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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-03-01 · 407 added, 292 removed, 764 unchanged (48% of the section changed)

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We seek to accomplish this by earning profits from insurance and reinsurance underwriting and generating meaningful risk-adjusted investment returns, while managing our capital.

For the year ended December 31, 2021, approximately 70.4% of our group-wide gross written premiums originated from the U.S.

E&S lines market including business assumed by our Casualty Reinsurance segment.

For the year ended December 31, 2022, approximately 71.2% of our group-wide gross written premiums and 90.3% of our group-wide net written premiums originated from the U.S.

E&S lines market, which we believe puts us among the top three publicly traded insurers as ranked by highest concentrations of E&S risk.

We also have a specialty admitted insurance business in the United States.

We intend to concentrate substantially all of our underwriting in casualty insurance and reinsurance, and for the year ended December 31, 2021, we derived 96.9% of our group-wide gross written premiums from casualty insurance and reinsurance.

We intend to concentrate substantially all of our underwriting in casualty insurance, and for the year ended December 31, 2022, we derived 96.5% of our group-wide gross written premiums from casualty insurance.

We focus on writing business in specialty markets where our underwriters have particular expertise and where we have long-standing distribution relationships;

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The Excess and Surplus Lines segment produced 61.5% of our gross written premiums and 78.7% of our net written premiums for the year ended December 31, 2022.

The Specialty Admitted Insurance segment focuses on niche classes within the standard insurance markets, such as workers’ compensation coverage for building trades, healthcare employees, light manufacturing and other light-to-medium hazard risks in select U.S.

states and fronting business, where we retain a small percentage of the risk and seek to earn fee income by allowing other carriers and producers to use our licensure, ratings, expertise and infrastructure.

Through Falls Lake National and its subsidiaries, this segment has admitted licenses and the authority to write excess and surplus lines insurance in 50 states and the District of Columbia and distributes through a variety of sources, including independent retail agents, program administrators and MGAs.

The Specialty Admitted Insurance segment focuses on niche classes within the standard insurance markets with a primary focus on fronting business, where we retain a minority share of the risk and seek to earn fee income by allowing other carriers and producers to use our licensure, ratings, expertise and infrastructure.

We also write workers’ compensation coverage for building trades, healthcare employees, light manufacturing and other light-to-medium hazard risks in select U.S.

Through Falls Lake National and its subsidiaries, this segment has admitted licenses and the authority to write excess and surplus lines insurance in 50 states and the District of Columbia and distributes through a variety of sources, including program administrators, MGAs, and independent retail agents.

The Specialty Admitted Insurance segment produced 32.8% of our gross written premiums and 10.2% of our net written premiums for the year ended December 31, 2022.

The Casualty Reinsurance segment provides proportional and working layer casualty reinsurance to third parties and to our U.S.-based insurance subsidiaries.

The Casualty Reinsurance segment provides proportional and working layer casualty reinsurance to third parties and, through December 31, 2021, to our U.S.-based insurance subsidiaries.

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.

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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.

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

Of the total gross premiums written by our Casualty Reinsurance segment during 2022, 64.8% were general liability accounts.

The Casualty Reinsurance segment distributes through reinsurance brokers.

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subsidiaries (after taking into account third-party reinsurance) to JRG Re.

Effective January 1, 2018, we generally discontinued ceding 70% of our U.S.-written premiums to JRG Re and instead ceded 70% of our U.S.-written premiums to Carolina Re, a Bermuda-domiciled, wholly-owned subsidiary of James River Group, Inc.

Carolina Re is a Class 3A reinsurer that made an irrevocable election to be taxed as a U.S.

Effective January 1, 2018 through December 31, 2021, we generally discontinued ceding 70% of our U.S.-written premiums to JRG Re and instead ceded 70% of our U.S.-written premiums to Carolina Re, a Bermuda-domiciled, wholly-owned subsidiary of James River Group, Inc.

Carolina Re made an irrevocable election to be taxed as a U.S.

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

Carolina Re is also the cedent on a stop loss reinsurance treaty with JRG Re.

Carolina Re was also the cedent on a stop loss reinsurance treaty with JRG Re through December 31, 2021.

Business in the Casualty Reinsurance segment is ceded under proportional, or quota-share, reinsurance treaties that provide for an arm’s length ceding commission.

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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.

All of the Company’s U.S.-domiciled insurance subsidiaries are party to an intercompany pooling agreement that distributes the net underwriting results among the group companies based on their approximate pro-rata level of statutory capital and surplus to the total Company statutory capital and surplus.

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 from January 1, 2018 through December 31, 2021, ceded 70% of their premiums and losses to Carolina Re.

During 2022, Carolina Re commuted the outstanding obligations ceded under the intercompany quota-share reinsurance agreements back to the Company’s U.S.-based insurance subsidiaries with effect from January 1, 2022.

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.

Best Company (“A.M.

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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.

We discuss certain key metrics, described below, which we believe provide useful information about our business and the operational factors underlying our financial performance.

Underwriting profit is a non-GAAP measure commonly used in the property and casualty insurance industry to evaluate underwriting performance.

We believe that the disclosure of underwriting profit by individual segment and of the Company as a whole is useful to investors, analysts, rating agencies and other users of our financial information in evaluating our performance because our objective is to consistently earn underwriting profits.

We evaluate the performance of our segments and allocate resources based primarily on underwriting profit.

We define underwriting profit as net earned premiums and gross fee income (in specific instances when the Company is not retaining insurance risk) less losses and loss adjustment expenses on business not subject to retroactive reinsurance accounting for loss portfolio transfers (see Loss Portfolio Transfers in Strategic Actions below) and other operating expenses.

Other operating expenses include the underwriting, acquisition, and insurance expenses of the operating segments and, for consolidated underwriting profit, the expenses of the Corporate and Other segment.

Our definition of underwriting profit may not be comparable to that of other companies.

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

Loss ratio , expressed as a percentage, is the ratio of losses and loss adjustment expenses on business not subject to retroactive reinsurance accounting for loss portfolio transfers to net earned premiums.

Our definition of loss ratio may not be comparable to that of other companies.

See “Underwriting Performance Ratios” for a reconciliation of underwriting ratios.

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

Expense ratio , expressed as a percentage, is the ratio of other operating expenses net of gross fee income included in other income to net earned premiums.

Combined ratio is a measure of underwriting performance calculated as the sum of the loss ratio and the expense ratio.

A combined ratio of less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss.

Our definition of combined ratio may not be comparable to that of other companies.

See “Underwriting Performance Ratios” for a reconciliation of underwriting ratios.

Adjusted net operating income is an internal performance measure used in the management of our operations.

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 is defined as income available to common shareholders excluding a) the impact of retroactive reinsurance accounting for loss portfolio transfers, b) net realized and unrealized gains (losses) on investments, c) certain non-operating expenses such as professional service fees related to a purported class action lawsuit, various strategic initiatives, and the filing of registration statements for the offering of securities, and d) severance costs associated with terminated employees.

Adjusted net operating income is a non-GAAP measure and should not be viewed as a substitute for net income calculated in accordance with GAAP.

Our definition of adjusted net operating income may not be comparable to that of other companies.

See “Reconciliation of Non-GAAP Measures” for a reconciliation of income available to common shareholders to adjusted net operating income.

Tangible equity is defined as shareholders' equity plus mezzanine Series A Preferred Shares (as defined below) and the unrecognized deferred retroactive reinsurance gain on loss portfolio transfers less goodwill and intangible assets, net of amortization.

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

Key financial measures that we use to assess our longer term financial performance include the percentage growth in our tangible equity per share and our return on tangible equity.

Tangible equity is a non-GAAP measure and should not be viewed as a substitute for shareholders’ equity calculated in accordance with GAAP.

Our definition of tangible equity may not be comparable to that of other companies.

See “Reconciliation of Non-GAAP Measures” for a reconciliation of shareholders' equity to tangible equity.

Adjusted net operating return on tangible equity is defined as annualized adjusted net operating income expressed as a percentage of the average quarterly tangible equity balances in the respective period.

Tangible equity per share represents tangible equity divided by the sum of total common shares outstanding plus the common shares resulting from an assumed conversion of the outstanding Series A Preferred Shares into common shares (at the current conversion price).

