James River Group Holdings Ltd Annual Report 2016

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, 2016orCommission 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 Floor 90 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, 2016,computed by reference to the closing sales price on the NASDAQ Global Select Market on that date, was approximately$481,620,625.The number of the Registrant’s common shares outstanding was 29,316,480 as of March 7, 2017.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 2017 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 SCHEDULESItem 16.FORM 10-K SUMMARYPART I444169696969PART II70707275121123123123124PART III125125125125125125PART IV125125125•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 which may expose us to greater risks thanintended;•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;•losses from catastrophic events which substantially exceed our expectations and/or exceed the amountof reinsurance we have purchased to protect us from such events;•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;•changes in laws or government regulation, including tax or insurance laws and regulations;•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 exceeding their authority, committing fraud or taking excessiverisks;•insufficient capital to fund our operations;•the potential impact of internal or external fraud, operational errors, systems malfunctions or cybersecurity 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 or 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, there could be material adverse taxconsequences to an investor that is subject to U.S. federal income taxation;•the Company or any of its foreign subsidiaries becoming subject to U.S. federal income taxation;•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, asamended (“Sarbanes-Oxley”);•the ownership of a substantial amount of our outstanding common shares by affiliates of D. E. Shaw &Co., L.P. (the “D. E. Shaw Affiliates”) and their resulting ability to exert significant influence overmatters requiring shareholder approval in a manner that could conflict with the interests of othershareholders and additionally, the D. E. Shaw Affiliates having certain rights with respect to boardrepresentation and 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 holding company. We own and operate a group ofspecialty insurance and reinsurance companies founded by members of our management team. For the yearended December 31, 2016, approximately 67.6% of our group-wide gross written premiums originated from theU.S. excess and surplus (“E&S”) lines market. Substantially all of our business is casualty insurance andreinsurance, and for the year ended December 31, 2016, we derived 98.1% 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 and generating meaningful risk-adjusted investmentreturns, while managing our capital opportunistically. Our group includes three specialty property-casualtyinsurance and reinsurance segments: Excess and Surplus Lines, Specialty Admitted Insurance and CasualtyReinsurance. In all of our segments, we tend to focus on accounts associated with small or medium-sizedbusinesses.We write very little property or catastrophe insurance and no property catastrophe reinsurance. For the yearended December 31, 2016, property insurance and reinsurance represented 1.9% 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 modeled 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 sells E&S commercial lines liability and property insurance in everyU.S. state and the District of Columbia through James River Insurance Company (“James River Insurance”) andits wholly-owned subsidiary, James River Casualty Company (“James River Casualty”). James River Insuranceand James River Casualty are both non-admitted carriers. Non-admitted carriers writing in the E&S market arenot bound by most of the rate and form regulations imposed on standard market companies, allowing themflexibility to change the coverage terms offered and the rate charged without the time constraints and financialcosts associated with the filing of such changes with state regulators. In 2016, the average account in thissegment (excluding commercial auto policies) generated annual gross written premiums of approximately$18,000. The Excess and Surplus Lines segment distributes primarily through wholesale insurance brokers.Members of our management team have participated in this market for over three decades and have long-standing relationships with the wholesale agents who place E&S lines accounts. The Excess and Surplus Linessegment produced 50.3% of our gross written premiums and 56.8% of our net written premiums for the yearended December 31, 2016.The Specialty Admitted Insurance segment has two areas of focus. We write a select book of workers’compensation coverage for residential contractors, light manufacturing operations, transportation workers andhealthcare workers in North Carolina, Virginia, South Carolina, and Tennessee as well as fronting and programbusiness which is becoming a significant element of our revenues and profits in this segment. We have admittedlicenses in 48 states and the District of Columbia. In our fronting and program business, we retain a smallpercentage of the risk and seek to earn fee income by allowing other carriers and producers to access ourlicensure, ratings, and underwriting and claims expertise. The Specialty Admitted Insurance segment acceptsapplications for insurance from a variety of sources, including independent retail agents, program administratorsand managing general agents (“MGAs”). The segment produced 24.7% of our gross written premiums and 10.0%of our net written premiums for the year ended December 31, 2016.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 companies and do not include the premiums andlosses ceded under our internal quota share arrangement described4TABLE OF CONTENTSbelow. All underwriting profits and losses in our Excess and Surplus Lines and Specialty Admitted Insurancesegments are before our internal quota share arrangements are reported in those segments. Our CasualtyReinsurance segment reflects the underwriting profits and losses of our unaffiliated business only.Typically, we structure our reinsurance contracts (also known as treaties) as quota share arrangements, withloss mitigating features, such as commissions that adjust based on underwriting results. We frequently includerisk mitigating features in our excess working layer treaties, which allows the ceding company to capture agreater percentage of the profits should the business prove more profitable than expected, or alternatively, withadditional premiums should the business incur higher than expected losses. We believe these structures bestalign our interests with the interests of our cedents. Treaties with loss mitigation features including sliding scaleceding commissions represented 85.6% of the gross premiums written by our Casualty Reinsurance segmentduring 2016. We typically do not assume large individual risks in our Casualty Reinsurance segment, nor do wewrite property catastrophe reinsurance. Most of the policies assumed by our Casualty Reinsurance segment havea $1.0 million per occurrence limit, and we typically assume only a portion of that exposure. We believe thisstructure reduces volatility in our underwriting results. We do not assume third-party property business at ourCasualty Reinsurance segment. Two of the three largest unaffiliated accounts written by JRG Re during 2016were casualty accounts assumed from E&S carriers. The Casualty Reinsurance segment distributes throughtraditional reinsurance brokers. The Casualty Reinsurance segment produced 25.0% of our gross writtenpremiums and 33.2% of our net written premiums for the year ended December 31, 2016.We have 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. We exclude the effects of this agreement from the presentation of Excess and Surplus Lines andSpecialty Admitted Insurance segments included herein. At December 31, 2016, approximately 67.3% of ourcash and invested assets were held in Bermuda, which benefits from a favorable operating environment,including an absence of corporate income or investment taxes. We pay a 1% excise tax on premiums ceded toJRG Re by our U.S. insurance subsidiaries.The Corporate and Other segment consists of the management and treasury activities of our holdingcompanies and interest expense associated with our debt.In 2016, our operating subsidiaries wrote $737.4 million of gross written premiums, allocated by segmentand underlying market as follows:Gross Written Premiums by SegmentGross Written Premiums Year Ended December 31, 2016% of Total(in thousands)Excess and Surplus Lines segment$370,84450.3Specialty Admitted Insurance segment182,22124.7Casualty Reinsurance segment184,33325.0$737,398100.0Gross Written Premiums by MarketNon-admitted markets$498,74467.6Admitted markets238,65432.4$737,398100.0The A.M. Best Company (“A.M. Best”) financial strength rating for our group’s regulated insurancesubsidiaries is “A” (Excellent). This rating reflects A.M. Best’s evaluation of our insurance subsidiaries’financial strength, operating performance and ability to meet obligations to policyholders and is not anevaluation 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) ratings assigned to our insuranceand reinsurance subsidiaries are consistent with our business plans and we believe allow our subsidiaries toactively pursue relationships with the agents and brokers identified in their marketing plans.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 remainsubsidiaries 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., a global investment andtechnology firm, acquired James River Group, at which point it ceased trading as a public company.Simultaneously, the investors and management founded and capitalized JRG Re, and we began the process ofbuilding 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 another institutional investor and its affiliate sold all of the common shares in theIPO. Neither the Company nor any of its management or other shareholders sold shares in the IPO.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, Sarah C. Doran, recently joined our group. She has significant experience withcapital markets and corporate development related to the insurance and financial services industry. Ms. Doranhas a history of working in a senior manager capacity in finance and advisory both within the insurance andreinsurance industry and for various investment banks.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.The President and Chief Executive Officer of our Specialty Admitted Insurance segment, Steven Hartman,has extensive experience as an insurance and reinsurance underwriter, and has the experience and industryknowledge to continue to build out our fronting and program business.The President and Chief Executive Officer of our Casualty Reinsurance segment, Dennis Johnson, has along track-record underwriting specialty reinsurance risks, particularly in the small account market where weconcentrate.All members of our executive management and senior management have equity grants that we believe helpalign their interests with those of our long-term shareholders.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.Emphasis on Lowering Volatility. We earn our profits by taking underwriting and investment risk. Weunderwrite many classes of insurance and invest in many types of assets. We actively seek to avoid underwritingbusiness or making investments that expose us to an unacceptably high risk of 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 on 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.Meaningful Risk Adjusted Investment Returns. We seek to generate meaningful contributions to companyprofitability from our investment portfolio. We attempt to follow a diversified strategy that emphasizes thepreservation of our invested assets, provides adequate liquidity for the prompt payment of claims and producesattractive results for our shareholders. Within that context, we seek to improve risk-adjusted returns in ourinvestment portfolio by allocating a portion of our portfolio to investments where we take measured risks basedupon detailed knowledge of certain niche asset classes. Investment grade fixed maturity securities make up themajority of our investment portfolio, but we are comfortable allocating a portion of our assets to non-traditionalinvestments. We consider non-traditional investments to include investments that are (1) unrated bond or fixedincome securities, (2) non-listed equities or (3) investments that generally have less liquidity than rated bond orfixed income securities or listed equities. Non-traditional investments held at December 31, 2016 and theirrespective percentage of our total invested assets at such date consist of syndicated bank loans (15.3%), interestsin limited liability companies that invest in renewable energy opportunities (2.0%), limited partnerships thatinvest in debt or equity securities (1.8%), and a private debt security (0.3%). While we are willing to makeinvestments in non-traditional types of investments, we seek to avoid asset classes and investments that we donot understand. The weighted average credit rating of our portfolio of fixed maturity securities, bank loans andredeemable preferred stocks as of December 31, 2016 was “AA-”. At December 31, 2016, the average duration ofour investment portfolio was 3.6 years.Talented Underwriters and Operating Leadership. The managers of our 16 underwriting divisions have anaverage of over 26 years of industry experience, substantial subject matter expertise and deep technicalknowledge. They have been successful and profitable underwriters for us in the specialty casualty insurance andreinsurance sectors. Our segment presidents have an average of 33 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.7TABLE OF CONTENTSMany carriers 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 the costof individually underwriting these accounts in our Excess and Surplus Lines and Specialty Admitted Insurancesegments, we continue to have our underwriters make individual judgments regarding the underwriting andpricing of accounts. Our experience leads us to believe this approach is more likely to produce consistent resultsover time and across markets. In addition, while we believe that the insurance and reinsurance industry isgenerally overcapitalized at this time and that rates in certain property and casualty sectors are “soft” across ourportfolio taken as a whole, we are currently achieving stable rates and experiencing benign loss trends in ourExcess and Surplus Lines and Specialty Admitted Insurance segments, which represented 75.0% of our grosswritten premiums and 66.8% of our net written premiums for the twelve months ended December 31, 2016. Webelieve that there are compelling opportunities for measured but profitable growth in many sectors of theinsurance 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 thoroughly and settle promptlyall covered claims, which we generally accomplish through direct contact with the insured and other affectedparties. We have historically been able to close approximately 95% of claims within five years, and as ofDecember 31, 2016, our reserves for claims incurred but not reported (“IBNR”) were approximately 66.9% of ourtotal net loss reserves.Efficient Operating Platform. Our Bermuda domicile and operations provide for capital flexibility and anefficient tax structure. At December 31, 2016, approximately 67.3% 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 throughDecember 31, 2016, we have experienced $145.2 million of cumulative net favorable reserve development.Earn a Meaningful Contribution from Investments. We seek to earn a meaningful contribution to ouroverall returns from our investment portfolio activities each year. We attempt to balance the preservation ofassets, liquidity needs and mitigation of volatility with returns across our portfolio. We believe our diversifiedportfolio and ability to source investment opportunities positions us well to generate returns while balancing theimportance of maintaining a strong balance sheet.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.8TABLE OF CONTENTSUse 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.Respond 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, 2016, our Excess and Surplus Lines segment gross writtenpremiums increased by 20.1% over the same period in 2015. In this favorable pricing environment, we havetaken steps to grow and are increasing gross written premiums across most underwriting divisions in thissegment. In 2016, we enjoyed growth in our Commercial Auto, Manufacturers and Contractors, GeneralCasualty, Excess Casualty, Excess Property, Small Business, Environmental, Life Sciences and Allied Healthdivisions within our Excess and Surplus Lines segment. During the same period, we felt rates and terms andconditions were generally less adequate for risks submitted to our Professional Liability, Medical Professionals,Sports and Entertainment, and Energy divisions, and we reduced our writings in those divisions. This veryspecific evaluation 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 dividends to our shareholders of $66.3 million ($2.25 per share including a$1.35 per share special dividend) during 2016, $47.8 million ($1.64 per share including a $1.00 per sharespecial dividend) in 2015 and $70.0 million ($2.45 per share) in 2014, as we had excess capital beyond the levelneeded to support our insurance operations. In 2013, we repurchased 7.5 million of our common shares for atotal 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.9TABLE OF CONTENTSOur StructureThe chart below displays our corporate structure as it pertains to our holding and operating subsidiaries.Business 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 Company and James River CasualtyCompany, from offices in Richmond, Virginia; Scottsdale, Arizona; and Atlanta, Georgia. James River Insuranceis our largest subsidiary as measured by gross written premiums (50.3% of consolidated gross written premiumsfor the year ended December 31, 2016 came from our Excess and Surplus Lines segment) and has been engagedin E&S insurance for 14 years. James River Insurance has had a consistent record of underwriting profits since itssecond year of operation. We added James River Casualty in 2009 to give us the ability to write E&S risks inOhio.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 2016, our Excess and Surplus Lines segment’s gross writtenpremiums grew by 20.1% over 2015. The Excess and Surplus Lines segment produced an average combinedratio of 81.5% from 2010 through 2016.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 are presented to us by authorized wholesale brokers who aretypically engaged by retail agents after their clients have been rejected by standard markets.10TABLE OF CONTENTSWith the exception of a program which had gross written premiums of approximately $17.3 million (4.7%of total gross premiums for the segment) for the year ended December 31, 2016, the Excess and Surplus Linessegment does not grant underwriting authority to brokers or agents. Instead, all underwriting decisions are madeby one of our 100+ underwriters who work within James River Insurance’s thirteen product divisions. Policiesare individually underwritten. The leaders of these thirteen divisions average 32 years of experience.All claims for business written by the Excess and Surplus Lines segment are managed by its internal claimsdepartment although we do use independent adjusters for inspection and payment of certain claims.The chart below identifies the Excess and Surplus Lines segment’s divisions and sets forth the amount ofgross written premiums by each division.Gross Written Premiums Year Ended December 31,E&S Division2016Percentage of Total 20162015201420132012($ in thousands)Commercial Auto$110,05029.7$73,770$34,605$2,527$0Manufacturers and Contractors83,27922.578,31572,06358,50946,648Excess Casualty43,57411.732,45831,68832,48929,761General Casualty36,8589.930,97225,85320,10912,674Energy29,7098.030,62328,98021,40015,766Allied Health14,4133.913,5139,7079,1488,391Excess Property14,0833.812,49811,79510,9889,231Life Sciences11,1323.08,91710,1559,9789,865Small Business9,1042.56,9166,9716,3135,782Professional Liability8,3612.310,04610,78410,69510,664Environmental5,3211.44,4373,4312,5572,954Medical Professionals2,7390.73,5853,9224,4925,294Sports and Entertainment2,2210.62,6672,7533,1891,624Total$370,844100.0$308,717$252,707$192,394$158,654Commercial Auto underwrites the hired and non-owned auto liability exposures only for a variety ofindustry segments including package delivery services, food delivery services and livery service organizations,and has developed a particular niche for insuring organizations operating networks connecting independentcontractors with customers. The head underwriter in this division has 29 years of experience. Limits assumed areretained by the Company, in some cases subject to self insured retentions of the insureds.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.General 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. The head underwriter in this division has 29 years ofexperience. We generally write $1.0 million per occurrence in limits, and we retain the entire $1.0 million limit.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 above11%%%%%%%%%%%%%%TABLE OF CONTENTSothers’ policies, we are selective regarding underlying carriers, focusing on the nature of the business, thefinancial strength of the carrier, their pricing and their claims handling capabilities. The underwriter who headsthis division has 33 years of 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 provide policy limits up to $11 million, with typicallimits between $1.0 million and $5.0 million per occurrence, retaining up to $1.0 million in limit net on either aprimary or excess basis. The underwriter leading this division has 45 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 provide policy limits up to $11 million, with typical limitsbetween $1.0 million and $5.0 million per occurrence, retaining up to $1.0 million in limit net. The underwriterresponsible for this unit has 23 years of experience in the business. Approximately 95% of the premiums writtenby our Allied Health division from inception through 2016 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 per risk limits offered range from $5.0 million to $30.0 million on a gross basis,and a maximum of $5.0 million on a net of reinsurance basis. The average net per risk limit is approximately$3.2 million as of December 31, 2016. We retain up to the first $5.0 million in any one event or catastrophe. Wehave purchased catastrophe reinsurance of $40.0 million in excess of a $5.0 million retention that is intended tocover the 1,000 year modeled probable maximum loss (“PML”) on the excess property book (in the aggregate).The underwriter leading our Excess Property division has 31 years of experience in the industry.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 provide policy limits up to $11 million, withtypical limits between $1.0 million and $5.0 million per occurrence, retaining up to $1.0 million in limit net.The underwriter at the head 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.Professional Liability writes professional liability coverage for accountants, architects, engineers, lawyersand certain other professions. We provide policy limits up to $11 million, with typical limits between $1.0million and $5.0 million per occurrence, retaining up to $1.0 million in limit net. The individual who directs ourprofessional liability division has 23 years of industry experience. All of our professional liability coverage iswritten on a claims made and reported basis.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 45 years ofexperience in the business. We generally write environmental coverage for contractors who are not engaged inenvironmental remediation work on an occurrence form. We provide policy limits up to $11 million, withtypical limits between $1.0 million and $5.0 million per occurrence, retaining up to $1.0 million in limit net ona primary or excess basis.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 typically12TABLE OF CONTENTSprovide between $1.0 million and $3.0 million per occurrence limits and retain up to $1.0 million of exposureper occurrence and cede the balance to our reinsurers. All of the policies written by this division have beenissued on a claims made and reported basis. The underwriter leading this division has 23 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.The 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, 2016 and the amount of gross writtenpremium produced by such states for the years ended December 31, 2015, 2014, 2013 and 2012. 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, 2016, 2015 and 2014.20162015201420132012StateGross Written Premiums% ofTotalGross Written Premiums% of TotalGross Written Premiums% of TotalGross Written PremiumsGross Written PremiumsCalifornia$114,10730.8$125,34340.6$94,83737.5$56,241$46,888New York39,40710.624,3147.919,9707.914,25811,767Florida35,7659.623,8537.717,2956.814,2779,661Texas26,7087.224,4917.921,6448.616,96313,211Illinois16,5484.58,3352.77,2952.96,3185,447New Jersey11,1503.07,0252.36,4622.66,2374,000Washington10,2702.87,0692.36,0942.45,0074,779Pennsylvania8,6662.37,1352.36,6312.64,2854,158Massachusetts8,4962.34,8351.63,0101.22,8162,124Georgia7,4642.03,7681.23,3271.32,8592,522All other states92,26324.972,54923.566,14226.263,13354,097Total$370,844100.0$308,717100.0$252,707100.0$192,394$158,654Marketing 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, 2016, the segment had authorized 121 broker groups to work with us. The Excess and SurplusLines segment generally makes broker authorizations by brokerage office and underwriting division. With theexception of one hired and non-owned auto program (combined premiums of approximately $17.3 million for2016) 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 $189.8 million of gross writtenpremiums for the year ended December 31, 2016, representing approximately 51.0% of the Excess and13%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%TABLE OF CONTENTSSurplus Lines segment’s gross written premiums for 2016. The two largest brokers produced $139.0 million(BB&T Insurance Services represented 18.8% of consolidated gross written premiums) and $50.8 million ofgross written premiums for the year ended December 31, 2016, respectively. One insured (Rasier LLC) produced$80.1 million of gross written premiums (representing 10.9% of our consolidated gross written premiums) and$9.6 million of fee income for the year ended December 31, 2016.In 2016 and 2015, our Excess and Surplus Lines segment paid an average commission to producers of14.9% and 16.1%, respectively, of gross written premiums.UnderwritingOur Excess and Surplus Lines segment’s staff includes over 120 individuals directly employed inunderwriting policies. We are very selective about the policies we bind. Our Excess and Surplus Lines segmentbinds approximately 3% of new submissions and one out of every six new quotes. We realize all excess andsurplus lines applications have already been rejected by the standard market. If our underwriters cannotreasonably expect to bind coverage at the combination of premiums and coverage that meet our standards, theyare encouraged to quickly move on to another prospective opportunity. For the year ended December 31, 2016,we received approximately 187,200 submissions (new and renewal, excluding commercial auto policies), quoted42,400 policies and bound 13,300 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.ClaimsWe believe that effective management of claims settlement and any associated litigation avoids delays andassociated additional costs.Our Excess and Surplus Lines segment’s claims department consists of over 200 claims professionals as ofDecember 31, 2016 with significant claims experience in the property casualty industry.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 evaluate whether the key issues in the case are being considered and to monitor case reserve levels.We keep the settlement authority of front-line adjusters low to ensure the14•our individual risk workers’ compensation business, underwritten by our staff and generated byappointed agents in North Carolina, Tennessee, Virginia, and South Carolina, produced 21.7% of2016 gross written premiums in this segment, (39.5% in 2015, 50.7% in 2014, 97.3% in 2013, and100% in 2012); and•fronting and program business written through selected MGAs, insurance carriers, and other producerswhich represented 78.3% of 2016 gross written premiums in this segment, (60.5% in 2015, 49.3% in2014, 2.7% in 2013, and 0.0% in 2012).TABLE OF CONTENTSpractice of having two or more members of the department participate in the decision as to whether to settle ordefend. In addition, cases with unusual damage, liability or policy interpretation issues are subjected to peerreviews. Members of the underwriting staff participate in this process. Prior to any scheduled mediation or trialinvolving a claim, claims personnel conduct further peer review to make sure all issues and exposures have beenadequately analyzed.Our claims staff also contributes to our underwriting operations through communication of claimsinformation to our underwriters. The Senior Vice President and Chief Claims Officer heads our forms committee,which reviews and develops all policy forms and exclusions and is also a member of the underwriting reviewcommittee.Approximately 95% of all claims received are closed within five years in the Excess and Surplus Linessegment.The calendar year net loss ratios for the Excess and Surplus Lines segment for the last ten years were:200756.1200861.4200962.6201054.9201148.5201252.6201340.4201455.2201554.5201662.6Specialty Admitted Insurance SegmentThe Falls Lake Insurance Companies (“Falls Lake”) comprises our other U.S. insurance segment, SpecialtyAdmitted Insurance. Falls Lake is currently licensed to underwrite admitted insurance in 48 states and theDistrict of Columbia. Falls Lake consists of Falls Lake National Insurance Company (an Ohio domiciledcompany), and its subsidiaries Stonewood Insurance Company (a North Carolina domiciled company), FallsLake General Insurance Company (an Ohio domiciled company), and Falls Lake Fire and Casualty Company (aCalifornia domiciled company). The Specialty Admitted Insurance segment produced 24.7% of consolidatedgross written premiums for the year ended December 31, 2016.Our plan is to continue to use our broad licensure and significant management expertise to earn substantialfee income as well as underwriting profits. The Specialty Admitted Insurance segment consists of:Traditional Workers’ Compensation BusinessOur individual risk workers’ compensation business, produced through a distribution channel comprised ofappointed independent retail agents and a limited number of appointed wholesale brokers, remains a regionallyfocused effort in select Southeastern U.S. states; however, we anticipate expanding its territorial footprint incontiguous states with positive economic outlooks and appropriate rate per unit of exposure. For the year endedDecember 31, 2016, approximately 66% of our retail produced workers’15%%%%%%%%%%TABLE OF CONTENTScompensation direct written premiums were in North Carolina, 17% were in Virginia, 13% were in SouthCarolina and 4% were in Tennessee. Due to more favorable market conditions, we were able to profitably growthis business line in 2016. Building trades represented approximately 32% of the direct premiums in force in ourretail produced workers’ compensation book in 2016. Other significant industry groups include healthcareemployees (19%), goods and services (16%), and manufacturing (12%). We view our retail produced workers’compensation business as a core competency, and seek to make consistent underwriting profits from it. Werecognize the cyclical nature of this line, and are prepared to contract the business rapidly when rates decline orthe regulatory or economic environment makes it difficult to contain costs.Program BusinessAs part of our plan to become less susceptible to admitted market cycles in our core business, we haveexpanded into the program business. In a program arrangement, we give selected MGAs authority to produce,underwrite and administer policies that meet our strict underwriting and pricing guidelines. We enter into thesearrangements selectively with agents who have significant experience and market presence in specialty class ofproperty/casualty and automobile risks. Underwriting, claims and financial performance is subject to regularreview by our staff. We are aware of many companies who have had poor results from MGA produced business.To avoid repeating their experiences, we only work with MGAs who permit us to actively engage with themthrough a combination of onsite and offsite resources to facilitate our real-time supervision of their work. Wespecifically grant limited authority for underwriting and claims administration, and employ a rigorous reviewprocess to ensure the authority is appropriately used.Ten programs were active and producing business as of December 31, 2016 and had combined gross writtenpremiums of $38.6 million for 2016. We focus our coverage on casualty risks, although some incidentalproperty insurance is written. We seek to limit our risk generally through reinsurance either on a proportional orexcess of loss basis, or sometimes both. We generally take up to $250,000 of loss per occurrence or per risk, netof reinsurance. For initial claims oversight and administration in our program business, we generally outsourcefrequency layer claims management to third-party administrators for the first $50,000 of a claim, and thenassume direct control above this amount.Under the terms of these program agreements, we pay variable commissions with lower commissions whenunderwriting profits are suppressed and increased commissions when the business proves particularly profitable.In addition, we typically build in a substantial “spread” between the commission we earn from our reinsurers andthe commissions paid to the MGA. This spread enhances our net underwriting returns and profitability. Ourprogram business is distributed primarily through MGAs and program managers. One insured’s programsaccounted for $21.0 million of gross written premium for the year ended December 31, 2016.Fronting BusinessIn our fronting business we issue insurance policies for another insurance company which may not have thelicensure, product suite or rating to serve its desired market, or for a program supported by reinsurance oralternative capital provider(s). We generally retain 10% or less of the underwriting risk in our fronting business.The issuance of our policy makes us contractually responsible to the insured in the event they experience acovered loss. Our oversight is similar to our program business. We enter into these arrangements selectively withcounterparties which have significant experience and market presence in their desired segment ofproperty/casualty, workers compensation or automobile business. Underwriting, claims and financialperformance is subject to regular review by our staff, and we hold appropriate collateral to manage counterpartycredit risk. We specifically grant limited authority for underwriting and claims administration, and employ arigorous review process to ensure the authority is appropriately used within the terms of our contract, and thatcollateral held by us is appropriate as determined by our personnel. We charge fees as a percentage of grosswritten premiums for issuing these policies. We establish fronting opportunities through a variety of sources,including direct carrier relationships, MGAs and reinsurance brokers.Due to our broad licensure and product filings, we are positioned to support this business on a broad basisthroughout the U.S. As a result of the limited capital allocation required to support it, we believe the frontingbusiness represents a very efficient use of capital with a high relative return potential. We materially expandedthis business in 2016. We front business for three insurers that accounted for $92.1 million of gross writtenpremium for the year ended December 31, 2016.16•We provide proportional and working layer reinsurance to unaffiliated U.S.-based insurancecompanies. We underwrote $184.3 million in gross written premiums for the year ended December 31,2016. Of the third-party premiums written by JRG Re, 58% is for general liability coverage (much ofthis business is E&S premium), 29% is personal auto coverage, 8% is commercial auto coverage, andthe rest is excess casualty or non-medical professional liability. We typically structure our reinsurancepolicies as quota share arrangements with loss and risk mitigating features that align our interest withthat of the ceding companies. At December 31, 2016, 98% of our third-party treaties are written as“proportional” arrangements and 85.6% of our treaties are subject to loss mitigation features. Wepurchase 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) are cededto JRG Re in Bermuda. In 2016, our U.S. subsidiaries ceded $260.4 million in premiums to JRG Re.This business is ceded to JRG Re under a proportional, or quota-share, reinsurance treaty that has anarm’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.TABLE OF CONTENTSOur objective over time is to utilize the combination of fee income and underwriting profits from ourSpecialty Admitted Insurance segment to leverage our capital and enhance returns on tangible equity.Additionally, we expect that this fee income will become increasingly material in future periods and provide uswith a steady revenue stream.Casualty Reinsurance SegmentWe report our business of writing insurance for insurance companies in our Casualty Reinsurance segment(representing 25.0% of consolidated gross written premiums for the year ended December 31, 2016). Weparticipate in the reinsurance business through our Bermuda domiciled reinsurance subsidiary, JRG Re, which isa Class 3B reinsurer. JRG Re provides proportional and working layer insurance to third parties and to our U.S.-based insurance subsidiaries. For purposes of management evaluation, this segment’s underwriting results onlyinclude premiums ceded by, and losses incurred with respect to business assumed from unaffiliated companiesand does not include premiums and losses ceded under the internal quota share arrangement described below.Business flows to JRG Re from the following two sources: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, 2016, our Casualty Reinsurance segment generated an underwriting loss of $194,000when analyzed as a stand-alone entity, without the benefit of the premiums ceded from our Excess and SurplusLines segment and Specialty Admitted Insurance segment.The Casualty Reinsurance segment’s four largest brokers generated $166.3 million of gross writtenpremiums in the year ended December 31, 2016, representing 90.2% of the segment’s gross written premiums.The four largest brokers produced $85.4 million, $31.5 million, $26.3 million, and $23.1 million of gross writtenpremiums for the year ended December 31, 2016, respectively. The Casualty Reinsurance segment assumedbusiness from two unaffiliated ceding companies that generated $114.4 million (State National InsuranceCompany represented 15.5% of consolidated gross written premiums) and $28.4 million of gross writtenpremiums for the year ended December 31, 2016.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, 2016, approximately 67.3% 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. This17TABLE OF CONTENTSis where we set and direct strategy for the group as a whole as well as high level objectives for each of the threeoperating segments. We make all capital management, capital allocation, treasury functions, informationtechnology and group wide risk management decisions in this segment. Our decisions at this level also includereinsurance purchasing.Financial Information About SegmentsFinancial and other information by segment for the fiscal years ended December 31, 2016, December 31,2015 and December 31, 2014 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.Purchased Property ReinsuranceOur focus on return on tangible equity leads us to avoid lines of business that we know are exposed to highdegrees of volatility. The Excess and Surplus Lines segment writes a limited book of excess property risks(approximately $14.1 million direct written premiums in 2016). 