JRG I~ E IN S URJ\N CE CC)i\1\P/\NY LTIJ.

Transcription

1 JRG I~ E IN S URJ\N CE CC)i\1\P/\NY LTIJ. FINANCIAL STATEMENTS Years Ended December 31, and With Rep01t of Independent Auditors

2 jrg REINSUR/\NCE C:OMPANY LTD. Fi nancial Statements Years Ended December 31, and Contents Repm1 of Independent Auditors I Balance Sheets Statements of Income and Comprehensive Income Statements of Changes in Shareholder's Equity... 6 Statements of Cash Flows

3 Building a better worl<ing world Ernst & Young Ltd. 3 Bermudiana Road Hamilton HMOS, Bermuda P.O. Box HM 463 Hamilton, HM BX, Bermuda Tel: +I 44 I fax: +I '/WI't.ey.com/bermuda The Board of Directors JRG Reinsurance Company Ltd. Report of Independent Auditors We have audited the accompanying financial statements of JRG Reinsurance Company Ltd., which comprise the balance sheets as of December 31,2014 and 2013, and the related statements of income and comprehensive income, changes in shareholder's equity and cash flows for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. A member f rmor Ernst & Young G!oba1 Um'ted

4 Building a better worl<ing world Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of JRG Reinsurance Company Ltd. at December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.. April27, A member f,rm of Ernst 8.. Young Global Lim. ted

5 Balance Sheets Assets Invested assets: Fi xed maturity securities: Available-for-sale, at fair value (amortized cost: $554,061; $485,382) Bank loan participations held-for-investment, at am011ized cost, net of allowance Short-term investments Total invested assets $ Decem bet 31, (ill lhoiisfllllfs) 564,528 $ 130, , , , ,032 65, ,724 Cash and cash equivalents Accrued investment income Premiums receivable, net Premiums receivable from affiliates Reinsurance recoverable on unpaid losses Reinsurance recoverable on paid losses Prepaid reinsurance premiums Deferred policy acquisition costs Due from JRG Holdings Other assets Total assets $ 32,204 4, ,267 17,360 24, ,804 14,884 1,304 1,085,91 5 $ 119,586 4, ,822 10,339 29, ,752 48,874 4,743 1, , 118 See accompanying notes. 3

6 Balance Sheets (continued) Lia!Jilities and shareholder's equity Liabilities: Reserve for losses and loss adjustment expenses Unearned premiums Payables to reinsurers Payables to affiliate insurance companies Payables to insurance companies Accrued expenses Other liabilities Total liabilities Commitments and contingent liabilities Shareholder's equity: Common Shares and 2013 : $1.00 par value; 120,000 shares authorized, issued and outstanding Additional paid-in capital Retained earnings Accumulated other comprehensive income Total shareholder's equity Total liabilities and shareholder's equity See accompanying notes. $ $ December 31, (in flrousands, except sltare amounts) 464,683 $ 412, , ,152 6,040 22,394 6,087 9, ,325 1,974 2, , , , , , ,770 10,467 5, , ,561 1,085,9 15 $ 998,118 4

7 JRG Reinsurance Comrmny, Ltd. Statements of Income and Comprehensive Income Revenues: Assumed written premiums Ceded written premiums Net written premiums Change in net unearned premiums Net earned premiums Net investment income Net real ized investment gains Total revenues Expenses: Losses and loss adjustment expenses Other underwriting expenses Other expenses Total expenses Net income Year Ended December 31, (intlwusam/s) $ 377,271 $ 279,043 (823) (3,855) 376, ,188 (47,5392 4, , ,025 20,745 21,907 1,187 3, , , , , ,603 87, , ,464 $ 50,530 $ 49,968 Other comprehensive income: Net unrealized gains (losses) Total comprehensive income 4,676 (23,065) $ 55,206 $ 26,903 See accompanying notes. 5

8 Statements of Changes in Shareholder's Equity (in thousands) Common Stock Additional Paid-in Capital Accumulated Other Retained Comprehensive Earnings Income Total Balances at December 31,2012 $ 120 $249,880 $ 64,802 $ 28,856 $ 343,658 Net income Other comprehensive loss Balances at December 31, 2013 $ 120 $249,880 49,968 (23,065) $ 114,770 $ 5,791 49,968 (23,065) $ 370,561 Net income Other comprehensive income Contribution from JRG Holdings Dividends Balances at December 31,2014 $ ,000 $ 259,880 50,530 4,676 (50,000} $ 115,300 $ 10,467 50,530 4,676 10,000 (50,000) $ 385,767 See accompanying notes 6

