Ladies and gentlemen, thank you for standing by. And welcome to the James River Fourth Quarter 2019 Results 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. Thank you. Please go ahead.

Thank you, Carlo. Good morning, everyone. And welcome to the James River Group fourth 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 sections of our most recent Form 10-K, Form 10-Qs, and other reports and filings we made with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

Thanks you, Kevin. Welcome everybody to our earnings call. I’m here with Sarah Doran, our CFO; and Bob Myron, our President and COO. And we look forward to taking your questions in just a minute. First a few remarks about the most recent quarter on past year, and the markets that we are operating in. We're coming off a very good quarter with strong earnings, significant growth in our most profitable core businesses, attractive rates per unit of exposure and encouraging progress in settling claims arising from the large ride-share account that we terminated late last year. The environment is quite positive. We continue to see very strong submission growth in our core business and are able to write accounts at rates that we think are very attractive. In the fourth quarter, excess and surplus lines rates on renewal accounts were up 6.6%. That's the 12th quarter in a row we have obtained rate increases. We anticipate this growth in small accounts. The average account size in our EMS business after all is in the low $20,000 range. We'll make up for a significant amount of the ride-share related premium we left behind last year. The natural diversification in this business combined with the rate increases we are enjoying, gives us confidence about the ultimate results to be realized from the business we are riding today. Our Specialty Admitted segment is growing, and we expect that growth to also continue, particularly in the fronting and program area, where we take modest risk and earn fee income. We are seeing more opportunities there than at any previous time in our history. We continue to struggle a bit with our reinsurance business. While profitable overall, our underwriting losses are disappointing to us. Nonetheless, our presence in Bermuda continues to create value for our shareholders. Roughly one half of our assets are in Bermuda. It goes without saying that the turnoff of the ride-share account has our attention. We're absolutely open to adverse development cover if the economic terms are reasonable and we can continue to manage claims. The management of claims is very important. Bob Myron along with our Head of Claims, Courtney Warren had been highly focused on this process with good results. In just a few months, we have succeeded in lowering claims accounts faster than we had anticipated. While we are litigating our claims, when we think the claim that there's asking for more than owed under the contract, our average cost of claims is going down materially. In other words, our internal claims handling, unimpeded by any market considerations other than our obligations under the policies has resulted in our significantly bending the claims curve – cost curve in our favor.

Thanks Adam. Let me highlighted a few of the financial points for the quarter. Last night, we reported fourth quarter operating earnings of $0.76 per share, an increase of 35% over the prior year quarter. The result reflects very attractive growth in our core E&S business and benign loss activity across our insurance businesses. Net earned premium grew over 16% in our Excess and Surplus Lines segment this quarter, and about 40% in our core E&S business alone. The E&S segment represented over 76% of our total group net earned premium. From an underwriting perspective, this quarter, we posted a loss ratio of 77.4% and accident year loss ratio of 73.4%, which was consistent for the full year. In 2019, our continued high accident year loss ratio reflects our cautious approach to reserving as well as higher relative loss pick of the commercial auto book, which was 36% of net earned premium for 2019, following the cancellation of our largest account in October.

Thank you, Sarah. And we're happy to take questions.

Our first question is from Matt Carletti of JMP. Go ahead with your question please.

I have a few questions. I actually wanted to start with the Casualty Re segment. And Sarah, you mentioned that kind of a big piece of the $9 million and $10 million adverse in the quarter was from a 2010 treaty that that pops. What sort of risk was that?

That was a casualty risk – the large account casualty risk.

Large account casualty. Okay. And then, Adam, you mentioned in your comments about the growth there that you'd expect it to be flat, possibly down a little. And I was hoping if you give us a little bit of color how that might shape over the year because I know you mentioned kind of the E&S, I don’t know what the right term is, let’s call kind of audit premium as it grows, it’s closer to you. I'd imagine there's still some potential for that. And I believe you also have a new fronted relationship there. I don't know if that's kind of all in apples-to-apples at this point or if that is still going to impact the early quarters of 2020? So little help on kind of how that might shape over the year would be helpful.

Yeah. I'll take that Matt. I think on the new fronting relationships we started that last quarter, and we expect that to continue to run over the course of next year. But I'm not sure if there was an earlier question there. We're certainly managing the growth or the lack thereof. I mean we did -- we had the underlying E&S treaties have grown. And that's what you saw this quarter, specifically with regard to the growth versus the fourth quarter.

