Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 James River Group Ltd. Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Kevin Copeland, Head of Investor Relations. You may begin, sir.

Thank you, Nicole. Good morning, everyone, and welcome to the James River Group Third 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-Q's 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'll now turn the call over to Bob Myron, President and Chief Executive Officer of James River Group.

Thank you, 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 you just heard from us and who also leads Investor Relations. We have a few prepared remarks and then we look forward to taking your questions. We have posted another solid quarter, and we've generated an annualized return on tangible equity of 15.1% for the year-to-date, well above our guidance of 12% or greater. We had good top and bottom line performance in each of our three 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 96.0, and we had good combined ratios at all three segments. We didn't have any material property losses in the quarter from any of the noteworthy catastrophic events or otherwise, nor do we currently anticipate any material losses from events in the fourth quarter to date. We had net adverse loss reserve development in two of our segments, but it didn't have a significant impact on our underwriting results. Pricing continues to be attractive in our E&S book, and I expect market conditions will continue to be positive going forward. Our Specialty Admitted segment continued to see favorable loss emergence as it has year to date, and this quarter generated a combined ratio of 87.3%, it's lowest in recent memory, as our fronting business is now a meaningful contributor to the segment. Our investment performance was again very strong. Let me talk about a few of these things in some more detail, and then I'll hand it over to Sarah. Regarding growth in our E&S segment, we had strong growth overall, growing in 8 of…

Thanks, Bob. Good morning, everyone. For the fourth quarter of 2018, we made strong underwriting profits of $8.1 million, generated operating profit of $19.4 million and are reporting net income of $19.6 million. Our combined ratio is improved as compared to the prior quarter as book-to-loss and expense ratios have declined. And while our expense ratio improved as compared to both the third quarter of last year and the second quarter of this year, we continue to believe that a mid-26 expense ratio is very attractive for our franchise and our mix of business. This quarter, the ratio has benefited from the continued growth of our Specialty Admitted business as well as certain lines within core E&S that entail attractive ceding commissions. Complementing our underwriting performance, investment income grew about 10% as compared to the prior quarter and even about 3% as compared to the sequential quarter. This was principally due to our larger investment portfolio and rising rates on a floating rate loan portfolio, which more than offset a decline in our Renewable Energy portfolio. We continue to enjoy the strong cash flow from our businesses as operating cash flow this quarter was $87.8 million as compared to $55.7 million in the third quarter of last year. In line with this, cash and investments have continued to grow and are up about 10% year-to-date -- 12% year-to-date. While we would not expect this growth to continue at current levels, given we have actively reduced our third-party reinsurance business, our portfolio has been the beneficiary of the strong growth in our business in these last few quarters. And finally, our taxes. Our effective tax rate this quarter was 11.5%. While there are many points of impact on our tax rate, we continue to believe that the full year rate will be similar to historical averages. We ended the quarter with tangible shareholders' equity of $477.7 million, an increase over the $469.4 million at the end of the second quarter of this year. Operating leverage for the trailing 12 months net premiums written to tangible equity was 1.5:1. As we mentioned in prior quarters, we have elected not to pay a special dividend this year given the attractive opportunities we continue to see, including our capital to work in our growing insurance businesses. And with that, I'll turn it back to Bob. Bob?

Thank you, Sarah. In closing, I feel great about our performance year-to-date and for our guidance for the year, so there is no change to that. Pricing continues to be up, submissions continue to be up. We're getting strong growth where we are targeting at, and we feel great about the performance of the most recent years in our Commercial Auto book. This concludes our prepared remarks. Operator, we're now ready to open up the call for questions.

[Operator Instructions] And our first question comes from Mark Hughes from SunTrust.

I wonder if you could talk about the adverse development in the quarter. You've given some very good detail. I'm sort of curious it may be little more practical level, what you're seeing in severity? Are these cases just lingering on in the whatever settlements or payouts higher than expected? How many claims are still going through some sort of adjudication process or they could still continue to develop? Just little bit more detail would be helpful.

Sure. And Mark, you're talking about the 2016 year specifically?

Yes, exactly.