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

Gross investment yield is annualized investment income before any deductions for fees and expenses, expressed as a percentage of the average beginning and ending carrying values of those investments during the period.

Unless specified otherwise, all references to our defined metrics above in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are for our business that is not subject to retroactive reinsurance accounting for loss portfolio transfers.

Management believes that the lack of economic impact of retroactive reinsurance accounting makes the presentation of our key metrics on business not subject to retroactive reinsurance accounting helpful to the users of our financial information.

See “Underwriting Performance Ratios” and “Reconciliation of Non-GAAP Measures.”

Critical Accounting Policies and Estimates

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We estimate the reserve using individual case-basis valuations of reported claims and statistical analysis.

We believe that the use of judgment is necessary to arrive at a best estimate for the reserve for losses and loss adjustment expenses given the long-tailed nature of the business we write and the limited operating experience of the fronting and program business in the Specialty Admitted Insurance segment and the commercial auto business in our Excess and Surplus lines segment.

In applying this judgment, we frequently establish reserves that differ from our internal actuaries’ estimate.

We believe that the use of judgment is necessary to arrive at a best estimate for the reserve for losses and loss adjustment expenses given the long-tailed nature of the business generally written by the Company 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 business in the Excess and Surplus Lines segment.

In applying this judgment, we may establish reserves that differ from our internal

actuaries’ estimate.

We seek to establish reserves that will ultimately prove to be adequate.

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Total $ 417,257 $ 831,013 $ 1,248,270 66.6 %

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.

Our Reserve Committee consists of our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, and Chief Actuary.

Additionally, the presidents, chief financial officers and segment actuaries of each of our three insurance segments participate in the Reserve Committee meetings for their respective segments.

The Reserve Committee meets quarterly to review the actuarial recommendations made by each segment 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 balance sheet.

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 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 generally written by the Company 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 business in the Excess and Surplus Lines 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.

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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 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.

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If actual loss emergence is better than our initial expected loss ratio assumptions, we will experience favorable development, and if it is worse than our initial expected loss ratio assumptions, we will experience adverse development.

Conversely, sufficient incurred and paid loss development is available for our oldest accident years, so more weight is given to the Incurred Loss Development method and the Paid Loss Development method than the Expected Loss method.

The Bornhuetter-Ferguson Incurred Loss Development and Paid Loss Development methods blend features of the Expected Loss method and the Incurred and Paid Loss Development methods.

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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.

Judgment is also required to make actuarial adjustments, if needed, for changes in claims processing and case reserving that could cause current reported loss and paid loss development patterns to deviate from historical patterns.

For the Excess and Surplus Lines segment, the segment actuary performs a study on each of these parameters at least 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 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 Specialty Admitted Insurance segment, expected loss ratios, loss development factors, and loss cost trends are reviewed and updated at least annually.

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

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Changes in reserves (91,278) — 5,045 130,057

The impact of recording the net reserve for losses and loss adjustment expenses at the highest value from the sensitivity analysis above would be to increase losses and loss adjustment expenses incurred by $162.3 million, reduce after-tax net income by $148.8 million, reduce shareholders’ equity by $148.8 million and reduce shareholders’ tangible equity by $148.8 million, in each case at or for the period ended December 31, 2021.

The impact of recording the net reserve for losses and loss adjustment expenses at the highest value from the sensitivity analysis above would be to increase losses and loss adjustment expenses incurred by $130.1 million, reduce after-tax net income by $113.7 million, reduce shareholders’ equity by $113.7 million and reduce shareholders’ tangible equity by $113.7 million, in each case at or for the year ended December 31, 2022.

The impact of recording the net reserve for losses and loss adjustment expenses at the lowest value from the sensitivity analysis above would be to reduce losses and loss adjustment expenses incurred by $91.3 million, increase after-tax net income by $81.2 million, increase shareholders’ equity by $81.2 million, and increase tangible equity by $81.2 million, in each case at or for the year ended December 31, 2022.

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Loss reserve estimates are subject to a high degree of variability due to the inherent uncertainty of ultimate claims settlement values.

In recording our best estimate of our reserve for losses and loss adjustment expenses, our Reserve Committee often selects an amount that is different from the actuarial recommendation due to the inherent variation associated with our reserve estimates and the possibility that there are unforeseen or incorrectly valued liabilities in the actuarial recommendations.

In recording our best estimate of our reserve for losses and loss adjustment expenses, our Reserve Committee may select an amount that is different from the actuarial recommendation submitted after considering other qualitative factors and our knowledge and expectations of trends and other business developments that impact our best estimate.

There is inherent variation associated with our reserve estimates and the possibility that there are unforeseen or incorrectly valued liabilities in the actuarial recommendations exists.

We believe that the insurance that we write is subject to above-average variation in reserve estimates.

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In addition, many of our policies are issued on an occurrence basis, and insureds suffering a loss frequently seek coverage beyond the policies’ original intent.

The difficulty in pinpointing actual ultimate losses and loss adjustment expenses (“LAE”) is illustrated by the fact that at December 31, 2021, 64.2% of our net reserve for losses and loss adjustment expenses in the Excess and Surplus Lines segment is for claims that have not been reported.

Our reserves are driven by a number of important assumptions, including litigation and regulatory trends, legislative activity, climate change, social and economic patterns and claims inflation assumptions.

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Our reserve estimates also assume that we will not experience significant losses from mass torts and that we will not incur losses from future mass torts not known to us today.

While it is not possible to predict the impact of changes in the litigation environment, if new mass torts or expanded legal theories of liability emerge, our cost of claims may differ substantially from our reserves.

our reserves.

Our reserve estimates assume that there will not be significant changes in the regulatory and legislative environment.

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Such adjustments are included in current operations.

We experienced $9.1 million of adverse development in 2022 on the reserve for losses and loss adjustment expenses held at December 31, 2021 (excluding adverse prior year development subject to retroactive reinsurance accounting - see Loss Portfolio Transfers in Strategic Actions below).

This adverse reserve development included $210,000 of favorable development in the Excess and Surplus Lines segment, $4.2 million of favorable development in the Specialty Admitted Insurance segment, and $13.4 million of adverse development in the Casualty Reinsurance segment.

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.

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

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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 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.

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.

Investment Valuation and Impairment

We carry fixed maturity securities classified as “available-for-sale” at fair value, and unrealized gains and losses on such securities, net of any deferred taxes, are reported as a separate component of accumulated other comprehensive income.

Equity securities (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are measured at fair value with changes in fair value recognized in net income.

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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 continue to be recognized in other comprehensive income.

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

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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If the present value of future expected cash flows is less than amortized cost, a credit loss is presumed to exist and an allowance for credit losses is established.

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.

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, 2022, 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.

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, 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 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.

The allowance for credit losses was maintained at a level considered adequate to absorb estimated probable credit losses.

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.

For the year ended December 31, 2022, management concluded that $1.5 million of the unrealized losses were due to credit-related impairments.

Management concluded that none of the unrealized losses were due to credit-related impairments for the year ended December 31, 2021.

For the year ended December 31, 2020, management concluded that $8.3 million of the unrealized losses were due to credit-related impairments.

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

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

We obtain an understanding of the methods, models, and inputs used by our investment managers and independent pricing services, and controls are in place to validate that prices provided represent fair values.

We obtain an understanding of the methods, models, and inputs used by our investment managers and independent pricing services, and controls are in place to validate that

prices provided represent fair values.

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.

Recent Accounting Pronouncements

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

In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock and became effective for interim and annual periods beginning after December 15, 2021.

The Company adopted the new standard concurrent with the issuance of our 7% Series A Perpetual Cumulative Convertible Preferred Shares on March 1, 2022.

Under ASU 2020-06, embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital.

The new guidance also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and generally requires them to include the effect of potential share settlement for instruments that may be settled in cash or shares.

Adoption of the new standard did not materially impact our financial position, results of operations, or earnings per share for the year ended December 31, 2022.

Impact of the COVID-19 Pandemic

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.

The Company’s financial condition and results of operations were not materially impacted by the coronavirus (COVID-19) pandemic during 2022.

However, we are continuing to monitor a number of risks that COVID-19 poses to the Company.

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

Risk Factors” in this Annual Report on Form 10-K.