I guess, yeah, go ahead.

Yeah. So you're exactly right. I mean, we’re -- the book is now 81% small account at the E&S. And that is, obviously, an area we're seeing growth in our primary operations. And therefore, we would certainly expect to see. We know that the underlying seedings are getting rate increases, and they're, obviously, getting exposure off -- increases and a lot more opportunities as well. So I think we got to do a careful job of managing the profitability there. There is obviously a relatively simple contractual way to manage the growth there, so to speak, by putting premium caps in the underlying -- in our reinsurance treaties, right? So, to the extent that, they're writing a lot more business than they originally anticipated or sort of expecting from a budgeting perspective. You can manage that through a premium cap and then you can make a decision to rise that or not along the way. So I think -- and to the extent you do, maybe there's a good reason to do it because of the type of business they're producing and the expectation profitability or maybe you don't or maybe there's a small concession that you can extract by raising it. So that is -- it's not as though, it just can -- that certainly happen to us as a result of premium adjustments when we will have control over it.

Matt, is that I mean probably, you almost certainly know this that 80% of that book, I think Bob mentioned this already is E&S casualty small accounts. And it's a good time to be reinsuring those accounts. So that’s positive. Almost three quarters, a little bit less than three quarters so that account of the -- accounts in our reinsurance group have sliding scale commissions, which protect us. And just -- over 95% of its proportional. So, I think we can manage there within a small band, but there is some -- there has to be a little bit of elasticity there. So we have other protections that are substantial, and we're in a market, and our clients are in the market, which is currently pretty positive. So we don't play on for this to be a large. We’re going to take our E&S play on the primary side for the most part.

Got it.

Yeah. And to address – to just finish addressing your specific question on the pop, it was a general casualty account, but it is a larger account that would be no longer our focus in the book, Matt. And I think, I said it or Adam said in his prepared remarks that roughly 70% of the adverse development this quarter came from accounts that we no longer write. So I think that's an important part of the way that we've shifted this book over the last two years.

Okay. That's really helpful color. And just say one numbers question, if I could, for full year 2019, I guess. Can you provide us with - just to help us really for modeling going forward in the E&S segment? What was the accident year loss pick for the year for those 12 core E&S lines?

Yeah. It was – I would say, it was in the -- I'm trying to avoid a specific number, but right around 70%

Our next question is from Mark Hughes of SunTrust. Your line is open. Go ahead please.

So when we think about investment income, what's a good bogey for Q1? The extra funds in -- and I think in October, obviously, yields on those are a little lower. You're starting to see the run-offs at least. What's the Q1 marker? And then we can activate the tapering from there?

Yeah, it's a great question. I think though where we came out, all things being equal. We were off a little bit in the private in the fourth quarter. And the investments of the additional $1.2 billion has got on balance sheet now, came in into the quarter. I think that $20 million number is not an unreasonable number for the quarter, Mark. So it's a decent run-rate in the fourth quarter going forward.

And then in the -- I don't know if this is too close in, but when we look at the core E&S or E&S on a go forward basis, excluding the large account, what do we think about the seated premium ratio that is kind of bounced around a little bit, and a little bit higher lately. But clearly that has been influenced by your strategy with the commercial auto. So when we think about 2020, any sense of what would that number ought to be?

Yeah, and it will really depend on the growth and the excess casualty line because that's where we see a fair amount. And we've had a lot of growth in that line, in this run over the last four or five quarters. But at a high level, I think of anywhere from -- we see it anywhere from 20% to 30% of that book overall the core books, Mark.

And then, in the Specialty Admitted, and I'm sorry as I might not have picked up from your earlier conversation. But when you take into account the moving parts business outside of that large account on the step down here lately, what does the Specialty Admitted top-line look like? Is that – I think it's been mid-single digits lately. Does it get a better from here all things considered?

I think that the big impact over the course of this year is that that large account shrunk by about 25%. And we don't -- we're not anticipating that it’s going to shrink by another 25%. We think it would be -- it's at a good level now. We've taken the rate decreases. We've made the move that we wanted to on that account. And Adam, I don't want to jump over you, I'm sorry. I was just continuing from before. But we would expect there would be good growth opportunities now moving forward because -- at the end of the day, we're basically flat from last year despite taking that lag down on large account. So I think that shows what Adam was saying, really good momentum in the rest of the fronting business.

