What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-02-26 · 302 added, 284 removed, 754 unchanged (44% of the section changed)

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In 2021, the average account in this segment (excluding commercial auto policies) generated annual gross written premiums of approximately $23,000.

The Excess and Surplus Lines segment distributes primarily through wholesale insurance brokers.

The Excess and Surplus Lines segment distributes its products primarily through wholesale insurance brokers.

Members of our management team have participated in this market for over three decades and have long-standing relationships with the wholesale agents who place E&S lines accounts.

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Typically, we structure our reinsurance contracts (also known as treaties) as quota share arrangements, with loss mitigating features, such as commissions that adjust based on underwriting results.

We frequently include risk mitigating features in our working layer excess of loss treaties, such as paid reinstatements, which allow the ceding company to capture a greater percentage of the profits should the business prove more profitable than expected, or alternatively, with additional premiums should the business incur higher than expected losses.

We believe these structures best align our interests with the interests of our cedents.

On a net premium volume basis, treaties with loss mitigation features including sliding scale ceding commissions represented 58.9% of the net premiums written by our Casualty Reinsurance segment during 2021.

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Most of the underlying policies assumed by our Casualty Reinsurance segment have a $1.0 million per occurrence limit, and we typically assume only a portion of that exposure.

We believe this structure reduces volatility in our underwriting results.

We do not assume stand-alone third-party property business at our Casualty Reinsurance segment, but we do have a small amount of assumed business with ancillary property exposure.

72.1% of gross premiums written by our

Casualty Reinsurance segment during 2020 were general liability accounts.

65.7% of gross premiums written by our Casualty Reinsurance segment during 2021 were general liability accounts.

The Casualty Reinsurance segment distributes through reinsurance brokers.

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We exclude the effects of intercompany reinsurance agreements from the presentation of our segment results, consistent with the way we manage the Company.

At December 31, 2020, 43.7% of our invested assets were held at JRG Re, which benefits from a favorable operating environment, including an absence of corporate income or investment taxes.

At December 31, 2021, 41.2% of our invested assets were held at JRG Re.

The Corporate and Other segment consists of the management and treasury activities of our holding companies, equity compensation for the group, and interest expense associated with our debt.

Best financial strength rating for our group’s regulated insurance subsidiaries is “A” (Excellent).

Best Company (“A.M.

Best”) financial strength rating for our group’s regulated insurance and reinsurance subsidiaries is “A-” (Excellent) with a stable outlook.

This rating reflects A.M.

Best’s opinion of our insurance subsidiaries’ financial strength, operating performance and ability to meet obligations to policyholders and is not an evaluation directed towards the protection of investors.

Best’s evaluation of our insurance and reinsurance subsidiaries’ financial strength, operating performance and ability to meet obligations to policyholders and is not an evaluation directed towards the protection of investors.

The rating for our operating insurance and reinsurance companies of “A-” (Excellent) is the fourth highest rating of the thirteen ratings issued by A.M.

Best and is assigned to insurers that have, in A.M.

Best’s opinion, an excellent ability to meet their ongoing obligations to policyholders.

The financial strength ratings assigned by A.M.

Best have an impact on the ability of our regulated subsidiaries to attract and retain agents and brokers and on the risk profiles of the submissions for insurance that our subsidiaries receive.

We believe the “A-” (Excellent) ratings assigned to our insurance and reinsurance subsidiaries allow our subsidiaries to actively pursue relationships with the agents and brokers identified in their marketing plans.

Critical Accounting Policies and Estimates

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Total $ 497,991 $ 901,223 $ 1,399,214 64.4 %

Our Reserve Committees consist of our Chief Actuary, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Chief Accounting Officer.

Our Reserve Committees consist of our Chief Actuary, Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer.

Additionally, the presidents, chief financial officers and chief actuaries of each of our three insurance segments are also members of the Reserve Committee for their respective segments.

The Reserve Committees meet quarterly to review the actuarial recommendations made by each chief actuary and use their best judgment to determine the best estimate to be recorded for the reserve for losses and loss adjustment expenses on our quarterly balance sheet.

The Reserve Committee believes that using judgment to supplement the actuarial recommendations is necessary to arrive at a best estimate given the nature of the business that we write and the limited operating experience of the Casualty Reinsurance segment, the fronting and program business in the Specialty Admitted Insurance segment and the commercial auto underwriting division in the Excess and Surplus Lines segment.

We engage an independent internationally recognized actuarial consulting firm to review our reserves for losses and loss adjustment expenses in the third and fourth quarters of each year.

This independent actuarial consulting firm prepares its own estimate of our reserve for loss and loss adjustment expenses, and we compare their estimate to the reserve for losses and loss adjustment expenses reviewed and approved by the Reserve Committee in order to gain additional comfort on the adequacy of our reserves.

The Reserve Committee believes that using judgment to supplement the actuarial recommendations is necessary to arrive at a best estimate given the nature of the business that we write.

In particular, this approach attempts to address the limited operating experience of the Casualty Reinsurance segment, and program business in the Specialty Admitted Insurance segment.

The process of estimating the reserve for losses and loss adjustment expenses requires a high degree of judgment and is subject to a number of variables.

In establishing the quarterly actuarial recommendation for the reserve for losses and loss adjustment expenses, our internal actuaries estimate an initial expected ultimate loss ratio for each of our product lines by accident year (or for our Casualty Reinsurance segment, on a contract by contract basis).

In establishing the quarterly actuarial recommendation for the reserve for losses and loss adjustment expenses, our actuaries estimate an initial expected ultimate loss ratio for each of our product lines by accident year (or for our Casualty Reinsurance segment, on a contract by contract basis).

Input from our underwriting and claims departments, including premium pricing assumptions and historical experience, are considered by our internal actuaries in estimating the initial expected loss ratios.

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The Expected Loss method multiplies earned premiums by an initial expected loss ratio.

In our Excess and Surplus Lines segment and for our Workers’ Compensation book in the Specialty Admitted Insurance segment, the initial expected loss ratio

is estimated based on adjusting book of business prior year experience to current cost and rate level.

In our Programs business within the Specialty Admitted Insurance segment and in our Casualty Reinsurance segment, the expected loss ratio is based on the actuarial pricing of the individual account.

Alternatively, when company experience lacks historical depth, initial expected loss ratios can be determined using loss ratios implied by industry loss costs for the class or reported industry loss ratios.

Incurred Loss Development Method

The Incurred Loss Development method uses historical loss reporting patterns to estimate future loss reporting patterns.

In this method, our actuaries apply historical loss reporting patterns to develop incurred loss development factors that are applied to current reported losses to calculate expected ultimate losses.

The Incurred Loss Development method uses historical loss reporting patterns by accident year or treaty year to estimate future loss reporting patterns.

In this method, our actuaries review historical loss reporting patterns to develop incurred loss development factors that are applied to current reported losses to calculate ultimate losses.

Paid Loss Development Method

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The portion that has yet to be reported is estimated as the product of premiums earned for the accident year, the initial expected ultimate loss ratio and an estimate of the percentage of ultimate losses that are unreported at the valuation date.

This technique is particularly valuable when there is a low volume of business being reviewed and reported losses lack historical depth.

Bornhuetter-Ferguson Paid Loss Development Method

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The portion that has yet to be paid is estimated as the product of premiums earned for the accident year, the initial expected ultimate loss ratio and an estimate of the percentage of ultimate losses that are unpaid at the valuation date.

This approach assumes that the paid experience has no effect on the subsequent paid loss emergence of the business.

Again, this technique is particularly valuable when there is a low volume of business being reviewed and paid losses lack historical depth.

Different reserving methods are appropriate in different situations, and our actuaries use their judgment and experience to determine the weighting of the methods detailed above to use for each accident year and each line of business and, for our Casualty Reinsurance segment, on a contract by contract basis.

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The Bornhuetter-Ferguson methods are typically used for the more recent prior accident years.

In applying these methods to develop an estimate of the reserve for losses and loss adjustment expenses, our internal actuaries use judgment to determine three key parameters for each accident year and line of business:

In applying these methods to develop an estimate of the reserve for losses and loss adjustment expenses, our actuaries use judgment to determine three key parameters for each accident year and line of business:

the initial expected loss ratios, the incurred and paid loss development factors and the weighting of the five actuarial methods to be used for each accident year and line of business.

For the Excess and Surplus Lines and Specialty Admitted Insurance segments, the actuary performs a study on each of these parameters annually and makes recommendations for the initial expected loss ratios, the incurred and paid loss development factors and the weighting of the five actuarial methods by accident year and line of business.

Members of the Reserve Committee review and approve the parameter review actuarial recommendations, and these approved parameters are used in the reserve estimation process for the next four quarters at which time a new parameter study is performed.

For the Casualty Reinsurance segment, periodic assessments are made on a contract by contract basis with the goal of keeping the initial expected loss ratios and the incurred and paid loss development factors as constant as possible until sufficient evidence presents itself to support adjustments.

Members of the Reserve Committee review and approve the parameter review actuarial recommendations, and absent any developments requiring an earlier review, these approved parameters are used in the reserve estimation process for the next four quarters at which time a new parameter study is performed.

For the Casualty Reinsurance segment, periodic assessments are made on a contract by contract basis.

Method weights are generally less rigid for the Casualty Reinsurance segment given the heterogeneous nature of the various contracts, and the potential for significant changes in mix of business within individual treaties.

We engage an independent internationally recognized actuarial consulting firm to review our reserves for losses and loss adjustment expenses twice each year, once prior to closing the third quarter and once for the closing of the fourth quarter.

The table below quantifies the impact of extreme reserve deviations from our expected value at December 31, 2021.

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Such adjustments are included in current operations.

$92.2 million of adverse development was experienced in 2020 on the reserve for losses and loss adjustment expenses held at December 31, 2019.

This adverse reserve development included $59.4 million of adverse development in the Excess and Surplus Lines segment, including $91.4 million of adverse development in the commercial auto line of business that was primarily related to the 2018 and prior accident years with Rasier.

Rasier's business was new, complex, and rapidly changing,

and the Company's underwriting assumptions and the related pricing of this risk did not keep pace with the insured's escalating loss trends.

As a result of changes in the risk, unsatisfactory underwriting profits from the Rasier business, and a desire to refocus on the Company's growing E&S core (non-commercial auto) lines of business where the Company has experienced many years of profitable underwriting results, on October 8, 2019, the Company delivered a notice of early cancellation to Rasier, effective December 31, 2019.

The adverse development for commercial auto was partially offset by $32.0 million of favorable development in other Excess and Surplus Lines underwriting divisions that was primarily related to the 2018 and 2019 accident years.

Favorable reserve development in the Specialty Admitted Insurance segment was $5.0 million as losses on our workers’ compensation business written prior to 2019 continued to develop more favorably than we had anticipated.

The Casualty Reinsurance segment experienced $37.8 million of adverse development on prior accident years primarily in accident years 2014 through 2018.

This adverse development was mainly in the general liability and commercial auto lines of business.

$69.0 million of adverse development was experienced in 2019 on the reserve for losses and loss adjustment expenses held at December 31, 2018.

This adverse reserve development included $51.2 million of adverse development in the Excess and Surplus Lines segment, including $57.4 million of adverse development in the commercial auto line of business that was primarily related to the 2016 and 2017 accident years with Rasier.

We experienced $325.8 million of adverse development in 2021 on the reserve for losses and loss adjustment expenses held at December 31, 2020.

This adverse reserve development included $190.7 million of adverse development in the Excess and Surplus Lines segment, including $200.1 million of adverse development in the commercial auto line of business that was primarily related to the 2019 and prior accident years with Rasier LLC and its affiliates (collectively, “Rasier”) .

Rasier's business was new, complex, and rapidly changing, and the Company's underwriting assumptions and the related pricing of this risk did not keep pace with the insured's escalating loss trends.

