Table of Contents

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UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.20549

FORM10-Q

|           |  |                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |  |
|-----------|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| (MarkOne) |  |                                                                                                                                                                                                                                                                                                                                                                                                    |
|      |  | QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF                                                                                                                                                                                                                                                                                                                                                       |
|      |  | THE SECURITIES EXCHANGEACT OF 1934                                                                                                                                                                                                                                                                                                                                                                      |
|      |  | For theQuarterly Period Ended March  31,2006                                                                                                                                                                                                                                                                                                                                                            |
| or        |
|      |  | TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)OF                                                                                                                                                                                                                                                                                                                                                      |
|      |  | THE SECURITIES EXCHANGEACT OF 1934                                                                                                                                                                                                                                                                                                                                                                      |
|      |  | For theTransition Period from                                to                             |
|           |

COMMISSIONFILE NO. 000-51480

JAMES RIVER GROUP,INC.

(Exact Name of Registrantas Specified in ItsCharter)

|                                                                                  |  |                                    |       |        |  |  |
|----------------------------------------------------------------------------------|--|------------------------------------|-------|--------|--|--|
| Delaware                                                                         |  | 05-0539572                         |
| (Stateor Other Jurisdiction ofIncorporation orOrganization)                      |  | (I.R.S. EmployerIdentificationNo.) |
| 300Meadowmont Village Circle, Suite 333Chapel Hill, NorthCarolina                |  |                               | 27517 |   |
| (Addressof Principal Executive Offices)                                          |  | (ZipCode)                          |
| (919)883-4171                                                                    |
| (Registrant’sTelephone Number, Including AreaCode)                         |
| 1414Raleigh Road, Suite 415, Chapel Hill, NC27517                                |
| (Former Name,Former Address and Former Fiscal Year, If Changed Since LastReport) |
|                                                                                  |

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes No

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-acceleratedfiler. See definition of ‘‘accelerated filer and largeaccelerated filer’’ in Rule 12b-2 of the Exchange Act.(Checkone):

|                        |  |                  |  |                       |  |  |  |  |  |  |
|------------------------|--|------------------|--|-----------------------|--|--|--|--|--|--|
| LargeAccelerated Filer |  | AcceleratedFiler |  | Non-Accelerated Filer |
|                        |

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the Act).Yes No 

On May  8,2006, 15,087,308 shares of the registrant’s common stock, parvalue $0.01 per share, wereoutstanding.

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INDEX

|         |  |            |  |                                                                                           |  |        |        |        |  |  |  |  |  |  |
|---------|--|------------|--|-------------------------------------------------------------------------------------------|--|--------|--------|--------|--|--|--|--|--|--|
|    |  |       |  |                                                                                      |  | Page   |
| PARTI.  |  |       |  | FINANCIALINFORMATION                                                                      |  |   |   |   |
|    |  | Item1.     |  | FinancialStatements:                                                                      |  |   |   |   |
|    |  |       |  | CondensedConsolidated BalanceSheets                                                       |  |   | 3      |   |
|    |  |       |  | CondensedConsolidated IncomeStatements                                                    |  |   | 5      |   |
|    |  |       |  | CondensedConsolidated Statements of CashFlows                                             |  |   | 6      |   |
|    |  |       |  | Notes to CondensedConsolidated FinancialStatements                                        |  |   | 7      |   |
|    |  | Item2.     |  | Management’s Discussion and Analysis of FinancialCondition and Results ofOperations |  |   | 16     |   |
|    |  | Item3.     |  | Quantitative and Qualitative Disclosures About MarketRisk                                 |  |   | 32     |   |
|    |  | Item4.     |  | Controls andProcedures                                                                    |  |   | 33     |   |
| PARTII. |  |       |  | OTHERINFORMATION                                                                          |  |   |   |   |
|    |  | Item2.     |  | Unregistered Sales of Equity Securities and Use ofProceeds                                |  |   | 34     |   |
|    |  | Item6.     |  | Exhibits                                                                                  |  |   | 35     |   |
|    |  | Signatures |  |                                                                                      |  |   | 37     |   |
|         |

2

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Table of Contents

PART I —FINANCIAL INFORMATION

Item 1. FinancialStatements.

Condensed Consolidated BalanceSheets

|                                                                                                      |  |                         |         |                 |  |        |         |        |  |  |
|------------------------------------------------------------------------------------------------------|--|-------------------------|---------|-----------------|--|--------|---------|--------|--|--|
|                                                                                                 |  | (Unaudited)March31,2006 |         | December31,2005 |
|                                                                                                 |  | (inthousands)           |
| Assets                                                                                               |  |                    |    |            |  |   |    |   |
| Investmentsavailable-for-sale:                                                                       |  |                    |    |            |  |   |    |   |
| Fixed maturity securitiesat fair value (amortized cost: 2006 – $393,545; 2005 –$344,636) |  | $                       | 383,941 |            |  | $      | 339,512 |   |
| Cashand cashequivalents                                                                              |  |                    | 48,961  |            |  |   | 41,029  |   |
| Accruedinvestmentincome                                                                              |  |                    | 4,063   |            |  |   | 3,988   |   |
| Premiumsreceivable and agents’balances                                                         |  |                    | 27,245  |            |  |   | 32,521  |   |
| Reinsurancerecoverable on unpaidlosses                                                               |  |                    | 106,031 |            |  |   | 110,514 |   |
| Reinsurancerecoverable on paidlosses                                                                 |  |                    | 5,421   |            |  |   | 11,544  |   |
| Prepaidreinsurancepremiums                                                                           |  |                    | 25,734  |            |  |   | 25,922  |   |
| Deferredpolicy acquisitioncosts                                                                      |  |                    | 15,318  |            |  |   | 13,899  |   |
| Federal incometaxesreceivable                                                                        |  |                    | — |            |  |   | 788     |   |
| Deferred taxassets                                                                                   |  |                    | 10,907  |            |  |   | 7,999   |   |
| Intangibleinsuranceassets                                                                            |  |                    | 4,184   |            |  |   | 4,184   |   |
| Property andequipment, net                                                                           |  |                    | 2,589   |            |  |   | 2,741   |   |
| Otherassets                                                                                          |  |                    | 2,550   |            |  |   | 2,403   |   |
| Totalassets                                                                                          |  | $                       | 636,944 |            |  | $      | 597,044 |   |
|                                                                                                      |

Seeaccompanying notes.

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Table of Contents

Condensed Consolidated Balance Sheets(continued)

|                                                                                                                                                                         |  |                                    |         |                 |  |        |         |         |  |  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|------------------------------------|---------|-----------------|--|--------|---------|---------|--|--|
|                                                                                                                                                                    |  | (Unaudited)March31,2006            |         | December31,2005 |
|                                                                                                                                                                    |  | (in thousandsexcept for sharedata) |
| Liabilities andstockholders’equity                                                                                                                                |  |                               |    |            |  |   |    |    |
| Reserve for losses and lossadjustmentexpenses                                                                                                                           |  | $                                  | 249,358 |            |  | $      | 226,493 |    |
| Unearnedpremiums                                                                                                                                                        |  |                               | 121,176 |            |  |   | 115,765 |    |
| Payables toreinsurers                                                                                                                                                   |  |                               | 6,440   |            |  |   | 11,316  |    |
| Seniordebt                                                                                                                                                              |  |                               | 15,000  |            |  |   | 15,000  |    |
| Juniorsubordinateddebt                                                                                                                                                  |  |                               | 22,681  |            |  |   | 22,681  |    |
| Fundsheld                                                                                                                                                               |  |                               | 19,248  |            |  |   | 21,992  |    |
| Accruedexpenses                                                                                                                                                         |  |                               | 4,659   |            |  |   | 4,635   |    |
| Federal incometaxes payable                                                                                                                                             |  |                               | 3,717   |            |  |   | — |    |
| Otherliabilities                                                                                                                                                        |  |                               | 14,121  |            |  |   | 3,007   |    |
| Totalliabilities                                                                                                                                                        |  |                               | 456,400 |            |  |   | 420,889 |    |
| Commitmentsandcontingencies                                                                                                                                             |  |                               |    |            |  |   |    |    |
| Stockholders’equity:                                                                                                                                              |  |                               |    |            |  |   |    |    |
| Common stock – $0.01par value; 100,000,000 shares authorized; 2006: 15,087,308 sharesissued and outstanding; 2005 – 15,070,053 shares issued andoutstanding |  |                               | 150     |            |  |   | 150     |    |
| Common stockwarrants                                                                                                                                                    |  |                               | 524     |            |  |   | 524     |    |
| Additional paid-incapital                                                                                                                                               |  |                               | 174,374 |            |  |   | 173,903 |    |
|                                                                                                                                                                    |  |                               | 175,048 |            |  |   | 174,577 |    |
| Notesreceivable from employees anddirectors                                                                                                                             |  |                               | (535    | )          |  |   | (535    | )  |
| Retainedearnings                                                                                                                                                        |  |                               | 12,273  |            |  |   | 5,444   |    |
| Accumulatedother comprehensiveloss                                                                                                                                      |  |                               | (6,242  | )          |  |   | (3,331  | )  |
| Totalstockholders’ equity                                                                                                                                         |  |                               | 180,544 |            |  |   | 176,155 |    |
| Totalliabilities and stockholders’equity                                                                                                                          |  | $                                  | 636,944 |            |  | $      | 597,044 |    |
|                                                                                                                                                                         |

Seeaccompanying notes.

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Condensed Consolidated Income Statements(Unaudited)

|                                   |  |                                    |         |         |  |        |            |         |  |  |
|-----------------------------------|--|------------------------------------|---------|---------|--|--------|------------|---------|--|--|
|                              |  | ThreeMonths EndedMarch31,          |
|                              |  | 2006                               |         | 2005    |
|                              |  | (inthousands except for sharedata) |
| Revenues                          |  |                               |    |    |  |   |       |    |
| Grosswrittenpremiums              |  | $                                  | 68,165  |    |  | $      | 47,020     |    |
| Cededwrittenpremiums              |  |                               | (14,477 | )  |  |   | (16,030    | )  |
| Netwrittenpremiums                |  |                               | 53,688  |    |  |   | 30,990     |    |
| Change in netunearnedpremiums     |  |                               | (5,599  | )  |  |   | (6,158     | )  |
| Netearned premiums                |  |                               | 48,089  |    |  |   | 24,832     |    |
| Netinvestmentincome               |  |                               | 3,993   |    |  |   | 1,745      |    |
| Realizedinvestment losses         |  |                               | (35     | )  |  |   | (25        | )  |
| Otherincome                       |  |                               | 42      |    |  |   | 45         |    |
| Totalrevenues                     |  |                               | 52,089  |    |  |   | 26,597     |    |
| Expenses                          |  |                               |    |    |  |   |       |    |
| Lossesand loss adjustmentexpenses |  |                               | 29,217  |    |  |   | 13,394     |    |
| Otheroperatingexpenses            |  |                               | 12,025  |    |  |   | 5,693      |    |
| Interestexpense                   |  |                               | 777     |    |  |   | 588        |    |
| Totalexpenses                     |  |                               | 42,019  |    |  |   | 19,675     |    |
| Incomebefore taxes                |  |                               | 10,070  |    |  |   | 6,922      |    |
| Federalincome taxexpense          |  |                               | 3,241   |    |  |   | 2,316      |    |
| Netincome                         |  | $                                  | 6,829   |    |  | $      | 4,606      |    |
| Earningspershare:                 |  |                               |    |    |  |   |       |    |
| Basic                             |  | $                                  | 0.45    |    |  | $      | 342,485.20 |    |
| Diluted                           |  | $                                  | 0.43    |    |  | $      | 0.46       |    |
|                                   |

Seeaccompanying notes.

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Condensed Consolidated Statements of CashFlows(Unaudited)

|                                                      |  |                           |         |         |  |        |         |         |  |  |
|------------------------------------------------------|--|---------------------------|---------|---------|--|--------|---------|---------|--|--|
|                                                 |  | ThreeMonths EndedMarch31, |
|                                                 |  | 2006                      |         | 2005    |
|                                                 |  | (inthousands)             |
| Operatingactivities                                  |  |                      |    |    |  |   |    |    |
| Net cash provided byoperatingactivities              |  | $                         | 46,036  |    |  | $      | 27,659  |    |
| Investingactivities                                  |  |                      |    |    |  |   |    |    |
| Securitiesavailable-for-sale:                        |  |                      |    |    |  |   |    |    |
| Purchases– fixed maturitysecurities            |  |                      | (62,848 | )  |  |   | (37,776 | )  |
| Maturitiesand calls – fixed maturitysecurities |  |                      | 6,112   |    |  |   | 1,178   |    |
| Sales– fixed maturitysecurities                |  |                      | 7,248   |    |  |   | 4,114   |    |
| Sales– equitysecurities                        |  |                      | — |    |  |   | 300     |    |
| Payableto securitiesbrokers                          |  |                      | 11,223  |    |  |   | 1,347   |    |
| Purchases ofproperty andequipment                    |  |                      | (87     | )  |  |   | (156    | )  |
| Netcash used in investingactivities                  |  |                      | (38,352 | )  |  |   | (30,993 | )  |
| Financingactivities                                  |  |                      |    |    |  |   |    |    |
| Proceeds fromexercise of stockoptions                |  |                      | 173     |    |  |   | — |    |
| Income taxbenefit from stock optionexercises         |  |                      | 75      |    |  |   | — |    |
| Netcash provided by financingactivities              |  |                      | 248     |    |  |   | — |    |
| Changein cash and cashequivalents                    |  |                      | 7,932   |    |  |   | (3,334  | )  |
| Cash andcash equivalents at beginning ofperiod       |  |                      | 41,029  |    |  |   | 20,210  |    |
| Cashand cash equivalents at end ofperiod             |  | $                         | 48,961  |    |  | $      | 16,876  |    |
|                                                      |

Seeaccompanying notes.

