Good day, ladies and gentlemen, and welcome to the Q3 2017 James River Group Holdings Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today’s conference, Mr. Kevin Copeland, Head of Investor Relations. Sir, you may begin.

Thank you, Bruce. Good morning, everyone, and welcome to the James River Group third quarter 2017 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 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 Chief Executive Officer of James River.

Thank you, Kevin. Hello, everybody and thank you for joining our third quarter conference call. I want to say a few words about my decision to hand over CEO responsibilities to my friend and colleague, Bob Myron and remain Chairman of the company. We have great succession in place. Bob and I've worked side by side since 2010 when he first joined us as our CFO. In the last seven years, he's held multiple senior roles, CFO, Chief Operating Officer, President and for two years when we were private, CEO. He has been a member of the board for most of his tenure here and he is well known to many, if not all of you on this phone call. Sarah Doran who joined us nine months ago as CFO has her side of the leadership table well in order. So now, it seems to me to be a good time for -- to take an opportunity to make a change because I know the company is in great hands. I'm proud of the fact that Bob, Sarah and our other colleagues will continue building our franchise and I'm confident they will maintain our commitment to great and innovative underwriting, while putting their own marks on the company and making it even better. I look forward to supporting them as Chairman. Since founding the company 15 years ago, we’ve grown an expertise, added a tremendous amount of talent, made two public offering, moved to Bermuda, protected hundreds of thousands of policyholders and made healthy returns for our investors. It's been a very satisfying experience to be a part of all this. I've made a number of great friendships here and have the opportunity to work with a lot of smart and dedicated people. I learned something new from my colleagues every day. It was and it is a terrific fun and opportunity to lead this company. I think we've done a lot of good, while we did well for ourselves and our shareholders. We've been fortunate, very fortunate to have a thoughtful and well informed shareholder base including our private equity partners and many of you on the phone who have a deep understanding of what's drive value in the insurance market. I can tell you the fundamental approach of our company to the market will remain unchanged. Now let me turn the call over to Bob.

Thank you Adam and good morning everyone. I’ll make some general comments and then get into a discussion of results for the quarter. It's a great time to be taking over the leadership of this company. As we have a very strong foundation on which to build on. Adam you've been a great partner, mentor, supporter and friend to me in the seven plus years that I have been at James River and it's a pleasure working with you. I look forward to continuing to work closely with you in the future and your continue role as Chairman of our Board. And I'm excited to continue to work with the rest of our Board and our strong senior management team. I want to acknowledge the critical roles played by Sarah Doran who is on the call with us today, our segment presidents and other discipline of leaders throughout our group. We've achieved a lot since I've been here, but there's a lot of opportunity still in front of us. In the wake of substantial catastrophe losses, we expect the industry will seek higher returns on capital across all lines. We are going to be seeking mid-to-high single digit rate increases in many of our core casualty divisions and our E&S business going forward. In our core E&S business, we continue to see strong submission flow. Submissions were up 7% year-over-year in the third quarter. With the catastrophic events of the last few months, we expect submission flow to increase driven by the rebuild of Texas, Florida and California for our contractors book, not only do we expect an increase in submissions, but demand surge will likely increase exposures in a good way. Small contractors will be earning more than they did a year ago. Contractor business is generally priced on…

Thanks, Bob. Yesterday, we announced that our board declared a common dividend of $0.30 per share and special dividend of $0.50 per share, each payable next month. You may remember that we raised our common dividend by 50% in the fourth quarter of last year and paid an additional $0.30 per share in common dividends through 2017. For the full year, we expect to return over 50 million or $1.70 per share in total dividends to shareholders as compared to 66 million or $2.20 per share that we returned last year. We've done this despite growing net written premiums about 40% over the last 12 months and taking operating leverage from about 0.9 times to 1.4 times. Looking at our business and the growth opportunities that Bob mentioned, we believe we've positioned our book well to benefit from expected attractive pricing. We view both the strong ROTE we’ve delivered and the capital return as important components of shareholder value. The special dividend is an attractive way for us to manage our capital both to support and respond to our growth and business opportunities as well as to provide return to share. As always we see to earn an attractive return on every dollar of capital we hold and to the extent we are not able to utilize our capital, return it to investors in an efficient manner. We've returned the majority of our earnings to shareholders since becoming a public company almost three years ago. Over that period we've paid cumulative dividends including these upcoming of approximately $165 million or over a third of our original tangible equity at IPO. We thank our shareholders and business partners for the opportunity to put our capital to work and look forward to continuing to generate meaningful returns for shareholders going forward. And operator with that this concludes our prepared remarks. So if you could open the line for question that would be great.

[Operator Instructions] And our first question comes from the line of Randy Binner from B. Riley. Your line is now open.

Hey, good morning. First of all just congratulations Adam on retiring and Bob for taking over as CEO, look forward to working with both of you in your new roles. It was a good quarter and I just actually had a couple that I wanted to flesh out. First on fronting, you mentioned that there's opportunities from the traditional and alternative kind of capacity providers out there. Can you give us more color kind of on where you see any opportunity and if it's in kind of traditional casualty lines or maybe in another business areas?