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). We buy such high limits because we believe the propertycatastrophe models are less accurate when applied to small books of business (like ours) than when applied tolarger portfolios. Where the Specialty Admitted Insurance segment incurs incidental property risks in its programbook of business, the segment is covered for $4.0 million in excess of $1.0 million per occurrence. This is alsointended to cover the 1,000 year modeled PML on any property exposures the Specialty Admitted Insurancesegment assumes. In our Casualty Reinsurance segment, we believe that our maximum loss from a catastrophicevent is approximately $1.0 million, and we do not currently purchase retrocessional reinsurance coverage forproperty-catastrophe risks. In aggregate, therefore, we believe our pre-tax group-wide PML from a 1 in 1,000year catastrophic event is approximately $10.0 million, inclusive of reinstatement 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 and18(1)These reinsurers are unrated, or below “A-”. All material reinsurance recoverables from these reinsurers arecollateralized.TABLE OF CONTENTSEntertainment), and we do not purchase any reinsurance for these policies. In our other divisions, where we issuepolicies with larger limits, we purchase reinsurance in excess of $1.0 million per occurrence.In our Specialty Admitted Insurance segment at December 31, 2016, we retain up to 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. This treaty also provides coverage to small programs with gross written premiumsof approximately $3.0 million, in the aggregate, for the year ended December 31, 2016. On other lines ofbusiness in our fronting and program 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.For 2016, our top ten reinsurers represented 78.6% 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 on unpaid losses and the amount of reinsurance recoverablespertaining to each such reinsurer as well as its A.M. Best rating as of December 31, 2016:ReinsurerReinsurance Recoverable as of December 31, 2016A.M. Best Rating December 31, 2016(in thousands)Swiss Reinsurance America Corporation$44,459A+Berkley Insurance Company38,263A+Mountain States Insurance Company20,598B++ Munich Reinsurance America7,899A+Pacific Valley Insurance Company7,583UnratedAccident Insurance Company5,307UnratedSafety National Casualty5,299A+QBE Reinsurance Corporation5,038ALloyd’s Syndicate Number 14584,690ALloyd’s Syndicate Number 44724,471ATop 10 Total143,607Other39,130Total$182,737Reserve 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.19(1)(1)(1)•Loss emergence and insured reporting patterns;•Underlying policy terms and conditions;•Business and exposure mix;•Trends in claim frequency and severity;•Changes in operations;•Emerging economic and social trends;•Inflation;•Changes in the regulatory and litigation environments; and•Discussions with third-party actuarial consultants.TABLE OF CONTENTSWe maintain reserves for specific claims incurred and reported, reserves for claims incurred but not reported(“IBNR”) and reserves for uncollectible reinsurance when appropriate. Our ultimate liability may be greater orless than current reserves. In the insurance industry, there is always the risk that reserves may prove inadequate.We continually monitor reserves using new information on reported claims and a variety of statistical techniquesand adjust our estimates as necessary as experience develops or new information becomes known. Suchadjustments (referred to as reserve development) are included in current operations. Anticipated inflation isreflected implicitly in the reserving process through analysis of cost trends and the review of historicaldevelopment. We do not discount our reserves for losses and loss adjustment expenses to reflect estimatedpresent value.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:The 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, and our Chief Accounting Officer. Additionally, the presidents and chief actuaries of each ofour three 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 bestjudgment to determine the best estimate to be recorded for the reserve for losses and loss adjustment expenses onour quarterly balance sheet.20(1)Casualty Reinsurance segment includes the underwriting results of our assumed crop reinsurance businesswhich was terminated effective December 31, 2012.(2)Includes $10.0 million of favorable development from the 2015 accident year, $10.7 million from the 2014accident year and $4.5 million from the 2013 accident year.(3)Includes $17.3 million and $10.5 million of favorable development from the 2014 and 2013 accident year,respectively.(4)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.(5)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.(6)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.(7)Includes $9.0 million of adverse development on assumed crop business almost entirely from the 2011accident year and $7.6 million of adverse development on other assumed business.TABLE OF CONTENTSThe following table reflects our reserve development by segment during the calendar years 2016 to 2008individually and in aggregate.SegmentExcess and Surplus LinesSpecialty Admitted InsuranceCasualty ReinsuranceGrand TotalCalendar Year2016$24,0793,822$(4,185$23,716201525,4243,531(12,63716,318201427,2835,854(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$179,287$14,516$(48,609$145,194Among the indicators of reserve strength that we monitor closely are the number of claims outstanding froma given year and the amount of IBNR reserves held on our balance sheet for claims that have been incurred butnot yet reported to us. As a general rule, every known claim has a specific case reserve established against itwhich management believes is adequate to resolve the claim and pay attendant expenses based on informationavailable at the time.21(1)(2)$)(3))(4))(5))(6)))(7)))))))TABLE OF CONTENTSA significant portion of reported claims from prior policy years were closed at December 31, 2016. 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, 2016Policy YearExcess andSurplus Lines SegmentAll Non Commercial AutoExcess and Surplus Lines Segment Commercial AutoSpecialty Admitted Insurance SegmentIndividual Risk Workers’CompSpecialtyAdmittedInsuranceSegmentFrontingandPrograms200499.9—99.8—200599.5—100.0—200699.4—100.0—200799.3—100.0—200898.9—99.9—200997.8—99.9—201097.3—99.9—201194.4—99.7—201290.9—99.6—201386.498.099.296.4201477.696.496.994.6201572.099.281.883.5Another 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, 2016. The percentage that IBNR represents of total gross reserves at December 31, 2016 is 68.0%.Gross Reserves at December 31, 2016IBNRTotalIBNR % of Total(in thousands)Excess and Surplus Lines$440,902$575,27976.6Specialty Admitted Insurance69,556128,79554.0Casualty Reinsurance131,775239,79155.0Total$642,233$943,86568.0The 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, 2016. The percentage that IBNRrepresents of total net reserves at December 31, 2016 is 66.9%.Net Reserves at December 31, 2016IBNRTotalIBNR % of Total(in thousands)Excess and Surplus Lines$350,278$471,45374.3Specialty Admitted Insurance30,84459,23952.1Casualty Reinsurance128,258230,43655.7Total$509,380$761,12866.922%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%TABLE OF CONTENTSInvestment StrategyWe 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 vast majority of ourinvestment portfolio is managed by third party, independent investment managers.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.One 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, 2016, 67.3% of our cash and invested assets were held inBermuda with the remainder held by our U.S. subsidiaries.The prolonged low interest rate environment made it difficult for insurance companies to earn attractivereturns on capital because of reduced investment income. If sustained, recent increases in interest rates willslowly improve investment income from fixed income investments. Our premium growth has allowed us to buildour asset base. Cash and invested assets now represent 3.1 times our tangible equity.A summary of our investment portfolio at December 31, 2016 is as follows:December 31, 2016PortfolioBook ValueMarket ValueCarrying ValueBook Yield% of Carrying Value($ in thousands)Core$943,350$943,041$943,0412.4268.2Bank Loans254,890253,271253,6745.3218.3Incremental Yield126,331130,580130,5805.949.4Private Investments56,419NA4.1Total1,383,714100.0Less cash and cash equivalents in Coreand Bank Loans(51,384Total Invested Assets$1,332,330We have generally managed our overall portfolio to a duration of 3 to 5 years. At December 31, 2016, theaverage duration of our investment portfolio was 3.6 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 secured23%%%%%%%%)TABLE OF CONTENTSloans with an average credit quality of “B” as of December 31, 2016 and floating interest rates based on spreadsover LIBOR. We believe bank loans are an attractive asset class because (1) floating-rate loans help to reduceour risk of loss in the event of rising interest rates, (2) the loans are generally senior secured, (3) the asset classhas a history of relatively high recovery rates in the event of default, (4) the portfolio provides an attractive yieldand (5) the maturities of the loans are relatively short (average of 5 years). We invest in this asset class byowning individual loan participations that are carried at amortized cost less any loan loss allowance. We haveover seven years 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, 2016 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, 2016, only $10.8 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, 2016,we held 8 private investments with a total carrying value of $56.4 million. Our portfolio consists of investmentsin wind and solar energy, banking, small cap equities, loans of middle market private equity sponsoredcompanies, and equity tranches of collateralized loan obligations (CLOs). We are opportunistic in our privateinvestment strategy and our portfolio may grow or shrink based on the opportunities available to us. Despitebeing only 4.1% of our portfolio, we believe our Private Investment Portfolio has added meaningful returns toour tangible equity. Our Private Investment strategy has significant risk and not all investments are successful.As a result, we intentionally keep this portfolio as a small portion of the overall investment portfolio.Our recent total returns on our portfolio are as follows:201420152016Trailing 3 years Ended 2016Core3.111.162.342.20Bank Loans1.15(1.0014.094.54Incremental10.577.269.239.01Total3.761.475.183.46Total 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, 2016 and their respectivepercentage of our total invested assets at such date consist of syndicated bank loans (15.3%), interests in limitedliability companies that invest in renewable energy opportunities (2.0%), limited partnerships that invest in debtor equity securities (1.8%), and private debt securities (0.3%). We will continue to actively review opportunitiesto invest in non-traditional assets and may invest in additional non-traditional assets in the future.24%%%%%)%%%%%%%%%%%TABLE OF CONTENTSOur invested assets totaled $1,332.3 million as of December 31, 2016. The weighted average credit rating ofour portfolio of fixed maturity securities, bank loans and redeemable preferred stocks as of December 31, 2016was “A”. We have intentionally maintained a cautious interest rate risk position by having an average durationof 3.6 years at December 31, 2016. This compares to an average duration at December 31, 2015 of 3.5 years.Based on the current duration of 3.6 years, a 1.0% increase in interest rates would result in a pre-tax decline inthe market value of our portfolio of approximately $47.8 million.Insurance Cycle Management and GrowthThe insurance and reinsurance business is cyclical in nature, with “hard” and “soft” cycles. Hard marketsoccur when insurance underwriters limit their exposure in a line of business or across their entire portfolio. Whenunderwriters exercise restraint, insurance buyers are forced to pay more to induce underwriters to cover theirrisks. A hard market can also be created by economic expansions when capital committed to backing insurancepolicies does not grow as fast as the demand for insurance. There is generally a correlation between interest ratesand the willingness of insurance companies to commit their capital to writing insurance. When fixed incomeyields are low, insurance companies need to raise insurance prices to improve underwriting results in order tooffset loss of investment income.We are currently in a growth phase for our U.S. primary operations. In both our Excess and Surplus Linesand Specialty Admitted Insurance segments, we are experiencing growth in premiums driven by stable rates aswell as increases in policy count and exposures. The table below shows the changes in gross written premiumswe have experienced in our operating segments from 2014 through 2016.201620152014Gross Written Premiums$% Change$% Change$% Change($ in thousands)Excess and Surplus Lines$370,84420.1$308,71722.2$252,70731.3Specialty Admitted Insurance182,221100.390,97853.259,380188.3Casualty Reinsurance184,3336.9172,499(16.5206,68032.9Total$737,39828.9$572,19410.3$518,76740.8In 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, 2016, 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 83.1% for the period from January 1, 2008through December 31, 2016.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 fronting and program 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 market25%%%%%%%)%%%%%TABLE OF CONTENTSconditions. We have $142.6 million of gross written premiums for fronting and program business for 2016($20.0 million on a net basis), and we expect that this fee income will become material in future periods andprovide us with a steady revenue stream that will be relatively insulated from conditions in the admittedinsurance market.In 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, Inc., AXISCapital Holdings Limited, Arch Capital Group Ltd., Admiral Insurance Company (W. R. Berkley Corporation),Lexington Insurance Company (American International Group, Inc.), Mt. Hawley Insurance Company (RLICorp.), Colony Specialty Insurance Company (Argo Group International Holdings, Ltd.), Houston CasualtyCompany (a subsidiary of Tokio Marine HCC) and Kinsale Capital Group.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 business 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 Insurance Company of America, W. R.Berkley Corporation, American Interstate Insurance Company (AMERISAFE, Inc.), and Amtrust Group.Competition for our fronting and program business includes State National Companies, Inc., Argo GroupInternational Holdings, Ltd., Clear Blue Insurance Group, QBE Insurance Group, and Amtrust Group.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 Hamilton Re, Ltd., PartnerReLtd., Tokio Milennium Re AG, MS Amlin, XL Catlin 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 (the26TABLE OF CONTENTS“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.The Insurance Act does not distinguish between insurers and reinsurers; companies are registered (licensed)under the Insurance Act as “insurers” (although in certain circumstances a condition to registration may beimposed to the effect that the company may carry on only reinsurance business). The Insurance Act uses thedefined term “insurance business” to include reinsurance business.The Insurance Act also grants to the BMA powers to supervise, investigate and intervene in the affairs ofinsurance companies.An Insurance Advisory Committee appointed by the Bermuda Minister of Finance advises the BMA onmatters connected with the discharge of the BMA’s functions and subcommittees thereof supervise, investigateand review the law and practice of insurance in Bermuda, including reviews of accounting and administrativeprocedures.The Insurance Act imposes solvency and liquidity standards on Bermuda insurance companies, as well asauditing and reporting requirements.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 Representative and Principal OfficeA Class 3B insurer is required to maintain a principal office and to appoint and maintain a principalrepresentative in Bermuda. For the purposes of the Insurance Act, the principal office of JRG Re is located atWellesley House, 2 Floor, 90 Pitts Bay Road, Pembroke, HM 08, Bermuda. JRG Re’s principal representative isKevin 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’ priornotice in writing to the BMA is given of the intention to do so.It is the duty of the principal representative to forthwith notify the BMA where the principal representativereaches the view that there is a likelihood of the Class 3B insurer (for which the principal representative acts)becoming insolvent, or the principal representative becoming aware of, or having reasonable grounds to believethat a reportable “event” has occurred. Examples of a reportable “event” include a failure by the Class 3B insurerto comply substantially with a condition imposed upon it by the BMA relating to a solvency margin or aliquidity or other ratio, a significant loss reasonably likely to cause the Class 3B insurer to fail to comply withits enhanced capital requirement (discussed below) and the occurrence of a material change (as such term isdefined under the Insurance Act) in its business operations.27ndTABLE OF CONTENTSWithin 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.Head OfficeA Class 3B insurer shall maintain its head office in Bermuda if its insurance business is directed andmanaged from Bermuda. In determining whether the insurer satisfies this requirement, the BMA shall consider,inter alia, the following factors: (i) where the underwriting, risk management and operational decision makingof the insurer occurs; (ii) whether the presence of senior executives who are responsible for, and involved in, thedecision making related to the insurance business of the insurer are located in Bermuda; and (iii) where meetingsof the board of directors of the insurer occur. In making its determination, the BMA may also have regard to (a)the location where management of the insurer meets to effect policy decisions of the insurer; (b) the residence ofthe officers, insurance managers or employees of the insurer; and (c) the residence of one or more directors of theinsurer in Bermuda. This provision does not apply to an insurer that has a permit to conduct business inBermuda under the Companies Act of Bermuda, 1981 (the “Companies Act”) or the Non-Resident InsuranceUndertakings Act 1967.Loss 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 in respect of its total general business insurance technical provisions (i.e. theaggregate of its net premium provisions, net loss and loss expense provisions and risk margin, as each is reportedin the insurer’s statutory economic balance sheet). The loss reserve specialist’s opinion must state, among otherthings, whether or not the aggregate amount of technical provisions shown in the statutory economic balancesheet as at the end of the relevant financial year (i) meets the requirements of the Insurance Act and (ii) makesreasonable provision for the total technical provisions of the insurer under the terms of its insurance contractsand agreements.Annual Financial StatementsA Class 3B insurer is required to prepare and submit, on an annual basis, audited GAAP financial statements(as defined below) and audited statutory financial statements.The Insurance Act prescribes rules for the preparation and substance of statutory financial statements (whichinclude, in statutory form, a balance sheet, an income statement, a statement of capital and surplus and notesthereto). The statutory financial statements include detailed information and analysis regarding premiums,claims, reinsurance and investments of the insurer.A Class 3B insurer is also required to prepare and submit to the BMA financial statements which have beenprepared under generally accepted accounting principles or international financial reporting standards (“GAAPfinancial statements”). The Class 3B insurer’s annual GAAP financial statements, and the auditor’s reportthereon, and the statutory financial statements are required to be filed with the BMA28TABLE OF CONTENTSwithin four months from the end of the relevant financial year (unless specifically extended with the approval ofthe BMA). The statutory financial statements do not form a part of the public records maintained by the BMAbut the GAAP financial 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 the issuance of its license, if applicable, theClass 3B insurer will be required to provide the BMA with particulars of such failure in writing. A Class 3Binsurer shall be liable to a civil penalty by way of a fine for failure to comply with a duty imposed on it inconnection with 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 of a Class 3B insurer shall consist of (i) an insurer information sheet, (ii) anauditor’s report, (iii) the statutory financial statements and (iv) notes to the statutory financial statements.The insurer information sheet shall state, among other matters, (i) whether the general purpose financialstatements of the insurer for the relevant year have been audited and an unqualified opinion issued, (ii) theminimum margin of solvency applying to the insurer and whether such margin was met, (iii) whether or not theminimum liquidity ratio applying to the insurer for the relevant year was met and (iv) whether or not the insurerhas complied with every condition attached to its certificate of registration. The insurer information sheet shallstate if any of the questions identified in items (ii), (iii) or (iv) above is answered in the negative, whether or notthe insurer has taken corrective action in any case and, where the insurer has taken such action, describe theaction in an attached statement.The directors are required to certify whether the minimum solvency margin has been met, and theindependent approved auditor is required to state whether in its opinion it was reasonable for the directors tomake this certification.Where an insurer’s accounts have been audited for any purpose other than compliance with the InsuranceAct, a statement to that effect must be filed with the statutory financial return.In addition, each year the insurer is required to file with the BMA a capital and solvency return along withits annual statutory financial return. The prescribed form of capital and solvency return comprises the insurer’sBermuda Solvency Capital Requirement (“BSCR”) model or an approved internal capital model in lieu thereof (more fully described below), a schedule of fixed income and equity investments by BSCR rating, a schedule offunds held by ceding reinsurers in segregated accounts/trusts by BSCR rating, a schedule of net loss and lossexpense provisions by line of business, a schedule of premiums written by line of business, a schedule ofgeographic diversification of net premiums written by line of business, a schedule of risk management, aschedule of fixed income securities, a schedule of commercial insurer’s solvency self-assessment (CISSA), aschedule of catastrophe risk return, a schedule of loss triangles or reconciliation of net loss reserves, a scheduleof eligible capital, a statutory economic balance sheet, the loss reserve specialist’s opinion, a schedule ofregulated non-insurance financial operating entities and a schedule of solvency.29TABLE OF CONTENTSNeither the statutory financial return nor the capital and solvency return is available for public inspection.Quarterly Financial ReturnA Class 3B insurer, not otherwise subject to group supervision, is required to prepare and file quarterlyfinancial returns with the BMA on or before the last day of the months of May, August and November of eachyear. The quarterly financial returns consist of (i) quarterly unaudited financial statements for each financialquarter (which must minimally include a balance sheet and income statement and must also be recent and notreflect a financial position that exceeds two months), (ii) a list and details of material intra-group transactionsthat the Class 3B insurer is a party to and the Class 3B insurer’s risk concentrations that have materialized sincethe most recent quarterly or annual financial returns, details surrounding all intra-group reinsurance andretrocession arrangements and other intra-group risk transfer insurance business arrangements that havematerialized since the most recent quarterly or annual financial returns and (iii) details of the ten largestexposures to unaffiliated counterparties and any other unaffiliated counterparty exposures exceeding 10% of theClass 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 web site, 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 statutory financial statements, each of which are required to be filed annuallywith the BMA. The auditor must be approved by the BMA as the independent auditor of the insurer. If theinsurer fails to appoint an approved auditor or at any time fails to fill a vacancy for such auditor, the BMA mayappoint an approved auditor for the insurer and shall fix the remuneration to be paid to the approved auditorwithin 14 days, if not agreed sooner by the insurer and the auditor.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.Minimum Liquidity RatioThe Insurance Act provides a minimum liquidity ratio for general business insurers. A Class 3B insurerengaged in general business is required to maintain the value of its relevant assets at not less than 75% of theamount of its relevant liabilities. Relevant assets include cash and time deposits, quoted investments, unquotedbonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiumsreceivable, reinsurance balances receivable, funds held by ceding reinsurers and any other assets which theBMA, on application in any particular case made to it with reasons, accepts in that case.There are certain categories of assets which, unless specifically permitted by the BMA, do not automaticallyqualify as relevant assets, such as unquoted equity securities, investments in and advances to affiliates and realestate and collateral loans.The relevant liabilities are total general business insurance reserves and total other liabilities less deferredincome taxes and letters of credit, guarantees and other instruments.30TABLE OF CONTENTSMinimum Solvency Margin and Enhanced Capital RequirementsThe Insurance Act provides that the value of the statutory assets of an insurer must exceed the value of itsstatutory liabilities by an amount greater than its prescribed minimum solvency margin (“MSM”).The MSM that must be maintained by a Class 3B insurer with respect to its general business is the greaterof (i) $1,000,000, (ii) 20% of the first $6,000,000 of net premiums written (if the net premiums written are inexcess of $6,000,000, the figure is $1,200,000 plus 15% of net premiums written in excess of $6,000,000), (iii)15% of the aggregate of net loss and loss expense provisions and other insurance reserves or (iv) 25% of theECR (as defined below) as reported at the end of the relevant year.Class 3B insurers are also required to maintain available statutory economic capital and surplus at a levelequal to or in excess of its enhanced capital requirement (“ECR”) which is established by reference to either theBSCR model or an approved internal capital model.The BSCR model is a risk-based capital model which provides a method for determining an insurer’s capitalrequirements (statutory economic capital and surplus) by taking into account the risk characteristics of differentaspects of the insurer’s business. The BSCR formula establishes capital requirements for ten categories of risk:fixed income investment risk, equity investment risk, interest rate/liquidity risk, currency risk, concentrationrisk, premium risk, reserve risk, credit risk, catastrophe risk and operational risk. For each category, the capitalrequirement is determined by applying factors to asset, premium, reserve, creditor, probable maximum loss andoperation items, with higher factors applied to items with greater underlying risk and lower factors for less riskyitems.While not specifically referred to in the Insurance Act (or required thereunder), the BMA has alsoestablished a target capital level (“TCL”) for each Class 3B insurer equal to 120% of its ECR. The TCL serves asan early warning tool for the BMA, and failure to maintain statutory capital at least equal to the TCL will likelyresult in increased regulatory oversight.Any Class 3B insurer which at any time fails to meet its MSM requirements must, upon becoming aware ofsuch failure, 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 insurer intends to rectify the failure.Any 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 report containingparticulars of the circumstances leading to the failure, and a plan detailing the manner, specific actions to betaken and time within which the insurer intends to rectify the failure. Within 45 days of becoming aware of thatfailure, or of having reason to believe that such a failure has occurred, a Class 3B insurer shall furnish the BMAwith (i) unaudited statutory economic balance sheets and unaudited interim statutory financial statementsprepared in accordance with GAAP covering such period as the BMA may require; (ii) the opinion of a lossreserve specialist in relation to the total general business insurance technical provisions as set out in theeconomic balance sheet, where applicable; (iii) a general business solvency certificate in respect of the financialstatements; and (iv) a capital and solvency return reflecting an enhanced capital requirement prepared using postfailure data where applicable.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.31TABLE OF CONTENTSThe 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.Where the BMA has previously approved the use of certain instruments for capital purposes, the BMA’sconsent will need to be obtained if such instruments are to remain eligible for use in satisfying the MSM and theECR.Code of ConductThe Insurance Code of Conduct (the “Code”) prescribes the duties, standards, procedures and soundbusiness principles that must be complied with by all insurers registered under the Insurance Act. The BMA willassess an insurer’s compliance with the Code in a proportional manner relative to the nature, scale andcomplexity of its business. Failure to comply with the requirements of the Code will be taken into account bythe BMA in determining whether an insurer is conducting its business in a sound and prudent manner asprescribed by the Insurance Act, may result in the BMA exercising its powers of intervention and investigation(see below) and will be a factor in calculating the operational risk charge under the insurer’s BSCR or approvedinternal 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 will beprohibited 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 Class 3B insurer may reduce its total statutory capital by 15% or more, as set out in its previous year’sfinancial statements, unless it has received the prior approval of the BMA. Total statutory capital consists of theinsurer’s paid in share capital, its contributed surplus (sometimes called additional paid in capital) and any otherfixed 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.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 shareholder controller, and (iv) any person inaccordance with whose directions or instructions the directors of the registered insurer or of its parent companyare accustomed to act.32TABLE OF CONTENTSThe 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 the registered insureror its parent company, (ii) a person who is entitled to exercise 10% or more of the voting power at anyshareholders’ meeting of such registered insurer or its parent company, or (iii) a person who is able to exercisesignificant influence over the management of the registered insurer or its parent company by virtue of itsshareholding 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. 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 and/or two years in prison.Notification 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.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 under Section 25 ofthe Insurance Act or Section 99 of the Companies Act, (ii) the amalgamation with or acquisition of another firm,(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 or 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)expansion into a material new line of business, (ix) the sale of an insurer, and (x) outsourcing of an officer role.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.33TABLE OF CONTENTSBefore 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.Supervision, Investigation, Intervention and DisclosureThe 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 such person’s auditor, underwriter, accountant orany other person with relevant professional skill of such registered person or designated insurer to prepare areport on any aspect pertaining thereto. In the case of a report, the person so appointed shall immediately givethe BMA written notice of any fact or matter of which he becomes aware or which indicates to him that anycondition attaching to his registration under the Insurance Act is not or has not, or may not be or may not have,been fulfilled and that such matters are likely to be material to the performance of its functions under theInsurance Act. If it appears to the BMA to be desirable in the interests of the clients of a registered person orrelevant insurance group, the BMA may also exercise these powers in relation to subsidiaries, parent companiesand 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 theinvestigation, such person may also investigate the business of any person who is or has been, at any relevanttime, a member of the insurance group or of a partnership of which the person being investigated is a member. Inthis regard, it shall be the duty of every person who is or was a controller, officer, employee, agent, banker,auditor, accountant, barrister and attorney or insurance manager to produce to the person appointed suchdocumentation as the appointed person may reasonably require for purposes of the investigation, and to attendand answer questions relevant to the investigation and to otherwise provide such assistance as may be necessaryin 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 and 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 it believes a person hasfailed to comply with a notice served on him, there are reasonable grounds for suspecting the information ordocumentation produced in response to such notice is incomplete, or that its directions will not be compliedwith or that any relevant documents would be removed, tampered with or destroyed.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 being unable to meet its obligations to policyholders, orthat the 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, or that a designated insurer is in breach ofany provision of the Insurance Act or the regulations or rules applicable to it, the BMA may issue suchdirections as it deems desirable for safeguarding the interests of policyholders or potential policyholders of theinsurer or the insurance group. The BMA may, among other things, direct an insurer, on the issuer’s own behalfand in its capacity as designated insurer of34TABLE OF CONTENTSthe insurance group of which it is a member, (i) not to take on any new insurance business, (ii) not to vary anyinsurance contract if the effect would be to increase the insurer’s liabilities, (iii) not to make certain investments,(iv) to dispose of certain investments, (v) to maintain in or transfer to the custody of a specified bank, certainassets, (vi) not to declare or pay any dividends or other distributions or to restrict the making of such payments,(vii) to limit its premium income, (viii) not to enter into any specified transaction with any specified persons orpersons of a specified class, (ix) to provide such written particulars relating to the financial circumstances of theinsurer as the BMA thinks fit, (x) as an individual insurer only, and not in its capacity as designated insurer, toobtain the opinion of a loss reserve specialist and submit it to the BMA, and/or (xi) to remove a controller orofficer.The BMA has the power to assist other regulatory authorities, including foreign insurance regulatoryauthorities, with their investigations involving insurance and reinsurance companies in Bermuda if it is satisfiedthat the assistance being requested is in connection with the discharge of regulatory responsibilities and thatsuch cooperation is in the public interest. The grounds for disclosure by the BMA to a foreign regulatoryauthority without consent of the insurer are limited and the Insurance Act provides for sanctions for breach of thestatutory duty of confidentiality.Cancellation of Insurer’s RegistrationAn insurer’s registration may be cancelled by the BMA at the request of the insurer or on certain groundsspecified in the Insurance Act. Failure by the insurer to comply with its obligations under the Insurance Act, or ifthe BMA believes that the insurer has not been carrying on business in accordance with sound insuranceprinciples, would be examples of such grounds.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 its 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”), the 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 require an insurance holdingcompany and their insurance subsidiaries to register with the insurance department authority, to file certainreports disclosing information, including but not limited to capital structure, ownership, management, andfinancial condition. Such holding company laws also impose standards and filing requirements on certaintransactions between related companies, which include, among other requirements, that all transactions be fairand reasonable, that an insurer’s surplus as regards policyholders be reasonable and adequate in relation to itsliabilities and that expenses and payments be allocated to the appropriate party in accordance with customaryaccounting 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 and modifications to such transactions. In 2012, the NAIC adopted significantchanges to the insurance holding company act and regulations (the “NAIC Amendments”). The NAICAmendments, when adopted by the various states, are designed to respond to perceived gaps in the regulation ofinsurance holding company systems in the United States. One of the major changes is a requirement that aninsurance holding company system’s ultimate controlling person submit annually to its lead state insuranceregulator an “enterprise risk report” that identifies activities, circumstances or events involving one or moreaffiliates of an insurer that, if not remedied properly, are likely to have a material adverse effect upon thefinancial condition or liquidity of the insurer or its insurance holding company system as a whole. Otherchanges include (i) requiring a controlling person to submit prior notice to its domiciliary insurance regulator ofits 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 bya state legislature and such state’s insurance regulator in order to be effective in that state. Each of California,North Carolina, Ohio, and Virginia, the states in which our U.S. insurance subsidiaries are domiciled, includethis enterprise risk report. In addition, in 2012, the NAIC adopted the Risk Management and Own Risk andSolvency Assessment Model Act (the “ORSA Model Act”). The ORSA Model Act, when adopted by the variousstates, will require an insurance holding company system’s Chief Risk Officer to submit at least annually to itslead state insurance regulator an Own Risk and Solvency Assessment Summary Report (“ORSA”). The ORSA is aconfidential internal assessment, appropriate to the nature, scale and complexity of an insurer, of the materialand relevant risks identified by the insurer associated with an insurer’s current business plan and the sufficiencyof capital resources to support those risks. The ORSA Model Act must be adopted by a state legislature in orderto be effective in that state. 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 restricting the transfer of Falls Lake Fire and Casualty Company’s shares(the “Agreement Restricting Shares”) for a five-year period commencing January 1, 2016. Specifically, under theagreement, the restriction on share transfer is released automatically without further approval or consent by theCalifornia Department of Insurance, or any other party, at the38TABLE OF CONTENTSfollowing respective times: 5% at the end of the first year of the 5-year restriction period; an additional 5% at theend of the second year; an additional 10% at the end of the third year; an additional 20% at the end of the fourthyear; and the remainder at the end of the fifth year. Therefore, under the organizational permit and theAgreement Restricting Shares, Falls Lake National’s ability to directly or indirectly transfer the shares of FallsLake Fire and Casualty Company to anyone without the prior written approval of the California Department ofInsurance is limited. These laws and the similar conditions applicable to Falls Lake Fire and CasualtyCompany’s shares may discourage potential acquisition proposals and may delay, deter or prevent aninvestment in or a change of control involving us, or one or more of our regulated subsidiaries, includingtransactions that our management and some or all of our shareholders might consider desirable. Pursuant toapplicable laws and regulations, “control” over an insurer is generally presumed to exist if any person, directlyor indirectly, owns, controls, holds the power to vote or holds proxies representing, 10 percent or more of thevoting securities of that 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 and surplusadequacy of insurance companies in relation to investment and insurance risks and identify insurers that are in,or are perceived as approaching, financial difficulty. This model establishes minimum capital needs based on therisks applicable to the operations of the individual insurer. The risk-based capital requirements for propertycasualty insurance companies measure three major areas of risk: asset risk, credit risk and underwriting risk.Under risk-based capital requirements, regulatory compliance is determined by the ratio of a company’s totaladjusted capital, as defined by the NAIC, to its company action level risk-based capital. Companies having lessstatutory surplus than required by the risk-based capital requirements are subject to varying degrees ofregulatory scrutiny and intervention, depending on the severity of the inadequacy. At December 31, 2016, theCompany’s U.S.-based insurance subsidiaries had total adjusted statutory capital of $184.9 million, which is inexcess of the minimum risk-based capital 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. Changes in legislation or regulationsand actions by regulators, including changes in administrative and enforcement policies, could requireoperational modifications from time to time. We cannot predict the effect that such changes or actions wouldhave on our business, financial condition or results of operations.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 U.S. federalgovernment has undertaken initiatives or considered legislation in several areas that may impact the insuranceindustry, including tort reform, corporate governance and the taxation of reinsurance companies. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) established the FederalInsurance Office which is authorized to study, monitor and report to Congress on the insurance industry and torecommend that the Financial Stability Oversight Council (“FSOC”) designate an insurer as an entity posingrisks to the U.S. financial stability in the event of the insurer’s material financial distress or failure. InDecember 2013, the Federal Insurance Office issued a report on alternatives to modernize and improve thesystem of insurance regulation in the United States, including by increasing national uniformity39TABLE OF CONTENTSthrough either a federal charter or effective action by the states. Additionally, the Dodd-Frank Act streamlinedE&S placements, the payment of E&S taxes, the regulation of credit for reinsurance, and simplified the processfor insurers to become an eligible E&S insurer in the U.S. In addition, legislation has been introduced from timeto time that, if enacted, could result in the U.S. federal government assuming a more direct role in the regulationof the insurance industry, including federal licensing in addition to or in lieu of state licensing and reinsurancefor natural catastrophes. Changes to federal legislation and administrative policies in several areas, includingchanges 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.In 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 are 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, 2016, 2015 and 2014, 100% of our gross written premiums andnet earned premiums were generated from policies issued to U.S.-based insureds.EmployeesAs of December 31, 2016, we had 557 employees located in the United States and Bermuda. All of ouremployees are full time. Our employees are not subject to any collective bargaining agreement and we are notaware of any current efforts to implement such an agreement. We believe we have good working relations withour 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.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, quarterly reports on Form 10-Q, current reports on Form 8-K 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 web site 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. Losses can emerge many years after a policy has lapsed. Accordingly, our first noticeof a claim or group of claims may arise many years after a policy has lapsed. Approximately 88.5% ofour net casualty loss reserves in this segment are associated with “occurrence form” policies atDecember 31, 2016.•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” risk factor herein.•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.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•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.•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 our42•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 CONTENTSability to generate revenue and profits. In an economic downturn that is characterized by higher unemployment,declining spending and reduced corporate revenues, the demand for insurance products is adversely affected,which directly affects our premium levels and profitability. Negative economic factors may also affect ourability to receive the appropriate rate for the risk we insure with our policyholders and may adversely affect thenumber of policies we can write, including with respect to our opportunities to underwrite profitable business. Inan economic downturn, our customers may have less need for insurance coverage, cancel existing insurancepolicies, modify their coverage, self insure their risks, or not renew with us. Existing policyholders mayexaggerate or even falsify claims to obtain higher claims payments. These outcomes would reduce ourunderwriting 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 fronting and program 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),” which is the third highest of 15 ratings that A.M. Best issues, to each of James RiverInsurance, 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 independent opinion of an insurance or reinsurancecompany’s ability to meet its obligations to policyholders and such ratings are not an evaluation directed toinvestors. A.M. Best periodically reviews our rating and may revise it downward or revoke it at its sole discretionbased primarily on its analysis of our balance sheet strength (including capital adequacy and loss and lossadjustment expense reserve adequacy), operating performance and business profile. Factors that could affectsuch 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 $189.8 million in gross written premiums, or 51.2% of that segment’s gross writtenpremiums for the year;•the Specialty Admitted Insurance segment conducted business with four agencies that produced anaggregate $112.5 million in gross written premiums, representing 61.7% of that segment’s grosswritten premiums for the year; and•the Casualty Reinsurance segment conducted business with four brokers that generated $166.3 millionof gross written premiums, or 90.2% 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 2016: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 materiallyadversely affected.We rely on a select group of customers for a significant portion of our business, and the loss of any of thesecustomers, or a material reduction in business with any of these customers, would materially adversely affectour rate of growth, results of operations and financial condition.Our two largest customers accounted for approximately $114.4 million (State National Insurance Company)and $80.1 million (Rasier LLC) of our gross written premium in 2016, representing 15.5% and 10.9% of ourgross written premiums in 2016, respectively. No other insured generated 10.0% or more of consolidated grosswritten premiums for 2016. The loss of any of these customers, or a significant reduction in the amount ofbusiness that we conduct with such customers, could have a material adverse effect on our results of operations.44TABLE OF CONTENTSWe 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. Most insuranceregulations are designed to protect the interests of insurance policyholders, as opposed to the interests ofshareholders. These regulations generally are administered by a department of insurance in each state and relateto, among other things, authorizations to write certain lines of business, capital and surplus requirements, reserverequirements, rate and form approvals, investment and underwriting limitations, affiliate transactions, dividendlimitations, cancellation and non-renewal of policies, changes in control, solvency, receipt of reinsurance credit,accounting principles and a variety of other financial and non-financial aspects of our business. These laws andregulations are regularly re-examined and any changes in these laws and regulations or new laws orinterpretations thereof may be more restrictive, could make it more expensive to conduct business or otherwisematerially adversely affect our financial condition or operations. State insurance departments and the BMA alsoconduct periodic examinations of the affairs of insurance companies and reinsurance companies and require thefiling of annual and other reports relating to financial condition, holding company issues and other matters.These regulatory requirements may impose timing and expense or other constraints that could materiallyadversely 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.Insurance Regulation — 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 controlling45TABLE OF CONTENTSperson submit annually to its lead state insurance regulator an “enterprise risk report” that identifies activities,circumstances or events involving one or more affiliates of an insurer that, if not remedied properly, are likely tohave a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holdingcompany system as a whole. Other changes include (i) requiring a controlling person to submit prior notice to itsdomiciliary insurance regulator of a divestiture of control, (ii) having detailed minimum requirements for costsharing and management agreements between an insurer and its affiliates and (iii) expanding the types ofagreements between an insurer and its affiliates to be filed with its domiciliary insurance regulator. The NAICAmendments must be adopted by a state legislature and such state’s insurance regulator in order to be effectivein that state. Each of California, North Carolina, Ohio and Virginia, the states in which our U.S. insurancesubsidiaries are domiciled, include this enterprise risk report requirement.In 2012, the NAIC also adopted the ORSA Model Act. The ORSA Model Act, when adopted by the variousstates, will require an insurance holding company system’s Chief Risk Officer to submit annually to its lead stateinsurance regulator an ORSA. The ORSA is a confidential internal assessment appropriate to the nature, scaleand complexity of an insurer of the material and relevant risks identified by the insurer associated with aninsurer’s current business plan and the sufficiency of capital resources to support those risks. The ORSA ModelAct must be adopted by a state legislature in order to be effective in that state. Each of California, Ohio andVirginia, the states in which several of our U.S. insurance subsidiaries are domiciled, adopted and require anORSA 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 materially 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.In addition, we design our E&S Lines segment’s policy terms to manage our exposure to expanding theoriesof legal liability like those which have given rise to claims for lead paint, asbestos, mold, construction defectsand environmental matters. Many of the policies we issue also include conditions requiring the prompt reportingof claims 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 sometime after we have issued insurance policies that are affected by thechanges. As a result, the full extent of liability under our insurance contracts may not be known for many yearsafter 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 adversely46•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 CONTENTSaffect our business by either broadening coverage beyond our underwriting intent or by increasing the numberor size of claims. In some instances, these changes may not become apparent until sometime 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.Three 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 exceed our amount of reinsurance purchased to protect us from such events, reduce ourearnings and cash flows, cause volatility in our results of operations and cash flows for any fiscal period ormaterially 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 Acts require commercial property and casualty insurancecompanies to offer coverage for acts of terrorism, whether foreign or domestic, and established a federalassistance program through the end of 2020 to help cover claims related to future terrorism-related losses. Theimpact 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.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 risk47TABLE OF CONTENTSor, in a rising interest rate environment, may not pre-pay as quickly as expected. In addition, individualsecurities in our fixed income securities portfolio are subject to credit risk and default. Downgrades in the creditratings of fixed maturities can have a significant negative effect on the market valuation of such securities.The 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 (15.3% of the carrying value of our investedassets as of December 31, 2016). 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 materially adversely affectthe value of these investments, including the possibility that we would suffer substantial losses on this portfolio.As of December 31, 2016, the fair value of our investments in publicly traded syndicated bank loans was $203.1million.As of December 31, 2016, we held equity investments of $27.1 million in non-public limited liabilitycompanies that have invested in renewable energy investments. These investments were sponsored and aremanaged by an affiliate of one of our principal shareholders. We invested in the equity of these projects becausewe anticipate earning attractive risk-adjusted returns from these investments. However, our investments in theseprojects are illiquid and the ultimate results from these 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 $28.4 million at December 31,2016. 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 to48TABLE OF CONTENTSprevailing 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 and reinsurance depends onnumerous factors, including the frequency and severity of catastrophic events, levels of capacity, theintroduction of new capital providers, general economic conditions and underwriting results of primary insurers.All of these factors fluctuate and may contribute to price declines generally in the insurance and reinsuranceindustry.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 adversely affected. Any of these factors couldlead 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 as well as the U.S. federal government, and the credit-driven equity market collapsemay increase the likelihood that some increased 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 U.S. federal government hasundertaken initiatives or considered legislation in several areas that may affect the insurance industry, includingtort reform, corporate governance and the taxation of reinsurance companies. The Dodd-Frank Act alsoestablished the Federal Insurance Office, which is authorized to study, monitor and report to Congress on theinsurance industry and to recommend that the FSOC designate an insurer as an entity posing risks to 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 increasing national uniformity through either a federal charter oreffective action by the states. Any additional regulations established as a result of the Dodd-Frank Act or actionsin response to the Federal Insurance Office Report could increase our costs of compliance or lead to disciplinaryaction. In addition, legislation has been introduced from time to time that, if enacted, could result in the U.S.federal government assuming a more direct role in the regulation of the insurance industry, including federallicensing in addition to or in lieu of state licensing and reinsurance for natural catastrophes. We are unable topredict whether any legislation will be enacted or any regulations will be adopted, or the effect that any suchdevelopments could have on our business, financial condition or results of operations.The Bermuda insurance and reinsurance regulatory framework has become subject to increased scrutiny inmany jurisdictions. The BMA sought “regulatory equivalency” which enables Bermuda’s commercial insurers totransact business with the European Union on a “level playing field”. In connection with its initial efforts toachieve equivalency under Solvency II, the BMA implemented and imposed49TABLE OF CONTENTSadditional requirements on the companies it regulates, such as JRG Re. On November 26, 2015, via delegatedact, the European Commission granted Bermuda’s commercial insurers full equivalence in all areas of SolvencyII for an indefinite period of time. The European Commission’s act was reviewed and approved by the EuropeanParliament and Council. On March 4, 2016, the delegated act was published in the official journal of theEuropean Union. The grant of full equivalence came into force on March 24, 2016 and applies from January 1,2016.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.The 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 utilize50TABLE OF CONTENTSreinsurance 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, 2016, reinsurancerecoverable on unpaid losses from our three largest reinsurers was $103.3 million in the aggregate andrepresented 56.5% of the total balance. Additionally, prepaid reinsurance premiums ceded to three reinsurers atDecember 31, 2016 was $42.7 million in the aggregate, or 47.3% of the total balance. At December 31, 2016, allof our material reinsurance recoverable amounts are from companies with A.M. Best ratings of “A-” or better orare collateralized 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 for other reasons.The failure of a reinsurer to pay us does not lessen our contractual obligations to insureds. If a reinsurer fails topay the expected portion of a claim or claims, our net losses might increase substantially and materiallyadversely affect our financial condition. Any disputes with reinsurers regarding coverage under reinsurancecontracts could 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 the obligations of the otherinsurance entity, it is possible that the collateral could be insufficient to cover all claims, either as a result of adecline in the value of the collateral, an increase in the obligation being collateralized, or a failure ofmanagement to monitor the adequacy of the collateral held. In that event, we51•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 CONTENTSwould be contractually entitled to recovery from the entity for which we are fronting, but it is possible that, forany of a variety of reasons, the other party could default in its obligations. See also “Business — BusinessSegments — 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 MGAs, do so in part bymaking decisions and choices that involve exposing us to risk. These include decisions such as settingunderwriting guidelines and standards, product design and pricing, determining which business opportunities topursue and other decisions. We endeavor, in the design and implementation of our compensation programs andpractices, to avoid giving our associates incentives to take excessive risks. Associates may, however, take suchrisks regardless of the structure of our compensation programs and practices. Similarly, although we employcontrols and procedures designed to monitor associates’ business decisions and prevent us from taking excessiverisks, these controls and procedures may not be effective. If our associates take excessive risks, the impact ofthose risks could have a material adverse effect on our financial condition and business 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:Any 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 of52TABLE OF CONTENTSdebt would most likely result in creditors having rights, preferences and privileges senior or otherwise superiorto those of the holders of our shares and may limit our flexibility in operating our business and make it moredifficult to obtain capital in the future. Disruptions, uncertainty, or volatility in the capital and credit marketsmay also limit our access to capital required to operate our business. If we are not able to obtain adequatecapital, or obtain it on favorable terms, our business, financial condition and results of operations could bematerially 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 businessdepends 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,intentional 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 our business, or cause financial loss, potential liability to insureds, inability tosecure insurance, reputational damage or regulatory intervention, which could materially adversely 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 criminal or terrorist acts.Such disruptions may give rise to losses in service to insureds and loss or liability to us. In addition, there is therisk that our controls and procedures as well as our business continuity, disaster recovery and data securitysystems prove to be inadequate. The computer systems and network systems we and others use could bevulnerable to unforeseen problems. These problems may arise in both our internally developed systems and thesystems of third-party service providers. In addition, our computer systems and network infrastructure presentsecurity risks and could be susceptible to hacking, computer viruses, data breaches, or ransomware attacks. Anysuch failure could affect our operations and could materially adversely affect our results of operations byrequiring us to expend significant resources to correct the defect, as well as by exposing us to litigation or lossesnot covered by insurance. Although we have business continuity plans and other safeguards in place, ourbusiness operations may be materially adversely affected by significant and widespread disruption to ourphysical infrastructure or operating systems 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 exposure to these matters remains heightened because of, amongother things, the evolving nature of these threats and the outsourcing of some of our business operations. As aresult, cyber-security and the continued development and enhancement of our controls, processes and practicesdesigned to protect our systems,53•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; andTABLE OF CONTENTScomputers, software, data and 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 modifyor enhance our protective measures or to investigate and remediate any information security vulnerabilities.Disruptions or failures in the physical infrastructure or operating systems that support our business 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.If we are unable to keep pace with the technological advancements in the insurance industry, our ability tocompete effectively could be impaired.We are committed to developing and maintaining information technology systems that will allow ourinsurance subsidiaries to compete effectively. There can be no assurance that the development of currenttechnology for future use will not result in our being competitively disadvantaged, especially with those carriersthat have greater resources. If we are unable to keep pace with the advancements being made in technology, ourability to compete with other insurance companies who have advanced technological capabilities will benegatively affected. Further, if we are unable to effectively execute and update or replace our key legacytechnology systems as they become obsolete or as emerging technology renders them competitively inefficient,our competitive position and our cost structure could be adversely affected.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 and maintainour systems and our internal controls effectively, allocate our human resources optimally, identify and hirequalified employees or incorporate effectively the components of any businesses we may acquire in our effort toachieve growth. The failure to manage our growth effectively could have a material adverse effect on ourbusiness, 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•Changing practices facilitated by the Internet may lead to greater competition in the insurancebusiness. Among the possible changes are shifts in the way in which commercial insurance ispurchased, which could affect both admitted and excess and surplus lines.•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 CONTENTSWe 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 in the wayE&S lines risks were marketed, including, without limitation, through use of the Internet, it could have amaterial adverse effect on our premiums, underwriting results and profits.There 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:55TABLE OF CONTENTSIf 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.We 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.56TABLE OF CONTENTSIn 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.Our 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 business.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 the57TABLE OF CONTENTSInternal Revenue Code of 1986, as amended (the “Code”), regulations or court decisions as to the specificactivities that constitute being engaged in the conduct of a trade or business within the United States, and anysuch determination is essentially factual in nature and must be made annually. The U.S. Internal RevenueService (the “IRS”) could successfully assert that our non-U.S. holding companies or JRG Re (or both) areengaged in a trade or business in the United States or, under the applicable income tax treaty, are engaged in atrade or business in the United States through a permanent establishment, and thus are subject to current U.S.federal income taxation. If our non-U.S. holding companies or JRG Re were deemed to be engaged in a trade orbusiness in the United States (or, under the applicable income tax treaty, were deemed to be so engaged througha permanent establishment), our non-U.S. holding companies or JRG Re, as applicable, would become subject toU.S. federal income tax on income “effectively connected” (or treated as effectively connected) with the U.S.trade or business and would become subject to the “branch profits” tax on earnings and profits that are botheffectively connected with the U.S. trade or business and deemed repatriated out of the United States. Any suchfederal 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 who owns shares of the CFC on the last day of the CFC’s taxable year must annually include inits taxable income its pro rata share of the CFC’s “subpart F income,” even if no distributions are made. SubpartF income typically includes “foreign personal holding company income” (such as interest, dividends and othertypes of passive income), as well as insurance and reinsurance income (including underwriting and investmentincome). In general (subject to the special rules applicable to “related person insurance income” describedbelow), for purposes of taking into account insurance income, a foreign insurance company will be treated as aCFC if U.S. 10% shareholders collectively own more than 25% of the total combined voting power or total valueof the company’s shares at any point during any year. While JRG Re is a CFC, we believe that the restrictions inour bye-laws placed on the voting power of our shares should generally prevent shareholders who acquire sharesfrom being treated as U.S. 10% shareholders of a CFC. Our existing shareholders who beneficially owned inexcess of 10% of our common shares prior to and immediately following the IPO are not subject to thislimitation. We cannot assure you,58TABLE OF CONTENTShowever, that these rules will not apply to you. If you are a U.S. person, we strongly urge you to consult yourown 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 threshold has been met or will be met. However, we cannot assureyou that this will continue to be the case. Consequently, we cannot assure you that a person who is a direct orindirect U.S. shareholder will not be required to include amounts in its income in respect of related personinsurance 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 their 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 2019.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.59TABLE OF CONTENTSUnder 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.Even 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 has ruled that the FET does not apply to retrocession contracts. We have not determinedif the FET should be applicable with respect to risks ceded to us by, or by us to, a non-U.S. insurance company. Ifthe FET is applicable, it should apply at a 1% rate on premiums for all U.S. Situs Risks ceded to us by a non-U.S.insurance company, or by us to a non-U.S. insurance company, even though the FET also applies at a 1% rate onpremiums 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 parent60TABLE OF CONTENTScompany and intercompany reinsurance agreements. We believe the terms of these transactions are appropriateand reflect arms-length terms and are consistent with all applicable rules and regulations. It is possible, however,that the Treasury Department or the IRS may review our intercompany agreements and successfully assert, underSection 482 of the Code, that they are not on an arm-length basis and that as a result, we owe taxes on account ofpast 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.Reduced tax rates for qualified dividend income may not be available in the future.We believe that the dividends paid on our 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.Federal Tax Reform Could Adversely Affect Us.Comprehensive U.S. tax reform has been stated to be a priority by President Trump and the U.S. Congress.Included in the tax reform proposals is a border adjustment tax that could tax imports of products and servicesfrom foreign countries. Risk transfer may or may not be included in the definition of products and services. Theapplication of a border adjustment tax to the cross-border insurance and reinsurance markets would be complex,and the manner in which it would be implemented and enforced is uncertain. Changes in tax laws or theirinterpretation, if adopted, could have a material impact on us.61•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;•the loss of one or more individually large clients, and its impact on our growth rate, profitability andfinancial condition;•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;•whether dividends on our common shares 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;•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 impacting the insurance and reinsurance market ingeneral;•changes in laws or government regulation, including tax or insurance laws and regulations;•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 common shares by us, our directors, executive officers or principal shareholders; and•adverse resolution of litigation against us.TABLE OF CONTENTSRisks 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 common shares couldfluctuate significantly for various reasons, including, without limitation:In addition, stock markets, including the NASDAQ Stock Market (the market on which our common sharesare traded), have experienced price and volume fluctuations that have affected and continue to affect the marketprices of equity securities issued by many companies, including companies in our industry. In62TABLE OF CONTENTSthe past, some companies that have had volatile market prices for their securities have been subject to classaction or derivative lawsuits. The filing of a lawsuit against us, regardless of the outcome, could have a negativeeffect on our business, as it could result in substantial legal costs and a diversion of management’s attention andresources.As a result of the factors described above, shareholders may not be able to resell their common shares at orabove their purchase price or may not be able to resell them at all. These market and industry factors maymaterially reduce the market price of our common shares, regardless of our operating performance.If securities or industry analysts do not continue to publish research or publish misleading or unfavorableresearch about our business, our common share price and trading volume could decline.The trading market for our common shares depends in part on the research and reports that securities orindustry analysts publish about us or our business. If one or more of these analysts do not continue to publishreports, fails to publish reports on us regularly or publishes misleading or unfavorable research about ourbusiness, demand for our common shares could decrease, which could cause our common share price or tradingvolume 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 not being required to comply with the auditorattestation requirements of Section 404(b) of Sarbanes-Oxley, reduced disclosure obligations regardingexecutive compensation in our periodic reports and proxy statements and exemptions from the requirements ofholding a non-binding advisory vote on executive compensation. We do not know if some investors will findour common shares less attractive as a result of our taking advantage of certain of these exemptions. The resultmay be a less active trading market for our common shares and our common 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”). The determination of large accelerated filer status isbased upon the market value of a company’s common equity held by non-affiliates as of the end of thecompany’s second quarter. If we maintain our current market capitalization, we will likely cease to qualify as anemerging growth company as of January 1, 2018.Failure to maintain effective internal controls in accordance with Sarbanes-Oxley could have a materialadverse effect on our business and common 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 may63TABLE OF CONTENTSnot be able 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 common shares.Affiliates of D. E. Shaw & Co., L.P. own and have voting power over a substantial amount of our outstandingcommon 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 approximately36.2% of our outstanding common shares in the aggregate. Based upon such ownership, the D. E. Shaw Affiliateshave significant influence over all matters requiring shareholder approval, including the election of directors(subject to a prohibition on the D. E. Shaw Affiliates right to vote in the election of at least half of our directorsas long as the D. E. Shaw Affiliates collectively beneficially own more than 20% of the outstanding commonshares), determination of significant corporate actions, amendments to our organizational documents, and theapproval of any business transaction, such as a merger or other sale of us or our assets. In addition, D. E. Shaw &Co., L.P. acts as an investment advisor to the D. E. Shaw Affiliates and may earn investment and managementfees from the investment of the D. E. Shaw Affiliates in the Company which may influence their decision withrespect to any proposed change of control of the Company. The D. E. Shaw Affiliates may also delay or prevent achange of control, even if such a change of control would benefit our other shareholders.Additionally, 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 our 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 our 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.Bryan Martin and David Zwillinger, Class I members of our board of directors with a term that continuesuntil our 2018 annual general meeting of shareholders, are affiliates of the D. E. Shaw Affiliates and weredesignated by them pursuant to our bye-laws. Messrs. Martin and Zwillinger will continue to have significantinfluence over our management, business plans and policies. The significant 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,64TABLE OF CONTENTSin the same business 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 incompanies and our bye-laws will not restrict them from acquiring and holding interests in businesses thatcompete directly or indirectly with us. For example, certain affiliates of D. E. Shaw & Co., L.P. are currentlyengaged in the reinsurance business. D. E. Shaw & Co., L.P., its affiliates and non-employee directors may alsopursue acquisition 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 within any 12 month period without advance regulatory approval. InOhio, the domiciliary state of Falls Lake General, Falls Lake National and James River Insurance, this limitationis the greater of statutory net income for the preceding calendar year or 10% of the statutory surplus at the end ofthe preceding calendar year, provided that such dividends may only be paid out of earned surplus of each of thecompanies, without obtaining regulatory approval. In North Carolina, the domiciliary state of StonewoodInsurance, this limitation is the greater of statutory net income excluding realized capital gains for the precedingcalendar year or 10% of the statutory surplus at the end of the preceding calendar year, provided that suchdividends may only be paid out of unassigned surplus without obtaining regulatory approval. In Virginia, thedomiciliary state of James River Casualty, this limitation is the greater of statutory net income excludingrealized capital gains 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 unassigned surplus without obtainingregulatory 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 — State Regulation” for more information. Inaddition, dividends paid by our U.S. subsidiaries to our U.K. holding company are subject to a 5% withholdingtax by the IRS. Under U.K. domestic law, no withholding tax is applied to dividends paid by U.K. tax residentcompanies.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 $84.2 million as ofDecember 31, 2016. See “Business — Regulation — Bermuda Insurance Regulation — Minimum SolvencyMargin and Enhanced Capital Requirements” 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 of65TABLE OF CONTENTSsuch dividend, its: (i) requirements under the Companies Act, 1981, (ii) minimum solvency margin,(iii) enhanced capital requirement or (iv) minimum liquidity ratio. If a Class 3B insurer fails to meet its minimumsolvency margin or minimum liquidity ratio on the last day of any financial year, it is prohibited from declaringor paying any dividends during the next financial year without the approval of the BMA. In addition, JRG Re, asa Class 3B insurer is prohibited from declaring or paying in any financial year dividends of more than 25% of itstotal statutory capital and surplus (as shown on its previous financial year’s statutory balance sheet) unless itfiles (at least seven days before payment of such dividends) with the BMA an affidavit signed by at least 2directors (one of whom must be a Bermuda resident director if any of the insurer’s directors are resident inBermuda) and the principal representative stating that it will continue to meet its solvency margin and minimumliquidity ratio. Where such an affidavit is filed, it shall be available for public inspection at the offices of theBMA. See “Business — Regulation — Bermuda Insurance Regulation — Restrictions on Dividends andDistributions” for more 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.During each of the first three quarters of 2016, we paid a dividend of $0.20 per common share, and duringthe fourth quarter, we paid a dividend of $0.30 per common share, and a special dividend of $1.35 per commonshare. Any determination to declare or pay future dividends to our shareholders will be at the discretion of ourboard of directors and will depend on a variety of factors, including (i) our financial condition, liquidity, resultsof operations (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.”Dividends 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 sales of our common shares, or the possibility of such sales, may cause the trading price of our commonshares to decline and could impair our ability to raise capital through subsequent 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 decline and could materially impair our ability to raise capitalthrough the issuance and sale of additional common shares. In January 2016, we filed a registration statementthat registered under the Securities Act all of the common shares owned by our largest affiliated shareholders, theD. E. Shaw Affiliates, as well as securities that we may issue and sell that have a maximum aggregate value of $250,000,000. In the fourth quarter of 2016, the D. E. Shaw Affiliates sold an aggregate of 3,450,000 of ourcommon shares. The remaining 10,597,238 common shares owned by the D. E. Shaw Affiliates remain eligiblefor sale under the registration statement.In December 2014, we filed a registration statement under the Securities Act to register the common sharesto be issued under our equity incentive plans and, as a result, all common shares acquired upon exercise of shareoptions or the vesting of restricted share units will be freely tradable under the Securities Act, subject torestrictions on the resale of our common shares by our affiliates pursuant to the Securities66•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 Affiliatesand other shareholders that held more than 9.5% of our common shares on the day of completion ofour IPO;•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 acquirer;•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 CONTENTSAct. As of December 31, 2016, there were share options outstanding to purchase a total of 2,234,699 commonshares and there were 196,800 common shares subject to restricted share units. In addition, 3,847,663 commonshares are reserved for future issuances under our equity incentive plans.In the future, we may issue additional common shares or other equity or debt securities convertible intocommon shares in connection with a financing, acquisition or employee arrangement or otherwise. Any suchissuance or sale by our existing shareholders, or the perception that the same may occur, could cause the tradingprice of our common shares to decline.