9 Statements of Cash Flows Year Ended December 31, (in thousands) Operating activities Net income $ 50,530 $ 49,968 Adjustments to reconcile net income to net cash provided by operating activities: Deferred policy acquisition costs (105,073) (73,750) Amortization of policy acquisition costs 91,143 76,527 Net realized investment gains (1,187) (3,500) Depreciation and amortization 1, Change in operating assets and liabilities: Reserve for losses and loss adjustment expenses 52,078 33,873 Unearned premiums 44,112 (24,121) Premiums receivable ( 13,466) 27,720 Reinsurance balances (7,754) 8,493 Payable to insurance companies (7,531) (29,886) Other (11,022) (3,251) Net cash provided by operating activities 93,161 62,319 I nvcsting activities Fixed maturity securities, available-for-sale: Purchases (125,070) (174,416) Sales 22, ,729 Maturities and calls 32,083 44,904 Bank loan participations: Purchases ( 162, 125) ( 153,458) Sales 98,518 93,616 Maturities 41,566 53,467 Securities receivable or payable, net 857 Short-term investments, net (49,129) 14, 130 Other (10) (161) Net cash (used in) provided by investing activities (140,543) 17,811 Financing activities Dividends paid (50,000) Contribution from JRG Holdings 10,000 Net cash used in financing activities (40,000) Change in cash and cash equivalents (87,382) 80, 130 Cash and cash equivalents at beginning of period 119,586 39,456 Cash and cash equivalents at end of period $ 32,204 $ 119,586 Supplemental information U.S. federal income taxes paid, net of refunds $ $ Interest paid $ $ See accompanying notes 7

10 December 31, 2014 and Organization JRG Reinsurance Company, Ltd. ("JRG Re" or the "Company") is a wholly owned subsidiary of James River Group Holdings, Ltd. ("JRG Holdings"), a holding company registered in Bermuda. JRG Re was formed in 2007 and began operations in JRG Re provides reinsurance to U.S. property/casualty insurance companies and to JRG Holdings' U.S.-based insurance subsidiaries. 2. Summary of Significant Accounting Policies Basis of Presentation The financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), which vary in some respects from statutory accounting practices ("SAP") which are prescribed or permitted by insurance regulators in Bermuda, the Bermuda Monetary Authority. Estimates and Assumptions Preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Those estimates are inherently subject to change, and actual results may ultimately differ from those estimates. Fixed Maturity Securities Fixed maturity securities classified as "available-for-sale" are carried at fair value, and unrealized gains and losses on such securities are reported as a separate component of accumulated other comprehensive income. The Company does not have any securities classified as "held-to-maturity" or "trading". Fair value generally represents quoted market value prices for securities traded in the public marketplace or prices analytically determined using bid or closing prices for securities not traded in the public marketplace. Premiums and discounts on fixed maturity securities not backed by other loans are amortized using the effective interest method. Premiums and discounts on mortgage-backed securities and asset-backed securities are amottized or accrued using the constant yield method which considers anticipated prepayments at the date of purchase. To the extent that the estimated lives of such securities change as a result of changes in estimated prepayment rates, the adjustments are included in net investment income using the retrospective method. Realized investment gains or losses are determined on a specific identification basis. Purchases and sales are recognized on the trade date. Interest income is recognized as earned. The Company evaluates its available-for-sale investments regularly to determine whether there are declines in value that are other-than-temporary. The Company's outside investment managers assist the Company in this evaluation. When the Company determines that a security has experienced an other-than-temporary impairment, the impairment loss is recognized as a realized investment loss. The factors that the Company considers in evaluating whether such an other-than-temporary impairment has occurred include the amount and percentage that fair value is below amortized cost or cost and the length of time that fair value has been below amortized cost or cost. For fixed maturity securities, the Company considers the credit quality rating of the security, with a special emphasis on securities downgraded below investment grade. Management does not intend to sell available-for-sale securities 8

11 December 31,2014 and Summary of Significant Accounting Policies (continued) 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 fair value to their amortized cost basis occurs. Bani< Loan Participations and Allowance for Credit Losses Bank loan participations are managed by a specialized outside investment manager and are generally stated at their outstanding unpaid principal balances net of unamot1ized premiums or discounts and net of any allowance for credit losses. Interest income is accrued on the unpaid principal balance. Discounts and premiums are amortized to income using the interest method. Generally, the accrual of interest on a bank loan participation is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest. A bank loan participation may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Interest received on nonaccrual loans generally is reported as investment income. There were no bank loans on nonaccrual status at December 31, 2014 or Generally, bank loan participations are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. The allowance for credit losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management's periodic evaluation of the adequacy of the allowance is based on consultations and advice of the Company's specialized investment manager, known and inherent risks in the portfolio, adverse situations that may aflect the borrower's ability to repay, the estimated value of any underlying collateral, current economic conditions, and other relevant factors. When an observable market price for a loan is available, the Company has recorded an allowance equal to the difference between the fair value and the amot1ized cost of bank loans that it has determined to be impaired as a practical expedient for an estimate of probable future cash flows to be collected on those bank loans. If an observable market price for a loan is not available, the Company records an allowance equal to the diflerence between the present value of expected future cash flows discounted at the loan's eftective interest rate and the amot1ized cost of the loan. Short-term Investments Shot1-term investments are carried at cost, which approximates fair value. Shm1-term investments have maturities greater than three months but less than one year at the date of purchase. Cash Equivalents The Company considers highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Assumed Reinsurance Premiums Assumed reinsurance written premiums include amounts reported by brokers and ceding companies, supplemented by the Company's own estimates of premiums when reports have not been received. Premiums on the Company's excess of loss and pro rata reinsurance contracts are estimated when the business is underwritten. For excess of loss contracts, the deposit premium, as defined in the contract, is generally recorded as an estimate of premiums written 9