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Table of Contents

Notes to CondensedConsolidated Financial Statements(Unaudited)

March  31,2006

(in thousands except for sharedata)

|          |                                              |
|----------|----------------------------------------------|
| 1.  | Accounting Policies and Basis ofPresentation |

Basis of Presentation

Theaccompanying condensed consolidated financial statements and notes havebeen prepared in accordance with accounting principles generallyaccepted in the United States for interim financial information and donot contain all of the information and footnotes required by accountingprinciples generally accepted in the United States for completefinancial statements. Readers are urged to review the Company’s2005 audited consolidated financial statements contained in Form 10-Kfor a more complete description of the Company’s business andaccounting policies. In the opinion of management, all adjustmentsnecessary for a fair presentation of the condensed consolidatedfinancial statements have been included. Such adjustments consist onlyof normal recurring items. Interim results are not necessarilyindicative of results of operations for the full year. The consolidatedbalance sheet as of December 31, 2005 was derived from theCompany’s audited annual consolidated financialstatements.

Significant intercompany transactions andbalances have been eliminated.

Certain reclassificationsof prior year amounts have been made to conform to the 2006presentation.

Estimates andAssumptions

Preparation of the condensed consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the condensedconsolidated financial statements and accompanying disclosures. Thoseestimates are inherently subject to change, and actual results mayultimately differ from those estimates.

New AccountingStandards

On December 16, 2004, the FinancialAccounting Standards Board (FASB) issued Statement No. 123(revised 2004), Share-Based Payment (Statement 123(R)), which isa revision of Statement No. 123, Accounting for Stock-BasedCompensation. Statement 123(R) supersedes Accounting PrinciplesBoard Opinion No. 25, Accounting for Stock Issued toEmployees (APB Opinion No. 25) and amends FASB Statement No.95, Statement of Cash Flows. The Company adopted Statement123(R) using the modified prospective method on January 1,2006.

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Notes to Condensed Consolidated FinancialStatements (Unaudited) (continued)

(in thousands exceptfor share data)

2.    Stock BasedCompensation

The Company’s shareholders haveapproved two incentive compensation plans, the 2003 Incentive Plan andthe 2005 Incentive Plan (the Plans). Effective March  23,2006, the 2003 Incentive Plan, for which options were previouslygranted to directors and key employees, was terminated with regard tofuture stock-based awards. Under the 2005 Incentive Plan, keyemployees, directors and third party service providers (generally,consultants, agents, advisors or independent contractors not involvedin marketing or selling the Company’s securities) are eligibleto receive share awards, subject to individual, annual and aggregateaward limits, in the form of options, share appreciation rights,restricted share awards or units, performance shares or units and othershare-based awards as well as cash-based awards. To date, the onlyshare-based awards granted have been options to directors and keyemployees. All share-based equity awards under the Plans are issued atthe discretion of the Compensation Committee of the Company’sBoard of Directors. All options awarded to date vest over a four yearperiod commencing from the date of grant and are exercisable for tenyears from the date of grant. All options issued pursuant to the 2005Incentive Plan will vest immediately in the event of a change incontrol of the Company as defined in the plan. As of March31,  2006 the maximum number of shares available for issuanceunder the 2005 Incentive Plan is 1,691,075.

Prior to theadoption of Statement 123(R), the Company accounted for stock optiongrants using the intrinsic value method prescribed by APB Opinion No.25. Accordingly, for pro forma disclosure purposes required byStatement 123, the Company used the minimum value method for estimatingcompensation expense for options issued prior to May  3,2005 (the date the Company filed its Form S-1 with the Securities andExchange Commission) and used the fair value method for estimatingcompensation expense for options issued subsequent to May3,  2005. As a result, no compensation expense was recognized inthe Company’s financial statements prior to January1,  2006 as all options granted prior to January  1,2006 had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.

On January1,  2006, the Company adopted the fair value recognitionprovisions of Statement 123(R) using the modified prospective methodfor those options granted subsequent to May  3,  2005 andany options granted prior to May  3,  2005 that weremodified, repurchased or cancelled subsequent to January1,  2006. Such expense amounts are recognized on a straight-linebasis over each award’s vesting period in the Company’sincome statement. No expense will be recognized in the Company’sfinancial statements related to options issued prior to May3,  2005 so long as those options are not modified, repurchasedor cancelled. To date, no options granted prior to May  3,2005 have been modified, repurchased or cancelled. Fair values forawards issued prior to May  3,  2005 as determined usingthe minimum value method are included in pro forma compensation expensedisclosures for all periods presented.

As a result ofadopting Statement 123(R) on January  1,  2006, the Companyrecognized $223 of other operating expenses for share-basedcompensation. As a result, the Company’s income before incometaxes and net income for the three months ended March  31,2006 are $223 and $145 lower, respectively, than if the Company hadcontinued to account for share-based compensation under APB Opinion No.25. Basic and diluted earnings per share for the three months endedMarch  31,  2006 would have been $0.46 and $0.44,respectively, if the Company had not adopted Statement 123(R), comparedto reported basic and diluted earnings per share of $0.45 and $0.43,respectively. The adoption of Statement 123(R) did not have a materialeffect on the Company’s statement of cash flows. No prior periodfinancial statements have been restated as a result of the adoption ofStatement 123(R).

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Notes to Condensed Consolidated FinancialStatements (Unaudited) (continued)

(in thousands exceptfor share data)

|          |                                     |
|----------|-------------------------------------|
| 2.  | Stock Based Compensation(continued) |

For all periods presented, the Company used aBlack-Scholes option pricing model in determining the fair value ofoption grants. The following table illustrates the effect on net incomeand earnings per share if the Company had expensed its options pursuantto Statement 123(R) for all periods presented:

|                                                                                                                                                                                |  |                                 |        |         |  |        |            |         |  |  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|---------------------------------|--------|---------|--|--------|------------|---------|--|--|
|                                                                                                                                                                           |  | Threemonths endedMarch 31, |
|                                                                                                                                                                           |  | 2006                            |        | 2005    |
| Netincome – asreported                                                                                                                                                   |  | $                               | 6,829  |    |  | $      | 4,606      |    |
| Less:after-tax compensation expense determined     using theminimum value method for stock-based     awards issued priorto May  3,2005 |  |                            | (169   | )  |  |   | (213       | )  |
| Netincome – proforma                                                                                                                                                     |  | $                               | 6,660  |    |  | $      | 4,393      |    |
| Earningsper share – asreported:                                                                                                                                          |  |                            |   |    |  |   |       |    |
| Basic                                                                                                                                                                          |  | $                               | 0.45   |    |  | $      | 342,485.20 |    |
| Diluted                                                                                                                                                                        |  | $                               | 0.43   |    |  | $      | 0.46       |    |
| Earningsper share – proforma:                                                                                                                                            |  |                            |   |    |  |   |       |    |
| Basic                                                                                                                                                                          |  | $                               | 0.44   |    |  | $      | 321,153.70 |    |
| Diluted                                                                                                                                                                        |  | $                               | 0.42   |    |  | $      | 0.44       |    |
|                                                                                                                                                                                |

Theassumptions used for the option awards vary depending on the date ofgrant. The following table summarizes the assumptions used to estimatethe fair value of the Company’s shared-based awards:

|                                  |  |                               |  |                                 |  |  |  |  |  |  |
|----------------------------------|--|-------------------------------|--|---------------------------------|--|--|--|--|--|--|
|                             |  | AwardsIssuedAfter May 3, 2005 |  | Awards IssuedPrior to May3,2005 |
| Expectedterm                     |  | 7years                        |  | 7 years                         |
| Expected stock pricevolatility   |  | 35.00%                        |  | 0.00%                           |
| Rangeof risk-free interest rates |  | 4.08% –4.34%            |  | 3.07% –4.04%              |
| Dividendyield                    |  | 0.00%                         |  | 0.00%                           |
|                                  |

Forall awards, the expected term is based on the midpoint between thevesting period and the contractual term of the award. Prior to theadoption of Statement 123(R), stock price volatility was estimated at0% pursuant to the minimum value method since the Company wasnot publicly traded. The use of 0% volatility is specificallyprohibited by Statement 123(R). Accordingly, stock price volatility forawards issued after May  3,  2005 was estimated based onstock price volatility data for similar property/casualty companies inthe period following their respective initial public offerings. Therisk-free interest rate assumption is based on the 7-year U.S. Treasuryrate at the date of grant. The Company does not anticipate payingdividends in the near future.

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Notes to Condensed Consolidated FinancialStatements (Unaudited) (continued)

(in thousands exceptfor share data)

|          |                                     |
|----------|-------------------------------------|
| 2.  | Stock Based Compensation(continued) |

A summary of option activity under theCompany’s incentive plans as of and for the three months endedMarch  31,  2006 is asfollows:

|                                         |  |                |           |                               |  |                                            |                                                                                 |                          |  |          |        |        |        |        |        |        |  |  |
|-----------------------------------------|--|----------------|-----------|-------------------------------|--|--------------------------------------------|---------------------------------------------------------------------------------|--------------------------|--|----------|--------|--------|--------|--------|--------|--------|--|--|
|                                    |  | NumberofShares |           | Weighted-AverageExercisePrice |  | Weighted-Average Remaining ContractualTerm |                                                                                 | Aggregate IntrinsicValue |
| Outstanding, beginning ofyear           |  |           | 2,128,359 |                          |  | $                                          | 11.79                                                                           |                     |  |     |   |   |        |   |   |   |
| Granted                                 |  |           | —   |                          |  |                                       | —                                                                         |                     |  |     |   |   |        |   |   |   |
| Exercised                               |  |           | (17,255   | )                        |  |                                       | 10.00                                                                           |                     |  |     |   |   |        |   |   |   |
| Forfeited                               |  |           | —   |                          |  |                                       |             — |                     |  |     |   |   |        |   |   |   |
| Outstanding,end ofperiod                |  |           | 2,111,104 |                          |  | $                                          | 11.81                                                                           |                     |  | 7.8years |        | $      | 31,966 |   |
| Vested or expected to vest,end ofperiod |  |           | 2,091,005 |                          |  | $                                          | 11.75                                                                           |                     |  | 7.8years |        | $      | 31,729 |   |
| Exercisable, end ofperiod               |  |           | 794,532   |                          |  | $                                          | 10.04                                                                           |                     |  | 7.4years |        | $      | 13,438 |   |
|                                         |

Gross stock-basedcompensation expense for the three months ended March  31,2006 totaled $223 ($145 after-tax). The Company recognized nocompensation expense for the three months ended March  31,2005. The Company granted no options during the three months endedMarch  31,  2006 or 2005. Reserved shares are issued tosatisfy stock option exercises.

As of March31,  2006, there was $3,000 of estimated unrecognizedcompensation costs expected to be charged to earnings over aweighted-average period of 3.4 years.

For the threemonths ended March  31,  2006, the Company received cashfrom stock option exercises of $173, and the related income tax benefittotaled $75. The intrinsic value (the difference between the fair valueof the options at exercise and the strike price) of options exercisedduring the three months ended March  31,  2006 totaled$217. There were no option exercises during the three months endedMarch  31,  2005.

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Notes to Condensed Consolidated FinancialStatements (Unaudited) (continued)

(in thousands exceptfor share data)

|          |                    |
|----------|--------------------|
| 3.  | Earnings Per Share |

|                                                                                                                                                                                |  |                            |            |        |  |        |                                                                                                   |         |  |  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|----------------------------|------------|--------|--|--------|---------------------------------------------------------------------------------------------------|---------|--|--|
|                                                                                                                                                                           |  | ThreeMonths Ended March31, |
|                                                                                                                                                                           |  | 2006                       |            | 2005   |
| Netincome – numerator for diluted earnings pershare                                                                                                                      |  | $                          | 6,829      |   |  | $      | 4,606                                                                                             |    |
| Dividendsinarrears                                                                                                                                                             |  |                       | —    |   |  |   | (1,181                                                                                            | )  |
| Netincome available to common shareholders –    numerator for basic earnings pershare                                                                |  | $                          | 6,829      |   |  | $      | 3,425                                                                                             |    |
| Weightedaverage common shares outstanding –     denominatorfor basic earnings pershare                                                               |  |                       | 15,075,771 |   |  |   | 10                                                                                                |    |
| Dilutivepotential commonshares:                                                                                                                                                |  |                       |       |   |  |   |                                                                                              |    |
| Series A PreferredStock                                                                                                                                                        |  |                       | —    |   |  |   | 1,700,000                                                                                         |    |
| SeriesB PreferredStock                                                                                                                                                         |  |                       | —    |   |  |   | 7,135,000                                                                                         |    |
| Preferredstockdividends                                                                                                                                                        |  |                       | —    |   |  |   | 925,440                                                                                           |    |
| Options                                                                                                                                                                        |  |                       | 734,763    |   |  |   | 322,860                                                                                           |    |
| Warrants                                                                                                                                                                       |  |                       | 83,659     |   |  |   | 29,920                                                                                            |    |
| Weightedaverage common shares and dilutive potential     common sharesoutstanding –     denominator for diluted earningspershare |  |                       | 15,894,193 |   |  |   | 10,113,230                                                                                        |    |
| Earningspershare:                                                                                                                                                              |  |                       |       |   |  |   |                                                                                              |    |
| Basic                                                                                                                                                                          |  | $                          | 0.45       |   |  | $      | 342,485.20                                                                                        |    |
| Diluted                                                                                                                                                                        |  | $                          | 0.43       |   |  | $      | 0.46                                                                                              |    |
| Anti-dilutivesecurities excluded from diluted earnings pershare:                                                                                                               |  |                       |       |   |  |   |                                                                                              |    |
| Warrants andoptions                                                                                                                                                            |  |                       | 449,479    |   |  |   |                — |    |
|                                                                                                                                                                                |

AllMarch  31,  2005 common stock share and per share amountshave been retroactively adjusted to give effect to a ten-for-one stocksplit of the Company’s Common Stock effective August9,  2005 to shareholders of record on that date.

|          |              |
|----------|--------------|
| 4.  | Income Taxes |

Income tax expense differsfrom the amounts computed by applying the Federal statutory income taxrate to income before income taxes primarily due to interest income ontax-advantaged state and municipal securities.