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.We 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 other shareholders holding more than 9.5% of our commonshares on the day of completion of our IPO, to sell to us at fair market value the minimum number of commonshares which is necessary to avoid or cure any adverse tax consequences or materially adverse legal or regulatorytreatment to us, our subsidiaries or our shareholders, if our board of directors reasonably determines, in goodfaith, that failure to exercise this option would result in such adverse consequences 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 and67TABLE OF CONTENTSacquisitions, takeovers, shareholder lawsuits and indemnification of directors. Generally, the duties of directorsand officers of a Bermuda company are owed to the company only. Shareholders of Bermuda companiestypically do not have rights to take action against directors or officers of the company and may only do so inlimited circumstances. Class actions are not available under Bermuda law. The circumstances in whichderivative actions may be available under Bermuda law are substantially more proscribed and less clear thanthey would be to shareholders of U.S. corporations. The Bermuda courts, however, would ordinarily be expectedto permit a shareholder to commence an action in the name of a company to remedy a wrong to the companywhere the act complained of is alleged to be beyond the corporate power of the company or illegal, or wouldresult in the violation of the company’s memorandum of association or bye-laws. Furthermore, considerationwould be given by a Bermuda court to acts that are alleged to constitute a fraud against minority shareholders or,for instance, where an act requires the approval of a greater percentage of the company’s shareholders than thatwhich 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, pursuant to its statement of June 1, 2005 (the “Public Notice”), gave its general permissionunder the Exchange Control Act 1972 (and related regulations) for the issue and free transfer of Equity Securities(as such term is defined in the Public Notice) of Bermuda companies to and among persons who are non-residents of Bermuda for exchange control purposes as long as Equity Securities of such company are listed onan appointed stock exchange, which includes the NASDAQ Stock Market. This general permission will apply toour common shares, but would cease to apply if we were to cease to be listed on the NASDAQ Stock 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.The 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).68TABLE OF CONTENTSExcept 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 common shares to provide the information required under our bye-laws. If any such shareholder orproposed acquiror 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 our common shares to whichsuch request is 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 restricting the transfer of Falls Lake Fire and Casualty Company’s sharesfor a five-year period commencing January 1, 2016. Specifically, under the agreement, the restriction on sharetransfer is released automatically without further approval or consent by the California Department of Insurance,or any other party, at the following respective times: 5% at the end of the first year of the 5-year restrictionperiod; an additional 5% at the end of the second year; an additional 10% at the end of the third year; anadditional 20% at the end of the fourth year; and the remainder at the end of the fifth year Therefore, under theOrganizational Permit and the Agreement Restricting Shares, Falls Lake National’s ability to directly orindirectly transfer the shares of Falls Lake Fire and Casualty Company to anyone without the prior writtenapproval of the California Department of Insurance is limited. These laws and the similar conditions applicableto Falls Lake Fire and Casualty Company’s shares may discourage potential acquisition proposals and maydelay, deter or prevent an investment in or a change of control involving us, or one or more of our regulatedsubsidiaries, including transactions that our management and some or all of shareholders might considerdesirable. Pursuant to applicable laws and regulations, “control” over an insurer is generally presumed to exist ifany person, directly or indirectly, owns, controls, holds the power to vote or holds proxies representing, 10% ormore of the voting securities of that reinsurer or insurer. Indirect ownership includes ownership of theCompany’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, Rancho Santa Margarita, California andSaratoga Springs, New York where we conduct business in our Specialty Admitted Insurance segment and (3)Richmond, Virginia, Scottsdale, Arizona and Atlanta, Georgia for the conduct of business in our Excess andSurplus Lines segment. We believe that our facilities are adequate for our current needs and that suitableadditional or substitute space will be available as needed.Item 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$26.23Fiscal Year 2016HighLowFirst Quarter$34.24$28.68Second Quarter$36.14$25.86Third Quarter$38.31$33.04Fourth Quarter$42.17$35.25As of February 28, 2017, there were approximately 12 holders of record of our common shares.DividendsWe paid dividends of $0.20 per share in each of the first three quarters of 2016 and, in the fourth quarter, a$0.30 per share dividend plus a special dividend of $1.35 per share. In 2015, we paid a dividend of $0.16 pershare during each quarter, as well as a special dividend of $1.00 per share during the fourth quarter. InAugust 2014, we declared a cash dividend of $2.45 per share payable 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 generallysubject to a 5% withholding tax by the IRS. Under U.K. domestic law, no withholding tax is applied todividends 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 to pay our operating expenses as they become due and our payment of future dividends toshareholders may be limited. See “Risk Factors — Risks Related to our Business and Industry — We dependupon dividends and distributions from our subsidiaries, and we may be unable to distribute dividends to ourshareholders to the extent we do not receive dividends from our subsidiaries,” and “— Dividends paid by ourU.S. subsidiaries to James 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 financial70TABLE OF CONTENTScondition, liquidity, results of operations (including our ability to generate cash flow in excess of expenses andour expected or actual net income), retained earnings and collateral and capital requirements, (2) generalbusiness conditions, (3) legal, tax and regulatory limitations, (4) contractual prohibitions and other restrictions,(5) the effect of a dividend or dividends upon our financial strength ratings and (6) any other factors that ourboard of directors deems relevant.Performance GraphThe graph below compares the cumulative total shareholder return of our common shares relative to thecumulative total returns of the Russell 2000 index and two selected peer groups of ten companies (the 2015 PeerGroup) and nine companies (the 2016 Peer Group). In modifying our peer group for 2016, we took intoconsideration, among other factors, size and lines of business of the component companies in our peer group, aswell as competitors that went public in 2016. The calculation of cumulative total shareholder return assumes aninitial investment of $100 and the reinvestment of all dividends, if any, for the period from December 12, 2014(the date of our initial public offering) through December 31, 2016. Such returns are based on historical resultsand are not intended to suggest future performance. The companies in the peer group are weighted by marketcapitalization.The 2015 Peer Group consists of ten companies which are: Amerisafe Inc., Amtrust Financial Services Inc.,Arch Capital Group Ltd, Argo Group International Holdings Ltd, Markel Corp, Navigators Group Inc.,OneBeacon Insurance Group Ltd, RLI Corp, State National Companies Inc. and W. R. Berkley Corp.The 2016 Peer Group consists of nine companies which are: Amerisafe Inc., Amtrust Financial Services Inc.,Argo Group International Holdings Ltd, Kinsale Capital Group Inc., Markel Corp, Navigators Group Inc., RLICorp, State National Companies Inc. and W. R. Berkley Corp.12/12/1412/1412/1512/16James River Group Holdings, Ltd.100.00107.11166.93219.56Russell 2000100.00104.65100.03121.342015 Peer Group100.00101.66120.60135.992016 Peer Group100.00101.38120.99132.5571Item 6.SELECTED FINANCIAL DATATABLE OF CONTENTSThe 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.The following tables present selected historical financial information of James River Group Holdings, Ltd.derived from our consolidated balance sheets as of December 31, 2016, 2015, 2014, 2013 and 2012, and therelated consolidated statements of income and comprehensive income, changes in shareholders’ equity and cashflows for each of the five years in the period ended December 31, 2016, which have been audited by Ernst &Young LLP.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 31,20162015201420132012($ in thousands, except for per share data)Operating Results:Gross written premiums$737,398$572,194$518,767$368,518$491,931Ceded written premiums(179,690(101,162(68,684(43,352(139,622Net written premiums$557,708$471,032$450,083$325,166$352,309Net earned premiums$515,663$461,205$396,212$328,078$364,568Net investment income52,63844,83543,00545,37344,297Net realized investment gains(losses)7,565(4,547(1,33612,6198,915Other income10,3613,4281,122222130Total revenues586,227504,921439,003386,292417,910Losses and loss adjustmentexpenses325,421279,016237,368184,486264,496Other operating expenses170,828157,803133,055114,804126,884Other expenses1,59073016,0126773,350Interest expense8,4486,9996,3476,7778,266Amortization of intangible assets5975975972,4702,848Impairment of intangible assets————4,299Total expenses506,884445,145393,379309,214410,143Income before income taxexpense79,34359,77645,62477,0787,767Income tax expense (benefit)4,8726,2799399,741(897Net income$74,471$53,497$44,685$67,337$8,664Adjusted net operating income$71,318$61,090$58,424$58,918$7,935Earnings per Share:Basic$2.56$1.87$1.57$2.21$0.24Diluted$2.49$1.82$1.55$2.21$0.24Weighted — average sharesoutstanding — diluted29,894,37829,334,91828,810,30130,500,80035,733,35072(1)(2)))))))))(4)(1)The amount received or to be received for insurance policies written or assumed by us during a specificperiod of time without reduction for acquisition costs, reinsurance costs or other deductions.(2)The amount of written premiums ceded to (reinsured by) other insurers.(3)We believe this measure is useful in evaluating our insurance subsidiaries’ operating leverage. It may notbe comparable to the definition of net written premiums to surplus ratio for other companies.(4)Adjusted net operating income is a non-GAAP measure. We define adjusted net operating income as netincome excluding net realized investment gains and losses, expenses related to due diligence costs forvarious merger and acquisition activities, severance costs associated with terminated employees,impairment charges on goodwill and intangible assets, gains on extinguishment of debt, expenses on aleased building we are deemed to own for accounting purposes, and professional services and otherexpenses associated with securities offerings and the payment of special dividends. We use adjusted netoperating income as an internal performance measure in the management of our operations because webelieve it gives our management and other users of our financial information useful insight into our resultsof operations and our underlying business performance. Adjusted net operating income should not beviewed as a substitute for net income in accordance with GAAP. See “Management’s Discussion andAnalysis of Financial Condition and Results of Operations — Reconciliation of Non-GAAP Measures” fora reconciliation of adjusted net operating income to net income in accordance with GAAP.TABLE OF CONTENTSAt or for the Year Ended December 31,20162015201420132012($ in thousands, except for per share amounts and ratios)Balance Sheet Data:Cash and invested assets$1,442,114$1,350,697$1,310,628$1,217,078$1,235,537Reinsurance recoverables185,614143,086128,979120,477176,863Goodwill and intangible assets220,762221,359221,956222,553225,023Total assets2,346,5332,055,4971,959,2921,806,7932,025,381Reserve for losses and loss adjustmentexpenses943,865785,322716,296646,452709,721Unearned premiums390,563301,104277,579218,532239,055Senior debt88,30088,30088,30058,00035,000Junior subordinated debt104,055104,055104,055104,055104,055Total liabilities1,653,3121,374,4591,271,3711,105,3031,241,341Total stockholders’ equity693,221681,038687,921701,490784,040GAAP Underwriting Ratios:Loss ratio63.160.559.956.272.6Expense ratio31.233.533.435.034.8Combined ratio94.394.093.391.2107.4Other Data:Tangible equity$472,459$459,679$465,965$478,937$559,017Tangible equity per common shareoutstanding$16.15$15.88$16.33$16.78$15.52Debt to total capitalization ratio21.722.021.918.815.1Regulatory capital and surplus$605,298$601,436$593,580$580,267$596,272Net written premiums to surplus ratio0.90.80.80.60.673(5)%%%%%(6)%%%%%(7)%%%%%(8)(9)%%%%%(10)(3)xxxxx(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.(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. Tangible equity should not beviewed as a substitute for shareholders’ equity calculated in accordance with GAAP. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations — Reconciliation of Non-GAAPMeasures” for a reconciliation of tangible equity to shareholders’ equity in accordance with GAAP.(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”).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 Form 10-K.OverviewJames River Group Holdings, Ltd. is a Bermuda-based holding company. We own and operate a group ofspecialty insurance and reinsurance companies with the objective of generating compelling returns on tangibleequity while limiting underwriting and investment volatility. We seek to accomplish this by consistentlyearning profits from insurance and reinsurance underwriting and generating meaningful risk-adjusted investmentreturns, while managing our capital opportunistically.For the year ended December 31, 2016, 67.6% of our group-wide gross written premiums originated fromthe U.S. E&S lines market including business assumed by our Casualty Reinsurance segment. We also have aspecialty admitted insurance business in the United States. We intend to concentrate substantially all of ourunderwriting in casualty insurance and reinsurance, and for the year ended December 31, 2016, we derived98.1% of our group-wide gross written premiums from casualty insurance and reinsurance. We focus on writingbusiness in specialty markets where our underwriters have particular expertise and where we have long-standingdistribution relationships; maintaining a strong balance sheet with appropriate reserves; monitoring reinsurancerecoverables carefully; managing our investment portfolio actively without taking undue risk; using technologyto monitor trends in our business; responding rapidly to market opportunities and challenges; and activelymanaging 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 2016, theaverage account in this segment (excluding commercial auto policies) generated annual gross written premiumsof approximately $18,000. The Excess and Surplus Lines segment distributes primarily through wholesaleinsurance brokers. Members of our management team have participated in this market for over three decades andhave long-standing relationships with the wholesale agents who place E&S lines accounts. The Excess andSurplus Lines segment produced 50.3% of our gross written premiums and 56.8% of our net written premiums forthe year ended December 31, 2016.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 aswell as fronting and program business. In our fronting and program business, we retain a small percentage of therisk and seek to earn fee income by allowing other carriers and producers to use our licensure, ratings, andinfrastructure. Through Falls Lake National Insurance Company and its subsidiaries, this segment has admittedlicenses in 48 states and the District of Columbia and distributes through a variety of sources, includingindependent retail agents, program administrators and MGAs. The Specialty Admitted Insurance segmentproduced 24.7% of our gross written premiums and 10.0% of our net written premiums for the year endedDecember 31, 2016.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. Typically, we structure ourreinsurance contracts as quota share arrangements, with loss mitigating features, such as commissions that adjustbased 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 85.6% of the gross premiums writtenby our Casualty Reinsurance segment during 2016. 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 2016 were assumed from E&S carriers. The Casualty Reinsurancesegment distributes through traditional reinsurance brokers. The Casualty Reinsurance segment produced 25.0%of our gross written premiums and 33.2% of our net written premiums for the year ended December 31, 2016.We have 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. We exclude the effects of these agreements for the presentation of the Excess and Surplus Lines andSpecialty Admitted Insurance segments included herein consistent with the manner in which we manage thebusiness. At December 31, 2016, 67.3% of our cash and invested assets were held in Bermuda, which benefitsfrom a favorable operating environment, including an absence of corporate income or investment taxes. We paya 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).This rating reflects A.M. Best’s opinion of our insurance subsidiaries’ financial strength, operating performanceand ability to meet obligations to policyholders and is not an evaluation directed towards the protection ofinvestors.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 fronting and program business in theSpecialty Admitted Insurance segment. In applying this judgment, we generally establish reserves that are aboveour internal actuaries’ estimate. As such, we seek to establish reserves that will ultimately prove to be adequate.If we have indications that claims frequency or severity exceeds our initial76TABLE OF CONTENTSexpectations, we generally increase our reserves for losses and loss adjustment expenses. Conversely, whenclaims frequency and severity trends are more favorable than initially anticipated, we generally reduce ourreserves for losses and loss adjustment expenses once we have sufficient data to confirm the validity of thefavorable 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, 2016 was $943.9million. Of this amount, 68.0% relates to IBNR. The Company’s gross reserve for losses and loss adjustmentexpenses by segment are summarized as follows:Gross Reserves at December 31, 2016CaseIBNRTotalIBNR % of Total($ in thousands)Excess and Surplus Lines$134,377$440,902$575,27976.6Specialty Admitted Insurance59,23969,556128,79554.0Casualty Reinsurance108,016131,775239,79155.0Total$301,632$642,233$943,86568.0The Company’s net reserve for losses and loss adjustment expenses at December 31, 2016 was $761.1million. Of this amount, 66.9% relates to IBNR. The Company’s net reserve for losses and loss adjustmentexpenses by segment are summarized as follows:Net Reserves at December 31, 2016CaseIBNRTotalIBNR % of Total($ in thousands)Excess and Surplus Lines$121,175$350,278$471,45374.3Specialty Admitted Insurance28,39530,84459,23952.1Casualty Reinsurance102,178128,258230,43655.7Total$251,748$509,380$761,12866.9Our 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, the fronting and program business in theSpecialty Admitted Insurance segment and the commercial auto underwriting division in the Excess and SurplusLines 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 Expected Lossmethod. The Bornhuetter-Ferguson Incurred Loss Development and Paid Loss Development methods blendfeatures of the Expected Loss method and the Incurred and Paid Loss Development methods. The Bornhuetter-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 Casualty Reinsurance segment, periodic assessments are made on acontract by contract 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, 2016. 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$667,921$742,853$761,128$817,784Changes in reserves(93,207(18,275—56,656The 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 $56.7million, reduce after-tax net income by $55.3 million, reduce shareholders’ equity by $55.3 million and reduceshareholders’ tangible equity by $55.3 million, in each case at or for the period ended December 31, 2016.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 $93.2 million,increase after-tax net income by $84.1 million, increase shareholders’ equity by $84.1 million, and increasetangible equity by $84.1 million, in each case at or for the year ended December 31, 2016. 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 insureds suffering a loss frequently seek coverage beyondthe policies’ original intent. The difficulty in pinpointing actual ultimate losses and loss adjustment expenses(“LAE”) is illustrated by the fact that at December 31, 2016, 74.3% 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 history to give more weight to our own experience. Our initial expected loss ratios andour paid loss development factors and incurred loss development factors were adjusted to more closely resembleour own internal indications. Method weights were also changed as management, in consultation with ouractuaries, deemed appropriate. These changes had the cumulative effect of reducing our then best estimate forthe 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, 2016 would equate to a $25.5 million change in the reserve for losses and lossadjustment expenses at such date, a $23.5 million change in after-tax net income, a 3.4% change inshareholders’ equity and a 5.0% change in tangible equity, in each case at or for the year ended December 31,2016.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 $23.7 million redundancy developed in 2016 on the reserve for losses and loss adjustment expenses heldat December 31, 2015. This favorable reserve development included $24.1 million of favorable development inthe Excess and Surplus Lines segment. The Excess and Surplus Lines segment favorable development included$10.0 million of favorable development from the 2015 accident year, $10.7 million of favorable developmentfrom the 2014 accident year and $4.5 million from the 2013 accident year. This favorable development occurredbecause our actuarial studies at December 31, 2016 showed that the experience on our casualty businesscontinued to be below our initial expected ultimate loss ratios driven by80TABLE OF CONTENTSfavorable calendar year emergence (39.7% calendar year loss ratio compared to our expected calendar year lossratio of 46.0%). Favorable reserve development in the Specialty Admitted Insurance segment was $3.8 million,and primarily came from accident years 2010 through 2014, as losses on our workers’ compensation businesswritten prior to 2015 continued to develop more favorably than we had anticipated. The Specialty AdmittedInsurance segment’s favorable development from accident years 2010 – 2014 was partially offset by unfavorabledevelopment for the 2015 accident year. In addition, $4.2 million of adverse development occurred in theCasualty Reinsurance segment, with the majority of this adverse development coming from two contracts fromthe 2012 and 2013 underwriting years that experienced higher loss development in 2016 than expected.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 our initial expected ultimate loss ratios. Theactuarial studies at December 31, 2015 also showed that the experience on our casualty business excluding ourshorter-tailed general casualty business continued to be below our initial expected ultimate loss ratios driven byfavorable 2015 calendar year emergence (45.4% calendar year loss ratio compared to our expected calendar yearloss ratio of 48.1%). Favorable reserve development in the Specialty Admitted Insurance segment was $3.5million and primarily came from accident years 2011 through 2013, as losses on our workers’ compensationbusiness written prior to 2013 continued to develop more favorably than we had anticipated. In addition, $12.6million of adverse development occurred in the Casualty Reinsurance segment, with the majority of this adversedevelopment coming from three reinsurance relationships from the 2011, 2012, and 2013 underwriting yearsthat 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 occurred 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.Investment 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.81TABLE OF CONTENTSWe 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 amortized cost or cost.At December 31, 2014, the Company held two municipal bonds issued by the Commonwealth of PuertoRico. These bonds were backed by future sales tax revenues in Puerto Rico. Puerto Rico’s weak economicconditions and heavy debt burden, combined with the passage of new legislation that allowed publiccorporations to defer or reduce payments on outstanding debt, heightened the risk of default on the bonds. Weconcluded that the bonds, which had been downgraded to below investment grade, were other-than-temporarilyimpaired, and we recognized impairment losses of $1.4 million on these bonds for the year ended December 31,2014. We recognized an additional $660,000 impairment loss on these bonds in 2015 before selling themduring the second quarter of 2015. We concluded that none of the other fixed maturity securities in anunrealized loss position at December 31, 2016, 2015 or 2014 had experienced an other-than temporaryimpairment. At December 31, 2016, all of our fixed maturity securities had a fair value greater than 80% of theircost or amortized cost. We concluded that our fixed maturity securities were not other-than-temporarily impairedat December 31, 2016 based in part on the fact that they had never missed a scheduled principal or interestpayment, and that they were rated investment grade by a nationally recognized statistical rating organization.We concluded that none of the equity securities in our portfolio at December 31, 2016, 2015 or 2014 hadexperienced an other-than-temporary impairment.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, current economicconditions and other relevant factors. The Company has recorded an allowance equal to the difference betweenthe fair value and the amortized cost of bank loans that it has determined to be impaired as a practical expedientfor an estimate of probable future cash flows to be collected on those bank loans. As a starting point for ourevaluation, we compare the carrying value of each loan to its fair value to identify any loans that had a fair valueless than its carrying value.The Company holds a participation in a loan issued by a company that produces and sells power to PuertoRico through a power purchase agreement with Puerto Rico Electric Power Authority (“PREPA”), a publiccorporation and governmental agency of the Commonwealth of Puerto Rico. PREPA’s credit strength has beenaffected by the economic conditions in Puerto Rico, thus raising doubt about its ability to make full and timelypayments on the debt obligations held by the Company. We determined that a credit allowance was needed atDecember 31, 2016, 2015, and 2014 on loans issued by companies that produce and supply power to PuertoRico. Accordingly, we established credit allowances totaling $177,000, $414,000, and $752,000 atDecember 31, 2016, 2015 and 2014, respectively. At December 31, 2016, the loan had a carrying value of $1.7million and unpaid principal of $2.0 million.During 2016, 2015 and 2014, we had a number of our bank loans to oil and gas companies in the energysector. The market value of these loans declined significantly in response to declining energy prices. Wedetermined that a total credit allowance of $545,000 on one loan at December 31, 2016 and $3.9 million82TABLE OF CONTENTSon two loans at December 31, 2015 was needed on bank loans to companies in the energy sector with oil and gasexposure. At December 31, 2016, our exposure to bank loans of oil and gas companies consisted of four loanswith a carrying value of $9.8 million and a market value of $8.4 million. Management also concluded that threenon-energy sector loans were impaired at December 31, 2016. The impaired loans had an allowance for creditlosses of $221,000. At December 31, 2015, one non-energy sector loan was impaired with an allowance forcredit losses of $34,000. The aggregate allowance for credit losses was $943,000 at December 31, 2016 on fiveimpaired loans with a total carrying value of $6.5 million and unpaid principal of $7.6 million. AtDecember 31, 2015, the aggregate allowance for credit losses was $4.3 million on five impaired loans.Fair values are measured in accordance with ASC 820, Fair Value Measurements. The guidanceestablishes a framework for measuring fair value and a three-level hierarchy based upon the quality of inputsused to measure fair value. The three levels of the fair value hierarchy are: (1) Level 1: quoted price (unadjusted)in active 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, 2016 and 2015 there were bank loan participationswith an unpaid principal balance of $2.3 million and $5.3 million, respectively, and a carrying value of $2.0million and $4.6 million, respectively, for which external sources were unavailable 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, models, and inputsused by our investment managers and independent pricing services, and controls are in place to validate thatprices provided represent fair values. Our control process includes, but is not limited to, initial and ongoingevaluation of the methodologies used, a review of specific securities and an83TABLE OF CONTENTSassessment 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.Goodwill and Intangible AssetsAt December 31, 2016, we have $181.8 million of goodwill and $38.9 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, 2016 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. 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, the Company would be required to perform the quantitative goodwill impairmenttest. In addition, we generally perform the quantitative analysis at least every third year, even if the qualitativefactors do not indicate a need for quantitative testing. Accordingly, we performed quantitative testing in 2016,even through our qualitative analysis did not indicate that it was more likely than not that our good will wasimpaired. During quantitative goodwill impairment testing, the fair value of the reporting units is determinedusing a combination of a market approach and an income approach which projects the future cash flowsproduced by the reporting units and discounts those cash flows to their present value. The projection of futurecash flows is necessarily dependent upon assumptions about 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 earnings. 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. The Company’s annual testingperformed in the fourth quarters of 2016, 2015 and 2014 indicated that no impairment of goodwill 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 2016, 2015 and 2014, the indefinite-lived intangible assets for trademarks and insurancelicenses and authorities were tested for impairment. There were no impairments recognized in 2016, 2015 or2014. The Relief From Royalty method utilized in our evaluation of the value of our trademarks requires anumber 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 2016, 2015 and2014. There were no impairments recognized in 2016, 2015 or 2014.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, 2016, 2015 and 2014, 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”) 2014-09, Revenue from Contractswith Customers (Topic 606). The guidance applies to all companies that either enter into contracts withcustomers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless thosecontracts are within the scope of other standards, such as insurance contracts. Under this guidance, a companywill recognize revenue when it transfers promised goods or services to customers in an amount that reflects theconsideration to which the company expects to be entitled in exchange for those goods or services. In doing so,companies will need to use more judgment and make more estimates than under the current guidance. These mayinclude identifying performance obligations in the contract, estimating the amount of variable consideration toinclude in the transaction price and allocating the transaction price to each separate performance obligation.ASU No. 2014-09 becomes effective for the Company during the first quarter of 2018 and must be appliedretrospectively. The Company is currently evaluating ASU No. 2014-09 to determine the potential impact thatadopting this standard will have on reported fee income. The Company does not believe adoption will have amaterial impact 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 on a disaggregated basisthat provides useful information to readers of the financial statements. The disclosures include annual tabulardisclosures of paid and incurred losses and loss adjustment expense by accident year for up to 10 years. ThisASU also requires disaggregated information on claim frequency and incurred-but-not-reported liabilities foreach accident year. The required disclosures also include the average annual percentage payout of incurredclaims by age. ASU 2015-09 was adopted in 2016. Increased disclosures were made to adopt this ASU.85TABLE OF CONTENTSIn January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10):Recognition and Measurement of Financial Assets and Financial Liabilities. Among other things, this ASU willrequire equity investments (except those accounted for under the equity method of accounting or those thatresult in consolidation of the investee) to be measured at fair value with changes in fair value recognized in netincome. This ASU is effective for interim and annual reporting periods beginning after December 15, 2017.Upon adoption, a cumulative-effect adjustment to the balance sheet will be made as of the beginning of thefiscal year of adoption. The Company has not yet completed the analysis of how adopting this ASU will affectits consolidated financial statements.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under current guidance for lessees,leases are only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, aremet. This update will require the recognition of a right-of-use asset and a corresponding lease liability,discounted to the present value, for all leases that extend beyond 12 months. This ASU is effective for annualand interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption,leases will be recognized and measured at the beginning of the earliest period presented using a modifiedretrospective approach. The Company is currently evaluating ASU 2016-02 to determine the potential impactthat adopting this standard will have on its consolidated financial statements.In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting. The guidance requires that, prospectively, all taxeffects related to share-based payments be made through the income statement at the time of settlement asopposed to excess tax benefits being recognized in additional paid-in capital under the current guidance. TheASU also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable.This change is required to be applied on a modified retrospective basis, with a cumulative-effect adjustment toopening retained earnings. Additionally, all tax related cash flows resulting from share-based payments are to bereported as operating activities on the statement of cash flows, a change from the current requirement to presenttax benefits as an inflow from financing activities and an outflow from operating activities. This ASU is effectivefor fiscal years beginning after December 15, 2016.In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments. Current GAAP delays the recognition of credit lossesuntil it is probable a loss has been incurred. The update will require financial assets measured at amortized cost,such as bank loan participations held for investment, to be presented at the net amount expected to be collectedby means of an allowance for credit losses that runs through net income. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses, with the amount of theallowance limited to the amount by which fair value is below amortized cost. This ASU is effective for annualand interim reporting periods beginning after December 15, 2019. Upon adoption, this ASU will be appliedusing the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retainedearnings as of the beginning of the first reporting period presented. The Company has not yet completed theanalysis of how adopting this ASU will affect Company’s financial statements.In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification ofCertain Cash Receipts and Cash Payments. ASU 2016-15 was issued to address the diversity in practice of howcertain cash receipts and payments are classified in the statement of cash flows. The update addresses specificissues, including distributions received from equity method investees and the classification of cash receipts andpayments that have aspects of more than one class of cash flows. This ASU is effective for annual and interimreporting periods beginning after December 15, 2017. Upon adoption, the update will be applied using theretrospective transition method. The Company has not yet completed the analysis of how adopting this ASU willaffect our financial statements, but does not expect a material impact on our statement of cash flows.86(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 $14.2 million and $5.0 million for the year ended December 31,2016 and 2015, respectively.•$7.6 million of net realized investment gains and $4.5 million of net realized investment losses for theyears ended December 31, 2016 and 2015, respectively. Net realized investment gains in 2016 includenet realized gains from equity securities of $4.8 million and net realized gains from fixed maturitysecurities of $1.8 million. Net realized investment losses in 2015 were primarily from the sale of fixedmaturity securities and bank loan participations. We sold fixed maturity securities and bank loanparticipations in 2015 to fund the $47.4 million of dividends paid to our commonTABLE OF CONTENTSYear Ended December 31, 2016 Compared to Year Ended December 31, 2015The following table summarizes our results for the years ended December 31, 2016 and 2015:Year Ended December 31,20162015% Change($ in thousands)Gross written premiums$737,398$572,19428.9Net retention75.682.3Net written premiums$557,708$471,03218.4Net earned premiums$515,663$461,20511.8Losses and loss adjustment expenses(325,421(279,01616.6Other operating expenses(160,762(154,6204.0Underwriting profit29,48027,5696.9Net investment income52,63844,83517.4Net realized investment gains (losses)7,565(4,547—Other income29524520.4Other expenses(1,590(730117.8Interest expense(8,448(6,99920.7Amortization of intangible assets(597(597—Income before taxes79,34359,77632.7Income tax expense(4,872(6,279(22.4Net income$74,471$53,49739.2Adjusted net operating income$71,318$61,09016.7Ratios:Loss ratio63.160.5Expense ratio31.233.5Combined ratio94.394.0We had an underwriting profit of $29.5 million for the year ended December 31, 2016. This compares to anunderwriting profit of $27.6 million for the prior year. On a consolidated basis, the Company recognized $23.7million and $16.3 million of net favorable reserve development for the years ended December 31, 2016 and2015, respectively.The results for the years ended December 31, 2016 and 2015 included certain non-operating items that aresignificant to the Company. These items (on a pre-tax basis) include:87%(1)%%%%))%))%(2), (3)%%)%))%))%))%)))%%%%%%%%%•$1.6 million and $730,000 of other expenses the years ended December 31, 2016 and 2015,respectively. Other expenses for 2016 include $1.5 million of employee severance costs. Otherexpenses for 2015 include $276,000 of expenses associated with a related party leasing arrangementfor a minority-interest in a real estate limited partnership pursuant to which we were deemed to be anowner for accounting purposes, $170,000 of employee severance costs, and $284,000 of legal, tax, andother professional services related to the formation of James River UK, the December 2015 dividend,and a securities registration statement.•Interest expense for the years ended December 31, 2016 and 2015 include $1.4 million and $661,000,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 CONTENTSshareholders in 2015. Also included in net realized investment losses in 2015 are $3.9 million ofimpairment losses on two bank loans to oil and gas companies in the energy sector whose marketvalues had declined significantly in response to declining energy prices.We define adjusted net operating income as net income excluding certain non-operating expenses such asnet realized investment gains and losses, expenses related to due diligence costs for various merger andacquisition activities, professional service fees related to the filing of registration statements for the offering ofsecurities, severance costs associated with terminated employees, and interest expense and other income andexpenses on a leased building that we are deemed to own for accounting purposes. We use adjusted netoperating income as an internal performance measure in the management of our operations because we believe itgives our management and other users of our financial information useful insight into our results of operationsand our underlying business performance. Adjusted net operating income should not be viewed as a substitutefor net income calculated in accordance with GAAP, and our definition of adjusted net operating income maynot be comparable to that of other companies.Our income before taxes and net income for the years ended December 31, 2016 and 2015 reconcile to ouradjusted net operating income as follows:Year Ended December 31,20162015Income Before TaxesNet IncomeIncome Before TaxesNet Income(in thousands)Income as reported$79,343$74,471$59,776$53,497Net realized investment (gains) losses(7,565(5,2074,5474,090Other expenses1,5901,136730574Dividend withholding taxes———2,500Interest expense on leased building the Company isdeemed to own for accounting purposes1,412918661429Adjusted net operating income$74,780$71,318$65,714$61,090The 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, 2016 was 94.3%. A combined ratio of less than 100% indicates an underwritingprofit, while a combined ratio greater than 100% reflects an underwriting loss. It included $23.7 million, or 4.6percentage points, of net favorable reserve development on direct and assumed business underwritten by theCompany on prior accident years, including $24.1 million of favorable reserve development from the Excessand Surplus Lines segment and $3.8 million of favorable reserve development from the Specialty AdmittedInsurance segment partially offset by $4.2 million of adverse development from the Casualty Reinsurancesegment.88))TABLE OF CONTENTSOur combined ratio for the year ended December 31, 2015 was 94.0%. 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.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 31.2% and 33.5% for the years ended December 31, 2016 and 2015, respectively.The reduced expense ratio for 2016 reflects the 25.1% increase in the Excess and Surplus segment’s net earnedpremiums and an increase in fee income for the Company as a whole. Our Excess and Surplus Lines segment (ourlargest segment with 58.4% of consolidated net earned premiums for the year ended December 31, 2016) hassignificant scale and produces a lower expense ratio than our other operating segments. Fee income for theCompany increased year over year from $5.0 million to $14.2 million, as we grew our fee business in both theExcess and Surplus Lines segment and the Specialty Admitted Insurance segment.PremiumsInsurance premiums are earned ratably over the terms of our insurance policies, generally twelve months.Reinsurance premiums assumed are earned over the terms of the underlying policies or reinsurance contracts.Contracts and policies written on a “losses occurring” basis cover claims that may occur during the term of thecontract or policy, which is typically twelve months. Contracts which are written on a “risks attaching” basiscover claims which attach to the underlying insurance policies written during the terms of such contracts.Premiums earned on such contracts usually extend beyond the original term of the reinsurance contract,typically resulting in recognition of premiums earned over a 24-month period in proportion to the level ofunderlying exposure.The following table summarizes the change in premium volume by component and business segment:Year Ended December 31,20162015% Change($ in thousands)Gross written premiums:Excess and Surplus Lines$370,844$308,71720.1Specialty Admitted Insurance182,22190,978100.3Casualty Reinsurance184,333172,4996.9$737,398$572,19428.9Net written premiums:Excess and Surplus Lines$316,922$253,28525.1Specialty Admitted Insurance55,80344,91724.2Casualty Reinsurance184,983172,8307.0$557,708$471,03218.4Net earned premiums:Excess and Surplus Lines$301,404$240,87825.1Specialty Admitted Insurance52,28142,20623.9Casualty Reinsurance161,978178,121(9.1$515,663$461,20511.889%%%%%%%%%%)%%•Commercial Auto division (representing 29.7% of this segment’s 2016 business) which increased$36.3 million (or 49.2%) over the prior year.•Excess Casualty division (representing 11.7% of this segment’s 2016 business) which increased $5.9million (or 19.0%) over the prior year.•General Casualty division (representing 9.9% of this segment’s 2016 business) which increased $5.9million (or 19.0%) over the prior year; and•Manufacturers & Contractors division (representing 22.5% of this segment’s 2016 business) whichincreased $5.0 million (or 6.3%) over the prior year.TABLE OF CONTENTSOur net premium retention by segment is as follows:Year Ended December 31,20162015Excess and Surplus Lines85.582.0Specialty Admitted Insurance30.649.4Casualty Reinsurance100.4100.2Total75.682.3For the Excess and Surplus Lines segment, gross written premiums for the year ended December 31, 2016increased 20.1% over the prior year. Excess and Surplus Lines segment policy submissions, excludingcommercial auto, were 12.8% higher and bound policies were 10.4% higher, which was partially offset by a4.3% decrease in the average premium from $19,253 to $18,417. The gross written premiums increase was mostnotable in the following divisions within the Excess and Surplus Lines segment:For the Specialty Admitted Insurance segment, gross written premiums increased 100.3% year over year.Gross written premiums for 2016 included $142.6 million ($20.0 million on a net basis) from fronting andprogram business where there had been $55.0 million ($12.4 million on a net basis) of gross written premiums in2015. We did not begin writing fronting and program business until the fourth quarter of 2013. We cede asignificant portion of the specialty admitted fronting and program business to third-party reinsurers. As a result,neither our net written premiums nor level of assumed risk for this segment has increased at a rate whichcorresponds to the increase in our gross written premiums. In addition, workers’ compensation gross writtenpremiums increased 10.2% for 2016 over 2015.The components of the increase in gross written premiums for the Specialty Admitted Insurance segment areas follows:Year Ended December 31,20162015% Change($ in thousands)Workers’ compensation premiums$34,471$32,4646.2Audit premiums on workers’ compensation policies3,0541,60690.2Allocation of involuntary workers’ compensation pool2,1021,89910.7Total workers’ compensation premium39,62735,96910.2Specialty admitted fronting and program business142,59455,009159.2Total$182,221$90,978100.3It 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, 2016 by $3.1 million (in the prioryear, audit premiums increased both written and earned premiums by $1.6 million).For the Casualty Reinsurance segment, gross written premiums increased 6.9%, from $172.5 million for theyear ended December 31, 2015 to $184.3 million for the year ended December 31, 2016. The CasualtyReinsurance segment generally writes large casualty-focused treaties that are expected to have lower90%%%%%%%%%%%%%%(1)See “— Reconciliation of Non-GAAP Measures.”(2)Underwriting results include fee income of $10.1 million and $3.2 million for the years endedDecember 31, 2016 and 2015, respectively.TABLE OF CONTENTSvolatility relative to property and catastrophe treaties. We rarely write stand-alone property reinsurance. Whentreaties that include property exposure are written, it is done with relatively low catastrophe sub-limits.Net RetentionThe net premium retention for the Company decreased from 82.3% to 75.6% for the years endedDecember 31, 2015 and 2016, respectively. The decrease in retention is due primarily to the Specialty AdmittedInsurance segment, which saw a decline in its net premium retention from 49.4% for the year endedDecember 31, 2015 to 30.6% for the year ended December 31, 2016. Fronting and program business generallyhas much lower net premium retention than our workers’ compensation business which we write on an admittedbasis. For the year ended December 31, 2016, the net retention on the segment’s fronting and program businesswas 14.0%, while the net retention on the workers’ compensation business was 90.3%. This compares to netretention on the segment’s fronting and program business of 22.6% and net retention of the workers’compensation business of 90.4% for year ended December 31, 2015. The net retention for the Excess andSurplus Lines segment increased from 80.2% in 2015 to 84.3% in 2016. The net retention for the CasualtyReinsurance segment for 2016 and 2015 includes adjustments of both gross and net written premiums from theprior year that caused this segment’s net premium retention to slightly exceed 100% for both years.Underwriting ResultsThe following table compares our combined ratios by segment:Year Ended December 31,20162015Excess and Surplus Lines84.380.2Specialty Admitted Insurance94.597.5Casualty Reinsurance100.1101.4Total94.394.0Excess and Surplus Lines SegmentResults for the Excess and Surplus Lines segment are as follows:Year Ended December 31,20162015% Change($ in thousands)Gross written premiums$370,844$308,71720.1Net written premiums$316,922$253,28525.1Net earned premiums$301,404$240,87825.1Losses and loss adjustment expenses(188,768(131,22143.9Underwriting expenses(65,401(62,0505.4Underwriting profit$47,235$47,607(0.8Ratios:Loss ratio62.654.5Expense ratio21.725.8Combined ratio84.380.291%%%%%%%%%%%))%))%(1), (2))%%%%%%%(1)See “— Reconciliation of Non-GAAP Measures.”(2)Underwriting profit includes fee income of $4.2 million and $1.8 million for the years ended December 31,2016 and 2015, respectively.TABLE OF CONTENTSCombined Ratio. The combined ratio of the Excess and Surplus Lines segment for the year endedDecember 31, 2016 was 84.3%, comprised of a loss ratio of 62.6% and an expense ratio of 21.7%. The combinedratio of the Excess and Surplus Lines segment for the year ended December 31, 2015 was 80.2%, comprised of aloss ratio of 54.5% and an expense ratio of 25.8%.Loss Ratio. The loss ratio of 62.6% for the year ended December 31, 2016 includes $24.1 million, or 8.0percentage points, of net favorable development in our loss estimates for prior accident years. The loss ratio of54.5% for the year ended December 31, 2015 includes $25.4 million, or 10.6 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 25.8% in 2015 to 21.7% in 2016. The decrease in theexpense ratio is primarily attributable to the 25.1% increase in net earned premiums without a proportionalincrease in the total amount of operating expenses and to the increase in fee income from $3.2 million in 2015 to$10.1 million in 2016.Underwriting Profit. As a result of the items discussed above, underwriting profit of the Excess andSurplus Lines segment decreased slightly by 0.8%, from $47.6 million for the year ended December 31, 2015 to$47.2 million for the year ended December 31, 2016.Specialty Admitted Insurance SegmentResults for the Specialty Admitted Insurance segment are as follows:Year Ended December 31,20162015% Change($ in thousands)Gross written premiums$182,221$90,978100.3Net written premiums$55,803$44,91724.2Net earned premiums$52,281$42,20623.9Losses and loss adjustment expenses(30,897(25,62320.6Underwriting expenses(18,512(15,50919.4Underwriting profit$2,872$1,074167.4Ratios:Loss ratio59.160.7Expense ratio35.436.7Combined ratio94.597.5Combined Ratio. The combined ratio of the Specialty Admitted Insurance segment for the year endedDecember 31, 2016 was 94.5%, comprised of a loss ratio of 59.1% and an expense ratio of 35.4%. This comparesto the combined ratio in the prior year of 97.5%, comprised of a loss ratio of 60.7% and an expense ratio of36.7%.Loss Ratio. The loss ratio for the year ended December 31, 2016 of 59.1% included $3.8 million, or 7.3percentage points of net favorable development on prior accident years. The loss ratio for the year endedDecember 31, 2015 of 60.7% included $3.5 million, or 8.4 percentage points of net favorable development onprior accident years. The favorable development in both 2016 and 2015 reflects the fact that actual lossemergence of the workers’ compensation book for prior accident years has been better than expected.92%%%))%))%(1), (2)%%%%%%%(1)See “— Reconciliation of Non-GAAP Measures.”TABLE OF CONTENTSExpense Ratio. The expense ratio of 35.4% for the year ended December 31, 2016 decreased from 36.7% inthe prior year. The expense ratio declined in 2016 for this segment primarily due to a 25.1% increase in netearned premiums as the fronting and program business continued to achieve scale. The gross written premiumson this fronting and program business were $142.6 million and $55.0 million for the years ended December 31,2016 and 2015, respectively. We believe the expense ratio for this segment will continue to decline as thissegment increases premium volume in its new businesses and territories during 2017 and in future periods.Underwriting Profit. As a result of the items discussed above, the underwriting profit improved from $1.1million for the year ended December 31, 2015 to $2.9 million for the year ended December 31, 2016.Casualty Reinsurance SegmentResults for the Casualty Reinsurance segment are as follows:Year Ended December 31,20162015% Change($ in thousands)Gross written premiums$184,333$172,4996.9Net written premiums$184,983$172,8307.0Net earned premiums$161,978$178,121(9.1Losses and loss adjustment expenses(105,756(122,172(13.4Underwriting expenses(56,416(58,507(3.6Underwriting profit (loss)$(194$(2,558(92.4Ratios:Loss ratio65.368.6Expense ratio34.832.8Combined ratio100.1101.4The 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, 2016 was 100.1%, comprised of a loss ratio of 65.3% and an expense ratio of 34.8%. Thiscompares to the combined ratio in the prior year of 101.4%, comprised of a loss ratio of 68.6% and an expenseratio of 32.8%.Loss Ratio. The loss ratio for the year ended December 31, 2016 of 65.3% included $4.2 million, or 2.6percentage points, of adverse reserve development in our loss estimates for prior accident years. The loss ratio forthe year ended December 31, 2015 of 68.6% included $12.6 million, or 7.1 percentage points, of adverse reservedevelopment in our loss estimates for prior accident years.Expense Ratio. The expense ratio of the Casualty Reinsurance segment increased from 32.8% for the yearended December 31, 2015 to 34.8% for the year ended December 31, 2016, as net earned premiums decreased9.1% in 2016 while underwriting expenses decreased by 3.6%.Underwriting Results. As a result of the items discussed above, the underwriting loss for the CasualtyReinsurance segment for the year ended December 31, 2016 was $194,000 compared to an underwriting loss of $2.6 million for the year ended December 31, 2015.93%%)%)))%)))%(1))))%%%%%%%TABLE OF CONTENTSOther 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, 2016 and 2015, the total operating expenses of the Corporate and Othersegment were $20.4 million and $18.6 million, respectively. The increase in these expenses was primarilyrelated to a $1.8 million increase in stock based compensation expense resulting from options and restrictedshare units granted in February and May 2016.Investing ResultsNet investment income was $52.6 million for the year ended December 31, 2016 compared to $44.8 millionin the prior year. The change in our net investment income is as follows:Year Ended December 31,20162015% Change(in thousands)Renewable energy LLCs$3,480$3,936(11.6Other private investments6,0562,011201.1Other invested assets9,5365,94760.3All other net investment income43,10238,88810.8Total net investment income$52,638$44,83517.4The $7.8 million increase in net investment income year-over-year was largely driven by the performance ofthe Company’s private investments. Strong performance by our other private investments, most notably alimited partnership that invests in equity tranches of collateralized loan obligations (CLOs), more than offset adecline in income from the renewable energy investments. The limited partnership, with a carrying value of $17.5 million at December 31, 2016, reported income of $4.6 million in 2016 compared to a loss of $958,000in 2015. Excluding the private investments, our net investment income increased by $4.2 million over the prioryear due to a 6.8% increase in our cash and invested assets from $1,350.7 million at December 31, 2015 to$1,442.1 million at December 31, 2016 and an increase in investment yield.94)%%%%%TABLE OF CONTENTSMajor categories of the Company’s net investment income are summarized as follows:Year Ended December 31,20162015(in thousands)Fixed maturity securities$25,917$24,178Bank loan participations14,48613,432Equity securities5,6174,444Other invested assets9,5365,947Cash, cash equivalents, and short-term investments824672Trading gains (losses)18(9Gross investment income56,39848,664Investment expense(3,760(3,829Net investment income$52,638$44,835The following table summarizes our investment returns:Year Ended December 31,20162015Annualized gross investment yield on:Average cash and invested assets4.03.7Average fixed maturity securities3.53.4Of our total cash and invested assets of $1,442.1 million at December 31, 2016, $109.8 million representsthe cash and cash equivalents portion of the portfolio. The majority of the portfolio, or $1,017.5 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 $203.5 million of bank loanparticipations, $55.4 million of other invested assets, $50.8 million of short-term investments, and $5.1 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 $203.5 million of bank loan participations are classified as held-for-investment and reported atamortized cost, net of an allowance for credit losses. Changes in this credit allowance are included in realizedgains or losses. These bank loan participations are primarily senior, secured floating-rate debt which aregenerally rated “BB,” “B,” or “CCC” by Standard & Poor’s or an equivalent rating from another nationallyrecognized statistical rating organization, and are therefore below investment grade. Bank loans includeassignments of and participations in, performing and non-performing senior corporate debt generally acquiredthrough primary bank syndications and in secondary markets. They consist of, but are not limited to, term loans,the funded and unfunded portions of revolving credit loans, and similar loans and investments. At December 31,2016 and 2015, the fair market value of these securities was $203.1 million and $180.1 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 $3.5 million and $3.9million for the years ended December 31, 2016 and 2015, respectively. These investments had a carrying valueof $27.1 million at December 31, 2016. Investments in bridge loans for renewable energy projects, primarilywith affiliates of D.E. Shaw, had investment income $450,000 and $3.1 million for the years ended December 31,2016 and 2015, respectively. In 2016, the Company received a $6.5 million repayment on one note. During2015, the Company invested a total of $36.3 million in these notes and received maturities and repaymentstotaling $30.8 million. The Company has invested in several limited95)))%%%%TABLE OF CONTENTSpartnerships that invest in concentrated portfolios of publicly-traded small cap equities, loans of middle marketprivate equity sponsored companies, and equity tranches of collateralized loan obligations (CLOs). Income fromthese partnerships was $5.3 million in 2016 compared to losses of $1.5 million in 2015. Together, these limitedpartnerships had a carrying value of $23.9 million at December 31, 2016. Income from the Company’sinvestments in renewable energy LLCs and limited partnerships is recognized under the equity method ofaccounting. The Company also holds $4.5 million of subordinated notes issued by a bank holding companyaffiliated with the Chairman and Chief Executive Officer of the Company. Interest income from the notes was$343,000 for the years ended December 31, 2016 and 2015.For the year ended December 31, 2016, we recognized net realized investment gains of $7.6 million. Theserealized investment gains included $1.8 million and $4.8 million, respectively, of net realized investment gainsrecognized on the sale of fixed maturity and equity securities. In addition, the Company recognized $579,000 ofnet realized gains on sales of bank loan participations and $415,000 of net realized gains related to changes inthe allowance for credit losses on bank loan participations.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.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. The Company recognized impairment losses of $660,000 on these bonds for the year endedDecember 31, 2015. The bonds were sold during the second quarter of 2015 and a net realized gain of $22,000was recognized on the sales.At December 31, 2015, the Company held participations in two loans issued by companies that produceand supply power to Puerto Rico through power purchase agreements with PREPA, a public corporation andgovernmental agency of the Commonwealth of Puerto Rico. PREPA’s credit strength and ability to make timelypayments was impacted by the economic conditions in Puerto Rico, thus raising doubt about the companies’ability to meet the debt obligations held by the Company. At December 31, 2015, the allowance for credit losseson these loans was $414,000. The loans had a carrying value of $3.9 million at December 31, 2015 and unpaidprincipal of $4.6 million. In June 2016, one of the loans was repaid in full at its scheduled maturity.Management concluded that the remaining loan, scheduled to mature in 2017, remained impaired atDecember 31, 2016. The allowance for credit losses on the loan was $177,000 at December 31, 2016. The loanhad a carrying value of $1.7 million and unpaid principal of $2.0 million at December 31, 2016.The Company’s bank loan portfolio includes loans to oil and gas companies in the energy sector. Themarket values of these loans were impacted by declining energy prices in 2015. At December 31, 2015, theCompany’s oil and gas exposure in the bank loan portfolio was in eight loans with a carrying value of $15.8million and an unrealized loss of $4.1 million. Management concluded that two of these loans were impaired asof December 31, 2015, and accordingly, an allowance for credit losses of $3.9 million was established on theloans. After recording this impairment, the loans had a carrying value of $1.7 million at December 31, 2015 andunpaid principal of $5.8 million. At December 31, 2016, the Company’s oil and gas exposure was in four bankloans and with a total carrying value of $9.8 million and an unrealized loss of $1.3 million. Managementconcluded that one of these loans was impaired with a carrying value of $1.6 million, unpaid principal of $2.2million and an allowance for credit losses of $545,000. All of the other loans are current at December 31, 2016.96TABLE OF CONTENTSManagement also concluded that three non-energy sector loans were impaired at December 31, 2016. AtDecember 31, 2016, the impaired loans had a carrying value of $3.2 million, unpaid principal of $3.5 million,and an allowance for credit losses of $221,000. At December 31, 2015, one non-energy sector loan was impairedwith a carrying value of $689,000, unpaid principal of $722,000, and an allowance for credit losses of $34,000.The aggregate allowance for credit losses was $943,000 at December 31, 2016 on five impaired loans with atotal carrying value of $6.5 million and unpaid principal of $7.6 million. At December 31, 2015, the aggregateallowance for credit losses was $4.3 million on five impaired loans with a total carrying value of $6.3 millionand unpaid principal of $11.1 million.At December 31, 2016, our available-for-sale investment portfolio of fixed maturity and equity securitieshad net unrealized gains of $2.7 million representing 0.3% of the cost or amortized cost of the portfolio.Additionally, at December 31, 2016, 99.0% of our fixed maturity security portfolio was rated “BBB-” or better(“investment grade”) by Standard & Poor’s or had an equivalent rating from another nationally recognizedstatistical rating organization. Fixed maturity securities with ratings below investment grade by Standard &Poor’s or another nationally recognized statistical rating organization at December 31, 2016 had an aggregatefair value of $9.2 million and an aggregate net unrealized loss of $979,000. The average duration of ourinvestment portfolio was 3.6 years at December 31, 2016.The amortized cost and fair value of our investments in available-for-sale securities were as follows:December 31, 2016December 31, 2015Cost or Amortized CostFair Value% of Total Fair ValueCost or Amortized CostFair Value% of Total Fair Value($ in thousands)Fixed maturity securities:State and municipal$101,793$105,84110.4$95,864$103,45710.6Residential mortgage-backed152,703150,79814.8137,308136,88714.1Corporate379,727378,44837.2368,961363,16837.3Commercial mortgage and asset-backed167,967168,04716.5130,231130,69613.4Obligations of U.S. governmentcorporations and agencies64,82365,0146.489,73490,1639.3U.S. Treasury securities and obligationsguaranteed by the U.S. government71,17471,1207.073,32273,2557.5Redeemable preferred stock2,0251,8090.22,0252,0340.2Total940,212941,07792.5897,445899,66092.4Equity securities:Preferred stock61,80664,8276.450,63154,0925.5Common stock12,74711,5741.119,19920,0192.1Total74,55376,4017.569,83074,1117.6Total investments$1,014,765$1,017,478100.0$967,275$973,771100.0The following table sets forth the composition of the Company’s portfolio of fixed maturity securities (bothavailable-for-sale and trading) by rating as of December 31, 2016:Standard & Poor’s or Equivalent DesignationFair Value% of Total($ in thousands)AAA$164,85517.4AA394,36941.7A277,48729.3BBB100,22610.6BB2,5680.3Below BB and unrated6,6350.7Total$946,140100.097%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%TABLE OF CONTENTSAt December 31, 2016, our portfolio of available-for-sale fixed maturity securities contained corporatefixed maturity securities with a fair value of $378.4 million. A summary of these securities by industry segmentis shown below as of December 31, 2016:IndustryFair Value% of Total($ in thousands)Industrials and other$267,80370.8Financial48,94912.9Utilities61,69616.3Total$378,448100.0Corporate available-for-sale fixed maturity securities include public traded securities and privately placedbonds is shown below as of December 31, 2016:Public/PrivateFair Value% of Total($ in thousands)Publicly traded$347,48791.8Privately placed30,9618.2Total$378,448100.0The amortized cost and fair value of our available-for-sale investments in fixed maturity securitiessummarized by contractual maturity are as follows:December 31, 2016Amortized CostFair Value% of Total Fair Value($ in thousands)Due in:One year or less$70,635$71,1657.5After one year through five years263,261263,14028.0After five years through ten years168,705167,49017.8After ten years114,916118,62812.6617,517620,42365.9Residential mortgage-backed152,703150,79816.0Commercial mortgage and asset-backed167,967168,04717.9Redeemable preferred stock2,0251,8090.2Total$940,212$941,077100.0At December 31, 2016, 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, 2016 and 2015 were $1.6 million and $730,000,respectively. In 2016, these expenses include $1.5 million of employee severance costs. In 2015, these expensesinclude $276,000 of expenses associated with a related party leasing arrangement for a minority-interest in a realestate limited partnership pursuant to which we were deemed to be an owner for accounting purposes, $170,000of severance expenses, 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.Interest ExpenseInterest expense was $8.4 million and $7.0 million for the years ended December 31, 2016 and 2015,respectively. See “— Liquidity and Capital Resources — Sources and Uses of Funds” for information regardingour senior bank debt facility and trust preferred securities.98%%%%%%%%%%%%%%%%TABLE OF CONTENTSAmortization of IntangiblesThe Company recorded $597,000 of amortization of intangibles for each of the years ended December 31,2016 and 2015, 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, 2016 or 2015.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 10.4% and 10.6% of our available-for-sale securities at December 31, 2016 and2015, respectively), dividends received income, and tax credits on certain renewable energy investments. For theyears ended December 31, 2016 and 2015, our effective tax rate was 6.1% and 10.5%, respectively. Income taxesfor 2015 included $2.5 million of U.S. withholding taxes on an intercompany dividend paid from the U.S.holding company to our U.K. intermediate holding company resulting in a higher effective tax rate in 2015compared to 2016.99(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.•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 $47.4 million of dividends paid to our common shareholders in 2015. Also included in netrealized investment losses in 2015 are $3.9 million of impairment losses on two bank loans to oil andgas companies in the energy sector whose market values had declinedTABLE OF CONTENTSYear Ended December 31, 2015 Compared to Year Ended December 31, 2014The following table summarizes our results for the years ended December 31, 2015 and 2014:Year Ended December 31,20152014% Change($ 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 profit27,56926,6723.4Net 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$44,68519.7Adjusted net operating income$61,090$58,4244.6Ratios:Loss ratio60.559.9Expense ratio33.533.4Combined ratio94.093.3We 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.The 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:100%(1)%%%%))%))%(2), (3)%%))%%)))%))%))%))%%%%%%%%%•Other expenses for the year ended December 31, 2014 included $14.9 million of expenses associatedwith our initial public offering, including $2.8 million of legal fees, $2.0 million of audit and filingrelated 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 CONTENTSsignificantly in response to declining energy prices. Net realized investment losses in 2014 include$2.0 million of impairment losses related to our investment exposure to fixed maturity securities andbank loan participations issued by entities in the Commonwealth of Puerto Rico.Our income before taxes and net income for the years ended December 31, 2015 and 2014 reconcile to ouradjusted net operating income as follows:Year Ended December 31,20152014Income Before TaxesNet IncomeIncome Before TaxesNet Income(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 purposes661429659429Adjusted net operating income$65,714$61,090$63,631$58,424Our combined ratio for the year ended December 31, 2015 was 94.0%. 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 and101)•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.TABLE OF CONTENTS$5.9 million of favorable reserve development from the Specialty Admitted Insurance segment offset by $5.7million of adverse development from the Casualty Reinsurance segment.Expense RatiosOur expense ratio was 33.5% and 33.4% for the years ended December 31, 2015 and 2014, respectively.The expense ratio for 2015 reflects the 16.4% increase in our net earned premiums compared to the prior yearwithout a proportional increase in other operating expenses, offset by the additional costs of being a publicly-traded company for a full year in 2015.PremiumsThe following table summarizes the change in premium volume by component and business segment:Year Ended December 31,20152014% Change($ 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, gross written premiums for the year ended December 31, 2015increased 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 endedDecember 31, 2015 than the year ended December 31, 2014. The gross written premiums increase was mostnotable in the following divisions within the Excess and Surplus Lines segment:102%%)%%%%)%%%%%%%%%%%%%%•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 CONTENTSFor the Specialty Admitted Insurance segment, during the year ended December 31, 2015, gross writtenpremiums increased 53.2% compared to the prior year. Gross written premiums for 2015 included $55.0 million($12.4 million on a net basis) from fronting and program business where there had been $29.3 million ($9.0million on a net basis) of gross written premiums in 2014. We did not begin writing fronting and programbusiness until the fourth quarter of 2013. We cede a significant portion of the specialty admitted fronting andprogram business to third-party reinsurers. As a result, neither our net written premiums nor level of assumed riskfor this segment has increased at a rate which corresponds to the increase in our gross written premiums.Workers’ compensation gross written premiums also increased 19.4% for 2015 over 2014.The components of the increase in gross written premiums for the Specialty Admitted Insurance segment areas follows:Year Ended December 31,20152014% Change($ 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 fronting and program business55,00929,25288.1Total$90,978$59,38053.2For the Casualty Reinsurance segment, gross written premiums decreased 16.5%, from $206.7 million forthe year ended December 31, 2014 to $172.5 million for the year ended December 31, 2015. The decrease inwritten premiums in 2015 from 2014 is primarily attributable to the very competitive environment forreinsurance. Despite the decrease in gross written and net written premiums for 2015, our net earned 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’sfronting and program business. Fronting and program business generally has 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 fronting and program business was 22.6%, while the net retention onthe workers’ compensation business was 90.4%. This compares to net retention on the segment’s fronting andprogram of 30.7% and a retention of the workers’ compensation business of 90.5% for year ended December 31,2014.103%%%%%%(1)See “— Reconciliation of Non-GAAP Measures.”(2)Underwriting results include fee income of $3.2 million and $883,000 for the years ended December 31,2015 and 2014, respectively.TABLE OF CONTENTSUnderwriting ResultsThe following table compares our combined ratios by segment:Year Ended December 31,20152014Excess and Surplus Lines80.282.1Specialty Admitted Insurance97.599.9Casualty Reinsurance101.499.6Total94.093.3Excess and Surplus Lines SegmentResults for the Excess and Surplus Lines segment are as follows:Year Ended December 31,20152014% Change($ 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 ratio54.555.2Expense ratio25.826.8Combined ratio80.282.1Combined 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 $47.6million for the year ended December 31, 2015.104%%%%%%%%%%%))%))%(1), (2)%%%%%%%(1)See “— Reconciliation of Non-GAAP Measures.”(2)Underwriting profit includes fee income of $1.3 million and $873,000 for the years ended December 31,2015 and 2014, respectively.TABLE OF CONTENTSSpecialty Admitted Insurance SegmentResults for the Specialty Admitted Insurance segment are as follows:Year Ended December 31,20152014% Change($ 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 ratio60.753.4Expense ratio36.746.5Combined ratio97.599.9Combined 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 fronting and program business. The gross written premiumson this fronting and program 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.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 $1.1 million for the year ended December 31, 2015.105%%%))%))%(1), (2)%%%%%%(1)See “— Reconciliation of Non-GAAP Measures.”TABLE OF CONTENTSCasualty Reinsurance SegmentResults for the Casualty Reinsurance segment are as follows:Year Ended December 31,20152014% Change($ 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 ratio68.666.3Expense ratio32.833.3Combined ratio101.499.6Combined 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.For 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.106)%)%%))%))%(1))%%%%%%TABLE OF CONTENTSInvesting 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 securities3.43.5Of 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 (the allowancefor credit losses was $752,000 at December 31, 2014 and was related to two Puerto Rico loans). Changes in thiscredit allowance are included in realized gains or losses. At December 31, 2015 and 2014, the fair market valueof these securities was $180.1 million and $231.3 million, respectively.Equity interests in various renewable energy LLCs managed by an affiliate of the Company’s largestshareholder, the D.E. Shaw Affiliates, generated investment income of $3.9 million and $5.2 million for theyears ended December 31, 2015 and 2014, respectively. These investments had a carrying value of $26.0107))))%%%%TABLE OF CONTENTSmillion at December 31, 2015. Investments in bridge loans for renewable energy projects, primarily withaffiliates of D.E. Shaw, had investment income of $3.1 million for the year ended December 31, 2015 comparedto none in 2014. During 2015, the Company invested a total of $36.3 million in these notes and receivedmaturities and repayments totaling $30.8 million. The Company has invested in several limited partnerships thatinvest in concentrated portfolios of high yield bonds of companies undergoing financial stress, publicly-tradedsmall cap equities, loans of middle market private equity sponsored companies, and equity tranches ofcollateralized loan obligations (CLOs). Losses from these partnerships were $1.5 million and $128,000 for theyears ended December 31, 2015 and 2014, respectively. Together, these limited partnerships had a carryingvalue of $17.5 million at December 31, 2015. The Company also holds $4.5 million of subordinated notesissued by a bank holding company affiliated with the Chairman and Chief Executive Officer of the Company.Interest income from the notes was $343,000 for the years 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 PREPA. PREPA’s credit strength and ability to maketimely payments has been impacted by the economic conditions in Puerto Rico, thus raising doubt about thecompanies’ ability to meet the debt obligations held by the Company. Management concluded that the loanswere impaired at December 31, 2014 and established an allowance for credit losses on the loans of $752,000. AtDecember 31, 2015, the allowance for credit losses on these loans was $414,000. The loans had a carrying valueof $3.9 million at December 31, 2015 and unpaid principal of $4.6 million.During 2014 and 2015 we held a number of bank loans to oil and gas companies in the energy sector. Themarket values of these loans have declined significantly in response to declining energy prices. In total, theCompany had eight loans to oil and gas companies in the energy sector with a carrying value of $15.8 millionand a market value of $11.7 million at December 31, 2015. Management concluded that two of these loanswere impaired as of December 31, 2015, and accordingly, an allowance for credit losses of $3.9 million wasestablished on the loans. After recording this impairment, the loans had a carrying value of $1.7 million atDecember 31, 2015 and unpaid principal of $5.8 million. Management also concluded that one non-energysector loan held at December 31, 2015 should be considered impaired and an allowance for credit losses of $34,000 was established on the loan. After recording this impairment, the loan had a carrying value of $689,000at December 31, 2015 and unpaid principal of $722,000. There was no allowance for credit losses on these loansat 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 statistical108TABLE OF CONTENTSrating organization. Fixed maturity securities with ratings below investment grade by Standard & Poor’s oranother nationally recognized statistical rating organization at December 31, 2015 had an aggregate fair valueof $9.4 million and an 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 corporations andagencies89,73490,1639.3100,376101,27512.3U.S. Treasury securities and obligations guaranteed 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$904,706100.0At 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$363,168100.0109%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%TABLE OF CONTENTSCorporate available-for-sale fixed maturity securities include public traded securities and privately placedbonds is shown below as of December 31, 2015:Public/PrivateFair Value% of Total($ 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 atotal invested 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.Interest 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.110%%%%%%%%%%%%TABLE OF CONTENTSGoodwill and ImpairmentThe 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).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 the payment of dividendscalculated under any applicable formula. See Item 1 — “U.S. Insurance Regulation — State Regulation” foradditional information. Pursuant to Bermuda regulations, the maximum amount of dividend and return of capitalavailable to be paid by a reinsurer is determined pursuant to a formula. See Item 1 “Regulation — BermudaInsurance Regulation — Restrictions on Dividends and Distributions” for additional information. Under thisformula, the maximum amount of dividends and return on capital available to us from JRG Re in 2017 iscalculated to be approximately $89.5 million. However, this dividend amount is subject to annual enhancedsolvency requirement calculations. Additionally, the maximum amount of dividends available to the U.S.holding company from our U.S. insurance subsidiaries during 2017 without regulatory approval is $18.5million.At December 31, 2016, our Bermuda holding company had $3.0 million of cash and cash equivalent assets.At December 31, 2016, our U.S. holding company had $76.5 million of cash and invested assets, comprised ofcash and cash equivalents of $12.9 million, fixed maturity securities of $5.1 million, other invested assets of $34.2 million, and short-term investments of $24.3 million, which are not subject to regulatory restrictions.Additionally, our U.K. intermediate holding company had no invested assets and cash of less than one thousanddollars at December 31, 2016.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 0.9x, 0.8x, and 0.8x for the years ended December 31,2016, 2015, and 2014, respectively.111•A $102.5 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. AtDecember 31, 2016, the Company had $38.4 million of letters of credit issued under the securedfacility.•A $112.5 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 of 1.625%, which is subject to change according to terms in thecredit agreement. At December 31, 2016 and 2015, the Company had a drawn balance of $73.3million outstanding on the unsecured revolver.TABLE OF CONTENTSThe Company has a $215.0 million senior revolving credit facility (the “Facility”). The Facility iscomprised of the following at December 31, 2016:The facility has been amended from time to time since its inception in 2013. On December 7, 2016, theCompany entered into an Amended and Restated Credit Agreement for the Facility which, among other things,extended the maturity date of the Facility until December 7, 2021 and modified other terms including reducingthe rate of interest and reducing the number of financial covenants. On May 20, 2015, under a provision of thecredit agreement, the Company requested, and the lenders subsequently agreed, to increase the securedrevolving facility by $40.0 million to its current total capacity of $102.5 million. On December 15, 2015, theCompany closed on an amendment which accommodated the organization and capitalization of an intermediateholding company in the United Kingdom. In connection with the amendment, the intermediate holdingcompany entered into a payment guaranty of the Company’s obligations under the senior revolving creditfacility. An amendment effective December 30, 2015 adjusted certain financial covenants.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, 2016.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 currently redeemable at par prior to its stated maturity at our option in whole or in part. The termsof this senior debt contain certain covenants, with which we are in compliance and which, among other things,restrict our 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.In 2016, we declared $66.3 million of dividends payable to our shareholders. These dividends were fundedby total dividends of $80.0 million that we received from JRG Re.