12 Notes to Fin:mcial Statements December 31, 2014 and Summary of Significant Accounting Policies (continued) at the inception date of the treaty. Estimates of premiums written under pro rata contracts are recorded in the period in which the underlying risks are expected to begin and are based on information provided by the brokers and the ceding companies. Reinsurance premium estimates are reviewed by management periodically. Any adjustment to these estimates is recorded in the period in which it becomes known. Reinsurance premiums assumed are earned over the terms of the underlying policies or reinsurance contracts. Contracts and policies written on a "losses occurring" basis cover claims that may occur during the term of the contract or policy, which is typically 12 months. Accordingly, the premium is earned evenly over the term. Contracts which are written on a "risks attaching" basis cover claims which attach to the underlying insurance policies written during the terms of such contracts. Premiums earned on such contracts usually extend beyond the original term of the reinsurance contract, typically resulting in recognition of premiums earned over a 24-month period in proportion to the level of underlying exposure. Cet1ain of the Company's reinsurance contracts include provisions that adjust premiums or acquisition expenses based upon the experience under the contracts. Premiums written and earned, as well as related acquisition expenses are recorded based upon the projected experience under the contracts. Premiums Receivable Premiums receivable are carried at face value net of any allowance for doubtful accounts, which approximates fair value. The allowance for doubtful accounts represents an estimate of amounts considered uncollectible based on the Company's assessment of the collectibility of receivables that are past due. The allowance for doubtful accounts was $0 at December 31, and Bad debt expense was $0 for the year ended December 31, and 20 13, and no receivables were written off against the allowance for doubtful accounts in 2014 or Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Deferred Policy Acquisition Costs Costs which are incrementally or directly related to the successful acquisition of new or renewal insurance business are deferred. These deferred costs are primarily commissions to brokers, ceding commissions paid on reinsurance assumed and federal excise taxes. Amortization of such policy acquisition costs is charged to expense in proportion to premium earned over the estimated policy life. To the extent that unearned premiums on existing policies are not adequate to cover projected related costs and expenses, deferred policy acquisition costs are charged to earnings. The Company considers anticipated investment income in determining whether a premium deficiency exists. Reinsurance Certain premiums and losses are assumed from other insurance companies or ceded to other insurance companies under various excess of loss and quota-share reinsurance contracts. The Company enters into ceded reinsurance contracts to limit its exposure to large losses and to provide additional capacity for gro\\1h. Premiums, commissions, and losses and loss adjustment expenses on reinsured business are accounted for on a basis consistent with that used in accounting for the original policies issued and the terms of the reinsurance contracts. Reinsurance recoverables and prepaid reinsurance premiums are repot1ed as assets. Other amounts payable to insurance companies and reinsurers or receivable from insurance companies and reinsurers are netted where the right of offset exists. The Company receives ceding commissions in connection with certain ceded reinsurance. The ceding commissions are recorded as a reduction of other operating expenses. 10