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Notes to Condensed Consolidated FinancialStatements (Unaudited) (continued)

(in thousands exceptfor share data)

|          |                                                |
|----------|------------------------------------------------|
| 5.  | Reserve for Losses and LossAdjustment Expenses |

A rollforward of the reserve forlosses and loss adjustment expenses (LAE), net of reinsurance, ispresentedbelow:

|                                                                                                     |  |                            |         |         |  |        |        |         |  |  |
|-----------------------------------------------------------------------------------------------------|--|----------------------------|---------|---------|--|--------|--------|---------|--|--|
|                                                                                                |  | ThreeMonths Ended March31, |
|                                                                                                |  | 2006                       |         | 2005    |
| Reservefor losses and LAE net of reinsurance recoverables at beginning ofperiod                     |  | $                          | 115,979 |    |  | $      | 47,043 |    |
| Add:Incurred losses and LAE net ofreinsurance:                                                      |  |                       |    |    |  |   |   |    |
| Currentyear                                                                                         |  |                       | 30,735  |    |  |   | 15,711 |    |
| Prioryears                                                                                          |  |                       | (1,518  | )  |  |   | (2,317 | )  |
| Totalincurred losses andLAE                                                                         |  |                       | 29,217  |    |  |   | 13,394 |    |
| Deduct:Loss and LAE payments net ofreinsurance:                                                     |  |                       |    |    |  |   |   |    |
| Currentyear                                                                                         |  |                       | 326     |    |  |   | 1,039  |    |
| Prioryears                                                                                          |  |                       | 1,543   |    |  |   | 2,277  |    |
| Totalloss and LAEpayments                                                                           |  |                       | 1,869   |    |  |   | 3,316  |    |
| Reservefor losses and LAE net of reinsurance recoverables at end ofperiod                           |  |                       | 143,327 |    |  |   | 57,121 |    |
| Add:Reinsurance recoverables on unpaid losses and LAE at end ofperiod                               |  |                       | 106,031 |    |  |   | 27,253 |    |
| Reservefor losses and LAE gross of reinsurance recoverables on unpaid lossesand LAE at end ofperiod |  | $                          | 249,358 |    |  | $      | 84,374 |    |
|                                                                                                     |

Theforegoing rollforward shows that a $1,518 redundancy developed in thethree months ended March  31,  2006 on the prior accidentyear reserves. Of this development, $1,455 of favorable developmentoccurred in the excess and surplus insurance casualty lines, with$1,197 of this favorable development coming from the 2004 accidentyear. Favorable development in the excess and surplus insuranceproperty lines was $626 primarily related to the 2005 accident year.This favorable development was offset by $563 of unfavorabledevelopment for the workers’ compensation line’s prioraccident year results which related to the Company’s allocationof the North Carolina involuntary workers’ compensationpool’s prior accident year results.

The foregoingrollforward also shows that a $2,317 redundancy developed in the threemonths ended March  31,  2005 on the reserve for losses andLAE held at December  31,  2004. Of this development,$1,717 occurred in the excess and surplus insurance property linesprimarily for the 2004 accident year. In addition, excess and surplusinsurance casualty lines experienced $304 of favorable reservedevelopment and the workers’ compensation line experienced $296of favorable reserve development in the first quarter of2005.

|          |                            |
|----------|----------------------------|
| 6.  | Related Party Transactions |

TheCompany has $535 of purchase money loans to employees outstanding atMarch  31,  2006. These loans were extended as part of theCompany’s 2003 Series B Preferred Stock offerings. The noteshave an interest rate of 4.5% and are reported in theaccompanying balance sheets as a reduction in stockholders’equity. Interest on the notes is recorded as other income and totaled$6 and $29 for the three-month periods ended March  31,2006 and 2005, respectively.

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Notes to Condensed Consolidated FinancialStatements (Unaudited) (continued)

(in thousands exceptfor share data)

7.    Comprehensive Income

The following table summarizes the components of othercomprehensiveincome:

|                                                              |  |                            |        |         |  |        |        |         |  |  |
|--------------------------------------------------------------|--|----------------------------|--------|---------|--|--------|--------|---------|--|--|
|                                                         |  | ThreeMonths Ended March31, |
|                                                         |  | 2006                       |        | 2005    |
| Unrealizedlosses arising during the period, beforetaxes      |  | $                          | (4,515 | )  |  | $      | (3,409 | )  |
| Incometaxes                                                  |  |                       | 1,581  |    |  |   | 1,193  |    |
| Unrealizedlosses arising during the period, net oftaxes      |  |                       | (2,934 | )  |  |   | (2,216 | )  |
| Lessreclassificationadjustment:                              |  |                       |   |    |  |   |   |    |
| Losses realizedin net income                                 |  |                       | (35    | )  |  |   | (25    | )  |
| Incometaxes                                                  |  |                       | 12     |    |  |   | 9      |    |
| Reclassificationadjustment for losses realized in net income |  |                       | (23    | )  |  |   | (16    | )  |
| Othercomprehensiveloss                                       |  |                       | (2,911 | )  |  |   | (2,200 | )  |
| Net income                                                   |  |                       | 6,829  |    |  |   | 4,606  |    |
| Comprehensiveincome                                          |  | $                          | 3,918  |    |  | $      | 2,406  |    |
|                                                              |

|          |                       |
|----------|-----------------------|
| 8.  | ContingentLiabilities |

The Company is a party to various lawsuitsarising in the ordinary course of its operations. The Company believesthat the ultimate resolution of these matters will not materiallyimpact its financial position or results ofoperations.

|          |               |
|----------|---------------|
| 9.  | Capital Stock |

OnMay 3, 2005, the Company filed a registration statement on FormS-1 with the Securities Exchange Commission for the purpose of makingan initial public offering of Common Stock. The Company’sregistration statement was declared effective on August8,  2005. On August  9,  2005, the Company increasedthe number of authorized shares of Common Stock to 100,000,000 andeffected a ten-for-one split of the Company’s Common Stock toshareholders of record on that date. All Common Stock share and pershare amounts have been restated to give retroactive effect to thestock split. Immediately prior to the closing of the initial publicoffering on August  12,  2005, all of the Company’soutstanding Series A Convertible Preferred Stock and Series BConvertible Preferred Stock, including shares representing accrued butunpaid dividends, were converted into 9,956,413 shares of Common Stock.The conversion of the Preferred Stock dividends had the effect ofdecreasing retained earnings by $9,909, increasing Common Stock by $11and increasing additional paid-in capital by $9,898. Gross proceedsfrom the sale of 4,444,000 shares of Common Stock, at an initial publicoffering price per share of $18.00, totaled $79,992. Costs associatedwith the initial public offering included $5,600 of underwriting costsand $995 of other issuance costs.

On August26,  2005, the underwriters of the initial public offeringexercised their over-allotment option in which an additional 666,600shares of Common Stock were issued at the $18.00 initial publicoffering price per share. Gross proceeds from this transaction were$11,999 and underwriting costs were $840.

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Notes to Condensed Consolidated FinancialStatements (Unaudited) (continued)

(in thousands exceptfor share data)

|           |                     |
|-----------|---------------------|
| 10.  | Segment Information |

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

|                                  |  |                           |         |                                     |  |                   |         |         |  |        |         |        |  |        |         |        |  |  |
|----------------------------------|--|---------------------------|---------|-------------------------------------|--|-------------------|---------|---------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                             |  | ExcessandSurplusInsurance |         | Workers’CompensationInsurance |  | CorporateandOther |         | Total   |
| ThreeMonths Ended March 31,2006  |  |                      |    |                                |  |              |    |    |  |   |    |   |  |   |    |   |
| Grosswrittenpremiums             |  | $                         | 57,768  |                                |  | $                 | 10,397  |    |  | $      | — |   |  | $      | 68,165  |   |
| Netearnedpremiums                |  |                      | 39,584  |                                |  |              | 8,505   |    |  |   | — |   |  |   | 48,089  |   |
| Segmentrevenues                  |  |                      | 42,628  |                                |  |              | 9,114   |    |  |   | 347     |   |  |   | 52,089  |   |
| Underwritingprofit(loss)         |  |                      | 8,131   |                                |  |              | (643    | )  |  |   | — |   |  |   | 7,488   |   |
| Netinvestmentincome              |  |                      | 3,079   |                                |  |              | 598     |    |  |   | 316     |   |  |   | 3,993   |   |
| Interestexpense                  |  |                      | — |                                |  |              | — |    |  |   | 777     |   |  |   | 777     |   |
| Segmentassets                    |  |                      | 531,206 |                                |  |              | 70,977  |    |  |   | 34,761  |   |  |   | 636,944 |   |
| ThreeMonths Ended March  31,2005 |  |                      |    |                                |  |              |    |    |  |   |    |   |  |   |    |   |
| Grosswrittenpremiums             |  | $                         | 41,769  |                                |  | $                 | 5,251   |    |  | $      | — |   |  | $      | 47,020  |   |
| Netearnedpremiums                |  |                      | 20,832  |                                |  |              | 4,000   |    |  |   | — |   |  |   | 24,832  |   |
| Segmentrevenues                  |  |                      | 22,179  |                                |  |              | 4,252   |    |  |   | 166     |   |  |   | 26,597  |   |
| Underwritingprofit               |  |                      | 5,642   |                                |  |              | 501     |    |  |   | — |   |  |   | 6,143   |   |
| Netinvestmentincome              |  |                      | 1,346   |                                |  |              | 247     |    |  |   | 152     |   |  |   | 1,745   |   |
| Interestexpense                  |  |                      | — |                                |  |              | — |    |  |   | 588     |   |  |   | 588     |   |
| Segmentassets                    |  |                      | 250,643 |                                |  |              | 35,524  |    |  |   | 19,616  |   |  |   | 305,783 |   |
|                                  |

Thefollowing table reconciles the underwriting profit (loss) of theinsurance segments by individual segment to consolidated income beforetaxes:

|                                                           |  |                            |        |         |  |        |        |         |  |  |
|-----------------------------------------------------------|--|----------------------------|--------|---------|--|--------|--------|---------|--|--|
|                                                      |  | ThreeMonths Ended March31, |
|                                                      |  | 2006                       |        | 2005    |
| Underwritingprofit (loss) of insurancesegments:           |  |                       |   |    |  |   |   |    |
| Excess andSurplusInsurance                                |  | $                          | 8,131  |    |  | $      | 5,642  |    |
| Workers’Compensation Insurance                      |  |                       | (643   | )  |  |   | 501    |    |
| Totalunderwriting profit of insurancesegments             |  |                       | 7,488  |    |  |   | 6,143  |    |
| Net investmentincome                                      |  |                       | 3,993  |    |  |   | 1,745  |    |
| Realizedinvestment losses                                 |  |                       | (35    | )  |  |   | (25    | )  |
| Otherincome                                               |  |                       | 42     |    |  |   | 45     |    |
| Other operatingexpenses of the Corporate and Othersegment |  |                       | (641   | )  |  |   | (398   | )  |
| Interestexpense                                           |  |                       | (777   | )  |  |   | (588   | )  |
| Consolidatedincome beforetaxes                            |  | $                          | 10,070 |    |  | $      | 6,922  |    |
|                                                           |

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Notes to Condensed Consolidated FinancialStatements (Unaudited) (continued)

(in thousands exceptfor share data)

11. Other OperatingExpenses

Other operating expenses consist of thefollowing:

|                                        |  |                            |        |        |  |        |       |        |  |  |
|----------------------------------------|--|----------------------------|--------|--------|--|--------|-------|--------|--|--|
|                                   |  | ThreeMonths Ended March31, |
|                                   |  | 2006                       |        | 2005   |
| Otherunderwritingexpenses              |  | $                          | 3,707  |   |  | $      | 3,482 |   |
| Amortizationof policy acquisitioncosts |  |                       | 7,677  |   |  |   | 1,813 |   |
| Othercosts                             |  |                       | 641    |   |  |   | 398   |   |
| Total                                  |  | $                          | 12,025 |   |  | $      | 5,693 |   |
|                                        |

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|              |                                                                                             |
|--------------|---------------------------------------------------------------------------------------------|
| Item2.  | Management’s Discussion and Analysis ofFinancial Condition and Results of Operations. |

OVERVIEW

James River Group, Inc. is a holding company that owns andmanages property/casualty insurance companies focused on specialtyinsurance niches. We seek to earn a profit from underwriting. Thismeans that we intend that the premiums we earn in any period will besufficient to pay all of the losses and loss adjustment expenses (LAE)we incur during the period as well as all of the expenses associatedwith our operations. Our insurance companies individually underwriteeach risk for which we issue a policy, and we do not grant underwritingauthority to our insurance agents or brokers.

Net incomewas $6.8  million, or $0.43 per diluted share, for the threemonths ended March  31,  2006 compared to net income of$4.6  million, or $0.46 per diluted share, for the three monthsended March  31,  2005. The first quarter of 2006 benefitedfrom favorable development on prior accident year reserves of $986,000after-tax, while the first quarter of 2005 benefited from favorabledevelopment on prior accident year reserves of $1.5  millionafter-tax.