The adverse development for commercial auto was partially offset by $9.4 million of favorable development in other Excess and Surplus Lines underwriting divisions.

Favorable reserve development in the Specialty Admitted Insurance segment was $2.5 million as losses on our workers’ compensation business written prior to 2020 continued to develop more favorably than we had anticipated.

The Casualty Reinsurance segment experienced $137.6 million of adverse development on prior underwriting years.

Actual reported and paid losses in the Casualty Reinsurance segment significantly exceeded expectations in 2021, particularly in the fourth quarter of 2021, causing us to refine some of the assumptions used to determine our best estimate of ultimate losses for this segment.

Specifically, we responded to this highly elevated loss emergence by making significant adjustments to our assumed tail factors, other development factors, initial expected loss ratios, and weights given to various actuarial methods.

In particular, we gave significantly more weight to incurred loss development methods and Bornhuetter – Ferguson incurred loss development methods than had been done previously.

These actuarial refinements resulted in material deterioration in ultimate loss selections for underwriting years 2014 through 2018.

We experienced $92.2 million of adverse development in 2020 on the reserve for losses and loss adjustment expenses held at December 31, 2019.

This adverse reserve development included $59.4 million of adverse development in the Excess and Surplus Lines segment including $91.4 million of adverse development in the commercial auto line of business that was primarily related to the 2018 and prior accident years with Rasier.

The Company also experienced $5.0 million of favorable development on prior accident years in the Specialty Admitted Insurance segment, as losses on our workers’ compensation business written prior to 2019 continued to develop more favorably than we had anticipated.

The Casualty Reinsurance segment experienced $37.8 million of adverse development on prior accident years primarily in accident years 2014 through 2018.

This adverse development was mainly in the general liability and commercial auto lines of business.

$17.7 million of adverse development was experienced in 2018 on the reserve for losses and loss adjustment expenses held at December 31, 2017.

This adverse reserve development included $15.0 million of adverse development in the Excess and Surplus Lines segment, including $20.7 million of adverse development in the commercial auto line of business that was primarily related to the 2016 contract year with Rasier.

The adverse development for commercial auto was partially offset by $5.7 million of favorable development in other Excess and Surplus Lines underwriting divisions primarily from favorable development in the Excess Property underwriting division related to the 2017 hurricanes.

Favorable reserve development in the Specialty Admitted Insurance segment was $5.6 million and primarily came from accident years 2014 through 2016, as loss emergence on our workers’ compensation business written prior to 2016 continued to develop more favorably than we had anticipated.

In addition, $8.2 million of adverse development occurred in the Casualty Reinsurance segment, with a majority of this adverse development coming primarily from accident years at least four years old and in treaties the Company has since non-renewed.

Investment Valuation and Impairment

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Certain restricted cash equivalents invested in funds with floating net asset values are measured at fair value with changes in fair value recognized in net income.

Fixed maturity securities purchased for short-term resale are classified as “trading” and are carried at fair value with unrealized gains and losses included in earnings as a component of investment income.

At December 31, 2021, we do not have any securities classified as “held-to-maturity” or “trading.”

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Changes in the allowance for credit losses are recognized in earnings and included in n et realized and unrealized gains (losses) on investments .

Unrealized losses that are not credit-related will continue to be recognized in other comprehensive income.

Unrealized losses that are not credit-related continue to be recognized in other comprehensive income.

The Company considers the extent to which fair value is below amortized cost in determining whether a credit-related loss exists.

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Management may conclude that a qualitative analysis is sufficient to support its conclusion that the present value of the expected cash flows equals or exceeds a security’s amortized cost.

As a result of this review, management concluded that there were no credit-related impairments of fixed maturity securities at December 31, 2020.

As a result of this review, management concluded that there were no credit-related impairments of fixed maturity securities at December 31, 2021 or 2020.

Management does not intend to sell the securities in an unrealized loss position, and it is not “more likely than not” that the Company will be required to sell these securities before a recovery in their value to their amortized cost basis occurs.

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The Company recorded impairment losses on these securities of $271,000.

Management concluded that none of the fixed maturity securities with an unrealized loss at December 31, 2019 or 2018 experienced an other-than-temporary impairment.

Management concluded that none of the fixed maturity securities with an unrealized loss at December 31, 2019 experienced an other-than-temporary impairment.

In connection with the adoption of ASU 2016-13, the Company elected the fair value option in accounting for bank loan participations effective January 1, 2020.

The targeted transition relief offered by ASU 2019-05, Financial Instruments - Credit Losses (Topic 326):

The targeted transition relief offered by ASU 2019-05, Financial Instruments - Credit

Losses (Topic 326):

Targeted Transition Relief was applied to elect the fair value option to account for bank loan participations already held at the January 1, 2020 date of adoption.

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Losses due to credit-related impairments on bank loan participations are determined based upon consultations and advice from the Company's specialized investment manager and consideration of any adverse situations that could affect the borrower's ability to repay, the estimated value of underlying collateral, and other relevant factors.

Management conclud ed that $8.3 million of unrealized losses were due to credit-related impairments for the year ended December 31, 2020 .

Management concluded that none of the loans in the Company's bank loan portfolio had credit-related impairments as of December 31, 2021.

For the year ended December 31, 2020, m anagement conclud ed that $8.3 million of unrealized losses were due to credit-related impairments.

Prior to the election of the fair value option on January 1, 2020, bank loan participations were generally stated at their outstanding unpaid principal balances net of unamortized premiums or discounts and net of any allowance for credit losses.

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At December 31, 2019, the aggregate allowance for credit losses was $7.2 million on seven impaired loans with a total carrying value of $6.9 million and unpaid principal of $14.3 million.

Management concluded that none of the loans in the Company's bank loan portfolio were impaired as of December 31, 2018 .

Fair values are measured in accordance with ASC 820, Fair Value Measurements.

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We review fair value prices provided by our outside investment accounting service provider or our investment managers for reasonableness by comparing the fair values provided to those provided by our investment custodian.

corroborative price testing comparing prices utilized for each security to those from an alternate reputable pricing service.

We conduct corroborative price testing comparing prices utilized for each security to those from an alternate reputable pricing service.

We also review and monitor changes in fair values and unrealized gains and losses.

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Our control process includes, but is not limited to, initial and ongoing evaluation of the methodologies used, a review of specific securities and an assessment for proper classification within the fair value hierarchy, and obtaining and reviewing internal control reports for our investment accounting services provider and investment managers that obtain fair values from independent pricing services.

Assumed Reinsurance Premiums

Assumed reinsurance written premiums include amounts reported by brokers and ceding companies, supplemented by the Company’s own estimates of premiums when reports have not been received.

Premiums on the Company’s excess of loss and pro rata reinsurance contracts are estimated when the business is underwritten.

For excess of loss contracts, the deposit premium, as defined in the contract, is generally recorded as an estimate of premiums written at the inception date of the treaty.

Estimates of premiums written under pro rata contracts are recorded in the period in which the underlying risks are expected to begin and are based on information provided by the brokers and the ceding companies.

Reinsurance premium estimates are reviewed by management periodically.

Any adjustment to these estimates is recorded in the period in which it becomes known.

The impact of any premium adjustments on net income is offset by corresponding changes to related policy acquisition costs and losses and loss adjustment expenses.

For the years ended December 31, 2020, 2019, and 2018, these adjustments were immaterial.

Reinsurance premiums assumed are earned over the terms of the underlying policies or reinsurance contracts.

Contracts and policies written on a “losses occurring” basis cover claims that may occur during the term of the contract or policy, which is typically 12 months.

Accordingly, the premiums are earned evenly over the term.

Contracts which are written on a “risks attaching” basis cover claims which attach to the underlying insurance policies written during the terms of such contracts.

Premiums earned on such contracts usually extend beyond the original term of the reinsurance contract, typically resulting in recognition of premiums earned over a 24-month period in proportion to the level of underlying exposure.

Certain of the Company’s reinsurance contracts include provisions that adjust premiums or acquisition expenses based upon the experience under the contracts.

Premiums written and earned, as well as related acquisition expenses, are recorded based upon the projected experience under the contracts.

Recent Accounting Pronouncements

On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , using the modified retrospective approach, by which a cumulative-effect adjustment was made to retained earnings as of the date of adoption.

This update requires financial assets measured at amortized cost, such as bank loan participations held for investment, to be presented at the net amount expected to be collected by means of an allowance for credit losses that is reflected in net income.

Credit losses relating to available-for-sale debt securities are recorded through an allowance for credit losses, with the amount of the allowance limited to the amount by which fair value is below amortized cost.

In connection with the adoption of this ASU, the Company elected the fair value option in accounting for bank loan participations effective January 1, 2020.

The targeted transition relief offered by ASU 2019-05, Financial Instruments - Credit Losses (Topic 326):

Targeted Transition Relief was applied to elect the fair value option to account for bank loan participations already held at the January 1, 2020 date of adoption.

Under the fair value option, bank loan participations are measured at fair value, and changes in unrealized gains and losses in bank loan participations are reported in our income statement as net realized and unrealized gains (losses) on investments.

At adoption on January 1, 2020, the Company reduced the carrying value of its bank loan portfolio to fair value through an $8.4 million adjustment with a $7.8 million (net of tax) cumulative effect adjustment to reduce retained earnings.

Upon adoption of this ASU, the Company established an allowance for uncollectible reinsurance balances through a $265,000 (net of tax) cumulative effect adjustment to retained earnings.

Because we purchase reinsurance from financially strong reinsurers or we have collateral securing the recoverables, the effect of adoption was not material to our financial position.

There were no new accounting standards adopted in 2021 that materially impacted the Company's financial statements .

Impact of the COVID-19 Pandemic

The Company is continually monitoring the impact that the outbreak of the coronavirus (COVID-19) pandemic may be having on the Company’s financial condition and results of operations.

The Company closed its offices except for certain essential functions, and directed its employees to work from their homes or other locations where they could ‘shelter in place’.

The Company’s investment portfolio was impacted by the volatility in the global financial markets during the first quarter of 2020 as discussed in “-Results of Operations-Investing Results” in the Quarterly Report on Form 10-Q for the quarterly period

ended March 31, 2020, filed with the SEC on April 30, 2020, however, investment markets recovered substantially in the second, third, and fourth quarters, leading to net unrealized gains in our investment portfolio for those quarters.

While COVID-19 has adversely affected premium volume and/or been the source of claims in some lines of business (such as auto and workers' compensation), to date it has not caused a decline in gross written premiums or a material increase in total claims for the Company as a whole.

However, the decreased economic and other activity caused by the coronavirus pandemic made it more difficult to set and maintain case and IBNR reserves in 2020, as medical procedures were delayed and case loss information on many lines of business went unreported until late in the year, which contributed to the adverse development we experienced for the year ended December 31, 2020.

In addition, we are closely monitoring a number of risks that COVID-19 poses to the Company’s financial condition and results of operations.

The Company is continually monitoring the impact that the ongoing coronavirus (COVID-19) pandemic may be having on the Company’s financial condition and results of operations.

COVID-19 has adversely affected premium and/or claims volume in some lines of business we write (such as auto and workers' compensation), however, to date it has not caused a decline in gross written premiums or a material increase in total claims for the Company as a whole.

While less significant in 2021, we continue to see a reduction in claims frequency in certain lines of business, such as commercial auto and many of our Core Excess and Surplus lines of business, that may be the result of the impacts of COVID-19 on the economy.

If these frequency reductions only succeed in eliminating less material matters while meaningful claims persist, potential delays in claims settlement (due to COVID-19 or other reasons) may have a material impact on our ability to accurately set reserves for those lines of business.

However, there was no material deterioration in calendar year 2021 reserve levels due to COVID-19 related matters.