I think it's sort of across the board, I think that there is continued interest from traditional and alternative markets to get at more US space risk. And we're in a position where obviously we're mostly a casualty writer but we do have some modest property capabilities and we certainly have the interest in ability to do something that would be in the property space. Not something where we would obviously think about taking a tremendous amount of risk, but could certainly with our infrastructure between several admitted companies and very broad E&S and overall licensure in infrastructure in the domestic markets, I think we're in good shape there.

Yet adding to that, while we choose not to because of our model having to do with volatility in the way we address capital and consistent returns. We recognize that there is a very vibrant capital market that makes a lot of sense that is very interested in taking property risk. And we actually have a very strong property team in our E&S division that is currently capable of writing a lot more property risk than we retain on our balance sheet. So I think we've got a lot of expertise there that we could deploy in the service of other smart capital that wants to take property risk that just doesn't fit our model. And we've got the modeling capabilities, we've got the underwriting capabilities, years of experience. We also have the claims handling experience to handle that. So I think we're well situated to do that and we're developing that. We also have the ability to develop that on the admitted side too.

And while we only write excess property currently, many of our folks have experience in primary property.

Just on the comp losses, it sounds like that's like a discreet set of losses and not necessarily representative of the book because comp in general is a good line right now. So can you just give us a little more color on what the large losses were there?

Yeah. It's just -- we have a retention of $600,000 in that book of business and we've just had a few large losses in more recent periods that have, where we’ve basically taken material amounts up to the $600,000. As mentioned, this is following on from several years where we had very benign loss activity. So I don't think that it is a result of pricing and it's not really as a result of underwriting. It just seems like there's been a little bit of a blip here in terms of some larger loss activity. As mention, the accident year loss ratio for the year-to-date is not up an awful lot and we saw some pretty good favorable reserve development coming through on that book from the prior periods. That was a good offset to that.

When you’re saying large losses, you mean there was an actual large event, it's not like a series of people going out on claim and not coming back. It's more like an accident, like –

Yeah. Absolutely. Yeah. It’s not a catastrophe so to speak. It is an individual accident. It is a workplace accident.

And our next question comes from the line of Mark Hughes from SunTrust.

The quarter in the E&S business, you had mentioned that the underlying probability, excluding cats, excluding development, you had a 160 basis point improvement. Last quarter, you were flat there on the same basis. The quarter prior to that, you were -- the combined ratio was up. Have you turned the corner? Was there anything unusual in this quarter that helped profitability?

I don't know that there was necessarily unusual. I think certainly a component of that, but the segment ended up having approximately a 15% expense ratio, which is framed by the continuing and growing fee income, which resulted in a reduction of that. So that was definitely part of it. Obviously, I mean, we're pleased to see the margin improvement there. And that's a combination of a number of things, both growth as well as performance of the underlying book as well as the expense ratio improvement and fee income.

The loss ratio was up about 80 basis points sequentially. Will that continue to move up a little bit assuming rideshare continues to grow or we had a fairly stable point in terms of the loss ratio.

Yes. I think it could pick up a little bit more because commercial auto book has grown faster than the core E&S book, although we still see decent growth in the core E&S book. So I would expect for the fourth quarter that that could be a little bit higher than it has, just kind of in keeping with the business mix change that we've seen through the course of the year, Mark.

And presumably the expense ratio under those circumstances would continue to come down?

That's right. That’s the second piece of it. With the way that that book is set up and the fee income that comes through it, et cetera, the various structural attributes of it, you would expect the expense ratio, again all things being equal in commercial auto, growing relative to the core book, to continue to come down.

I wonder from a capital perspective, you're 1.4 times, you’re looking at rate increases, new opportunities, the rideshare business is growing nicely, how the core business can you support on the current capital base?

We certainly think we have room to support that. We have, I think we could, we have additional capital that we can use, i.e., debt capacity. I think that our book can be written at the leverage where it is, maybe slightly higher. So we certainly do not, in any way, feel limited to look at business opportunities by our capital. So, it's not a question of turning business away, it’s obviously just a question of writing the best business and the best returning business that we can see and taking advantage of that opportunity.

I would agree with that. We don't feel that we've got a capital constraint in going after the business that we want to put on the books. And it's not going to be limiting in terms of going after what we believe is going to be higher priced business in a number of different areas across the group.

You indicated you’re going to be seeking mid to high single digit rate increases in the casualty book, what your early sense on that and have you already began, is it starting to happen, how good do you feel about your success there.

I think we're really just getting started. It’s more of what we are down to the level of the underwriting desk, it what we've - what leadership is seeking, right. And that has been passed along to those folks as well. And so we're out there expecting to get it and we think it's completely warranted. But it's going to take - we’ll have an update for you on it obviously our next quarter.

And our next question comes from the line of Meyer Shields from KBW. Your line is now open.

Bob, when you talk about some expense flexibility as a consequence of the expense ratio improvements. So, can you elaborate on what you meant?