RESULTS OF OPERATIONS

The followingtable summarizes our results for the three months ended March31,  2006 and 2005:

|                           |  |                            |        |         |  |        |        |         |  |        |         |          |  |  |
|---------------------------|--|----------------------------|--------|---------|--|--------|--------|---------|--|--------|---------|----------|--|--|
|                      |  | ThreeMonths Ended March31, |
|                      |  | 2006                       |        | 2005    |  | Change |
|                      |  | ($in thousands)            |
| Gross writtenpremiums     |  | $                          | 68,165 |    |  | $      | 47,020 |    |  |   | 45.0    | %   |
| Netwrittenpremiums        |  | $                          | 53,688 |    |  | $      | 30,990 |    |  |   | 73.2    | %   |
| Netearnedpremiums         |  |                       | 48,089 |    |  | $      | 24,832 |    |  |   | 93.7    | %   |
| Netinvestmentincome       |  |                       | 3,993  |    |  |   | 1,745  |    |  |   | 129     | %   |
| Realizedinvestmentlosses  |  |                       | (35    | )  |  |   | (25    | )  |  |   | (40.0   | )%  |
| Otherincome               |  |                       | 42     |    |  |   | 45     |    |  |   | (6.7    | )%  |
| Totalrevenues             |  |                       | 52,089 |    |  |   | 26,597 |    |  |   | 95.8    | %   |
| Lossesand LAE             |  |                       | 29,217 |    |  |   | 13,394 |    |  |   | 118     | %   |
| Otheroperatingexpenses    |  |                       | 12,025 |    |  |   | 5,693  |    |  |   | 111     | %   |
| Interestexpense           |  |                       | 777    |    |  |   | 588    |    |  |   | 32.1    | %   |
| Totalexpenses             |  |                       | 42,019 |    |  |   | 19,675 |    |  |   | 114     | %   |
| Incomebeforetaxes         |  |                       | 10,070 |    |  |   | 6,922  |    |  |   | 45.5    | %   |
| Federalincome tax expense |  |                       | 3,241  |    |  |   | 2,316  |    |  |   | 39.9    | %   |
| Netincome                 |  | $                          | 6,829  |    |  | $      | 4,606  |    |  |   | 48.3    | %   |
| Ratios:                   |  |                       |   |    |  |   |   |    |  |   |    |     |
| Lossratio                 |  |                       | 60.8   | %  |  |   | 53.9   | %  |  |   | — |     |
| Expenseratio              |  |                       | 25.0   | %  |  |   | 22.9   | %  |  |   | — |     |
| Combinedratio             |  |                       | 85.8   | %  |  |   | 76.9   | %  |  |   | — |     |
|                           |

Grosswritten premiums (direct written premiums plus assumed writtenpremiums) increased 45.0% from $47.0  million for thethree months ended March  31,  2005 to $68.2  millionfor the three months ended March  31,  2006. Growth in thebroker network at James River Insurance Company (James River Insurance)and the agency network at Stonewood Insurance Company (StonewoodInsurance) were key drivers for the increase in gross written premiums.James River Insurance’s gross written premiums increased38.3% to $57.8  million for the three months endedMarch  31,  2006 compared to $41.8  million in thethree months ended March  31,  2005. StonewoodInsurance’s gross written premiums increased 98.0% to$10.4  million for the three months ended March  31,2006 compared to $5.3  million in the three months endedMarch  31,  2005. Gross written premiums for Stonewood

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Insurance for the three months endedMarch  31,  2006 included $588,000 of assumed premiums fromour allocation of the involuntary workers’ compensation pool forNorth Carolina.

Net written premiums increased73.2% to $53.7  million for the three months endedMarch  31,  2006 from $31.0  million for the threemonths ended March  31,  2005. The written premium cedingratio (ratio of ceded written premiums to direct written premiums)decreased to 21.4% for the three months ended March31,  2006 from 34.1% for the three months endedMarch  31,  2005. We entered into a quota share reinsurancecontract effective January  1,  2005 that transferred aportion of the risk related to certain property/casualty businesswritten by James River Insurance in 2005 to reinsurers in exchange fora portion of our direct written premiums on that business. This quotashare treaty significantly affected our written premium ceding ratiofor the three months ended March  31,  2005. Ceded writtenpremiums and ceded earned premiums related to this quota share treatyfor the three months ended March  31,  2005 totaled$7.6  million. This quota share reinsurance treaty was notrenewed for 2006.

Net earned premiums grew 93.7%for the three months ended March  31,  2006 compared to thethree months ended March  31,  2005, which generally trackswith the growth in net written premiums. Premiums are earned ratablyover the terms of our insurance policies, generally 12months.

Net investment income for the three months endedMarch  31,  2006 was $4.0  million, up 129%from $1.7  million for the three months ended March31,  2005. The increase in net investment income reflects thesignificant growth in our cash and invested assets from $220.3million at March  31,  2005 to $432.9  million atMarch  31,  2006. The growth in our cash and investedassets came from net written premiums and from the $84.6  millionof proceeds from our initial public offering and theunderwriters’ exercise of their overallotment option inAugust  2005. The annualized gross investment yield (beforeinvestment expenses) on average cash and invested assets for the threemonths ended March  31,  2006 and 2005 was 4.2% and3.7%, respectively. The annualized gross investment yield on ouraverage fixed maturity securities for the three months endedMarch  31,  2006 and 2005 was 4.2% and 3.9%,respectively. We have significantly increased our holdings oftax-advantaged state and municipal fixed maturity securities over thepast twelve months. Our annualized tax equivalent yield on our averagefixed maturity security balance was 4.7% and 4.3%,respectively, for the three months ended March  31,  2006and 2005.

Losses and LAE totaled $29.2  million forthe three months ended March  31,  2006 representing a118% increase compared to losses and LAE of $13.4  millionfor the three months ended March  31,  2005. The loss ratio(the ratio of losses and LAE to net earned premiums, net of the effectsof reinsurance) was 60.8% and 53.9%, respectively, forthe three months ended March  31,  2006 and 2005.

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A rollforward of the reserve forlosses and LAE, net of reinsurance, is presentedbelow:

|                                                                                                     |  |                            |         |         |  |        |        |         |  |  |
|-----------------------------------------------------------------------------------------------------|--|----------------------------|---------|---------|--|--------|--------|---------|--|--|
|                                                                                                |  | ThreeMonths Ended March31, |
|                                                                                                |  | 2006                       |         | 2005    |
|                                                                                                |  | (inthousands)              |
| Reserve for losses and LAE net ofreinsurance recoverables at beginning ofperiod                     |  | $                          | 115,979 |    |  | $      | 47,043 |    |
| Add:Incurred losses and LAE net ofreinsurance:                                                      |  |                       |    |    |  |   |   |    |
| Currentyear                                                                                         |  |                       | 30,735  |    |  |   | 15,711 |    |
| Prioryears                                                                                          |  |                       | (1,518  | )  |  |   | (2,317 | )  |
| Totalincurred losses andLAE                                                                         |  |                       | 29,217  |    |  |   | 13,394 |    |
| Deduct: Losses andLAE payments net of reinsurance:                                                  |  |                       |    |    |  |   |   |    |
| Currentyear                                                                                         |  |                       | 326     |    |  |   | 1,039  |    |
| Prioryears                                                                                          |  |                       | 1,543   |    |  |   | 2,277  |    |
| Totalloss and LAEpayments                                                                           |  |                       | 1,869   |    |  |   | 3,316  |    |
| Reservefor losses and LAE net of reinsurance recoverables at end ofperiod                           |  |                       | 143,327 |    |  |   | 57,121 |    |
| Add:Reinsurance recoverables on unpaid losses and LAE at end ofperiod                               |  |                       | 106,031 |    |  |   | 27,253 |    |
| Reservefor losses and LAE gross of reinsurance recoverables on unpaid lossesand LAE at end ofperiod |  | $                          | 249,358 |    |  | $      | 84,374 |    |
|                                                                                                     |

Theforegoing rollforward shows that a $1.5  million redundancydeveloped in the three months ended March  31,  2006 on theprior accident year reserves. Of this development, $1.5  millionof favorable development occurred in the excess and surplus insurancecasualty lines, with $1.2  million of this favorable developmentcoming from the 2004 accident year. Favorable development in the excessand surplus insurance property lines was $626,000 relating primarily tothe 2005 accident year. This favorable development was offset by$563,000 of adverse development for the workers’ compensationlines’ prior accident year results which related to ourallocation of the North Carolina involuntary workers’compensation pool’s prior accident year results.

The foregoing rollforward also shows that a $2.3million redundancy developed in the three months ended March31,  2005 on the reserve for losses and LAE held atDecember  31,  2004. Of this favorable development,$1.7  million occurred in the excess and surplus insuranceproperty lines primarily for the 2004 accident year and $304,000occurred in the excess and surplus insurance casualty lines. Theworkers’ compensation line experienced $296,000 of favorablereserve development in the first quarter of 2005.

Netlosses paid during the three months ended March  31,  2006totaled $568,000 and net LAE paid totaled $1.3  million, fortotal net losses and LAE paid of $1.9  million. Net losses paidduring the three months ended March  31,  2005 totaled$1.8  million and net LAE paid totaled $1.5  million, fortotal paid net losses and LAE of $3.3  million.

Ananalysis of the gross reserve and the net reserve for losses and LAE bymajor line of business at March  31,  2006 is presentedbelow:

|                                           |  |               |        |               |  |               |         |        |  |        |         |        |  |  |
|-------------------------------------------|--|---------------|--------|---------------|--|---------------|---------|--------|--|--------|---------|--------|--|--|
| GrossReserves for Losses and LAE          |  | CaseReserves  |        | IBNR Reserves |  | TotalReserves |
|                                      |  | (inthousands) |
| Excess and Surplus InsuranceCasualtyLines |  | $             | 28,651 |          |  | $             | 129,792 |   |  | $      | 158,443 |   |
| Excessand Surplus Insurance PropertyLines |  |          | 49,376 |          |  |          | 19,215  |   |  |   | 68,591  |   |
| Workers'CompensationInsurance             |  |          | 8,515  |          |  |          | 13,809  |   |  |   | 22,324  |   |
| Total                                     |  | $             | 86,542 |          |  | $             | 162,816 |   |  | $      | 249,358 |   |
|                                           |

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|                                           |  |               |        |               |  |               |         |        |  |        |         |        |  |  |
|-------------------------------------------|--|---------------|--------|---------------|--|---------------|---------|--------|--|--------|---------|--------|--|--|
| NetReserve for Losses and LAE             |  | CaseReserves  |        | IBNR Reserves |  | TotalReserves |
|                                      |  | (inthousands) |
| Excess and Surplus InsuranceCasualtyLines |  | $             | 12,196 |          |  | $             | 95,022  |   |  | $      | 107,218 |   |
| Excessand Surplus Insurance PropertyLines |  |          | 9,466  |          |  |          | 7,148   |   |  |   | 16,614  |   |
| Workers'CompensationInsurance             |  |          | 8,465  |          |  |          | 11,030  |   |  |   | 19,495  |   |
| Total                                     |  | $             | 30,127 |          |  | $             | 113,200 |   |  | $      | 143,327 |   |
|                                           |

Wehave not provided insurance coverage that could reasonably be expectedto produce material levels of asbestos claims activity. In addition, webelieve we are not exposed to any environmental liability claims otherthan those which we have specifically underwritten and priced as anenvironmental exposure. Any asbestos or environmental exposure onpolicies issued by Fidelity Excess and Surplus Insurance Company(Fidelity) prior to June  30,  2003, the date that weacquired that company, are subject to a reinsurance agreement and atrust agreement with American Empire Insurance Company (AmericanEmpire) (see ‘‘—Reinsurance’’).

Other operating expenses for the three months endedMarch  31,  2006 totaled $12.0  million, up111% from other operating expenses incurred during the threemonths ended March  31,  2005 of $5.7  million. Otheroperating expenses for the three months ended March  31,2006 consisted of commissions (net of reinsurance ceding commissionsearned) and other underwriting expenses (net of deferred policyacquisition costs) of $3.7  million, amortization of deferredpolicy acquisition costs of $7.7  million and other costs of$641,000. Other operating expenses for the three months endedMarch  31,  2005 consisted of commissions and otherunderwriting expenses (net of deferred policy acquisition costs) of$1.6  million, amortization of deferred policy acquisition costsof $3.7  million and other costs of $398,000. Reinsurance cedingcommissions earned were $2.9  million and $3.5  million,respectively, for the three months ended March  31,  2006and 2005, with $1.9  million of these commissions in 2005 comingfrom our quota share reinsurance contract. A portion of the costs ofacquiring insurance business, principally commissions and certainpolicy underwriting and issuance costs, which vary with and areprimarily related to the production of insurance business, is deferred.For the three months ended March  31,  2006, $9.1million of costs were deferred, $6.2  million of which related tocommissions and $2.9  million of which related to otheracquisition expenses. For the three months ended March31,  2005, $5.0  million of costs were deferred,$2.8  million of which related to commissions and $2.2million of which related to other acquisition expenses. Deferred policyacquisition costs are charged to other operating expenses in proportionto premiums earned over the estimated policy term, generally 12months.

The expense ratio, which is the ratio, expressedas a percentage, of other operating expenses to net earned premiums,was 25.0% for three months ended March  31,  2006compared to 22.9% for the three months ended March31,  2005. The expense ratio for the three months endedMarch  31,  2006 was affected by the $223,000 we recognizedas compensation expense associated with expensing stock options due tothe adoption of FASB Statement 123(R) effective January1,  2006 (see ‘‘—New AccountingStandards’’). In addition, the quota share treaty ineffect in the first quarter of 2005 reduced the earned premiums in thatquarter by $7.6  million and reduced other operating expenses by$1.9  million, which reduced the expense ratio for that quarterby 0.6%.

Interest expense totaled $777,000 for thethree months ended March  31,  2006 and $588,000 for thethree months ended March  31,  2005, an increase of32.1%. Interest expense relates to the $15.0  million ofsenior notes and $22.7  million of junior subordinated notes thatwe issued in May and December  2004, respectively. Interest onthese notes accrues at floating rates, and the increase in interestexpense reflects increases in interest rates over the past 12months.