Impact of Macroeconomic Events Including Higher Levels of Inflation and Rising Interest Rates

Current macroeconomic events including the war in Ukraine and sustained supply chain constraints stemming from the COVID-19 pandemic led to higher levels of inflation in 2022.

The Federal Reserve, attempting to gain control of inflation, implemented a series of federal funds rate increases in 2022 and early 2023.

Interest rates, in response, rose significantly in 2022 and fears of an impending economic slowdown have increased the likelihood of an economic recession, all of which negatively impacted financial markets.

The immediate impacts to the Company were on our investment portfolio and investing results.

Our investment portfolio is primarily comprised of fixed maturity investments (81.3% of total invested assets at December 31, 2022).

The fair values of fixed maturities generally move inversely with interest rates, and unrealized losses associated with the declines in fair values are recognized as a component of other comprehensive income (loss), contributing to declines in shareholders' equity and tangible equity.

For the year ended December 31, 2022, other comprehensive loss, representing the after-tax impact of the unrealized losses on fixed maturity investments, was $193.0 million.

We are monitoring our portfolio for signs of credit-related impairments, and to date, we have concluded that the declines are primarily interest rate and market-driven with no allowance for credit losses considered necessary.

As turnover has occurred in our portfolio and we invest cash generated from operations, we are benefiting from the higher yields now available on fixed maturities which is reflected in our investment income.

Our investment portfolio also contains investments in equity securities and bank loan participations (comprising 5.4% and 7.1% of total invested assets at December 31, 2022, respectively) that are carried on our Balance Sheets at fair value.

The fair values of these investments, the changes in which are recognized as unrealized gains and losses in our Statements of Income (Loss) and Comprehensive (Loss) Income, have been negatively impacted by the ongoing macroeconomic events and associated declines in financial markets.

Net realized and unrealized (losses) gains on investments for the year ended December 31, 2022 include unrealized losses of $11.2 million and $15.9 million, respectively, for the changes in fair values of equity securities and bank loan participations.

The rising interest rates have also increased interest expense on our outstanding variable rate senior and trust preferred debt.

The applicable rates on our debt reset quarterly or semi-annually and are structured as LIBOR plus a margin or spread.

Strategic Actions

Issuance of Series A Preferred Shares

The Company closed on the issuance and sale of 150,000 7% Series A Perpetual Cumulative Convertible Preferred Shares, par value $0.00125 per share (the “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 liquidation preference per share (the “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.

During 2022, cash dividends of $8.8 million were declared, of which $2.6 million was payable at December 31, 2022.

Please see “Note 11.

Series A Preferred Shares” in the Notes to our Consolidated Financial Statements in this Form 10-K.

Loss Portfolio Transfers

Loss portfolio transfers are a form of reinsurance utilized by the Company to transfer losses and loss adjustment expenses and associated risk of adverse development on covered subject business, as defined in the respective agreements, to an assuming reinsurer in exchange for a reinsurance premium.

Loss portfolio transfers can bring economic finality on the subject risks when they no longer meet the Company's appetite or are no longer aligned with our risk management guidelines.

Commercial Auto Loss Portfolio Transfer

On September 27, 2021, James River Insurance Company and James River Casualty Company (together, “James River”) entered into a loss portfolio transfer transaction (the “Commercial Auto LPT”) 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 structured to be fully collateralized, is not subject to an aggregate limit, and is 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.

Casualty Re Loss Portfolio Transfer

On February 23, 2022, JRG Re entered into a loss portfolio transfer retrocession agreement (the “Casualty Re LPT”) with Fortitude Reinsurance Company Ltd.

(“FRL”) under which FRL reinsures the majority of the reserves in the Company’s Casualty Reinsurance segment.

Under the terms of the transaction, which closed on March 31, 2022 (the “Retrocession Closing Date”), JRG Re (a) ceded to FRL all existing and future claims for losses arising under certain casualty reinsurance agreements with underlying insurance companies with treaty inception dates ranging from 2011 to 2020 (the “Subject Business”), in each case net of third-party reinsurance and other recoveries, up to an aggregate limit of $400.0 million;

(b) continues to manage and retain the benefit of other third-party reinsurance on the Subject Business;

(c) paid FRL a reinsurance premium of $335.0 million, $310.0 million of which JRG Re credited to a notional funds withheld account (the “Funds Withheld Account”) and $25.0 million of which was paid in cash to FRL;

and (d) pays FRL a 2% per annum crediting rate on the Funds Withheld Account balance on a quarterly basis.

The total premium, initial Funds Withheld Account credit, and aggregate limit was adjusted for claims paid from October 1, 2021 to the Retrocession Closing Date.

The Casualty Reinsurance segment incurred $6.8 million of net adverse reserve development in the three months ended March 31, 2022 associated with the Casualty Re LPT.

The Funds Withheld Account balance was $213.6 million at December 31, 2022 and Funds Withheld Account crediting fees of $3.7 million are included in interest expense in our Statements of Income (Loss) and Comprehensive (Loss) Income for the year ended December 31, 2022.

Retroactive Reinsurance Accounting

The Company periodically reevaluates the remaining reserves subject to the Commercial Auto LPT and the Casualty Re LPT (together, the “Loss Portfolio Transfers”).

For the year ended December 31, 2022, due to adverse paid loss trends on the legacy Rasier business, the Company recognized adverse prior year development of $46.7 million on the reserves subject to the Commercial Auto LPT, resulting in a corresponding additional amount ceded under the Commercial Auto LPT.

As a result, the cumulative amounts ceded under the Commercial Auto LPT exceed the consideration paid, moving the Commercial Auto LPT into a gain position and requiring retroactive reinsurance accounting.

Similarly, due to adverse paid and reported loss trends on the business subject to the Casualty Re LPT, the Company ceded an additional $6.1 million of losses recoverable under the Casualty Re LPT for the year ended December 31, 2022, moving the Casualty Re LPT into a deferred gain position requiring retroactive reinsurance accounting.

At December 31, 2022, the Company has $58.9 million of aggregate limit remaining under the Casualty Re LPT.

Under retroactive reinsurance accounting, gains are deferred and recognized in earnings in proportion to actual paid recoveries under the Loss Portfolio Transfers using the recovery method.

Over the life of the contracts, we would expect no economic impact to the Company as long as any additional losses are within the limit of the loss portfolio transfer and the counterparty performs under the contract.

In periods where the Company recognizes a change in the estimate of the reserves subject to the Loss Portfolio Transfers that increases or decreases the amounts ceded under the Loss Portfolio Transfers, the proportion of actual paid recoveries to total ceded losses is affected and the change in deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the loss portfolio transfer.

The effect of the deferred retroactive reinsurance benefit is recorded in losses and loss adjustment expenses on the Consolidated Statements of Income (Loss) and Comprehensive (Loss) Income.

Retroactive reinsurance benefits totaling $32.7 million ($31.0 million for the Commercial Auto LPT and $1.7 million for the Casualty Re LPT) were recorded in losses and loss adjustment expenses for the year ended December 31, 2022 using the

recovery method.

As of December 31, 2022, the cumulative amounts ceded under the Loss Portfolio Transfers was $732.9 million ($391.8 million under the Commercial Auto LPT and $341.1 million under the Casualty Re LPT).

At December 31, 2021, $345.1 million was ceded under the Commercial Auto LPT.

The total unrecognized deferred retroactive reinsurance gain of $20.1 million at December 31, 2022 under the Loss Portfolio Transfers ($15.7 million related to the Commercial Auto LPT and $4.4 million related to the Casualty Re LPT) is separately presented on the Company's Consolidated Balance Sheets.

Suspension of Underwriting Activities in Casualty Reinsurance Segment

In keeping with our previously announced plans to significantly shrink top-line writings of the Casualty Reinsurance segment, we have decided to suspend writing business in the Casualty Reinsurance segment, as we continue our focus on growing our higher returning U.S.

insurance and fronting businesses.

We expect the Casualty Reinsurance segment to continue earning premium due to the nature of the earnings patterns in the reinsurance business, which can extend over multiple years.