13 December 31,2014 and Summary of Significant Accounting Policies (continued) Property and Equipment, Net Property and equipment, which is included in "other assets" in the accompanying balance sheets, is repo11ed at cost less accumulated depreciation and is depreciated principally on a straight-line basis over the estimated useful lives of the depreciable assets, generally three to ten years. Reserve for Losses and Loss Adjustment Expenses The reserve for losses and loss adjustment expenses represents the estimated ultimate cost of all rep011ed and unreported losses and loss adjustment expenses incurred and unpaid at the balance sheet date. The Company does not discount this reserve. The process of estimating the rese1ves for losses and loss adjustment expenses requires a high degree of judgment and is subject to a number of variables. The reserve for losses and loss adjustment expenses is estimated using individual case-basis valuations and statistical analyses. Those estimates are subject to the effects of trends in loss severity and frequency. The Company utilizes various actuarially-accepted reserving methodologies in determining the continuum of expected outcomes for its reserves. These methodologies utilize various inputs, including management's initial expected loss ratio (the ratio of losses and loss adjustment expenses incurred to net earned premiums), expected reporting patterns and payment patterns for losses and loss adjustment expenses (based on insurance indust1y data and the Company's own experience), and the Company's actual paid and reported losses and loss adjustment expenses. An internal actuary reviews these results and (after applying appropriate professional judgment and other actuarial techniques that are considered necessary) presents recommendations to the Company's management. Management uses this information and its judgment to make decisions on the final recorded reserve for losses and loss adjustment expenses. Management believes 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 Company. Although management believes that the reserve for losses and loss adjustment expenses is reasonable, it is possible that the Company's actual incurred losses and loss adjustment expenses will not develop consistent with the assumptions inherent in the determination of these reserves. Specifically, the Company's actual ultimate loss ratio could differ from management's initial expected loss ratio and/or the Company's actual reporting patterns for losses could differ from the expected repo11ing patterns. Accordingly, the ultimate settlement of losses and the related loss adjustment expenses may vary significantly fi om the estimates included in the Company's financial statements. These estimates are reviewed continually by management and are adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations. Prospective Accounting Standards In May 2014, the FASB issued ASU No , Revenue from Contracts with Customers (Topic 606), which creates a new comprehensive revenue recognition standard that will serve as a single source of revenue guidance for all companies in all industries. The guidance applies to all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards, such as insurance contracts. Under this guidance, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU No becomes effective for the Company during the first quarter of 2017 and must be applied retrospectively. The Company is II

14 December 31, 2014 and Summary of Significant Accounting Policies (continued) currently evaluating ASU No to determine the potential impact that adopting this standard will have on its financial statements. 3. Investments The Company's available-for-sale investments in fixed maturity securities are summarized as follows: Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (iutflousruuls) December 31, 2014 Fixed maturity securities, available-for-sale: State and municipal $ 27,909 $ 2,972 $ (2) $ 30,879 Residential mortgage-backed 102,123 2,233 (1,371) 102,985 Corporate 218,434 6,579 (1,764) 223,249 Commercial mortgage and asset-backed 79,692 1,060 (114) 80,638 Obligations of U.S. government corporations and agencies 93,559 1,386 (505) 94,440 U.S. Treasury securities and obligations guaranteed by the U.S. government 32, (140) 32,337 Total fixed maturity securities, available-for-sale $554,061 $ 14,363 $ (3,896) $ 564,528 December 31,2013 Fixed maturity securities, available-for-sale: State and municipal $ 28,015 $ 2,221 s (14) $ 30,222 Residential mortgage-backed 92,950 1,705 ( 4,756) 89,899 Corporate 188,084 6,479 (1,527) 193,036 Commercial 11101tgage and asset-backed 56,656 1, 123 (82) 57,697 Obligations of U.S. government corporations and agencies 96,810 1,879 (1,073) 97,616 U.S. Treasury securities and obligations guaranteed by the U.S. government 22, {316} 22,703 Total fixed maturity securities, available-for-sale $ 485,382 $ 13,559 $ (7,768) $ 491,173 12

15 December 31, 2014 and Investments (continued) The amortized cost and fair value of available-for-sale investments in fixed maturity securities at December 31, 2014 are summarized, by contractual maturity, as follows: Amortized Fair Cost Value (in thousands) One year or less After one year through five years After five years through ten years After ten years Residential mortgage-backed Commercial mortgage and asset-backed Total $ $ 30, ,100 30,527 55, ,123 79, ,061 $ $ 30, ,925 32,794 58, ,985 80, ,528 Actual maturities may differ for some securities because borrowers have the right to call or prepay obligations with or without penalties. The following table shows the Company's gross unrealized losses and fair value for available-for-sale securities aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position: 13

16 December 31,2014 and Investments (continued) Less Than 12 Months 12 Months or More Total Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses (in thousands) December 31, 2014 Fixed maturity securities, avai!able-for-sale: State and municipal $ - $ $ 247 $ (2) $ 247 $ (2) Residential mortgagebacked 46,139 (1,371) 46,139 (1,371) Corporate 22,761 (224) 19,359 (I,540) 42,120 (1,764) Commercial mortgage and asset-backed 15,678 (94) 4,904 (20) 20,582 (114) Obligations ofu.s. government corporations and agencies 45,185 (505) 45,185 (505) U.S. Treasury securities and obligations guaranteed by the U.S. government 10,059 (22) 13,962 (118) 24,021 (140) Total fixed maturity securities available-for-sale $ 48,498 $ (340) $129,796 $ (3,556) $ 178,294 $ (3,896) December 31,2013 Fixed maturity securities, available-for-sale: State and municipal $ 236 $ (14) $ $ $ 236 $ (14) Residential mortgagebacked 44,385 (3,035) 15,876 (1,721) 60,261 (4,756) Corporate 30,143 (I,336) 722 (191) 30,865 (1,527) Commercialmot1gage and asset -backed 32,438 (82) 32,438 (82) Obligations ofu.s. government corporations and agencies 47,264 (1,073) 47,264 (I,073) U.S. Treasury securities and obligations guaranteed by the U.S. government 19,574 (316) 19,574 (316) Total fixed maturity securities available-for-sale $ 174,040 $ (5,856) $ 16,598 $ (I,912) $ 190,638 $ (7,768) As of December 31, 20 14, the Company held securities of 36 issuers that were in an unrealized loss position with a total fair value of $178.3 million and gross unrealized losses of $3.9 million. None of the fixed maturity securities with unrealized losses has ever missed, or been delinquent on, a scheduled principal or interest payment. 14