Income tax expense for the three months endedMarch  31,  2006 and 2005 differs from the amount computedby applying the Federal statutory income tax rate to the loss beforeincome taxes primarily due to interest on tax-advantaged state andmunicipal securities. The effective tax rate is 32.2% for thethree months ended March  31,  2006 and 33.5% forthe three months ended March  31,  2005. The lowereffective tax rate in 2006 reflects an increase in interest income ontax-advantaged state and municipal securities over the prior year firstquarter.

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Results by Business Segment

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

|  |              |                                                                                                                                                 |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | TheExcess and Surplus Insurance segment offers commercial excess andsurplus lines liability and property products through James RiverInsurance; |

|  |              |                                                                                                                             |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------|
|  | •  | The Workers'Compensation Insurance segment offers workers' compensationinsurance coverages through Stonewood Insurance; and |

|  |              |                                                                                                                                                            |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | The Corporate and Other segment consists ofcertain management and treasury activities of our holding company andinterest expense associated with our debt. |

There is anintercompany reinsurance pooling agreement in place between James RiverInsurance and Stonewood Insurance to best employ our capital at theregulatory level. We report all segment information in this‘‘Management's Discussion and Analysis of FinancialCondition and Results of Operations’’ prior to theeffects of the intercompany reinsurance pooling agreement because weevaluate the operating performance of our reportable segments on apre-pooling basis.

Excess and Surplus Insurance

Results for the Excess and Surplus Insurance segment are asfollows:

|                          |  |                            |        |         |  |        |         |         |  |        |         |         |  |  |
|--------------------------|--|----------------------------|--------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                     |  | ThreeMonths Ended March31, |
|                     |  | 2006                       |        | 2005    |  | Change |
|                     |  | ($in thousands)            |
| Gross writtenpremiums    |  | $                          | 57,768 |    |  | $      | 41,769  |    |  |   | 38.3    | %  |
| Netwrittenpremiums       |  | $                          | 44,576 |    |  | $      | 26,902  |    |  |   | 65.7    | %  |
| Netearnedpremiums        |  | $                          | 39,584 |    |  | $      | 20,832  |    |  |   | 90.0    | %  |
| LossesandLAE             |  |                       | 22,367 |    |  |   | 11,317  |    |  |   | 97.6    | %  |
| Underwritingexpenses     |  |                       | 9,086  |    |  |   | 3,873   |    |  |   | 135     | %  |
| Underwritingprofit(1)    |  |                       | 8,131  |    |  |   | 5,642   |    |  |   | 44.1    | %  |
| Netinvestmentincome      |  |                       | 3,079  |    |  |   | 1,346   |    |  |   | 129     | %  |
| Realizedinvestmentlosses |  |                       | (35    | )  |  |   | — |    |  |   | — |    |
| Incomebeforetaxes        |  | $                          | 11,175 |    |  | $      | 6,988   |    |  |   | 59.9    | %  |
| Ratios:                  |  |                       |   |    |
| Lossratio                |  |                       | 56.5   | %  |  |   | 54.3    | %  |  |   | — |    |
| Expenseratio             |  |                       | 23.0   | %  |  |   | 18.6    | %  |  |   | — |    |
| Combinedratio            |  |                       | 79.5   | %  |  |   | 72.9    | %  |  |   | — |    |
|                          |

|           |                                                                          |
|-----------|--------------------------------------------------------------------------|
| (1)  | See‘‘—Reconciliation of Non-GAAPMeasure.’’ |

Underwriting results bymajor line of business within the Excess and Surplus Insurance segmentare asfollows:

|                    |  |                                  |        |                                  |  |        |       |               |  |               |        |         |  |        |        |         |  |        |        |          |  |        |        |         |  |  |
|--------------------|--|----------------------------------|--------|----------------------------------|--|--------|-------|---------------|--|---------------|--------|---------|--|--------|--------|---------|--|--------|--------|----------|--|--------|--------|---------|--|--|
|               |  | ThreeMonths Ended March 31, 2006 |        | Three Months Ended March 31,2005 |
|               |  | CasualtyLines                    |        | Property Lines                   |  | Total  |       | CasualtyLines |  | PropertyLines |        | Total   |
|               |  | ($ inthousands)                  |
| Net earnedpremiums |  | $                                | 37,702 |                             |  | $      | 1,882 |          |  | $             | 39,584 |    |  | $      | 19,675 |    |  | $      | 1,157  |     |  | $      | 20,832 |    |
| LossesandLAE       |  | $                                | 21,309 |                             |  | $      | 1,058 |          |  | $             | 22,367 |    |  | $      | 12,390 |    |  | $      | (1,073 | )   |  | $      | 11,317 |    |
| Lossratio          |  |                             | 56.5   | %                           |  |   | 56.2  | %        |  |          | 56.5   | %  |  |   | 63.0   | %  |  |   | (92.7  | )%  |  |   | 54.3   | %  |
|                    |

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

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

The written premium cedingratio for the Excess and Surplus Insurance segment was 22.8% and35.6%, respectively, for the three months ended March31,  2006 and 2005. The higher written premium ceding ratio forthe three months ended March  31,  2005 was driven by theimpact of the quota share reinsurance contract that was effectiveJanuary  1,  2005 and was not renewed for 2006. Cededwritten premiums related to this quota share treaty for the threemonths ended March  31,  2005 totaled $7.6million.

The loss ratio for the Excess and SurplusInsurance segment was 56.5% and 54.3%, respectively, forthe three months ended March  31,  2006 and 2005. The lossratio for the three months ended March  31,  2006 and 2005was affected by $2.1  million and $2.0  million,respectively, of favorable loss and LAE reserve development on prioraccident years. For the three months ended March  31,2006, this favorable development included $1.5  million offavorable development in the James River Insurance casualty lineprimarily related to the 2004 accident year and $626,000 of favorabledevelopment in property lines, primarily related to the 2005 accidentyear. The favorable development for the three months ended March31,  2005 included $1.7  million on property lines relatedto the 2004 accident year.

The expense ratio for theExcess and Surplus Insurance segment increased from 18.6% forthe three months ended March  31,  2005 to 23.0% forthe three months ended March  31,  2006. The expense ratiofor the three months ended March  31,  2005 benefited fromthe ceding commission that James River Insurance received on the quotashare reinsurance contract, which totaled $1.9  million for thethree months ended March  31,  2005. The quota share treatyalso 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' CompensationInsurance

Results for the Workers' CompensationInsurance segment are as follows:

|                              |  |                            |        |         |  |                  |       |         |  |        |         |         |  |  |
|------------------------------|--|----------------------------|--------|---------|--|------------------|-------|---------|--|--------|---------|---------|--|--|
|                         |  | ThreeMonths Ended March31, |
|                         |  | 2006                       |        | 2005    |  | PercentageChange |
|                         |  | ($in thousands)            |
| Gross writtenpremiums        |  | $                          | 10,397 |    |  | $                | 5,251 |    |  |   | 98.0    | %  |
| Netwrittenpremiums           |  | $                          | 9,112  |    |  | $                | 4,088 |    |  |   | 123     | %  |
| Netearnedpremiums            |  | $                          | 8,505  |    |  | $                | 4,000 |    |  |   | 113     | %  |
| Lossesand LAE                |  |                       | 6,850  |    |  |             | 2,077 |    |  |   | 230     | %  |
| Underwritingexpenses         |  |                       | 2,298  |    |  |             | 1,422 |    |  |   | 61.6    | %  |
| Underwriting(loss) profit(1) |  |                       | (643   | )  |  |             | 501   |    |  |   | — |    |
| Netinvestmentincome          |  |                       | 598    |    |  |             | 247   |    |  |   | 142     | %  |
| Otherincome                  |  |                       | 11     |    |  |             | 5     |    |  |   | 120     | %  |
| (Loss)income beforetaxes     |  | $                          | (34    | )  |  | $                | 753   |    |  |   | — |    |
| Ratios:                      |  |                       |   |    |
| Lossratio                    |  |                       | 80.5   | %  |  |             | 51.9  | %  |  |   | — |    |
| Expenseratio                 |  |                       | 27.0   | %  |  |             | 35.6  | %  |  |   | — |    |
| Combinedratio                |  |                       | 107.6  | %  |  |             | 87.5  | %  |  |   | — |    |
|                              |

|           |                                                                          |
|-----------|--------------------------------------------------------------------------|
| (1)  | See‘‘—Reconciliation of Non-GAAPMeasure.’’ |

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

The impact of Stonewood Insurance’sallocation of the involuntary workers’ compensation pool forNorth 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 Insurancesegment was 80.5% for the three months ended March31,  2006, compared to 51.9% for the three months endedMarch  31,  2005. The loss ratio for the Workers’Compensation Insurance segment for the three months ended March31,  2006 was significantly affected by high loss activity in thequarter. In addition, the loss ratio on Stonewood Insurance’sallocation of the North Carolina involuntary workers’compensation pool’s results was 143.0% for the threemonths ended March  31,  2006. The loss ratio for theWorkers’ Compensation Insurance segment for the three monthsended March  31,  2006 was also affected by $563,000 ofadverse reserve development on prior accident years, consisting of$786,000 of adverse development on business allocated from the NorthCarolina involuntary workers’ compensation pool partially offsetby $223,000 of favorable reserve development on direct business writtenby Stonewood Insurance. The loss ratio for the three months endedMarch  31,  2005 benefited from $296,000 of favorablereserve development experienced in that quarter related to the 2004accident year.

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The expense ratio for theWorkers’ 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 expenseratio for the Workers’ Compensation Insurance segment in thethree months ended March  31,  2005 was affected by thecosts required to establish the infrastructure to handle a high volumeof insurance activity during the first quarter of workers’compensation insurance operations.

Corporate and Other

Results for the Corporate and Other segment are asfollows:

|                           |  |                            |         |         |  |        |      |         |  |  |
|---------------------------|--|----------------------------|---------|---------|--|--------|------|---------|--|--|
|                      |  | ThreeMonths Ended March31, |
|                      |  | 2006                       |         | 2005    |
|                      |  | (inthousands)              |
| Net investmentincome      |  | $                          | 316     |    |  | $      | 152  |    |
| Realized investmentlosses |  |                       | — |    |  |   | (25  | )  |
| Otherincome               |  |                       | 31      |    |  |   | 40   |    |
| Other operatingexpenses   |  |                       | (641    | )  |  |   | (398 | )  |
| Interestexpense           |  |                       | (777    | )  |  |   | (588 | )  |
| Lossbeforetaxes           |  | $                          | (1,071  | )  |  | $      | (819 | )  |
|                           |

Netinvestment 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. Inthe third quarter of 2005, we retained a portion of the proceeds fromour initial public offering at the holding company. At March31,  2006, cash and invested assets at our holding companytotaled $31.7  million, compared to $16.1  million atMarch  31,  2005.

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

Interest expense totaled $777,000 and$588,000 for the three months ended March  31,  2006 and2005, respectively. Interest expense related to $15.0  million ofsenior notes and $22.7  million of junior subordinated notes thatwere issued in May and December  2004. Interest on these notesaccrues at floating rates, and the increase in interest expensereflects increases in interest rates over the past 12months.

LIQUIDITY AND CAPITAL RESOURCES

Sources andUses of Funds    

We are organized as a holdingcompany with all of our operations being conducted by our wholly-ownedinsurance company subsidiaries. Accordingly, our holding companyreceives cash through loans from banks, issuance of equity and debtsecurities (including our initial public offering in August2005), corporate service fees or dividends received from our insurancesubsidiaries, payments from our subsidiaries pursuant to ourconsolidated tax allocation agreement and other transactions. Wereceive corporate service fees from our subsidiaries to reimburse usfor most of the other operating expenses that we incur. Reimbursementof expenses through the corporate service 

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fees is based on the budgeted costs that weexpect to incur with no mark up above our expected costs. We file aconsolidated federal income tax return with our subsidiaries, and underour corporate tax allocation agreement, each participant gets a taxcharge or tax refund for the amount that the participant would havepaid or received if it had filed on a separate return basis with theInternal Revenue Service. We may use the proceeds from these sources tocontribute to the capital of our insurance subsidiaries in order tosupport premium growth, to repurchase our common stock, to retire ouroutstanding indebtedness, to pay interest, dividends and taxes and forother business purposes.

The payment to us of dividendsby our subsidiaries is limited by statute. In general, theserestrictions require that dividends be paid out of earned surplus andlimit the aggregate amount of dividends or other distributions that oursubsidiaries may declare or pay within any 12 month period withoutadvance regulatory approval. In Ohio, the domiciliary state of JamesRiver Insurance, this limitation is the greater of the statutory netincome for the preceding calendar year or 10% of the statutorysurplus at the end of the preceding calendar year. In North Carolina,the domiciliary state of Stonewood Insurance, this limitation is thelesser of the statutory net income for the preceding calendar year or10% of the statutory surplus at the end of the precedingcalendar year. In addition, insurance regulators have broad powers toprevent reduction of statutory surplus to inadequate levels and couldrefuse to permit the payment of dividends of the maximum amountscalculated under any applicable formula. The maximum amount ofdividends available to us from our insurance subsidiaries during 2006without regulatory approval is $14.5  million.

AtMarch  31,  2006, cash and invested assets at our holdingcompany totaled $31.7  million. To the extent that our insurancesubsidiaries require capital in 2006 above the amount available at theholding company, we would anticipate issuing trust preferred securitiesor other debt at our holding company.

Cash Flows

Our sources of operating funds consist primarily of writtenpremiums, investment income and proceeds from offerings of our debt andequity securities. We use operating cash flows primarily to payoperating expenses, losses and LAE and income taxes.

