“Underwriters dream about” Q1’s E&S metrics: James River’s D’Orazio
James River CEO Frank D’Orazio has commented that early indicators in 2021 suggest a continuation of the buoyant excess and surplus lines (E&S) rate environment, while the executive also stated he is open to options to reduce exposure to the run-off Uber book.
On an earnings call today, D’Orazio said James River is benefiting from the 16th straight quarter of positive rate change for its E&S business, with a 9.3 percent renewal rate increase in Q4 that compared with a 12.8 percent increase in Q3 2020.
Over those 16 quarters, the insurer’s compounded aggregated rate increase on its core E&S renewable book has been 31.8 percent.
“Our core E&S segment truly hit its stride in 2020, with positive indicators across all major metrics, including 38.9 percent GWP growth in the fourth quarter and 29.5 percent growth for the year. Our submission count increased 11 percent for 2020, and policy count rose 26 percent over year-end 2019,” the executive said.
”Our early Q1 indicators point to a continuation of the buoyant 2020 rate environment as our January rate change was actually more significant than both Q4 and full-year 2020”
James River’s CEO Frank D’Orazio
D’Orazio - speaking on his first earnings call as CEO after taking the helm in November last year - said that the E&S segment experienced 13.7 percent positive rate change on the renewal portfolio for the whole of 2020.
“We feel particularly optimistic about our ability to carry this momentum into 2021,” he said. “Our early Q1 indicators point to a continuation of the buoyant 2020 rate environment as our January rate change was actually more significant than both Q4 and full-year 2020.”
D’Orazio revealed that James River experienced 37 percent GWP growth in January compared with the same month in 2020 while the quote-to-bind ratio increased 26 percent over January 2020.
“These metrics seem to signal that we remain in a market that E&S underwriters dream about,” he said.
“If you had asked me our thesis for the rate environment for 2021 a month ago I would tell you that I thought it was a continuation of some blend of what we saw in Q3 and Q4 maybe with some moderation by the backend of the year. But our January report on rate was much higher, not just in Q4 but on our year-end 2020.”
He said James River is “seeing a lot of opportunities” in segments including excess casualty, excess property, allied health and some professional lines.
“We still think this market has legs between the line size limitations that we’re witnessing in the market, the retrenchment of the standard market across a number of classes, the Lloyd’s Decile 10 review and limitation on stamp size growth and certainly the continued overhang of recent accident years,” he said.
58% of Uber claims closed
James River last night reported an adjusted net operating loss for the fourth quarter of $29.0mn, compared with adjusted operating income of $23.3mn in the same period of 2019.
The insurer’s share price closed up 1.5 percent in trading Friday, at $45.91, on a mixed day for US-listed property casualty stocks.
Preannounced unfavourable reserve development of $86.0mn pushed James River’s combined ratio to 131.0 percent in Q4, a significant deterioration from 93.8 percent in the same period of 2019.
The bulk of the unfavourable development, $75.8mn, came from commercial auto, which is the run-off Uber business that previously represented James River’s largest client. The commercial auto reserved increase primarily related to the 2016 to 2018 years of the run-off portfolio.
D’Orazio said James River saw “heightened reported losses” on the Uber book in Q4, after paid and reported losses had been trending down since it was placed in run-off at the start of 2020.
“The company started to see higher reported losses in the last two weeks of the third quarter and this trend continued and accelerated during the fourth quarter. We believe this trend reflects Covid-driven delays as well as the year-end settlement season, possibly exacerbated by higher unemployment rates,” D’Orazio stated.
James River has now closed almost 58 percent of the claims that were open in the book in January 2020, with the executive saying the insurer is receiving “very few” new claims.
The run-off portfolio accounted for about $300mn of James River’s approximately $1.4bn total group-wide net reserves at the end of 2020.
D’Orazio said he is comfortable with the reserving action James River has taken but hinted he would be open to options that would reduce the exposure to the run-off portfolio. Equity analysts have previously suggested that a reinsurance deal such as an adverse development cover would make sense.
“If there’s an opportunity for us to further reduce any possibility of future emergence or tail risk, or to move to a higher-end of the range of outcomes in a format that makes sense and is economically viable, then we’re open to exploring that option,” he said.
“I don’t want a run-off book to be an ongoing distraction and drag on the organisation. I want the full resource of the company completely focused on the opportunities in this market, to continue to grow our core E&S lines profitably, and scale our fronting business,” he added.
James River’s specialty admitted insurance GWP grew 11 percent in Q4 to $104.9mn, driven by a 14 percent increase in premiums written in the fronting business. Fee income in the fronting business grew 22 percent during the whole of 2020.
D’Orazio noted that despite the fourth quarter charge, the E&S segment produced a 97.7 percent combined ratio while the specialty admitted segment had a combined ratio of 92.7 percent. The combined ratio was 113.7 percent in the casualty reinsurance segment, however.
“Our overall corporate results are clearly disappointing and not consistent with the company’s unwavering focus on underwriting profits,” he said.
“Our fourth quarter charge understates what was otherwise a year of significant accomplishment for the organisation. I remain both enthusiastic about the positive fundamentals that underlie our ongoing business and very bullish on our prospects for 2021.”