We are closely monitoring a number of risks that COVID-19 poses to the Company’s financial condition and results of operations.

For a description of these risks, see “Part I-Item 1A.

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Net investment income 56,865 73,368 (22.5) %

Net realized and unrealized investment losses (16,030) (2,919) 449.2 %

Net realized and unrealized investment gains (losses) 15,564 (16,030) — %

Other (expenses) income (2,232) (985) 126.6 %

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Amortization of intangible assets (363) (538) (32.5) %

Income before taxes 11,937 51,867 (77.0) %

Income tax expense 7,113 13,528 (47.4) %

Net income $ 4,824 $ 38,339 (87.4) %

Adjusted net operating income (4)

(Loss) income before taxes (196,034) 11,937 — %

Income tax (benefit) expense (23,235) 7,113 — %

Net (loss) income $ (172,799) $ 4,824 — %

Adjusted net operating (loss) income (4)

$ (184,245) $ 21,218 — %

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Combined ratio 136.9 % 105.6 %

Accident year loss ratio (5) 67.1 % 63.7 %

Accident year loss ratio ex-cat (6) 66.4 % 63.7 %

(1) Net retention is defined as the ratio of net written premiums to gross written premiums.

(2) Underwriting loss is a non-GAAP measure.

See “Reconciliation of Non-GAAP Measures” for a reconciliation to income before tax and for additional information.

See “Reconciliation of Non-GAAP Measures” for a reconciliation to (loss) income before tax and for additional information.

(3) Underwriting loss includes gross fee income of $22.7 million and $20.9 million for the years ended December 31, 2021 and 2020, respectively.

(4) Adjusted net operating income is a non-GAAP measure.

See “Reconciliation of Non-GAAP Measures” for reconciliation to net income and for additional information.

Underwriting losses of $33.8 million and $9.8 million for the years ended December 31, 2020 and 2019, respectively, reflect net adverse reserve development of $92.2 million and $69.0 million in the respective years, including $59.4 million and $51.2 million, respectively, of net adverse reserve development from the Excess and Surplus Lines segment and $37.8 million and $23.1 million, respectively, of net adverse reserve development from the Casualty Reinsurance segment.

This adverse reserve development included $91.4 million and $57.4 million, respectively, of adverse development in the commercial auto line of business in the Excess and Surplus Lines segment that was primarily related to Rasier.

Rasier's business was new, complex, and rapidly changing, and the Company's underwriting assumptions and the related pricing of this risk did not keep pace with the insured's escalating loss trends.

As a result of changes in the risk, unsatisfactory underwriting profits from the Rasier business, and a desire to refocus on the Company’s growing E&S core (non-commercial auto) lines of business where the Company has experienced many years of profitable underwriting results, on October 8, 2019, the Company delivered a notice of early cancellation to Rasier, effective December 31, 2019.

(4) Adjusted net operating (loss) income is a non-GAAP measure.

See “Reconciliation of Non-GAAP Measures” for reconciliation to net (loss) income and for additional information.

(5) Accident year loss ratio is defined as the ratio of losses and loss adjustment expenses for the current accident year (excluding development on prior accident year reserves) to net earned premiums.

(6) Accident year loss ratio excluding the $5.0 million of net catastrophe losses related to Hurricane Ida in the year ended December 31, 2021.

Underwriting losses of $256.9 million and $33.8 million for the years ended December 31, 2021 and 2020, respectively, were primarily driven by net adverse reserve development of $325.8 million and $92.2 million in the respective years, including $190.7 million and $59.4 million, respectively, of net adverse reserve development from the Excess and Surplus Lines segment almost entirely related to a previous commercial auto account, and $137.6 million and $37.8 million, respectively, of net adverse reserve development from the Casualty Reinsurance segment.

Refer to the discussion of segment underwriting results below for additional details on this adverse reserve development.

Underwriting results in the current year were also negatively impacted by $8.1 million of reinstatement premium on certain casualty reinsurance treaties and $5.0 million of net catastrophe losses related to Hurricane Ida in the third quarter of 2021, both in the Excess and Surplus Lines segment.

The $8.1 million of

reinstatement premium, including $6.4 million triggered by one claim on a 2019 excess of loss treaty, reduced net written and net earned premium in the current year, and increased the underwriting loss.

The results for the years ended December 31, 2021 and 2020 also include certain non-operating items that are significant to the Company.

These items (on a pre-tax basis) include:

• Net realized and unrealized investment losses of $16.0 million and $2.9 million for the years ended December 31, 2020 and 2019, respectively, which included net unrealized gains of $1.1 million and $6.3 million related to changes in unrealized gains and losses in the respective years for equity securities and bank loan participations (pursuant to fair value option election effective January 1, 2020).

• Net realized and unrealized investment gains (losses) of $15.6 million and $(16.0) million for the years ended December 31, 2021 and 2020, respectively, which included net unrealized gains of $12.0 million and $1.1 million related to changes in unrealized gains and losses in the respective years for equity securities and bank loan participations (pursuant to fair value option election effective January 1, 2020).

See “- Investing Results" for more information on these realized and unrealized investment losses.

• Employee severance expenses of $2.0 million and $1.1 million in the respective years.

The 2020 expense primarily reflects reductions in claims personnel following the cancellation of Rasier.

We define adjusted net operating income as net income excluding certain non-operating expenses such as net realized and unrealized investment gains and losses, expenses related to due diligence costs for various merger and acquisition activities, professional service fees related to the filing of registration statements for the offering of securities, and severance costs associated with terminated employees.

We use adjusted net operating income as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance.

Adjusted net operating income should not be viewed as a substitute for net income calculated in accordance with GAAP, and our definition of adjusted net operating income may not be comparable to that of other companies.

Our income before taxes and net income for the years ended December 31, 2020 and 2019 reconcile to our adjusted net operating income as follows:

• Other expenses were $2.2 million and $2.0 million for the years ended December 31, 2021 and 2020, respectively, and include legal and other professional fees related to the Company's May 2021 common share offering, certain legal and professional consulting fees related to various strategic initiatives, and employee severance costs.

We define adjusted net operating (loss) income as net (loss) income excluding net realized and unrealized gains and losses on investments, and certain non-operating expenses such as professional service fees related to various strategic initiatives and the filing of registration statements for the offering of securities, and severance costs associated with terminated employees.

We use adjusted net operating (loss) income as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance.

Adjusted net operating (loss) income should not be viewed as a substitute for net (loss) income calculated in accordance with GAAP, and our definition of adjusted net operating (loss) income may not be comparable to that of other companies.

Our (loss) income before taxes and net (loss) income for the years ended December 31, 2021 and 2020 reconcile to our adjusted net operating (loss) income as follows:

Year Ended December 31,

Taxes Net Income Income

Taxes Net Loss Income

(in thousands)

Income as reported $ 11,937 $ 4,824 $ 51,867 $ 38,339

Net realized and unrealized losses on investments 16,030 14,840 2,919 3,761

(Loss) income as reported $ (196,034) $ (172,799) $ 11,937 $ 4,824

Net realized and unrealized (gains) losses on investments (15,564) (13,292) 16,030 14,840

Other expenses 2,214 1,846 1,967 1,554

Adjusted net operating income $ 29,934 $ 21,218 $ 55,841 $ 42,934

Adjusted net operating (loss) income $ (209,384) $ (184,245) $ 29,934 $ 21,218

Combined Ratios

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In 2021, the combined ratio included $325.8 million, or 46.8 percentage points, of net adverse reserve development on prior accident years, including $190.7 million of net adverse reserve development from the Excess and Surplus Lines segment, $2.5 million of net favorable reserve development from the Specialty Admitted Insurance segment, and $137.6 million of net adverse reserve development from the Casualty Reinsurance segment.

The combined ratio for the current year was also negatively impacted by the aforementioned $8.1 million (1.6 points) of reinstatement premium related to casualty treaties and $5.0 million (0.7 points) of net catastrophe losses related to Hurricane Ida in the third quarter of 2021, both in the Excess and Surplus Lines segment.

Our combined ratio for the year ended December 31, 2020 was 105.6%.

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Additionally, each of the Company’s U.S.-domiciled insurance subsidiaries is a party to a quota share reinsurance agreement that in periods prior to January 1, 2018 ceded 70% of their premiums and losses to JRG Re, and starting January 1, 2018, ceded 70% of their premiums and losses to Carolina Re, an entity domiciled in Bermuda that made an irrevocable election to be taxed as a U.S.

domestic corporation under Section 953(d) of the Code effective January 1, 2018.

JRG Re also provides stop loss reinsurance to Carolina Re.

domestic corporation under Section 953(d)

of the Internal Revenue Code of 1986, as amended, effective January 1, 2018.

JRG Re also provides aggregate stop loss reinsurance to Carolina Re.

We report all segment information in this ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ prior to the effects of intercompany reinsurance, consistent with the manner in which we evaluate the operating performance of our reportable segments.

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Our expense ratio was 23.0% and 26.7% for the years ended December 31, 2021 and 2020, respectively.

The increase reflects the termination of the Rasier business effective December 31, 2019 (the Rasier business carried higher loss ratios, but lower expense ratios).

This was partially offset by a 28.1% increase in the Core E&S net earned premiums of the Excess and Surplus Lines segment including in lines that have meaningful ceding commissions.

The decrease reflects a 16.9% increase in the Core E&S net earned premiums of the Excess and Surplus Lines segment including in lines that have meaningful ceding commissions.

Our Excess and Surplus Lines segment has significant scale and produces a lower expense ratio than our other operating segments.

The Excess and Surplus Lines segment is our largest segment and makes up 69.9% of consolidated net earned premiums for the year ended December 31, 2021 (68.4% for the year ended December 31, 2020).

Gross fee income for the Company declined from $24.9 million for the year ended December 31, 2019 to $20.9 million for the year ended December 31, 2020.

The Rasier termination resulted in a $7.5 million decline of gross fee income in the Excess and Surplus Lines segment for the year ended December 31, 2020.

This was partially offset by $3.5 million higher fee income in the Specialty Admitted Insurance segment due to new fronting programs and growth in existing fronting programs.

Gross fee income for the Company increased from $20.9 million for the year ended December 31, 2020 to $22.7 million for the year ended December 31, 2021 driven by $3.4 million higher fee income in the Specialty Admitted Insurance segment due to new fronting programs and growth in existing fronting programs, and partially offset by the Rasier termination which resulted in a $1.6 million decline of gross fee income in the Excess and Surplus Lines segment.

In the Casualty Reinsurance segment, our expense ratio declined from 25.6% for the year ended December 31, 2020 to 23.6% for the year ended December 31, 2021.

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Net adverse reserve development on treaties with such features reduced our commissions in the respective years by $11.8 million or 8.8 percentage points and $10.6 million or 7.9 percentage points.

The Casualty Reinsurance expense ratio was also favorably impacted by improved treaty terms and business mix in 2021.

Insurance premiums are earned ratably over the terms of our insurance policies, generally twelve months.

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$ 695,594 $ 606,806 14.6 %

Gross written premiums for the Excess and Surplus Lines segment (which represents 55.6% of our consolidated gross written premiums in 2020) decreased 24.2% from the prior year.

The decrease was largely due to the termination of the Rasier commercial auto business effective December 31, 2019.

Excluding commercial auto policies, gross written premiums for the Excess and Surplus Lines segment increased 29.5% over the prior year.

Policy submissions excluding the commercial auto policies were 11.1% higher and 17.7% more policies were bound in 2020 than in 2019.

Renewal rates for the Excess and Surplus Lines segment excluding commercial auto were up 13.7% compared to 2019.

Gross written premiums for the Excess and Surplus Lines segment (which represents 55.3% of our consolidated gross written premiums in 2021) increased 19.2% from the prior year.