Aside from the suspension of underwriting activities, we plan for the Casualty Reinsurance segment to maintain its normal day-to-day operations, with a staff to continue servicing the business on its books and to facilitate compliance with its regulatory requirements.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

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Net retention 50.0 % 49.4 %

49.4 % 51.5 %

Net written premiums $ 748,479 $ 744,380 0.6 %

Net earned premiums $ 766,161 $ 695,594 10.1 %

Losses and loss adjustment expenses (792,352) (478,545) 65.6 %

Losses and loss adjustment expenses excluding retroactive reinsurance (524,723) (792,352) (33.8) %

Other operating expenses (191,796) (160,188) 19.7 %

Underwriting loss (2), (3)

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

49,642 (256,946) —

Losses and loss adjustment expenses - retroactive reinsurance (20,091) — —

Net investment income 71,111 56,865 25.1 %

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

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

Net realized and unrealized investment (losses) gains (28,318) 15,564 —

Other income and expense (5,016) (2,232) 124.7 %

Interest expense (17,578) (8,922) 97.0 %

Amortization of intangible assets (363) (363) —

(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)

Income (loss) before taxes 49,387 (196,034) —

Income tax expense (benefit) 18,414 (23,235) —

Net income (loss) $ 30,973 $ (172,799) —

Dividends on Series A Preferred Shares (8,750) — —

Net income (loss) available to common shareholders $ 22,223 $ (172,799) —

Adjusted net operating income (loss) (1)

$ 69,542 $ (184,245) —

4 unchanged sentences

Accident year loss ratio ex-cat (3)

(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 (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 (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.

66.7 % 66.4 %

(1) Underwriting profit (loss) and adjusted net operating income (loss) are non-GAAP measures.

See “Reconciliation of Non-GAAP Measures.”

(2) Underwriting results include gross fee income of $23.6 million and $22.7 million for the years ended December 31, 2022 and 2021, respectively.

(3) Accident year loss ratio excluding $5.0 million of net catastrophe losses related to Hurricane Ian in the year ended December 31, 2022 and $5.0 million of net catastrophe losses related to Hurricane Ida in the year ended December 31, 2021.

The Company produced an underwriting profit of $49.6 million and a combined ratio of 93.5% for the year ended December 31, 2022 compared to an underwriting loss of $256.9 million and a combined ratio of 136.9% for the year ended December 31, 2021.

The 10.1% growth in consolidated net earned premiums was driven by attractive market conditions, particularly for our Excess and Surplus Lines segment, which reported net earned premium growth of $69.6 million or 14.3% compared to the prior year.

The Excess and Surplus Lines segment is our largest segment, comprising 61.5% of consolidated gross written premiums and 72.5% of consolidated net earned premiums in 2022.

Our loss ratio improved from 113.9% in the prior year to 68.5% in the current year.

The improvement was primarily driven by net reserve development on prior accident years which was $9.1 million or 1.2 percentage points adverse for the year ended December 31, 2022 compared to $325.8 million or 46.8 percentage points adverse for the year ended December 31, 2021.

$9.1 million of net adverse reserve development for the year ended December 31, 2022 includes $210,000 of net favorable development from the Excess and Surplus Lines segment, $4.2 million of net favorable development from the Specialty Admitted Insurance segment, and $13.4 million of net adverse development from the Casualty Reinsurance segment, of which $6.8 million related to the Company's entrance into the Casualty Re LPT in March of 2022.

The $325.8 million of net adverse reserve development for the year ended December 31, 2021 included $190.7 million of net adverse reserve development from the Excess and Surplus Lines segment almost entirely related to a previous commercial auto account, $2.5 million of net favorable development from the Specialty Admitted Insurance segment, and $137.6 million 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 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.

• 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 Loss Income

(in thousands)

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

Combined Ratios

The combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and other operating expenses to net earned premiums.

Our combined ratio for the year ended December 31, 2021 was 136.9%.

A combined ratio of less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss.

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%.

It included $92.2 million, or 15.2 percentage points, of net adverse reserve development on prior accident years, including $59.4 million of net adverse reserve development from the Excess and Surplus Lines segment, $5.0 million of net favorable development from the Specialty Admitted Insurance segment, and $37.8 million of net adverse reserve development from the Casualty Reinsurance segment.

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

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

Expense Ratios

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

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 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.

The Casualty Reinsurance segment typically structures its reinsurance treaties with loss mitigation features including sliding scale ceding commissions.

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.

Current accident year losses in both years include $5.0 million of net catastrophe losses (Hurricane Ian in 2022 and Hurricane Ida in 2021) in our small Excess Property book within the Excess and Surplus Lines segment.

The Excess and Surplus Lines segment has a surplus share reinsurance treaty in effect that was specifically designed to cover property risks.

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

Our expense ratio increased relative to the prior year driven by higher expense ratios for our Specialty Admitted Insurance and Casualty Reinsurance segments and higher operating expenses for our Corporate and Other segment.

The Specialty Admitted Insurance segment benefited from 4.3% growth in fee income, but the segment expense ratio was higher due to slightly lower net earned premiums and the net impact of commission, tax and assessment accrual adjustments in both years.

The Casualty Reinsurance segment typically structures its reinsurance treaties with loss mitigation features including profit and sliding scale ceding commissions.

Net adverse reserve development on treaties with such features reduced our commissions in 2021 by $11.8 million compared to $249,000 in 2022.

Operating expenses for our Corporate and Other segment increased driven by higher compensation expenses due to the hiring of additional employees.

Underwriting results in the prior year were also negatively impacted by $8.1 million of reinstatement premium, including $6.4 million triggered by one claim on a 2019 excess of loss treaty in the Excess and Surplus Lines segment.

The reinstatement premium reduced net written and net earned premium and increased the underwriting loss.

Our net income increased over the prior year due to the improved underwriting results and higher net investment income, with partially offsetting items including the $20.1 million of retroactive reinsurance losses and loss adjustment expenses under the loss portfolio transfers, the unfavorable swing in net realized and unrealized gains and losses on investments, and higher interest expense.

As discussed above, the Company recognized adverse prior year development of $52.8 million on the reserves subject to the LPT Agreements in the year ended December 31, 2022, resulting in corresponding additional amounts ceded under the LPT Agreements, and requiring retroactive reinsurance accounting.

Retroactive reinsurance benefits of $32.7 million were recorded in losses and loss adjustment expenses for the year ended December 31, 2022, resulting in a net impact of $20.1 million within our net losses and loss adjustment expenses.

Higher interest rates in the current year boosted yields on fixed income investments and increased investment income, but also resulted in higher interest expense on our variable rate senior and trust preferred debt.

Interest expense for the year ended December 31, 2022 also includes $3.7 million of crediting fees on the Funds Withheld Account balance under the Casualty Re LPT.

The unfavorable swing in net realized and unrealized gains and losses on investments (see Investing Results below) also had a negative impact on the comparative net results for the two years as market values of equity securities and bank loan participations have declined in the current year due to the effect of macroeconomic events on financial markets.

Net income available to common shareholders for the year ended December 31, 2022 reflects the $8.8 million of current year dividends on the Series A Preferred Shares.

Adjusted net operating income (loss) improved from a $184.2 million loss in the year ended December 31, 2021 to income of $69.5 million in the year ended December 31, 2022.

Tangible equity decreased by 1.2% in 2022 as net income of $31.0 million and proceeds from the Series A Preferred Share issuance of $144.9 million were offset by $193.0 million of unrealized losses on our fixed maturity investments in other comprehensive loss (see Investing Results below).

Tangible equity per share decreased by 14.4% for the year reflecting the small decrease in tangible equity over a larger share count including an assumed conversion of the Series A Preferred Shares.

Our adjusted net operating return on tangible equity of 13.5% for the year ended December 31, 2022 compares favorably to the prior year loss and reflects the turnaround in underwriting results and higher investment income.

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

2 unchanged sentences

Reinsurance 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.

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.

The following table summarizes the change in premium volume by component and business segment:

18 unchanged sentences

Gross written premiums for the Excess and Surplus Lines segment (which represents 61.5% of our consolidated gross written premiums in 2022) increased 10.5% 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.

Total policy submissions for Core E&S lines (excluding commercial auto) declined 4.9% in 2022, but renewal submissions increased 12.2% and our ratio of bound policies to quoted policies improved generating 1.5% more bound policies in the year ended December 31, 2022.