Yeah I think we just – look, it doesn't it frame our - really, I mean, we are going to - definitely going to be seeking the price increases that we talked about, but I think running in the mid 20s versus the mid 30s or higher which you see sometimes in a commercial specialist business, I think just in general that gives us not only flexibility to add staff, but also at the individual account level it gives us flexibility as well so to speak because of that lower overall overhead. So we've always had a philosophy here of sleeves rolled up and running pretty lean. I just think that it would be a different situation if we were in the high 30s that could be reasonably constraining.

Last time when [indiscernible] reported they talked about [indiscernible] declining frequency in personal auto. Are you seeing the same sort of trend in the rideshare?

I would say that we're not necessarily seeing a decline in frequency. I would say from what we've seen most recently there is sort of not a significant change there.

And then last question, is there any, I don’t even know if it's meaningful, but to the extent that you have bought very effective protection on the property book, is there a timing issue where reinsurance rates may go up faster than you can push them up of the primary side.

So, good question, interestingly most of our property reinsurance is renewed in June and July, so I’m not expecting that they were necessarily going to get caught in that timing trap so to speak. So, no, I don't think so.

And our next question comes from the line of Brian Meredith from UBS. Your line is open.

A couple questions here for you all. First of all just a quick numbers question here, is the current year development in the segment, what was that from a dollar figure perspective, just so we kind of get that kind of true underlying run rate of the action year.

I can come back to you on that Brain. I don’t have that at my fingertips.

And then Bob, I’m just curious and Adam, you're talking about getting rates in the E&S casualty and kind of pushing for that. I just want to dive into that a little bit more. Historically, I’ve always found that you get rate when you get an increase in loss trends more, something happens with respect to the perception of risk. Has that changed? Are you seeing an acceleration in loss trend? What are you telling to your distribution and brokers and agents as to why you need these price increases?

A couple of things, one is our - we think this is based on the feedback we're getting from the senior leadership of our insurance companies. We think this is an expectation that is not unique to us in the market that there is an expectation among -- and of course the brokers want to represent their customers and they will push back on this, but I think there's an understanding that rates have been relatively flat for four or five years. This is -- and I think there's also a recognition in the market that the casualty business that you're writing, that we're writing and our competitors are writing has a four to five year or in some cases longer tails and with rates having been relatively flat for four or five years and the nature of the tail of this business, it's prudent for every capital provider to be looking for rate increases. And in the wake of tremendous loss of capital, really a record loss of capital in some people's estimates in the insurance business, across the insurance industry, people are going to be very careful about where they allocate their capital. We hope we think that that makes a lot of sense and this is a moment in time when there -- it's appropriate for there to be just on the merits for there to be price increases. It's well understood in the industry. Now, how that all plays out remains to be seen, but I don't think we're going to be alone in looking for price increases and I think that the industry is absolutely appropriately pricing risk when they raise rates in the mid-single digit or high-single digit rates and of course some of this will be by line of business and by the nature of the class of the risk or the class code of the risk itself in the history of individual accounts. But we expect that we're going to push for and expect that others will be pushing for across the board rate increases. Bob, do you have something to add?

Yeah. Just a couple of additional thoughts, one of which Adam made in part, but I think we, several years in a row here, balancing along with us 1% down, 1% so to speak. And while the underlying loss trends have been benign, we just can't ignore the obvious nature of loss cost inflation, for example, just healthcare costs, right, when somebody gets hurt and the like. So that is obviously -- there have been increases in -- there has been loss cost inflation. It's unavoidable coming from some places without necessarily corresponding rate increases and our margins have been okay, but I think we have to take that into account further to Adam's point about the duration and tail of this. I think the other most [indiscernible] in particular in E&S is, we are likely going to get increased cost of reinsurance. It’s likely it’s coming. By a substantial amount of reinsurance on our E&S, it’s almost entirely excess of loss. But we have an expectation further to discussion earlier in this phone call that there are going to be increases coming from reinsurance capital providers. So a couple of more reasons why it's completely warranted.

But those increases do you think more on your property than the casualty side, right?

We very well could be getting property prices -- casualty price increases as well. I mean I think that, you spend time in conferences, we obviously listen to other people's conference calls. There is a lot of the losses that are out there are still sort of unreconciled or not relative to the industry loss estimates and what people put out there have not been -- that difference hasn’t been reconciled. I think that there is a trend towards loss increases for P&C more broadly. I mean cost increases for P&C insurance more broadly.

And I’m just curious, if I look at your E&S segment and if you kind of adjust for the -- obviously increase in the rideshare business and the effect that's had on your underlying kind of loss ratios, how have they trended the last couple of years? Have they kind of moved up some because of that loss trend in excess of pricing or have they kind of been stable?

They've moved up a little bit, but they haven't been off a very low level. We've had several years of very benign loss activity and then there's been a little bit of elevated loss activity this year, not to a level that we would deem to be problematic in terms of where we priced the business that we've put on or putting on now and have put on in the recent past, but it is up a little bit over the more recent years.

[Operator Instructions] And I am showing no further questions at this time.

Well, thank you all very much for your interest on our company and we look forward to Bob and Sarah and team reporting results in future quarters and to being with you and to investing alongside of you for a long time. Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.