Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)

5.    Reserve for Losses and Loss Adjustment Expenses    (continued)

A $252,000 reserve deficiency developed in the three months ended June 30, 2005 on the reserve for losses and loss adjustment expenses (LAE) held at December 31, 2004. Of this development, $709,000 of incurred losses related to the Company’s allocation of 2004 accident year results of the North Carolina involuntary workers’ compensation pool. In addition, Excess and Surplus Insurance casualty lines experienced $199,000 of adverse reserve development, and the Excess and Surplus Insurance property lines experienced $670,000 of favorable reserve development in the second quarter of 2005.

A $4.4 million redundancy developed in the six months ended June 30, 2006 on the prior accident year reserves. Of this development, $3.0 million of favorable development occurred in the Excess and Surplus Insurance casualty lines, with $2.4 million of this favorable development coming from the 2004 accident year. Favorable development in the Excess and Surplus Insurance property lines was $1.1 million primarily related to the 2005 accident year. Favorable development for the Workers’ Compensation Insurance lines totaled $299,000.

A $2.1 million redundancy developed in the six months ended June 30, 2005 on the reserve for losses and LAE held at December 31, 2004. Of this development, $2.4 million occurred in the Excess and Surplus Insurance property lines for the 2004 accident year. The Workers’ Compensation Insurance line experienced $283,000 of favorable reserve development on the 2004 accident year in the first six months of 2005 on direct business written. This favorable development was partially offset by $709,000 of incurred losses related to the Company’s allocation of 2004 accident year results of the North Carolina involuntary workers’ compensation pool.

6.    Junior Subordinated Debt

On June 15, 2006, James River Group, Inc. arranged for the sale of $20.0 million of trust preferred securities (Trust Preferred Securities) through James River Capital Trust III (the Trust), a Delaware statutory trust sponsored and wholly-owned by the Company. The Trust was created solely for the purpose of issuing the Trust Preferred Securities. In accordance with FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, the Trust has not been consolidated with the Company in these financial statements.

The Trust used the proceeds from the sale of its Trust Preferred Securities to purchase $20.6 million of the Company’s floating rate junior subordinated debentures (the Junior Subordinated Debt) issued to the Trust under an indenture (the Indenture). The Junior Subordinated Debt is the sole asset of the Trust, and the Trust Preferred Securities are the sole liabilities of the Trust. The Junior Subordinated Debt matures on June 15, 2036, unless accelerated earlier. The Company purchased all of the outstanding common stock of the Trust, and the Company’s investment in the Trust is included in other assets in the accompanying condensed consolidated balance sheet.

Interest on the Trust Preferred Securities and interest paid by the Company to the Trust on the Junior Subordinated Debt are payable quarterly in arrears. Through September 15, 2006, interest accrues at the per annum rate of 8.3%. On September 15, 2006 and quarterly thereafter, the interest rate will be reset to a per annum rate equal to the three-month LIBOR on the Determination Date (as defined in the Indenture) plus a margin of 3.0%. The Company has the right to defer interest payments on the Junior Subordinated Debt for up to five years without triggering an event of default. Interest payable is included in accrued expenses in the accompanying condensed consolidated balance sheet.

The Trust Preferred Securities are subject to mandatory redemption in a like amount (a) upon repayment of all of the Junior Subordinated Debt on the stated maturity date, (b) contemporaneously with the optional prepayment of all of the Junior Subordinated Debt by the Company in conjunction with a special event (as defined) and (c) five years or more after the issue date, contemporaneously with the optional prepayment, in whole or in part, of the Junior Subordinated Debt.

The Company has provided a full, irrevocable and unconditional guarantee of payments of amounts due on the Trust Preferred Securities.

9

Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)

6.    Junior Subordinated Debt    (continued)

The Indenture contains certain covenants with which the Company is in compliance as of June 30, 2006.

7.    Comprehensive Income

The following table summarizes the components of comprehensive income:

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
			($ in thousands)
Unrealized gains (losses) arising during the period,      before taxes				$	(4,078	)				$	3,622					$	(8,593	)				$	213
Income taxes					1,426						(1,267	)					3,007						(74	)
Unrealized gains (losses) arising during the period,      net of taxes					(2,652	)					2,355						(5,586	)					139
Less reclassification adjustment:
Losses realized in net income					(49	)					(73	)					(84	)					(98	)
Income taxes					17						25						29						34
Reclassification adjustment for losses realized in      net income					(32	)					(48	)					(55	)					(64	)
Other comprehensive income (loss)					(2,620	)					2,403						(5,531	)					203
Net income					8,551						4,685						15,380						9,291
Comprehensive income				$	5,931					$	7,088					$	9,849					$	9,494

8.    Contingent Liabilities

The Company is a party 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 or results of operations.

