Good day ladies and gentlemen. Thank you for standing by and welcome to Q2 2018 James River Group Holdings, Ltd Earnings Conference Call [Operator Instructions]. As a reminder, this conference may be recorded. At this time, I would like turn the conference call over to Mr. Kevin Copeland, Head of Investor Relations. You may begin.

Thank you, Olivia. Good morning, everyone, and welcome to the James River Group Second Quarter 2018 Earnings Conference Call. During the call we'll 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 Bob Myron Chief Executive Officer of James River Group.

Thanks, Kevin and good morning, everyone. This is Bob Myron, President and CEO and with me today are Sarah Doran, our CFO and Kevin Copeland, Our Chief Investment Officer who also leads IR for us. We have a few prepared remarks and then we look forward to taking your questions. We've posted another solid quarter generating an annualized return on tangible equity of 15%. We had good top and bottom line performance in each of our 3 segments with underwriting results showing an overall improvement from a year ago as highlighted in our press release. Our combined ratio for the group came in at 97.3 and we had good combined ratios at all 3 segments. We had a small amount of net adverse loss reserve development but it didn't have a significant impact on our underwriting result in part because our expense ratio continues to decrease and is at a great absolute level in the quarter at 23.1. Pricing continues to be attractive in our E&S book. And I expect market conditions will continue to move in the right direction. Our investment performance was very strong. 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 growing in 9 of 13 underlying division. The commercial auto division grew 25%, substantially assisted by the rate increases we previously obtained on our largest account back in March. In our core E&S book, we grew 15.3%. The growth in Commercial Auto is moderating as in the current contract period for our largest account we're insuring 40 states down from 49 states in the previous contract. We mentioned this in our call with you last quarter. We still expect Commercial Auto…

Thanks Bob, good morning, everyone. For the second quarter of 2018, we made underwriting profits of $5.5 million, generated an operating profit of $17.6 million and our reporting net income of $17 million. As Bob mentioned, our combined ratio has modestly improved as, compared to the prior quarter, in part given our low expense ratio. While our expense ratio improved as compared to both the second quarter of last year and the first quarter of this year. We continue to believe that a mid-20s expense ratio is extremely attractive for a franchise and mix of business. Complementing our underwriting performance, investment income was 18%, as compared to the second quarter of 2017. This was principally due to our larger investment portfolio, rising yields and strong performance from our alternatives portfolio as has been the case through our history. We continue to enjoy strong cash flow from our businesses as operating cash flow this quarter was $115.6 million, as compared to $49 million in the second quarter of last year. In line with this, cash investments have continued to grow and are up about 7% year-to-date. While we would not expect this growth to continue at current levels, our portfolio has been the beneficiary of the strong growth in our business these last few quarters. A brief note in our external reinsurance renewals many of which occurred during the second quarter. We were pleased to renew our significant coverage at little to no change in pricing and to be able to expand coverage to match our growth in certain lines of business. We continue to use our reinsurance strategy as a key capital management tool. And finally on taxes. Our effective tax rate this quarter with 8.2%. While there are many points of impact to our tax rate, we continue to believe that the full year rate will be similar to historical averages and therefore likely a few points higher than it was this quarter. We ended the quarter with tangible shareholders' equity of $469.4 million, an increase over the $465.8 million at the end of the first quarter of 2018. Operating leverage or trailing 12 months net premiums written to tangible equity was 1.7 times to 1. With that let me turn it back to Bob.

Thank you Sarah. In closing I feel great about our prospects going forward. Pricing is up, submissions are up. Loss costs are reasonable. We're getting strong growth where we are targeting it and the continued economic expansion of the U.S. economy will continue to drive positive exposure growth. This concludes our prepared remarks. Operator we are now ready to open the call up for questions.

[Operator Instructions] Our first question is coming from the line of Randy Binner with B. Riley FBR.

Good morning. Thank you, I just had a couple questions about the commercial auto activity on the reserve side in the quarter. Bob, I think you mentioned in the call that it was -- it was relatively modest and that the 2018 action year is off to positive start. So the 2 question, is kind of, one is there a way to kind of size what that move in commercial auto was versus the offset from other E&S because that's a dynamic we've seen in years past and then if if -- if '18 is looking good, just curious where the adverse came from accident year wise for your commercial auto.

Yes. So I think I think we said this in the -- if I understand your first part of your question frankly we said, I said, this is -- that the -- there was about $2 million to $3 million of adverse development in commercial auto offset by about $2 million to $3 million of positive development in other core E&S lines. So that's how we ended up flat. And in terms of where it came from, it was mostly from 2016 but overall a very, a very small number and I would I would just reiterate that we're seeing the reported under reported underlying loss ratio in this division be substantially lower than it was 1 year ago. And as you pointed out we are booking a -- what we think is a very good current accident year loss pick as we are earning premium on the current contract.

Okay, that's same thing…

We feel good about -- we feel good about the overall level of reserves in that division.

