Net Reserve for Losses and LAE				Case Reserves				IBNR Reserves				Total Reserves
				(in thousands)
Excess and Surplus Insurance Casualty Lines				$	12,196			$	95,022			$	107,218
Excess and Surplus Insurance Property Lines					9,466				7,148				16,614
Workers' Compensation Insurance					8,465				11,030				19,495
Total				$	30,127			$	113,200			$	143,327

We have not provided insurance coverage that could reasonably be expected to produce material levels of asbestos claims activity. In addition, we believe we are not exposed to any environmental liability claims other than those which we have specifically underwritten and priced as an environmental exposure. Any asbestos or environmental exposure on policies issued by Fidelity Excess and Surplus Insurance Company (Fidelity) prior to June 30, 2003, the date that we acquired that company, are subject to a reinsurance agreement and a trust agreement with American Empire Insurance Company (American Empire) (see ‘‘—Reinsurance’’).

Other operating expenses for the three months ended March 31, 2006 totaled $12.0 million, up 111% from other operating expenses incurred during the three months ended March 31, 2005 of $5.7 million. Other operating expenses for the three months ended March 31, 2006 consisted of commissions (net of reinsurance ceding commissions earned) and other underwriting expenses (net of deferred policy acquisition costs) of $3.7 million, amortization of deferred policy acquisition costs of $7.7 million and other costs of $641,000. Other operating expenses for the three months ended March 31, 2005 consisted of commissions and other underwriting expenses (net of deferred policy acquisition costs) of $1.6 million, amortization of deferred policy acquisition costs of $3.7 million and other costs of $398,000. Reinsurance ceding commissions earned were $2.9 million and $3.5 million, respectively, for the three months ended March 31, 2006 and 2005, with $1.9 million of these commissions in 2005 coming from our quota share reinsurance contract. A portion of the costs of acquiring insurance business, principally commissions and certain policy underwriting and issuance costs, which vary with and are primarily related to the production of insurance business, is deferred. For the three months ended March 31, 2006, $9.1 million of costs were deferred, $6.2 million of which related to commissions and $2.9 million of which related to other acquisition expenses. For the three months ended March 31, 2005, $5.0 million of costs were deferred, $2.8 million of which related to commissions and $2.2 million of which related to other acquisition expenses. Deferred policy acquisition costs are charged to other operating expenses in proportion to premiums earned over the estimated policy term, generally 12 months.

The expense ratio, which is the ratio, expressed as a percentage, of other operating expenses to net earned premiums, was 25.0% for three months ended March 31, 2006 compared to 22.9% for the three months ended March 31, 2005. The expense ratio for the three months ended March 31, 2006 was affected by the $223,000 we recognized as compensation expense associated with expensing stock options due to the adoption of FASB Statement 123(R) effective January 1, 2006 (see ‘‘—New Accounting Standards’’). In addition, the quota share treaty in effect in the first quarter of 2005 reduced the earned premiums in that quarter by $7.6 million and reduced other operating expenses by $1.9 million, which reduced the expense ratio for that quarter by 0.6%.

Interest expense totaled $777,000 for the three months ended March 31, 2006 and $588,000 for the three months ended March 31, 2005, an increase of 32.1%. Interest expense relates to the $15.0 million of senior notes and $22.7 million of junior subordinated notes that we issued in May and December 2004, respectively. Interest on these notes accrues at floating rates, and the increase in interest expense reflects increases in interest rates over the past 12 months.

Income tax expense for the three months ended March 31, 2006 and 2005 differs from the amount computed by applying the Federal statutory income tax rate to the loss before income taxes primarily due to interest on tax-advantaged state and municipal securities. The effective tax rate is 32.2% for the three months ended March 31, 2006 and 33.5% for the three months ended March 31, 2005. The lower effective tax rate in 2006 reflects an increase in interest income on tax-advantaged state and municipal securities over the prior year first quarter.

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Results by Business Segment

We are organized into three reportable segments which are separately managed business units:

	•	The Excess and Surplus Insurance segment offers commercial excess and surplus lines liability and property products through James River Insurance;

	•	The Workers' Compensation Insurance segment offers workers' compensation insurance coverages through Stonewood Insurance; and

	•	The Corporate and Other segment consists of certain management and treasury activities of our holding company and interest expense associated with our debt.