Renewal rates for the Excess and Surplus Lines segment were up 9.9% compared to 2021 and the total number of policies in force grew by 4.2% in 2022.

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

5 unchanged sentences

Excess Property 52,104 47,241 10.3 %

Allied Health 35,192 26,918 30.7 %

Small Business 36,930 32,593 13.3 %

Sports & Entertainment 13,934 9,442 47.6 %

All other Core E&S divisions 139,620 144,341 (3.3) %

6 unchanged sentences

($ in thousands)

Individual risk workers’ compensation premium $ 57,396 $ 63,949 (10.2) %

Fronting and program premium $ 437,221 $ 434,165 0.7 %

Individual risk workers’ compensation premium 52,987 57,396 (7.7) %

Specialty Admitted gross written premium $ 490,208 $ 491,561 (0.3) %

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.

Our fronting written premium increased slightly from the prior year driven by new fronting relationships in the current year and the continued expansion of existing fronting relationships (together representing an increase of $50.8 million for the year ended December 31, 2022), and partially offset by the loss of one relationship from merger and acquisition activity at a general agent and a decline of $13.2 million or 10.6% in written premium for our largest workers' compensation program due to a very competitive workers' compensation market in California.

Our two largest fronting relationships represented $231.8 million or 47.3% of segment gross written premium in 2022 compared to $213.6 million or 43.5% in 2021.

Individual risk workers' compensation premium declined in 2022 due to the soft market conditions currently present for workers' compensation.

Gross written premiums for the Casualty Reinsurance segment (which represents 5.7% of our consolidated gross written premiums in 2022) decreased 53.2% in 2022 reflecting our current strategic focus on downsizing the Casualty Reinsurance third party book, which resulted in the nonrenewal of several treaties in the current year and lower participations on certain renewing treaties.

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

We rarely write stand-alone property reinsurance.

8 unchanged sentences

Total 50.0 % 49.4 %

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 premium retention for the Excess and Surplus Lines segment increased in 2022 largely driven by the segment's Excess Casualty division, which comprises approximately one-third of the segment's gross written premiums in the years ended December 31, 2022 and 2021.

The Excess Casualty division cedes a high percentage of written premiums under a reinsurance treaty and changes in growth rates for this division can impact comparable premium retention ratios for the segment.

In the third quarter of 2022, we increased our retention on the reinsurance treaty applicable to the Excess Casualty division.

Net retention for the Excess Casualty division was 20.3% in 2022 compared to 14.1% in 2021.

In addition, net retention for the segment in 2021 was impacted by $8.1 million of reinstatement premium in the prior year third quarter which reduced net written premium and the net retention for that year.

The net premium retention for the Specialty Admitted Insurance segment decreased in 2022 primarily due to a lower retention in the fronting business reflecting the mix of business and changes in reinsurance coverage as treaties renew.

The net retention on the segment’s fronting business was 13.9% and 15.7% in the years ended December 31, 2022 and 2021, respectively.

The net retention on the workers’ compensation business was 29.8% and 27.3% for the years ended December 31, 2022 and 2021, 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

The following table compares our combined ratios by segment:

The renewal of the workers' compensation quota share treaty on January 1, 2022 resulted in a higher retention for this business.

The Casualty Reinsurance segment previously wrote a retrocessional treaty/fronting arrangement under which 100% of the premiums were ceded.

The treaty was nonrenewed for 2022 and higher net retention in the current year reflects adjustments to prior year assumed and ceded written premiums on the treaty.

Segment Results

The following table presents our combined ratios by segment:

Year Ended December 31,

13 unchanged sentences

Underwriting expenses (106,194) (91,179) 16.5 %

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

Underwriting profit (loss) (1)

$ 83,051 $ (121,478) —

5 unchanged sentences

65.1 % 66.0 %

(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 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.

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

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.

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

See “Reconciliation of Non-GAAP Measures.”

(2) Accident year loss ratio excluding $5.0 million of net catastrophe losses related to Hurricane Ian in the year ended December 31, 2022 and $5.0 million of net catastrophe losses related to Hurricane Ida in the year ended December 31, 2021.

The Excess and Surplus Lines segment produced an underwriting profit of $83.1 million and combined ratio of 85.1% for the year ended December 31, 2022 compared to an underwriting loss of $121.5 million and a combined ratio of 125.0% for the year ended December 31, 2021.

The loss ratio of 65.9% for the year ended December 31, 2022 includes $210,000 of net favorable reserve development (excluding adverse prior year development on the legacy Rasier business and the impact of retroactive reinsurance - see Commercial Auto Loss Portfolio Transfer in Strategic Actions ) in our loss estimates for prior accident years.

The loss ratio of 106.2% for the year ended December 31, 2021 included $190.7 million of net adverse reserve development (39.2 percentage points) in our loss estimates for prior accident years, including $200.1 million of net adverse reserve development on our commercial auto business that was almost entirely related to the legacy Rasier business that has been in runoff since 2019.

We had expected that reported losses on this terminated commercial auto account would decline as the account moved further into runoff, but the continued heavy reported loss emergence in 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.

Current accident year losses in both 2022 and 2021 include $5.0 million of net catastrophe losses (Hurricane Ian in 2022 and Hurricane Ida in 2021) in our small Excess Property book within the Excess and Surplus Lines segment.

The Excess and Surplus Lines segment has a surplus share reinsurance treaty in effect that was specifically designed to cover property risks.

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

Written and earned premiums for our Excess and Surplus Lines segment grew due to attractive market conditions.

Net earned premiums increased $69.6 million or 14.3% over the prior year, including growth in lines that have meaningful ceding

The segment expense ratio increased slightly over the prior year primarily due to higher compensation related expenses.

The reinstatement premium reduced net written and net earned premium in the prior year quarter and year to date and increased the underwriting loss.

Specialty Admitted Insurance Segment

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

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

See “Reconciliation of Non-GAAP Measures.”

(2) Underwriting profit includes fee income of $23.6 million and $22.7 million for the years ended December 31, 2022 and 2021, respectively.

The Specialty Admitted Insurance segment generated underwriting profits of $4.2 million and $9.7 million (combined ratios of 94.3% and 87.2%) for the years ended December 31, 2022 and 2021, respectively.

The loss ratios of 79.0% and 74.1% for the years ended December 31, 2022 and 2021 include $4.2 million and $2.5 million (5.6 and 3.3 percentage points, respectively) of net favorable development on prior accident years.

The favorable development in both 2022 and 2021 reflects the fact that actual loss emergence of the workers’ compensation book for prior accident years has been better than expected.

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 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.

The higher current accident year loss ratio in 2022 (84.6% compared to 77.5% in the prior year) reflects current actuarial indications and higher loss trends in the business.

The expense ratio of the Specialty Admitted Insurance segment was 15.3% for the year ended December 31, 2022 compared to the prior year ratio of 13.1%, reflecting slightly lower net earned premiums, higher compensation related expenses, and the net impact of commission, tax and assessment accrual adjustments.

The segment also benefited from growth in our fronting business which led to a 4.3% increase in fee income.

Casualty Reinsurance Segment

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

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 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.

See “Reconciliation of Non-GAAP Measures.”

The Casualty Reinsurance segment produced underwriting losses of $6.4 million and $117.5 million (combined ratios of 104.7% and 187.6%) for the years ended December 31, 2022 and 2021, respectively.

The loss ratio of 73.2% for the year ended December 31, 2022 includes net adverse reserve development of $13.4 million or 9.8 points (including $6.8 million of net adverse reserve development on prior accident years recognized in the three months ended March 31, 2022 associated with the Casualty Re LPT).

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 accident years.

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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 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.

The Casualty Reinsurance segment typically structures its reinsurance treaties with loss mitigation features including sliding scale ceding commissions.

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.

Other Operating Expenses

In addition to the underwriting, acquisition and insurance expenses of the Excess and Surplus Lines segment, the Specialty Admitted Insurance segment and the Casualty Reinsurance segment discussed previously, other operating expenses for the Company also includes the expenses of the Corporate and Other segment.

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

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

The segment typically structures its reinsurance treaties with loss mitigation features including sliding scale ceding commissions.