Yes, I would say that it's obviously as mentioned in the prepared remarks, its concentrated in Florida, and it's really a severity issue there and it's really around UM, UIM and that's underinsured or uninsured motors related claims. And it's not really necessarily related to litigation. It's really more of just settlement on what the absolute value of those claims are. So it's really a severity thing based upon the regulatory environment in Florida, and not really frequency-driven.

Anything you can say about how many open claims are there? Or at least just some sense of the magnitude of the risk that you could have potentially more adverse?

Yes, sure. So I don't have the statistics specifically for Florida, but I can tell you for the accident year on aggregate, 98% of the claims for the accident year have been closed. So it's a pretty substantial number. I think we've said a number of times that this book of business, given what it is and also given our proactive claims handling here, it's meaningfully shorter tail and shorter duration than the rest of our casualty business.

And then final question, your underwriting leverage, is that influencing your growth outlook at all? Are you being a little more selective in the business you will take in light of our capital situation?

No. I wouldn't say that we are. Only that we are focused on the insurance businesses rather than the reinsurance business. So that's where the growth is showing up year-to-date, and we will continue for it to be so, Mark. And that's in line with some of the tax changes that came down at the end of last year and the structural changes that we made that we've been discussing throughout the year, but I wouldn't say that all of the capital is influencing the growth in our insurance businesses.

And our next question comes from Brian Meredith from UBS.

A couple of questions for you. Just curious, Bob and Sarah, 2016 year felt diversely, why aren't the loss trends that you're seeing in '16 also impacting your '17, I understand it's a different rate on that business is much higher, but wouldn't the loss trends have an impact on the '17 year also if that's kind of getting elevated?

Yes. So I mean, a couple of things. First of all, we took significant underwriting and pricing action in '17, and then, of course, '18 as well, and so that was -- we've had pricing increases on top of pricing increases and the reunderwriting actions were principally around the shares of the risks we might take by state, for example, and some other smaller things. But given that the thing that has made 2017 so -- 2016, so problematic has really been Florida, whereby we had a materially reduced share of that risk in '17 along with a separate pricing for that state. That is the reason why we haven't seen it leak into 2017. And 2017 has held. And I think that another important thing that -- in this regard is for the group as a whole, we -- in the past, we generally had third-party actuarial work done in the latter half of the year in the fourth quarter, but in this year, some of the third-party actuarial work that's done by outsiders that was done in the fourth quarter of last year, was done in the third quarter of this year, specifically around worker -- commercial auto and workers' comp and some other lines of business. So the results of that work is reflected in this quarter's results.

And then second question on workers' compensation insurance; one very, very large workers' compensation insurance writer out there noted rising frequency as a result of this very low employment environment. Just curious what your thoughts are on that? Doesn't sound like you're seeing it in your book, but is it something that you're keeping a watchful eye on?

This is in workers' compensation?

Correct. Workers' compensation, individual comp in your Specialty Admitted business?

Yes, I don't think we've seen a real increase in frequency. There is actually -- there's -- maybe I'll weave this into the change in the accident year loss pick. We saw some elevated reported loss ratios in the first 9 months of last year. And it started to appear as though -- it started to appear as though we were in particular getting some severity increases and then just number of policies enforced and there are a number of people in the workforce, some frequency activity as well. And that's the reason why on a year-to-date through last September 30, 2017, we ended up having a materially higher current accident year loss pick. We put in place the 50% quota share effective October 1 of last year. And since that point in time, we've seen nothing but low reported loss ratios, again. And they've been meaningfully low, right back to the level -- excuse me that they were at in the several prior years prior to 2017. So we're not really seeing frequency and severity issues in the workers' compensation book in the last four quarters.

And we're absolutely keeping an eye on that and they did expect us to.

Yes.

And the increased submission count of 60% that Bob mentioned in his prepared remarks, is nice and powerful, but our growth has been pretty moderate, certainly as compared to that as we want to keep a close eye and be selective around it, comp is cyclical.