What -- so that would be a pretty dramatic improvement in how reserves are developing. I think that move in '16 accident year and '17 was a number that's maybe like $35 million roughly. So this is obviously much smaller. This is just a quarter but still it seems small and your comments are positive. So what -- you have pricing that's better but you mentioned loss activities better so just thinking about that, that category of risk. What has kind of supported such a significant improvement in that, that exposure?

Well I think it's -- I think it's a number of things. I think it's as we've highlighted substantial price increases over the last two years both in terms of the '17 and the '18 renewal. There has been some re-underwriting actions that aren't specifically related to rate with respect to share that we may take up the risk, what we're getting paid for fees from a claim handling perspective that ends up getting booked as premium. The states that we're actually insuring and how those states perform. Some states have a -- there's some relatively state specific performance that we've talked about before and so there's a number of different factors.

And I think there is a lot of geographies you're covering in that book. Is it would you expect to continue to shed certain geographies as you lock in on the more profitable aspect of that block?

I wouldn't say that we would Randy. I mean at this point in time, we're just 4 months into the new contract. And so as of right now we don't have any expectation of any changes. Obviously there, as we get into the into the winter when we start renewal discussions we'll see about that. But we're -- we're still the largest insurer of these guys in terms of their U.S. risk and 40 states is a -- is a significant number. And obviously a majority of the mileage that they have driven across the United States. So we don't we don't expect any changes right now. I mean there could be some could be some turn down but I don't see it right now.

And next question coming from the line of Mark Hughes with SunTrust Bank.

Thank you, good morning. Bob, when you talk -- when you talk about reported underlying lawsuit are good, are there you referring to frequency and severity as opposed to kind of the financially reported or book losses? I think you're making the distinction between what your experience is versus you're actually putting up for loss reserves. Could you clarify that a bit?

Yes. Well I think you're exactly right. We're talking -- obviously we booked what we did in the quarter. When you sort of -- when you look across casualty-re, specialty admitted, core E&S and then the Commercial Auto division. So I was just adding some color around what the underlying reported loss activity really looking at reported loss ratios which would be paid plus change in case incurred outstanding, that ratio relative to a year ago and those were year-to-date statistics that I was quoting. So specialty admitted is running very well relative to 1 year ago. Core is basically flat. Commercial auto is down and casualty-re is basically flat as well. And I think that, that answers another question that we were anticipating getting because other people have gotten this well is, in particular in core E&S which is maybe the best measurement and we're not really seeing a big change in underlying loss cost trend. Now we're trying to book a prudent and conservative accident year pick in case that happens but on a year-to-date basis, we're not really seeing that.

Right, that's helpful. How about loss emergence on the 2017 accident year for the commercial auto. Can you comment about that?

It is de minimus, negligible not a big number at all.

Okay so coming in line with expectations?

Yes.

You said in workers’ comp your pricing is down 1%. Now is that on an absolutely basis it's down 1%? Or is that taking into account the loss cost as well if you follow me? Is it loss cost plus 1% or is it 1% on absolute terms?

No it's on absolute terms. So we're sort of looking at that on a pure premium basis and as -- but what we also look at as we should is what do we think the underlying loss cost trend is there. And I -- it's basically down so I think we think that there the margin are holding or perhaps even expanding in comp. So even with a price decline, I think there's just positive margin there.

Is this some particular niche that you're finding that kind of good pricing? Or is that you, I think you mentioned some expansion in staff, marketing folks that sort of thing?

I don't think we, I don't think there's anything that we would point to in particular. The book is a lot more diverse than it was certainly when I came here several, several years ago. It was very focused on one state and 90% contractors business and now contractors is one of the larger classes but there's a number of other classes. I'd say in general it was pretty, it was pretty broad that we're getting, that rates are holding up for us.

But we still don't have exposure to a state like California, for example, still a regionally focused largely 4 states for the most part book.

For that individual risk workers' comp book, yes.

Yes for that book.

And then finally in specialty admitted, sounds like activity is picking up in terms of some new agreements. How is the pipeline behind that looking?

I think it's good. Nothing, nothing is. Nothing is booked until it's bound, I guess I would say right and as Sarah has always pointed out that this definitely is lumpy but I think we're, you don't do anything for one quarter or two and then you get a new $40 million deal. So I think the pipelines is pretty robust. It's always been a little difficult to forecast but I think we're, we made mention of 3 that we put on that we think are going to continue to drive some year-over-year gross rate in premium growth and fee income growth in the coming quarters relative to a year ago.

And our next question coming from the line of Matt Carletti with JMP Securities.

Bob, I wanted to go back to the commentary you had on the core E&S rates and it sounds like mix shift, just changes in mix of business impacted the kind of the aggregate number. Can you kind of just looking at the individual line, I think it is about 12 of them. I mean forgetting mix just kind of looking at each line and what pricing did, how would you characterize that. Did it did it largely hold and at kind of the levels it was at and therefore we're just kind of seeing say a 4% number because of where the business is written this quarter? Or did you see a little bit of slowdown in the absolute levels of increase in those lines a little cooling off?