Renewal rates for Core E&S lines (excluding commercial auto) were up 13.3% compared to 2020 and although policy submissions and quotes were relatively consistent year over year, the strong market conditions led to 13.2% more policies bound in 2021 than in 2020.

The change in gross written premiums was notable in several divisions as shown below:

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Manufacturers & Contractors 139,720 122,880 13.7 %

Energy 51,109 45,442 12.5 %

Excess Property 47,241 37,332 26.5 %

Life Sciences 35,163 24,462 43.7 %

Allied Health 35,192 26,918 30.7 %

Small Business 32,593 24,790 31.5 %

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Specialty Admitted gross written premium $ 491,561 $ 408,691 20.3 %

Our fronting business saw growth related to eight new fronting relationships added in 2020 that generated $35.0 million of gross written premium in the year ended December 31, 2020.

Growth in existing fronting relationships, excluding our largest relationship, contributed an additional $4.3 million of gross written premiums in 2020.

Our largest fronted relationship, Atlas General Insurance Services, experienced a decline in production in 2020 producing $125.5 million of gross written premium for the year ended December 31, 2020 (down from $146.5 million for the year ended December 31, 2019) and representing 30.7% of the segment's gross written premium for the year ended December 31, 2020 down from 37.8% for the year ended December 31, 2019.

Atlas production was negatively impacted by the COVID-19 pandemic, which caused a decline in the California economy and lower exposures for this workers' compensation relationship, as well as a challenging rate environment in the state.

Gross written premiums for the Casualty Reinsurance segment (which represents 11.9% of our consolidated gross written premiums in 2020) decreased 7.2% from the prior year.

The decline in gross written premiums was primarily due to the non-renewal of two large treaties.

The Casualty Reinsurance segment generally writes large casualty-focused treaties that are expected to have lower volatility relative to property and catastrophe treaties.

Our fronting business (excluding our largest fronting relationship) saw growth related to new fronting relationships added since January 1, 2020 that generated $105.2 million and $35.0 million of gross written premium in the years ended December 31, 2021 and 2020, respectively.

Our largest fronted relationship, Atlas General Insurance Services, produced $124.1 million of gross written premium for the year ended December 31, 2021 (down from $125.5 million for the year ended December 31, 2020), representing 25.2% of the segment's gross written premium for the year ended December 31, 2021 down from 30.7% for the year ended December 31, 2020.

The decrease in individual risk workers' compensation gross written premiums reflects the Company's decision to exit certain northeastern states.

Gross written premiums for the Casualty Reinsurance segment (which represents 12.1% of our consolidated gross written premiums in 2021) increased 22.1% from the prior year.

The increase in gross written premiums reflects both new business writings of $26.2 million and higher renewals of $38.9 million largely due to higher subject premium on several treaties, and partially offset by non-renewed treaties with $29.6 million of premium including treaties the Company elected to exit.

We rarely write stand-alone property reinsurance.

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Total 49.4 % 51.5 %

The net premium retention for the Excess and Surplus Lines segment decreased for the year ended December 31, 2020 as compared to the prior year due to growth in written premium for the Excess Casualty and Excess Property underwriting

divisions, which have higher percentages of ceded premium relative to our other Core E&S divisions.

Additionally, the net premium retention for the Commercial Auto underwriting division is higher than the net premium retention for the Core E&S underwriting divisions, and the Company terminated its largest Commercial Auto insured, Rasier, effective December 31, 2019.

The net premium retention for the Specialty Admitted Insurance segment decreased slightly from 2019 to 2020.

The net retention on the workers’ compensation business was 29.3% and 44.7% for the years ended December 31, 2020 and 2019, respectively, reflecting an increase in the percentage of premiums ceded under a third-party quota share reinsurance treaty from 50% in 2019 to 70% in 2020.

The net retention on the segment’s fronting business was 11.9% and 9.3% in the years ended December 31, 2020 and 2019, respectively, reflecting changes in the production mix of fronting relationships.

The net premium retention for the Casualty Reinsurance segment decreased slightly for the year ended December 31, 2020 as compared to the prior year due to a change in the renewal date of a retrocessional treaty/fronting arrangement under which 100% of the premiums are ceded.

The net premium retention for the Excess and Surplus Lines segment decreased for the year ended December 31, 2021 as compared to the prior year primarily due to growth in written premium in the Excess Casualty underwriting division, which has a higher percentage of ceded premium than our other divisions.

The $8.1 million of reinstatement premium in the current year reduced net written premium and the net premium retention.

The net premium retention for the Specialty Admitted Insurance segment increased from 2020 to 2021 driven by the fronting business and higher retentions on some of the newer relationships.

The net retention on the segment’s fronting business was 15.7% and 11.9% in the years ended December 31, 2021 and 2020, respectively.

The net retention on the workers’ compensation business was 27.3% and 29.3% for the years ended December 31, 2021 and 2020, respectively.

The net premium retention for the Casualty Reinsurance segment for the years ended December 31, 2021 and 2020, respectively, reflects the impact of one retrocessional treaty/fronting arrangement under which 100% of the premiums are ceded.

Underwriting Results

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Underwriting expenses (91,179) (86,949) 4.9 %

Underwriting profit (1), (2)

Underwriting (loss) profit (1), (2)

$ (121,478) $ 9,752 — %

2 unchanged sentences

Combined ratio 125.0 % 97.7 %

(1) Underwriting Profit is a non-GAAP Measure.

See “Reconciliation of Non-GAAP Measures” for a reconciliation to income before tax and for additional information.

Accident year loss ratio 67.0 % 62.4 %

Accident year loss ratio ex-cat (3)

66.0 % 62.4 %

(1) Underwriting (Loss) Profit is a non-GAAP Measure.

See “Reconciliation of Non-GAAP Measures” for a reconciliation to (loss) income before tax and for additional information.

(2) Underwriting results include gross fee income of $0.0 million and $1.6 million for the years ended December 31, 2021 and 2020, respectively.

(3) Accident year loss ratio excluding the $5.0 million of net catastrophe losses related to Hurricane Ida in the year ended December 31, 2021.

The loss ratios of 106.2% and 76.7% for the years ended December 31, 2021 and 2020 include $190.7 million and $59.4 million (39.2 and 14.3 percentage points, respectively) of net adverse development in our loss estimates for prior accident years.

The net adverse reserve development included $91.4 million and $57.4 million, respectively, of adverse development in the commercial auto line of business that was primarily related to Rasier, which was terminated effective December 31, 2019.

The net adverse reserve development for commercial auto was partially offset by net favorable development on prior accident years in our Core E&S divisions of $32.0 million and $6.2 million for the years ended December 31, 2020 and 2019, respectively, and a reduction of the 2020 accident year loss ratio for Core E&S to reflect a significant decline in claims frequency experienced in the most recent year.

The expense ratio for this segment increased from 12.5% in 2019 to 21.0% for 2020 due to the termination of the Rasier commercial auto business effective December 31, 2019 (the Rasier business carried higher loss ratios, but lower expense ratios).

This was partially offset by a 28.1% increase in Core E&S net earned premiums including in lines that have meaningful ceding commissions.

Commercial auto made up 7.2% of the segment’s net earned premiums for 2020 compared to 51.9% for 2019.

Gross fee income related to the Rasier business contributed to a reduction in the expense ratio of 0.4 and 1.5 percentage points for the years ended December 31, 2020 and 2019, respectively.

As a result of the items discussed above, the underwriting profit of the Excess and Surplus Lines segment decreased 49.1%, from $19.2 million for the year ended December 31, 2019 to $9.8 million for the year ended December 31, 2020.

The net adverse reserve development for the years ended December 31, 2021 and 2020 included $200.1 million and $91.4 million, respectively, of adverse development on commercial auto business that was almost entirely related to Rasier, a previously canceled account that has been in runoff since 2019.

The net adverse reserve development for commercial auto was partially offset by net favorable development on prior accident years in our Core E&S divisions of $9.4 million and $32.0 million for the years ended December 31, 2021 and 2020, respectively.

The current year loss ratio also includes $5.0 million (1.0 points) of net catastrophe losses related to Hurricane Ida in the third quarter of 2021.

The prior year loss ratio was also

favorably impacted by a reduction of the 2020 accident year loss ratio for Core E&S due to a significant decline in claims frequency experienced in the year.

In the three months ended March 31, 2021, the reported losses on the terminated Rasier account meaningfully exceeded our expectations.

We had expected that reported losses would decline as the account moved further into runoff, but the continued heavy reported loss emergence in the first quarter of 2021 indicated more inherent severity than anticipated.

In response, we meaningfully adjusted our actuarial methodology, resulting in a significant strengthening of reserves for this account ($169.9 million of net adverse development was recorded in the first quarter).

In prior quarters, our actuarial work for this terminated commercial auto account had been based on industry data, pricing data, experience data, average claims severity data, and blended methodologies.

However, the continuation of the highly elevated reported losses in the first quarter of 2021 led us to conclude that using only our own loss experience in our paid and incurred reserve projections rather than the array of inputs that we had used in prior quarters, and giving greater weight to incurred methods, would give us a better estimate of ultimate losses on this account.

On September 27, 2021, James River Insurance Company and James River Casualty Company (together, “James River”) entered into a loss portfolio transfer agreement (the “LPT Agreement”) with Aleka Insurance, Inc.

(“Aleka”), a captive insurance company affiliate of Rasier LLC, to reinsure substantially all of the Excess and Surplus Lines segment's legacy portfolio of commercial auto policies previously issued to Rasier LLC and its affiliates (collectively, “Rasier”) for which James River is not otherwise indemnified by Rasier.

Under the terms of the transaction, effective as of July 1, 2021, James River ceded to Aleka approximately $345.1 million of commercial auto liabilities relating to Rasier policies written in the years 2013-2019, which amount constituted the reinsurance premium.

The reinsurance coverage is fully collateralized, not subject to an aggregate limit, and subject to certain exclusions.

A pre-tax loss of $29.6 million was recognized as adverse loss and loss adjustment reserve development in the Excess and Surplus Lines segment for the third quarter of 2021 associated with the loss portfolio transfer, of which $15.8 million was related to claims handling costs.

The $15.8 million claims handling costs constitutes James River’s contribution to the fees of an administrator appointed by James River and Aleka to handle the claims on the Rasier commercial auto policies for the remaining life of those claims, and unallocated loss adjustment expenses required to facilitate the transition of the claims to the administrator.

The expense ratio for this segment decreased from 21.0% in 2020 to 18.8% for 2021 driven by a 16.9% increase in Core E&S net earned premiums including in lines that have meaningful ceding commissions.

Gross fee income related to the former Rasier business contributed to a reduction in the expense ratio of 0.4 percentage points for the year ended December 31, 2020 (none for the year ended December 31, 2021).

Underwriting results in the current year were also negatively impacted by $8.1 million of reinstatement premium (2.1 points of combined ratio), including $6.4 million triggered by one claim on a 2019 excess of loss treaty.

The reinstatement premium reduced net written and net earned premium in the current year, and increased the underwriting loss.

As a result of the items discussed above, the underwriting results of the Excess and Surplus Lines segment declined from an underwriting profit of $9.8 million for the year ended December 31, 2020 to an underwriting loss of $121.5 million for the year ended December 31, 2021.

Specialty Admitted Insurance Segment

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Combined ratio 87.2 % 92.7 %

Accident year loss ratio 77.5 % 81.6 %

(1) Underwriting Profit is a non-GAAP Measure.

See “Reconciliation of Non-GAAP Measures” for a reconciliation to income before tax and for additional information.

See “Reconciliation of Non-GAAP Measures” for a reconciliation to (loss) income before tax and for additional information.

(2) Underwriting profit includes fee income of $22.7 million and $19.3 million for the years ended December 31, 2021 and 2020, respectively.

