Ladies and gentlemen, thank you for standing by and welcome to the James River Third Quarter 2019 Results Conference Call. At this time, all participants are in a listen-only mode . I would now like to hand the conference over to your speaker today, Kevin Copeland, Head of Investor Relations. Please, go ahead.

Thank you, Danielle. Good morning everyone and welcome to the James River Group Third Quarter 2019 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.

Thanks so much, Kevin and good morning everybody. Sarah Doran, Bob Myron and I are all here together. And before I turn the call to Sarah, I have a few comments about the loss we reported this quarter and our decision to walk away from our largest account. I think those of you who have followed us for a while know that we pride ourselves in our underwriting standards and this loss, which is driven by the lack of profitability on the Uber account is not acceptable to us. We decided that it is not in the long-term interest of our company and our stakeholders to continue our contract with Uber. In 17 years since we founded James River, we've made underwriting profits in all but two years, and we've never reported a loss of this magnitude before. We've canceled the account. And after taking a reserve charge, we expect to resume producing low-double-digit annual returns on tangible equity in 2020. In Uber, we wrote a new type of risk that initially seemed to be highly profitable based on the data available to us. But Uber's business and the underlying risk evolved very quickly. Our underwriting assumptions and the related pricing did not keep pace with changes in Uber's business. Uber created a new transportation model that altered the American transport system and presented new challenges and opportunities for the insurance industry. The risk associated with this model shifted as the company expanded into new regions, added tens of thousands of drivers and evolved beyond just ride hailing. All of these factors created a situation where the risk became too large in absolute terms, given the size of our company. And candidly in some years, we mispriced the risk. Having said that, we are comfortable with our pricing for the 2018 and 2019 years. In response to poor results in 2016 and 2017, we negotiated substantial pricing increase for the contract on the 2018 renewal and renewed at similar rates for the 2019 renewal. We also purchased a quota share reinsurance contract for a third of the account for the first time in 2019. However profits we anticipate earning in these last two years will not fully offset losses from prior years. We decided to cancel this year, even though we believe the risk is well priced, because of further complications related to the passage of Assembly Bill 5, or AB 5 as it's known in the State of California. We believe they AB 5 will adversely alter the claims profile for ride-share companies.

Thanks, Adam. Let me highlight a few of the financial points from the quarter. Net earned premium grew over 16% in our E&S segment this quarter and 30% in our core E&S business alone. Year-to-date core E&S premium is up 20%, core E&S earned premium is up 20%. This quarter, the E&S segment represented over 77% of our total group in net earned premiums. Starting in January of 2020, core E&S will be the majority of our group's earned premium as the large commercial auto account will roll off by the end of this year. Thinking about core E&S on its own, as Adam mentioned, we are booking loss ratios at above 70% loss in LAE ratio. The expense and commission ratio for this business is in the mid-to-high 20s. As we've mentioned previously, we are getting strong rate in our core E&S lines. Given our strong pricing and our historical results in core E&S, we expect that this business will generate very attractive returns.

Thank you, Sarah. Operator, do we have questions?

And our first question comes from Matt Carletti from JMP Securities. Your line is now open. Please go ahead.

Hi, thanks, good morning.

Good morning.

If I could maybe just - good morning. Maybe just a couple of questions to start on the commercial auto reserve charge. For starters, can you give us a little bit of color behind the themes in terms of what change with the reserve charge this quarter, are you at a different point in terms of kind of confidence level in the reserving numbers, have you gone higher towards the top end of kind of the actuarial range, has a percentage of IBNR increased? Can you help us understand how the reserve picture sits today versus a quarter or two ago?

Sure, Matt. This is Sarah. I think I would say first of all, we have fairly standard practices and procedures around this and we follow the same that we do every quarter and that we're looking at this book which monthly actuarial data and then we're doing a deep dive every single quarter. And what we reacted to was losses in excess of expected in this quarter. We put up the number that I think was demanding of that. And we are certainly watching it very carefully and very closely, especially around the claims and further development and behavior of that, but we feel that we have put up a number that is in response - well in response to the data that we saw that we were presented with. And that's where we got to this quarter. As I mentioned, more of that was concentrated on the '17 year than on the '16 year, but clearly closer to the end of the '16 year just from a timing perspective than we would have been at the beginning of the year.