Right. Comp is cyclical. We obviously are off a peak from a pricing perspective. And so I think it's -- we got to watch it really carefully as Sarah says, just that what we will start to see, lost cost inflation at some point, but we're not seeing it yet. And I think to the extent we do, we're well protected with a 50% quota share and then a meaningful excess of lost tower as well that sits on top of that workers' comp book we're buying 29.4 million excess of $600,000 I think, so that should take any severity issues out of the equation as well. And we the ceding commission that we're getting the quota share treaty there. So I think, we're in good shape to weather what might be coming. We just haven't seen it yet.

And our next question comes from Meyer Shields from KBW.

I was wondering whether it's possible to quantify, I guess, by accident year, we look outside of Florida in Commercial Auto, the average incurred loss per, I don't know, 1,000 miles, how accident year '18 compares to accident year '16 and '17?

The average incurred loss, I guess, you're talking about that from a perspective -- excluding rates right, you're just talking about absolute dollars?

Exactly.

Yes, I think given our mix and the fact that with the 40 states that we have and there are some less volatile states in there and some less higher, but it's down a little bit in there. And then, of course, on top of that, we've gotten very significant price increases. And then I would also say that there has been some modest frequency declines. And that's been because of the driver actions that our client has taken in terms of improving the driver pool. The folks that we deal with there they are normally the heads of insurance, but also what they call, safety division as well. And they've done a lot of good work on better screening for drivers in terms of calling drivers who have had negative reviews and/or accidents and/or complaints and things like that. And so that has manifested itself in the frequency numbers that we've seen as well.

Second question; as Casualty Reinsurance -- I guess, setting aside the $50 million timing shift. Should the shrinkage in Casualty Reinsurance premiums translate to or have any impact on the investment portfolio duration?

No. I don't think so Meyer. I mean, it's -- the duration of our E&S business and even the little that we retain in the Specialty Admitted business is not dissimilar to what we write in the casualty re business. So I wouldn't think that the investment duration will be that different either. If I think, about the dynamics of answering your question if that's -- that's the way I think about it at least. Obviously we are not absolutely asset liability matching just given it's a P&C business, but yes.

[Operator Instructions] And our next question comes from Randy Binner from B. Riley.

I came in late, I apologize if this has been asked, but can you share what the statutory or Schedule P developed loss ratio is for your Commercial Auto line in 2016 and 2017, including this quarter?

Well, I want to be careful about providing information that's too specific to an individual client. But I think it's -- the 2016 year obviously is a significant loss position from a ratio perspective. And then I think that the '17 year is not materially different than where it would have been at the end of last year. And then we feel very good about a conservative accident year pick that we are still booking on the '18 year given all the magnitude of the pricing and underwriting changes. And so '17 and '18 are still booked at levels that are resulting in underwriting profits. And we feel good about those years.

And then on operating leverage. I guess -- I think this may have been covered before, but it seems like it's around 0.8x, so -- the way we measure it is last 12 months net written premiums over total GAAP capital, I understand that there's different ways of measure, but because it's an offshore company, that's what we use. So just, in general, that would be pretty conservative from an operating leverage perspective, I think, it would be closer to 1. What -- without the special here, but kind of a good operating outlook for the business, what's the right operating leverage? Is this the right operating leverage we should expect in 2019, 2020 and beyond?

I think that there is room, we measure it a little bit differently, we get to 1.5:1x, and that's down a little bit from last quarter, it was 1.7:1x. I think that we have room likely above the 1.7:1. So we have room from an operating leverage. We have a safe room from a financial leverage perspective as well. So there is a fair amount of room to run as we look at the growth opportunities in our insurance businesses over the next year or so. We just felt like that was a better use of capital. And we've been saying that this whole year than paying the special that we don't feel like we get quite candidly a lot of credit for given that we've only been paying it for a couple of years. So we wanted to get the 15% operating return on capital that we've gotten on our business kind of year-to-date and kind of blow that out over the next couple of quarters with that capital as well rather than paying the special this year.

How is your calculation work?

Yes, we get to 1.5:1x Randy, which is what I said in my prepared remarks, which is just 12 months net written to capital -- tangible capital.

Tangible capital, got it.

Yes, and might be the delta.

And I'm showing no further questions at this time. I would now like to turn the call back to Bob Myron, President and CEO for any further remarks.

Thank you, everyone, for your time this quarter and we look forward to talking to you again in three months.