James River’s D’Orazio: Excess E&S capacity “fairly tight” for many industries

James River CEO Frank D’Orazio expects the E&S market to continue to benefit from pockets of industry dislocation, with excess property and casualty capacity tight for many industries.

Bermuda-based James River after markets closed yesterday reported adjusted net operating income for the second quarter that increased to $20.0mn from $18.8mn in the prior-year period.

The adjusted net operating income of $0.52 per diluted share narrowly beat the $0.50 estimate of seven analysts as compiled by MarketWatch.

Nasdaq-listed James River’s share price was trading down 0.7 percent as of 10.00am ET on Tuesday.

Gross written premiums in E&S, James River’s largest division, grew 25 percent to $266.6mn in Q2 2022.

Along with its second quarter results, James River reported that E&S renewal rate change increased sequentially from 8.4 percent in the first quarter to 14.1 percent in the second quarter.

On Tuesday’s earnings call, D’Orazio commented that James River’s E&S renewal and retention levels remain extremely high, while the E&S business is producing positive rate change well in excess of its view of loss cost trend.

“Clearly, the excess and surplus lines marketplace continues to benefit from pockets of industry dislocation as admitted market underwriting discipline remains broadly enforced driving sustained pricing improvement in the E&S sector,” he said. “Rate increases in our book during the second quarter were the strongest level that we’ve seen in a year.”

In aggregate, James River has experienced renewal rate increases for 22 consecutive quarters, compounding to 58.1 percent.

D’Orazio noted that rate changes have “fluctuated a bit” from quarter to quarter, and he expects that dynamic to continue.

“On a year-to-date basis, our renewal rate change is 12 percent, which is comfortably ahead of both our planned rate increase and expected loss cost trends for the segment,” the executive said. “For the quarter, the headline rate increase is driven by some of our larger underlying divisions, like excess casualty, but we also had double-digit rate increases in a number of product lines, including general casualty, sports and entertainment, healthcare and excess property.”

In excess casualty, James River tends to be a first excess player with a limit profile of $5mn or less on a gross basis.

D’Orazio said that James River increased its view of loss cost trend for 2022 at the end of last year, with a trend for the portfolio in the mid-single-digit range with the view for certain lines of business increasing over 200 basis points.

“When you think about our portfolio as well as some of the more concerning areas relative to inflation, remember our excess property unit is less than 5 percent of our E&S segment, commercial auto is even smaller,” D’Orazio said. “So when we discuss loss trend, we tend to focus on the difference between our view of loss trend in a particular line and exposure trend for that same product line.

“So in essence, we view exposure trend as a bit of an offset to loss trend.”

D’Orazio noted that capacity still remains “fairly tight” for many industries in a few classes such as excess property and excess casualty.

“Carriers have reduced their risk appetite and are offering compressed limits, and that hasn’t abated,” he said. “This dynamic has allowed us to push rate, and I think the organisation has done a very good job of making our underwriters aware of the rate thresholds they need to meet or exceed based on our 2022 plan.”

The E&S division produced a combined ratio of 83.8 percent in Q2 2022, compared with 77.2 percent in the prior-year period.

E&S underwriting income was $22.3mn, down from $26.9mn in Q2 2021. D’Orazio noted it was the third consecutive quarter of segment underwriting profit greater than $20mn.