Net adverse reserve development on treaties with such features reduced our commissions by $11.8 million (8.8 percentage points) for the year ended December 31, 2021 compared to $249,000 for the year ended December 31, 2022.

Corporate and Other Segment

Other operating expenses for the Corporate and Other segment include personnel costs associated with the Bermuda and U.S.

holding companies, professional fees, and various other corporate expenses that are included in our calculation of our expense ratio and our combined ratio including equity compensation expense for the full Company.

Other operating expenses of the Corporate and Other segment represent the expenses of both the Bermuda and U.S.

holding companies that were not reimbursed by our subsidiaries, including costs associated with our internal quota share, rating agencies and strategic initiatives.

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

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.

holding companies, professional fees, and various other corporate expenses that were not reimbursed by our subsidiaries, including costs associated with our internal quota share, rating agencies and strategic initiatives.

The expenses are included in our calculation of consolidated underwriting profit, and in our consolidated expense ratio and combined ratio.

Total operating expenses of the Corporate and Other segment were $31.3 million and $27.6 million for the years ended December 31, 2022 and 2021, respectively.

The higher current year expenses as compared to the prior year were largely driven by higher compensation expenses due to the hiring of additional employees.

Investing Results

Net investment income was $71.1 million for the year ended December 31, 2022 compared to $56.9 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 $3.4 million and $2.2 million for the years ended December 31, 2022 and 2021, respectively.

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

Excluding private investments, our net investment income for the year ended December 31, 2022 increased 23.9% over the prior year principally due to higher yields on fixed maturities, bank loan participations, short-term investments, and cash and cash equivalents.

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

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The majority of the portfolio, or $1,783.4 million, is comprised of fixed maturity securities that are classified as available-for-sale and carried at fair value with unrealized gains and losses on these securities reported, net of applicable taxes, as a separate component of accumulated comprehensive income or loss.

The fair values of our fixed maturity securities were negatively impacted in 2022 by a heightened inflationary environment and rate actions of the Federal Reserve, which led to higher interest rates and lower fair values of our fixed maturity securities.

Unrealized losses on fixed maturities recognized in other comprehensive (loss) income resulted in a $193.0 million reduction in accumulated other comprehensive (loss) income in the year ended December 31, 2022.

Also included in our investments are $155.0 million of bank loan participations, $118.6 million of equity securities, $107.8 million of short-term investments, and $27.4 million of other invested assets.

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

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.

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.

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

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

Bank loan participations are measured at fair value pursuant to the Company's election of the fair value option, 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 December 31, 2022 and 2021, the fair value of these securities was $155.0 million and $156.0 million, respectively.

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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 an investment loss of $1.4 million and income of $2.0 million for the years ended December 31, 2021 and 2020, respectively.

Equity interests in various renewable energy LLCs generated investment income of $3.8 million and losses of $1.4 million for the years ended December 31, 2022 and 2021, 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 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.

During the fourth quarter of 2022, the underlying projects in two of our LLCs were sold at the manager's discretion.

We received proceeds of $20.2 million, and could receive additional contingent payments in the future according to terms of the transaction.

The remaining investments had a carrying value of $9.2 million at December 31, 2022.

Investments in loans for renewable energy projects had investment income of $607,000 and $939,000 for the years ended December 31, 2022 and 2021, respectively.

During 2022, the Company received principal repayments of $2.5 million on the notes receivable.

These investments had a

carrying value of $2.7 million at December 31, 2022.

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.

Income from these partnerships was $2.4 million in 2021 compared to $1.2 million in 2020.

Investment losses from these partnerships were $1.3 million in 2022 compared to income of $2.4 million in 2021.

Together, these limited partnerships had a carrying value of $11.1 million at December 31, 2022.

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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, 2022, the Company recognized net realized and unrealized investment losses of $28.3 million, including $275,000 of net realized investment gains on the sale of fixed maturity securities, $1.2 million of net realized investment losses on the sale of bank loans securities, $254,000 of net realized investment losses on the sale of equity securities, $15.9 million of losses for the change in fair value of bank loans, and $11.2 million of losses for the change in fair value of equity securities.

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, $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.

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.

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Management does not intend to sell available-for-sale 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.

At December 31, 2021, our available-for-sale fixed maturity securities had net unrealized gains of $33.7 million representing 2.0% of the amortized cost of the portfolio.

At December 31, 2022, our available-for-sale fixed maturity securities had net unrealized losses of $186.4 million representing 9.5% of the amortized cost of the portfolio.

Additionally, at December 31, 2022, 99.8% of our fixed maturity security portfolio was rated “BBB-” or better (“investment grade”) by Standard & Poor’s or had an equivalent rating from another nationally recognized statistical rating organization.

The average duration of our investment portfolio was 4.0 years at December 31, 2021.

The average duration of our invested assets and cash, excluding restricted cash, was 4.1 years at December 31, 2022.

The amortized cost and fair value of our available-for-sale fixed maturity securities were as follows:

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Total $ 1,969,783 $ 1,783,417 100.0 %

Other Expenses

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.

Other Income and Expense

Other income and expense primarily consists of non-operating expenses of $6.0 million and $2.6 million for the years ended December 31, 2022 and 2021, respectively.

Non-operating expenses include legal fees related to a purported class action lawsuit, legal and other professional fees related to the Company's May 2021 common share offering, legal and other professional fees and other expenses related to various strategic initiatives including loss portfolio transfers accounted for as retroactive reinsurance, and employee severance costs.

Interest Expense

Interest expense was $17.6 million and $8.9 million for the years ended December 31, 2022 and 2021, respectively.

Interest expense for the year ended December 31, 2022 includes $3.7 million of crediting fees on the Funds Withheld Account balance under the Casualty Re LPT.

The impact of rising interest rates on our variable rate senior and trust preferred debt also contributed to the higher current year interest expense.

See “—Liquidity and Capital Resources—Sources and Uses of Funds” for information regarding our senior debt facilities and trust preferred securities.

Amortization of Intangibles

The Company recorded $363,000 and $538,000 of amortization of intangibles for the years ended December 31, 2021 and 2020, respectively.

The Company recorded $363,000 of amortization of intangibles in each of the years ended December 31, 2022 and 2021.

Goodwill and Impairment

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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 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, 2022, our effective tax rate was 37.3%.

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.

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

commercial auto reserves ceded from the U.S.

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.

to Bermuda under the internal quota share reinsurance in 2021 and because of the unprofitable underwriting results at JRG Re and the non-deductible Bermuda holding company expenses in both 2021 and 2022.

The Company does not receive a U.S.

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

federal income tax expense differs from the amounts computed by applying the federal statutory income tax rate to income before taxes due primarily to interest income on tax-advantaged state and municipal securities, dividends received income, and excess tax benefits on share based compensation.

The Company has a deferred tax asset of $23.3 million at December 31, 2022 associated with unrealized losses in the Company’s available-for-sale fixed maturity securities portfolio.

The unrealized losses are attributable to rising market interest rates and other economic factors rather than credit-related factors of the issuers.

The Company does not intend to sell available-for-sale debt 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 fair value to their amortized cost basis occurs.

The Company’s hold to recovery assertion related to investments in an unrealized loss position is considered a tax planning strategy.

Both the cash generated by the Company from operating activities and the unused capacity on the Company’s unsecured revolving credit facilities reduce the likelihood of having to sell debt securities in an unrealized loss position.

As a result, the Company has concluded that no valuation allowance is required for the deferred tax asset associated with unrealized losses on its investments at December 31, 2022.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

For a discussion of our results for the year ended December 31, 2020 as compared to year ended December 31, 2019, please refer to our 2020 Form 10-K filed with the SEC on February 26, 2021.

For a discussion of our results for the year ended December 31, 2021 as compared to year ended December 31, 2020, please refer to our 2021 Form 10-K filed with the SEC on March 1, 2022.

Liquidity and Capital Resources

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.

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Change in cash, cash equivalents, and restricted cash equivalents $ (15,749) $ (730,052) $ (383,896)

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.

Cash provided by operating activities excluding restricted cash equivalents of $221.5 million for the year ended December 31, 2022 was driven by the growth in our U.S.

segments and the collection of premiums receivable at a quicker rate than payments of loss and loss adjustment expenses.