17 December 31,2014 and Investments (continued) Unrealized losses on fixed maturity securities are primarily interest rate related. At December 31, 2014, 90.9% of the Company's fixed maturity security portfolio was rated "A-" or better by Standard & Poor's or received an equivalent rating from another nationally recognized rating agency. Fixed maturity securities with ratings below investment grade by Standard & Poor's or another nationally recognized rating agency at December 31, 2014 had an aggregate fair value of $21.6 million and an aggregate net unrealized loss of $552,000. Management concluded that none of the securities in its fixed maturity portfolio with an unrealized loss at December 31, 2014 or 2013 had experienced an other-than-temporaty impairment. 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. Bank loan participations generally have a credit rating that is below investment grade (i.e. below "BBB-" for Standard & Poor's) at the date of purchase. These bank loans are primarily senior, secured floating-rate debt rated "B" or "BB" by Standard & Poor's or an equivalent rating from another nationally recognized rating agency. These bank loans include assignments of, and pat1icipations in, performing and non-performing senior corporate debt generally acquired through primary bank syndications and in secondary markets. Bank loans consist of, but are not limited to, term loans, the funded and unfunded pot1ions of revolving credit loans, and other similar loans and investments. Management believed that it was probable at the time that these loans were acquired that the Company would be able to collect all contractually required payments receivable. Generally, the accrual of interest on a bank loan participation is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about fut1her collectibility of principal or interest. A bank loan participation may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Generally, bank loan patiicipations are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Interest received on nonaccrual loans generally is reported as investment income. There were no bank loans on nonaccrual status at December 31, or The allowance for credit losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management's periodic evaluation of the adequacy of the allowance is based on consultations and advice of the Company's specialized investment manager, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, current economic conditions, and other relevant factors. The Company generally records an allowance equal to the difference between the fair value and the amortized cost of bank loans that it has determined to be impaired as a practical expedient for an estimate of probable future cash flows to be collected on those bank loans. Bank loans are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At December 31, 2014, there were no investments in bank loan participations considered to be impaired. At December 31, 2013, investments in bank loan pat1icipations considered impaired were $246,000, net of the related allowance for credit losses on such bank loan patiicipations of $242,000. The unpaid principal balance on these bank loan participations was $488,000 at December 31, The average recorded investment in impaired bank loans was $123,000 and $307,000 during the years ended December 31, 2014 and 2013, respectively, on which investment income of $8,000 and $32,000, respectively, was recognized during the time that the loans were impaired. There were no recorded realized gains or losses during the year ended December 31, 2014 for changes in the fair value of impaired bank loans. The Company recorded realized losses of $121,000 during the year ended December 3 I, 2013 for changes in the fair value of impaired bank loans. 15

18 December 31,2014 and Investments (continued) At December 31, 20 I4, unamortized discounts on bank loan pa11icipations were $1.4 million, and unamortized premiums on bank loan participations were $15,000. At December 31, 2013, unamot1ized discounts on bank loan participations were $ 1.2 million, and unamortized premiums on bank loan participations were $73,000. Major categories of the Company's net investment income are summarized as follows: Fixed maturity securities Bank loan participations Cash, cash equivalents, and short-term investments Gross investment income Investment expense Net investment income Year Ended December 31, (ill thousmrds) $ 15,056 $ 15,829 7,646 7,907 10I 93 22,803 23,829 (2,058) (1,922) $ 20,745 $ 21,907 The Company's realized gains and losses on investments are summarized as follows: Year Ended December 31, (i11 thousu11ds) Fixed maturity securities: Gross realized gains $ 248 $ 5,263 Gross realized losses {72) {2,697) 176 2,566 Bank loan pat1icipations: Gross realized gains 1, 145 1,437 Gross realized losses (145) (514) 1, Short-term investments and other: Gross realized gains I I I I Gross realized losses II 11 Total $ 1,187 $ 3,500 The Company maintains fixed maturity securities, short-term investments, and cash and cash equivalents amounting to $381.4 million at December 31, 2014 in trust accounts or on deposit as collateral for outstanding letters of credit issued as security to third-pat1y reinsureds on reinsurance assumed by JRG Re. The Company also maintains fixed maturity securities, bank loan participations, short-term investments, and cash and cash equivalents amounting to $331.6 million at December 31, 2014 in trust accounts as security to the Company's U.S.-based insurance subsidiaries on reinsurance assumed by JRG Re under intercompany quota-share reinsurance contracts. At December 31, 20 I 4, the Company held no sub-prime mortgages or alternative-a mortgages. 16