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The favorable development in both 2021 and 2020 reflects the fact that actual loss emergence of the workers’ compensation book for prior accident years has been better than expected.

The higher loss ratio for 2020 primarily reflects higher current accident year losses incurred for both the workers' compensation book and the fronting business.

The current accident year loss ratio was 81.6% compared to 73.8% in the prior year.

The expense ratio of the Specialty Admitted Insurance segment was 13.1% for the year ended December 31, 2021 compared to the prior year ratio of 19.8%.

The expense ratio decline in 2020 was primarily due to a 22.0% increase in gross fee income from the fronting business driven by a mix shift to fronting arrangements with higher fees and the addition of eight new fronted programs in 2020, as well as additional ceding commissions on the third-party quota share reinsurance coverage purchased on individual risk workers' compensation business resulting from an increase in the cession from 50% to 70% effective January 1, 2020.

Underwriting results for the Specialty Admitted Insurance segment in 2020 were favorably impacted by a $1.0 million adjustment to fee income on one fronted program (a reduction in commission expense, representing a 1.8 point reduction in the combined ratio for the respective period).

As a result of the items discussed above, the underwriting profit of the Specialty Admitted Insurance segment decreased 29.2%, from $5.9 million for the year ended December 31, 2019 to $4.2 million for the year ended December 31, 2020.

The improvement was primarily driven by the growth in our fronting business, which led to 31.1% growth in net earned premiums for the segment and a 17.4% increase in fee income.

In addition, the segment benefited from current year adjustments to premium taxes and assessments which together represented a 3.3 percentage point decrease in the segment expense ratio for the current year.

In the prior year, underwriting results were favorably impacted by a $1.0 million adjustment to fee income on one fronted program (a reduction in commission expense, representing a 1.8 point reduction in the expense ratio).

As a result of the items discussed above, the underwriting profit of the Specialty Admitted Insurance segment increased $5.5 million or 131.0%, from $4.2 million for the year ended December 31, 2020 to $9.7 million for the year ended December 31, 2021.

Casualty Reinsurance Segment

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Combined ratio 187.6 % 113.7 %

Accident year loss ratio 61.5 % 59.9 %

(1) Underwriting Loss is a non-GAAP Measure.

See “Reconciliation of Non-GAAP Measures” for a reconciliation to income before tax and for additional information.

See “Reconciliation of Non-GAAP Measures” for a reconciliation to (loss) income before tax and for additional information.

The Casualty Reinsurance segment focuses on lower volatility, proportional reinsurance which requires larger ceding commissions resulting in a higher commission expense than in our other segments.

The loss ratio of 88.1% for the year ended December 31, 2020 includes $37.8 million, or 28.2 percentage points, of net adverse development in our loss estimates for prior accident years.

The 2020 net adverse development was primarily in accident years 2014 through 2018.

The loss ratio of 164.0% for the year ended December 31, 2021 includes $137.6 million, or 102.5 percentage points, of net adverse development in our loss estimates for prior underwriting years.

In particular, we gave significantly more weight to incurred loss development methods and Bornhuetter – Ferguson incurred loss development methods than had been done previously.

These actuarial refinements resulted in material deterioration in ultimate loss selections for underwriting years 2014

through 2018.

The loss ratio of 88.1% for the year ended December 31, 2020 includes $37.8 million, or 28.2 percentage points, of net adverse development in our loss estimates for prior accident years.

The 2019 net adverse development was primarily in accident years 2011 through 2016.

This adverse development was mainly in the general liability and commercial auto lines of business.

The 2020 net adverse development was primarily in accident years 2014 through 2018 and was mainly in the general liability and commercial auto lines of business.

The expense ratio of the Casualty Reinsurance segment declined from 25.6% for the year ended December 31, 2020 to 23.6% for the year ended December 31, 2021.

1 unchanged sentence

Net adverse reserve development on treaties with such features reduced our commissions by $11.8 million and $10.6 million (8.8 and 7.9 percentage points, respectively) for the years ended December 31, 2021 and 2020.

The Casualty Reinsurance expense ratio was also favorably impacted by improved treaty terms and business mix in 2021.

As a result of the items discussed above, the Casualty Reinsurance segment had an underwriting loss of $117.5 million for the year ended December 31, 2021 compared to an underwriting loss of $18.4 million for the year ended December 31, 2020.

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These costs vary from period-to-period based on the status of these initiatives.

For the years ended December 31, 2020 and 2019, the total operating expenses of the Corporate and Other segment were $29.4 million and $27.7 million, representing a 6.3% increase over the prior year.

For the years ended December 31, 2021 and 2020, the total operating expenses of the Corporate and Other segment were $27.6 million and $29.4 million, representing a 6.1% decrease from the prior year due primarily to lower compensation expenses including bonuses and stock compensation.

Investing Results

Net investment income was $56.9 million for the year ended December 31, 2021 compared to $73.4 million in the prior year.

Excluding private investments, our net investment income for the year ended December 31, 2021, decreased 14.8% from the prior year, principally due to lower investment income from restricted cash equivalents, bank loan participations (resulting from a smaller portfolio following sales in the second quarter of the prior year to reduce exposure to this asset class) and lower investment yields.

The Company's private investments generated income of $2.2 million and $9.2 million for the years ended December 31, 2021 and 2020, respectively.

Income from our renewable energy portfolio in 2020 benefitted from a $5.3 million gain on one maturing investment.

During 2020, we reduced our exposure to bank loan participations and increased our investments in fixed maturities.

Investment yields were negatively impacted by a decline in interest rates in 2020.

Income from our renewable energy portfolio in 2020 benefited from a $5.3 million gain on one maturing investment.

Major categories of the Company’s net investment income are summarized as follows:

21 unchanged sentences

Investment income on bank loan participations included in net investment income was $12.2 million during the year ended December 31, 2020.

Net realized and unrealized gains (losses) on investments includes gains of $1.3 million related to changes in unrealized gains and losses on bank loans participations for the year ended December 31, 2020.

Prior to January 1, 2020, bank loans were classified as held-for-investment and reported at amortized cost, net of any allowance for credit losses.

Changes in the credit allowance were included in net realized and unrealized gains (losses).

Under the prior accounting method, management concluded that seven loans from six issuers in the Company's bank loan portfolio were impaired at December 31, 2019.

The impaired loans had a carrying value of $6.9 million, unpaid principal of $14.3 million, and an allowance for credit losses of $7.2 million , $5.1 million of which related to two loans from one issuer that was experiencing liquidity concerns resulting from revenue declines and poor growth prospects in its most profitable segment.

Investment income on bank loan participations included in net investment income was $10.6 million and $12.2 million during the years ended December 31, 2021 and 2020, respectively.

Net realized and unrealized gains (losses) on investments includes gains of $6.7 million and $1.3 million related to changes in unrealized gains and losses on bank loans participations for the years ended December 31, 2021 and 2020, respectively.

Bank loan participations generally provide a higher yield than our portfolio of fixed maturity securities and are primarily senior, secured floating-rate debt rated “BB”, “B”, or “CCC” by Standard & Poor’s or an equivalent rating from another nationally recognized statistical rating organization, and are therefore below investment grade.

Bank loans include assignments

of and participations in, performing and non-performing senior corporate debt generally acquired through primary bank syndications and in secondary markets.

Bank loans include assignments of and participations in, performing and non-performing senior corporate debt generally acquired through primary bank syndications and in secondary markets.

They consist of, but are not limited to, term loans, the funded and unfunded portions of revolving credit loans, and similar loans and investments.

2 unchanged sentences

These investments comprise the Company’s other invested assets and are primarily focused in renewable energy, limited partnerships, and bank holding companies.

Equity interests in various renewable energy LLCs generated investment income of $2.0 million and $2.2 million for the years ended December 31, 2020 and 2019, respectively.

The LLCs are managed by an entity for which two of our recent former directors serve as officers, and the Company’s Non-Executive Chairman has invested in certain of these LLCs.

Equity interests in various renewable energy LLCs generated an investment loss of $1.4 million and income of $2.0 million for the years ended December 31, 2021 and 2020, respectively.

The LLCs are managed by an entity for which two of our former directors serve as officers, and the Company’s Non-Executive Chairman has invested in certain of these LLCs.

These investments had a carrying value of $26.9 million at December 31, 2021.

Investments in loans for renewable energy projects had investment income $5.6 million and $1.3 million for the years ended December 31, 2020 and 2019, respectively.

Two of our recent former directors are officers of the entities that issued the loans.

Investments in loans for renewable energy projects had investment income of $939,000 and $5.6 million for the years ended December 31, 2021 and 2020, respectively.

During 2021, the Company received principle repayments of $3.8 million on the notes receivable.

These investments had a carrying value of $5.2 million at December 31, 2021.

Two of our former directors are officers of the entities that issued the loans.

The Company has invested in several limited partnerships that invest in concentrated portfolios of publicly-traded small cap equities, loans of middle market private equity sponsored companies, equity tranches of collateralized loan obligations (CLOs), and tranches of distressed home loans.

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The Company’s Non-Executive Chairman was previously the Lead Independent Director of the bank holding company and an investor in the bank holding company.

For the year ended December 31, 2021, the Company recognized net realized and unrealized investment gains of $15.6 million, including $4.9 million of net realized investment gains on the sale of fixed maturity securities, $833,000 of net realized investment losses on the sale of bank loans securities, $543,000 of net realized investment losses on the sale of equity securities, $6.7 million of gains for the change in fair value of bank loans, and $5.4 million of gains for the change in fair value of equity securities.

For the year ended December 31, 2020, the Company recognized net realized and unrealized investment losses of $16.0 million, including $16.7 million of net realized investment losses on the sale of bank loans, $1.4 million of net realized investment losses on the sale of equity securities, $1.3 million of gains for the change in fair value of bank loans, and $1.0 million of net realized investment gains on the sale of fixed maturity securities.

For the year ended December 31, 2019, the Company recognized net realized and unrealized investment losses of $2.9 million, including $8.9 million of net realized investment losses from an increase in our bank loan credit allowance, $1.1 million of net realized investment losses on the sale of bank loan securities, $6.3 million of gains for the change in fair value of equity securities, and $1.1 million of net realized investment gains on the sale of fixed maturity securities.

In conjunction with its outside investment managers, the Company performs quarterly reviews of all securities within its investment portfolio to determine whether any impairment has occurred.

During 2019, three fixed maturity securities from one issuer were determined to be impaired because we intended to sell the securities at a loss.

The Company recorded impairment losses on these securities of $271,000.

Management concluded that none of the fixed maturity securities with an unrealized loss at December 31, 2021 or 2020 experienced an other-than-temporary impairment.

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60,329 60,390 3.5 % 97,489 99,848 5.6 %

Redeemable preferred stock — — — % 2,025 2,034 0.1 %

Total fixed maturity securities, available-for-sale

38 unchanged sentences

Total $ 1,643,865 $ 1,677,561 100.0 %

At December 31, 2020, the Company had no investments in securitizations of alternative-A mortgages or sub-prime mortgages.

Other Expenses

Other expenses of $2.1 million and $1.1 million for the years ended December 31, 2020 and 2019, respectively, were mostly comprised of employee severance expenses.

The 2020 expense primarily reflects reductions in claims personnel following the cancellation of Rasier.

Other expenses of $2.6 million for the year ended December 31, 2021 primarily consist of legal and other professional fees related to the Company’s May 2021 common share offering, certain legal and professional consulting fees related to various strategic initiatives, and employee severance costs.

Other expenses of $2.1 million for the year ended December 31, 2020 was mostly comprised of employee severance expenses including those related to reductions in claims personnel following the cancellation of Rasier.

Interest Expense

12 unchanged sentences

No impairment was present for the years ended December 31, 2021 or 2020.

Falls Lake General was merged into Falls Lake National in the fourth quarter of 2018.