Asummary of our cash flows is as follows:

|                                                |  |                            |         |         |  |        |         |         |  |  |
|------------------------------------------------|--|----------------------------|---------|---------|--|--------|---------|---------|--|--|
|                                           |  | ThreeMonths Ended March31, |
|                                           |  | 2006                       |         | 2005    |
|                                           |  | (inthousands)              |
| Cash and cash equivalentsprovided by (usedin): |  |                       |    |    |  |   |    |    |
| Operatingactivities                            |  | $                          | 46,036  |    |  | $      | 27,659  |    |
| Investingactivities                            |  |                       | (38,352 | )  |  |   | (30,993 | )  |
| Financingactivities                            |  |                       | 248     |    |  |   | — |    |
| Changein cash and cashequivalents              |  | $                          | 7,932   |    |  | $      | (3,334  | )  |
|                                                |

Netcash provided by operating activities for the three months endedMarch  31,  2006 totaled $46.0  million compared tocash provided by operating activities of $27.7  million for thethree months ended March  31,  2005. Cash provided byoperating activities in both periods is primarily attributable to cashreceived on written premiums exceeding cash disbursed for operatingexpenses and losses and LAE. The increase in net cash provided byoperating activities reflects the significant growth in our premiumcash receipts in the three months ended March  31,  2006compared to the three months ended March  31,  2005.

Cash from financing transactions during the three monthsended 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 endedMarch  31,  2005.

Senior Notes and JuniorSubordinated 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 arenot redeemable by the holder or subject to sinking fund 

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requirements. Interest accrues quarterly andis payable in arrears at a floating rate per annum equal to three-monthLIBOR plus 3.85%. The senior notes are redeemable prior to theirstated maturity at our option in whole or in part, on or afterMay  15,  2009. The terms of the indenture for the seniornotes contain certain covenants which, among other things, restrict ourassuming senior indebtedness secured by our Common Stock or oursubsidiaries’ capital stock or issuing shares of oursubsidiaries’ capital stock. We are in compliance with allcovenants in the indenture at March  31,2006.

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

The following table summarizes thenature and terms of the junior subordinated notes and trust preferredsecurities outstanding at March  31,  2006:

|                                                                      |  |                            |       |                             |  |   |        |        |  |  |
|----------------------------------------------------------------------|--|----------------------------|-------|-----------------------------|--|---|--------|--------|--|--|
|                                                                 |  | JamesRiver Capital Trust I |       | James River Capital TrustII |
|                                                                 |  | ($ inthousands)            |
| Issuedate                                                            |  | May26,2004                 |       | December15,  2004           |
| Principal amount of trust preferredsecurities                        |  | $                          | 7,000 |                        |  | $ | 15,000 |   |
| Principalamount of junior subordinatednotes                          |  | $                          | 7,217 |                        |  | $ | 15,464 |   |
| Maturitydate of junior subordinated notes, unless acceleratedearlier |  | May24,2034                 |       | December15,  2034           |
| Trust commonstock                                                    |  | $                          | 217   |                        |  | $ | 464    |   |
| Interest rate, perannum                                              |  | Three-MonthLIBOR plus4.0%  |       | Three-MonthLIBOR plus 3.4%  |
| Redeemable at100% of principal amount at our option on orafter       |  | May  24,2009               |       | December  15,2009           |
|                                                                      |

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

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

Initial PublicOffering

On May  3,  2005, we filed aregistration statement on Form S-1 with the Securities ExchangeCommission for an initial public offering of Common Stock. Ourregistration statement was declared effective on August8,  2005. On August  9,  2005, we effected aten-for-one split of our Common Stock to shareholders of record on thatdate. Immediately prior to the closing of the initial public offeringon August  12,  2005, all of our outstanding Series AConvertible Preferred Stock and Series B Convertible Preferred Stock,including shares representing accrued but unpaid dividends, wereconverted into 9,956,413 shares of Common Stock. In addition, weamended and restated our certificate of incorporation to increase thenumber of authorized shares of Common Stock to 100,000,000 and decreasethe number of authorized shares of preferred stock to 5,000,000. Grossproceeds from the sale of 4,444,000 shares of Common Stock, at aninitial public offering price per share of $18.00, totaled $80.0million. Costs associated with the initial public offering included$5.6  million of underwriting costs and $995,000 of otherissuance costs.

On August  26,  2005, theunderwriters of the initial public offering exercised theirover-allotment option in which an additional 666,600 shares of CommonStock were issued and sold at the $18.00 initial public offering priceper share. Gross proceeds from this transaction were $12.0million and underwriting costs were $840,000.

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Return on Equity

One ofthe key financial measures that we use to evaluate our operatingperformance is return on equity. We calculate return on equity bydividing annualized net income by average stockholders' equityfor the period. Our overall financial goal is to produce a return onequity of at least 15.0% over the long-term. Our return onaverage equity for the three months ended March  31,  2006,using annualized net income for that period as the numerator, was15.3%, down from 22.5% for the three months endedMarch  31,  2005. The decline in our return on averageequity reflects the significant growth in our average equity resultingprimarily from our initial public offering in August  2005 (see‘‘—Initial Public Offering’’).Interim results are not necessarily indicative of results of operationsfor the full year.

Cash and Invested Assets

Ourcash and invested assets consist of fixed maturity securities and cashand cash equivalents. Our fixed maturity securities are classified asavailable-for-sale and are carried at fair value with unrealized gainsand losses on these securities reported, net of tax, as a separatecomponent of accumulated other comprehensive income (loss). The averageduration of our fixed maturity security portfolio at March31,  2006 is approximately 4.2 years.

The amortizedcost and fair value of our investments in fixed maturity securitieswere as follows:

|                                                                    |  |                 |         |                  |  |                      |         |               |  |            |       |                      |  |        |         |        |  |        |         |        |  |        |       |         |  |  |
|--------------------------------------------------------------------|--|-----------------|---------|------------------|--|----------------------|---------|---------------|--|------------|-------|----------------------|--|--------|---------|--------|--|--------|---------|--------|--|--------|-------|---------|--|--|
|                                                               |  | March31, 2006   |         | December 31,2005 |
|                                                               |  | AmortizedCost   |         | FairValue        |  | % of TotalFair Value |         | AmortizedCost |  | Fair Value |       | % of Total FairValue |
|                                                               |  | ($ inthousands) |
| Corporate                                                          |  | $               | 98,925  |             |  | $                    | 95,978  |          |  |       | 25.0  | %               |  | $      | 97,807  |   |  | $      | 95,899  |   |  |   | 28.3  | %  |
| U.S.treasury securities and obligations of U.S. governmentagencies |  |            | 49,695  |             |  |                 | 48,091  |          |  |       | 12.5  | %               |  |   | 46,868  |   |  |   | 45,929  |   |  |   | 13.5  | %  |
| Stateandmunicipal                                                  |  |            | 113,775 |             |  |                 | 111,645 |          |  |       | 29.1  | %               |  |   | 99,047  |   |  |   | 98,161  |   |  |   | 28.9  | %  |
| Mortgage-backed                                                    |  |            | 81,845  |             |  |                 | 79,991  |          |  |       | 20.8  | %               |  |   | 65,319  |   |  |   | 64,424  |   |  |   | 19.0  | %  |
| Asset-backed                                                       |  |            | 49,305  |             |  |                 | 48,236  |          |  |       | 12.6  | %               |  |   | 35,595  |   |  |   | 35,099  |   |  |   | 10.3  | %  |
| Total                                                              |  | $               | 393,545 |             |  | $                    | 383,941 |          |  |       | 100.0 | %               |  | $      | 344,636 |   |  | $      | 339,512 |   |  |   | 100.0 | %  |
|                                                                    |

Theamortized cost and fair value of our investments in fixed maturitysecurities summarized by contractual maturity were as follows:

|                                  |  |                 |         |           |  |                     |         |        |  |        |        |         |  |  |
|----------------------------------|--|-----------------|---------|-----------|--|---------------------|---------|--------|--|--------|--------|---------|--|--|
|                             |  | March31,2006    |
|                             |  | AmortizedCost   |         | FairValue |  | % of TotalFairValue |
|                             |  | ($ inthousands) |
| Duein:                           |  |            |    |      |  |                |    |   |  |   |   |    |
| One year orless                  |  | $               | 12,580  |      |  | $                   | 12,471  |   |  |   | 3.2    | %  |
| Afterone year through fiveyears  |  |            | 92,108  |      |  |                | 89,444  |   |  |   | 23.3   | %  |
| Afterfive years through tenyears |  |            | 74,536  |      |  |                | 72,111  |   |  |   | 18.8   | %  |
| Aftertenyears                    |  |            | 83,171  |      |  |                | 81,688  |   |  |   | 21.3   | %  |
| Mortgage-backed                  |  |            | 81,845  |      |  |                | 79,991  |   |  |   | 20.8   | %  |
| Asset-backed                     |  |            | 49,305  |      |  |                | 48,236  |   |  |   | 12.6   | %  |
| Total                            |  | $               | 393,545 |      |  | $                   | 383,941 |   |  |   | 100.0  | %  |
|                                  |

AtMarch  31,  2006, our fixed maturity security portfolio hadan unrealized loss of $9.6  million, representing 2.4% ofthe amortized cost of the portfolio. The majority of the unrealizedlosses on fixed maturity securities at March  31,  2006 areinterest rate related. All but two of the fixed maturity securities inour portfolio at March  31,  2006 were rated investmentgrade by Standard & Poor’s. In addition, all but onesecurity in our portfolio had a fair value that was greater than92% of its amortized cost, and that security had an unrealizedloss of $61,000 at March  31,  2006. None of the fixedmaturity securities with unrealized losses has ever missed, or beendelinquent on, a scheduled 

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principal or interest payment. AtMarch  31,  2006, 97.2% of our fixed maturitysecurity portfolio was rated ‘‘A−’’or better by Standard & Poor's or received an equivalentrating from another nationally recognized rating agency. We haveconcluded that none of the available-for-sale securities withunrealized losses at March  31,  2006 has experienced another-than-temporary impairment. In determining that securities withunrealized losses at March  31,  2006 had not experiencedan other-than-temporary impairment, we considered our intent andability to hold the securities for a sufficient time to allow for arecovery in value.

Our cash and cash equivalents were$49.0  million at March  31,  2006. The percentage ofour cash and invested assets in cash and cash equivalents was11.3% at March  31,  2006 compared to 10.8%at December  31,  2005. At March  31,  2006,cash and invested assets per share was $28.69 compared to $25.25 atDecember  31,  2005.

Deferred Policy AcquisitionCosts

A portion of the costs of acquiring insurancebusiness, principally commissions and certain policy underwriting andissuance costs which vary with and are primarily related to theproduction of insurance business, are deferred. Deferred policyacquisition costs totaled $15.3  million or 16.0% ofunearned premiums (net of reinsurance) at March  31,  2006.Deferred policy acquisition costs totaled $13.9  million or15.5% of unearned premiums (net of reinsurance) atDecember  31,  2005.

Reinsurance

Weenter into reinsurance contracts to limit our exposure to potentiallosses arising from large risks and to provide additional capacity forgrowth. Our reinsurance is contracted under excess of loss andquota-share reinsurance contracts. In quota share reinsurance, thereinsurer agrees to assume a specified percentage of the cedingcompany's losses arising out of a defined class of business inexchange for a corresponding percentage of premium. In excess of lossreinsurance, the reinsurer agrees to assume all or a portion of theceding company's losses in excess of a specified amount. Inexcess of loss reinsurance, the premium payable to the reinsurer isnegotiated by the parties based on their assessment of the amount ofrisk being ceded to the reinsurer because the reinsurer does not shareproportionately in the ceding company's losses.

Thefollowing is a summary of our casualty reinsurance in place atMarch  31,2006:

|                            |  |                                           |  |                                                                                                               |  |                                                                                                              |  |  |  |  |  |  |  |  |
|----------------------------|--|-------------------------------------------|--|---------------------------------------------------------------------------------------------------------------|--|--------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|--|--|
| Lineof Business            |  | Company Policy Limit                      |  | ReinsuranceCoverage                                                                                           |  | CompanyRetention                                                                                             |
| PrimaryCasualty            |  | Up to $5.0  million peroccurrence         |  | $4.0  million excess of $1.0million                                                                           |  | $1.0  million per occurrence                                                                                 |
| Excess Casualty            |  | Up to $8.0  million peroccurrence         |  | Variable quota share (1)                                                                                      |  | $500,000 peroccurrence                                                                                       |
| Worker’sCompensation |  | Unlimited (benefits prescribed bystatute) |  | $19.25  million in excess of $750,000 peroccurrence with a maximum of $9.25  million on any one injuredworker |  | $750,000 per occurrence and losses above $20.0million per occurrence and above $10.0  million on any onelife |
|                            |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | For policies with anoccurrence limit of $1.0  million or higher, the quota sharepercentage is set such that our retention is $1.0  million. Forall excess casualty policy limits in excess of $5.0  million, wepurchase facultative reinsurance. For policies where we also write theunderlying primary casualty limit, the quota share reduces ourretention to $100,000 which results in a $1.1  million retentionfor James River Insurance on that risk. |

Our excessof loss property reinsurance treaties renewed on July  1,2005, and our catastrophe reinsurance program renewed on June1,  2005. For 2006, all property reinsurance renews onJune  1.