19 December 31,2014 and Investments (continued) At December 31,2014 and 2013, the Company holds fixed maturity securities with a fair value of$12.6 million and $11.0 million, respectively, issued by First Wind Capital, LLC ("First Wind"). At December 31, 2014, two of the directors of JRG Holdings are also directors of First Wind, which is an affiliate of JRG Holdings' largest shareholder. 4. Deferred Policy Acquisition Costs An analysis of deferred policy acquisition costs is as follows: Year Ended December 31, (iu tflousmufs) Balance at beginning of period Policy acquisition costs deferred: Commissions Underwriting and other issue expenses Amortization of policy acquisition costs Net change Balance at end of period $ 48,874 $ 51, ,941 73, I 05,073 73,750 (91,143) (76,527) 13,930 (2,777) $ 62,804 $ 48,874 17

20 December 31,2014 and Reserve for Losses and Loss Adjustment Expenses The following table provides a reconciliation of the beginning and ending reserve balances for losses and loss adjustment expenses, net of reinsurance, to the gross amounts reported in the balance sheets: Reserve for losses and loss adjustment expenses net of reinsurance recoverables at beginning of period Add: Incurred losses and loss adjustment expenses net of reinsurance: Current year Prior years Total incurred losses and loss and adjustment expenses Deduct: Loss and loss adjustment expense payments net of reinsurance: Current year Prior years Total loss and loss adjustment expense payments Reserve for losses and loss adjustment expenses net of reinsurance recoverables at end of period Add: Reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period Reserve for losses and loss adjustment expenses gross ofreinsurance recoverables on unpaid losses and loss adjustment expenses at end of period Year Ended December 31, (ill tfioiis{/1/i{s) $ 382,969 $ 365, , ,952 {8,958} { 14,890) 198, ,062 17,659 16, , , , , , ,969 24,785 29,636 $ 464,683 $ 412,605 The foregoing reconciliation shows that a $9.0 million redundancy developed in 2014 on the reserve for losses and loss adjustment expenses held at December 31, This favorable reserve development included $14.6 million of favorable development on assumed business from affiliated U.S. insurance companies and $5.7 million of adverse development on assumed business from third pa11ies, with a majority of this adverse development coming from one reinsurance relationship from the 20 II underwriting year that experienced higher loss development in 2014 than expected. The foregoing reconciliation shows that a $14.9 million redundancy developed in 2013 on the reserve for losses and loss adjustment expenses held at December 31, This favorable reserve development included $18.6 million of favorable development on assumed business fi om affiliated U.S. insurance companies and $3.7 million of adverse development on assumed business from third pa11ies, primarily from the 20 II accident year. The Company has not provided insurance coverage that could reasonably be expected to produce material levels of asbestos claims activity. fn addition, management does not believe that the Company is exposed to any environmental liability claims other than those which it has specifically underwritten and priced as an environmental exposure. 18

21 December 31, 2014 and Rcinsumnce The Company remains liable to policyholders if its reinsurers are unable to meet their contractual obligations under applicable reinsurance agreements. To minimize exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk. The Company's ceded reinsurance contracts generally require reinsurers that are not authorized as reinsurers under U.S. 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. At December 31, 2014, the Company had reinsurance recoverables on unpaid losses of $24.8 million. All of these reinsurance recoverables are from companies with A.M. Best Company ratings of "A-" (Excellent) or better, or are collateralized with letters of credit or by a trust agreement. There were no reinsurance recoverables on paid losses at December 31, At December 31, 20 14, reinsurance recoverables on unpaid losses from the Company's two largest reinsurers were $18.2 million and $3.4 million, representing 87.0% of the total balance. At December 31, 2014, prepaid reinsurance premiums ceded to one reinsurer totaled $326,000, representing 100.0% of the total balance. Premiums earned, and losses and loss adjustment expenses incurred are summarized as follows: Earned premiums: Assumed Ceded Net Losses and loss adjustment expenses: Assumed Ceded Net Year Ended December 31, (ill t/wusam/s) $ 333,158 $ 303,164 (4,249) (23,139) $ 328,909 $ 280,025 $ 201,453 $ 190,448 (3,345) (22,386) $ 198,108 $ 168, Related Party Transactions The Company has entered into quota share reinsurance agreements with its afliliated U.S. insurance companies, James River Insurance Company, James River Casualty Company, Falls Lake National Insurance Company, Stonewood Insurance Company, and Falls Lake General Insurance Company, under which 70% of the premiums written by the U.S. insurance companies are ceded to JRG Re. Amounts related to these quota share reinsurance agreements are settled in cash monthly. Total written premium ceded to JRG Re under the intercompany quota share agreements was $170.6 million and $123.6 million for the years ended December 31, 2014 and 2013, respectively. Amounts related to the intercompany quota share agreements are as follows (in thousands): 19

