Thank you for standing by and welcome to the James River Group Holdings Third Quarter 2021 Earnings Call. As a reminder today's program is being recorded. And now, I'd like to introduce your host for today's program, Brett Shirreffs, Head of Investor Relations. Please go ahead, sir.

Thank you, Jonathan. Good morning, everyone, and welcome to the James River Group third quarter 2021 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 of our most recent Form 10-K, Form 10-Qs, and other reports and filings, we have made 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 Frank D'Orazio, Chief Executive Officer of James River Group.

Thank you for that introduction, Brett. Good morning and welcome to everyone on the call. It's a pleasure to join you again, having just yesterday completed my first year at James River as CEO. I certainly plan to cover the results of the quarter in a moment, but given the timing of this call, I'd like to first reflect on some of the goals I originally set for the organization and review the progress we've achieved in my first 12 months. As I said on my first call with you last February, my primary objectives were to ensure that the Company remained laser focus on the market opportunity that we have in front of us, to strengthen our position as a best-in-class E&S carrier with an expanded fronting and fee income business and to eliminate the overhang surrounding our commercial auto run off portfolio. I believe, we've been very successful in executing on these two priorities, having put a loss portfolio transfer agreement in place in late September, with coverage provided highlighted without an aggregate limit and fully collateralized, priced very close to our held reserves. And secondly, by driving strong growth and attractive rate increases throughout our two very strong insurance franchises, out E&S unit which has long been an industry leader and our Specialty Admitted unit, which we emphasize are fronting capabilities and fee income generation. At the same time, I've also significantly added to my senior management team with the addition of highly experienced leadership in our new Chief Actuary and new Chief Claims Officer, who just joined us this past quarter and are playing pivotal roles in the risk framework of the organization as we invest in and bolster our enterprise risk program. James River has also added to its Board of Directors adding two very…

Thanks, Frank. Good morning, everyone. Given Frank's extensive comments on the current quarter as well as the past 12 months, I'm going to focus my comments on a few discrete parts of the quarter, as well as some other key financial items. Last night, we reported a net loss of $23.9 million for the quarter and had a $26.8 million operating loss. This loss was impacted by the aforementioned commercial auto LPT that we executed at the end of September, bringing economic finality to substantially all of our commercial auto run off portfolio. We also had two other unique impacts on the quarter, which I will further explain in a moment. Frank has already commented on the adverse developments in the Casualty Reinsurance segment. So to sum the unique impacts of the quarter in E&S, first, as we mentioned in conjunction with our 8-K filing and the signing of the commercial auto LPT, there is the impact of the transaction of which the majority is related to claims expense. Second, there is the $5 million net impact of the Ida cat losses. We have a small geographically diversified excess property portfolio that the Company has written for many years, which is heavily reinsured. Our reinsurance in such at $5 million of losses and provides for $40 million of limit. We also benefit from a substantial surplus share treaty. For that reason, the $5 million of net losses should not grow. Last, this quarter was unique, in that we had $8.1 million of reinstatement premiums for casualty treaties in different years, caused by losses we experienced in those accident years. Reinstatement premiums are a function of excess of loss reinsurance, which is what these treaties are. Generally, our casualty treaties work such that the first reinstatement premium is due on first…

Thank you, Sarah. Operator, please open up the lines for questions from our listeners.

Our first question comes from the line of Mark Hughes from Truist. Your question please.

Is there any impact that -- you mentioned the new Chief Actuary and Chief Claims Officer, did that influence in any way the approach to the Casualty Re reserve development?

No. Not necessarily, Dave joined the organization just this quarter, as you know, joined in August, and our prior -- our Chief Actuary retired at the end of September. So, while he was a key part of the Q3 review, he has not been with us for a full quarter, not completely finished his initial review. In essence, what you saw relative to the quarter in Casualty Re was no change relative to methodology.

Okay. And then the reinstatement premium, could you talk a little bit more about that -- the particular circumstances that drove that? That at least in my experience in unusual that you would have that magnitude of a loss that would trigger the reinstatement premium. Just a little more detail on that would be helpful.