10

---

Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)

9.     Segment Information

The Company has three reportable segments: the Excess and Surplus Insurance segment, the Workers’ Compensation Insurance segment and the Corporate and Other segment. Segment profit (loss) is measured by underwriting profit (loss), which is generally defined as net earned premiums less losses and LAE and other operating expenses of the insurance segments. Segment results are reported prior to the effects of the intercompany reinsurance pooling agreement between the Company’s insurance subsidiaries. The following table summarizes segment results:

			Excess and Surplus Insurance						Workers’ Compensation Insurance						Corporate and Other						Total
			($ in thousands)
Three Months Ended June 30, 2006
Gross written premiums				$	63,788					$	10,846					$	—					$	74,634
Net earned premiums					43,316						9,286						—						52,602
Segment revenues					46,754						9,972						379						57,105
Underwriting profit					9,760						410						—						10,170
Net investment income					3,487						674						345						4,506
Interest expense					—						—						896						896
Segment assets					558,025						83,659						30,680						672,364
Three Months Ended June 30, 2005
Gross written premiums				$	49,466					$	8,328					$	—					$	57,794
Net earned premiums					24,423						6,651						—						31,074
Segment revenues					26,001						6,985						63						33,049
Underwriting profit					5,619						256						—						5,875
Net investment income					1,583						325						109						2,017
Interest expense					—						—						642						642
Segment assets					293,353						44,034						13,163						350,550

			Excess and Surplus Insurance						Workers’ Compensation Insurance						Corporate and Other						Total
			($ in thousands)
Six Months Ended June 30, 2006
Gross written premiums				$	121,556					$	21,243					$	—					$	142,799
Net earned premiums					82,900						17,791						—						100,691
Segment revenues					89,382						19,086						726						109,194
Underwriting profit (loss)					17,891						(233	)					—						17,658
Net investment income					6,566						1,272						661						8,499
Interest expense					—						—						1,673						1,673
Segment assets					558,025						83,659						30,680						672,364
Six Months Ended June 30, 2005
Gross written premiums				$	91,235					$	13,579					$	—					$	104,814
Net earned premiums					45,255						10,651						—						55,906
Segment revenues					48,179						11,237						230						59,646
Underwriting profit					11,261						757						—						12,018
Net investment income					2,929						572						261						3,762
Interest expense					—						—						1,230						1,230
Segment assets					293,353						44,034						13,163						350,550

11

---

Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)

9.     Segment Information    (continued)

The following table reconciles the underwriting profit (loss) of the insurance segments by individual segment to consolidated income before taxes:

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
			($ in thousands)
Underwriting profit (loss) of insurance segments:
Excess and Surplus Insurance				$	9,760					$	5,619					$	17,891					$	11,261
Workers’ Compensation Insurance					410						256						(233	)					757
Total underwriting profit of insurance segments					10,170						5,875						17,658						12,018
Net investment income					4,506						2,017						8,499						3,762
Realized investment losses					(49	)					(73	)					(84	)					(98	)
Other income					46						31						88						76
Other operating expenses of the Corporate and Other segment					(1,166	)					(241	)					(1,807	)					(639	)
Interest expense					(896	)					(642	)					(1,673	)					(1,230	)
Consolidated income before taxes				$	12,611					$	6,967					$	22,681					$	13,889

10.    Other Operating Expenses

Other operating expenses consist of the following:

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
			($ in thousands)
Other underwriting expenses of the insurance segments				$	3,856					$	1,667					$	7,563					$	3,303
Amortization of policy acquisition costs					8,362						4,572						16,039						8,231
Other operating expenses of the Corporate and Other segment					1,166						241						1,807						639
Total				$	13,384					$	6,480					$	25,409					$	12,173

12

---

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

James River Group, Inc. is a holding company that owns and manages property/casualty insurance companies focused on specialty insurance niches. We seek to:

	•	earn a profit from underwriting; and

	•	produce a return on average equity of 15% or greater.

By earning a profit from underwriting, we expect that the premiums we earn in any period to be sufficient to pay all of the losses and loss adjustment expenses (LAE) we incur during the period as well as all of the expenses associated with our operations. We use underwriting profit or loss as a basis for evaluating our underwriting performance. We intend to generate underwriting profits by minimizing expenses and focusing on underwriting specialty insurance risks where we can use our expertise to price and structure policies to minimize our claims expenses. We believe that we can do this since we operate at a lower expense ratio than many of our competitors, focus on specialty insurance markets, underwrite each risk individually, use timely and accurate data and actively manage claims. Our underwriting profit for the three months ended June 30, 2006 was $9.0 million, an increase of 59.8% over the $5.6 million reported for the same period last year. For the six months ended June 30, 2006, our underwriting profit was $15.9 million, an increase of 39.3% over the $11.4 million reported for the same period last year.