Cash used in operating activities excluding restricted cash equivalents of $155.6 million for the year ended December 31, 2021 primarily reflects the outflow of funds to effect the Commercial Auto LPT in the third quarter of that year.

For the year ended December 31, 2020, cash provided by operations of $65.4 million was impacted 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.

In 2022 and 2020, cash used in investing activities of $328.2 million and $176.0 million reflects our efforts to enhance the yield in our investment portfolio by investing available cash and cash equivalents into higher yielding investments.

Cash provided by investing activities of $35.8 million for the year ended December 31, 2021 was primarily due to the investments sold and funds withdrawn from our investment portfolio to effect the Commercial Auto LPT in the third quarter of that year.

Cash and cash equivalents (excluding restricted cash equivalents) comprised 7.3%, 8.2%, and 6.9% of total cash and invested assets at December 31, 2022, 2021, and 2020, 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.

Cash provided by financing activities of $89.7 million for the year ended December 31, 2022 includes $144.9 million of net proceeds (after expenses) from the issuance and sale of 150,000 Series A Preferred Shares on March 1, 2022.

The proceeds were used for general corporate purposes and to repay $40.0 million of loans outstanding on the 2017 Facility (as defined below) on March 28, 2022.

Financing activities for the year ended December 31, 2022 includes $6.1 million of dividends paid on the Series A Preferred Shares.

Cash provided by financing activities also includes dividends paid to common shareholders of $7.8 million in 2022, $43.2 million in 2021, and $37.1 million in 2020.

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

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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.

In 2020, net draws on our senior credit facilities of $104.0 million 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.

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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 without regulatory approval in 2022 is calculated to be approximately $129.7 million.

Based on that calculation, the maximum amount of dividends available to us from JRG Re without regulatory approval in 2023 is calculated to be approximately $93.9 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.

Holders of the Series A Preferred Shares are entitled to a dividend at the initial rate of 7% of the 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.

Dividends accrue and are payable quarterly.

During 2022, cash dividends of $8.8 million were declared, of which $2.6 million was payable at December 31, 2022.

At December 31, 2022, our Bermuda holding company had $277,000 of cash and cash equivalent assets.

holding company had $25.9 million of cash and invested assets at December 31, 2021, comprised of cash and cash equivalents of $18.1 million and other invested assets of $7.8 million, which are not subject to regulatory restrictions.

holding company had $28.1 million of cash and invested assets at December 31, 2022, comprised of cash and cash equivalents of $15.5 million, short-term investments of $10.0 million and other invested assets of $2.6 million, which are not subject to regulatory restrictions.

Additionally, our U.K.

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The loans and letters of credit made or issued under the revolving line of credit of the 2017 Facility may be used to finance the borrowers' general corporate purposes.

On November 8, 2019, the Company entered into a First Amendment to Credit Agreement which, among other things, lowered the applicable interest rate and modified certain negative covenants to be less restrictive.

The 2017 Facility has been amended from time to time since its inception in 2017.

On November 8, 2019, the Company entered

into a First Amendment to Credit Agreement which, among other things, lowered the applicable interest rate and modified certain negative covenants to be less restrictive.

At December 31, 2022, unsecured loans of $21.5 million and secured letters of credit totaling $22.9 million were outstanding on the 2017 Facility.

During the three months ended March 31, 2022, the Company repaid $40.0 million of loans that were outstanding under the 2017 Facility.

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

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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.

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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 $60.0 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 the event of a catastrophe loss exhausting our $60.0 million property catastrophe reinsurance, we estimate our pre-tax cost would not exceed 2.5% of shareholders’ equity, including reinstatement premiums payable 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 .

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

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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.

and excess of loss coverage for up to $8.7 million excess of $300,000 of our 20% share of the quota share each occurrence.

(1) Excluding one program which has quota share coverage for 84% 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.

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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.

This coverage has two reinstatements in the event we exhaust any of the coverage.

On February 23, 2022, JRG Re entered into the Casualty Re LPT with FRL to reinsure the majority of the segment risk, which closed on March 31, 2022.

See “ Strategic Actions – Loss Portfolio Transfers - Casualty Re Loss Portfolio Transfer” above for further information on this retrocession agreement.

We also had 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 covered $10.0 million in excess of a $2.0 million retention for loss occurrences within the treaty term.

This coverage was put into runoff effective July 1, 2022.

As of December 31, 2022, our average net retained limit per risk is $2.5 million.

Effective January 1, 2020, we purchased an additional $10.0 million in claims made coverage for excess policy limits and extra contractual obligations exposures above the clash and contingency treaty for the period 2014 to present.

This treaty has one reinstatement.

This treaty had one reinstatement and expired on December 31, 2022.

The Company’s insurance segments remain liable to policyholders if its reinsurers are unable to meet their contractual obligations under applicable reinsurance agreements.

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state insurance regulations or that experience rating downgrades from rating agencies below specified levels to fund their share of the Company’s ceded outstanding losses and loss adjustment expense reserves, typically through the use of irrevocable and unconditional letters of credit.

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.

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

At December 31, 2022, we had reinsurance recoverables on unpaid losses of $1,520.1 million (net of a $612,000 allowance for credit losses) and reinsurance recoverables on paid losses of $114.2 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.

Best ratings of “A-" (Excellent) or better, or are collateralized by the reinsurer for our benefit through letters of credit or funds on deposit in trust accounts.

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 $ 340,393 A+

Aleka Insurance Company 256,452 Unrated (1)

Fortitude Re (Casualty Re LPT) 244,657 A

Aleka Insurance Company (Commercial Auto LPT) 132,049 Unrated (1)

Berkley Insurance Company 130,860 A+

Safety National Casualty 47,916 A++

Aioi Nissay Dowa Insurance Company 47,341 A+

Hannover Ruck SE 50,764 A+

Safety National Casualty 46,769 A++

Endurance Assurance Corporation 45,300 A+

Munich Reinsurance America 34,612 A+

American European Insurance Company 38,891 B (2)

North Carolina Reinsurance Facility 26,995 Unrated (3)

Munich Reinsurance America 33,699 A+

Aioi Nissay Dowa Insurance Company 25,583 A+

Top 10 Total 1,088,965

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All material reinsurance recoverable amounts from this reinsurer are collateralized.

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

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

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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.

On September 27, 2021, James River entered into a loss portfolio transfer reinsurance agreement (the “Commercial Auto LPT”) 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 Commercial Auto LPT, 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.

For the year ended December 31, 2022, due to adverse paid loss trends on the legacy Rasier business, the Company recognized adverse prior year development of $46.7 million on the reserves subject to the Commercial Auto LPT, bringing the cumulative amount ceded under the Commercial Auto LPT to $391.8 million at December 31, 2022.

Each of Rasier and Aleka are required to post collateral under the Indemnity Agreements and the Commercial Auto LPT:

• Pursuant to the Indemnity Agreements, Rasier is required to post collateral equal to 102% of James River's estimate of the amounts that are recoverable or 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.

In connection with the execution of the Commercial Auto LPT, 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, 2022, the balance in the Indemnity Trust was $267.0 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 $336.2 million.

• Pursuant to the Commercial Auto LPT, Aleka is required to post collateral equal to 102% of James River's estimate of Aleka's obligations under the Commercial Auto LPT, calculated in accordance with standard actuarial principles and based on reserves recorded in our statutory financial statements.

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.

At December 31, 2022, the balance in the LPT Trust was $121.9 million, and, together with the balance of the Loss Fund Trust (as defined below) attributable to the Commercial Auto LPT as described below, the total balance of collateral securing Aleka’s obligations under the Commercial Auto LPT was $150.0 million.

At December 31, 2022, the total reinsurance recoverables under the Commercial Auto LPT was $145.2 million (including $132.0 million of unpaid recoverables and $13.2 million of paid recoverables).

In connection with the execution of the Commercial Auto LPT, 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.

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 Commercial Auto LPT and James River’s existing third party reinsurance agreements, respectively.

At December 31, 2022, the balance in the Loss Fund Trust was $103.2 million, including $69.2 million representing collateral supporting Rasier’s obligations under the Indemnity Agreements and $28.2 million representing collateral supporting Aleka’s obligations under the Commercial Auto LPT.

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.