In connection with this merger, Falls Lake General surrendered its licenses to the various state insurance departments and reduced the carrying value of its intangible asset for "State Licenses" to $0.

This caused a $200,000 impairment in 2018.

Income Tax Expense

Our effective tax rate fluctuates from period to period based on the relative mix of income reported by country and the respective tax rates imposed by each tax jurisdiction.

For the years ended December 31, 2020 and 2019, our effective tax rates were 59.6% and 26.1%, respectively.

In both years, the effective rate exceeded the U.S.

statutory rate of 21% because U.S.

pre-tax income exceeded consolidated pre-tax income.

For the year ended December 31, 2021, we had an effective tax benefit that was 11.9% of our pre-tax loss for the year.

For the year ended December 31, 2020, our effective tax rate was 59.6%.

Bermuda had losses in both years due to significant adverse development on U.S.

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to Bermuda under the internal quota share reinsurance and because of the unprofitable underwriting results at JRG Re and the non-deductible Bermuda holding company expenses.

The Company does

not receive a U.S.

The Company does not receive a U.S.

tax deduction for losses in Bermuda.

In addition, the Company experienced a BEAT tax for the first time in 2020 in the amount of $2.8 million over and above the amount of taxes calculated without regard to BEAT.

For U.S.-sourced income, the Company’s U.S.

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Liquidity and Capital Resources

Sources of Funds

Sources and Uses of Funds

Our sources of funds consist primarily of premiums written, investment income, reinsurance recoveries, proceeds from sales and redemptions of investments, borrowings on our credit facilities, and the issuance of common shares, and, once closed, the issuance of the Series A Preferred Shares.

We use operating cash flows primarily to pay operating expenses, losses and loss adjustment expenses, reinsurance premiums, and income taxes.

Cash flow from operations may differ substantially from net income.

The potential for a large claim under an insurance or reinsurance contract means that substantial and unpredictable payments may need to be made within relatively short periods of time.

The following table summarizes our cash flows:

Year Ended December 31,

2021 2020 2019

(in thousands)

Cash and cash equivalents provided by (used in):

Operating activities (excluding restricted cash equivalents) $ (155,631) $ 65,414 $ 289,858

Investing activities 35,823 (175,991) (263,359)

Financing activities 147,671 65,925 7,956

Change in cash and cash equivalents 27,863 (44,652) 34,455

Change in restricted cash equivalents (Operating activities) (757,915) (339,244) 1,199,164

Change in cash, cash equivalents, and restricted cash equivalents $ (730,052) $ (383,896) $ 1,233,619

Cash used in operating activities excluding restricted cash equivalents of $155.6 million in 2021 primarily reflects the $317.6 million of reinsurance premium paid to effect the LPT Transaction in the third quarter.

In 2020, a decline in cash provided by operations was largely driven by the run-off of Rasier.

There were no associated premiums collected in 2020 for the Rasier policies terminated on December 31, 2019, but claim payments associated with the run-off continued in 2020.

Cash provided by investing activities for the year ended December 31, 2021 reflects the investments sold/funds withdrawn from our investment portfolio to effect the LPT Transaction in the third quarter.

In 2020 and 2019, cash used in investing activities reflects our efforts to enhance the yield in our investment portfolio by investing available cash and cash equivalents into higher yielding fixed maturity securities and bank loan participations.

Cash and cash equivalents (excluding restricted cash equivalents) comprised 8.2%, 6.9%, and 9.4% of total cash and invested assets at December 31, 2021, 2020 and 2019, respectively.

Cash provided by financing activities includes dividends paid to shareholders of $43.2 million in 2021, $37.1 million in 2020, and $36.7 million in 2019.

On May 10, 2021, the Company closed on a public offering of its common shares.

The Company received net proceeds (before expenses) of $192.1 million.

The proceeds were used for general corporate purposes.

In 2020 and 2019, net draws on our senior credit facilities of $104.0 million and $40.0 million, respectively, were used to help support our growth.

As permitted under the agreements establishing the Indemnity Trust and the LPT Trust, we have withdrawn collateral from the Indemnity Trust and the LPT Trust to fund the Loss Fund Trust as required under the Administrative Services Agreement.

Amounts on deposit in the Loss Fund Trust are included in restricted cash equivalents on the Company's consolidated balance sheet.

See Amounts Recoverable from an Indemnifying Party and Reinsurer on Legacy Commercial Auto Book below.

We are organized as a Bermuda holding company with our operations conducted by our wholly-owned subsidiaries.

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See Item 1- “Regulation- Bermuda Insurance Regulation- Restrictions on Dividends and Distributions” for additional information.

Based on that calculation, the maximum combined amount of dividends and return of capital available to us from our Bermuda insurers in 2020 is calculated to be approximately $153.8 million.

However, this dividend amount is subject to annual enhanced solvency requirement calculations.

Based on that calculation, the maximum combined amount of dividends and return of capital available to us from our Bermuda insurers without regulatory approval in 2022 is calculated to be approximately $129.7 million.

However, any dividend payment is contingent upon continued compliance with Bermuda regulatory requirements, including but not limited to the enhanced solvency requirement calculations.

We expect to close on the issuance and sale of 150,000 Series A Preferred Shares on March 1, 2022.

Holders of the Series A Preferred Shares are entitled to a dividend at the initial rate of 7% of the $1,000 per share liquidation preference per annum, paid in cash, in-kind in common shares or in Series A Preferred Shares, at our election.

On the five-year anniversary of the Closing Date, and each five-year anniversary thereafter, the dividend rate will reset to a rate equal to the five-year U.S.

treasury rate plus 5.2%.

Dividends will accrue quarterly and will be payable on March 31, June 30, September 30 and December 31 of each year, commencing June 30, 2022.

At December 31, 2021, our Bermuda holding company had $157,000 of cash and cash equivalent assets.

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Interest accrues quarterly and is payable in arrears at 3-month LIBOR plus a margin which at December 31, 2021 was 1.625% and is subject to change according to terms in the credit agreement.

At December 31, 2020 and 2019, the Company had drawn balances of $185.8 million and $133.3 million outstanding on the unsecured revolver.

The $52.5 million of additional unsecured borrowings in 2020 were used to support our growth and for general corporate purposes.

At December 31, 2021 and 2020, the Company had a drawn balance of $185.8 million outstanding on the unsecured revolver.

The 2013 Facility has been amended from time to time since its inception in 2013.

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On August 2, 2017, the Company, and its wholly-owned subsidiary, JRG Re, together as borrowers, entered into a credit agreement (the "2017 Facility") that provides the Company with a revolving line of credit of up to $100.0 million, which may be used for loans and letters of credit made or issued, at the borrowers' option, on a secured or unsecured basis.

Obligations under the 2017 Facility carry a variable rate of interest subject to terms in the credit agreement and will mature 30 days after notice of termination from the lender.

Obligations under the 2017 Facility carry a variable rate of interest subject to terms in the credit agreement (LIBOR plus a margin of 1.625% at December 31, 2021) and will mature 30 days after notice of termination from the lender.

The 2017 Facility contains certain financial and other covenants with which we are in compliance at December 31, 2021.

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At December 31, 2021, unsecured loans of $61.5 million and secured letters of credit totaling $20.5 million were outstanding on the 2017 Facility.

During 2020, we borrowed an additional $51.5 million in unsecured loans to support our growth and for general corporate purposes.

On May 26, 2004, we issued $15.0 million of senior debt due April 29, 2034.

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holding company's common stock or its subsidiaries' capital stock or to issue shares of its subsidiaries' capital stock.

Interest payable is included in “accrued expenses” in the accompanying consolidated balance sheets.

From May 2004 through January 2008, we sold trust preferred securities through five Delaware statutory trusts sponsored and wholly-owned by the Company or its subsidiaries.

Each trust used the net proceeds from the sale of its trust preferred securities to purchase our floating-rate junior subordinated debt.

The following table summarizes the nature and terms of the junior subordinated debt and trust preferred securities outstanding at December 31, 2021 (including the Company’s repurchase of a portion of these trust preferred securities):

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The junior subordinated debt contains certain covenants with which we are in compliance as of December 31, 2021.

At December 31, 2020 and December 31, 2019, the ratio of total debt outstanding, including both senior debt and junior subordinated debt, to total capitalization (defined as total debt plus total shareholders’ equity) was 31.5% and 25.2%, respectively.

At December 31, 2021 and December 31, 2020, the Company's leverage ratio was 31.1% and 30.4%, respectively.

The leverage ratio is defined in our senior credit agreements as the ratio of adjusted consolidated debt to total capital.

Adjusted consolidated debt treats trust preferred securities as equity capital up to 15% of total capital.

Total capital is defined as total debt plus tangible equity excluding accumulated other comprehensive income.

The maximum leverage ratio permitted by the agreements is 35.0%.

Having debt as part of our capital structure allows us to generate a higher return on equity and greater book value per share results than we could by using equity capital alone.

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Our reinsurance is contracted under excess of loss and quota share reinsurance contracts.

In excess of loss reinsurance, the reinsurer agrees to assume all or a portion of the ceding company’s losses in excess of a specified amount.

In excess of loss reinsurance, the reinsurer

agrees to assume all or a portion of the ceding company’s losses in excess of a specified amount.

The premiums payable to the reinsurer are negotiated by the parties based on their assessment of the amount of risk being ceded to the reinsurer because the reinsurer does not share proportionately in the ceding company’s losses.

In quota share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company’s losses arising out of a defined class of business in exchange for a

corresponding percentage of premiums.

In quota share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company’s losses arising out of a defined class of business in exchange for a corresponding percentage of premiums.

For the years ended December 31, 2021, 2020, and 2019 our net premium retention was 49.4%, 51.5% and 60.9%, respectively.

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The surplus share treaty along with facultative reinsurance helps ensure that our net retained limit per risk will be $5.0 million or less.

Based upon the modeling of our Excess and Surplus Lines and Specialty Admitted segments, it would take an event beyond our 1 in 1000 year PML to exhaust our $45.0 million property catastrophe treaty.

In the event of a catastrophe loss exhausting our $45.0 million property catastrophe treaty, we estimate our pre-tax cost at approximately $7.3 million, including reinstatement premiums and net retentions.

Based upon the modeling of our Excess and Surplus Lines and Specialty Admitted segments, it would take an event at the 1 in 1000 year PML to exhaust our $45.0 million property catastrophe reinsurance.

In the event of a catastrophe loss exhausting our $45.0 million property catastrophe reinsurance, we estimate our pre-tax cost would not exceed 2.5% of shareholders’ equity, including reinstatement premiums and net retentions.

In addition to this retention, we would retain any losses in excess of our reinsurance coverage limits.

On September 27, 2021, James River entered into the LPT Agreement with Aleka to reinsure substantially all of the Excess and Surplus Lines segment’s legacy portfolio of commercial auto previously issued to Rasier .

See “ Amounts Recoverable from an Indemnifying Party and Reinsurer on the Legacy Commercial Auto Book ” below for further information on this reinsurance agreement.

The following is a summary of our Specialty Admitted Insurance segment’s ceded reinsurance in place as of December 31, 2021:

Line of Business Coverage

Workers’ Compensation

Quota share coverage for 70% of the first $1.0 million.

Workers’ Compensation Quota share coverage for 70-85% of the first $1.0 million.

Excess of loss coverage for $29.0 million in excess of $1.0 million.

Auto Programs

Quota share coverage for 70-90% of limits up to $1.5 million liability and $5.0 million physical damage per occurrence.

Auto Programs Quota share coverage for 70-90% of limits up to $1.5 million liability and $5.0 million physical damage per occurrence.

General Liability & Professional Liability – Programs Quota share coverage for 70%-100% of limits up to $3.0 million per occurrence.