There is an intercompany reinsurance pooling agreement in place between James River Insurance and Stonewood Insurance to best employ our capital at the regulatory level. We report all segment information in this ‘‘Management's Discussion and Analysis of Financial Condition and Results of Operations’’ prior to the effects of the intercompany reinsurance pooling agreement because we evaluate the operating performance of our reportable segments on a pre-pooling basis.

Excess and Surplus Insurance

Results for the Excess and Surplus Insurance segment are as follows:

				Three Months Ended March 31,
				2006				2005				Change
				($ in thousands)
Gross written premiums				$	57,768			$	41,769				38.3	%
Net written premiums				$	44,576			$	26,902				65.7	%
Net earned premiums				$	39,584			$	20,832				90.0	%
Losses and LAE					22,367				11,317				97.6	%
Underwriting expenses					9,086				3,873				135	%
Underwriting profit (1)					8,131				5,642				44.1	%
Net investment income					3,079				1,346				129	%
Realized investment losses					(35	)			—				—
Income before taxes				$	11,175			$	6,988				59.9	%
Ratios:
Loss ratio					56.5	%			54.3	%			—
Expense ratio					23.0	%			18.6	%			—
Combined ratio					79.5	%			72.9	%			—

(1)	See ‘‘—Reconciliation of Non-GAAP Measure.’’

Underwriting results by major line of business within the Excess and Surplus Insurance segment are as follows:

				Three Months Ended March 31, 2006												Three Months Ended March 31, 2005
				Casualty Lines				Property Lines				Total				Casualty Lines				Property Lines				Total
				($ in thousands)
Net earned premiums				$	37,702			$	1,882			$	39,584			$	19,675			$	1,157			$	20,832
Losses and LAE				$	21,309			$	1,058			$	22,367			$	12,390			$	(1,073	)		$	11,317
Loss ratio					56.5	%			56.2	%			56.5	%			63.0	%			(92.7	)%			54.3	%

Gross written premiums for the three months ended March 31, 2006 increased 38.3% to $57.8 million from $41.8 million for the three months ended March 31, 2005. The increase in gross written

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premiums in the three months ended March 31, 2006 is driven by an increase in the number of brokers submitting insurance business to James River Insurance from 158 for the three months ended March 31, 2005 to 199 for the three months ended March 31, 2006. In addition, the growing book of business in the Excess and Surplus Insurance segment created increased opportunities for renewal premiums. Gross written premiums for the three months ended March 31, 2006 included $23.4 million of renewal premiums compared to $11.9 million of renewal premiums for the three months ended March 31, 2005.

The written premium ceding ratio for the Excess and Surplus Insurance segment was 22.8% and 35.6%, respectively, for the three months ended March 31, 2006 and 2005. The higher written premium ceding ratio for the three months ended March 31, 2005 was driven by the impact of the quota share reinsurance contract that was effective January 1, 2005 and was not renewed for 2006. Ceded written premiums related to this quota share treaty for the three months ended March 31, 2005 totaled $7.6 million.

The loss ratio for the Excess and Surplus Insurance segment was 56.5% and 54.3%, respectively, for the three months ended March 31, 2006 and 2005. The loss ratio for the three months ended March 31, 2006 and 2005 was affected by $2.1 million and $2.0 million, respectively, of favorable loss and LAE reserve development on prior accident years. For the three months ended March 31, 2006, this favorable development included $1.5 million of favorable development in the James River Insurance casualty line primarily related to the 2004 accident year and $626,000 of favorable development in property lines, primarily related to the 2005 accident year. The favorable development for the three months ended March 31, 2005 included $1.7 million on property lines related to the 2004 accident year.

The expense ratio for the Excess and Surplus Insurance segment increased from 18.6% for the three months ended March 31, 2005 to 23.0% for the three months ended March 31, 2006. The expense ratio for the three months ended March 31, 2005 benefited from the ceding commission that James River Insurance received on the quota share reinsurance contract, which totaled $1.9 million for the three months ended March 31, 2005. The quota share treaty also impacted the expense ratio by reducing net earned premiums by $7.6 million for the three months ended March 31, 2005.