We calculate return on equity by dividing annualized net income by average stockholders' equity for the period. Our overall financial goal is to produce an annual return on equity of at least 15.0%. Our return on average equity was 18.6% for the quarter ended June 30, 2006 and 17.0% for the six months ended June 30, 2006. Our return on average equity for the same periods in 2005 was 21.4% and 21.5%, respectively. After the end of the second quarter of 2005, we raised $84.6 million in our initial public offering (see ‘‘Initial Public Offering’’). As a result, comparison of our year-over-year return on equity should include the proceeds of this offering.

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 insurance through James River Insurance Company (James River Insurance);

	•	The Workers' Compensation Insurance segment offers workers' compensation coverage primarily for the residential construction industry in North Carolina through Stonewood Insurance Company (Stonewood Insurance); and

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

James River Insurance and Stonewood Insurance each have a financial strength rating of ‘‘A−’’ (Excellent) from A.M. Best.

13

---

RESULTS OF OPERATIONS

The following table compares the components of net income:

			Three Months Ended June 30,																		Six Months Ended June 30,
			2006						2005						% Change						2006						2005						% Change
			($ in thousands)
Gross written premiums				$	74,634					$	57,794						29.1	%				$	142,799					$	104,814						36.2	%
Net written premiums				$	54,824					$	38,528						42.3	%				$	108,512					$	69,518						56.1	%
Net retention (a)					73.5	%					66.7	%											76.0	%					66.3	%
Net earned premiums				$	52,602					$	31,074						69.3	%				$	100,691					$	55,906						80.1	%
Losses and loss adjustment expenses					(30,214	)					(18,960	)					59.4	%					(59,431	)					(32,354	)					83.7	%
Other operating expenses					(13,384	)					(6,480	)					106.5	%					(25,409	)					(12,173	)					108.7	%
Underwriting profit (b)					9,004						5,634						59.8	%					15,851						11,379						39.3	%
Net investment income					4,506						2,017						123.4	%					8,499						3,762						125.9	%
Realized investment losses					(49	)					(73	)					(32.9	)%					(84	)					(98	)					(14.3	)%
Other income					46						31						48.4	%					88						76						15.8	%
Interest expense					(896	)					(642	)					39.6	%					(1,673	)					(1,230	)					36.0	%
Federal income tax expense					(4,060	)					(2,282	)					77.9	%					(7,301	)					(4,598	)					58.8	%
Net income				$	8,551					$	4,685						82.5	%				$	15,380					$	9,291						65.5	%
Ratios:
Loss ratio					57.4	%					61.0	%											59.0	%					57.9	%
Expense ratio					25.4	%					20.9	%											25.2	%					21.8	%
Combined ratio					82.9	%					81.9	%											84.3	%					79.6	%

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

(b)	See ‘‘Reconciliation of Non-GAAP Measures’’ for further detail.

Net income was $8.6 million, or $0.53 per diluted share, for the three months ended June 30, 2006, which represented an 82.5% increase over the net income of $4.7 million, or $0.46 per diluted share, for the three months ended June 30, 2005. For the six-month period ended June 30, 2006, net income was $15.4 million, or $0.96 per diluted share, which represented a 65.5% increase over the same period in the prior year of $9.3 million, or $0.91 per diluted share. Weighted-average diluted shares outstanding in the second quarter of 2006 of 16.0 million (15.9 million on a year-to-date basis) exceeded those in the second quarter of 2005 of 10.2 million (10.2 million on a year-to-date basis) principally as a result of shares issued in the Company’s initial public offering in August 2005.

Our combined ratio for the three months ended June 30, 2006 was 82.9%. The combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, LAE and other operating expenses to net earned premiums. A combined ratio of less than 100.0% indicates an underwriting profit, while a combined ratio greater than 100.0% reflects an underwriting loss. The combined ratio for the quarter included $2.0 million, or 3.9 points, of favorable reserve development on direct business written arising from prior accident years including $1.5 million from the Excess and Surplus Insurance segment’s casualty business and $513,000 from the Excess and Surplus Insurance segment’s property business.

In the prior year, the combined ratio for the three months ended June 30, 2005 was 81.9%. It included $457,000, or 1.5 points, of favorable reserve development on direct business written arising from prior accident years including $670,000 from the Excess and Surplus Insurance segment’s property business, offset by $199,000 of adverse development from the Excess and Surplus Insurance segment’s casualty business.

The combined ratio for the six months ended June 30, 2006 of 84.3% included $4.4 million, or 4.3 points, of favorable reserve development on direct business arising from prior accident years including

14

---

$3.0 million from the Excess and Surplus Insurance segment’s casualty business, $1.1 million from the Excess and Surplus Insurance segment’s property business and $242,000 from the Workers’ Compensation Insurance segment.

In the prior year, the combined ratio for the six months ended June 30 was