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 that wereceived through our U.K. intermediate holding company and a $4.8 million dividend that we received fromJRG 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 $20.0 million in additional borrowings under our senior revolving credit facility.We sold trust preferred securities through five Delaware statutory trusts sponsored and wholly-owned by theCompany or its subsidiaries. Each trust used the net proceeds from the sale of its trust preferred securities topurchase our floating-rate junior subordinated debt. 112TABLE OF CONTENTSThe following table summarizes the nature and terms of the junior subordinated debt and trust preferredsecurities outstanding at December 31, 2016 (including the Company’s repurchase of a portion of these TrustPreferred Securities):James River Capital Trust IJames River Capital Trust IIJames River Capital Trust IIIJames River Capital Trust IVFranklin Holdings II (Bermuda) Capital Trust I($ 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 currently redeemable at 100.0% of the unpaid principal amount at ouroption.The junior subordinated debt contains certain covenants with which we are in compliance as ofDecember 31, 2016. All of these securities are currently redeemable at par.At December 31, 2016 and December 31, 2015, the ratio of total debt and trust preferreds securitiesoutstanding to total capitalization (defined as total debt and trust preferreds securities plus total shareholders’equity) was 21.7% and 22.0%, respectively. Having debt as part of our capital structure allows us to generate ahigher return on equity and greater book value per share results than we could by using equity capital alone.Ceded ReinsuranceOur insurance segments enter into reinsurance contracts to limit our exposure to potential losses arisingfrom large risks, to protect against the aggregation of several risks in a common loss occurrence, and to provideadditional capacity for growth. Our reinsurance is contracted under excess of loss and quota share reinsurancecontracts. In excess of loss reinsurance, the reinsurer agrees to assume all or a portion of the ceding company’slosses in excess of a specified amount. The premiums payable to the reinsurer are negotiated by the parties basedon their assessment of the amount of risk being ceded to the reinsurer because the reinsurer does not shareproportionately in the ceding company’s losses. In quota share reinsurance, the reinsurer agrees to assume aspecified percentage of the ceding company’s losses arising out of a defined class of business in exchange for acorresponding percentage of premiums. For the years ended December 31, 2016, 2015, and 2014 our netpremium retention was 75.6%, 82.3% and 86.8%, respectively.113(1)Total exposure to any one claim is generally $1.0 million.(2)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.(3)The property catastrophe reinsurance treaty has a limit of $40.0 million with one reinstatement.TABLE OF CONTENTSThe following is a summary of our Excess and Surplus Lines segment’s ceded reinsurance in place as ofDecember 31, 2016:Line of BusinessCompany RetentionCasualtyPrimary Specialty Casualty, including Professional LiabilityUp to $1.0 million per occurrence, subject to a $1.0 million aggregatedeductible.Primary CasualtyUp to $2.0 million per occurrence.Excess CasualtyUp to $1.0 million per occurrence.PropertyUp to $5.0 million per event.In our Excess and Surplus Lines segment, we write a small book of excess property insurance, but we do notwrite primary property insurance. In our Excess and Surplus Lines segment, we have a surplus share reinsurancetreaty in effect that 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.We use catastrophe modeling software to analyze the risk of severe losses from hurricanes and earthquakeson our exposure. We utilize the model in our risk selection, pricing, and to manage our overall portfolioprobable maximum loss (“PML”) accumulations. A PML is an estimate of the amount we would expect to pay inany one catastrophe event within a given annual probability of occurrence (i.e. a return period or lossexceedance probability). Based upon our modeling, a $45.0 million gross catastrophe loss would exceed our1,000 year PML. In the event of a $45.0 million gross property catastrophe loss to the Company, we estimate ourpre-tax cost at approximately $7.9 million, including reinstatement premiums and net retentions. In addition tothis retention, we would retain any losses in excess of our reinsurance coverage limits.Our Specialty Admitted Insurance segment purchases reinsurance for at least 50% of the exposed limits onspecialty admitted property-casualty business. The segment enters into reinsurance contracts for the individualrisk workers’ compensation business and fronting and program business. While the segment focuses on casualtybusiness, incidental property risk is incurred in the fronting and program business. The segment is covered for$4.0 million in excess of $1.0 million per occurrence to manage exposure to an approximate 1,000 year PML.The following is a summary of our Specialty Admitted Insurance segment’s ceded reinsurance in place as ofDecember 31, 2016:114(1)(2)(3)(1)The treaty also provides coverage to small programs with gross written premium of approximately $3.0million, in aggregate, for the year ended December 31, 2016.TABLE OF CONTENTSLine of BusinessCoverageCasualtyWorkers’ Compensation – Individual RiskQuota share coverage for 50% of the first $600,000 per occurrenceand excess of loss coverage for $29.4 million in excess of$600,000.Workers’ Compensation – ProgramQuota share coverage for 87.5% of the first $1.0 million peroccurrence and excess of loss coverage for $49.0 million in excess of $1.0 million.Commercial Auto – ProgramQuota share coverage for 75% of $1.0 million per occurrence.Professional Liability – ProgramQuota share coverage for 65% of $1.0 million per occurrence.General Liability – ProgramQuota share coverage for 85% of the first $1.0 million per occurrenceand excess of loss coverage for $1.0 million in excess of $1.0 millionper occurrence.PropertyExcess of loss coverage for $4.0 million in excess of $1.0 million. 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 1,000 year catastrophe event would notexceed $10.0 million, inclusive of reinstatement premiums payable.We also have a clash and contingency reinsurance treaty to cover both the Excess and Surplus Lines andSpecialty Admitted Insurance segments in the event of a claims incident involving more than one of ourinsureds. The treaty covers $6.0 million in excess of a $2.5 million retention for loss occurrences within thetreaty term. This coverage has two reinstatements in the event we exhaust any of the coverage.At December 31, 2016, we had reinsurance recoverables on unpaid losses of $182.7 million andreinsurance recoverables on paid losses of $2.9 million, and all material recoverable amounts were fromcompanies with A.M. Best ratings of “A-” or better or collateral had been posted by the reinsurer for our benefit.The Company’s insurance segments remain liable to policyholders if its reinsurers are unable to meet theircontractual obligations under applicable reinsurance agreements. We establish allowances for amountsconsidered uncollectible. At December 31, 2016, there was no allowance for such uncollectible reinsurancerecoverables. To minimize exposure to significant losses from reinsurance insolvencies, the Company evaluatesthe financial condition of its reinsurers and monitors concentrations of credit risk. The Company generally seeksto purchase reinsurance from reinsurers with A.M. Best financial strength ratings of “A-” (Excellent) or better.The Company’s reinsurance contracts generally require reinsurers that are not authorized as reinsurers under U.S.state insurance regulations or that experience rating downgrades from rating agencies below specified levels tofund their share of the Company’s ceded outstanding losses and loss adjustment expense reserves, typicallythrough the use of irrevocable and unconditional letters of credit. In fronting arrangements, which the Companyconducts through its Specialty Admitted Insurance segment, we are subject to credit risk with regard to insurancecompanies who act as reinsurers for us in such arrangements. We customarily require a collateral trustarrangement to secure the obligations of the insurance entity for whom we are fronting.115(1)(1)These reinsurers are unrated or below A-. All material reinsurance recoverable amounts from these reinsurersare collateralized.TABLE OF CONTENTSThe 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, 2016:ReinsurerReinsurance Recoverable as of December 31, 2016A.M. Best Rating December 31, 2016(in thousands)Swiss Reinsurance America Corporation$44,459A+Berkley Insurance Company38,263A+Mountain States Insurance Company20,598B++Munich Reinsurance America7,899A+Pacific Valley Insurance Company7,583UnratedAccident Insurance Company5,307UnratedSafety National Casualty5,299A+QBE Reinsurance Corporation5,038ALloyds Syndicate Number 14584,690ALloyds Syndicate Number 44724,471ATop 10 Total143,607Other39,130Total$182,737Credit Risk on Amounts Recoverable from an Indemnifying PartyThe Company is also exposed to credit risk relating to insurance contracts with an insured in which theCompany pays losses and loss adjustment expenses on the contract. The Company has an indemnity agreementwith this insured and is contractually entitled to receive reimbursement for a significant portion of the losses andloss adjustment expenses paid on behalf of the insured party (a non-insurance entity). The insured party isrequired to collateralize all amounts currently due to the Company and to provide additional collateralsufficient to cover the unpaid losses and loss adjustment expenses related to the contracts. At December 31,2016, the cash collateral held by the Company from this insured exceeds the amount of claims receivable andunpaid reported losses and loss adjustment expenses outstanding. This is a growing relationship, and as such,there is an exposure to reported losses on this contract growing at a faster pace than our collateral from theinsured grows. To mitigate this risk, we closely monitor our exposure compared to our collateral held, and werequest additional collateral from the insured when our analysis indicates that we have uncollateralizedexposure. Based on our relationship with the insured and the cash collateral held, management does not believethat this exposure is material.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. We have generated positive cash flow fromoperations in each of the three years ended December 31, 2016, 2015, and 2014. The following table summarizesour cash flows:116(1)(1)(1)TABLE OF CONTENTSYear Ended December 31,201620152014(in thousands)Cash and cash equivalents provided by (used in):Operating activities$151,158$116,391$130,393Investing activities(80,764(34,163(174,877Financing activities(67,016(49,205(40,737Change in cash and cash equivalents$3,378$33,023$(85,221Cash used in investing activities in 2016 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 7.6% of total cash and invested assets atDecember 31, 2016. Cash used in financing activities in 2016 is primarily due to the $66.0 million of dividendsto shareholders in 2016. These dividends were funded with an $80.0 million dividend received from JRG Re.Cash and cash equivalents comprised 7.9% of total cash and invested assets at December 31, 2015. Cashused in financing activities in 2015 is primarily due to the $47.4 million of dividends to shareholders in 2015.These dividends (and the related $2.5 million of U.S. dividend withholding taxes) were funded with a $47.5million dividend received through our U.K. intermediate holding company and a $4.8 million dividend receivedfrom JRG Re.Cash and cash equivalents comprised 5.6% of total cash and invested assets at December 31, 2014. Net cashused in financing activities in 2014 is a result of the $70.0 million dividend to shareholders in 2014. A portionof this dividend was funded by additional borrowings on our unsecured revolving credit facility of $20.0million. In addition, we drew down an additional $10.0 million on our unsecured revolving credit facility inDecember 2014 to provide additional operating flexibility at the Bermuda holding company.RatingsThe A.M. Best financial strength rating for our group’s regulated insurance subsidiaries is “A” (Excellent).This rating reflects A.M. Best’s opinion of our insurance subsidiaries’ financial strength, operating performanceand ability to meet obligations to policyholders and is not an evaluation directed towards the protection ofinvestors. The rating for our operating insurance and reinsurance companies of “A” (Excellent) is the thirdhighest rating of the thirteen ratings issued by A.M. Best and is assigned to insurers that have, in A.M. Best’sopinion, an excellent ability to meet their ongoing obligations to policyholders.The financial strength ratings assigned by A.M. Best have an impact on the ability of our regulatedsubsidiaries to attract and retain agents and brokers and on the risk profiles of the submissions for insurance thatour subsidiaries receive. The “A” (Excellent) ratings assigned to our insurance and reinsurance subsidiaries areconsistent with our business plans and we believe allow our subsidiaries to actively pursue relationships withthe agents and brokers identified in their marketing plans.Equity AwardsFor the years ended December 31, 2016, 2015 and 2014, the Company recognized $5.5 million, $3.7million, and $589,000, respectively, of share-based compensation expense. The amount of unrecognized share-based compensation expense to be recognized over the remaining weighted-average service period of 1.7 yearsat December 31, 2016 is $6.9 million.In 2016, 496,550 options were exercised at a weighted average exercise price of $16.02 per share. In 2015,1,047,500 options were exercised at a weighted average exercise price of $15.66 per share. There were no optionexercises during the year ended December 31, 2014. The Company granted 706,203 and 10,627 non-qualifiedshare options at an exercise price of $32.07 and $24.32 per option during 2016 and 2015, respectively. TheCompany granted 993,518 non-qualified share options in conjunction with its initial public offering duringDecember 2014, each with an exercise price of $21.00 per option. In addition, 33,039117)))))))TABLE OF CONTENTSoptions with a weighted average exercise price of $27.68 per share, 9,810 options with a weighted averageexercise price of $21.00 per share; and 55,000 options with a weighted average exercise price of $15.65 lapsedor were forfeited during 2016, 2015, and 2014, respectively. The Company also granted 340,474 restricted stockunits (“RSUs”) in December 2014 and 60,291 RSUs in February 2016. The RSUs vest over one to five years.Contractual Obligations and CommitmentsThe following table illustrates our contractual obligations and commercial commitments by due date as ofDecember 31, 2016:Payments Due by PeriodTotalLess than 1 year1 – 3 years3 – 5 yearsMore than 5 years(in thousands)Reserve for losses and loss adjustment expenses$943,865$276,552$343,567$109,488$214,258Long-term debt:Senior debt88,300——73,30015,000Junior subordinated debt104,055———104,055Operating lease obligations28,0323,8007,3706,43610,426Interest on debt obligations108,5807,52613,92910,61076,515Financing obligations29,8461,1692,4072,5045,360Total$1,302,678$289,047$367,273$202,338$425,614The 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.Financing 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, 2016and 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, 2016 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 in118(1)Underwriting profit includes fee income of $14.2 million, $5.0 million, and $1.8 million for the yearsended December 31, 2016, 2015, and 2014, respectively.TABLE OF CONTENTSevaluating our performance because our objective is to consistently earn underwriting profits. We evaluate theperformance of our segments and allocate resources based primarily on underwriting profit (loss). Our definitionof underwriting 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, 2016, 2015and 2014.Year Ended December 31,201620152014(in thousands)Underwriting profit (loss) of the operating segments:Excess and Surplus Lines$47,235$47,607$35,096Specialty Admitted Insurance2,8721,07433Casualty Reinsurance(194(2,558667Total underwriting profit of the operating segments49,91346,12335,796Other operating expenses of the Corporate and Other segment(20,433(18,554(9,124Underwriting profit29,48027,56926,672Net investment income52,63844,83543,005Net realized investment gains (losses)7,565(4,547(1,336Other income295245239Other expenses(1,590(730(16,012Interest expense(8,448(6,999(6,347Amortization of intangible assets(597(597(597Income before taxes$79,343$59,776$45,624Reconciliation of Adjusted Net Operating IncomeWe define adjusted net operating income as net income excluding certain non-operating expenses such asnet realized investment gains and losses, expenses related to due diligence costs for various merger andacquisition activities, severance costs associated with terminated employees, and interest expenses on a leasedbuilding that we are deemed to own for accounting purposes. We use adjusted net operating income as aninternal performance 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. Adjusted net operating income should not be viewed as a substitute for net incomecalculated in accordance with GAAP, and our definition of adjusted net operating income may not becomparable to that of other companies.119)))))(1))))))))))))TABLE OF CONTENTSOur income before taxes and net income for the years ended December 31, 2016, 2015 and 2014 reconcileto our adjusted net operating income as follows:Year Ended December 31,201620152014Income Before TaxesNet IncomeIncome Before TaxesNet IncomeIncome Before TaxesNet Income(in thousands)Income as reported$79,343$74,471$59,776$53,497$45,624$44,685Net realized investment (gains) losses(7,565(5,2074,5474,0901,336(890Initial Public Offering costs————14,93013,223Other expenses1,5901,1367305741,082977Dividend withholding taxes———2,500——Interest expense on leased building the Company isdeemed to own for accounting purposes1,412918661429659429Adjusted net operating income$74,780$71,318$65,714$61,090$63,631$58,424Tangible Equity and Tangible Equity per ShareOne 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. We believe tangible equity is agood measure to evaluate the strength of our balance sheet and to compare returns relative to this measure. Forthe year ended December 31, 2016 our tangible equity increased from $459.7 million at December 31, 2015 to$472.5 million at December 31, 2016, an increase of 1.7% per share. Absent the $66.3 million in dividends toshareholders in 2016, our tangible book value per share grew 15.9% for the year. Using a five quarter averagemethodology to determine our average shareholders’ equity, our operating return on tangible shareholders’equity was 14.6% for the year ended December 31, 2016 and 13.0% for the year ended December 31, 2015.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, 2016, 2015 and 2014:As of December 31,201620152014EquityEquityper shareEquityEquityper shareEquityEquityper share(in thousands, except per share amounts)Shareholders’ equity$693,221$23.69$681,038$23.53$687,921$24.11Less:Goodwill181,8316.21181,8316.28181,8316.37Intangible assets38,9311.3339,5281.3740,1251.41Tangible equity$472,459$16.15$459,679$15.88$465,965$16.33120)))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 interest rate risk associated with investments infixed maturities and equity price risk associated with investments in equity securities. 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 3.6 years at December 31, 2016, 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.121TABLE OF CONTENTSThe following table summarizes our interest rate risk and shows the effect of hypothetical changes ininterest rates as of December 31, 2016. The selected hypothetical changes do not indicate what could be thepotential best or worst case scenarios.As of December 31, 2016Estimated 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 andpreferred stock investments$1,010,967200 bp decrease$1,095,3838.4100 bp decrease1,057,6744.6100 bp increase964,463(4.6200 bp increase920,890(8.9Bank Loan Participations$203,123200 bp decrease$209,5833.2100 bp decrease206,1301.5100 bp increase202,331(0.4200 bp increase201,966(0.6Liabilities$184,801200 bp decrease$183,304(0.8100 bp decrease184,102(0.4100 bp increase185,4130.3200 bp increase185,9530.6Equity Price RiskA portion of our portfolio is invested in equity securities, which have historically produced higher long-term returns relative to fixed maturities. We own preferred stocks, generally in the financial services industry,and common stocks. The changes in the estimated fair value of the equity securities portfolio are presented as acomponent of shareholders’ equity in accumulated other comprehensive income, net of taxes. See Note 2 to theNotes to the Audited Consolidated Financial Statements for disclosure of gross unrealized gains and losses byinvestment category.At December 31, 2016, our equity securities portfolio was concentrated in terms of the number of issuersand industries. Such concentrations can lead to higher levels of price volatility.The following table summarizes our equity price risk and shows the effect of a hypothetical 35% increase ordecrease in the fair value of our equity securities portfolio as of December 31, 2016. We believe that this rangerepresents a reasonably likely scenario, as the largest annual increases and decreases in the S&P 500 Index in thepast twenty-five years were 34.1% (1995) and (38.5%) (2008), respectively. The selected hypothetical changesdo not indicate what could be the potential best or worst case scenarios.As of December 31, 2016Estimated Fair ValueHypothetical Price ChangeEstimated Fair Value after Hypothetical Change in Prices($ in thousands)Equity securities$76,40135% increase$103,14135% decrease49,661122%%)%)%%%)%)%)%)%%%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 Co-Principal Financial Officers (“Co-PFOs”), as appropriate, to allow timely decisions regarding required disclosure.In connection with the preparation of this Annual Report on Form 10-K, our management carried out anevaluation, under the supervision and with the participation of our management, including the CEO and Co-PFOs, as of December 31, 2016, of the effectiveness of the design and operation of our disclosure controls andprocedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based uponthis evaluation, our CEO and Co-PFOs concluded that our disclosure controls and procedures were effective asof December 31, 2016.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, 2016. 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, 2016, 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.”123Item 9B.OTHER INFORMATIONTABLE OF CONTENTSChanges 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, 2016 that havematerially affected, or are reasonably likely to materially affect, our internal control over financial reporting.The effectiveness of any system of controls and procedures is subject to certain limitations, and, as a result,there can be no assurance that our controls and procedures will detect all errors or fraud. A control system, nomatter how well conceived and operated, can provide only reasonable, not absolute, assurance that theobjectives of the control system will be attained.None.124Item 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 SCHEDULESItem 16.FORM 10-K SUMMARYTABLE 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 127.Not applicable.125TABLE 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, 2017Pursuant 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 and Chairman of the Board (Principal Executive Officer)March 10, 2017/s/ Robert P. MyronRobert P. MyronPresident, Chief Operating Officer and Director (Co-Principal Financial Officer)March 10, 2017/s/ Sarah C. DoranSarah C. DoranChief Financial Officer (Co-Principal Financial Officer)March 10, 2017/s/ Michael E. CrowMichael E. CrowPrincipal Accounting OfficerMarch 10, 2017/s/ Janet CowellJanet CowellDirectorMarch 10, 2017/s/ Bryan MartinBryan MartinDirectorMarch 10, 2017/s/ Jerry R. MastersJerry R. MastersDirectorMarch 10, 2017/s/ Michael T. OakesMichael T. OakesDirectorMarch 10, 2017/s/ Ollie L. Sherman, Jr.Ollie L. Sherman, Jr.DirectorMarch 10, 2017/s/ David ZwillingerDavid ZwillingerDirectorMarch 10, 2017126TABLE 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+127TABLE OF CONTENTSExhibitNumberDescription4.8Guarantee 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+4.10Amended 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+10.1Amended and Restated Credit Agreement, dated as of December 7, 2016, by and among JamesRiver Group Holdings, Ltd., JRG Reinsurance Company, Ltd., KeyBank National Association, asAdministrative Agent and Letter of Credit Issuer, KeyBank National Association, SunTrustRobinson Humphrey, Inc. as Joint Book Runners, KeyBank National Association, SunTrustRobinson Humphrey, Inc. and BMO Capital Markets Corp., as Joint Lead Arrangers and Bank ofMontreal and SunTrust Bank as Co-syndication Agents (incorporated by reference to Exhibit 10.1of the Current Report on Form 8-K filed on December 9, 2016, Commission File No. 001-36777)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 parties128TABLE OF CONTENTSExhibitNumberDescription(incorporated by reference to Exhibit 10.2 of the Registration Statement on Form S-1, RegistrationNo. 333-199958, filed with the Commission on November 7, 2014)10.3Continuing Guaranty of Payment, dated as of December 15, 2015, by James River Group HoldingsUK Limited, 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 10.5 to the Annual Report on Form 10-K filed on March 10, 2016,Commission File No. 001-36777)10.4Form 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)10.5Form 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)10.6Amended 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)*10.7Form 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)*10.8First 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)*10.9James 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)*10.10Form 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)*10.11Form 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)*10.12Form 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)*10.13James 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)*129TABLE OF CONTENTSExhibitNumberDescription10.14Form 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)*10.15Form of Restricted share Unit Award Agreement (James River Group Holdings, Ltd., 2014 Non-Employee Director Incentive Plan) (incorporated by reference to Exhibit 10.17 of Amendment No.3 to the Registration Statement on Form S-1, Registration No. 333-199958, filed with theCommission on December 9, 2014)*10.16James 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)*10.17Amended 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)*10.18Amended 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)*10.19Employment 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)*10.20James 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)*10.21Consulting 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)*10.22Registration 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)10.23Separation and Release Agreement, dated November 14, 2016, by and among James River GroupHoldings, Ltd., James River Group, Inc., and Gregg Davis (incorporated by reference to Exhibit10.1 to the Current Report on Form 8-K filed on November 18, 2016, Commission File No. 001-36777)*10.24Letter Agreement, dated December 19, 2016, by and among James River Group Holdings, Ltd.,James River Group, Inc., and Sarah C. Doran (incorporated by reference to Exhibit 10.1 to theCurrent Report on Form 8-K filed on December 22, 2016, Commission File No. 001-36777)*130*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 CONTENTSExhibitNumberDescription21.1List of subsidiaries of James River Group Holdings, Ltd.23.1Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm31.1Principal Executive Officer Certification pursuant to Rule 13a-14(a)/15d-14(a)31.2Co-Principal Financial Officer Certification pursuant to Rule 13a-14(a)/15d-14(a)31.3Co-Principal Financial Officer Certification pursuant to Rule 13a-14(a)/15d-14(a)32.1Principal Executive Officer and Co-Principal Financial Officers Certification pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.101.INSXBRL Instance Document101.SCHXBRL Taxonomy Extension Schema Document101.CALXBRL Taxonomy Extension Calculation Linkbase Document101.DEFXBRL Taxonomy Extension Definition Linkbase Document101.LABXBRL Taxonomy Extension Label Linkbase Document101.PREXBRL Taxonomy Extension Presentation Linkbase Document131Schedule 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, 2016 and 2015F-3Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2016, 2015 and 2014F-5Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2016, 2015 and 2014F-6Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014F-7Notes to Consolidated Financial Statements for the Years Ended December 31, 2016, 2015 and 2014F-8F-58F-59F-63F-64F-65F-66F-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, 2016 and 2015, 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, 2016. 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, 2016 and2015, and the consolidated results of their operations and their cash flows for each of the three years in theperiod ended December 31, 2016, 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 LLPPittsburgh, Pennsylvania March 10, 2017F-2TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Balance SheetsDecember 31,20162015(in thousands)AssetsInvested assets:Fixed maturity securities:Available-for-sale, at fair value (amortized cost: 2016 – $940,212; 2015 – $897,445)$941,077$899,660Trading, at fair value (amortized cost: 2016 – $5,052; 2015 – $5,053)5,0635,046Equity securities available-for-sale, at fair value (cost: 2016 – $74,553; 2015 – $69,830)76,40174,111Bank loan participations held-for-investment, at amortized cost, net ofallowance203,526191,700Short-term investments50,84419,270Other invested assets55,41954,504Total invested assets1,332,3301,244,291Cash and cash equivalents109,784106,406Accrued investment income7,2468,068Premiums receivable and agents’ balances, net265,315176,685Reinsurance recoverable on unpaid losses182,737131,788Reinsurance recoverable on paid losses2,87711,298Prepaid reinsurance premiums90,14744,146Deferred policy acquisition costs64,78960,754Intangible assets, net38,93139,528Goodwill181,831181,831Income tax receivable5,5662,094Deferred tax assets, net—468Other assets64,98048,140Total assets$2,346,533$2,055,497See accompanying notes.F-3TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Balance SheetsDecember 31,20162015(in thousands, except share amounts)Liabilities and shareholders’ equityLiabilities:Reserve for losses and loss adjustment expenses$943,865$785,322Unearned premiums390,563301,104Payables to reinsurers39,89919,867Senior debt88,30088,300Junior subordinated debt104,055104,055Accrued expenses36,88429,476Deferred tax liabilities, net2,902—Other liabilities46,84446,335Total liabilities1,653,3121,374,459Commitments and contingent liabilitiesShareholders’ equity:Common Shares – $0.0002 par value; 200,000,000 shares authorized.2016 and 2015: 29,257,566 and 28,941,547 shares issued andoutstanding, respectively66Preferred Shares – 2016 and 2015: $0.00125 par value; 20,000,000 sharesauthorized; no shares issued and outstanding——Additional paid-in capital636,856630,820Retained earnings55,23247,026Accumulated other comprehensive income1,1273,186Total shareholders’ equity693,221681,038Total liabilities and shareholders’ equity$2,346,533$2,055,497See accompanying notes.F-4TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive IncomeYear Ended December 31,201620152014(in thousands, except share amounts)Revenues:Gross written premiums$737,398$572,194$518,767Ceded written premiums(179,690(101,162(68,684Net written premiums557,708471,032450,083Change in net unearned premiums(42,045(9,827(53,871Net earned premiums515,663461,205396,212Net investment income52,63844,83543,005Net realized investment gains (losses)7,565(4,547(1,336Other income10,3613,4281,122Total revenues586,227504,921439,003Expenses:Losses and loss adjustment expenses325,421279,016237,368Other operating expenses170,828157,803133,055Other expenses1,59073016,012Interest expense8,4486,9996,347Amortization of intangible assets597597597Total expenses506,884445,145393,379Income before income taxes79,34359,77645,624Income tax expense (benefit):Current(2215,3574,700Deferred5,093922(3,7614,8726,279939Net income$74,471$53,497$44,685Other comprehensive income:Net unrealized (losses) gains, net of taxes of $(1,723) in 2016,$(939) in 2015 and $3,489 in 2014(2,059(15,17011,155Total comprehensive income$72,412$38,327$55,840Per share data:Basic earnings per share$2.56$1.87$1.57Diluted earnings per share$2.49$1.82$1.55Dividend declared per share$2.25$1.64$2.45Weighted-average common shares outstanding:Basic29,063,07528,662,05128,540,350Diluted29,894,37829,334,91828,810,301See 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 EarningsAccumulated Other Comprehensive IncomeTotal Shareholders’ Equity(in thousands, except share amounts)Balances at December 31, 201328,540,350$6$ —$627,647$66,636$7,201$701,490Net income————44,685—44,685Other comprehensive income—————11,15511,155Dividends————(69,998—(69,998Compensation expense under share incentive plan———589——589Balances at December 31, 201428,540,350$6$—$628,236$41,323$18,356$687,921Net income————53,497—53,497Other comprehensive loss—————(15,170(15,170Dividends————(47,794—(47,794Exercise of stock options and related excess tax benefits341,264——(15——(15Vesting of RSUs and related excess tax benefits59,933——(1,136——(1,136Compensation expense under share incentive plans———3,735——3,735Balances at December 31, 201528,941,547$6$—$630,820$47,026$3,186$681,038Net income————74,471—74,471Other comprehensive loss—————(2,059(2,059Dividends————(66,265—(66,265Exercise of stock options and related excess tax benefits260,672——1,536——1,536Vesting of RSUs and related excess tax benefits55,347——(992——(992Compensation expense under share incentive plans———5,492——5,492Balances at December 31, 201629,257,566$6$—$636,856$55,232$1,127$693,221See accompanying notes.F-6))))))))))))))))TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Statements of Cash FlowsYear Ended December 31,201620152014(in thousands)Operating activitiesNet income$74,471$53,497$44,685Adjustments to reconcile net income to net cash provided by operating activities:Deferred policy acquisition costs(105,659(98,302(99,181Amortization of policy acquisition costs101,62497,75085,183Net realized investment (gains) losses(7,5654,5471,336Distributions from equity method investments3,4672,8853,904Income from equity method investments(8,743(2,468(5,163Trading securities purchases, sales, and maturities, net—2,3199,808Deferred U.S. federal income tax expense (benefit)5,093922(3,761Provision for depreciation and amortization2,4142,0042,760Share based compensation expense5,4923,735589Change in operating assets and liabilities:Reserve for losses and loss adjustment expenses158,54369,02669,844Unearned premiums89,45923,52559,047Premiums receivable and agents’ balances(88,630(14,158(26,638Reinsurance balances(68,497(28,213(24,302Payable to insurance companies(9504,170(4,090Other(9,361(4,84816,372Net cash provided by operating activities151,158116,391130,393Investing activitiesSecurities available-for-sale:Purchases – fixed maturity securities(300,135(393,168(161,951Sales – fixed maturity securities110,124110,12228,101Maturities and calls – fixed maturity securities135,472122,79147,775Purchases – equity securities(3,680(18,519(8,133Sales – equity securities14,85014,06816,612Bank loan participations:Purchases(156,638(109,107(272,902Sales51,077113,391157,863Maturities97,09737,38875,185Other invested assets:Purchases(2,365(52,663(6,800Return of capital226237—Disposals—1,3749,470Maturities and repayments6,50030,753—Securities receivable or payable, net1,018(2,1041,332Short-term investments, net(31,574112,586(60,338Other(2,736(1,312(1,091Net cash used in investing activities(80,764(34,163(174,877Financing activitiesSenior debt issuances—10,00030,300Senior debt repayments—(10,000—Dividends paid(65,988(47,405(69,998Issuances of common shares under equity incentive plans2,2601,730—Common share repurchases(4,907(6,461—Excess tax benefits from equity incentive plan transactions3,1913,580—Other financing activities(1,572(649(1,039Net cash used in financing activities(67,016(49,205(40,737Change in cash and cash equivalents3,37833,023(85,221Cash and cash equivalents at beginning of year106,40673,383158,604Cash and cash equivalents at end of year$109,784$106,406$73,383Supplemental informationIncome taxes (refunded) paid, net$(59$(2,827$7,933Interest paid$8,121$7,342$6,682See 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 began 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 2016, 2015, and 2014OrganizationJames 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. 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 2016, 2015, and 2014 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, 2016 or 2015.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 2016, 2015, and 2014 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, 2016 and 2015 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 2016, 2015, and 2014 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. The allowance for doubtful accounts represents an estimate of amounts considered uncollectible basedon the Company’s assessment of the collectability of receivables that are past due. Receivables greater than 90days past due were $2.0 million and $2.6 million at December 31, 2016 and 2015, respectively. The allowancefor doubtful accounts was $2.1 million and $2.8 million at December 31, 2016 and 2015, respectively. Bad debtexpense was $813,000 for the year ended December 31, 2016, $1.1 million for the year ended December 31,2015, and $812,000 for the year ended December 31, 2014. Receivables written off against the allowance fordoubtful accounts totaled $1.5 million for the year ended December 31, 2016, $268,000 for the year endedDecember 31, 2015, and $528,000 for the year ended December 31, 2014. Account balances are charged offagainst the allowance after all means of collection have been exhausted and the potential for recovery isconsidered 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.F-111.Accounting Policies (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 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.The Company’s Specialty Admitted Insurance segment writes insurance under specialty admitted frontingand program arrangements. The fronting and program 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. Fee income of $10.1 million, $3.2 million, and $883,000 is included in otherincome for the years ended December 31, 2016, 2015, and 2014, respectively. Fees are earned on a pro rata basisover the service period of the underlying business. Policies are accounted for on an individual basis, with noaggregation by 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. If management determines that it ismore likely than not that the fair value of a reporting unit is less than the carrying value based on qualitativefactors then they will perform the quantitative goodwill impairment test. For the quantitative goodwillimpairment testing, the fair value of the reporting units is determined using a combination of a market approachand an income approach which projects the future cash flows produced by the reporting units and discountsthose cash flows to their present value. The projection of future cash flows is necessarily dependent uponassumptions on the future levels of income as well as business trends, prospects, market, and economicconditions. The results of the two approaches are weighted to determine the fair value of each reporting unit.When the fair value is less than the carrying value of the net assets of the reporting unit, including goodwill, animpairment loss is charged to operations. To determine the amount of any goodwill impairment, the implied fairvalue of reporting unit goodwill is compared to the carrying amount of that goodwill. The implied fair value ofgoodwill is determined in the same manner as the amount of goodwill recognized in a business combination isdetermined. That is, the fair value of a reporting unit is assigned to all of the assets and liabilities of that unit(including any unrecognized intangible assets) as if the reporting unit had been acquired in a businesscombination. The excess of the fair value of a reporting unit over the amounts assigned to its assets andliabilities is the implied fair value of goodwill.F-121.Accounting Policies (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 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.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 reserve 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 adjustmentF-131.Accounting Policies (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 expenses (based on insurance industry data and the Company’s own experience), and the Company’s actual paidand reported losses and loss adjustment expenses. An internal actuary reviews these results and (after applyingappropriate professional judgment and other actuarial techniques that are considered necessary) presentsrecommendations to the Company’s management. Management uses this information and its judgment to makedecisions on the final recorded reserve for losses and loss adjustment expenses. Management believes that theuse of judgment is necessary to arrive at a best estimate for the reserve for losses and loss adjustment expensesgiven the long-tailed nature of the business generally written by the Company and the limited operatingexperience of the Casualty Reinsurance segment and of the fronting and program business in the SpecialtyAdmitted 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.F-141.Accounting Policies (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 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’seconomic 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 $27.1 million and $26.0 million as of December 31, 2016and 2015, 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, 2016Basic$74,47129,063,075$2.56Common share equivalents—831,303(0.07Diluted$74,47129,894,378$2.49Year 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$1.55F-15)))1.Accounting Policies (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 Common share equivalents relate to our stock options and restricted stock units (“RSUs”).For the year ended December 31, 2016 and 2015, all common share equivalents are dilutive. For the yearended December 31, 2014, common share equivalents of 1,358,992 shares are excluded from the calculations ofdiluted earnings per share as their effects are anti-dilutive.Adopted Accounting StandardsThe Company adopted ASU 2015-09, Financial Services Insurance Topic (944): Disclosures about Short-Duration Contracts in 2016. ASU 2015-09 requires additional disclosures about short-duration contracts on adisaggregated basis that provides useful information to readers of the financial statements. The disclosuresinclude annual tabular disclosures of paid and incurred losses and loss adjustment expenses by accident year forup to 10 years. This ASU also requires disaggregated information on claims frequency and incurred-but-not-reported liabilities for each accident year. The required disclosures also include the average annual percentagepayout of incurred claims by age. Increased disclosures were made to adopt this ASU.Prospective Accounting StandardsIn May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update(“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). 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 reported fee income. TheCompany does not believe adoption will have a material impact on its consolidated financial statements.In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10):Recognition and Measurement of Financial Assets and Financial Liabilities. Among other things, this ASU willrequire equity investments (except those accounted for under the equity method of accounting or those thatresult in consolidation of the investee) to be measured at fair value with changes in fair value recognized in netincome. This ASU is effective for interim and annual reporting periods beginning after December 15, 2017.Upon adoption, a cumulative-effect adjustment to the balance sheet will be made as of the beginning of thefiscal year of adoption. The Company has not yet completed the analysis of how adopting this ASU will affectour consolidated financial statements.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under current guidance for lessees,leases are only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, aremet. This update will require the recognition of a right-of-use asset and a corresponding lease liability,discounted to the present value, for all leases that extend beyond 12 months. This ASU is effective for annualand interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption,leases will be recognized and measured at the beginning of the earliest period presented using a modifiedretrospective approach. The Company is currently evaluating ASU 2016-02 to determine the potential impactthat adopting this standard will have on its consolidated financial statements.F-161.Accounting Policies (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting. The guidance requires that, prospectively, all taxeffects related to share-based payments be made through the income statement at the time of settlement asopposed to excess tax benefits being recognized in additional paid-in capital under the current guidance. TheASU also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable.This change is required to be applied on a modified retrospective basis, with a cumulative-effect adjustment toopening retained earnings. Additionally, all tax related cash flows resulting from share-based payments are to bereported as operating activities on the statement of cash flows, a change from the current requirement to presenttax benefits as an inflow from financing activities and an outflow from operating activities. This ASU is effectivefor fiscal years beginning after December 15, 2016.In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments. Current GAAP delays the recognition of credit lossesuntil it is probable a loss has been incurred. The update will require financial assets measured at amortized cost,such as bank loan participations held for investment, to be presented at the net amount expected to be collectedby means of an allowance for credit losses that runs through net income. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses, with the amount of theallowance limited to the amount by which fair value is below amortized cost. This ASU is effective for annualand interim reporting periods beginning after December 15, 2019. Upon adoption, this ASU will be appliedusing the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retainedearnings as of the beginning of the first reporting period presented. The Company has not yet completed theanalysis of how adopting this ASU will affect Company’s financial statements.In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification ofCertain Cash Receipts and Cash Payments to address the diversity in practice of how certain cash receipts andpayments are classified in the statement of cash flows. The update addresses specific issues, includingdistributions received from equity method investees and the classification of cash receipts and payments thathave aspects of more than one class of cash flows. This ASU is effective for annual and interim reporting periodsbeginning after December 15, 2017. Upon adoption, the update will be applied using the retrospective transitionmethod. The Company has not yet completed the analysis of how adopting this ASU will affect our financialstatements, but does not expect a material impact on our statement of cash flows.F-172.InvestmentsTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 The Company’s available-for-sale investments are summarized as follows:Cost or Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value(in thousands)December 31, 2016Fixed maturity securities:State and municipal$101,793$5,032$(984$105,841Residential mortgage-backed152,7031,070(2,975150,798Corporate379,7274,382(5,661378,448Commercial mortgage and asset-backed167,967906(826168,047Obligations of U.S. government corporations and agencies64,823276(8565,014U.S. Treasury securities and obligations guaranteed by theU.S. government71,174131(18571,120Redeemable preferred stock2,025—(2161,809Total fixed maturity securities940,21211,797(10,932941,077Equity securities74,5534,503(2,65576,401Total investments available-for-sale$1,014,765$16,300$(13,587$1,017,478December 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 theU.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$973,771The amortized cost and fair value of available-for-sale investments in fixed maturity securities at December31, 2016 are summarized, by contractual maturity, as follows:Amortized CostFair Value(in thousands)One year or less$70,635$71,165After one year through five years263,261263,140After five years through ten years168,705167,490After ten years114,916118,628Residential mortgage-backed152,703150,798Commercial mortgage and asset-backed167,967168,047Redeemable preferred stock2,0251,809Total$940,212$941,077F-18)))))))))))))))))))2.Investments (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 Actual maturities may differ for some securities because borrowers have the right to call or prepayobligations with or without penalties.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, 2016Fixed maturity securities:State and municipal$28,398$(984$—$—$28,398$(984Residential mortgage-backed93,242(1,54832,330(1,427125,572(2,975Corporate199,841(4,2128,477(1,449208,318(5,661Commercial mortgage and asset-backed47,990(7997,195(2755,185(826Obligations of U.S. governmentcorporations and agencies50,573(85——50,573(85U.S. Treasury securities and obligationsguaranteed by the U.S. government48,989(185——48,989(185Redeemable preferred stock1,809(216——1,809(216Total fixed maturity securities470,842(8,02948,002(2,903518,844(10,932Equity securities21,345(1,0716,558(1,58427,903(2,655Total investments available-for-sale$492,187$(9,100$54,560$(4,487$546,747$(13,587December 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$469,037$(14,212The Company held available-for-sale securities of 166 issuers that were in an unrealized loss position atDecember 31, 2016 with a total fair value of $546.7 million and gross unrealized losses of $13.6 million. Noneof the fixed maturity securities with unrealized losses has ever missed, or been delinquent on, a scheduledprincipal or interest payment.F-19))))))))))))))))))))))))))))))))))))))))))))))))))))2.Investments (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 At December 31, 2016, 99.0% of the Company’s fixed maturity security portfolio was rated “BBB-” orbetter (“investment grade”) by Standard & Poor’s or received an equivalent rating from another nationallyrecognized rating agency. Fixed maturity securities with ratings below investment grade by Standard & Poor’s oranother nationally recognized rating agency at December 31, 2016 had an aggregate fair value of $9.2 millionand an aggregate net unrealized loss of $979,000.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. The bonds were soldduring the second quarter of 2015 and a net realized gain of $22,000 was recognized on the sales.Management concluded that none of the other fixed maturity securities with an unrealized loss at December31, 2016, 2015, and 2014 experienced an other-than-temporary impairment. Management does not intend to sellavailable-for-sale securities in an unrealized loss position, and it is not “more likely than not” that the Companywill be required to sell these securities before a recovery in their value to their amortized cost basis occurs.Management also concluded that none of the equity securities with an unrealized loss at December 31, 2016,2015, and 2014 experienced an other-than-temporary impairment. Management has evaluated the near-termprospects of these equity securities in relation to the severity and duration of the impairment, and managementhas the ability and intent to hold these securities 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.At December 31, 2015 and 2014, the Company held participations in two loans issued by companies thatproduce and supply power to Puerto Rico through power purchase agreements with Puerto Rico Electric PowerAuthority (“PREPA”), a public corporation and governmental agency of the Commonwealth of Puerto Rico.PREPA’s credit strength and ability to make timely payments was impacted by the economic conditions inPuerto Rico, thus raising doubt about the companies’ ability to meet the debt obligations held by the Company.Management concluded that the loans were impaired at December 31, 2014 and established an allowance forcredit losses on the loans of $752,000. After recording this impairment, these loans had a carrying value of $7.1million at December 31, 2014 and unpaid principal of $8.4 million. At December 31, 2015, the allowance forcredit losses on these loans was $414,000. The loans had a carrying value of $3.9 million at December 31, 2015and unpaid principal of $4.6 million. In June 2016, one of the loans was repaid in full at its scheduled maturity.Management concluded that the remaining loan, scheduled to mature in 2017, remained impaired at December31, 2016. The allowance for credit losses on the loan was $177,000 at December 31, 2016. The loan had acarrying value of $1.7 million and unpaid principal of $2.0 million at December 31, 2016.The Company’s bank loan portfolio includes loans to oil and gas companies in the energy sector. Themarket values of these loans were impacted by declining energy prices in 2014 and 2015. At December 31,2015, the Company’s oil and gas exposure in the bank loan portfolio was in eight loans with a carryingF-202.Investments (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 value of $15.8 million and an unrealized loss of $4.1 million. Management concluded that two of these loanswere impaired as of December 31, 2015, and accordingly, an allowance for credit losses of $3.9 million wasestablished on the loans. After recording this impairment, the loans had a carrying value of $1.7 million atDecember 31, 2015 and unpaid principal of $5.8 million. At December 31, 2016, the Company’s oil and gasexposure was in 4 bank loans with a total carrying value of $9.8 million and an unrealized loss of $1.3 million.Management concluded that one of these loans was impaired with a carrying value of $1.6 million, unpaidprincipal of $2.2 million and an allowance for credit losses of $545,000. All of the other loans are current atDecember 31, 2016. There was no allowance for credit losses on these loans at December 31, 2014.Management also concluded that three non-energy sector loans were impaired at December 31, 2016. AtDecember 31, 2016, the impaired loans had a carrying value of $3.2 million, unpaid principal of $3.5 million,and an allowance for credit losses of $221,000. At December 31, 2015, one non-energy sector loan was impairedwith a carrying value of $689,000, unpaid principal of $722,000, and an allowance for credit losses of $34,000. There were no such impairments at December 31, 2014.The aggregate allowance for credit losses was $943,000 at December 31, 2016 on five impaired loans with atotal carrying value of $6.5 million and unpaid principal of $7.6 million. At December 31, 2015, the aggregateallowance for credit losses was $4.3 million on five impaired loans with a total carrying value of $6.3 millionand unpaid principal of $11.1 million. At December 31, 2014, the aggregate allowance for credit losses was$752,000 on two impaired loans with a total carrying value of $7.1 million and unpaid principal of $8.4million.The average recorded investment in impaired bank loans was $6.4 million, $6.7 million, and $3.7 million,during the years ended December 31, 2016, 2015, and 2014, respectively, and investment income of $297,000,$229,000, and $106,000, was recognized during the time that the loans were impaired. The Company recordedrealized gains of $415,000 and realized losses of $3.4 million and $607,000 during the years ended December31, 2016, 2015, and 2014, respectively, for changes in the fair value of impaired bank loans.At December 31, 2016, unamortized discounts on bank loan participations were $4.0 million, andunamortized premiums were $14,000. At December 31, 2015, unamortized discounts on bank loan participationswere $7.1 million, and unamortized premiums were $35,000.Major categories of the Company’s net investment income are summarized as follows:Year Ended December 31,201620152014(in thousands)Fixed maturity securities$25,917$24,178$22,861Bank loan participations14,48613,43213,809Equity securities5,6174,4444,103Other invested assets9,5365,9475,690Cash, cash equivalents, short-term investments, and other824672116Trading gains (losses)18(9(32Gross investment income56,39848,66446,547Investment expense(3,760(3,829(3,542Net investment income$52,638$44,835$43,005F-21)))))2.Investments (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 Changes 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, 2016 included $18,000of net trading gains, all of which related to securities still held at December 31, 2016. Net investment income forthe year ended December 31, 2015 included $9,000 of net trading losses of which $7,000 of net trading lossesrelated to securities still held at December 31, 2015. Net investment 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 heldat December 31, 2014.The Company’s realized gains and losses on investments are summarized as follows:Year Ended December 31,201620152014(in thousands)Fixed maturity securities:Gross realized gains$1,916$2,197$522Gross realized losses(106(826(1,5021,8101,371(980Equity securities:Gross realized gains4,7611,04188Gross realized losses—(10(8424,7611,031(754Bank loan participations:Gross realized gains2,8271,2692,178Gross realized losses(1,832(8,258(1,211995(6,989967Short-term investments and other:Gross realized gains3541,371Gross realized losses(4(14(1,940(140(569Total$7,565$(4,547$(1,336The following table summarizes the change in the Company’s available-for-sale gross unrealized gains orlosses by investment type:Year Ended December 31,201620152014(in thousands)Change in gross unrealized gains (losses):Fixed maturity securities$(1,350$(16,832$10,765Equity securities(2,4337243,879Total$(3,783$(16,108$14,644F-22)))))))))))))))))))))))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 $2.4 million and $3.1 million for theyears ended December 31, 2016 and 2015, 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 has held investments in bridge loans for renewable energy projects. The notes, all withaffiliates of the Company’s largest shareholder, generally matured in less than one year and carriedprimarily variable rates of interest ranging from 7.3% to 15.0%. Original discounts and commitment feesreceived were recognized over the terms of the notes under the effective interest method. During the yearended December 31, 2016, the outstanding balance of a $6.5 million note was fully repaid. During the yearended December 31, 2015, the Company invested a total of $36.3 million in these notes and receivedmaturities and repayments totaling $30.8 million.(c)The Company owns investments in limited partnerships that invest in concentrated portfolios of publicly-traded small cap equities, loans of middle market private equity sponsored companies, and equity tranchesof collateralized loan obligations (CLOs). Income from the partnerships is recognized under the equitymethod of accounting. The Company’s Corporate and Other segment held investments in limitedpartnerships of $2.6 million and $2.2 million at December 31, 2016 and 2015, and recognized investmentincome of $455,000 and investment losses of $510,000 and $128,000 for the years ended December 31,2016, 2015 and 2014, respectively. The Chairman and Chief Executive Officer of the Company is aninvestor in one limited partnership held by the Corporate and Other segment. The Company’s Excess andSurplus Lines segment holds investments in limited partnershipsTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 The 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 31,20162015201620152014(in thousands)(in thousands)Category:Renewable energy LLCs$27,067$26,001$3,480$3,936$5,234Renewable energy bridge financing notes—6,5004503,136—Limited partnerships23,85217,5035,263(1,468(128Bank holding companies4,5004,500343343400Other— ———184Total other invested assets$55,419$54,504$9,536$5,947$5,690F-23(a)(b)(c)))(d)(e)2.Investments (continued) (d)Net investment income for the year ended December 31, 2014 includes $57,000 related to a previouslyheld equity investment in a bank holding company (“Predecessor Bank Holding Company”). On July 4,2014, the Predecessor Bank Holding Company merged with and into another bank holding company (the“Surviving Bank Holding Company”). In exchange for its shares of the Predecessor Bank HoldingCompany, the Company received $354,000 in cash and $6.4 million of common shares in the SurvivingBank Holding Company, and the realized investment gain on the exchange was $1.4 million. The commonshares of the Surviving Bank Holding Company were carried as available for-sale equity securities untiltheir sale in 2016. The Company recognized a gain of $3.6 million on the sale of the shares in the fourthquarter of 2016. Dividend income of $299,000 and $66,000 was recorded on the shares for the years endedDecember 31, 2016 and 2015, respectively.(e)For the year ended December 31, 2014, income of $184,000 was recognized on a $3.3 million noteagreement with two property development companies. The note, which carried a fixed interest rate of11.10%, was repaid in full on July 3, 2014. The Bank Holding Company also entered into note agreementswith the same property development companies.TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 of $21.2 million and $15.3 million at December 31, 2016 and 2015, respectively. Investment income of$4.8 million and investment losses of $958,000 were recognized on the investments for the years endedDecember 31, 2016 and 2015, respectively. At December 31, 2016, the Company’s Excess and SurplusLines segment has an outstanding commitment to invest another $1.3 million in a limited partnership thatinvests in loans of middle market private equity sponsored companies.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 each of the years ended December 31, 2016, 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 andSurviving Bank Holding Company. In addition, this director was a lender to the Bank Affiliate and is now alender to the Surviving Bank Holding Company. The Company’s former Chief Financial Officer is a formerinvestor in the Predecessor Bank Holding Company and the Surviving Bank Holding Company.At December 31, 2016 and 2015, the Company held an investment in a collateralized loan obligation(CLO) where one of the underlying loans was issued by the Surviving Bank Holding Company. The investment,with a carrying value of $5.0 million at December 31, 2016, is classified as an available-for-sale fixed maturity.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, 2017, is carriedas a short-term investment. Interest income of $4,000 and $5,000 was recognized on this investment for theyears ended December 31, 2016 and 2015, respectively. F-242.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 2016, 2015, and 2014 Two of the Company’s directors were previously directors of First Wind Holdings, LLC (“First Wind”),which is an affiliate of the Company’s largest shareholder. At December 31, 2014, the Company held fixedmaturity securities with a fair value of $12.6 million issued by a subsidiary of First Wind. These securities werecalled in March 2015, resulting in a realized gain of $845,000. Also at December 31, 2014, the Company held abank loan participation with a carrying value of $4.6 million from another subsidiary of First Wind. The loanwas repaid in full in January 2015.The Company maintains fixed maturity securities, short-term investments, and cash and cash equivalentsamounting to $415.6 million at December 31, 2016 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, 2016 and 2015, investments with a fair value of $16.4 million and $16.2 million,respectively, were on deposit with state insurance departments to satisfy regulatory requirements.At December 31, 2016, 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 31,201620152014(in thousands)Balance at beginning of period$60,754$60,202$46,204Policy acquisition costs deferred:Commissions92,73690,34293,646Underwriting and other issue expenses12,9237,9605,535105,65998,30299,181Amortization of policy acquisition costs(101,624(97,750(85,183Net change4,03555213,998Balance at end of period$64,789$60,754$60,202On 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 2016, 2015 and 2014 indicated that no impairment of goodwill hadoccurred. The carrying amount of goodwill at December 31, 2016 and 2015 was $181.8 million. Accumulatedgoodwill impairment losses were $99.6 million at December 31, 2016 and 2015.Specifically identifiable intangible assets were acquired in the Merger. During the fourth quarters of 2016,2015 and 2014, 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 2016,2015, or 2014.F-25)))4.Goodwill and Intangible Assets (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 The gross carrying amounts and accumulated amortization for each major specifically identifiableintangible asset class were as follows:December 31,20162015Weighted- Average Life (Years)Gross 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 relationships24.611,6114,04411,6113,447Identifiable intangible assets subject toamortization11,6114,04411,6113,447$42,975$4,044$42,975$3,447Future estimated amortization of specifically identifiable intangible assets as of December 31, 2016 is asfollows (in thousands):2017$5972018597201959720205382021363Thereafter4,875Total$7,567The table below summarizes the changes in the net carrying values of intangible assets by segment for2016:December 31, 2015 Net Carrying ValueAmortizationImpairment LossesDecember 31, 2016 Net Carrying Value(in thousands)Excess and Surplus LinesTrademarks$19,700$—$ —$19,700Insurance licenses and authorities4,900——4,900Broker relationships7,051(362—6,68931,651(362—31,289Specialty Admitted InsuranceTrademarks2,500——2,500Insurance licenses and authorities4,265——4,265Broker relationships1,112(235—8777,877(235—7,642Total identifiable intangible assets$39,528$(597$—$38,931F-26)))))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 2016, 2015, and 2014 The 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$—$39,528Amortization of intangible assets was $362,000 for the Excess and Surplus Lines segment and $235,000 forthe Specialty Admitted Insurance segment for the year ended December 31, 2014.Property and equipment, net of accumulated depreciation, consists of the following:December 31,20162015(in thousands)Building, leased for which the Company has been deemed the owner foraccounting purposes (Note 21)$30,902$29,940Electronic data processing hardware and software4,4603,481Furniture and equipment2,7062,183Property and equipment, cost basis38,06835,604Accumulated depreciation(13,388(11,615Property and equipment, net$24,680$23,989F-27)))))))6.Reserve for Losses and Loss Adjustment ExpensesTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 In establishing the reserve for losses and loss adjustment expenses, the Company’s internal actuariesestimate an initial expected ultimate loss ratio for each of our product lines by accident year (or for our CasualtyReinsurance segment, on a contract by contract basis). Input from the Company’s underwriting and claimsdepartments, including premium pricing assumptions and historical experience, are considered by theCompany’s internal actuaries in estimating the initial expected loss ratios. The Company’s internal actuariesgenerally utilize five actuarial methods in their estimation process for the reserve for losses and loss adjustmentexpenses. These five methods utilize, to varying degrees, the initial expected loss ratio, detailed statisticalanalysis of past claims reporting and payment patterns, claims frequency and severity, paid loss experience,industry loss experience, and changes in market conditions, policy forms, exclusions, and exposures.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 internal actuary performs a study on each of these parametersannually in the third quarter and makes recommendations for the initial expected loss ratios, the incurred andpaid loss development factors and the weighting of the five actuarial methods by accident year and line ofbusiness. Members of management’s Reserve Committee review and approve the parameter review actuarialrecommendations, and these approved parameters are used in the reserve estimation process for the next fourquarters at which time a new parameter study is performed. For the Casualty Reinsurance segment, periodicassessments are made on a contract by contract basis with the goal of keeping the initial expected loss ratios andthe incurred and paid loss development factors as constant as possible until sufficient evidence presents itself tosupport adjustments. Method weights are generally less rigid for the Casualty Reinsurance segment given theheterogeneous nature of the various contracts, and the potential for significant changes in mix of business withinindividual treaties.Different reserving methods are appropriate in different situations, and the Company’s internal actuaries usetheir judgment and experience to determine the weighting of the methods to use for each accident year and eachline of business and, for our Casualty Reinsurance segment, on a contract by contract basis. For example, thecurrent accident year has very little incurred and paid loss development data on which to base reserveprojections. As a result, the Company relies heavily on the initial expected loss ratio in estimating reserves forthe current accident year. The Company generally sets the initial expected loss ratio for the current accident yearconsistent with the internal actuaries’ pricing assumptions. We believe that this is a reasonable and appropriatereserving assumption for the current accident year since our pricing assumptions are actuarially driven and sincethe Company expects to make an acceptable return on the new business written. If actual loss emergence is betterthan our initial expected loss ratio assumptions, we will experience favorable development and if it is worse thanour initial expected loss ratio assumptions, we will experience adverse development. Conversely, sufficientincurred and paid loss development is available for the oldest accident years, so more weight is given to thisdevelopment data and less weight is given to the initial expected loss ratio.Historically, the Company’s reserve selections for the Excess and Surplus Lines segment gave more weightto industry indications due to the Company’s limited operating history. When reviewing the Excess and SurplusLines segment’s reserve parameters in 2013, our internal actuaries’ felt that there was enough Company historyto give more weight to the Company’s own experience. Accordingly, the initial expected loss ratios, the paidloss development factors and the incurred loss development factors were adjusted to more closely resemble theCompany’s own internal indications. Method weights were also changed as management, in consultation withour actuaries, deemed appropriate. These changes had the cumulative effect of reducing our then best estimatefor the reserve for losses and loss adjustment expenses.F-286.Reserve for Losses and Loss Adjustment Expenses (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 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 31,201620152014(in thousands)Reserve for losses and loss adjustment expenses net of reinsurancerecoverables at beginning of period$653,534$589,042$526,985Add: Incurred losses and loss adjustment expenses net of reinsurance:Current year349,137295,334264,786Prior years(23,716(16,318(27,418Total incurred losses and loss and adjustment expenses325,421279,016237,368Deduct: Loss and loss adjustment expense payments net of reinsurance:Current year39,47331,95725,942Prior years178,354182,567149,369Total loss and loss adjustment expense payments217,827214,524175,311Reserve for losses and loss adjustment expenses net of reinsurancerecoverables at end of period761,128653,534589,042Add: Reinsurance recoverables on unpaid losses and loss adjustmentexpenses at end of period182,737131,788127,254Reserve for losses and loss adjustment expenses gross of reinsurancerecoverables on unpaid losses and loss adjustment expenses at end ofperiod$943,865$785,322$716,296The foregoing reconciliation shows that a $23.7 million redundancy developed in 2016 on the reserve forlosses and loss adjustment expenses held at December 31, 2015. This favorable reserve development included$24.1 million of favorable development in the Excess and Surplus Lines segment primarily from the 2013, 2014and 2015 accident years with favorable development of $4.5 million, $10.7 million and $10.0 million,respectively. This favorable development occurred because our actuarial studies at December 31, 2016 for theExcess and Surplus Lines segment indicated that our loss experience on our casualty business continues to bebelow our initial expected ultimate loss ratios. The Company also experienced $3.8 million of favorabledevelopment on prior accident years in the Specialty Admitted Insurance segment primarily from accident years2010 through 2014, as losses on our workers’ compensation business written prior to 2015 continued to developmore favorably than we had anticipated. The Casualty Reinsurance segment experienced $4.2 million of adversedevelopment on prior accident years primarily from two contracts from 2012 and 2013 that had higher thanexpected reported losses in 2016.The 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 yearand $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 expectedF-29)))6.Reserve for Losses and Loss Adjustment Expenses (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 ultimate loss ratios. Favorable reserve development written in the Specialty Admitted Insurance segment was$3.5 million and primarily came from accident years 2011 through 2013, as losses on our workers’ compensationbusiness written prior to 2014 continued to develop more favorably than we had anticipated. In addition, $12.6million of adverse development occurred in the Casualty Reinsurance segment, with a majority of this adversedevelopment coming from three reinsurers principally in the 2011, 2012, and 2013 underwriting years thatexperienced higher loss 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 our actuarial studies at December 31,2014 for the Excess and Surplus Lines segment indicated that our loss experience on our maturing casualtybusiness continues to be below our initial expected ultimate loss ratios. Favorable reserve development writtenin the Specialty Admitted Insurance segment was $5.9 million and primarily came from accident years 2007through 2012, as losses on our workers’ compensation business written prior to 2013 continued to develop morefavorably than we had anticipated. In addition, $5.7 million of adverse development occurred in the CasualtyReinsurance segment, with a majority of this adverse development coming from one reinsurance relationshipfrom the 2011 underwriting year that experienced higher loss development in 2014 than expected.The following tables present incurred and paid losses and loss adjustment expenses, net of reinsurance as ofDecember 31, 2016 for: (1) the Excess and Surplus Lines segment split between all excess and surplus linesbusiness excluding commercial auto and commercial auto, (2) the Specialty Admitted Insurance segment splitbetween individual risk workers’ compensation and fronting and programs, and (3) the Casualty Reinsurancesegment. The information provided herein about incurred and paid accident year claims development for theyears ended December 31, 2015 and prior is presented as unaudited supplementary information.Excess and Surplus Lines — Excluding Commercial AutoIncurred losses and loss adjustment expenses, net of reinsurance (in thousands)Accident Year20072008200920102011201220132014201520162007$120,679$119,181$121,021$117,835$110,565$106,483$99,231$94,987$93,954$94,0422008120,760119,736116,817112,227107,927102,12299,16998,76596,6872009114,834110,783106,48098,50286,69181,76483,43183,846201078,42480,56978,11773,03569,08069,96470,2942011111,190119,927114,473106,564106,381106,130201297,90898,67297,82996,49797,306201396,72996,06485,43381,0092014114,942104,09290,2672015126,443113,4172016138,507Total$971,505F-306.Reserve for Losses and Loss Adjustment Expenses (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 Cumulative paid losses and loss adjustment expenses, net of reinsurance (in thousands)Accident Year20072008200920102011201220132014201520162007$7,806$30,138$50,123$64,080$76,262$82,264$85,049$87,082$88,539$90,002200816,92235,22853,56669,58580,38583,93787,63091,75091,768200929,86041,68751,73161,54867,29371,24576,09179,014201013,67326,41835,81245,64152,07157,37161,307201127,68453,10972,73281,69690,88494,99820126,94433,75749,60463,21674,86920133,86714,50930,38244,42120143,41216,96928,21220154,04817,16420165,180Total$586,935All outstanding losses and loss adjustment expenses prior to 2007, net of reinsurance$8,345Total outstanding losses and loss adjustment expenses, net of reinsurance$392,915Excess and Surplus Lines — Commercial AutoIncurred losses and adjustment expenses, net of reinsurance (in thousands)Accident Year20132014201520162013$1,255$1,300$1,451$1,351201420,48714,07117,233201530,10933,113201674,340Total$126,037Cumulative paid losses and loss adjustment expenses, net of reinsurance (in thousands)Accident Year2013$60$1,182$1,285$1,29120146,1668,64512,67920158,35615,234201618,295Total$47,499Total outstanding losses and loss adjustment expenses, net of reinsurance$78,538F-316.Reserve for Losses and Loss Adjustment Expenses (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 Specialty Admitted — Individual Risk Workers’ CompensationIncurred losses and loss adjustment expenses, net of reinsurance (in thousands)Accident Year20072008200920102011201220132014201520162007$33,846$32,211$32,474$32,190$31,061$30,013$30,007$29,246$29,139$29,071200837,60236,64138,65438,80740,33040,55239,32139,32039,131200928,69128,52627,53528,11627,79526,17126,16926,232201027,20928,73630,46430,37328,96328,93827,590201137,83441,42140,15438,99938,31137,455201232,11632,42031,49029,68928,255201312,52513,66812,78611,578201416,63816,65214,620201520,93821,274201621,678Total$256,884Cumulative paid losses and loss adjustment expenses, net of reinsurance (in thousands)Accident Year20072008200920102011201220132014201520162007$7,475$18,240$23,671$25,774$27,837$28,337$28,782$28,824$28,846$28,846200810,47922,66428,43631,43233,88536,77837,90537,93337,96520097,27716,94521,09522,64624,23124,19224,35024,41820107,15716,24521,80523,89825,21025,47726,345201110,12323,12729,02133,20434,24034,28720129,22220,30824,75526,43526,89720134,4878,7239,84610,24620144,63310,64812,04120156,60413,28520164,664Total$218,994All outstanding losses and loss adjustment expenses prior to 2007, net of reinsurance$246Outstanding losses and loss adjustment expenses assumed from involuntary workers’ compensation pools$5,040Total outstanding losses and loss adjustment expenses, net of reinsurance$43,176Specialty Admitted — Fronting and ProgramsIncurred losses and loss adjustment expenses, net of reinsurance (in thousands)Accident Year20132014201520162013$104$80$52$5220143,4603,4683,81820157,1369,632201611,542Total$25,044F-326.Reserve for Losses and Loss Adjustment Expenses (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 Cumulative paid losses and loss adjustment expenses, net of reinsurance (in thousands)Accident Year2013$28$52$52$5220148831,6872,36920152,0584,66620161,894Total$8,981Total outstanding losses and loss adjustment expenses, net of reinsurance$16,063Casualty ReinsuranceIncurred losses and loss adjustment expenses, net of reinsurance (in thousands)Accident Year2008200920102011201220132014201520162008$1,418$3,215$2,897$2,859$3,199$3,473$3,462$3,467$3,470200934,58728,24424,12526,45827,07827,11626,98926,931201064,41360,47661,06862,71461,34460,94960,9782011114,908103,12397,36697,81298,99399,2822012148,251132,388131,281135,594136,8132013133,230130,361131,352134,4462014118,881115,927114,6362015119,157108,8702016112,759Total$798,185Cumulative paid losses and loss adjustment expenses, net of reinsurance (in thousands)Accident Year2008$320$616$999$1,595$2,087$2,478$2,706$2,929$3,02920096,4879,92612,95616,46619,67221,64623,02423,796201021,91831,50038,43044,92149,26352,76154,659201148,68861,92268,61678,16487,26790,287201273,12481,85997,215113,943121,026201359,75675,09493,902108,396201441,42158,60176,302201540,02153,986201636,268Total$567,749Total outstanding losses and loss adjustment expenses, net of reinsurance$230,436F-336.Reserve for Losses and Loss Adjustment Expenses (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 The reconciliation of the net incurred and paid claims development tables to the reserve for losses andloss adjustment expenses in the consolidated balance sheet at December 31, 2016 is as follows (in thousands):E&S – excluding commercial auto$392,915E&S – commercial auto78,538Specialty Admitted – individual risk workers’ compensation43,176Specialty Admitted – fronting and programs16,063Casualty Reinsurance230,436Net reserve for losses and loss adjustment expenses761,128Reinsurance recoverables on unpaid losses182,737Gross reserve for losses and loss adjustment expenses$943,865The following is unaudited supplementary information about average annual percentage payouts ofincurred claims by age, net of reinsurance, for the Excess and Surplus Lines segment and the Specialty AdmittedInsurance segments as of December 31, 2016. The Specialty Admitted Insurance segment’s first full year ofwriting fronting and programs business was 2014, so the average annual percentage payouts for fronting andprograms only shows three years of payout information.Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10E&S – excluding commercialauto10.916.917.517.313.87.14.54.81.61.1E&S – commercial auto22.044.114.914.5Specialty Admitted – individualrisk workers’ compensation29.735.414.96.93.91.51.10.10.10.0Specialty Admitted – fronting and programs22.021.34.2Casualty Reinsurance32.712.512.59.56.44.13.53.12.82.5In determining the cumulative number of reported claims, the Company measures claim counts byindividual claimant for individual risk workers’ compensation policies in the Specialty Admitted Insurancesegment. In the Excess and Surplus Lines insurance segment and for fronting and programs in the SpecialtyAdmitted Insurance segment, the Company measures claim counts by claim event. The claim counts include allclaims reported, even if the Company does not establish a liability for the claim (i.e. reserve for loss and lossadjustment expenses).The Casualty Reinsurance segment typically assumes written premium under quota share arrangements. TheCompany typically does not have direct access to claim frequency information underlying its assumed quotaarrangements given the nature of that business. In addition, multiple claims are often aggregated by the cedingcompany before being reported to the Company. We do not use claim frequency information in the CasualtyReinsurance segment in the determination of loss reserves or for other internal purposes. Based on theseconsiderations, the Company does not believe providing claims frequency information is practicable as it relatesto the Casualty Reinsurance segment.The table below provides information on IBNR liabilities and claims frequency for: (1) the Excess andSurplus Lines segment split between commercial auto and all non commercial auto, and (2) the SpecialtyAdmitted Insurance segment split between individual risk workers’ compensation and fronting and programs:F-34%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%6.Reserve for Losses and Loss Adjustment Expenses (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 Excess and Surplus Lines — Excluding Commercial AutoAccident YearIncurred Losses and Loss Adj ExpensesIBNRCumulative # of Reported Claims($ in thousands)2007$94,042$3,7862,478200896,6874,4512,237200983,8463,7661,644201070,2945,4281,3332011106,1308,7311,399201297,30612,6611,659201381,00923,0092,090201490,26746,2321,9092015113,41776,0902,0462016138,507120,9591,873Excess and Surplus Lines — Commercial AutoAccident YearIncurred Losses and Loss Adj ExpensesIBNRCumulative # of Reported Claims($ in thousands)2013$1,351$6054201417,2333,6087,574201533,1139,58240,876201674,34026,82283,099Specialty Admitted - Individual Risk Workers’ CompensationAccident YearIncurred Losses and Loss Adj ExpensesIBNRCumulative # of Reported Claims($ in thousands)2007$29,071$2252,119200839,1319942,011200926,2324621,490201027,5901,1801,604201137,4552,6491,813201228,2551,2611,322201311,5781,115539201414,6202,102850201521,2743,964972201621,6786,783800F-356.Reserve for Losses and Loss Adjustment Expenses (continued) 7.ReinsuranceTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 Specialty Admitted — Fronting and ProgramsAccident YearIncurred Losses and Loss Adj ExpensesIBNRCumulative # of Reported Claims($ in thousands)2013$52$—8420143,8188571,36320159,6322,4161,469201611,5424,3541,283The 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 toenvironmental liability claims other than those which it has specifically underwritten and priced as anenvironmental exposure.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, 2016, the Company had reinsurance recoverables on unpaid losses of $182.7 million andreinsurance recoverables on paid losses of $2.9 million. All material 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.At December 31, 2016, reinsurance recoverables on unpaid losses from the Company’s three largestreinsurers were $44.5 million, $38.3 million, and $20.6 million, representing 56.5% of the total balance.At December 31, 2016, prepaid reinsurance premiums ceded to three reinsurers totaled $19.0 million, $12.1million, and $11.6 million, representing 47.3% of the total balance.F-367.Reinsurance (continued) 8.Senior Debt•A $102.5 million secured revolving facility utilized by JRG Re to issue letters of credit for the benefitof third-party reinsureds. At December 31, 2016, the Company had $38.4 million of letters of creditissued under the secured facility.•A $112.5 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 1.625%, which is subject to change according to terms in the creditagreement. At December 31, 2016 and 2015, the Company had a drawn balance of $73.3 millionoutstanding on the unsecured revolver.TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 Premiums written, premiums earned, and losses and loss adjustment expenses incurred are summarized asfollows:Year Ended December 31,201620152014(in thousands)Written premiums:Direct$549,700$395,816$310,161Assumed187,698176,378208,606Ceded(179,690(101,162(68,684Net$557,708$471,032$450,083Earned premiums:Direct$483,166$367,340$281,676Assumed164,771181,326178,045Ceded(132,274(87,461(63,509Net$515,663$461,205$396,212Losses and loss adjustment expenses:Direct$314,920$201,755$144,178Assumed108,029127,276118,515Ceded(97,528(50,015(25,325Net$325,421$279,016$237,368The Company’s $215.0 million senior revolving credit facility (the “Facility”) is comprised of thefollowing:James River Group Holdings, Ltd. and JRG Re are borrowers on the Facility. On December 7, 2016, theCompany entered into an Amended and Restated Credit Agreement for the Facility which, among other things,extended the maturity date of the Facility until December 7, 2021 and modified other terms including reducingthe rate of interest and reducing the number of financial covenants. On May 20, 2015, under a provision of thecredit agreement, the Company requested, and the lenders subsequently agreed, to increase the securedrevolving facility by $40.0 million to its current total capacity of $102.5 million. On December 15, 2015, theCompany closed on an amendment which accommodated the organization and capitalization of an intermediateholding company in the United Kingdom. In connection with theF-37)))))))))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 2016, 2015, and 2014 amendment, the intermediate holding company entered into a payment guaranty of the Company’s obligationsunder the senior revolving credit facility. An amendment effective December 30, 2015 adjusted certain financialcovenants.A subsidiary of the Surviving Bank Holding Company is one of the lenders for the Facility, with a $25.0million commitment allocation on the total $215.0 million Facility.The Company is in compliance with all financial and other covenants of the Facility, as contained in theAmended and Restated Credit Agreement, at December 31, 2016.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, 2016.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 sole asset of eachTrust, and the Trust Preferred Securities are the sole liabilities of each Trust. The Company purchased all of theoutstanding common stock of the Trusts, and the investment in the Trusts is included in “other assets” in theaccompanying consolidated balance sheets.F-389.Junior Subordinated Debt (continued) 10.Capital StockTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 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%All of the Junior Subordinated Debt is currently redeemable at 100.0% of the unpaid principal amount atthe Company’s option. Interest on the Trust Preferred Securities and interest paid to the Trusts on the JuniorSubordinated Debt is payable quarterly in arrears at a per annum rate as described in the table above. TheCompany has the right to defer interest payments on the Junior Subordinated Debt for up to five years withouttriggering an event of default.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, 2016.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 of 200,000,000 commonshares, par value $0.0002 per share (29,257,566 shares issued and outstanding at December 31, 2016) and20,000,000 undesignated preferred shares, par value $0.00125 per share (no shares issued or outstanding).F-3910.Capital Stock (continued) 11.Equity AwardsTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 Share activity in 2015 and 2016 includes issuances from stock option exercises and RSU vesting,increasing the number of common shares outstanding from 28,540,350 at December 31, 2014 to 28,941,547 atDecember 31, 2015 and 29,257,566 at December 31, 2016.The Company has 3,847,663 common shares reserved for future issuance upon exercise of equity awards.The Board of Directors declared the following cash dividends in 2016 and 2015:Date of DeclarationDividend per Common SharePayable to Shareholders of Record onPayment DateTotal Amount2016February 16, 2016$0.20March 14, 2016March 28, 2016$5.8 millionMay 3, 2016$0.20June 13, 2016June 30, 2016$5.9 millionAugust 3, 2016$0.20September 12, 2016September 30, 2016$5.9 millionNovember 1, 2016$0.30December 16, 2016December 29, 2016$8.9 millionNovember 1, 2016$1.35December 16, 2016December 29, 2016$39.8 millionTotal$2.25$66.3 million2015February 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 $664,000 and $558,000 of dividend equivalents on RSUs, of which $666,000and $385,000 were payable as of December 31, 2016 and 2015, respectively.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.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.Employees are eligible to receive non-qualified stock options, incentive stock options, share appreciationrights, performance shares, restricted shares, restricted share units, and other awards under the 2014 LTIP. Themaximum number of shares available for issuance under the 2014 LTIP is 3,171,150, and at December 31, 2016,1,116,334 shares are available for grant.F-4011.Equity Awards (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 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, 2016, 36,552 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), at any time followinga Change in Control (as defined in the applicable plans).OptionsThe following table summarizes the option activity for the periods ended December 31, 2016, 2015, and2014:Year Ended December 31,201620152014SharesWeighted- Average Exercise PriceSharesWeighted- Average Exercise PriceSharesWeighted- Average Exercise PriceOutstanding:Beginning of year2,058,085$18.113,104,768$17.272,166,250$15.51Granted706,203$32.0710,627$24.32993,518$21.00Exercised(496,550$16.02(1,047,50015.66——Forfeited(33,039$27.68(9,81021.00——Lapsed———$—(55,000$15.65End of year2,234,699$22.842,058,085$18.113,104,768$17.27Exercisable, end of year1,207,479$18.141,217,903$16.851,751,249$15.51All 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 2016, 2015 and 2014, the fair value of the underlyingshare was equal to the market price.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 2016 and 2015 was $10.2 million and $12.8 million, respectively. There were no options exercised in2014. The aggregate intrinsic value of options outstanding at December 31, 2016, 2015, and 2014 was $41.8million, $31.8 million, and $17.1 million, respectively. The aggregate intrinsic value of options exercisable atDecember 31, 2016, 2015, and 2014 was $28.3 million, $20.3 million and $12.7 million, respectively. The fairvalue used for calculating intrinsic values was $41.55, $33.54, and $22.76 at December 31, 2016, 2015, and2014, respectively.The weighted-average remaining contractual life of the options outstanding and options exercisable atDecember 31, 2016 is 4.6 years and 3.6 years, respectively. The weighted-average fair value of options grantedduring 2016, 2015, and 2014 was $5.55, $4.31, and $3.99, respectively. The value of the options granted wasestimated at the date of grant using the Black-Scholes-Merton option pricing model using the followingassumptions:F-41)))))11.Equity Awards (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 Year Ended December 31,201620152014Range of risk-free interest rates1.231.541.53Dividend yield2.504.002.00Expected share price volatility25.0025.0025.00Expected 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, 2016, 2015, and 2014:Year Ended December 31,201620152014SharesWeighted- Average Grant Date Fair ValueSharesWeighted- Average Grant Date Fair ValueSharesWeighted- Average Grant Date Fair ValueUnvested, beginning of year234,922$21.00340,474$21.00—$—Granted60,291$32.03—$—340,474$21.00Vested(98,413$21.00(105,552$21.00—$—Unvested, end of year196,800$24.38234,922$21.00340,474$21.00The vesting period of RSUs granted to employees range from one 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 2016 and 2015 was $3.8 million and $3.5 million, respectively. Theholders of RSUs are entitled to dividend equivalents. The dividend equivalents are settled in cash at the sametime that the underlying RSUs vest and are subject to the same risk of forfeiture as the underlying shares. The fairvalue of the RSUs granted is based on the market price of the underlying shares.F-42%%%%%%%%%))11.Equity Awards (continued) 12.Income TaxesTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 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 31,201620152014(in thousands)Share based compensation expense$5,492$3,735$589U.S. tax benefit on share based compensation expense$1,532$1,025$135As of December 31, 2016, the Company had $6.9 million of unrecognized share based compensationexpense expected to be charged to earnings over a weighted-average period of 1.7 years.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 generally subject to a 5% dividend withholding tax. James River Group paid a $50.0 million dividendto James River UK during 2015 and remitted $2.5 million of dividend withholding taxes to the U.S. taxauthorities for the year 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, 2013.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 $18.3 million, $15.2 million, and $9.0 million for theyears ending December 31, 2016, 2015, and 2014, 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:Year Ended December 31,201620152014(in thousands)Expected Federal income tax expense$6,401$5,317$3,166Tax-exempt investment income(643(858(751Dividends received deduction(880(867(740Tax credits on renewable energy investments——(2,033Other(6379897Federal income tax expense$4,872$3,971$539U.S. state income tax (benefit) expense—(192400U.S. dividend withholding tax—2,500—Total income tax expense$4,872$6,279$939F-43)))))))))12.Income Taxes (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 The significant components of the net deferred tax asset at the current prevailing corporate income tax rateare summarized as follows:December 31,20162015(in thousands)Deferred tax assets:Accrued compensation expenses$1,604$5,318Reserve for losses and loss adjustment expenses4,8104,861Unearned premiums2,8592,474Share based compensation2,2811,948Allowance for doubtful accounts748972Deferred policy acquisition costs1,983593Property and equipment2,6492,221AMT credit464430Invested asset impairments291891Other2,9462,209Total deferred tax assets20,63521,917Deferred tax liabilities:Intangible assets12,55412,573Net unrealized gains1,5863,310Deferred gain on extinguishment of debt212318Equity method investments8,6684,784Other517464Total deferred tax liabilities23,53721,449Net deferred tax assets (liabilities)$(2,902$468Deferred 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, 2016 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.The Company had no reserve for future tax contingencies or liabilities (“unrecognized tax benefits”) atDecember 31, 2016 or 2015.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, 2016, 2015, and 2014, the Company paid $2.6million, $1.9 million, and $1.4 million, respectively, of federal excise taxes on its intercompany reinsurancetransactions. The Company also paid excise taxes of $1.6 million, $1.7 million, and $1.8 million for the yearsended December 31, 2016, 2015, and 2014, 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.F-44)13.Other Operating Expenses and Other Expenses14.Employee Benefits15.Commitments and Contingent LiabilitiesTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 Other operating expenses consist of the following:Year Ended December 31,201620152014(in thousands)Amortization of policy acquisition costs$101,624$97,750$85,183Other underwriting expenses of the insurance segments48,77141,49938,748Other operating expenses of the Corporate and Other segment 20,43318,5549,124Total$170,828$157,803$133,055Other expenses in the accompanying financial statements for the year ended December 31, 2016 were $1.6million and included $1.5 million of severance expenses. For the year ended December 31, 2015, other expensesof $730,000 included $276,000 associated with a related party leasing agreement (Note 21), $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 included $10.2 million of expenses related to a cash bonuspool approved by the Company’s directors and shareholders for certain officers and employees that becameeffective with the consummation of the Offering. Also included were $4.3 million of legal, audit and otherprofessional services related to the Company’s Offering, $399,000 of other Offering related expenses, $600,000of employee severance expenses, $183,000 of due diligence costs for various merger and acquisition activitieswhich were not consummated, and $299,000 of expenses associated with a related party leasing agreement (Note21).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, 2016, 2015, and 2014, the expense associated with theSavings Plans totaled $1.9 million, $1.6 million, and $1.3 million, respectively.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 $3.7million, $2.6 million, and $2.4 million for the years ended December 31, 2016, 2015, and 2014, respectively.F-4515.Commitments and Contingent Liabilities (continued) 16.Other Comprehensive Income (Loss)TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 As of December 31, 2016, future minimum payments under non-cancelable operating leases for office spaceare as follows (in thousands):2017$3,80020183,72620193,64420203,28720213,149Thereafter10,426$28,032Included in the future minimum lease payments is $21.6 million related to the building constructed andowned by a partnership in which the Company has a minority investment (see Note 21).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, $86.2 million of letters of credit were issuedthrough December 31, 2016 which were secured by deposits of $103.6 million. Under a $102.5 million facility,$38.4 million of letters of credit were issued through December 31, 2016 which were secured by deposits of $49.1 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 $262.9 million atDecember 31, 2016 (see Note 2).The following table summarizes the components of other comprehensive (loss) income:Year Ended December 31,201620152014(in thousands)Unrealized gains (losses) arising during the period, before U.S. income taxes$2,790$(13,707$12,910U.S. income taxes(414517(2,820Unrealized gains (losses) arising during the period, net of U.S. income taxes2,376(13,19010,090Less reclassification adjustment:Net realized investment gains (losses)6,5722,402(1,734U.S. income taxes(2,137(422669Reclassification adjustment for investment gains (losses) realized in netincome4,4351,980(1,065Other comprehensive (loss) income$(2,059$(15,170$11,155F-46))))))))))16.Other Comprehensive Income (Loss) (continued) 17.Segment InformationTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 In addition to the $6.6 million and $2.4 million of realized investment gains and $1.7 million of realizedinvestment losses on available-for-sale securities for the years ended December 31, 2016, 2015, and 2014, theCompany recognized $995,000 of realized investment gains, $7.0 million of realized investment losses, and$967,000 of realized investment gains in the respective years on its investments in bank loan participations.Also, for the year ended December 31, 2014, the Company recognized $569,000 of realized investment losses onits short-term and other invested assets.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 fronting and program 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). Fee income of $10.1 million, $3.2 million and$883,000 was included in underwriting profit for the years ended December 31, 2016, 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, 2016Gross written premiums$370,844$182,221$184,333$—$737,398Net earned premiums301,40452,281161,978—515,663Segment revenues331,09055,412190,0649,661586,227Net investment income18,0512,54227,2574,78852,638Interest expense———8,4488,448Underwriting profit (loss) of operatingsegments47,2352,872(194—49,913Segment goodwill181,831———181,831Segment assets740,144300,5191,195,230110,6402,346,533F-47)17.Segment Information (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 Excess andSurplus LinesSpecialtyAdmittedInsuranceCasualtyReinsuranceCorporateandOtherTotal(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 assets684,838124,5031,035,084114,8671,959,292F-48)17.Segment Information (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 The following table reconciles the underwriting profit (loss) of insurance segments by individual segmentto income before taxes:Year Ended December 31,201620152014(in thousands)Underwriting profit (loss) of the operating segments:Excess and Surplus Lines$47,235$47,607$35,096Specialty Admitted Insurance2,8721,07433Casualty Reinsurance(194(2,558667Total underwriting profit of operating segments49,91346,12335,796Other operating expenses of the Corporate and Other segment(20,433(18,554(9,124Underwriting profit29,48027,56926,672Net investment income52,63844,83543,005Net realized investment gains (losses)7,565(4,547(1,336Other income295245239Other expenses(1,590(730(16,012Interest expense(8,448(6,999(6,347Amortization of intangible assets(597(597(597Income before income taxes$79,343$59,776$45,624The Company currently has 15 underwriting divisions, including 13 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 31,201620152014(in thousands)Commercial Auto$110,050$73,770$34,605Manufacturers and Contractors83,27978,31572,063Excess Casualty43,57432,45831,688General Casualty36,85830,97225,853Energy29,70930,62328,980Allied Health14,41313,5139,707Excess Property14,08312,49811,795Life Sciences11,1328,91710,155Small Business9,1046,9166,971Professional Liability8,36110,04610,784Environmental5,3214,4373,431Medical Professionals2,7393,5853,922Sports and Entertainment2,2212,6672,753Total Excess and Surplus Lines segment370,844308,717252,707Specialty Admitted Insurance segment182,22190,97859,380Casualty Reinsurance segment184,333172,499206,680Total$737,398$572,194$518,767F-49))))))))))))))))17.Segment Information (continued) 18.Fair Value MeasurementsTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 The Company does business with two brokers that generated $139.0 million and $50.8 million of grosswritten premiums for the Excess and Surplus Lines segment for the year ended December 31, 2016, representing18.8% (BB&T Insurance Services) and 6.9% of consolidated gross written premiums and 37.5% and 13.7% ofthe Excess and Surplus Lines segment’s gross written premiums, respectively. The Company has agencycontracts with various branches within the aforementioned brokers. No other broker generated 10.0% or more ofthe gross written premiums for the Excess and Surplus Lines segment for the year ended December 31, 2016. TheCompany does business with one insured that generated $80.1 million of gross written premiums and $9.6million of fee income for the Excess and Surplus Lines segment for the year ended December 31, 2016,representing 10.9% (Rasier LLC) of consolidated gross written premiums and 21.6% of the Excess and SurplusLines segment’s gross written premiums. No other insured generated 10.0% or more of the gross writtenpremiums for the Excess and Surplus Lines segment.The Company does business with four agencies that generated $47.5 million, $23.7 million, $21.0 millionand $20.4 million of gross written premiums for the Specialty Admitted Insurance segment for the year endedDecember 31, 2016, representing 6.4%, 3.2%, 2.8% and 2.8% of the consolidated gross written premiums and26.1%, 13.0%, 11.5% and 11.2% of the Specialty Admitted Insurance segment’s gross written premiums. Noother agency generated 10.0% or more of the gross written premiums for the Specialty Admitted Insurancesegment for the year ended December 31, 2016. The Company does business with four insureds that generated$47.5 million, $24.2 million, $21.0 million and $20.4 million of gross written premiums for the SpecialtyAdmitted Insurance segment for the year ended December 31, 2016, representing 6.3%, 3.3%, 2.8% and 2.8% ofconsolidated gross written premiums and 26.1%, 13.3%, 11.5% and 11.2% of the Specialty Admitted Insurancesegment’s gross written premiums. No other insured generated 10.0% or more of the gross written premiums forthe Specialty Admitted Insurance segment.The Company does business with four brokers that generated $85.4 million, $31.5 million, $26.3 million,and $23.1 million of gross written premiums for the Casualty Reinsurance segment for the year ended December31, 2016, representing 11.6% (Atlantic Intermediaries), 4.3%, 3.6%, and 3.1% of consolidated gross writtenpremiums and 46.3%, 17.1%, 14.3%, and 12.5% of the Casualty Reinsurance segment’s gross written premiums,respectively. No other broker generated 10.0% or more of the gross written premiums for the CasualtyReinsurance segment for the year ended December 31, 2016. The Casualty Reinsurance segment assumedbusiness from two unaffiliated ceding companies that generated $114.4 million and $28.4 million of grosswritten premiums for the year ended December 31, 2016, representing 15.5% (State National InsuranceCompany) and 3.8% of consolidated gross written premiums and 62.0% and 15.4% 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 securitiesF-5018.Fair Value Measurements (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 (including state and municipal securities and obligations of U.S. government corporations and agencies)generally incorporate significant Level 2 inputs, and in some cases, Level 3 inputs, using the market approachand income approach valuation techniques. There have been no changes in the Company’s use of valuationtechniques since December 31, 2014.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 not limited to, initial and ongoingevaluation of the methodologies used, a review of specific securities and an assessment for proper classificationwithin the fair value hierarchy, and obtaining and reviewing internal control reports for our investment managerthat obtains fair values from independent pricing services.Assets measured at fair value on a recurring basis as of December 31, 2016 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$—$105,841$—$105,841Residential mortgage-backed—150,798—150,798Corporate—378,448—378,448Commercial mortgage and asset-backed—163,0475,000168,047Obligations of U.S. government corporations andagencies—65,014—65,014U.S. Treasury securities and obligations guaranteed by the U.S. government70,465655—71,120Redeemable preferred stock—1,809—1,809Total fixed maturity securities70,465865,6125,000941,077Equity securities:Preferred stock—64,827—64,827Common stock10,840734—11,574Total equity securities10,84065,561—76,401Total available-for-sale securities$81,305$931,173$5,000$1,017,478Trading securities:Fixed maturity securities$1,250$3,813$—$5,063Short-term investments$1,100$49,744$—$50,844F-5118.Fair Value Measurements (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 Assets measured at fair value on a recurring basis as of December 31, 2015 are summarized below:Fair Value Measurements UsingQuoted Prices in Active Markets for Identical Assets Level 1Significant Other Observable Inputs Level 2Significant Unobservable Inputs Level 3Total(in thousands)Available-for-sale securitiesFixed maturity securities:State and municipal$—$103,457$—$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 guaranteedby 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$16,344$—$19,270A 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 31,201620152014(in thousands)Beginning balance$5,000$—$ —Transfers out of Level 3———Transfers in to Level 3———Purchases—5,000—Sales———Amortization of discount———Total gains or losses (realized/unrealized):———Included in earnings———Included in other comprehensive income———Ending balance$5,000$5,000$—F-5218.Fair Value Measurements (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 The Company held one available-for-sale fixed maturity security at December 31, 2016 and 2015 forwhich the fair value was determined using significant unobservable inputs (Level 3). A market approach usingprices in trades of comparable securities was utilized to determine a fair value of $5.0 million for the security atDecember 31, 2016 and 2015.Transfers out of Level 3 occur when the Company is able to obtain reliable prices from pricing vendors forwhich the Company was previously unable to obtain reliable prices. Transfers in to Level 3 occur when theCompany is unable to obtain reliable prices for securities from pricing vendors and instead must use broker pricequotes.There were no transfers between Level 1 and Level 2 during 2016, 2015 or 2014. The Company recognizestransfers between levels at the beginning of the reporting period.There were no realized gains or losses included in earnings for the year ended December 31, 2016attributable to the change in unrealized gains or losses relating to Level 3 assets valued at fair value on arecurring basis that are still held at December 31, 2016.The Company measures certain bank loan participations at fair value on a non-recurring basis during theyear as part of the Company’s impairment evaluation when loans are determined by management to be impaired.Assets measured at fair value on a nonrecurring basis are summarized below:Fair Value Measurements UsingQuoted Prices in Active Markets for Identical Assets Level 1Significant Other Observable Inputs Level 2Significant Unobservable Inputs Level 3Total(in thousands)December 31, 2016Bank loan participations held-for-investment$ —$ —$4,849$4,849December 31, 2015Bank loan participations held-for-investment$ —$ —$2,342$2,342At December 31, 2016 and 2015, bank loan participations held for investment that were determined to beimpaired were written down to their fair value of $4.8 million and $2.3 million, respectively.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,F-5318.Fair Value Measurements (continued) TABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 convertibility or exchangeability of the security, redeemability of the security (including the timing ofredemptions), application of industry accepted valuation models, recent trading activity, liquidity, estimates ofliquidation value, purchase cost, and prices received for securities with similar terms of the same issuer or similarissuers. At December 31, 2016, there were bank loan participations with an unpaid principal balance of $2.3million and a carrying value of $2.0 million for which external sources were unavailable to determine fair value.At December 31, 2015, there were bank loan participations with an unpaid principal balance of $5.3 million anda carrying value of $4.6 million for which external sources were unavailable to determine fair value.The carrying values and fair values of financial instruments are summarized below:December 31,20162015Carrying ValueFair ValueCarrying ValueFair Value(in thousands)AssetsAvailable-for-sale:Fixed maturity securities$941,077$941,077$899,660$899,660Equity securities76,40176,40174,11174,111Trading:Fixed maturity securities5,0635,0635,0465,046Bank loan participations held-for-investment203,526203,123191,700180,086Cash and cash equivalents109,784109,784106,406106,406Short-term investments50,84450,84419,27019,270Other invested assets – notes receivable4,5006,00811,00012,548LiabilitiesSenior debt88,30085,40488,30079,539Junior subordinated debt104,05599,397104,05584,594The 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, 2016 and 2015 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, 2016 and 2015, 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, 2016 and 2015 were determined using inputs to the valuation methodology that are unobservable(Level 3).F-5419.Statutory Matters20.Dividend RestrictionsTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 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, 2016, 2015, and 2014 and for the years then ended aresummarized as follows:201620152014(in thousands)Statutory net income$13.468$14,747$14,872Statutory capital and surplus184,859176,884207,813Minimum required statutory capital and surplus25,00025,00021,250Risk-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, 2016, 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, 2016 wasapproximately $84.2 million. Actual statutory capital and surplus at December 31, 2016 was $418.9 million.JRG Re had statutory net income of $74.7 million for 2016, $54.3 million for 2015, and $35.0 million for 2014.JRG Re had shareholders’ equity of $420.4 million on a GAAP basis at December 31, 2016. 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 31,2016, 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-5520.Dividend Restrictions (continued) 21.Other Related Party TransactionsTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 end of the preceding year. The maximum amount of dividends available to James River Group from its U.S.insurance subsidiaries during 2017 without regulatory approval is $18.5 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.Distributions from the Company’s U.S.-based subsidiaries to its U.K. intermediate holding company, JamesRiver UK, are generally subject to a 5% dividend withholding tax. 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.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 2017 iscalculated to be approximately $89.5 million. However, this dividend amount is subject to annual enhancedsolvency requirement calculations.As of December 31, 2016, JRG Holdings had consolidated retained earnings of $55.2 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 $246,000, $211,000, and$690,000 for 2016, 2015, and 2014, 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 in director fees,Investment Committee Chairman service fees, and investment and other business consulting fees for 2014. Uponthe Company’s Offering, the Company entered into a consulting agreement (the “Consulting Agreement”) withthis director. Under the terms of the Consulting Agreement, the director received $150,000 in each of 2015 and2016 for investment and other business consulting services. The Consulting Agreement is for one year andautomatically renews for a one year term unless written notice is provided 30 days prior to the expiration of theterm.F-5622.Subsequent Events23.Unaudited Selected Quarterly Financial DataTABLE OF CONTENTSJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial StatementsYears ended December 2016, 2015, and 2014 On February 14, 2017, the Board of Directors declared a cash dividend of $0.30 per share. The dividend ispayable on March 31, 2017 to shareholders of record on March 13, 2017.On February 14, 2017, the Board of Directors granted awards under the 2014 LTIP and the 2014 DirectorPlan to the Company’s employees and directors. Non-qualified stock options for 195,508 shares were grantedwith an exercise price of $42.17 per share and a three year vesting period. RSUs for 117,878 shares were alsoawarded with a fair value on the date of grant of $42.17 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:2016 Quarter2016FirstSecondThirdFourthYear(in thousands, except per share data)Gross written premiums$133,071$170,671$260,166$173,490$737,398Total revenues131,329134,511151,365169,022586,227Net income12,83714,59621,36625,67274,471Comprehensive income (loss)28,45727,38819,694(3,12772,412Earnings per share:Basic$0.44$0.50$0.73$0.88$2.56Diluted$0.43$0.49$0.71$0.85$2.492015 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 income (loss)13,326(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$1.82F-57))(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$101,793$105,841$105,841Residential mortgage-backed152,703150,798150,798Corporate379,727378,448378,448Commercial mortgage and asset-backed167,967168,047168,047Obligations of U.S. government corporations and agencies64,82365,01465,014U.S. Treasury securities and obligations guaranteed by the U.S. government71,17471,12071,120Redeemable preferred stock2,0251,8091,809Total fixed maturity securities, available-for-sale940,212941,077941,077Fixed maturity securities, trading5,0525,0635,063Equity securities, available-for-salePreferred Stock61,80664,82764,827Common Stock12,74711,57411,574Total equity securities, available-for-sale74,55376,40176,401Bank loan participations, held-for-investment, net of allowance203,526203,123203,526Short-term investments49,84449,84449,844Other invested assets21,243Total invested assets$1,297,154F-58(1)TABLE OF CONTENTSSCHEDULE IIJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIESCondensed Financial Information of RegistrantBalance Sheets (Parent Company)December 31,20162015(in thousands)AssetsCash and cash equivalents$2,969$1,976Investment in subsidiaries897,729891,627Other assets2,4152,152Total assets$903,113$895,755Liabilities and shareholders’ equityLiabilities:Accrued expenses$1,428$3,243Senior debt73,30073,300Junior subordinated debt15,92815,928Notes payable to subsidiary100,000100,000Due to subsidiaries18,54920,541Other liabilities6871,705Total liabilities209,892214,717Commitments and contingent liabilitiesShareholders’ equity:Class A common shares66Additional paid-in capital636,856630,820Retained earnings55,23247,026Accumulated other comprehensive income1,1273,186Total shareholders’ equity693,221681,038Total liabilities and shareholders’ equity$903,113$895,755See accompanying notes.F-59TABLE OF CONTENTSSCHEDULE IIJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIESCondensed Financial Information of RegistrantStatements of Income and Comprehensive Income (Parent Company)Year Ended December 31,201620152014(in thousands)Revenues:Management fees from subsidiaries$—$—$2,600Other income444040Total revenues44402,640Expenses:Other operating expenses9,4678,2545,204Other expenses2932847,353Interest expense3,9743,6873,099Total expenses13,73412,22515,656Loss before equity in net income of subsidiaries(13,690(12,185(13,016Equity in net income of subsidiaries88,16165,68257,701Net income$74,471$53,497$44,685Other comprehensive (loss) income:Equity in other comprehensive (losses) earnings of subsidiaries(2,059(15,17011,155Total comprehensive income$72,412$38,327$55,840See accompanying notes.F-60)))))TABLE OF CONTENTSSCHEDULE IIJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIESCondensed Financial Information of RegistrantStatements of Cash Flows (Parent Company)Year Ended December 31,201620152014Operating activitiesNet income$74,471$53,497$44,685Adjustments to reconcile net income to net cash (used in) provided byoperating activities:Provision for depreciation and amortization157157203Share based compensation expense5,4923,735589Equity in undistributed earnings of subsidiaries(88,161(65,682(57,701Changes in operating assets and liabilities:(5,0805,95212,443Net cash (used in) provided by operating activities(13,121(2,341219Investing activitiesDividends from subsidiaries80,00052,25050,000Net cash provided by investing activities80,00052,25050,000Financing activitiesDividends paid(65,988(47,405(69,998Senior debt issuance—10,00030,300Senior debt repayments—(10,000—Contribution to subsidiary——(10,000Debt issue costs paid(442—(412Issuances of common shares under equity incentive plans2,2601,730—Common share repurchases(4,907(6,461—Excess tax benefits from equity incentive plan transactions3,1913,580—Net cash used in financing activities(65,886(48,556(50,110Increase in cash and cash equivalents9931,353109Cash and cash equivalents at beginning of period1,976623514Cash and cash equivalents at end of period$2,969$1,976$623Supplemental informationInterest paid$4,676$4,337$3,733See accompanying notes.F-61))))))))))))))))))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-62TABLE 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, 2016Excess and Surplus Lines$14,808$575,280$137,290$301,404$18,051$188,768$46,669$75,467$316,922Specialty Admitted1,767128,79584,15652,2812,54230,8975,96818,51255,803Casualty Reinsurance48,214239,790169,117161,97827,257105,75648,98756,416184,983Corporate and Other————4,788——20,433—Total$64,789$943,865$390,563$515,663$52,638$325,421$101,624$170,828$557,708December 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$450,083F-63TABLE OF CONTENTSSCHEDULE IVJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIESReinsuranceDirect AmountCeded to Other CompaniesAssumed from Other CompaniesNet AmountPercentage of Amount Assumed to Net(in thousands)Year Ended December 31, 2016Excess and Surplus Lines Written Premiums$370,802$53,922$42$316,922—Specialty Admitted Written Premiums178,898126,4183,32355,8036.0Casualty Reinsurance Written Premiums—(650184,333184,98399.6Total Written Premiums$549,700$179,690$187,698$557,70833.7Year 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$450,08346.3F-64%)%%%)%%%%%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 Period(in thousands)Year Ended December 31, 2016Allowance for Doubtful Accounts$2,778$814$(1,456$2,136Allowance for Credit Losses on Bank Loans4,310(791(2,576943Total$7,088$23$(4,032$3,079Year 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$2,737F-65))))))))))TABLE OF CONTENTSSCHEDULE VIJAMES RIVER GROUP HOLDINGS, LTD. AND SUBSIDIARIESSupplementary Information Concerning Property Casualty Insurance OperationsYear Ended December 31,201620152014(in thousands)Deferred policy acquisition costs$64,789$60,754$60,202Reserve for losses and loss adjustment expenses943,865785,322716,296Unearned premiums390,563301,104277,579Net earned premiums515,663461,205396,212Net investment income52,63844,83543,005Losses and loss adjustment expenses incurred:Current year349,137295,334264,786Prior year(23,716(16,318(27,418Total losses and loss adjustment expenses incurred325,421279,016237,368Amortization of policy acquisition costs101,62497,75085,183Paid losses and loss adjustment expenses, net of reinsurance217,827214,524175,311Net written premiums557,708471,032450,083F-66))) 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, 2017, 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, 2016. /s/ Ernst & Young LLP Pittsburgh, PennsylvaniaMarch 10, 2017 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, 2017 /s/ J. Adam Abram J. Adam AbramChairman and Chief Executive Officer(Principal Executive Officer) Exhibit 31.2CERTIFICATION I, Robert P. Myron, 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, 2017 /s/ Robert P. Myron Robert P. MyronPresident and Chief Operating Officer(Co-Principal Financial Officer) Exhibit 31.3CERTIFICATION I, Sarah C. Doran, 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, 2017 /s/ Sarah C. Doran Sarah C. DoranChief Financial Officer(Co-Principal Financial Officer) Exhibit 32.1 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, 2016 asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), we, J. Adam Abram, Chairman and Chief Executive Officer of theCompany, Robert P. Myron, President and Chief Operating Offier, and Sarah C. Doran, Chief Financial Officer of the Company, certify, to the best of ourknowledge, pursuant to 18 U.S.C. § 1350, as adopted pursuant 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, 2017 /s/ Robert P. Myron Robert P. MyronPresident and Chief Operating Officer (Co-Principal Financial Officer) March 10, 2017 /s/ Sarah C. Doran Sarah C. DoranChief Financial Officer (Co-Principal Financial Officer) March 10, 2017

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