Exactly. And we've already added some programs that are just beginning to produce premium. And we think, based on the conversations that are being had in that segment by the segment leader there, we see more business being added during the year that will come on in the second, third and fourth quarters of this year. So we -- two things, one is we think we will grow, but we think we're also setting the stage for additional growth even further down the road. So we'll grow this year. And then the stage should be set for continued growth. And remember this is a line, and I know you know this Mark, but this is a segment where we tend to take less underwriting risks, and to be very focused on the fee income, which has a high IRR for ROTE for us.

And then just one final question. I'd be curious if any general ideas you might share when you talk about you're pleased with some of the settlement activity in the commercial auto. I know one of the challenges has been the social inflation and higher damage awards, and it sounds like you're getting making some progress on that. Anything more you could say on that front to give us some context?

Yeah, I mean, I think, and if Bob wants to chime in here, I would invite him to do it. But let me just start by saying that we are aware, of course, of much of the commentary that we're hearing in the industry about social inflation. And we are looking very hard and assiduously for it in our book. And to be honest about it, we're not seeing it in our reported claims development. We're not seeing it in frequency. And we're not seeing it in average claims resolution costs. And we are not seeing it in the commercial auto runoff book that Bob has been really very constructively focused on and has had great success. And Bob, do you want to add anything to that?

I wouldn't add a lot more. I guess, I would just agree with Adam's comments. I think that our – the nature of that company in runoff and then with respect to the rest of the book of business, I mean, with a small account casualty type of business we just have really not seen social inflation pervasively. We had a very good quarter from a loss emergence perspective overall when you look at the growth in terms of reported loss ratios. We've looked into some of the details around this, around percent of claims that are in the litigation in the light. We are just not seeing a trend in our book of business. And so, I think, it's tough for us to say. But I would attribute it to more medium and a larger size accounts. I think all the bigger limits and we're just not, we don't have a tremendous amount of exposure to more traditional commercial auto, I think a lot of people have seen that too. So all-in-all, I think we're seeing pretty benign loss trends and not terribly concerned about social inflation, but I think it would be -- or myths of us to not be very focused on looking out for that. And we and I are staying in very close contact with our claims group in this regard.

Thank you. Our next question is from Randy Binner of B. Riley. Go ahead please.

I wanted to ask some questions about claims because it seems like in your opening comments you attributed some of the kind of benign or flat results on reserves in the commercial auto runoff to that. So can you outline what some of your process changes have been there? Do you have more adjusters? And can you quantify the change in closer rates that was mentioned in the opening comments?

Randy, this is -- we want to be respectful of all of our clients. And we just really avoid getting into conversations where we would be revealing things that are central to customers’ business that. That's part of our promise in relationship with them. So I really don't want to go deep into any single account. I will say this that we've got runoff book. We've got a tremendous amount of focus on getting accurate information about each claim through evaluating first, and then valuing each claim quickly. So rapidly paying and closing amounts that are owed, and being assertive under -- in the context of the policy terms and conditions about sticking with the policy terms. And I think that the total claims count that we were moving through claims well. The total claims count, I think, outstanding claims is lower today than I even had an expected it to be at this point in our development. We are -- it is true that more of these claims are going to arbitration and litigation than previously. But previously that was a very rare event, and now it's just consistent with the standard practice in our company, and across many companies in terms of the percentage claims that are -- where we have to get someone who wears robes to determine what's the right amount owed, or if any amount is owed. So this book is now being handled in a very customary way and to really good effect.

Okay. And then I just had one on programs. I guess can you – it seems that you're adding programs for – fronting programs. Can you review for us or talk about the market dynamics around that demands for fronting arrangements in light of what's a soft workers comp pricing environment, in particular, but kind of a -- somewhat soft casualty lines pricing environment overall?

It's Bob Myron. I'll go first. I think all of or nearly all of the new opportunities that we're seeing are not really in the comps area.

Okay.