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Workers' Compensation Insurance

Results for the Workers' Compensation Insurance segment are as follows:

				Three Months Ended March 31,
				2006				2005				Percentage Change
				($ in thousands)
Gross written premiums				$	10,397			$	5,251				98.0	%
Net written premiums				$	9,112			$	4,088				123	%
Net earned premiums				$	8,505			$	4,000				113	%
Losses and LAE					6,850				2,077				230	%
Underwriting expenses					2,298				1,422				61.6	%
Underwriting (loss) profit (1)					(643	)			501				—
Net investment income					598				247				142	%
Other income					11				5				120	%
(Loss) income before taxes				$	(34	)		$	753				—
Ratios:
Loss ratio					80.5	%			51.9	%			—
Expense ratio					27.0	%			35.6	%			—
Combined ratio					107.6	%			87.5	%			—

(1)	See ‘‘—Reconciliation of Non-GAAP Measure.’’

Gross written premiums for the three months ended March 31, 2006 increased 98.0% to $10.4 million from $5.3 million for the three months ended March 31, 2005. Gross written premiums for Stonewood Insurance for the three months ended March 31, 2006 included $588,000 of assumed premiums from our allocation of the involuntary workers’ compensation pool for North Carolina. Growth in the agency network also contributed to the increase in gross written premiums. At March 31, 2006, there were 139 agents in the Workers' Compensation Insurance segment network compared to 116 at March 31, 2005. Stonewood Insurance wrote its first insurance policy effective January 1, 2004, and gross written premiums for the three months ended March 31, 2005 included $453,000 of renewal premium. There was a larger book of business to generate renewal premiums in the three months ended March 31, 2006, and gross written premiums for that quarter included $2.1 million of renewal premium. The growth in net written premiums and net earned premiums for the three months ended March 31, 2006 over the three months ended March 31, 2005 is primarily attributable to the growth in gross written premiums over the past 12 months.

The impact of Stonewood Insurance’s allocation of the involuntary workers’ compensation pool for North Carolina on loss before taxes was to increase the loss by $553,000 for the three months ended March 31, 2006.

The loss ratio for the Workers' Compensation Insurance segment was 80.5% for the three months ended March 31, 2006, compared to 51.9% for the three months ended March 31, 2005. The loss ratio for the Workers’ Compensation Insurance segment for the three months ended March 31, 2006 was significantly affected by high loss activity in the quarter. In addition, the loss ratio on Stonewood Insurance’s allocation of the North Carolina involuntary workers’ compensation pool’s results was 143.0% for the three months ended March 31, 2006. The loss ratio for the Workers’ Compensation Insurance segment for the three months ended March 31, 2006 was also affected by $563,000 of adverse reserve development on prior accident years, consisting of $786,000 of adverse development on business allocated from the North Carolina involuntary workers’ compensation pool partially offset by $223,000 of favorable reserve development on direct business written by Stonewood Insurance. The loss ratio for the three months ended March 31, 2005 benefited from $296,000 of favorable reserve development experienced in that quarter related to the 2004 accident year.

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The expense ratio for the Workers’ Compensation Insurance segment improved to 27.0% for three months ended March 31, 2006 from 35.6% for the three months ended March 31, 2005. The expense ratio for the Workers’ Compensation Insurance segment in the three months ended March 31, 2005 was affected by the costs required to establish the infrastructure to handle a high volume of insurance activity during the first quarter of workers’ compensation insurance operations.

Corporate and Other

Results for the Corporate and Other segment are as follows:

				Three Months Ended March 31,
				2006				2005
				(in thousands)
Net investment income				$	316			$	152
Realized investment losses					—				(25	)
Other income					31				40
Other operating expenses					(641	)			(398	)
Interest expense					(777	)			(588	)
Loss before taxes				$	(1,071	)		$	(819	)

Net investment income for the Corporate and Other segment increased from $152,000 for the three months ended March 31, 2005 to $316,000 for the three months ended March 31, 2006. In the third quarter of 2005, we retained a portion of the proceeds from our initial public offering at the holding company. At March 31, 2006, cash and invested assets at our holding company totaled $31.7 million, compared to $16.1 million at March 31, 2005.

Other operating expenses of the Corporate and Other segment were $641,000 for the three months ended March 31, 2006 and $398,000 for the three months ended March 31, 2005. Other operating expenses for the three months ended March 31, 2006 included $223,000 that we recognized as compensation expense associated with expensing stock options in connection with the adoption of FASB Statement 123(R) effective January 1, 2006 (see — ‘‘New Accounting Standards’’). Other operating expenses for the Corporate and Other segment include personnel costs associated with the holding company employees, directors' fees, professional fees and various other corporate expenses. A majority of these costs are reimbursed by our subsidiaries. The amount of the reimbursement is included primarily as underwriting expenses in the results of our Excess and Surplus Insurance and Workers' Compensation Insurance segments. The amounts of other operating expenses of the Corporate and Other segment represent the expenses of the holding company that were not reimbursed by our subsidiaries.