Okay. And maybe can you remind us a little bit of some of the - either the broad pricing changes or underlying exposure state footprint changes that how '17 might be different than '16 on an underlying basis?

Sure. I mean, I think, and that's a great question. A big piece of moving from '16 to '17 was that we took a smaller share. I think we've mentioned this publicly before, of Florida. And we've mentioned Florida as being an outsized contributor from an under-insured - uninsured motorists' perspective, and that's causing some issues with regard to '16. Now clearly, we in retrospect have underpriced '17 from the reserve additions that we're making this quarter, but we have less exposure to that state in '17, than we did in '16. We did have a pricing increase from '16 to '17, but as Adam mentioned, much more material pricing increase from '17 into '18. And I think that really provides a significant amount of the basis for our comfort in '18 and then '19.

Okay, great. And then I'll stop beating the reserve question here, just one more. Have you considered, would you consider, are you considering an ADC on that book or some other form of reinsurance protection or transaction that would kind of put it out investors' minds for good?

We certainly realize the value that something like that could provide for - exactly as you said it, for putting it to the side from an investor and certainly from our perspective. And those are options that we look at every day in our business with regard to this business, with regard to other options, soft capital options that could make sense. I think they need to make sense economically for us and they are not simple transactions, but they're absolutely things that we would and should be considering for sure.

Great. And then one last one if I can on the reserves. You mentioned - can you help us understand kind of how that E&S segment maybe will look different in - and I know 2020 will be a bit of a transition year and then longer term in terms of loss ratio/expense ratio mix. I heard you mention kind of mid-to-high 20s expense ratios historically where the core E&S has run. But I would imagine, maybe it runs a little higher initially as you still have the commercial auto TPA business all of the 18,500 claims kind of run-off. So can you help us at least directionally understand kind of how that split will look as we move forward?

That's a great question and we are still working through. I'll maybe take a stab at it and then let Adam come in at the end. We are still working through kind of the fine point on our 2020 plan. But what I would say is that we will probably carry a little bit of additional expense into the beginning of the year, but we'll have worked our way out of that, certainly by the end of the year. So I'm comfortable with that mid-to-high 20s expense ratio on the core E&S business for all of 2020. I would say it would be at the low end of that once we work our way out of all of the additional expense-related to the business in managing that those run off claims, because we - just to reinforce, we do not expect to have any premiums coming in from that large account in 2020. But I think what's most important there is that we work our way out of the claims and we come to a good reserve results. So we're okay to carry a little bit of additional expense in the beginning with the big picture to come to a good landing. Adam, is there more you would add to that?

No, it's just that I think you can get a good feel for how this book will look, if you go back and look prior to our taking on the Uber account at our E&S business. For years, that business has run at a loss in LAE ratio hovering around 60% and we've been able to run that business and as Sarah said, well below 30% in the mid - 25% to 28% expense ratio. So that's where I would expect this book to settle out once we move through all the other - what I will now call noise, I mean because it's stuff we're rolling off.

Well, thank you for the answers and best of luck going forward.

Thank you.

Thank you. Your next question comes from Mark Hughes from SunTrust. Your line is now open. Please go ahead.

Yes. Thank you very much. Good morning.

Good morning, Mark.

Hey, Adam.

The underwriting expenses in E&S kind of the mid- to high 20s, what sort of corporate expense would you have on top of that? I think you break that out in your earnings report. If I am looking at it properly, the other operating expenses, the corporate and other $7 million last quarter. Do we have the kind of mid-20 - mid to high 20s E&S expense load and then the corporate on top of that?

Yes. Well, yes, excuse me, Mark. When I say mid- to high 20s, that's just the E&S, the core E&S expense ratio. We do have the ongoing corporate expense, which is roughly $7 million and change a quarter, and then we've got the expense ratios in the other segments that we wouldn't expect to change materially.