Sure, Mark. It's Sarah. I can help to conceptualize that a bit more. As I mentioned, they're both casualty XOL treaties that we have in E&S that we've had in E&S for many, many years, the same structure, et cetera. And if I think those about, for lack of a better term, the ran of them this year is that we had losses from two different years on the treaty. So, we triggered two different reinstatement premiums. As I mentioned, typically you pay for the first reinstatement premium, and then you get a number of free reinstatements. So to the extend we had further losses on those particular accident years, there would likely 0% financial impact from any future reinstatement premium. But what that does is conceptually net down our losses to call it a $1 million to $2 million range on anything we're writing which obviously protects our balance sheet, kind of plays through the low volatility focus of our E&S business. This cover largely helps with, I would say, four or five divisions within E&S. And one of the things to consider here with regard to XOL treaties in the way these are priced is, there is going to be a factor for our growth, said a different way, yes, we have grown a fair amount which point of fact, makes the reinstatement premiums relatively large compared to where they have been -- we have been a few years ago when we weren't growing as much, but I think the import here is, there is some randomness in that they both came through in the same quarter and I would not expect to see those triggered for the foreseeable future.

Anything on the nature of the loss, what sort of end market, what industry perhaps, is this social inflation, just a little more characterization of the underlying issue?

Yes. Sure. So, the two reinstatement losses that you're referencing came out of the energy segment. Not sure how familiar you are with our energy underwriting unit there, but it's not a large unit. I think we did roughly about $15 million in premium last year primarily focused on oilfield services. We are not a big E&P or coal, underground mining type of underwriting shop. Certainly, there has been a push within that underwriting department to cut our limits to take some of the volatility out of the underwriting segment. It has historically been very profitable line of business for us, but we have pushed policy limits down. So, now, I would say roughly a little more than half of the policies that we write out of that unit have limits under $5 million, $5 million or less, I should say.

Okay. And then any commentary in terms of the business flow activity early in the fourth quarter?

So, sure. I mean I would say that and we referenced this I guess in Q2, right. So we saw some slowdown in terms of growth in E&S in May, but it picked right back up in June and July, and that really continued through the rest of the quarter and into the fourth quarter as well. So, policies in force, that count is up about 24%, numbers of binders on our small business initiative is up 11%. We continue to see the benefit of strong support from our wholesalers, the negative outlook removed. So, it's all been quite positive, particularly since the outlook was stabilized.

Our next question comes from the line of Matt Carletti with JMP. Your question, please.

Frank, I was hoping to circle back to your commentary on Casualty Re. And I caught what you said about, expect the top-line to significantly shrink, particularly starting in Q1. What I was hoping you could give us some more color on is what you're planning to do to address the back book, because shrinking it forward isn't going to take care of prior reserve issues? I know it's reinsurance, is it ADC or an LPT a possibility or something that's been considered? Is there -- you commented that you've always kept it at or above actuarial indications, but I mean if we look back over many quarters and years like those actuarial indications have consistently been short. Is there a deeper reserve study or are you considering Kind of changing the actuarial approach? I'm just trying to get at, are you willing to make a commitment to kind of as you brought economic finality to the Uber issue, is there a commitment to bring economic finality to the back book here in Casualty Re?

No, Matt. It's a good question. So you're right, it's a two-step process relative to the strategic action, relative to underwriting operations, but then also to use your terminology, the back book. So we're going to finish our actuarial review for the segment. So, again this is Dave's first full quarter working with the Casualty Re portfolio. But to your point, I'm going to be open to exploring our options fairly thoughtfully, some more complex than others, but I'm going to be open to options, particularly if we can improve the certainty associated with that portfolio, especially after what we were able to accomplish on the commercial auto run off book and the value that it added to our organization and we're doing that now.

And on the -- sounds like a deeper dive that's taking place. Any sense on timing, is that something we could expect the long side or with Q4 reporting or do you suspect it would take longer than that to get through the numbers?

We're expecting to complete our review of the reserves in the first quarter.

Yes. Great. Thank you.

Yes. This is underway.

Our next question comes from the line of Brian Meredith from UBS. Your question please.

Yes. Thanks. A couple of ones here. Just quickly. The winddown of the reinsurance or taking it down, any tax implications that we need to be aware of, will it have any effect on tax rate going forward, is that at all limiting factor to doing some type of a transaction?

No. We want to do what's right for the business, Brian, and I wouldn't think that we're not going to drive the business pace on tax implications. I think there's many different things we can think about here and that's what the team is committed to doing. I wouldn't hold tax out as a reason, not to be full force on kind of looking at this segment going forward.

Okay. Understood. But will it have an implication for your tax rate here going forward?