Umbrella and Excess Casualty - Programs Quota share coverage for 95%-100% of limits up to $10.0 million per occurrence, and excess of loss coverage for $5.0 million in excess of $10.0 million.

Commercial Property within Package - Programs

Quota share coverage for 100% of limits up to $25.0 million per occurrence.

Catastrophe Coverage

Excess of Loss coverage for $44.0 million in excess of $1.0 million per occurrence.

Umbrella and Excess Casualty - Programs Quota share coverage for at least 95% of limits up to $10.0 million per occurrence, and 87.5% of excess of loss coverage for $5.0 million in excess of $10.0 million.

Property within Package - Programs Quota share coverage for 100% of limits up to $40.0 million per occurrence.

Excess Property Quota share coverage for 100% of limits up to $16.9 million.

Catastrophe Coverage Excess of Loss coverage for $44.0 million in excess of $1.0 million per occurrence.

Aviation Programs Quota share coverage for 80% of limits up to $20 million liability and $2.5 million hull per occurrence, each aircraft;

and excess of loss coverage for up to $7.3M excess of $200 thousand of our 20% share of the quota share each occurrence.

(1) Excluding one program which has quota share coverage for 84.5% of the first $1.0 million per occurrence and excess of loss coverage for $49.0 million in excess of $1.0 million per occurrence.

(2) Includes any residual market pools.

(3) Excluding one program which has quota share coverage for 90% of the first $500,000 and excess of loss coverage for $39.5 million in excess of $500,000 per risk per occurrence.

Our Specialty Admitted Insurance segment purchases reinsurance for at least 50% of the exposed limits on specialty admitted property-casualty business.

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The segment is covered for $44.0 million in excess of $1.0 million per occurrence to manage its property exposure to an approximate 1 in 1,000 year PML.

In our Casualty Reinsurance segment, we also have limited property catastrophe exposure, primarily through auto physical damage coverage.

In the aggregate, we believe our pre-tax group-wide PML from a 1 in 1,000 year property catastrophe event would not exceed $10.0 million, inclusive of reinstatement premiums payable.

We also have a clash and contingency reinsurance treaty to cover both the Excess and Surplus Lines and Specialty Admitted Insurance segments in the event of a claim incident involving more than one of our insureds.

In our Casualty Reinsurance segment, we also have limited property catastrophe exposure on treaties in run-off, primarily through auto physical damage coverage.

In the aggregate, we believe our pre-tax group-wide PML from a 1 in 1,000 year property catastrophe event would not exceed 2.5% of shareholders’ equity, inclusive of reinstatement premiums payable.

We also have a contingency clash reinsurance treaty to cover both the Excess and Surplus Lines and Specialty Admitted Insurance segments in the event of a claim incident involving more than one of our insureds in addition to Extra Contractual and Excess Policy Limits protection.

The treaty covers $10.0 million in excess of a $2.0 million retention for loss occurrences within the treaty term.

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In fronting arrangements, which the Company conducts through its Specialty Admitted Insurance segment, we are subject to credit risk with regard to insurance companies who act as reinsurers for us in such arrangements.

We may require collateral, such as a trust agreement, funds held or a letter of credit, to secure the obligations of the insurance entity for whom we are fronting.

At December 31, 2020, we had reinsurance recoverables on unpaid losses of $805.7 million and reinsurance recoverables on paid losses of $46.1 million, and all material recoverable amounts were from companies with A.M.

Best ratings of “A-" (Excellent) or better, collateral had been posted by the reinsurer for our benefit, or represent recoverables from a state residual market for automobile insurance.

We customarily require a collateral trust arrangement to secure the obligations of the insurance entity for whom we are fronting.

At December 31, 2021, we had reinsurance recoverables on unpaid losses of $1,348.6 million (net of a $631,000 allowance for credit losses) and reinsurance recoverables on paid losses of $82.2 million, and all material recoverable amounts were from companies with A.M.

Best ratings of “A-" (Excellent) or better, are collateralized by the reinsurer for our benefit through letters of credit or funds on deposit in trust accounts, or represent recoverables from a state residual market for automobile insurance.

The following table sets forth our most significant reinsurers by amount of reinsurance recoverables and the amount of reinsurance recoverables pertaining to each such reinsurer as well as its A.M.

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Swiss Reinsurance America Corporation $ 324,982 A+

Aleka Insurance Company 256,452 Unrated (1)

Berkley Insurance Company 125,424 A+

Safety National Casualty 47,916 A++

Hannover Ruck SE 35,848 A+

Aioi Nissay Dowa Insurance Company 47,341 A+

Hannover Ruck SE 47,335 A+

Endurance Assurance Corporation 36,843 A+

Munich Reinsurance America 34,612 A+

North Carolina Reinsurance Facility 28,355 Unrated (2)

American European Insurance Company 34,349 B (2)

Endurance Assurance Corporation 27,626 A+

Partner Reinsurance Company 22,267 A+

North Carolina Reinsurance Facility 26,995 Unrated (3)

Top 10 Total 982,249

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Total $ 1,348,628

(1) This reinsurer is unrated.

All material reinsurance amounts from this reinsurer are collateralized.

(2) This reinsurer is below A-.

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(3) The North Carolina Reinsurance Facility is a residual market mechanism for automobile insurance in North Carolina.

Amounts Recoverable from an Indemnifying Party

The Company previously issued a set of insurance contracts to Rasier under which the Company pays losses and loss adjustment expenses on the contracts.

The Company has indemnity agreements with Rasier (non-insurance entities) and is contractually entitled to receive reimbursement for a significant portion of the losses and loss adjustment expenses paid on behalf of Rasier and other expenses incurred by the Company.

Rasier is required to collateralize all amounts currently due to the Company and to provide additional collateral sufficient to cover the amounts that may be recoverable under the indemnity agreements, including, among other things, case loss and loss adjustment expense reserves, IBNR loss and loss adjustment expense reserves, extra contractual obligations and excess of policy limits liabilities.

The collateral is provided through a collateral trust arrangement established in favor of the Company by a captive insurance company affiliate of Rasier.

As permitted under our indemnification agreements with Rasier and the associated trust agreement, we have withdrawn the collateral posted to the trust account.

At December 31, 2020, the Company held collateral funds of $859.9 million.

The funds withdrawn from the trust account, currently invested in short term U.S.

Treasury securities and included in restricted cash equivalents on the Company's consolidated balance sheet, will be used to reimburse the Company for the losses and loss adjustment expenses paid on behalf of Rasier and other related expenses incurred by the Company to the extent not paid as required under the indemnity agreements.

The Company has ongoing exposure to estimated losses and expenses on these contracts growing at a faster pace than growth in our collateral balances.

In addition, we have credit exposure if our estimates of future losses and loss adjustment expenses and other amounts recoverable, which are the basis for establishing collateral balances, are lower than actual amounts paid or payable.

Amounts Recoverable from an Indemnifying Party and Reinsurer on Legacy Commercial Auto Book

James River previously issued a set of commercial auto insurance contracts to Rasier (the “Rasier Commercial Auto Policies”) under which James River pays losses and loss adjustment expenses on the contracts.

James River has indemnity agreements with Rasier (non-insurance entities) (collectively, the “Indemnity Agreements”) and is contractually entitled to reimbursement for the portion of the losses and loss adjustment expenses paid on behalf of Rasier under the Rasier Commercial Auto Policies and other expenses incurred by James River.

On September 27, 2021, James River entered into a loss portfolio transfer reinsurance agreement (the “LPT Agreement”) with Aleka to reinsure substantially all of the Rasier Commercial Auto Policies for which James River is not otherwise indemnified by Rasier under the Indemnity Agreements.

Under the terms of the LPT Agreement, effective as of July 1, 2021, James River ceded to Aleka approximately $345.1 million of commercial auto liabilities relating to Rasier Commercial Auto Policies written in the years 2013-2019, which amount constituted the reinsurance premium.

Each of Rasier and Aleka are required to post collateral under the Indemnity Agreements and the LPT Agreement, respectively:

• Pursuant to the Indemnity Agreements, Rasier is required to post collateral for the amounts recoverable or that may be recoverable under the Indemnity Agreements, including, among other things, case loss and loss adjustment expense reserves, IBNR loss and loss adjustment expense reserves, extra contractual obligations and excess policy limits liabilities.

The collateral is provided through a collateral trust arrangement (the “Indemnity Trust”) in favor of James River by Aleka.

In connection with the execution of the LPT Agreement, James River returned $691.3 million to the Indemnity Trust, representing the remaining balance of the amount withdrawn in October 2019, as was permitted under the indemnification agreements with Rasier and the associated trust agreement.

At December 31, 2021, the balance in the Indemnity Trust was $584.6 million, and, together with the balance of the Loss Fund Trust (as defined below) attributable to the Indemnity Agreements as described below, the total balance of collateral securing Rasier’s obligations under the Indemnity Agreements was $653.7 million.

• Pursuant to the LPT Agreement, Aleka is required to post collateral equal to 102% of James River's estimate of Aleka's obligations under the LPT Agreement, calculated in accordance with statutory accounting principles.

The collateral is provided through a collateral trust arrangement (the “LPT Trust”) established in favor of James River by Aleka.

At December 31, 2021, the balance in the LPT Trust was $251.7 million, and, together with the balance of the Loss Fund Trust (as defined below) attributable to the LPT Agreement as described below, the total balance of collateral securing Aleka’s obligations under the LPT Agreement was $279.9 million.

At December 31, 2021, the total reinsurance recoverables under the LPT Agreement was $272.3 million (including $256.5 million of unpaid recoverables and $15.9 million of paid recoverables).

In connection with the execution of the LPT Agreement, James River and Aleka entered into an administrative services agreement (the “Administrative Services Agreement”) with a third party claims administrator (the “Administrator”) pursuant to which the Administrator handles the claims on the Rasier Commercial Auto Policies for the remaining life of those claims.

The claims paid by the Administrator are reimbursable by James River, and pursuant to the Administrative Services Agreement, James River established a loss fund trust account for the benefit of the Administrator (the “Loss Fund Trust”) to collateralize its claims payment reimbursement obligations.

James River funds the Loss Fund Trust using funds withdrawn from the Indemnity Trust, funds withdrawn from the LPT Trust, and its own funds, in each case in an amount equal to the pro rata portion of the required Loss Fund Trust balance attributable to the Indemnity Agreements, the LPT Agreement and James River’s existing third party reinsurance agreements, respectively.

At December 31, 2021, the balance in the Loss Fund Trust was $102.0 million, including $69.2 million of which representing collateral supporting Rasier’s obligations under the Indemnity Agreements and $28.2 million of which representing collateral supporting Aleka’s obligations under the under the LPT Agreement.

Funds posted to the Loss Fund Trust are classified as restricted cash equivalents on the Company's balance sheet.

While the LPT Agreement brings economic finality to substantially all of the Rasier Commercial Auto Policies, the Company has credit exposure to Rasier and Aleka under the Indemnity Agreements and the LPT Agreement if the estimated losses and expenses of the Rasier Commercial Auto Policies grow at a faster pace than the growth in our collateral balances.

In addition, we have credit exposure if our estimates of future losses and loss adjustment expenses and other amounts recoverable under the Indemnity Agreements and the LPT agreement, which are the basis for establishing the collateral balances, are lower than actual amounts paid or payable.

The amount of our credit exposure in any of these instances could be material.

To mitigate these risks, we closely and frequently monitor our exposure compared to our collateral held, and we request additional collateral when our analysis indicates that we have uncollateralized exposure.

Our sources of operating funds consist primarily of premiums written, investment income, reinsurance recoveries and proceeds from offerings of debt and equity securities and from sales and redemptions of investments.

We use the operating cash flows primarily to pay operating expenses, losses and loss adjustment expenses, ceded premiums, and income taxes.