Interest expense totaled $777,000 and $588,000 for the three months ended March 31, 2006 and 2005, respectively. Interest expense related to $15.0 million of senior notes and $22.7 million of junior subordinated notes that were issued in May and December 2004. Interest on these notes accrues at floating rates, and the increase in interest expense reflects increases in interest rates over the past 12 months.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Funds    

We are organized as a holding company with all of our operations being conducted by our wholly-owned insurance company subsidiaries. Accordingly, our holding company receives cash through loans from banks, issuance of equity and debt securities (including our initial public offering in August 2005), corporate service fees or dividends received from our insurance subsidiaries, payments from our subsidiaries pursuant to our consolidated tax allocation agreement and other transactions. We receive corporate service fees from our subsidiaries to reimburse us for most of the other operating expenses that we incur. Reimbursement of expenses through the corporate service

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fees is based on the budgeted costs that we expect to incur with no mark up above our expected costs. We file a consolidated federal income tax return with our subsidiaries, and under our corporate tax allocation agreement, each participant gets a tax charge or tax refund for the amount that the participant would have paid or received if it had filed on a separate return basis with the Internal Revenue Service. We may use the proceeds from these sources to contribute to the capital of our insurance subsidiaries in order to support premium growth, to repurchase our common stock, to retire our outstanding indebtedness, to pay interest, dividends and taxes and for other business purposes.

The payment to us of dividends by our subsidiaries is limited by statute. In general, these restrictions require that dividends be paid out of earned surplus and limit the aggregate amount of dividends or other distributions that our subsidiaries may declare or pay within any 12 month period without advance regulatory approval. In Ohio, the domiciliary state of James River Insurance, this limitation is the greater of the statutory net income for the preceding calendar year or 10% of the statutory surplus at the end of the preceding calendar year. In North Carolina, the domiciliary state of Stonewood Insurance, this limitation is the lesser of the statutory net income for the preceding calendar year or 10% of the statutory surplus at the end of the preceding calendar year. In addition, insurance regulators have broad powers to prevent reduction of statutory surplus to inadequate levels and could refuse to permit the payment of dividends of the maximum amounts calculated under any applicable formula. The maximum amount of dividends available to us from our insurance subsidiaries during 2006 without regulatory approval is $14.5 million.

At March 31, 2006, cash and invested assets at our holding company totaled $31.7 million. To the extent that our insurance subsidiaries require capital in 2006 above the amount available at the holding company, we would anticipate issuing trust preferred securities or other debt at our holding company.

Cash Flows

Our sources of operating funds consist primarily of written premiums, investment income and proceeds from offerings of our debt and equity securities. We use operating cash flows primarily to pay operating expenses, losses and LAE and income taxes.

A summary of our cash flows is as follows:

				Three Months Ended March 31,
				2006				2005
				(in thousands)
Cash and cash equivalents provided by (used in):
Operating activities				$	46,036			$	27,659
Investing activities					(38,352	)			(30,993	)
Financing activities					248				—
Change in cash and cash equivalents				$	7,932			$	(3,334	)

Net cash provided by operating activities for the three months ended March 31, 2006 totaled $46.0 million compared to cash provided by operating activities of $27.7 million for the three months ended March 31, 2005. Cash provided by operating activities in both periods is primarily attributable to cash received on written premiums exceeding cash disbursed for operating expenses and losses and LAE. The increase in net cash provided by operating activities reflects the significant growth in our premium cash receipts in the three months ended March 31, 2006 compared to the three months ended March 31, 2005.

Cash from financing transactions during the three months ended March 31, 2006 of $248,000 was attributable to $173,000 of proceeds from the exercise of employee stock options and $75,000 of income tax benefits we received on stock options exercised. There were no financing activities during the three months ended March 31, 2005.