22 7. Related Party Transactions (continued) JRG Reinsurance Company, Ltd. December 31, 2014 and 2013 Income Statement Assumed premiums written Assumed premiums earned Assumed losses and loss adjustment expenses Assumed other underwriting expenses Net income effect of quota share reinsurance with affi liates Balance Sheet Assumed premiums receivable Assumed deferred policy acquisition costs Assumed reserves for losses and loss adjustment expenses Assumed unearned premiums Assumed payables to insurance companies Year Ended December 31, fiu tllnut:nurld $ 170,645 $ 123, , ,998 84,098 53,914 42,729 30,609 30,033 27,475 17,360 10,339 18,587 15, , ,022 68,535 54,749 6,089 9,530 The Company declared and paid a $50.0 million dividend to JRG Holdings in September, The Company received a $10.0 mill ion capital contribution from JRG Holdings in December, The Company pays a corporate services fee to its parent, JRG Holdings, for management, accounting, administrative services, and stock based compensation expense related to JRG Re employees. The Company paid $2.6 million of corporate service fees to JRG Holdings in both 2014 and At December 31, 2014, the Company had $14.9 million receivable fi om JRG Holdings. At December 31, 2013, the Company had $4.7 million receivable from JRG Holdings. 8. Income Taxes Under current Bermuda law, JRG Re is not required to pay any Bermuda taxes on its income or capital gains. The Company has received an unde11aking from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, the Company will be exempt from taxation in Bermuda until March FASB ASC Topic 740, Income Tcn es, defines how unce11ain tax positions should be recognized, measured, presented, and disclosed in the financial statements and requires entities to recognize a tax benefit fi"mn an uncertain tax position only if it is "more likely than not" that the position is sustainable, based so I ely on its technical merits and consideration of the relevant taxing authority's widely understood administrative practices and precedents. The Company has evaluated its tax positions taken to determine whether the tax positions are more likely than not to be sustained by the applicable tax authority. Based on this analysis, there were no tax positions deemed to meet a "more likely than not" threshold. Therefore, no tax expense, including any interest and penalties, was recorded for the periods covered by this rep011. The U.S. imposes a I % excise tax on reinsurance premiums paid to non-u.s. reinsurers with respect to risks located in the U.S. The rates of tax are established based on the nature of the risk, unless reduced by an applicable U.S. tax treaty. For the years ended December 31, 2014 and 2013, the Company paid $1.7 million and $1.2 million, respectively, of federal excise taxes on its reinsurance assumed from JRG Holdings' U.S. insurance subsidiaries. 20

23 December 31, 2014 and Income Taxes (continued) The Company also paid excise taxes of $1.8 million and $2.6 million for the years ended December 31, 2014 and 2013, respectively, on written premiums assumed from third-party insurers with respect to risks located in the U.S. Federal excise taxes are reflected as "other underwriting expenses" in the Company's income statements. 9. Other Underwl"iting Expenses and Other Expenses Other operating expenses consist of the following: Amortization of policy acquisition costs Other underwriting expenses Total Year Ended December 31, (i11 tflousmtds) $ 91,143 10,460 $101,603 $ 76,527 10,875 $ 87,402 Other expenses for the year ended December 31, 2014 include $600,000 of employee severance expenses. I 0. Employee Benefits The Company's parent (JRG Holdings) offers a savings plan (the "Savings Plan") which qualifies under Section 40 I (k) of the U.S. Internal Revenue Code. Par1icipants may contribute cer1ain percentages of their pre-tax salary to the Savings Plan subject to statutory limitations. The Company matches employee contributions at various rates up to a maximum contribution of 6.0% of the participant's earnings subject to certain statutory limits. For the years ended December 31, and 20 13, respectively, the expense associated with the Savings Plan totaled $80,000 and $51,000, respectively. 11. Commitments and Contingent Liabilities The Company is a par1y to various lawsuits arising in the ordinary course of its operations. The Company believes that the ultimate resolution of these matters will not materially impact its financial position, cash flows, or results of operations. The Company leases certain oftlce space under operating leases that expire at various times and are subject to renewal options at market rates prevailing at the time of renewal. Rental expense for such leases was $213,000 and $209,000 for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014, future minimum payments under non-cancelable operating leases arc $18,000 due in The Company has entered into two letter of credit facilities with banks as security to third-party reinsureds on reinsurance assumed by the Company. The Company has established custodial accounts to secure these letters of credit. Under a $125.0 million facility, $101.2 million of letters of credit were issued through December 31, 2014 and assets of $111.4 million were on deposit at December 31, 2014 securing the letters of credit. Under a $62.5 million facility, $40.1 million of letters of credit were issued through December 31, 2014 and assets of$51.8 million were on deposit at December 31, 2014 securing the letters of credit. The Company has also established trust accounts to secure its obligations to selected reinsureds. The total amount deposited in the trust accounts for the benefit ofthird-party reinsureds was $218.2million at December 31,2014. Another $331.6 million was also in trust accounts at December 31, 2014 securing the Company's obligations under quota share reinsurance agreements with its affiliated U.S. insurance companies. 21