Yes. Again, I don't see it, Brian. We're early days in this, but I'm not seeing a meaningful implication, right.

And then second question, I'm just curious, the cat loss you had in the quarter and I guess, what you said in excess property, so maybe you can kind of -- it's something that obviously unfamiliar with cat losses with James River and I understand you've got a lot of great reinsurance protection. Can you maybe describe what it was, what happened, why it was so unusual?

Sure, Brian. So, as you know, our excess property book, it's always been fairly small, less than $50 million in GWP. About 5% to 7% of our core E&S business. It's pretty well-diversified book geographically, heavily reinsured as you mentioned to the one on 1,000 level, on no EP basis, it's engineered to perform very well and our loss year was really driven by the fact that this was a $30 billion event. I think that's how we think about this underwriting unit is, it performs very well when you have a very noteworthy or large event. We're going to have some loss. And I think that we were fairly conservative in terms of how we evaluated our potential loss from this event. We are into -- based on where our protection is attached from a property standpoint, this event can't get worse for us.

Our next question comes from the line of Cullen Johnson from B. Riley. Your question, please.

Thanks for taking my questions. Looking at the higher retention ratio in the fronting book, was that just a pretty standard fluctuation quarter to quarter you think or was that more than an intentional move there?

Yes. That's a great question, Cullen. That was not an intentional move, as Frank said, and as we've characterized that book, it's just lumpy, depending on when certain deals come on and when they don't. And I think on average, as we've said, our intention there is probably going to be 10% to 20% over the whole book, but you're going to feel that at different points in time. Obviously, there'd be some that might go up to 30%, but that should be our average overall as I've stated. So --

Okay. Great. Thank you. And then, I think last quarter we kind of talked about loss cost trends at roughly mid-single digits broadly across the entire portfolio. Is that still a reasonable way to think about that figure here?

Yes. No. I think so. I don't think anything has changed. When we think about the portfolio at a high level, mid-single digits, it's a good way to think about it, maybe slightly above that on excess casualty and kind of right there for the primary $1million limits. Again, if you take a look at the rate that we've experienced over the last 19 quarters, 46% over that period of time, we feel very good about where we are versus our view of the trend.

Our next question comes from the line of Derek Han from KBW. Your question, please.

Good morning. Thanks. I know you talked a lot about the consistent average development in Casualty RE in detail, but I was hoping that you could provide some color on what that implies for social inflation within the E&S lines? And how do your accident year loss picks Kind of reflect that? I know you're still kind of doing the reserve study but I was hoping for some details on that.

Yes. Sure. So listen, I think all insurance companies have some exposure to social inflation. We've certainly seen some aspects of it. I think, overall, if you're talking about the E&S book, based on our focus on SME business, I think, we're probably a little bit more insulated than most. I also think that the industry talks about social inflation like the 2020-2021 phenomenon. I think it is something that has been kind of ticking up over the last five to seven years, and to some extent, you've got a little bit of this exposure baked into your loss history. But I think we're fine. We obviously take a look at it on a pretty close basis and that's factored into our overall views relative to the loss picks.

And then my second question is on the fronting business. I know you've had pretty good growth there in the past year or so. But are you seeing any increased competition from peers? I know there were some recent launches and start-ups and other carriers kind of get into the space?

Yes. No. I think you're right. There have been some new entrants in the space, particularly over the last 18 months, I would say Falls Lake is considered a leader in this space. I would suggest our fronting pipeline is very strong, submission growth has been strong and is up 30% for the quarter. At any given point in time, we've got as many as three to six programs in various stages of diligence. And like I said during my prepared comments, it oftentimes takes several months to actually onboard a program, but right now, we're very bullish about the prospects for the segment. Q4 activity is good. We've actually bound a new program. We expect to onboard two more over the quarter. And we're just given another notice on a fourth that I think has got a little bit more of a lead-time because it's a book roll and there is a notice of cancellation provision to the incumbent. So again, I'm very excited about the prospects for growth in this segment.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Frank for any further remarks.

Okay. Thank you, operator. I want to thank everyone listening on the call for their time today, and for the questions we received this morning. I'll wrap up the call by reiterating my appreciation for the staff of James River and our ability to continue to grow our U.S. insurance segments profitably while continuing to deliver on our corporate objectives to make this a stronger and more profitable Company. I look forward to speaking with you again early next year to discuss our Q4 results. Thank you. And enjoy your day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.