Very good. And then the - when you think about the core E&S, Adam you point out how usually book it at 70 and then it develops favorably over time. As we think about 2020, the pace of development I think it's all then you kind of caught up in the issues with Uber these last year or two and so it's been harder to get a look at what's going on in the core E&S. Can you say anything about the either the pace of development in the core E&S as it's been recently or is it likely to be at least in the near term? I know that's something that's difficult to predict or provide guidance on, but just sort of try to think how the model looks at least in the near term with respect to the moving pieces.

We were booking and Sarah, you'll correct me I hope here, but we started booking the E&S business at a 70 in '18 and so we have the benefit of the 18-year, which is already developing some maturity and we get more insight into that as it goes on. But typically, I mean, we don't have a script here about how we bring down reserves. We look at the actual case reserves and we look at on our IBNR and measure the pace of claims and make a judgment that's historically well informed judgment and then it starts a couple of years after we like the business, you'll start to see those reserves roll into earnings as appropriate.

Very good. And then just two others, if I may. The $1.2 billion, why - if it was available and you could begin generating investment income, why - just economically speaking, why wouldn't you have done it sooner than you did here? What was the kind of the dynamic on the timing on the decision process?

No, it's just - it's a standard trust, Mark and we felt that we were making a change and by canceling the account, we just - we felt like we wanted to be as secure as we could be at the moment and we made the decision to draw on the funds, commensurate with the early cancellation of the account just out of an abundance of caution.

Is there - is that what triggers if this is some sort of - you have to make a case that there is a reason to take the assets and then it becomes - yes, go ahead.

Mark, no, there is no case that needs to be made. But I don't - look, this is an account with the client we had for quite some time and I don't really want to get us into a lot of specific...

Sure.

About the account, but this is a very standard arrangement. Across the industry, any insurer who interest into one of these standard agreements can at any time typically draw down that trust. Our policy was - we have canceled the policy; we are putting this book into run off. We thought carefully about our situation and made the choice that we thought was the appropriate choice.

Thank you for that. And then the AB5, you say that - you think that may adversely alter the claims profile for ridesharing. Could you expand on that a little bit?

Well, look, there's been an awful lot written about that by a lot of experts, but obviously, it's something that we did not price for. Nobody - we didn't price for AB5 and it was a change and we think it's a material change. And so, having experienced many different changes in the course of this relationship that affected losses, we thought this was the right thing for us to do. Just was not incorporated in our pricing.

Thank you.

Thank you. And your next question comes from Meyer Shields from KBW. Your line is now open. Please go ahead.

Great. Thanks so much. So just a few hopefully quick questions. I'm trying to understand - or let me ask this as a question. Given the significant rate increases embedded in both new and renewal core E&S, should we assume that 2020 could be booked to something below 70% initially or is that roughly a good initial guide with favorable experience we reported later?

We're not far along there, Meyer, to have a materially different view on the market. So, in the absence of new data in the beginning of November, I do think about that loss ratio, that 70% accident year as being a reasonable assumption.

Okay. That is perfect. Is it - can you give us a sense of the timeline for paying down the $1.2 billion of claims related collateral? In other words, how long that will be augmenting investment income?

Yes. That's very hard to tell because there are a lot of assumptions around claims payments and kind of future, I guess, interaction as well. So, I think in the absence of that, I would just assume that is the $1.2 billion over the next year.

Okay. Perfect. Does the funding arrangement in casualty reinsurance provide ceding commissions to be earned in coming quarters? Was that all booked in the third quarter?

No, that will come over the next few quarters. Good question.

Okay. And then one last question if I can on the Uber reserves. I guess the one question that I'm hearing is that since you've had sort of late adverse experience on accident year '16 and '17, how do you have comfort that, that won't materialize later on in the more recent accident years even in the context of the current improved underwriting performance?

I think the biggest buffer against that is a very, very substantial price increase that we got in the '18-'19 year.

Does that preclude later development of claims for later emerging information?

No. It doesn't preclude later emergence of claims, but we just aren't seeing that right now. We're not seeing that kind of emergence right now.

Where is it? I think we were in earlier points of prior years.

Yes.

Okay. Understood. Okay. Thank you so much.

Thank you. And your next question comes from Brian Meredith from UBS. Your line is now open. Please go ahead.