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The following table is a summaryof our property reinsurance in place as of March  31,2006:

|                 |  |                                            |  |                                           |  |                                                                                 |  |  |  |  |  |  |  |  |
|-----------------|--|--------------------------------------------|--|-------------------------------------------|--|---------------------------------------------------------------------------------|--|--|--|--|--|--|--|--|
| Lineof Business |  | Company Per Risk Limit                     |  | ReinsuranceProgram                        |  | CompanyRetention                                                                |
| PrimaryProperty |  | Generally up to $15.0  million per risk(1) |  | $14.0  million excess of $1.0  million(2) |  | $1.0  million per risk                                                          |
| ExcessProperty  |  | Generally up to $15.0  million per risk(1) |  | $14.0  million excess of $1.0  million(2) |  | July  1,  2005 through October31,  2005, $1.0  million perrisk;                 |
|            |  |                                       |  | 85% quota share(3)                        |  | November  1,  2005 through May31,  2006, 15% of the first $5.0  million perrisk |
|                 |

|     |                                                                                   |
|-----|-----------------------------------------------------------------------------------|
| (1) | We purchase facultativereinsurance for per risk limits in excess of $15.0million. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Primary Property and ExcessProperty share the same reinsurance treaty for coverage of $10.0million excess of $5.0  million. The $10.0  million excessof $5.0  million has maximum coverage for a single event of$20.0  million and maximum coverage for the life of the treaty of$20.0  million. For Primary Property, the reinsurance treaty for$4.0  million excess of $1.0  million has maximum coveragefor a single event of $8.0  million and maximum coverage for thelife of the treaty of $16.0  million. For Excess Property, thereinsurance treaty for $4.0  million excess of $1.0million has maximum coverage for a single event of $9.0  millionand maximum coverage for the life of the treaty of $12.0million. |

|     |                                                                                                                                                                                                                                      |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | The 85% quota sharereinsurance treaty on Excess Property started November  1,2005 and ends on May  31,  2006. The purchase of thiscoverage coincided with our resuming writing Excess Property coverageafter a temporary suspension. |

We have a propertyreinsurance treaty that covers our per occurrence exposure to terrorismas provided under the Terrorism Risk Insurance Act of 2002. The treatycovers $13.0  million in excess of $2.0  million perrisk.

Reinsurance contracts do not relieve us from ourobligations to policyholders. Failure of a reinsurer to honor itsobligations could result in losses to us, and therefore, we establishallowances for amounts considered uncollectible. At March31,  2006, there was no allowance for uncollectible reinsurance.James River Insurance and Stonewood Insurance generally targetreinsurers with A.M. Best financial strength ratings of‘‘A’’ (Excellent) or better for liabilitycoverages and ‘‘A−’’ (Excellent) orbetter for property coverages.

At March  31,2006, we had reinsurance recoverables on unpaid losses of $106.0million and reinsurance recoverables on paid losses of $5.4million. Included in reinsurance recoverables on unpaid losses atMarch  31,  2006 are $30.5  million of recoverablesrelated to Hurricane Katrina losses and $14.7  million related toHurricane Wilma losses. All but $2.0  million of our totalrecoverables at March  31,  2006 are from reinsurers rated‘‘A’’ or better by A.M. Best or arecollateralized with letters of credit or by a trust agreement withAmerican Empire.

We use catastrophe modeling software toanalyze the risk of severe losses from hurricanes and earthquakes andto individually review each property insurance policy to determine itsimpact on the risk of our overall portfolio. We model our portfolio ofinsurance policies in force each month and track our accumulations ofexposed values geographically to manage our concentration in any onearea. We measure exposure to these catastrophe losses in terms ofprobable maximum loss (PML), which is an estimate of the highest amountwe would expect to pay in any one catastrophe event over a specifiedtime. We manage this potential loss by purchasing catastrophereinsurance coverage. Effective June  1,  2004, wepurchased catastrophe reinsurance coverage of $5.0  million perevent in excess of our $2.0  million per event retention.Effective June  1,  2005, we increased our catastrophereinsurance coverage to $36.0  million per event in excess of our$2.0  million per event retention. Our catastrophe reinsurancecoverage in place effective June  1,  2005 had onereinstatement in the event that we exhausted the $36.0  millionof coverage. We ceded $2.7  million of reinstatement premium to

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our catastrophe reinsurers in 2005 and anadditional $140,000 of reinstatement premium in the first quarter of2006. At March 31, 2006, losses from Hurricane Katrina exceeded ourcatastrophe reinsurance coverage limit for a single event.Additionally, we have ceded some losses from Hurricane Wilma to ourcatastrophe reinsurance coverage. Effective November  1,2005, we purchased additional catastrophe reinsurance coverage whichprovides an additional $6.5  million of coverage throughMay  31,  2006. Beginning in the fourth quarter of 2005, weare reducing our exposure to hurricane losses by not writing new orrenewal primary property insurance with wind coverage within 100 milesof the Southeast and Gulf coasts of the United States or within 30miles of the Northeast coast of the United States. We are reducing theconcentration of exposed limits in any 50 mile area to $50.0million or less. These actions have significantly reduced our modeledprobable maximum catastrophe loss from its peak level. At ourJune  1,  2006 property reinsurance renewal, we intend topurchase more reinsurance relative to our estimated exposure than inthe prior year.

At the time of our acquisition ofFidelity in June  2003, Fidelity had a reinsurance agreement withits parent, American Empire. Under this reinsurance agreement, Fidelityceded all of its liabilities on all insurance business it wrote orassumed through June  30,  2003 to American Empire.American Empire and Fidelity also entered into a trust agreement underwhich American Empire established a trust account with Fidelity as thebeneficiary. Under the trust agreement, American Empire must maintainassets with a current fair value greater than or equal to the ultimatenet aggregate losses recoverable under the reinsurance agreement.Cessions under the reinsurance agreement are net of third partyreinsurance. At March  31,  2006, reinsurance recoverablesfrom American Empire were $2.6  million. These recoverables aresecured by trust assets of $4.1  million. Reinsurancerecoverables from third party reinsurers associated with the businessthat Fidelity wrote before we acquired it were $4.2  million atMarch  31,  2006. In the event that the third partyreinsurers default on their obligations, the recoverables would becomesubject to our reinsurance agreement with American Empire and,accordingly, American Empire will indemnify us for any suchuncollectible third party reinsurance recoverables. As additionalsecurity, Great American Insurance Company (Great American), anaffiliate of American Empire, has irrevocably and unconditionallyguaranteed the performance by American Empire of all of its obligationsunder the reinsurance agreement and trust agreement. Great American andAmerican Empire have financial strength ratings of‘‘A’’ (Excellent) from A.M. Best. We remainliable for the liabilities ceded under the reinsurance agreement in theevent that the trust assets are insufficient to cover the ultimate netaggregate losses recoverable under the reinsurance agreement andAmerican Empire and Great American default on their respectiveobligations.

We entered into a quota share reinsurancecontract effective January  1,  2005 that transferred aportion of the risk related to certain property/casualty businesswritten by James River Insurance in  2005 to reinsurers inexchange for a portion of our direct written premiums on that business.Under  terms of the agreement, James River Insurance ceded aportion of its other liability occurrence  and primary propertybusiness which includes business written by the General Casualty,Manufacturers and Contractors and Primary Property divisions. Thisquota share treaty was not renewed for 2006. James River Insurancereceived a ceding commission equal to 25% of ceded earnedpremium and paid a reinsurer margin equal to 4.5% of cededearned premium under this quota share reinsurance contract. Thereinsurers do not receive a margin when they are in a loss position onthe contract. The ceding commission cannot be reduced, but undercertain circumstances,  based on underwriting results, JamesRiver Insurance is entitled to an additional profit  contingentcommission up to an amount equal to all of the reinsurers’profits above the margin. James River Insurance maintains a funds-heldaccount which is credited interest at a fixed rate of 3.75%annually. The funds-held account balance is recorded as a liability onour consolidated balance sheet, and at March  31,  2006,the balance of the account was $19.2  million. The funds-heldaccount balance represents the excess of ceded earned premium andinterest credited over ceded paid losses and LAE, the Company’sceding commission and the reinsurers’ margin. Assets supportingthe funds-held liability are not segregated or restricted. The quotashare reinsurance contract has a loss ratio cap of 115%, whichmeans that we cannot cede any losses in excess of a 115% lossratio to the reinsurer. For the three months ended March31,  2005, ceded earned premiums related to this quota sharetreaty were $7.6  million, ceded loss and LAE were $5.3million and our reinsurance ceding 

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commission was $1.9  million. For thethree months ended March  31,  2006, there were no cededearned premiums related to this quota share contract, ceded losses andLAE were $679,000 and our reinsurance ceding commission was ($190,000),representing interest credited on the funds-held account balance.

Ratings

James River Insurance and StonewoodInsurance each have a financial strength rating of‘‘A−’’  (Excellent) from A.M.Best. A.M. Best assigns 16 ratings to insurance companies, whichcurrently range from ‘‘A++’’ (Superior) to‘‘F’’ (In Liquidation).‘‘A−’’ (Excellent) is the fourthhighest  rating issued by A.M. Best. The‘‘A−’’ (Excellent) rating isassigned to insurers that have, in  A.M. Best's opinion, anexcellent ability to meet their ongoing obligations to policyholders.This  rating is intended to provide an independent opinion of aninsurer's ability to meet its obligation  to policyholdersand is not an evaluation directed at investors.

Thefinancial strength ratings assigned by A.M. Best have an impact on theability of the insurance  companies to attract and retain agentsand brokers and on the risk profiles of the submissions for insurancethat the insurance companies receive. The‘‘A−’’ (Excellent) ratings obtainedby James River Insurance and Stonewood Insurance are consistent withthe companies'  business plans and allow the companies toactively pursue relationships with the agents  and brokersidentified in their marketing plans.

Reconciliation of Non-GAAPMeasure

Underwriting profit (loss) of insurancesegments is defined as net earned premiums less losses and LAE andother operating expenses of our two insurance segments, the Excess andSurplus Insurance  segment and the Workers' CompensationInsurance segment. Our definition of underwriting  profit (loss)may not be comparable to the definition of underwriting profit (loss)for  other companies. We evaluate the performance of ourinsurance segments and allocate resources  based primarily onunderwriting profit (loss) of insurance segments. We believe that thisis  a  useful measure for investors in evaluating theperformance of our insurance segments because our  objective isto consistently earn underwriting profits.

Thefollowing table reconciles the underwriting profit (loss) of insurancesegments by individual segment to consolidated income beforetaxes:

|                                                           |  |                            |        |         |  |        |        |         |  |  |
|-----------------------------------------------------------|--|----------------------------|--------|---------|--|--------|--------|---------|--|--|
|                                                      |  | ThreeMonths Ended March31, |
|                                                      |  | 2006                       |        | 2005    |
|                                                      |  | (inthousands)              |
| Underwriting profit (loss)of insurancesegments:           |  |                       |   |    |  |   |   |    |
| Excess andSurplusInsurance                                |  | $                          | 8,131  |    |  | $      | 5,642  |    |
| Workers’Compensation Insurance                      |  |                       | (643   | )  |  |   | 501    |    |
| Totalunderwriting profit of insurancesegments             |  |                       | 7,488  |    |  |   | 6,143  |    |
| Net investmentincome                                      |  |                       | 3,993  |    |  |   | 1,745  |    |
| Realizedinvestment losses                                 |  |                       | (35    | )  |  |   | (25    | )  |
| Otherincome                                               |  |                       | 42     |    |  |   | 45     |    |
| Other operatingexpenses of the Corporate and Othersegment |  |                       | (641   | )  |  |   | (398   | )  |
| Interestexpense                                           |  |                       | (777   | )  |  |   | (588   | )  |
| Consolidatedincome beforetaxes                            |  | $                          | 10,070 |    |  | $      | 6,922  |    |
|                                                           |

NEWACCOUNTING STANDARDS

On December  16,  2004,the Financial Accounting Standards Board (FASB) issued Statement No.123 (revised 2004), Share-Based Payment (Statement 123(R)),which is a revision of Statement No. 123, Accounting for Stock-BasedCompensation. Statement 123(R) supersedes Accounting PrinciplesBoard 

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Opinion No. 25, Accounting for StockIssued to Employees (APB Opinion No. 25) and amends FASB StatementNo. 95, Statement of Cash Flows. We adopted Statement 123(R)using the modified prospective method on January  1,2006.

Prior to May  3,  2005 (the date that wefiled the Form S-1 with the Securities and Exchange Commission), weused the minimum value method to calculate the pro forma disclosuresrequired by Statement 123. We continue to account for the portion ofawards granted prior to May  3,  2005 and not modified,cancelled or repurchased subsequent to that date using the provisionsof APB Opinion No. 25 and its related interpretiveguidance.

Prior to adopting Statement 123(R) onJanuary  1,  2006, we accounted for stock option grantsusing the intrinsic value method prescribed in APB Opinion No. 25.Because all options granted prior to January  1,  2006 werefor a fixed number of shares with an exercise price equal to the fairvalue of the shares at the date of grant, we recognized no compensationexpense for these stock options. When we adopted Statement 123(R), webegan recognizing the expense associated with awards issued on or afterMay  3,  2005 and for awards modified, repurchased orcancelled on or after that date in the income statement over theaward’s vesting period using the modified prospective method. Asa result of adopting Statement 123(R) on January  1,  2006,our income before income taxes and net income for the three month endedMarch  31,  2006 are $223,000 and $145,000 lower,respectively, than if we had continued to account for share-basedcompensation under APB Opinion No. 25. Reported basic and dilutedearnings per share for the three months ended March  31,2006 would have each increased by $0.01 if we had not adopted Statement123(R). The adoption of Statement 123(R) did not have a material effecton our statement of cash flows.

CRITICAL ACCOUNTING POLICIES ANDESTIMATES

Critical accounting estimates are defined asthose estimates that are both important to the portrayal of ourfinancial condition and results of operations and require us toexercise significant judgment. We use significant judgment concerningfuture results and developments in applying these critical accountingestimates and in preparing our consolidated financial statements. Thesejudgments and estimates affect the reported amounts of assets,liabilities, revenues and expenses and the disclosure of materialcontingent assets and liabilities.

We evaluate ourestimates regularly using information that we believe to be relevant.These reviews include evaluating the adequacy of reserves for lossesand LAE, evaluating the investment portfolio for other-than-temporarydeclines in estimated fair value and analyzing the recoverability ofdeferred tax assets. Actual results may differ materially from theestimates and assumptions used in preparing the consolidated financialstatements.

Readers are urged to review‘‘Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — CriticalAccounting Policies and Estimates’’ and Note 1 to theaudited consolidated financial statements contained in our Form 10-Kfor the fiscal year ended December  31,  2005 on file withthe Securities and Exchange Commission for a more complete descriptionof our critical accounting policies and estimates.

