Good morning. My name is Andrew, and I'll be conference operator today. At this time, I'd like to welcome everyone to the Third Quarter 2016 James River Group Holdings Limited Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Kevin Copeland, Head of Investor Relations, you may begin your conference.

Thank you, Andrew. Good morning everyone and welcome to the James River Group third quarter 2016 earnings conference call. During the call, we will be making forward-looking statements. These statements are based on current beliefs, intentions, expectations and assumptions that are subject to various risks and uncertainties, which may cause actual results to differ materially. For a discussion of such risks and uncertainties, please see the cautionary language regarding the forward-looking statements in yesterday's earnings release, and the Risk Factor section of our most recent Form 10-K, Form 10-Qs and other reports and filings we make with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. I will now turn the call over to Adam Abram, Chairman and CEO of James River Group.

Thank you, Kevin. And welcome to our third quarter earnings report. I’m joined by Bob Myron, our President and Chief Operating Officer; and Gregg Davis, our Chief Financial Officer. We all want to thank our colleagues for another excellent quarter. We thought we might frame the discussion with a few opening comments, and then we look forward to answering any questions that you may have about the quarter. Over the course of a long history in this industry, we've come to the conclusion that the best way to deliver value to our shareholders is by reliably and consistently generating a high-risk adjusted low volatility return on tangible equity. We enjoy the fact that our model generates substantial earnings that we can consistently use to reward investors in the form of dividend. This quarter, our Board raised the quarterly dividend by 50% to $0.30 per share and declared $1.35 per share special dividend. This will bring the per share payout for 2016 to $2.25 per share. And with this announced dividend, we will have paid $3.89 per share in dividends since going public in 2014. Our guidance, which we generally announce which we actually always announce annually in the first quarter of each year, is that in 2016, we will make a 12% or greater return on tangible equity and deliver 92% to 95% combined ratio for the entire Company. We’re on track to meet or exceed those goals. I emphasize the words reliably and consistently above, and that was intentional. We’re an underwriting Company. Our focus is and always has been on making consistent underwriting profits where our margins and returns on equity did not vary much year-to-year. We can only achieve high confidence levels at our underwriting results if we maintain a cautious approach to reserving. We’ve been growing…

[Operator Instructions] Your first question comes from the line of Randy Binner with FBR. Your line is open.

Just on the special, we saw that methodology or saw the 135 million. Wanted to ask you question about the methodology, and specifically around operating leverage. This is not even getting you back to one-time premiums to surplus. And so I was wondering, how you think about it in terms of operating leverage, and how you think about it in terms of where the business could ultimately run from operating leverage prospective?

So the business could run, Randy, up to 1.1 million, 1.2 million, something like that, in answer to your question. And this was the subject of a very detailed and long and -- conversation at the Board meeting. We’re trying to balance many, many things. We’re trying to balance how much excess capital we have, how much growth we think may come in the future. Our rating considerations, also where the capital is, business there is, call it, seems that there is a distinction to be made between excess capital and distributable cash once you work your way through the mechanics of the rating and tax and regulatory regimes. So at a $1.35 special dividend we thought that that in combination with the raised dividend was just very substantial return to our shareholders, that it was the right number, it was meaningful without constraining options going forward. And that’s what we landed on, and I hope those responses to you.

I guess the way I summarize that is that it's a material dividend from a yield perspective. But it’s not designed to get your operating leverage normalized, so you’re leaving a lot of gap in the tank there. If you have organic options, inorganic options, et cetera. And I guess just to clarify in the loss pick, and we’ll focus on in assets. I mean it seems like your submissions and bindings are very positive. And this team is like, I’m hearing your comments are that actual loss activities not developing very high. And so I know that you have a conservative methodology. But I guess just want to understand like a little bit better, usually when we hear anecdotal positives from companies, we all see the conservative loss pick. Just kind of hoping that, am I getting that right that everything is going great, but you just seemed very conservative on the loss picks. And anything more on that would be helpful?

Everything is going great, and we are being absolutely consistent with a long history of approaching our business with a careful eye, and a perspective on -- one of our guys like to say, you hate to spike the ball on the two yards line. So we just wait and let things develop. And this is the approach we’ve taken over a long time. I think you see -- you can calculate that our return on equity is very good. We’ve reaffirmed the combined ratio. We think the business is really solid. I love the rates that we’re putting this business on, really pleased with loss emergence across the Company, both then the E&S division, in particular and in Specialty Admitted also. And so you should read into this that we feel very good about our business and that we’re maintaining a discipline that has allowed us to generate very consistent high returns on equity and very good over the long haul underwriting profitability.

Your unext question comes from the line of Mark Hughes with SunTrust. Your line is open.