Yes, thanks. One quick one and one maybe a little bit longer. The first one, Sarah, what kind of yield do we assume on the short-term funds?

It's a money market, treasury T-bill type yield there, Brian.

Okay. It's like . Okay. Great, and then my second question, Adam, I'm just curious with the substantial growth you're putting on your E&S, core E&S business, do you have kind of the platform and infrastructure to absorb that type of growth right now? And then I want to tie that in with what's going on right now with Uber and just how integrated with that in the rest of your platform. And just to avoid disruptions that could potentially cause some issues towards claims management, underwriting, all sorts of other things.

Absolutely, we've got the infrastructure to manage the growth in the E&S business and our throughput right now is growing without - because of good hard work and very capable management and organization that our teams in the E&S unit, our throughput has grown. That is the number of quotes that we've been able to put out. We put some technology behind that that assist us in quoting faster and better. And so we're not strained at all in terms of our ability to handle this growth. We've added new people in the underwriting division. Right now, the Uber account is really strictly obviously a claims operation and we have sufficient people to handle those claims easily efficiently, consistently and within the four corners of the contract and we'll engage in orderly run-off of that book. And the Uber claims segment is separated from our E&S claims segment. They're under a common management, but the people handling Uber claims are different than the people handling the liability claims in our E&S segment. Now as Uber runs off by the way, there may be opportunities for us to move people over from - some people over from Uber claims into the liability group as that grows. And in fact that's kind of an advantage that we have right now in terms of this expanding book. And if you think about the growth in claims that interest in numerical claims that will inevitably come, we've got a lot of talented people handling Uber claims who may eventually come over and be part of it E&S claims handling. So it's actually fortuitous and good arrangement.

Great. Thank you.

Thank you. You have a follow-up question from Mark Hughes from SunTrust. Your line is now open. Please go ahead.

Yes. On claims development, there's been some commentary obviously around the commercial auto that development pattern has been lengthening or you're seeing - not you, but others are seeing higher losses in the tail. But then even on non-commercial auto risks or the losses there perhaps have been developing less favorably than expected. Have you seen that? There's a whole point about social inflation just kind of broadening up the conversation and one of your notable competitors talked about it. Are you seeing anything like that in your core E&S business, where some of the development patterns are a little different?

We're not. We're looking hard at it. We certainly are aware of all the commentary around that. We've not seen what people are referring to as the social inflation in our core E&S book, middle-market, basically small and middle-market E&S book to-date, but we are alert to it. I will say, we've enjoyed 10 quarters in a row of significant rate increases. And then as I was pointing out before, the renewal book, those rate increases that we report to you, I think are - they're part of the story, but there is another part of the story where you can't quite capture the flavor except to explain to you what the expiring premium from another insurer was compared to the premium we've got and I gave you a couple of examples of several 100% here. And I didn't just cherry pick those examples. That's a phenomena that's going on in parts of the E&S market. And at the same time, I'm not seeing yet the social inflation that people are talking about. But, if you look at our long-term history in this business, which is as I pointed out earlier, 17 years, we've got a long history through many cycles of looking at fully developed loss on LAE ratios. And those typically have been right - hovering right around 60% over time. I think the price increases that we're getting are really good and I think that this book will perform in line with our long-term history in good years, because I think we're really in good position in these years in the current environment.

Understood. Then one final quick question. Do you even have the written and earned for the commercial auto piece in the third quarter? I think historically that maybe gets broken out later. But own review, you have been there in front of you, again, the written and earned in commercial auto within E&S?

Yes. It was about $80 million there.

That was the - those earned.

Thereabouts, yes. That's the net written and the net earned. They're about the same, right? Because we basically earn the premium as we write it.

I guess that's right, yes, net written would be the same. Do you have gross written by any chance?

Well, gross will be the additional amount given the large reinsurance contracts. So, it's a little over $100 million.

Yes. Okay. Very good. Thank you.

Thank you. And I'm showing no further questions in queue at this time, I would like to turn the call back to Adam Abram for closing remarks.

Well, thank you, everybody for your interest in our company and we look forward to reporting to you next quarter and to visiting with you from time to time, and we appreciate - deeply appreciate your interest and speak to you soon. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.