24 JRG Rcinsumnce Company, Ltd. Decembe 31, 2014 and Conunitmcnts and Contingent Liabilities (continued) The Company and JRG Holdings are borrowers on a $125.0 million unsecured revolving credit facility. The facility was placed for the benefit of JRG Holdings to meet working capital needs. At December 31, 20 I 4, a $73.3 million drawn and outstanding balance on the revolver was carried as debt at JRG Holdings. The credit facility contains certain financial and other covenants with which JRG Holdings and the Company are in compliance with at December 31, Other ComJwehensive Income (Loss) The following table summarizes the components of other comprehensive income (loss): Year Ended December 31, (i1111tousamfs) Unrealized gains (losses) arising during the period Less reclassification adjustment for net investment gains realized in net income Other comprehensive income (loss) $ 4, $ 4,676 $ (20,499) 2,566 $ (23,065) In addition to the $176,000 of realized investment gains on available-for-sale securities for the year ended December 31, 2014, the Company also recognized $1.0 million of realized gains on its investments in bank loan participations in In addition to the $2.6 million of realized investment gains on available-for-sale securities for the year ended December 31, 2013, the Company also recognized $923,000 of realized gains on its investments in bank loan participations in Broker and Ceding Company Concentmtions The Company conducts business with three brokers that generated $64.2 million, $56.3 million, and $32.7 million of gross written premiums for the Company for the year ended December 31, 2014, representing 31.1 %, 27.3%, and 15.8% of the gross written premiums from unaffiliated cedants. No other broker generated 10.0% or more of the gross written premiums for the Company for the year ended December 31, The Company assumes business from two unaffiliated ceding companies that generated $100.2 million and $37.5 million of gross written premiums for the year ended December 31, 2014, representing 48.5% and 18.1% of the gross written premiums fi om unaffiliated cedants. 14. Fair Value Measurements Three levels of inputs are used to measure fair value of financial instruments: (I) Level I: quoted price (unadjusted) in active markets for identical assets, (2) Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument, and (3) Level 3: inputs to the valuation methodology are unobservable for the asset or liability. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. To measure fair value, the Company obtains quoted market prices for its investment securities from its outside investment managers. If a quoted market price is not available, the Company uses prices of similar securities. 22

25 14. Fair Value Measurements (continued) December 31,2014 and 2013 Values for U.S. Treasmy and publicly-traded equity securities are generally based on Level I inputs which use the market approach valuation technique. The values for all other fixed maturity securities (including state and municipal securities and obligations of U.S. government corporations and agencies) generally incorporate significant Level 2 inputs, and in some cases, Level 3 inputs, using the market approach and income approach valuation techniques. There have been no changes in the Company's use of valuation techniques since December 31, The Company reviews fair value prices provided by its outside investment managers for reasonableness by comparing the fair values provided by the managers to those provided by our investment custodian. The Company also reviews and monitors changes in unrealized gains and losses. The Company has not historically adjusted security prices. The Company obtains an understanding of the methods, models and inputs used by the investment managers and independent pricing services, and controls are in place to validate that prices provided represent fair values. The Company's 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 manager that obtains fair values from independent pricing services. Assets measured at fair value on a recurring basis as of December 31, 2014 are summarized below: Fair Value Measurements Using Quoted Prices in Active Significant Marl<ets for Other Significant Identical Observable Unobservable Assets Inputs Inputs Levell Leve12 Level3 Total (ill ffjoiisu/ids) Available-for-sale securities Fixed maturity securities: State and municipal $ $ 30,879 $ $ 30,879 Residential mortgage-backed 102, ,985 Corporate 223, ,249 Commercial mortgage and asset-backed 80,638 80,638 Obligations of U.S. government corporations and agencies 94,440 94,440 U.S. Treasury securities and obligations guaranteed by the U.S. government 32,337 32,337 Total available-for-sale securities $ 32,337 $ 532,191 $ $ 564,528 Short-term investments $ 57,508 $ 57,140 $ $ 114,648 23