While the Commercial Auto LPT 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 Commercial Auto LPT 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 Commercial Auto LPT, 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.

To mitigate these risks, we closely and frequently monitor our exposure compared to our collateral held, and we request additional collateral in accordance with the terms of the Commercial Auto LPT and Indemnity Agreements when our analysis indicates that we have uncollateralized exposure.

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

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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.

Best in the third quarter of 2021 following the closing of the Commercial Auto LPT which reinsures substantially all of the legacy commercial auto business.

The financial strength ratings assigned by A.M.

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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.

Series A Preferred Shares

The Company closed 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.

Dividends on the Series A Preferred Shares accrue quarterly at the initial rate of 7% of the 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.

The Company issued 97,171 common shares in the twelve months ended December 31, 2022 related to vesting of restricted share units (“RSUs”), increasing the total common shares outstanding from 37,373,066 at December 31, 2021 to 37,470,237 at December 31, 2022.

Share Based Compensation Expense

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Unvested, end of year 665,458 $ 25.98 292,135 $ 45.89 399,856 $ 43.59

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.

Outstanding RSUs granted to employees generally vest ratably over a three year vesting period.

RSUs granted to non-employee directors have a one year vesting period.

Material Cash Requirements

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Payments Due by Period

Total Less than 1 year 1–3 years 3–5 years More than

Total 2023 2024-2025 2026-2027 Thereafter

(in thousands)

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We do not have any off-balance sheet arrangements.

Underwriting Performance Ratios

The following table provides the underwriting performance ratios of the Company inclusive of the business subject to retroactive reinsurance accounting for loss portfolio transfers.

There is no economic impact to the Company over the life of a loss portfolio transfer contract so long as any additional losses subject to the contract are within the limit of the loss portfolio transfer and the counterparty performs under the contract.

Retroactive reinsurance accounting is not indicative of our current and ongoing operations.

Management believes that providing loss ratios and combined ratios on business not subject to retroactive reinsurance accounting for loss portfolio transfers gives the users of our financial statements useful information in evaluating our current and ongoing operations.

Years Ended December 31,

2022 2021 2020

Excess and Surplus Lines:

Loss Ratio 65.9 % 106.2 % 76.7 %

Impact of retroactive reinsurance 2.8 % — % — %

Loss Ratio including impact of retroactive reinsurance 68.7 % 106.2 % 76.7 %

Combined Ratio 85.1 % 125.0 % 97.7 %

Impact of retroactive reinsurance 2.8 % — % — %

Combined Ratio including impact of retroactive reinsurance 87.9 % 125.0 % 97.7 %

Casualty Reinsurance:

Loss Ratio 73.2 % 164.0 % 88.1 %

Impact of retroactive reinsurance 3.2 % — % — %

Loss Ratio including impact of retroactive reinsurance 76.4 % 164.0 % 88.1 %

Combined Ratio 104.7 % 187.6 % 113.7 %

Impact of retroactive reinsurance 3.2 % — % — %

Combined Ratio including impact of retroactive reinsurance 107.9 % 187.6 % 113.7 %

Consolidated:

Loss Ratio 68.5 % 113.9 % 78.9 %

Impact of retroactive reinsurance 2.6 % — % — %

Loss Ratio including impact of retroactive reinsurance 71.1 % 113.9 % 78.9 %

Combined Ratio 93.5 % 136.9 % 105.6 %

Impact of retroactive reinsurance 2.6 % — % — %

Combined Ratio including impact of retroactive reinsurance 96.1 % 136.9 % 105.6 %

Reconciliation of Non-GAAP Measures

See “Key Metrics” above for description of why management believes the following Non-GAAP measures provide useful information about our financial condition and results of operation.

Reconciliation of Underwriting Profit

We evaluate the performance of our segments and allocate resources based primarily on underwriting profit.

Our definition of underwriting profit may not be comparable to that of other companies.

The following table reconciles the underwriting (loss) profit by individual segment and for the entire Company to consolidated income before income taxes for the years ended December 31, 2021, 2020 and 2019.

The following table reconciles the underwriting profit (loss) of the operating segments by individual segment to consolidated income (loss) before income taxes for the years ended December 31, 2022, 2021 and 2020.

Year Ended December 31,

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(in thousands)

Underwriting (loss) profit of the operating segments:

Underwriting profit (loss) of the operating segments:

Excess and Surplus Lines $ 83,051 $ (121,478) $ 9,752

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Casualty Reinsurance (6,383) (117,526) (18,364)

Total underwriting (loss) profit of the operating segments (229,337) (4,427) 17,909

Total underwriting profit (loss) of the operating segments 80,902 (229,337) (4,427)

Other operating expenses of the Corporate and Other segment (31,260) (27,609) (29,418)

Underwriting loss (1)

Underwriting profit (loss) (1)

49,642 (256,946) (33,845)

Losses and loss adjustment expenses - retroactive reinsurance (20,091) — —

Net investment income 71,111 56,865 73,368

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

(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:

Income (loss) before income taxes $ 49,387 $ (196,034) $ 11,937

(1) Underwriting profit (loss) includes gross fee income of $23.6 million, $22.7 million, and $20.9 million for the years ended December 31, 2022, 2021, and 2020, respectively.

Reconciliation of Adjusted Net Operating Income (Loss)

Adjusted net operating income is defined as income available to common shareholders excluding a) the impact of loss portfolio transfers accounted for as retroactive reinsurance, b) net realized and unrealized gains (losses) on investments, c) certain non-operating expenses such as professional service fees related to a purported class action lawsuit, various strategic initiatives, and the filing of registration statements for the offering of securities, and d) severance costs associated with terminated employees.

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 (loss) available to common shareholders for the years ended December 31, 2022, 2021 and 2020 reconciles to our adjusted net operating income (loss) as follows:

Year Ended December 31,

2022 2021 2020

Taxes Net Loss Income

Income Income

Taxes Net Income Loss

(in thousands)

(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

Income (loss) available to common shareholders $ 40,637 $ 22,223 $ (196,034) $ (172,799) $ 11,937 $ 4,824

Losses and loss adjustment expenses - retroactive reinsurance 20,091 16,786 — — — —

Net realized and unrealized investment losses (gains) 28,318 25,014 (15,564) (13,292) 16,030 14,840

Other expenses 5,519 5,519 2,214 1,846 1,967 1,554

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

Adjusted net operating income (loss) $ 94,565 $ 69,542 $ (209,384) $ (184,245) $ 29,934 $ 21,218

Tangible Equity and Tangible Equity per Share

Key financial measures that we use to assess our longer term financial performance include the percentage growth in our tangible equity per share and our return on tangible equity.

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

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).

Our definition of tangible equity may not be comparable to that of other companies, and it should not be viewed as a substitute for shareholders’ equity calculated in accordance with GAAP.

The following table reconciles shareholders’ equity to tangible equity as of December 31, 2021, 2020 and 2019 and reconciles tangible equity to pre-dividend tangible equity as of December 31, 2021:

Tangible equity is defined as shareholders' equity plus mezzanine Series A Preferred Shares and the unrecognized deferred retroactive reinsurance gain on loss portfolio transfers less goodwill and intangible assets, net of amortization.

Our definitions of tangible equity and tangible equity per share may not be comparable to that of other companies, and they should not be viewed as a substitute for shareholders’ equity and shareholders’ equity per share calculated in accordance with GAAP.

The following table reconciles shareholders’ equity to tangible equity as of December 31, 2022, 2021 and 2020:

As of December 31,

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Shareholders’ equity $ 553,766 $ 14.78 $ 725,362 $ 19.41 $ 795,608 $ 25.96

Series A redeemable preferred shares 144,898 — —

Deferred reinsurance gain 20,091 — —

Goodwill 181,831 181,831 181,831

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Tangible equity $ 501,248 $ 11.63 $ 507,492 $ 13.58 $ 577,375 $ 18.84

Dividends to shareholders for the year ended December 31, 2021 43,091 1.20

Pre-dividend tangible equity $ 550,583 $ 14.78

Common shares outstanding 37,470,237 37,373,066 30,649,261

Common shares from assumed conversion of Series A Preferred Shares 5,640,158 — —

Common shares outstanding after assumed conversion of Series A Preferred Shares 43,110,395 37,373,066 30,649,261

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