In the E&S segment, your underwriting expenses were little bit higher sequentially this quarter on a percentage basis. I think there was some, maybe some true-up and some fee income, I understand. How should we look at that on a go forward basis? You were at 21% of earned premium in Q2. Is the 21% closer to what we should think about or is it 23% closer?

Well, I think, first of all, as you know the fee income resulted in offset to the expense ratio. And we did have a true-up in the E&S fee income this quarter, resulting in a $600,000 sequential decline. We think that's the new basis for which we’ll build fee income off starting in Q4 going forward. So fee incomes could be down relative to Q2, or little bit certainly in Q4 again, which would elevate the expense ratio little bit. And then I just think that there is a little bit of increased compensation expenses in that segment. Obviously, we had great growth in our premium, but there also has been substantial hiring across many divisions and disciplines within that segment. So we feel great about the overall combined expense ratio. There is obviously very compelling, certainly the lower fee income base could keep it a little bit higher than it was in Q2.

In the E&S segment, is there much commercial auto that's coming in? I know you talked about in right share and new emerging economy. Are you picking up much commercial auto, and how do you get comfortable with that?

Well, no, that segment for us, that business for us is in this new economy right share kind of business. It's not large trucks or the kinds of commercial auto that have had some headlines in the industry press for the complications in the high loss ratios. This business is different than our results and that are quite different overtime, and we watch it very, very closely. But we like the emergence that we’re seeing, and we think the pricing is quite good and the territory of it is -- it really should be called new economy or right share or something. There is a distinction to be made here between that and the business that's causing trouble elsewhere.

In the Specialty Admitted segments, a very nice acceleration in the written premiums, the bottom line is still hovering modestly profitable there. As this new business flows-through, could we see a little bit more of a pick-up in the bottom-line contribution?

Sure. So, a big piece of the increase in the top-line is result of the new fronting program that we mentioned on the last earnings conference call and which incepted July 1st, so that business drove gross written premium up a lot, net written premium up less and obviously that earned premium not a tremendous amount. We do think the fact funding deal by itself has the $200 million plus run-rate but that's over -- ultimately, that premium would be earned over a 24-months period. So, absolutely, we think that the expense ratio can continue to come down, the combined ratio can improve. There is just the natural lag with something of that size in terms of the earned premium coming through and really getting that scale and leverage.

The thing I want to comment also that what we’re seeing in workers’ comp, the direct workers’ comp is smaller, but the direct workers’ comp book and good results we’re seeing in rates.

Adam mentioned in his script, this is, as you guys know, probably $32 million $35 million book of business that we write with retail agents, and it’s the foundation book of business in that Specialty Admitted and also leg segment. And we continue to get the highest risk adjusted returns there we have seen in sometime and perhaps in the history the Group. Going back to 2004, when you look where it's priced and when you look at the underlying loss costs, similarly as Adam mentioned in his commentary, we have seen it. We saw very low loss emergence in the quarter there. So we feel good, both about the traditional workers’ comp that we write on a retail basis, the one division there, as well as we’re funding and programs are headed. We expect growth not only from the large program going forward, but we’re seeing other opportunities as well. And so I think it’s really just a function Mark of ultimately getting that, starting to get material amounts of premium and fee income earning in because the fee income earns in the same way the firm premium would, so it's just this delay.

And would your rates and comp, be similar to, I think, you described down 1% in the E&S book of what you’ve seen in comp?

The comp overall is you adjust it for loss cost business and classes at higher rate as we’ve ever had, so it's really on a risk adjusted basis, because your book is changing and your territory changes a little bit. And that’s a very low price book as this priced this response that’s ever been.

Your next question comes from Charles Sebaski with BMO Capital Markets. Your line is open.

Just hoping -- I think you’re giving a little bit of color on the E&S and the different product lines. And I am not talking about particular, I’ m trying to work out the change in the book make-up due to change in the loss pick. And I guess for me and some investors probably would appreciate, if there is any way we could get some, may be categories of business as opposed to single line item. I think the conservative nature of your underwriting we understand. But the increase in the accident year loss pick seems to be driven by mixed shift. But it’s hard to get clarity on the mix shift from this. So I was -- anything further would really be appreciated?