Yes so that's good question and I think let's try and look at this on a little bit more of, on a little bit more of a normalized basis. We got 6% in Q4, 13% in Q1 but we tried to normalize that ex Allied Health which has gotten, which we had have seen a lot of new but also renewals and of course pricing changes that we're talking about are always based upon renewals, right. And ex Allied Health, it was 8% and then we're trying to normalize again and basically say basically 4%. And I would say one of the, while many of the divisions had pricing increases that were compelling, I would say one of the ones Allied Healthcare did not have a lot of renewals. It was only about $3 million and I would say that, that, that division is in, that market is in a little bit of flux right now and trying to figure out what it's going to be. There was substantial price increases that you know about. Some of the insured response here has been, Well perhaps let's take our retentions up materially right and trying to have this more of an access coverage and do like a self-insured retention type of thing. And that is not business that we love from a credit risk perspective because oftentimes we want to get collateral for the whatever that large SIR is because, the way it works [indiscernible] standpoint you got to pay the claim first and then recover the SIR from the insured. So we -- we haven't -- we're not in love with doing that. So we did get rate on what we renewed in that Allied Healthcare division but the overall level of renewals was low and the rate increase was a lot smaller. So I think we're going to -- we're going to have to see where that goes. I think more broadly the other divisions were up sort of mid-single-digits in general. So we're pleased with that and we're going to -- we're going to continue to seek that.

And have you seen that kind of hold and I know July is just a few days in the past but has that generally kind of -- have we kind of reached a little bit of equilibrium of rate increase in a number of those markets may be ex Allied Health that you see it as sustainable in the near term.

I think it's sustainable but we did get asked this question on the -- on the call last quarter as well. And we don't really -- the rate information that we get we usually get several business days, at least, after the end of the month right. And so I think it's more anecdotal than we are still I think we're still out there getting that. But I actually don't have anything concrete in that respect.

And then just my only -- my other question. I'm just wanting to talk about capital management expectations and kind as we get in the back half of the year how you're thinking about it. Obviously casually re is shrinking so the overall kind of top line growth is muted while they're still good growth in E&S and specialty admitted. How should we think about that and balancing, I think you guys have shown that you're putting your capital to work the specials have shrunk. How should we think about your capital position as we kind of approach year end?

So I think, Matt, it's Sarah. I think the way that we -- we're thinking about that is to just looking at our ordinary dividend. We feel that, that yield is decently in access as where many of the peers and many of the other folks in this space are. So that's a helpful balancing point but I think more importantly you'll see us grow in both of our insurance businesses and obviously shrink in the reinsurance business for the balance of the year but we want to keep that capital for the opportunities that we've seen in both of the insurance businesses. I mean to get the rate that we've been getting in different pocket of E&S and to look at some of these fronting opportunities and even in the individual risk workers comp book, just given our comments on that earlier. We feel like we're in a better spot to make a return on that. So I think this is probably a year where we rethink more heavily about our ordinary dividend and less about the special which has been episodic. I mean a special is by definition a special and that's kind of a if and when decision but just given the pipeline that we have we'd like to -- we're at 1.7 times surplus now we're up over a half a churn from this point last year. So I guess that's how I would think about it and how we're thinking about it.

That makes sense. Great, thanks for the color and best of luck.

Thank you.

[Operator Instructions] And our next question coming from the line of Meyer Shields with KBW. Your line is now open.

Great, thanks. Good morning So 2 quick questions on investment income. One, can you give us the new money rate? And two, is there a timeline for deploying the I'm calling it excess cash that's been built up on the balance sheet?

Hey, Meyer, it's Kevin here. So to answer your first question. We are reinvesting at rates roughly 20 basis points higher than maturing levels and then as for the timing of reinvesting the funding in Carolina Re, our new reinsurance vehicle that'll happen during this quarter. So over the next month or 2, it'll be fully invested.

Casualty Re I guess sequentially the expense ratio went down. Can you give us a sense as to maybe like a sustainable level for the rest of the year as topline shrinks?

Yes, you know I think the -- where the expense ratio was this quarter is not unreasonable to stretch that through the rest of the year. This kind of 30% to 32-ish% and there are a lot of things I caution that there are a fair amount of things that can move around. We have your profit commissions attached to a fair amount of net business and should that particular book or contract do well that would push up the expense ratio. But certainly with the rationalization of the book and the way that we're looking at things I think that's a fairly reasonable generic assumption. So was your second question Meyer, was it on top line?

No it was the expense ratio in light of the direction of top line.

Yes, I would think about the expense ratio kind of where it was this quarter going forward.

[Operator Instructions] At this time, I'm showing no further question. I would like to turn the call back over to Mr. Bob Myron.

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