Good day, ladies and gentlemen, and welcome to the Q1 2018 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 be given at that time. [Operator Instructions] As a reminder, this conference may be recorded. I will now like to turn the conference over to our host of today's call, Mr. Kevin Copeland. You may begin.

Thank you, Tonya. Good morning everyone, and welcome to the James River Group first quarter 2018 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 factors 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 Bob Myron, Chief Executive Officer of James River Group.

Thank you, Kevin, and good morning everyone. This is Bob Myron, and with me today are Sarah Doran, our CFO, and Kevin Copeland, who you just heard from, our Chief Investment Officer who also leads Investor Relations for us. We have a few prepared remarks, and then we look forward to taking your questions. The year is off to a great start. We had strong top and bottom line performance in each of our three segments, with underwriting results showing a substantial improvement from a year ago, as highlighted in our press release. Our combined ratio for the group came in at a 96.4% and we had compelling combined ratios in all three segments, with favorable reserve development in each of them. I am thrilled by the pricing increases we received in our core E&S book and very pleased with renewal pricing overall. While relative to a year ago our investment performance was down, in absolute terms investments performed well, roughly in line with our expectations. Let me talk about a few of these things in some more detail, and then I'll ask Sarah to do the same. Regarding growth, in our E&S segment, we had strong growth overall and strong growth in most of the underlying divisions. The commercial auto division grew 84%, substantially assisted by the rate increases we have obtained on our largest account. In our core E&S book, we had growth in 9 of 12 divisions. In particular, we saw strong growth in allied healthcare, which was up 208%, and energy, which was up 97%, and in general casualty, which was up 70%. Part of this growth was from rate increases, which I will discuss more in a minute, and part of it was from increased submission activity and opportunities in some larger accounts. As mentioned…

Thank you, Bob. Good morning, everyone. We are very excited about our start to the year, the prospects for our business, and our continued balance sheet strength. I'll go ahead and fill in some of the blanks on the moving pieces to the quarter and our outlook. For the first quarter of 2018, we made underwriting profits of $7.2 million, generated an operating profit of $16.6 million, and are reporting net income of $15.6 million. Before I get too far into the results, I'll take a moment to highlight the accounting change effective in the first quarter which creates a further difference between non-GAAP operating income and GAAP net income and will likely have the effect of creating net income volatility going forward. Effective January 1, 2018, all changes in the fair value of equity securities are reflected in net income rather than in other comprehensive income on the balance sheet, so there are now two components of net realized and unrealized gains and losses on investments in the P&L. The first are the pre-tax gains and losses from the sale of investments, which includes the valuation allowance on our bank loan portfolio. And the second is the change in unrealized gains or losses on equity securities resulting from the new accounting pronouncement. This quarter we recognized a pre-tax loss in the value of equity securities of $1.7 million within net income, which was partially offset by realized pre-tax gains of $900,000 on investment sales during the quarter. I'll stay on investment results for just a few more comments. This quarter, our net investment income decreased about 21% as compared to the same quarter last year. The first quarter of last year included an exceptional performance from our renewable energy portfolio. While income in our core fixed income and other…

Thank you, Sarah. Operator, can you please open the line for questions?

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

I just have [technical difficulty]

And Mr. Binner your line is open.

All right. Maybe we should move on to the next.

The next question?

And our next question comes from Matt Carletti of JMP Securities and your line is open.

Bob, I was just hoping you could maybe expand on your comment about commercial auto a little bit, how you said that loss emergence was in line with expectations. Is there anything else you can point to? I know it's only been three months since kind of what happened last quarter, but is there anything else you can kind of point to in kind of the daily claims trends you're seeing or things like that that give you additional comfort that the actions you took at the time were more than appropriate?

Yes. Obviously, this is something that we look at pretty carefully, but I think there isn't a lot more to say. I think we have an expectation in terms of what we think loss emergence might be, and then you're always comparing that to actual. And for the quarter, it was in line. And so that ended up with the result that we ended up having in the segment, which was a reasonable loss ratio, a reasonable loss combined ratio, and overall favorable development for that segment. So I think it was consistent with our expectations. And we're obviously pleased about that, given that we are about three months beyond the results that we had there in Q4.

Okay. And then my only other question relates to the pricing in core E&S. I think you quoted you have 13% in the press release, and I think I caught you saying 8% kind of ex-Allied Health. How did April look? I know it might be too little to give a number, but did the acceleration that you saw in Q1 kind of persist in April, or did it inflect one way or the other?

Yes, we really don't have rate information for April yet, given how close we are to that month. And so let me just go back to the beginning. Yes, you heard correctly that we did get 8% ex allied health, which I would reemphasize that is a really good rate increase on renewals. And we are continuing to seek rate increases in this current environment. And in terms of April and Q2 activity, we'll have to give you an update on that when we release Q2 earnings. We just don't have a lot of data that right now.