Chuck, I don’t think we’re going to break it down that leg by division within the segment. We haven’t reported that publically before. I think, let me try to reassure you, that we have a long history of putting up conservative of loss picks. And they come, they have historically, and mentioned for 17 quarters in a row come down consistently. And then we’ve reaffirmed to the 92% to 95% combined ratio. And we obviously would not do that if you had hesitation of that. And let me also point out to you that our mix, the only reason I'm really talking about mix shift here is because we’re good at new product development. Our friends in the E&S segment have done a great job in new product development and positioning us for the future. But over the many years, our mix has shifted every year, and every quarter, as we saw opportunity in one division and less opportunity division if you remember you've seen in our IPO presentation and then in our public presentations, you've seen us show you how we adjust division-by-division within the E&S segment overtime, and that's going to be dramatic overtime. So there is absolutely nothing in this. There is nothing new about our conservative pick. The fact that it's a little higher, it's driven by the fact that we’re growing. And so we put, as we grow, we put more -- we put a higher loss ratio on more of the business because we’re growing quickly. There is nothing dramatically new or new at all about mix shifts we do that all the time. And we are really confident. And I did mentioned to you I think that pricing is down, I think, less than 1% is the commentary in that E&S book year-over-year. So, I'm hoping that I'm obtaining a roadmap for you to allow you to feel confident that this is not new. It's in the context of a long established consistently applied methodology that has yielded good results from a long time.

I appreciate that clarity. I guess also on your E&S...

Just one more, if I could. Just want to add into some of the stuff that we have disclosed. Last year, we had disclosure that commercial auto was about $65 million of our $310 million in that segment, and that was a written premium number. So a material portion of that earns in this year. And then of course as we've talked about, but no specifically, we've had growth in that gross written premium number this year as well. So you've got a more -- really just getting down to the information we've disclosed. You have a much higher percentage of the earned premium that is coming in from this new division. And some of that is because of the growth that we’ve got last year that was written and not necessarily earned. And we of course were applying that axis depict to the earned premium base. So I think it's nothing more than saying, it continues to make up a larger percentage of the overall segment. And of course we’re growing many divisions with this in the segment, but that's growing quite well.

And obviously it seems that your holding, that you like the business because your gross to net is down over the last year. And I guess in the E&S you just talked about how you think about the gross to net on this book if you think that's going to keep coming down as you have capital. Is that just due to this change in commercial auto that's helping to drive that any clarity on how that's running in those the low teens versus the high teens the prior couple of years?

Yes, I think it's a couple of things. For the more traditional business, the non-commercial auto, we are taking a little bit more risk in that. But it's really just on the margin in terms of treaty renewals that happened at July 1st. We have great confidence in our book as gross line underwriters and in many divisions we only write million dollar limits anyway. But our experience, since our inception in 2002 and approach this for companies that are loss ratio experienced gross and that is great. So as we’ve grown a little bit, as another year passes, we continue to gain more confidence in our results, We’re happy to take a little bit more net on the more traditional E&S business. And then, yes, I think there, as we continue to get confidence in the commercial auto, similar story there.

And I guess on a combined basis, I know you said the fee income is kind of an E&S off the kind of $2.1 million. I guess then additionally with these Specialty Admitted. How we should think about the fee income ramp up, especially with this new fronting program just came on to, anything would be appreciated?

Yes, in terms of the disclosed number, probably the best I could give you is, it’s not going to grow an awful lot faster than necessarily than earned premium is.

But that would the marker, at some kind to basis to earned premium growth in specialty?

Yes.

Okay and then I think, no, I think that. No, I guess one final question, talk about on run-rate, on obviously the investment income was really good and the clean energy investments, you don’t have, that’s marks that happened. What’s the thought process as you think as a reasonable run rate then? Or how do you guys operate the business, and what the expected net investment income is given the volatility of some of those non traditional investments?

Yes, I think that, if you look at the table on the press release, I’ll go bottom to top. The first one is easy. We had growth in our fixed income and loan portfolio of $900,000 in the quarter, and that’s really just because of increased flows, perhaps a little bit of additional yield we’re putting some cash to work. But that’s a reasonable number from a sequential run rate prospective. On the other investments and I think we’ve said this before, we budget for those just by putting in a high single-digit expected return. And they obviously have a fair amount of volatility to them. Because we have to rely on fair valuations provided by third parties associated with those, the change in the fair value runs to the income statement, which is the accounting that we’re required to do, rather than through equity. And they bounce around an awful lot. I think our feeling is over the long-term, we really like these investments. They’ve performed extremely well for us, and I’m talking about of course the other private and the renewables. And we expect a high single-digit return. And when we have a quarter like this, one also like better than that, that’s great. But it certainly, as you’ve seen before like a year ago, that can reverse on us. So I think, on a quarter-to-quarter basis, it's awfully difficult to predict. That’s just how we budget for it and we really think about that as an annual rate of return or a multi-year rate of return.

And the tax rate, effective tax rate, down in the quarter. Is that just higher component of investment income to underwriting income?

I mean there it's a couple of things. It's just based upon where the income landed from a legal entity perspective, I guess, post quarter share, and had some of the more income off-shore than we would have expected. The other piece of it is that in the United States, we have been making a conservative assumption around how much we could deduct for compensation expense under true called 162 million and we subsequently found out that we have the ability to make higher deductions. So, that's really more of a one-time thing, Chuck. And we do expect the tax rate to normalize to high single digits. It's been subsequent quarters and years.