Cash flow from operations may differ substantially from net income.

The potential for a large claim under an insurance or reinsurance contract means that substantial and unpredictable payments may need to be made within relatively short periods of time.

We have generated positive cash flow from operations (excluding restricted cash equivalents) in each of the three years ended December 31, 2020, 2019, and 2018.

The following table summarizes our cash flows:

Year Ended December 31,

2020 2019 2018

(in thousands)

Cash and cash equivalents provided by (used in):

Operating activities (excluding restricted cash equivalents) $ 65,414 $ 289,858 $ 290,028

Investing activities (175,991) (263,359) (266,772)

Financing activities 65,925 7,956 (14,294)

Change in cash and cash equivalents (44,652) 34,455 8,962

Change in restricted cash equivalents (Operating activities) (339,244) 1,199,164 —

Change in cash and cash equivalents and restricted cash equivalents $ (383,896) $ 1,233,619 $ 8,962

Cash provided by operating activities (excluding restricted cash equivalents) was $65.4 million, $289.9 million, and $290.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The decline in cash provided by operations was largely driven by the run-off of Rasier.

There were no associated premiums collected in 2020 for the Rasier policies terminated on December 31, 2019, but claim payments associated with the run-off continued in 2020.

Cash used in investing activities reflects our efforts to enhance the yield in our investment portfolio by investing available cash and cash equivalents into higher yielding fixed maturity securities and bank loan participations.

Cash and cash equivalents (excluding restricted cash equivalents) comprised 6.9%, 9.4%, and 9.3% of total cash and invested assets at December 31, 2020, 2019 and 2018, respectively.

Cash provided by (used in) financing activities primarily relates to net draws on our senior credit facilities of $104.0 million, $40.0 million, and $20.0 million in 2020, 2019, and 2018, respectively, to help support our growth, partially offset by dividends paid to shareholders of $37.1 million in 2020, $36.7 million in 2019, and $36.1 million in 2018.

Restricted cash equivalents used in operating activities for the year ended December 31, 2020 primarily reflects $339.2 million returned to a former insured, per the terms of a collateral trust (see Amounts Recoverable from an Indemnifying Party in Liquidity and Capital Resources ).

Restricted cash equivalents provided by operating activities in 2019 reflects the withdrawal, as permitted under our indemnification agreements and the associated trust agreement with Rasier, of collateral posted to the trust account.

At December 31, 2020, the Company held collateral funds of $859.9 million as restricted cash equivalents on its balance sheet.

Best financial strength rating for our group’s regulated insurance subsidiaries is “A” (Excellent).

Best financial strength rating for our group’s regulated insurance and reinsurance subsidiaries is “A-” (Excellent) with a stable outlook.

This rating reflects A.M.

The rating for our operating insurance and reinsurance companies of “A” (Excellent) is the third highest rating of the thirteen ratings issued by A.M.

Best’s opinion of our insurance and reinsurance subsidiaries’ financial strength, operating performance and ability to meet obligations to policyholders and is not an evaluation directed towards the protection of investors.

The rating for our operating insurance and reinsurance companies of “A-” (Excellent) is the fourth highest rating of the thirteen ratings issued by A.M.

Best and is assigned to insurers that have, in A.M.

Best’s opinion, an excellent ability to meet their ongoing obligations to policyholders.

On March 4, 2021, A.M.

Best announced that it reduced the outlook on our regulated insurance subsidiaries to negative from stable on the “A” (Excellent) financial strength rating on such entities following our announcement of $86.0 million of adverse development on reserves for losses and loss adjustment expenses in the fourth quarter of 2020 principally related to our commercial auto business in our Excess and Surplus Lines segment.

On May 7, 2021, following the Company's announcement of $168.7 million of further adverse development in the first quarter of 2021 on reserves for losses and loss adjustment expenses in our Excess and Surplus Lines segment, inclusive of $170.0 million of unfavorable development in our commercial auto business, A.M.

Best announced a downgrade of our financial strength rating to “A-” (Excellent) and maintained a negative outlook on our regulated insurance subsidiaries.

The Company's outlook was upgraded to stable by A.M.

Best in the third quarter following the closing of the LPT Agreement which reinsures substantially all of the legacy commercial auto business.

The financial strength ratings assigned by A.M.

Best have an impact on the ability of our regulated subsidiaries to attract and retain agents and brokers and on the risk profiles of the submissions for insurance that our subsidiaries receive.

The “A” (Excellent) ratings assigned to our insurance and reinsurance subsidiaries are consistent with our business plans and we believe allow our subsidiaries to actively pursue relationships with the agents and brokers identified in their marketing plans.

Share activity in 2019 and 2020 includes issuances from stock option exercises and RSU vesting, increasing the number of common shares outstanding from 29,988,460 at December 31, 2018 to 30,424,391 at December 31, 2019 and 30,649,261 at December 31, 2020.

On May 10, 2021, the Company closed the offering and public sale (the “Offering”) of an aggregate of 6,497,500 of the Company’s common shares at a public offering price of $31.00 per share.

The Company received net proceeds (before expenses) from the Offering of $192.1 million, which were used for general corporate purposes.

The common shares were offered and sold pursuant to an underwriting agreement entered into by the Company, Barclays Capital, Inc., and Keefe, Bruyette & Woods, Inc., as representatives of the several underwriters named therein.

The Company also issued 226,305 common shares in the twelve months ended December 31, 2021 related to outstanding equity incentive plan awards.

Of the new shares issued, 93,446 were related to employee stock option exercises and 132,859 were related to vesting of restricted share units (“RSUs”).

As a result of the Offering and the issuances related to equity incentive plan awards, the total common shares outstanding increased from 30,649,261 at December 31, 2020 to 37,373,066 at December 31, 2021.

We expect to close on the issuance and sale of 150,000 Series A Preferred Shares on March 1, 2022 for an aggregate purchase price of $150.0 million, or $1,000 per share, in a private placement.

The Series A Preferred Shares are convertible into the Company’s common shares at the option of the holder at any time, or at the Company’s option under certain circumstances.

Dividends on the Series A Preferred Shares accrue quarterly at the initial rate of 7% of the $1,000 per share liquidation preference per annum, which may be paid in cash, in-kind in common shares or in Series A Preferred Shares, at the Company’s election.

Share Based Compensation Expense

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Exercisable, end of year 287,974 $ 35.26 463,324 $ 32.25 590,340 $ 29.34

All of the outstanding options vest over three years and have a contractual life of seven years from the original date of grant.

All of the outstanding options vested over three years and have a contractual life of seven years from the original date of grant.

The following table summarizes the RSU activity:

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Unvested, end of year 292,135 $ 45.89 399,856 $ 43.59 340,368 $ 41.50

The vesting period of RSUs granted to employees range from one to five years and vest ratably over the respective vesting period, and the majority vest in three years.

The vesting period of RSUs granted to employees have ranged from one to five years and vest ratably over the respective vesting period, and the majority vest in three years.

All RSUs granted to date to non-employee directors had a one year vesting period.

Contractual Obligations and Commitments

The following table illustrates our contractual obligations and commercial commitments by due date as of December 31, 2020:

Material Cash Requirements

We believe the cash generating capability of our operations, together with our revolving credit facilities, and ability to raise capital through future equity offerings, will be adequate to meet our short and long-term cash requirements and provide the financial strength necessary to support our business growth.

The following table illustrates our material cash requirements by due date as of December 31, 2021:

Payments Due by Period

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Interest on debt obligations was calculated using the LIBOR rate as of December 31, 2021 with the assumption that interest rates would remain flat over the remainder of the period that the debt was outstanding.

The Company owns investments in limited partnerships that invest in concentrated portfolios including publicly-traded small cap equities, loans of middle market private equity sponsored companies, private equity general partnership interests, commercial mortgage-backed securities, and tranches of distressed home loans.

At December 31, 2021, the Company’s Excess and Surplus Lines segment has outstanding commitments to invest another $5.3 million in these limited partnerships.

Off-Balance Sheet Arrangements

15 unchanged sentences

Other operating expenses of the Corporate and Other segment (27,609) (29,418) (27,664)

Underwriting (loss) profit (1)

Underwriting loss (1)

(256,946) (33,845) (9,755)

Net investment income 56,865 73,368 75,652

Net realized and unrealized losses on investments (16,030) (2,919) (5,479)

Net realized and unrealized gains (losses) on investments 15,564 (16,030) (2,919)

Other income 353 1,153 1,137

2 unchanged sentences

Amortization of intangible assets (363) (538) (597)

Income before income taxes $ 11,937 $ 51,867 $ 70,838

(1) Underwriting (loss) profit includes gross fee income of $20.9 million, $24.9 million, and $28.7 million for the years ended December 31, 2020, 2019, and 2018, respectively.

Reconciliation of Adjusted Net Operating Income

insight into our results of operations and our underlying business performance.

Our income before taxes and net income for the years ended December 31, 2020, 2019 and 2018 reconcile to our adjusted net operating income as follows:

(Loss) income before income taxes $ (196,034) $ 11,937 $ 51,867

(1) Underwriting loss includes gross fee income of $22.7 million, $20.9 million, and $24.9 million for the years ended December 31, 2021, 2020, and 2019, respectively.

Reconciliation of Adjusted Net Operating (Loss) Income

We define adjusted net operating (loss) income as net (loss) income excluding net realized and unrealized gains (losses) on investments, and certain non-operating expenses such as professional service fees related to various strategic initiatives and the filing of registration statements for the offering of securities, and severance costs associated with terminated employees.

Our (loss) income before taxes and net (loss) income for the years ended December 31, 2021, 2020 and 2019 reconcile to our adjusted net operating (loss) income as follows:

Year Ended December 31,

2021 2020 2019

Taxes Net Income Income

Taxes Net Loss Income

Income Income

(in thousands)

Income as reported $ 11,937 $ 4,824 $ 51,867 $ 38,339 $ 70,838 $ 63,830

Net realized and unrealized losses on investments

16,030 14,840 2,919 3,761 5,479 4,374

(Loss) income as reported $ (196,034) $ (172,799) $ 11,937 $ 4,824 $ 51,867 $ 38,339

Net realized and unrealized losses (gains) on investments (15,564) (13,292) 16,030 14,840 2,919 3,761

Other expenses 2,214 1,846 1,967 1,554 1,055 834

Impairment of intangible assets — — — — 200 200

Interest expense on leased building the Company was previously deemed to own for accounting purposes

— — — — 1,584 1,251

Adjusted net operating income $ 29,934 $ 21,218 $ 55,841 $ 42,934 $ 79,201 $ 70,596

Adjusted net operating (loss) income $ (209,384) $ (184,245) $ 29,934 $ 21,218 $ 55,841 $ 42,934

Tangible Equity and Tangible Equity per Share

1 unchanged sentence

We believe tangible equity is a good measure to evaluate the strength of our balance sheet and to compare returns relative to this measure.

Tangible equity before dividends increased 9.8% from $559.8 million at December 31, 2019 to $614.5 million at December 31, 2020, largely due to net income of $4.8 million and $50.8 million of unrealized gains, net of taxes, on available-for-sale fixed maturity securities.

Tangible equity after dividends increased 3.1% from $559.8 million at December 31, 2019 to $577.4 million at December 31, 2020.

Tangible equity per common share was $18.84 at December 31, 2020, net of $1.20 of dividends per share paid by the Company during 2020.

The 2020 adjusted net operating income return on average tangible equity was 3.8%, which compares to 7.9% for the full year 2019.

For the year ended December 31, 2021, our tangible equity per share decreased by 27.9%.

Absent the $43.1 million of shareholder dividends in 2021, our tangible equity per share decreased by 21.5%.

We define tangible equity as the sum of shareholders’ equity less goodwill and intangible assets (net of amortization).

14 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis