties under and pursuant to the Credit Agreement and each of the other Loan Documents and that such Debt and other obligations areowed to each of the Lender Parties according to their respective terms. Each Borrower hereby affirms as of the date hereof that there are no claims or defensesto the enforcement by the Lender Parties of the Debt and other obligations of such Borrower to each of them under and pursuant to the Credit Agreement orany of the other Loan Documents. 6. Administrative Agent’s Expense. The Borrowers agree to reimburse the Administrative Agent promptly for its reasonable invoiced out-of-pocket costs and expenses 7 incurred in connection with this Second Amendment and the transactions contemplated hereby, including, without limitation, the reasonable fees andexpenses of the Special Counsel. 7. Governing Law; Binding Effect. THIS SECOND AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCEWITH THE LAWS OF THE STATE OF NEW YORK AND SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF THE BORROWERS, THELENDERS, THE LETTER OF CREDIT ISSUER AND THE ADMINISTRATIVE AGENT AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS. 7. Counterparts. This Second Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed tobe an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. Any partyhereto may execute and deliver a counterpart of this Second Amendment by delivering by facsimile or email transmission a signature page of this SecondAmendment signed by such party, and any such facsimile or email signature shall be treated in all respects as having the same effect as an original signature.Any party delivering by facsimile or email transmission a counterpart executed by it shall promptly thereafter also deliver a manually signed counterpart ofthis Second Amendment. 8. Miscellaneous. (a) Upon the effectiveness of this Second Amendment, this Second Amendment shall be a Loan Document. (b) The invalidity, illegality, or unenforceability of any provision in or Obligation under this Second Amendment in any jurisdiction shall notaffect or impair the validity, legality, or enforceability of the remaining provisions or obligations under this Second Amendment or of such provision orobligation in any other jurisdiction. 8 (c) This Second Amendment and all other agreements and documents executed in connection herewith have been prepared through the jointefforts of all of the parties. Neither the provisions of this Second Amendment or any such other agreements and documents nor any alleged ambiguity shall beinterpreted or resolved against any party on the ground that such party’s counsel drafted this Second Amendment or such other agreements and documents, orbased on any other rule of strict construction. Each of the parties hereto represents and declares that such party has carefully read this Second Amendment andall other agreements and documents executed in connection herewith and therewith, and that such party knows the contents thereof and signs the same freelyand voluntarily. The parties hereby acknowledge that they have been represented by legal counsel of their own choosing in negotiations for and preparationof this Second Amendment and all other agreements and documents executed in connection therewith and that each of them has read the same and had theircontents fully explained by such counsel and is fully aware of their contents and legal effect. (d) The Obligations of the Borrowers hereunder are joint and several, all as more fully set forth in Article 10 of the Credit Agreement. 9. Waiver of Jury Trial. EACH OF THE PARTIES TO THIS SECOND AMENDMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO ATRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE) ARISINGOUT OF OR RELATING TO THIS SECOND AMENDMENT, THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBYOR THEREBY. EACH PARTY HERETO HEREBY (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HASREPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER 9 PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, AND (B) ACKNOWLEDGES THAT IT ANDTHE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS SECOND AMENDMENT BY, AMONG OTHER THINGS, THE MUTUALWAIVERS AND CERTIFICATION IN THIS SECTION. [No additional provisions are on this page; the page next following is the signature page.] 10 IN WITNESS WHEREOF, the Borrowers, the Lenders, the Letter of Credit Issuer and the Administrative Agent have hereunto set their hands as of thedate first above written. BORROWERS JAMES RIVER GROUP HOLDINGS, LTD. By:/s/ Gregg Davis Gregg Davis, Chief Financial Officer JRG REINSURANCE COMPANY LTD. By:/s/ Kevin Copeland Kevin Copeland, Chief Financial Officer 11 ADMINISTRATIVE AGENT AND LETTER OF CREDIT ISSUER KEYBANK NATIONAL ASSOCIATION, as Administrative Agent and Letterof Credit Issuer LENDERS KEYBANK NATIONAL ASSOCIATION, as Lender By:/s/ James Cribbet James Cribbet, Senior Vice President 12 [Lender Signatures Continued] SUNTRUST BANK, as Lender By:/s/ Paula Mueller Name: Paula Mueller Title: Director 13 [Lender Signatures Continued] BANK OF MONTREAL, CHICAGO BRANCH, as Lender By:/s/ Joan S. Murphy Name: Joan S. Murphy Title: Director 14 [Lender Signatures Continued] THE BANK OF NOVA SCOTIA, as Lender By:/s/ Eli Mou Name: Eli Mou Title: Director & Exec. Head 15 [Lender Signatures Continued] THE BANK OF N.T. BUTTERFIELD & SON LIMITED, as Lender By:/s/ Alan Day Name: Alan Day Title: Vice President And: /s/ Raymond Long Name: Raymond Long Title: Vice President 16 [Lender Signatures Continued] FIRST TENNESSEE BANK, N.A., as Lender By:/s/ Keith A. Sherman Name: Keith A. Sherman Title: Senior Vice President 17 [Lender Signatures Continued] YADKIN BANK, as Lender By:/s/ Jeff Hendrick Name: Jeff Hendrick Title: Vice President 18 Exhibit 10.5 CONTINUING GUARANTY OF PAYMENT WHEREAS, James River Group Holdings, Ltd., a Bermuda company (the “Parent”), directly owns all of the issued and outstanding capital stock ofthe undersigned JAMES RIVER GROUP HOLDINGS UK LIMITED, a private limited company incorporated under the Laws of England and Wales (the“Guarantor”); WHEREAS, the Guarantor directly or indirectly owns 100% of the issued and outstanding capital stock of James River Group, Inc. (“James River”); WHEREAS, the Parent and JRG Reinsurance Company Ltd., as “Borrowers”; KeyBank National Association, as Administrative Agent (in suchcapacity, the “Administrative Agent”) and as “Letter of Credit Issuer”; and certain “Lender” parties; and certain other parties are the parties to that certainCredit Agreement of dated June 5, 2013 (as the same heretofore has been and hereafter may from time to time be amended, supplemented or replaced, the“Credit Agreement”); WHEREAS, pursuant to the Credit Agreement, inter alia, the Lenders have agreed to advance Loans (as this and other capitalized terms used hereinand not otherwise defined herein are defined in the Credit Agreement) to the Borrowers and issue Letters of Credit; WHEREAS, the Guarantor and its subsidiaries, including James River, will receive substantial benefit from the proceeds of the Loans; and WHEREAS, the Lenders and the Administrative Agent have required that the Guarantor execute this guaranty of payment (this “Guaranty”) as acondition to the effectiveness of the Second Amendment; NOW, THEREFORE, in order to induce the Lenders and the Administrative Agent to enter into the Second Amendment, and in consideration ofthe benefits to accrue to the Guarantor by reason thereof, and for other good and valuable consideration, receipt and sufficiency of which are herebyacknowledged, the Guarantor hereby represents and warrants to, and covenants and agrees with each of each Lender, the Letter of Credit Issuer and theAdministrative Agent (each a “Guaranteed Creditor” and, collectively, the “Guaranteed Creditors”) as follows: 1. Guaranty; Guaranteed Obligations. (a) The Guarantor does hereby irrevocably and unconditionally guarantee to the Guaranteed Creditors, and each of them, the punctual (i) paymentof the full amount, when due (whether by demand, acceleration or otherwise), of the principal and interest on each of the notes issued by the Borrowerspursuant to the Credit Agreement (the “Notes”) and any amendment or supplement thereto whether now outstanding or hereafter issued (including interestaccruing thereon after the commencement of any case or proceeding under any federal or state bankruptcy, insolvency or similar law (a “Proceeding”) whether or not a claim for such interest is allowable in such Proceeding (“Post-Petition Interest”)) and(ii) payment and performance of all other Indebtedness and other obligations of each Borrower under the Credit Agreement and each of the other LoanDocuments, whether now or hereafter existing, due or to become due, direct or contingent, joint, several or independent, secured or unsecured and whethermatured or unmatured (including Post-Petition Interest ) (all of the liabilities included in clauses (i) and (ii) of this Paragraph are hereinafter collectivelyreferred to as the “Guaranteed Obligations”). (b) This is a guaranty of payment and performance and not of collection and is the primary obligation of the Guarantor; and the GuaranteedCreditors, and each of them, may enforce this Guaranty against the Guarantor without any prior pursuit or enforcement of the Guaranteed Obligations againstthe Borrowers, any collateral, any right of set-off or similar right, any other guarantor or other obligor or any other recourse or remedy in the power of theGuaranteed Creditors or any of them. (c) All payments made by the Guarantor under or by virtue of this Guaranty shall be paid to the Administrative Agent, for the benefit of theGuaranteed Creditors, at the Payment Office or such other place as the Administrative Agent may hereafter designate in writing. The Guarantor hereby agreesto make all payments under or by virtue of this Guaranty to the Administrative Agent as aforesaid on demand; provided that all of the GuaranteedObligations shall automatically be due and payable in full upon the occurrence of an Event of Default of the type described in clause (h) or clause (i) ofArticle 7 of the Credit Agreement. 2. Waivers. The Guarantor hereby waives (i) notice of acceptance of this Guaranty, notice of the creation, renewal or accrual of any of theGuaranteed Obligations and notice of any other liability to which it may apply, and notice of or proof of reliance by the Guaranteed Creditors upon thisGuaranty, (ii) diligence, protest, notice of protest, presentment, demand of payment, notice of dishonor or nonpayment of any of the Guaranteed Obligations,suit or taking other action or making any demand against, and any other notice to the Borrowers or any other party liable thereon, (iii) any defense basedupon any statute or rule of law to the effect that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that ofthe principal, (iv) any defense based upon any Guaranteed Creditor’s administration or handling of the Guaranteed Obligations, except behavior whichamounts to bad faith and (v) to the fullest extent permitted by law, any defenses or benefits which may be derived from or afforded by law which limit theliability of or exonerate guarantors or sureties, or which may conflict with terms of this Guaranty. 3. Certain Rights of the Guaranteed Creditors. (a) So far as the Guarantor is concerned, the Guaranteed Creditors may, at any time and from time to time, without the consent of, or notice to, theGuarantor, and without impairing or releasing any of the Guaranteed Obligations hereunder, upon or without any terms or conditions and in whole or in part: Page 2 of 11 1. modify or change the manner, place or terms of, and/or change or extend or accelerate the time of payment of, renew or alterany of the Guaranteed Obligations, any security therefor or any liability incurred directly or indirectly in respect thereof (including, withoutlimitation, (A) increase or decrease in the Guaranteed Obligations or the rate of interest on the Guaranteed Obligations and (B) anyamendment of the Guaranteed Obligations to permit any Guaranteed Creditors to extend further or additional accommodations to theBorrowers in any form, including credit by way of loan, lease, sale or purchase of assets, guarantee, or otherwise, which shall thereupon beGuaranteed Obligations), and this Guaranty shall apply to the Guaranteed Obligations as so modified, changed, extended, renewed oraltered; 2. request, accept, sell, exchange, release, subordinate, surrender, realize upon or otherwise deal with, in any manner and in anyorder, (a) any other guaranty by whomsoever at any time made of the Guaranteed Obligations or any liabilities (including any of thosehereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset or right with respect thereto and (b) any property bywhomsoever at any time pledged, mortgaged or otherwise encumbered to secure, or howsoever securing, the Guaranteed Obligations or anyliabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset or right withrespect thereto; 3. exercise or refrain from exercising any rights against the Borrowers or against any collateral or others (including, withoutlimitation, any other guarantor) or otherwise act or refrain from acting; 4. settle or compromise any of the Guaranteed Obligations, and security therefor or any liability (including any of thosehereunder) incurred directly or indirectly in respect thereof or hereof, and subordinate the payment of all or any part thereof to the paymentof any liability (whether due or not) of the Borrowers to creditors of the Borrowers other than the Guaranteed Creditors when, in theRequired Lenders’ sole judgment, it considers such subordination necessary or helpful in the protection of its interest or the exercise of itsremedies, including, without limitation, the sale or other realization upon collateral; 5. apply in the manner determined by the Required Lenders any sums by whomsoever paid or howsoever realized to any of theGuaranteed Obligations, regardless of what liability or liabilities of the Borrowers remain unpaid; and 6. amend or otherwise modify, consent to or waive any breach of, or any act, omission or default or Event of Default under theCredit Agreement, the Notes, any other Loan Document or any agreements, instruments or documents referred to therein or executed anddelivered pursuant thereto or in connection therewith. Page 3 of 11 (b) Without limiting the generality of paragraph (a), above, the Guarantor consents that the Guaranteed Creditors may, and authorizes theGuaranteed Creditors at any time in their discretion without notice demand and without affecting the indebtedness and liabilities of the Guarantor hereunder,to: (i) accept new or additional documents, instruments, or agreements relative to the Guaranteed Obligations, (ii) consent to the change, restructure ortermination of the individual, partnership, or company structure or existence of a Borrower, the Guarantor, any other guarantor obligor or any Affiliate of aBorrower or the Guarantor and correspondingly restructure the Guaranteed Obligations, (iii) accept partial payments on the Guaranteed Obligations, (iv)amend, alter, exchange, substitute, transfer, enforce, perfect or fail to perfect, waive, subordinate, terminate, or release any collateral or other guaranties and(iv) assign the Guaranteed Obligations or any rights related thereto in whole or in part. 3. Obligations Absolute. This Guaranty and the obligations of the Guarantor hereunder shall be valid and enforceable and shall not be subject tolimitation, impairment or discharge for any reason (other than the payment in full of the Guaranteed Obligations), including, without limitation, theoccurrence of any of the following, whether or not the Guarantor shall have had notice or knowledge of any of them: (i) any failure to assert or enforce oragreement not to assert or enforce, or the stay or enjoining by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim ordemand of any right, power or remedy with respect to the Guaranteed Obligations or any agreement relating thereto or with respect to any other guarantythereof or security therefor, (ii) any waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including,without limitation, provisions relating to Events of Default) of the Credit Agreement, the Notes, any other Loan Document or any other agreement at any timeexecuted in connection therewith, (iii) the Guaranteed Obligations or any portion thereof at any time being found to be illegal, invalid or unenforceable inany respect, (iv) the application of payments received from any source to the payment of indebtedness other than the Guaranteed Obligations, even thoughthe Guaranteed Creditors might have elected to apply such payment to the payment of all or any part of the Guaranteed Obligations, (v) any failure to perfector continue perfection of a security interest in any collateral which secures any of the Guaranteed Obligations, (vi) any defenses, set-offs or counterclaimswhich the Borrowers may allege or assert against the Guaranteed Creditors or any of them in respect of the Guaranteed Obligations, (vii) the avoidance orvoidability of the Guaranteed Obligations under the Bankruptcy Code or other applicable laws and (viii) any other act or thing or omission which may ormight in any manner or to any extent vary the risk of the Guarantor as an obligor in respect of the Guaranteed Obligations. 4. Representations and Warranties. The Guarantor hereby represents and warrants to the Guaranteed Creditors that the Guarantor has, independentlyand without reliance upon the Guaranteed Creditors and based on such documents and information as it has deemed appropriate, made its own credit analysisand decision to enter into this Guaranty, and the Guarantor has established adequate means of obtaining from any other obligors on a continuing basisinformation pertaining to, and is now and on a continuing basis will be completely familiar with, the financial condition, operations, properties and prospectsof such other obligors. Page 4 of 11 5. Subrogation. (a) Any and all rights and claims of the Guarantor against a Borrower or any of its property arising by reason of any payment by the Guarantor tothe Guaranteed Creditors or any of them pursuant to the provisions of this Guaranty, shall be subordinate and subject in right of payment to the prior andindefeasible payment in full of all Guaranteed Obligations to the Guaranteed Creditors, and until such time the Guarantor shall have no right of subrogation,contribution, reimbursement or similar right and hereby waives any right to enforce any remedy the Guaranteed Creditors or the Guarantor may now orhereafter have against such Borrower, any endorser of any other guarantor of all or any part of the Guaranteed Obligations of such Borrower and any right toparticipate in, or benefit from, any security given to the Guaranteed Creditors to secure any Guaranteed Obligations. Any promissory note evidencing suchliability of such Borrower to the Guarantor shall be non-negotiable and shall expressly state that it is subordinated pursuant to this Guaranty. (b) All Liens of the Guarantor, if any, whether now or hereafter arising and however existing, in any assets of a Borrower or any assets securingGuaranteed Obligations shall be and hereby are subordinated to the rights and interests of the Guaranteed Creditors in those assets until the prior andindefeasible payment in full of all Guaranteed Obligations to the Guaranteed Creditors and termination of all commitments and other financing arrangementsbetween the Borrowers and the Guaranteed Creditors; provided that the provisions of this sentence shall not be construed as a waiver or modification of theprovisions of the Credit Agreement restricting the Borrowers’ right to grant or permit Liens on their respective property. 6. Borrower and Other Guarantor Information. The Guarantor acknowledges that the Guarantor is relying upon the Guarantor’s own knowledge andis fully informed with respect to each Borrower’s financial condition. The Guarantor assumes full responsibility for keeping fully informed of the financialcondition of the Borrowers and all other circumstances affecting the Borrowers’ ability to perform their obligations to the Guaranteed Creditors, and agreesthat the Guaranteed Creditors will have no duty to report to the Guarantor any information that the Guaranteed Creditors or any of them receive about theBorrowers’ financial condition or any circumstances bearing on the Borrowers’ ability to perform all or any portion of the Guaranteed Obligations, regardlessof whether any Guaranteed Creditor has reason to believe that any such facts materially increase the risk beyond that which the Guarantor intends to assumeor has reason to believe that such facts are unknown to the Guarantor or has a reasonable opportunity to communicate such facts to the Guarantor. 7. Losses and Expenses. The Guarantor hereby agrees to defend, indemnify and hold harmless each Guaranteed Creditor from and against anylosses, costs or expenses (including, without limitation, reasonable attorneys’ fees and litigation costs) incurred by such Guaranteed Creditor in connectionwith any Guaranteed Creditor’s collection of any sum due hereunder or its enforcement of its and the other Guaranteed Creditors’ rights hereunder. 8. Payments Net. All payments made by the Guarantor hereunder will be made without setoff, counterclaim or other defense. All such paymentswill be made free and clear of, and Page 5 of 11 without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now orhereafter imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein with respect to such payments (but excluding,except as provided in the second succeeding sentence, tax imposed on or measured by the net income or net profits of any Guaranteed Creditor pursuant tothe laws of the jurisdiction in which such Guaranteed Creditor is organized or the jurisdiction in which the principal office or applicable lending office ofsuch Guaranteed Creditor is located or any subdivision thereof or therein) and all interest, penalties or similar liabilities with respect thereto (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as “Taxes”). If any Taxes are so levied or imposed, theGuarantor agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under thisGuaranty, after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein. If any amounts are payable inrespect of Taxes pursuant to the preceding sentence, the Guarantor agrees to reimburse each Guaranteed Creditor, upon the written request of such GuaranteedCreditor, for Taxes imposed on or measured by the net income or net profits of such Guaranteed Creditor pursuant to the laws of the jurisdiction in which theprincipal office or applicable lending office of such Guaranteed Creditor is located and for any withholding of Taxes as such Guaranteed Creditor shalldetermine are payable by, or withheld from, such Guaranteed Creditor in respect of such amounts so paid to or on behalf of such Guaranteed Creditorpursuant to the preceding sentence and in respect of any amounts paid to or on behalf of such Guaranteed Creditor pursuant to this sentence. The Guarantorwill furnish to the Administrative Agent, within 30 days after the date the payment of any Taxes is due pursuant to applicable law, certified copies of taxreceipts evidencing such payment by the Guarantor. The Guarantor agrees to indemnify and hold harmless each Guaranteed Creditor, and reimburse suchGuaranteed Creditor upon its written request, for the amount of any Taxes so levied or imposed and paid by such Guaranteed Creditor. Without prejudice tothe survival of any other agreement of the Guarantor hereunder or under any other Loan Document, the agreements and obligations of the Guarantorcontained in this paragraph shall survive the payment in full of the Guaranteed Obligations and all other amounts payable under this Guaranty. 9. Notices. All notices, requests, demands or other communications hereunder shall be in writing delivered by hand or overnight courier service,mailed by certified or registered mail or sent by telecopy, as follows: If to the Guarantor: 44 Church StreetP.O. Box 1502Hamilton HM FXBermudaAttention of Gregg Davis, Chief Financial Officer(Facsimile No. (441) 278-4588) Page 6 of 11 If to a Guaranteed Creditor: c/o KeyBank National Association, as Administrative Agent127 Public SquareCleveland, Ohio 44114Attention of James Cribbet, Senior Vice President(Facsimile No. (216) 689-4981) Any notice, request, demand or other communication hereunder shall be deemed to have been duly given when deposited in the mails, postage prepaid, or inthe case of telecopy notice, when sent, addressed as aforesaid. The Administrative Agent and the Guarantor may change the person or address to whom orwhich notices are to be given hereunder, by notice duly given hereunder. 10. No Waiver by the Guaranteed Creditors. No delay on the part of the Guaranteed Creditors in exercising any of their options, powers or rights,and no partial or single exercise thereof, whether arising hereunder, under the Credit Agreement, the Notes, the other Loan Documents or otherwise, shallconstitute a waiver thereof or affect any right hereunder. No waiver of any such rights and no modification, amendment or discharge of this Guaranty shall bedeemed to be made by any Guaranteed Creditor or shall be effective unless the same shall be in writing signed by such Guaranteed Creditor, and then suchwaiver shall apply only with respect to the specific instance involved and shall in no way impair the rights of any other Guaranteed Creditor or of suchGuaranteed Creditor or the obligations of the Guarantor to such Guaranteed Creditor in any other respect at any other time. 11. Authorization to Debit Account. If and to the extent payment owed to the Guaranteed Creditors is not made when due hereunder or within three(3) days thereafter, the Guarantor hereby authorizes each Guaranteed Creditor to debit from time to time against any or all of the Guarantor’s general depositaccounts with such Guaranteed Creditor any amount so due. 12. Payments Final. Whenever the Guaranteed Creditors shall credit any payment to the Guaranteed Obligations or any part thereof, whatever thesource or form of payment, the credit shall be conditional as to the Guarantor unless and until the payment shall be final and valid and indefeasible as to allthe world. Without limiting the generality of the foregoing, the Guarantor agrees that if any check or other instrument so applied shall be dishonored by thedrawer or any party thereto, or if any payment by the Guarantor or any proceeds of collateral so applied shall thereafter be recovered by any trustee inbankruptcy or anyone else, each Guaranteed Creditor in each case may reverse any entry relating thereto in its books, and the Guarantor shall remain liabletherefor even if such Guaranteed Creditor may no longer have in its possession any evidence of the Guaranteed Obligations to which the payment in questionwas applied. 13. Governing Law; Service; No Set-off. This Guaranty and the respective rights and obligations of the Guaranteed Creditors and the Guarantorhereunder shall be construed and enforced in accordance with the laws of the State of New York applicable to contracts made and Page 7 of 11 to be performed wholly within such state. The Guarantor irrevocably consents that service of notice, summons or other process in any action or suit in anycourt of record to enforce this Guaranty may be made upon the Guarantor by mailing a copy of the summons to the Guarantor by certified or registered mail,at the address specified above. The Guarantor hereby waives the right to interpose counterclaims or set-offs of any kind and description in any such action orsuit arising hereunder or in connection herewith. 14. Successors and Assigns. This Guaranty shall be binding upon the Guarantor and its successors and assigns, and shall inure to the benefit of theGuaranteed Creditors and their respective successors and assigns. Without limiting the generality of the foregoing, each Guaranteed Creditor may assign itsrights under this Guaranty in whole or in part and upon any such assignment, all the terms and provisions of this Guaranty shall inure to the benefit of suchassignee to the extent so assigned. The terms used to designate any of the parties herein shall be deemed to include the successors and assigns of such partiesand the term “Lender” shall include, in addition to such Lender, any lawful owner, holder or pledgee of a Note or other Obligations or any of them. 15. Final Agreement. This Guaranty, the Credit Agreement and the other Loan Documents represent the final agreement among the parties and maynot be contradicted by evidence of prior, contemporaneous or subsequent oral agreements. There are no unwritten oral agreements between the parties. Allprior or contemporaneous agreements, understandings, representations and statements, oral or written, are merged into this Guaranty, the Credit Agreementand the other Loan Documents. Guarantor acknowledges that it has received copies of the Notes and all other Loan Documents. 16. Severability; Limitations. (a) If this Guaranty by the Guarantor is held or determined to be void, invalid or unenforceable, in whole or in part, such holding or determinationshall not impair or affect the validity and enforceability of any clause or provision not so held to be void, invalid or unenforceable. If this Guaranty as to theGuarantor would be held or determined by a court or tribunal having competent jurisdiction to be void, invalid or unenforceable on account of the amount ofits aggregate liability under this Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the aggregate amount of the liability ofthe Guarantor under this Guaranty shall, without any further action by the Guarantor, the Guaranteed Creditors or any other person, be automatically limitedand reduced to an amount which is valid and enforceable. (b) Without limiting the generality of paragraph (a), above, the Guarantor, and by acceptance hereof, the Guaranteed Creditors, hereby confirm thatit is the intention of all such parties that this Guaranty not constitute a fraudulent transfer or conveyance under the federal Bankruptcy Code, the UniformFraudulent Conveyances Act, the Uniform Fraudulent Transfer Act or similar state statute applicable to this Guaranty. Therefore, such parties agree that theGuaranteed Obligations shall be limited to maximum amount as will, after giving effect to such maximum amount and other contingent and fixed liabilitiesof the Guarantor that are relevant under such laws, and after giving effect to any collections from, rights to receive contribution Page 8 of 11 from or payments made by or on behalf of any other obligor, result in the Guaranteed Obligations not constituting a fraudulent transfer or conveyance. 17. Jurisdiction. This Guaranty is delivered in Cleveland, Ohio, and the Guarantor (a) hereby irrevocably submits to the jurisdiction of the statecourts of the State of Ohio and to the jurisdiction of the United States District Court for the Northern District of Ohio, for the purpose of any suit, action orother proceeding arising out of or based upon this Guaranty or the subject matter hereof brought by the Guaranteed Creditors or their successors or assigns,(b) hereby waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subjectpersonally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action orproceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Guaranty or the subject matter hereofmay not be enforced in or by such court and (c) hereby waives and agrees not to seek any review by any court of any other jurisdiction which may be calledupon to grant an enforcement of the judgment of any such Ohio state or federal court. The Guarantor agrees that its submission to jurisdiction and its consentto service of process by mail is made for the express benefit of the Guaranteed Creditors. Final judgment against the Guarantor in any such action, suit orproceeding may be enforced in other jurisdictions (a) by suit, action or proceeding on the judgment or (b) in any other manner provided by or pursuant to thelaws of such other jurisdiction; provided, however, that the Guaranteed Creditors may at their option bring suit, or institute other judicial proceedings,against the Guarantor in any state or federal court of the United States or of any country or place where the Guarantor or its property may be found. 18. Separate Indemnity. As a separate, additional and continuing obligation, the Guarantor unconditionally and irrevocably undertakes and agrees,for the benefit of the Guaranteed Creditors, that, should any amounts not be recoverable from the Guarantor under the above provisions of this Guaranty forany reason whatsoever (including, without limitation, by reason of any provision of the Credit Agreement or any other Loan Documents being or becomingvoid, unenforceable, or otherwise invalid under any applicable law) then, notwithstanding any notice or knowledge thereof by the Guaranteed Creditors, anyof their Affiliates, or any other person, at any time, the Guarantor as sole, original and independent obligor, upon demand by the Administrative Agent or anyother the Guaranteed Creditors, will make payment to the Guaranteed Creditors of all such obligations not so recoverable by way of full indemnity, in suchcurrency and otherwise in such manner as is provided in the Credit Agreement or any other Loan Document. 19. Service. (a) The Guarantor irrevocably consents to service of process in the manner provided for notices in Section 9, above. Nothing in any LoanDocument will affect the right of any Guaranteed Creditor to serve process in any other manner permitted by law. (b) The Guarantor hereby irrevocably designates, appoints and empowers Corporation Service Company, with offices on the Effective Date at 80State Street, Albany, New York Page 9 of 11 12207-2543, as its designee, appointee and agent to receive, accept and acknowledge for and on its behalf, and in respect of its property, service of any andall legal process, summon, notices and documents which may be served in any such action or proceeding. If for any reason such designee, appointee andagent shall cease to be available to act as such, the Guarantor agrees to designate a new designee, appoint and agent in New York City on the terms and forthe purposes of this provision reasonably satisfactory to the Administrative Agent. 20. WAIVER OF JURY TRIAL. THE GUARANTOR AND, BY THEIR ACCEPTANCE OF THIS GUARANTY, THE GUARANTEED CREDITORSHEREBY IRREVOCABLY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPONOR ARISING OUT OF THE CREDIT AGREEMENT, THE NOTES, THE OTHER LOAN DOCUMENTS OR THIS GUARANTY OR ANY DEALINGS AMONGTHEM RELATING TO THE SUBJECT MATTER OF THE CREDIT AGREEMENT, THE NOTES, THE OTHER LOAN DOCUMENTS OR THIS GUARANTYAND THE RELATIONSHIPS THEREBY ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may befiled in any court and that relate to the subject matter of this transaction, including, without limitation, contract claims, tort claims, breach of duty claims, andall other statutory and common law claims. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS ORMODIFICATIONS OF THIS GUARANTY. In the event of litigation, this provision may be filed as a written consent to a trial by the court. [No additional provisions are on this page; the page next following is the signature page.] Page 10 of 11 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed as fully written above as of this 15TH day of December,2015. Executed bySignature:/s/ Gregg DavisJAMES RIVER GROUPPrint name:Gregg DavisHOLDINGS UK LIMITED acting by a director in the presence of: Witness’ signature:/s/ Kevin CopelandWitness’ name:Kevin CopelandWitness’ address:18 North Shore Rd BermudaWitness’ occupation:CFO JRG RE Page 11 of 11 Exhibit 10.6 THIRD AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this “Third Amendment”) is made and entered into as of the 30th day of December, 2015,by and among: (i) JAMES RIVER GROUP HOLDINGS, LTD., a Bermuda company (the former company name of which is Franklin Holdings(Bermuda), Ltd.), and JRG REINSURANCE COMPANY LTD., a regulated insurance company domiciled in Bermuda (each a “Borrower” and,collectively, the “Borrowers”); (ii) THE FINANCIAL INSTITUTIONS as signatory lender parties hereto and their successors and assigns (each a “Lender” and,collectively, the “Lenders”); and (iii) KEYBANK NATIONAL ASSOCIATION, a national banking association, in its capacity as “Administrative Agent” under the CreditAgreement (defined below). Recitals: A. The Borrowers, the Lenders and the Administrative Agent and certain other parties are the parties to that certain Credit Agreement dated asof June 5, 2013, as amended by a First Amendment dated September 24, 2014, a Waiver Letter dated February 6, 2015, a Commitment Acceptance Agreementdated May 20, 2015 and a Second Amendment dated December 15, 2015 (collectively, the “Credit Agreement”), pursuant to which, inter alia, the Lendersagreed, subject to the terms and conditions thereof, to advance Loans (as this and other capitalized terms used herein and not otherwise defined herein aredefined in the Credit Agreement) to the Borrowers; and the Letter of Credit Issuer agreed, subject to the terms and conditions thereof, to issue Letters ofCredit. B. The Borrowers have requested the Lenders to agree to an amendment to Section 6.13 of the Credit Agreement. Agreements: NOW, THEREFORE, in consideration of the foregoing Recitals and the mutual agreements hereinafter set forth, the Borrowers, the Lenders and theAdministrative Agent, intending to be legally bound, hereby agree as follows: 1. Amendment to Credit Agreement. Subject to the terms and conditions of this Third Amendment, including, without limitation, Paragraph 2,below, paragraph (a) of Section 6.13 (Risk-Based Capital Ratio; Other Minimum Capital Requirements) of the Credit Agreement is hereby amended andrestated in its entirety to provide as follows: (a) (i) The Borrowers shall not, as of the end of any Fiscal Year ending December 31, 2012 and thereafter through and including December 31,2014, permit the Risk-Based Capital Ratio of any Domestic Insurance Subsidiary to be less than 2.50 to 1, and (ii) the Borrowers shall not, as of theend of any Fiscal Year ending December 31, 2015 and thereafter, permit the Risk-Based Capital Ratio (A) of James River Insurance to be less than2.00 to 1 or (B) of any other Domestic Insurance Subsidiary to be less than 2.50 to 1. 2. Amendment Effective Date; Conditions Precedent. The amendment set forth in Paragraph 1, above, shall not be effective unless and until thedate on which all of the following conditions precedent have been satisfied (such date of effectiveness being the “Third Amendment Effective Date”);provided, however, that upon the effectiveness of this Third Amendment as provided in this Paragraph 2, the amendment provided for in Paragraph 1, above,shall be deemed to be effective, nunc pro tunc, as of the 30th day of December, 2015: (a) Officer’s Certificate. On the Third Amendment Effective Date, after giving effect to the amendment set forth in Paragraph 1, above, (i) thereshall exist no Default, and a Financial Officer or other executive officer of each Borrower, on behalf of such Borrower, shall have delivered to theAdministrative Agent written confirmation thereof dated as of the Third Amendment Effective Date, (ii) the representations and warranties of the Borrowersunder Article 3 of the Credit Agreement shall have been reaffirmed in writing by each Borrower as being true and correct in all material respects as of theThird Amendment Effective Date (unless 2 and to the extent that any such representation and warranty is stated to relate solely to an earlier date, in which case such representation and warranty shallhave been true and correct in all material respects as of such earlier date), (iii) each Borrower shall have represented in writing that its execution, delivery andperformance of this Third Amendment have been authorized by all necessary corporate or company action, and (iv) each Borrower shall have reaffirmed inwriting that the Regulatory Condition Satisfaction remains effective. (b) Third Amendment. The Administrative Agent or the Special Counsel (defined below) shall have received from each Borrower and theRequired Lenders either (i) a counterpart of this Third Amendment signed on behalf of such party or (ii) written evidence satisfactory to the AdministrativeAgent (which may include telecopy or email transmission of a signed signature page of this Third Amendment) that such party has signed and delivered acounterpart of this Third Amendment. (c) Guarantor Confirmations. Each of James River and James River UK shall have executed and delivered to the Administrative Agent aconfirmation of its Payment Guaranty in form and substance reasonably satisfactory to the Administrative Agent, accompanied by such certificationsregarding good standing and authorization as the Administrative Agent may reasonably request. (d) Agent Expenses. The Borrowers shall have paid or caused to be paid to the Administrative Agent all fees and other amounts due andpayable on or prior to the Third Amendment Effective Date, including, to the extent invoiced, reimbursement or payment of all reasonable out-of-pocketexpenses (including fees, charges and disbursements of the Special Counsel) required to be reimbursed or paid by the Borrowers hereunder, under any otherLoan Document or under said fee letter agreement. 3 (e) Legal Matters. All legal matters incident to this Third Amendment and the consummation of the transactions contemplated hereby shall bereasonably satisfactory to Squire Patton Boggs (US) LLP, Cleveland, Ohio, special counsel to the Administrative Agent (the “Special Counsel”).Notwithstanding the foregoing, if the Third Amendment Effective Date has not occurred on or before March 31, 2016, this Third Amendment shall notbecome effective and shall be deemed of no further force and effect. 3. No Other Modifications. Except as expressly provided in this Third Amendment, all of the terms and conditions of the Credit Agreement andthe other Loan Documents remain unchanged and in full force and effect. 4. Confirmation of Obligations; Release. Each Borrower hereby affirms as of the date hereof all of its respective Debt and other obligations toeach of the Lender Parties under and pursuant to the Credit Agreement and each of the other Loan Documents and that such Debt and other obligations areowed to each of the Lender Parties according to their respective terms. Each Borrower hereby affirms as of the date hereof that there are no claims or defensesto the enforcement by the Lender Parties of the Debt and other obligations of such Borrower to each of them under and pursuant to the Credit Agreement orany of the other Loan Documents. 5. Administrative Agent’s Expense. The Borrowers agree to reimburse the Administrative Agent promptly for its reasonable invoiced out-of-pocket costs and expenses incurred in connection with this Third Amendment and the transactions contemplated hereby, including, without limitation, thereasonable fees and expenses of the Special Counsel. 6. Governing Law; Binding Effect. THIS THIRD AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITHTHE LAWS OF THE 4 STATE OF NEW YORK AND SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF THE BORROWERS, THE LENDERS AND THEADMINISTRATIVE AGENT AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS. 7. Counterparts. This Third Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to bean original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. Any partyhereto may execute and deliver a counterpart of this Third Amendment by delivering by facsimile or email transmission a signature page of this ThirdAmendment signed by such party, and any such facsimile or email signature shall be treated in all respects as having the same effect as an original signature.Any party delivering by facsimile or email transmission a counterpart executed by it shall promptly thereafter also deliver a manually signed counterpart ofthis Third Amendment. 8. Miscellaneous. (a) Upon the effectiveness of this Third Amendment, this Third Amendment shall be a Loan Document. (b) The invalidity, illegality, or unenforceability of any provision in or Obligation under this Third Amendment in any jurisdiction shall notaffect or impair the validity, legality, or enforceability of the remaining provisions or obligations under this Third Amendment or of such provision orobligation in any other jurisdiction. (c) This Third Amendment and all other agreements and documents executed in connection herewith have been prepared through the jointefforts of all of the parties. Neither the provisions of this Third Amendment or any such other agreements and documents nor any alleged ambiguity shall beinterpreted or resolved against any party on the ground that such 5 party’s counsel drafted this Third Amendment or such other agreements and documents, or based on any other rule of strict construction. Each of the partieshereto represents and declares that such party has carefully read this Third Amendment and all other agreements and documents executed in connectionherewith and therewith, and that such party knows the contents thereof and signs the same freely and voluntarily. The parties hereby acknowledge that theyhave been represented by legal counsel of their own choosing in negotiations for and preparation of this Third Amendment and all other agreements anddocuments executed in connection therewith and that each of them has read the same and had their contents fully explained by such counsel and is fullyaware of their contents and legal effect. (d) The Obligations of the Borrowers hereunder are joint and several, all as more fully set forth in Article 10 of the Credit Agreement. 9. Waiver of Jury Trial. EACH OF THE PARTIES TO THIS THIRD AMENDMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO ATRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE) ARISINGOUT OF OR RELATING TO THIS THIRD AMENDMENT, THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY ORTHEREBY. EACH PARTY HERETO HEREBY (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HASREPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THEFOREGOING WAIVER, AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THISTHIRD 6 AMENDMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATION IN THIS SECTION. [No additional provisions are on this page; the page next following is the signature page.] 7 IN WITNESS WHEREOF, the Borrowers, the Lenders and the Administrative Agent have hereunto set their hands as of the date first above written. BORROWERS JAMES RIVER GROUP HOLDINGS, LTD. By: /s/ Gregg Davis Gregg Davis, Chief Financial Officer JRG REINSURANCE COMPANY LTD. By: /s/ Kevin Copeland Kevin Copeland, Chief Financial Officer 8 ADMINISTRATIVE AGENT KEYBANK NATIONAL ASSOCIATION, as Administrative Agent as Lender By: /s/ James Cribbet James Cribbet, Senior Vice President LENDERS KEYBANK NATIONAL ASSOCIATION, as Lender By: /s/ James Cribbet James Cribbet, Senior Vice President 9 [Lender Signatures Continued] SUNTRUST BANK, as Lender By: /s/ Paula Mueller Name: Paula Mueller Title: Director 10 [Lender Signatures Continued] BANK OF MONTREAL, CHICAGO BRANCH, as Lender By: /s/ Joan Murphy Name: Joan Murphy Title: Director 11 [Lender Signatures Continued] THE BANK OF NOVA SCOTIA, as Lender By: /s/ Kevin Chan Name: Kevin Chan Title: Director 12 [Lender Signatures Continued] FIRST TENNESSEE BANK, N.A., as Lender By: /s/ Keith Sherman Name: Keith Sherman Title: Senior Vice President 13 [Lender Signatures Continued] YADKIN BANK, as Lender By: /s/ Jeff Hendrick Name: Jeff Hendrick Title: Vice President 14 Exhibit 21.1 SUBSIDIARIES OF JAMES RIVER GROUP HOLDINGS, LTD. SubsidiaryJurisdiction of Incorporation or FormationFalls Lake Fire and Casualty Company California Falls Lake General Insurance CompanyOhioFalls Lake Insurance Management Company, Inc.DelawareFalls Lake National Insurance CompanyOhioFranklin Holdings II (Bermuda) Capital Trust IDelawareJames River Capital Trust IDelawareJames River Capital Trust IIDelawareJames River Capital Trust IIIDelawareJames River Capital Trust IVDelawareJames River Casualty CompanyVirginiaJames River Group Holdings UK Limited United Kingdom James River Group, Inc.DelawareJames River Insurance CompanyOhioJames River Management Company, Inc.DelawareJames River Richmond Real Estate, LLCVirginiaJRG Reinsurance Company, Ltd.BermudaPotomac Risk Services, Inc.VirginiaStonewood Insurance CompanyNorth Carolina Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the following Registration Statements: (1) Registration Statement (Form S-8 No. 333-200995) of James River Group Holdings, Ltd. and (2) Registration Statement (Form S-3 No. 333-208903) of James River Group Holdings, Ltd.; of our report dated March 10, 2016, with respect to the consolidated financial statements and schedules of James River Group Holdings, Ltd. included in thisAnnual Report (Form 10-K) of James River Group Holdings, Ltd. for the year ended December 31, 2015. /s/ Ernst & YoungRichmond, VirginiaMarch 10, 2016 Exhibit 31.1CERTIFICATION I, J. Adam Abram, certify that: 1.I have reviewed this annual report on Form 10-K of James River Group Holdings, Ltd.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date: March 10, 2016 /s/ J. Adam Abram J. Adam AbramChairman and Chief Executive Officer(Principal Executive Officer) Exhibit 31.2CERTIFICATION I, Gregg T. Davis, certify that: 1.I have reviewed this annual report on Form 10-K of James River Group Holdings, Ltd.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date: March 10, 2016 /s/ Gregg T. Davis Gregg T. DavisChief Financial Officer(Principal Financial Officer) Exhibit 32 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of James River Group Holdings, Ltd. (the “Company”) on Form 10-K for the period ended December 31, 2015 asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), we, J. Adam Abram, Chairman and Chief Executive Officer of theCompany, and Gregg T. Davis, Chief Financial Officer of the Company, certify, to the best of our knowledge, pursuant to 18 U.S.C. § 1350, as adoptedpursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ J. Adam Abram J. Adam AbramChairman andChief Executive Officer (Principal Executive Officer) March 10, 2016 /s/ Gregg T. Davis Gregg T. DavisChief Financial Officer (Principal Financial Officer) March 10, 2016

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