Your next question comes from the line of Christopher Campbell with KBW. Your line is open.

Just a quick question on casualty reinsurance, we had adverse development. And look like that was getting better than last two quarters, and then you have a little bit of adverse development this quarter. Can we get some additional color on what's driving that?

Yes, sure. I think the first thing that I’d point out is that on a year-to-date basis, even though we do have adverse development in both periods, it's substantially lower, $1.5 million year-to-date and $2 million in the quarter, so we have had favorable development year-to-date. I guess, it's kind of what you are pointing out. And it's really just from a couple of places. It's from one treaty -- the underlying risk at workers’ compensation. And then there was another treaty where we had some large loss activity that was reported through us from I think the 2012 or 2013 year with respect to specific risks like that general liability type of...

And it is in part and in short...

Yes. And so from a couple of places from several years ago and we just had some elevated reporting, and so it impacted the bottom line. But I think overall we are pleased with where that segment is directionally going from a underwriting and reserving perspective. And obviously it affords us the benefit that we get for the rest of the Group.

And is there anything we've read into the higher loss picks. Are you just building in more conservatism in that segment?

I think it's just following our consistent methodology. There definitely is an ongoing change in the underlying mix there as the new team has been on-board now for four plus years. There has been a more substantial move to general liability in terms of the small account general liability policies in which we find all are very consistent, a similar approach to how we book to our U.S. business in that regard. And so I think it is just our methodology and somewhat of a change in the underlying lines of business.

Just switching to the fee income, is there like a differential expense ratio benefit that you get between seeding exceeding commission, between the E&S and Specialty? So what I'm thinking is, is it more profitable? Are your seeding commissions more profitable in E&S than Specialty Admitted?

I think we look at them differently. The fee income in the Excesses and Surplus Lines segment comes from where we are servicing claims handling, or which where we're not taking any risk, so it's a pure fee arrangement. The fee income generally in the Specialty Admitted segment is where we get paid a reinsurance commission that is higher than what we’re paying to the agents that produces the business. So I think that they love both fee in nature in terms of how they are generated, they are quite different. And so not sure that they’re necessarily comparable.

[Operator Instructions] Your next question comes from line of Brian Meredith with UBS. Your line is open.

This is actually Jason on for Brian. If we go to the accident year loss ratio in E&S. If I look at 2013 and 2014 there wasn’t a lot of seasonality there, in first three quarters of ’16, again not much seasonality. Was there anything unusual or any true-ups or anything there in the second half of 2015?

I’m sorry you’re looking back to 2013, 2014 and then looking at 2016.

I’m saying every year except for step or in 2015, there was not much seasonality in E&S accident year loss ratio. Was there something unusual last year?

In talking about to sequential quarters you’re getting at, right?

Correct.

I’m not remembering exactly, we have to take that question with you offline. I think that that there may have been, because of how something is running in there maybe have been occur in accident year sort of reduction in the underlying loss assumption in Q3, I’m just not remembering.

But in general when you think about the business, you think that sequentially things are fairly consistent, and this should be significant ups and downs other than any true-ups for accident year development?

Yes, generally, I think that’s true-up. If you look at our history, just over the last seven quarters that I have in front of me and in a particular this year it certainly has moved. It does move around. And I think we’re much more focused on looking at the year to date number than any individual quarter.

And in Specially Admitted, you just break-out or you have a positive comment about workers’ comp. But some your peers there they are saying that’s being more competitive maybe a little less optimistic about it. Is this just because you guys are in a smaller portion of the market? I mean why do you think that you’re having so much better experience than some other people?

Well, this is the very seasoned book in a relatively tight territory that we’ve written, and re-underwritten for a lot of years. Number one is, it is small account business. I think our team in rally in particular does not only a very, very good job with underwriting that stable book but they’re focused on claims. And the proper and rapid and consistent adjudication of claims is really -- and we’re not the only people who do this. But I think if you look across the workers’ comp universe that companies to pay great attention to the adjudicating claims carefully and accurately, you’ll find that they outperform, particularly in combination with a lot of attention to rate. And you’ll note that this book, which is today at $39 million, it's been as high as $60 million and as low as $12 million. So attention to rate, attention to class, the small account and the really proactive claims handling, I think, are the combination of reasons.

There are no further questions at this time. I will turn the call back over to the presenters.

Well, thank you, everybody for participating. Thanks again to all of our colleagues whose hard work and good work made this quarter profitable, congratulating to everybody. And thank you to our investors for you support. We very much appreciate it. Speak to you next quarter.

This concludes today’s conference call. And you may now disconnect.