Insurance holding company James River Group, Inc. (Nasdaq: JRVR) will be acquired by a member of the D.E. Shaw Group, based in Bermuda. The acquisition should be finalized by the end of December 2007. James River Group is not seeking a buyer because it is in financial trouble. Far from it. The company posted good numbers in its recent 3Q 2007 earnings release. Underwriting profit for the quarter increased 10% to $11 million, not including $1 million spent in acquisition costs. Net income increased to just over $10 million, with diluted earnings per share (EPS) up 9% to $0.63. Excluding year-to-date (YTD) acquisition costs of $3 million, YTD EPS of $1.82 represents a 20% increase.

James River's Workers' Compensation unit posted significantly higher profit margins, due both to lower losses and better management of expenses. Net investment income increased $1 million to $6.3 million, a 20% gain. Buried in the earnings release, however, is the fact that the company holds $4.3 million worth of sub-prime mortgages in its investment portfolio. This may be a problem down to road for the new owners. James River Group is currently rated A- by A.M. Best Company.

Given the company's impending acquisition, CEO J. Adam Abram offered no guidance for 4Q 2007, nor held a conference call to discuss 3Q 2007 numbers.

Mega hedge fund D.E. Shaw & Co. certainly likes insurance plays. The most recent deal: the $575 million buyout of the James River Group (NASDAQ: JRVR).

The firm provides property and casualty insurance coverage across 48 states. In fiscal Q1, earnings increased 49% to $10.1 million.

But with D.E. Shaw's heft, James River should scale its business even more.

I had a chance to interview Gene Mueller, who is a managing partner at Mueller Carey Companies and an expert on insurance. According to him:

"In this proposed deal, investors reacted poorly on day one to slightly below-market pricing. But of course, not every deal that's signed actually closes on the same terms. Here, there doesn't appear to be a meaningful no-shop clause, and no financing contingency, indicating that the buyer, investment manager D.E. Shaw, may be looking at a financial play. Despite a termination fee of some $7MM, that would be only a little over 1% of the deal price. Hard to predict, but maybe this is just a toe in the water for the target. James River is a very well-run company, so I would expect others to take close look at the proposed pricing. I would say stay tuned on this one."

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.