Withour adoption of Statement 123(R) on January  1,  2006,estimating the compensation expense associated with share-based awardshas become a critical accounting estimate. The assumptions used for theoption awards vary depending on the date of grant. The following tablesummarizes the assumptions used to estimate the fair value of theCompany’s shared-based awards:

|                                 |  |                                                 |  |                                                 |  |  |  |  |  |  |
|---------------------------------|--|-------------------------------------------------|--|-------------------------------------------------|--|--|--|--|--|--|
|                            |  | AwardsIssued After May 3, 2005                  |  | Awards IssuedPrior to May 3,2005                |
| Expectedterm                    |  | 7years                 |  | 7years                 |
| Expected stock pricevolatility  |  | 35.00%                 |  | 0.00%                  |
| Rangeof risk-free interestrates |  | 4.08%–4.34%      |  | 3.07%–4.04%      |
| Dividendyield                   |  | 0.00%                  |  | 0.00%                  |
|                                 |

Forall awards, the expected term is based on the midpoint between thevesting period and the contractual term of the award. Prior to theadoption of Statement 123(R), stock price volatility was 

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estimated at 0% pursuant to theminimum value method since the Company was not publicly traded. The useof 0% volatility is specifically prohibited by Statement 123(R).Accordingly, stock price volatility for awards issued after May3,  2005 was estimated based on stock price volatility data forsimilar property/casualty companies in the period following theirrespective initial public offerings. The risk-free interest rateassumption is based on the 7-year U.S. Treasury rate at the date ofgrant. The Company does not anticipate paying dividends in the nearfuture. As of March  31,  2006, there was $3.0million of estimated unrecognized compensation costs expected to becharged to earnings over a weighted-average period of 3.4 years.

OUTLOOK FOR 2006

For 2006, we anticipate achieving anannual return on average equity of at least 15% and writing at acombined ratio of between 80% and 90%. We also expectgrowth in gross written premiums of between 20% and 30%for 2006.

FORWARD-LOOKING STATEMENTS

This Form10-Q contains ‘‘forward-looking’’statements within the meaning of the Securities Litigation Reform Actof 1995, including among others those concerning: our business andgrowth strategies; the basis for our reserve estimates; our exposure toenvironmental liability claims; the adequacy of our reserves; ourtarget debt to total capitalization ratio and our return on equitygoal; the resolution of litigation; and our belief that our reinsurancerecoverables are collectible. Such statements involve certain risks anduncertainties that could cause actual results to differ materially fromthose in the forward-looking statements. Potential risks anduncertainties include such factors as: effects of increasedcompetition; effects of the cyclical nature of our business; effects ofdevelopments in the financial or capital markets; changes inavailability, cost or quality of reinsurance; losses of key personnelor the inability to recruit qualified personnel; payment of claims byreinsurers on time or at all; effects of severe weather conditions andother catastrophes; effects of war or terrorism; changes inrelationships with agencies, brokers and agents; changes in ratingagency policies or practices; declines in financial ratings; changes inregulations or laws applicable to our insurance subsidiaries; changesin legal theories of liability under our insurance policies; accuracyof assumptions underlying our reserves for losses and LAE and ourcatastrophe model; actual losses incurred by policyholders as a resultof hurricanes and risks described in our filings with the Securitiesand Exchange Commission, including our Form 10-K for the fiscal yearended December  31,  2005.

|              |                                                            |
|--------------|------------------------------------------------------------|
| Item3.  | Quantitative and Qualitative Disclosures AboutMarket Risk. |

Market risk is the potential economic lossprincipally arising from adverse changes in the fair value of financialinstruments. The major components of market risk affecting us arecredit risk and interest rate risk. Our market risks at March31,  2006 have not materially changed from those identified inour Form 10-K for the fiscal year ended December  31,2005.

Credit Risk

Credit risk is the potentialeconomic loss principally arising from adverse changes in the financialcondition of a specific debt issuer or a reinsurer.

Weaddress the risk associated with debt issuers by investing in fixedmaturity securities that are investment grade, which are thosesecurities rated ‘‘BBB−’’ or higherby Standard & Poor's. We monitor the financial condition ofall of the issuers of fixed maturity securities in our portfolio. Ouroutside investment managers assist us in this process. We utilize aratings changes report, a security watch list and a schedule ofsecurities in unrealized loss positions as part of this process. If asecurity is rated ‘‘BBB−’’ or higherby Standard & Poor's at the time that we purchase it and thenis downgraded below ‘‘BBB−’’ whilewe hold it, we evaluate the security for impairment, and afterdiscussing the security with our investment advisors, make a decisionto either dispose of the security or continue to hold it. Finally, weemploy stringent diversification rules that limit our credit exposureto any single issuer or business sector.

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We address the risk associatedwith reinsurers by generally targeting reinsurers with A.M. Bestfinancial strength ratings of ‘‘A’’(Excellent) or better for liability coverages and‘‘A−’’ (Excellent) or better forproperty coverages. In an effort to minimize our exposure to theinsolvency of our reinsurers, our security committee, consisting of ourChief Financial Officer and our corporate actuary, evaluates theacceptability and reviews the financial condition of each reinsurerannually. In addition, our security committee continually monitorsrating downgrades involving any of our reinsurers. At March31  2006, all but $2.0  million of our reinsurancerecoverables are either from companies with A.M. Best ratings of‘‘A’’ (Excellent) or better, or arecollateralized by a letter of credit or by a trust agreement withAmerican Empire.

Interest Rate Risk

Interestrate risk is the risk that we may incur economic losses due to adversechanges in interest rates. The primary market risk to the investmentportfolio is interest rate risk associated with investments in fixedmaturity securities. Fluctuations in interest rates have a directimpact on the market valuation of these securities. We manage ourexposure to interest rate risk through an asset/liability matchingprocess. In the management of this risk, the characteristics ofduration, credit and variability of cash flows are critical elements.These risks are assessed regularly and balanced within the context ofour liability and capital position. Our outside investment managersassist us in this process. We also have interest rate risk relating toour senior notes and junior subordinated notes, since interest on thesenotes accrues at a floating rate.

|              |                          |
|--------------|--------------------------|
| Item4.  | Controls and Procedures. |

Evaluation ofDisclosure Controls and Procedures

We carried out anevaluation as of the end of the period covered by this report, underthe supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controlsand procedures, as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the Exchange Act), as ofthe end of the period covered by this report. Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective asof that date. Disclosure controls and procedures are controls andprocedures that are designed to ensure that information required to bedisclosed in reports filed or submitted by us under the Exchange Act isrecorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules andforms.

Changes in Internal Control Over FinancialReporting

There has been no change in our internalcontrol over financial reporting (as defined in Rule 13a-15(f)under the Exchange Act) that occurred during the period covered by thisreport that has materially affected or is reasonably likely tomaterially affect our internal control over financialreporting.

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PART II— OTHER INFORMATION

|              |                                                             |
|--------------|-------------------------------------------------------------|
| Item2.  | Unregistered Sales of Equity Securities and Useof Proceeds. |

|  |           |                                             |
|--|-----------|---------------------------------------------|
|  | (b)  | Use of Proceeds fromInitial Public Offering |

On May 3, 2005, wefiled a registration statement on Form S-1 with the Securities ExchangeCommission for an initial public offering of Common Stock. The offeringwas made through an underwriting syndicate led by book-running managerKeefe, Bruyette & Woods, Inc., and co-managers Bear, Stearns& Co., Inc., Friedman, Billings, Ramsey & Co., Inc. andWachovia Capital Markets, LLC. Our registration statement was declaredeffective on August  8,  2005. On August  9,2005, we effected a ten-for-one split of our Common Stock toshareholders of record on that date. Immediately prior to the closingof the initial public offering on August  12,  2005, all ofour outstanding Series A Convertible Preferred stock and Series BConvertible Preferred Stock, including shares representing accrued butunpaid dividends, were converted into 9,956,413 shares of Common Stock.In addition, on that date we amended and restated our certificate ofincorporation to increase the number of authorized shares of CommonStock to 100,000,000 and decrease the number of authorized shares ofpreferred stock to 5,000,000. Gross proceeds from the sale of 4,444,000shares of Common Stock, at an initial public offering price per shareof $18.00, totaled $80.0  million. Costs associated with theinitial public offering included $5.6  million of underwritingcosts and $995,000 of other issuance costs, resulting in net proceedsfrom the sale of $73.4  million.

On August26,  2005, the underwriters of the initial public offeringexercised their over-allotment option in which an additional 666,600shares of Common Stock were issued and sold at the $18.00 initialpublic offering price per share. Gross proceeds from this transactionwere $12.0  million and underwriting costs were $840,000,resulting in net proceeds from the sale of $11.2  million.

We contributed $60.5  million of the proceeds fromthe offering to our insurance subsidiaries. We intend to use theremaining proceeds for general corporate purposes, which may includepotential acquisitions of companies in the specialty insurance businessor additional contributions to our insurancesubsidiaries.

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|              |           |
|--------------|-----------|
| Item6.  | Exhibits. |

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |  |  |  |
|------------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNo. |  | Description ofExhibit                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.1        |  | ThirdAmended and Restated Certificate of Incorporation (incorporated hereinby reference to Exhibit 3.1 to the Company’s Current Report onForm 8-K dated August  12,  2005 (File No.000-51480)).                                                                                                                                                                                                                                                      |
| 3.2        |  | Form of Third Amended andRestated By-Laws (incorporated herein by reference to Exhibit 3.2 tothe Company’s Current Report on Form 8-K dated August12,  2005 (File No.000-51480)).                                                                                                                                                                                                                                                                    |
| 4.1        |  | Specimen Stock Certificate,representing James River Group, Inc. common stock, par value $0.0l pershare (incorporated by reference to Exhibit 4.1 to the Company’sRegistration Statement on Form S-1 (File No.333-124605)).                                                                                                                                                                                                                      |
| 4.2        |  | Form of Warrantrelating to Series B Convertible Preferred Stock (incorporated byreference to Exhibit 4.2 to the Company’s Registration Statementon Form S-1 (File No.333-124605)).                                                                                                                                                                                                                                                                   |
| 4.3        |  | Registration RightsAgreement dated January  21,  2003, by and among JamesRiver Group, Inc. and certain stockholders as named therein(incorporated by reference to Exhibit 4.6 to the Company’sRegistration Statement on Form S-1 (File No.333-124605)).                                                                                                                                                                                              |
| 4.4        |  | Indenture dated as ofMay  26,  2004, by and between James River Group, Inc. andWilmington Trust Company, as Trustee, relating to Floating Rate SeniorDebentures Due 2034 (incorporated by reference to Exhibit 4.8 to theCompany’s Registration Statement on Form S-1 (File No.333-124605)).                                                                                                                                                         |
| 4.5        |  | Indenture dated as ofMay  26,  2004, by and between James River Group, Inc. andWilmington Trust Company, as Trustee, relating to Floating Rate JuniorSubordinated Debentures Due 2034 (incorporated by reference to Exhibit4.9 to the Company’s Registration Statement on Form S-1 (FileNo. 333-124605)).                                                                                                                                            |
| 4.6        |  | Amended and RestatedDeclaration of Trust of James River Capital Trust I dated as ofMay 26, 2004, by and among James River Group, Inc., the Trustees(as defined therein) and the holders, from time to time, of undividedbeneficial interests in James River Capital Trust I (incorporated byreference to Exhibit 4.10 to the Company’s RegistrationStatement on Form S-1 (File No.333-124605)).                                                 |
| 4.7        |  | Preferred SecuritiesGuarantee Agreement dated as of May  26,  2004, by JamesRiver Group, Inc., as Guarantor and Wilmington Trust Company, asPreferred Guarantee Trustee, for the benefit of the Holders (as definedtherein) of James River Capital Trust I (incorporated by reference toExhibit 4.11 to the Company’s Registration Statement on Form S-1(File No. 333-124605)).                                                                      |
| 4.8        |  | Indenture datedDecember  15,  2004, by and between James River Group, Inc.and Wilmington Trust Company, as Trustee, relating to Floating RateJunior Subordinated Deferrable Interest Debentures Due 2034(incorporated by reference to Exhibit 4.12 to the Company’sRegistration Statement on Form S-1 (File No.333-124605)).                                                                                                                         |
| 4.9        |  | Amended and RestatedDeclaration of Trust of James River Capital Trust II dated as ofDecember  15,  2004, by and among James River Group, Inc.,the Trustees (as defined therein), the Administrators (as namedtherein), and the holders, from time to time, of undivided beneficialinterests in the James River Capital Trust II (incorporated byreference to Exhibit 4.13 to the Company’s RegistrationStatement on Form S-1 (File No. 333-124605)). |
|            |

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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                          |  |  |  |  |
|------------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNo. |  | Description ofExhibit                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.10       |  | Guarantee Agreementdated as of December  15,  2004, by James River Group,Inc., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee,for the benefit of the Holders (as defined therein) from time to timeof the capital securities of James River Capital Trust II (incorporatedby reference to Exhibit 4.14 to the Company’s RegistrationStatement on Form S-1 (File No.333-124605)). |
| 10.1       |  | Summary of offer letterby and between James River Group, Inc. and Gregg T.Davis.*                                                                                                                                                                                                                                                                                                                        |
| 31.1       |  | Certification of ChiefExecutive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.                                                                                                                                                                                                                                                                                                        |
| 31.2       |  | Certification of Chief FinancialOfficer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.                                                                                                                                                                                                                                                                                                        |
| 32         |  | Certification of the ChiefExecutive Officer and Chief Financial Officer pursuant toSection 906 of the Sarbanes-Oxley Act of2002.                                                                                                                                                                                                                                                                    |
|            |

* Denotes compensatory plan orarrangement for Company officer or director.

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SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

|  | James River Group,Inc. |
|--|------------------------|

May  11,2006

|  | /s/   Gregg T.Davis                                Gregg T.DavisExecutive Vice President –Finance |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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