And I would say that the demand for this product so to speak, and the way we do it, which is we have a lot of involvement in both underwriting processes as well as claims both in terms of establishing guidelines as well as oversight. And that's important to the reinsurers in this space, no question. And that's our key value proposition in this area. And so, I think the demand for that is high. There's a recognized value in doing that. And then, I would just say more generally and qualitatively, Terence McCafferty, who is running that segment for us, is getting as a robust pipeline, and he's getting an awful lot of overtures in that space for really sort of existing deals that are enforced that could potentially move to us at relatively meaningful size. It's much less about when we first got into this business eight years ago sort of startup programs and alike. So that gives us -- there's a lot of optimism there too. And in terms of the opportunity McCafferty seeing, he's doing an awful lot of traveling, but a very little of this is sort of outward marketing. This is a lot of stuff that's inbound to him. And then he's going out and seeing people and trying to evaluate these deals. So the shingle has not really been sort of hung out in terms of trying to go out and pound the pavement from a business. It's just naturally coming to us.

And a fair amount of this business, fortunately, is coming to us from our reinsurance partners, who are seeking to get a little closer to the primary risk position, but value our contribution in terms of overriding, oversight, claims administration et cetera. And so these are, in many cases, what we're looking at now, are established programs brought to us by -- partnership by both the MGAs and their existing reinsurers on that book. So we really like that combination. We provide a service that is valued all the way around. And they're bringing business that we think is attractive and sustainable and has a long history and also has enough scale to be really the larger scale that is very attractive of each these larger programs.

Thank you. Our next question is from Myer Shields with KBW. Go ahead please.

I wanted to ask a big picture question. I know there is a lot of -- depending on the insurance companies in quest. There was commentary about whether this is or is not as traditional hard market. But in the core E&S market – oh, sorry, in the core E&S segment, it looks like we're seeing really very typical impact of rates and maybe some standard companies pulling out. So I want to sort of draw on your expertise, Adam, say in those product lines, does this seem like hard market? Is there any major difference?

You faded out for just one second, but I think your question is this -- does this seem like a hard market – a traditional hard market? And I think it does. It's beginning to have that warm feeling of a market where capacity is challenged. And there are a lot of businesses that's in the market that's looking for a home and has been thrown out some things out, and it’s going to get re-priced in a significant -- with significant increases, and so -- and changes in terms and conditions in some cases. So yes, in answer to your question, it feels to me like we're in a very positive, strong market position. And we're seeing it in terms of the submissions that are coming to us. We're seeing it in terms of our hit ratio. And we're -- that is on new submissions and we're seeing it in terms of our renewal ratios on our existing business end rate, so all of those things are positive. They all point to a lack of capacity in the market and an ability on our part to service that market and get good rates and good terms.

Second, E&S question. With regards to seated reinsurance, is pricing for that changing in any significantly?

And this is our third-party business, Myer, just to be clear.

No. The reinsurance segment volume on the E&S book.

It hasn’t -- our treaties renew throughout the year. But we -- so our last significant renewal there was – it’s more so in the midyear process, and we've seen very consistent rates stability there. We haven't had material increases. Something we’ve really had increases, and we haven’t materially changed the structures at all. Our business has performed well. So I think our counterparties have performed well with us. So we don't anticipate anything there, and we haven't seen that yet. A –Bob Myron: And so, this is Bob Myron. And with expire of the commercial auto account -- that reinsurance – that seeded reinsurance on E&S is almost entirely -- it is entirely excess of loss. There is no proportional business. And I agree with Sarah, that's a July -- there is a June and maybe July -- June and July renewals. And we have not – we saw a very reasonable renewal rates back then. And, yes, we've had the reinsurance of a good loss experience. So I'm just repeating what she said. So that's definitely part of it.

No, that's very helpful. And then final question, Sarah. I know there are so many moving parts going from 2019 to 2020. Is there anything to give any rough guidance on a normalized tax rate for 2020?

Yeah, so that's a great question because, obviously, there was a lot of noise to our tax rate over the course of this year, Myer. But given -- I think, Adam said that roughly half of our assets – our invested assets remain in Bermuda with the casualty reinsurance business and other kind of intercompany structures we have. I would think about a tax rate in the mid teens, so decent savings from the US rate. But I would -- that's ticked up a little bit over the last two years as we have more assets on shore. But we continue to have a good balance on the Island. So mid teens is where we'd come up.

Thank you. We no longer have a question in queue. I would now like to hand the call back to our presenters.

Thank you, operator. And thank you everybody who has participated in the call by asking questions or listening. We appreciate your following our company. We appreciate your interest in it, and we hope to see you -- our shareholders out on the road over the course of the next many months. And we will be reporting in next quarter. And we look forward to that as well. Thank you.

This concludes today's conference call. Thank you all for attending. You may now disconnect.