Okay, great. Thank you for the answers and congrats on a nice start to the year.

And our next question comes from Mark Hughes of SunTrust. And your line is open, Mr. Hughes.

Can you give us a sense of the loss picks on the core E&S business when we think about last year, the prior year? Are those loss picks relatively steady? Have they come down given that the pricing has improved, or is there a little more conservatism in the loss picks?

Yes. Thanks, Mark. So I think just philosophically, always we seek to book, as I mentioned in my prepared remarks, a prudent and conservative pick in that respect. And we've basically said always before this is always sort of in the high 60%s or sort of low 70%s. And we're continuing to take a similar approach in that regard. And so it's really not different than what we've - a lot different than we've done in the past. It may be up a little bit, and I think that that's just really, again, a philosophical approach, that we want to make sure that we start out of the box with earned premium and, even in the context of these pricing increases, booking something that we think is prudent and conservative.

In that commercial auto book, where is the sort of - is there an inflection point somewhere where, once you get beyond that point, you've got much more confidence in the loss emergence? When do you know, so to speak?

It's a shorter tail book clearly, than the average general liability type of business that we're writing in the rest of the segment. I think we have always, as time passes for any individual underwriting year, as time passes, you sort of gain more and more confidence. But I think that really we think of 12 to 24 months beyond the end of the underlying underwriting year when you start to have increasing levels of certainty with respect to paid losses relative to ultimate and reported losses relative to ultimate, and you've got a significant amount of the claims closed. So it's sort of not a four to five-year thing like it might be in general liability. It's a bit shorter than that. But it does take some time because, as you know, we're not covering any of the property or physical damage piece of these risks, so it's all liability. Sarah, would you add anything to that?

No, that's pretty expansive. I think that covers everything. Thanks.

And then does '17 look like its acting like '16 in that way? Is it following a similar pattern, I guess, i.e. more predictable?

Yes. So the '17 - for the largest account, the '17 underwriting year just finished up on February 28, right, because this is a large first renewal, which I think we've said before. And I would just go back to the previous comment, that in general for that division within the segment, loss emergence was consistent with our expectations generally.

Thank you very much.

[Operator Instructions] And our next question comes from Meyer Shields of KBW. Your line is open.

Two quick questions. One, the tail on the allied health book where you're seeing all this growth, is that meaningfully different than the rest of non-core? I'm sorry, of core E&S?

I don't think it's a lot different, no. I think that if you think about the type of claims there, it might be like a slip and fall or a broken hip or something in a nursing home or something like that. And so it certainly is going to have a tail, but I don't think it's tremendously different than like a construction defect claim for a contractor's GL or something like that. And part of that is because we're principally writing primary there, right? It's not like it's an excess book.

When I look at investment income, if I add back the $1.7 million impact of the accounting standard change, it looks like net investment income on I'll call it the core portfolio is up 23%. Is that a good base run rate going forward based on new money yields?

I think so. I don't have a view that it's going to be different. And I'll ask our Chief Investment Officer, Kevin, if you want to chime in on that.

Yes, absolutely. This quarter would be a good run rate looking forward. But just to be clear, Meyer, the unrealized loss that went through income, that's actually booked as a realized loss. It wouldn't be in net investment income if you're modifying that line item.

Okay. So I guess I'm trying to get that clear. So the 11-4 is the right number?

The 11-4 after - sorry, is 11-4 your number for the non-private investment portfolio?

Yes, it's the 11-436 excluding renewable energy and other private.

Yes.

Okay.

Yes, that would be - exactly, yes. That would be a good run rate going forward.

Okay. No, that clarifies that. And one last question. Is there any change - I know that there's a rate increase on the largest account within commercial auto. Any change to the fee structure?

Yes, we mentioned this a little bit last quarter, Meyer, in that the structure itself didn't change but the way that we account for it will change, in that, over the next couple quarters you will likely see - and this is just geography, less fees coming through and increased premium. So we will account for more of that fee business as premium.

Okay. And should we assume that that premium carries 100% combined ratio?

I wouldn't.

Okay.

Yes, basically, claims handling fees - some of the claims handling fees that previously we were booking as fee income are now - there's now a requirement that we've got to book this as premium. And so it's got to flow through the P&L as written and then earned, and then have probably a loss ratio and sort of expense ratio applied to it. So optically it's going to - for that segment, it's going to cause a decrease in how we - what we show for fee income.

For fees, but the same level of profitability here.

But it's really not affecting the economics as significantly.

Yes.

Okay. Yes, that's what I meant to ask. The underwriting profit will look similar to - expected underwriting profit will look similar to the current fee profitability.

I think that's fair. Remember the renewal was just March 1, so now going forward we'll have that as an indirect comparison from last year.

Right.

And I'm showing no further questions at this time. I would now like to turn the call back over to management.

Thank you, everyone, for your interest and your time today. And we look forward to speaking with you next quarter.