Senior Notes and Junior Subordinated Notes

In May 2004, we issued $15.0 million of senior notes due April 29, 2034, with net proceeds to us of $14.5 million. The senior notes are not redeemable by the holder or subject to sinking fund

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requirements. Interest accrues quarterly and is payable in arrears at a floating rate per annum equal to three-month LIBOR plus 3.85%. The senior notes are redeemable prior to their stated maturity at our option in whole or in part, on or after May 15, 2009. The terms of the indenture for the senior notes contain certain covenants which, among other things, restrict our assuming senior indebtedness secured by our Common Stock or our subsidiaries’ capital stock or issuing shares of our subsidiaries’ capital stock. We are in compliance with all covenants in the indenture at March 31, 2006.

In May and December of 2004, we sold trust preferred securities through two Delaware statutory business trusts sponsored and wholly-owned by us. Each trust used the net proceeds from the sale of its trust preferred securities to purchase our floating rate junior subordinated notes.

The following table summarizes the nature and terms of the junior subordinated notes and trust preferred securities outstanding at March 31, 2006:

				James River Capital Trust I				James River Capital Trust II
				($ in thousands)
Issue date				May 26, 2004				December 15, 2004
Principal amount of trust preferred securities				$	7,000			$	15,000
Principal amount of junior subordinated notes				$	7,217			$	15,464
Maturity date of junior subordinated notes, unless accelerated earlier				May 24, 2034				December 15, 2034
Trust common stock				$	217			$	464
Interest rate, per annum				Three-Month LIBOR plus 4.0%				Three-Month LIBOR plus 3.4%
Redeemable at 100% of principal amount at our option on or after				May 24, 2009				December 15, 2009

We have provided a full, irrevocable and unconditional guarantee of payment of the obligations of each of the trusts under the trust preferred securities. The indentures for the junior subordinated notes contain certain organizational covenants with which we are in compliance as of March 31, 2006.

At March 31, 2006, the ratio of total debt outstanding to total capitalization (defined as total debt outstanding plus total stockholders' equity) was 17.3%. We use capital to support our premium growth and having debt as part of our capital structure allows us to generate higher earnings per share and book value per share results than we could by using entirely equity capital to support our premium growth. Our target debt to total capitalization ratio is 35.0% or less.

Initial Public Offering

On May 3, 2005, we filed a registration statement on Form S-1 with the Securities Exchange Commission for an initial public offering of Common Stock. Our registration statement was declared effective on August 8, 2005. On August 9, 2005, we effected a ten-for-one split of our Common Stock to shareholders of record on that date. Immediately prior to the closing of the initial public offering on August 12, 2005, all of our outstanding Series A Convertible Preferred Stock and Series B Convertible Preferred Stock, including shares representing accrued but unpaid dividends, were converted into 9,956,413 shares of Common Stock. In addition, we amended and restated our certificate of incorporation to increase the number of authorized shares of Common Stock to 100,000,000 and decrease the number of authorized shares of preferred stock to 5,000,000. Gross proceeds from the sale of 4,444,000 shares of Common Stock, at an initial public offering price per share of $18.00, totaled $80.0 million. Costs associated with the initial public offering included $5.6 million of underwriting costs and $995,000 of other issuance costs.

On August 26, 2005, the underwriters of the initial public offering exercised their over-allotment option in which an additional 666,600 shares of Common Stock were issued and sold at the $18.00 initial public offering price per share. Gross proceeds from this transaction were $12.0 million and underwriting costs were $840,000.

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Return on Equity

One of the key financial measures that we use to evaluate our operating performance is return on equity. We calculate return on equity by dividing annualized net income by average stockholders' equity for the period. Our overall financial goal is to produce a return on equity of at least 15.0% over the long-term. Our return on average equity for the three months ended March 31, 2006, using annualized net income for that period as the numerator, was 15.3%, down from 22.5% for the three months ended March 31, 2005. The decline in our return on average equity reflects the significant growth in our average equity resulting primarily from our initial public offering in August 2005 (see ‘‘—Initial Public Offering’’). Interim results are not necessarily indicative of results of operations for the full year.

Cash and Invested Assets

Our cash and invested assets consist of fixed maturity securities and cash and cash equivalents. Our fixed maturity securities are classified as available-for-sale and are carried at fair value with unrealized gains and losses on these securities reported, net of tax, as a separate component of accumulated other comprehensive income (loss). The average duration of our fixed maturity security portfolio at March 31, 2006 is approximately 4.2 years.

The amortized cost and fair value of our investments in fixed maturity securities were as follows:

March 31, 2006

December 31, 2005

Amortized Cost

Fair Value

% of Total Fair Value

Amortized Cost

Fair Value

% of Total Fair Value