James River says Uber overhang eliminated after actuarial work and reserve charge
Recently appointed James River Group Holdings CEO Frank D’Orazio has said the specialty carrier “got it wrong” when it led the way in underwriting rideshare business but that the reserving actions it has taken have eliminated the overhang and positioned it for profitable growth in its core E&S business.
Speaking on a pre-recorded earnings call following the Bermuda-domiciled company’s results release last week, D’Orazio said the insurer should not be defined by the recent experience that led it to put a large commercial auto account – understood to be Uber – into run-off at the end of 2019.
James River has subsequently taken significant reserve charges relating to the run-off account, most recently with a $170mn hit in its Q1 earnings, which drove it to a heavy quarterly loss and prompted AM Best to downgrade the insurer from A to A-.
“Several years ago we were at the vanguard of underwriting a new sector of the commercial auto industry without the benefit of past loss history, promulgated rates or loss triangles, and we got it wrong.
“My point in all this is that this experience should not define James River, a company with a rich underwriting culture and commitment to excellence. And I look forward to working with the management team to continue to make the company larger, stronger and more profitable in the years to come,” said the former Allied World executive, who joined the insurer in November 2020.
Legacy solutions path not taken yet
On James River’s fourth-quarter earnings call D’Orazio had suggested the carrier was interested in exploring the potential to reduce tail risk and move to a higher end of the range of outcomes on the portfolio, including through potential solutions in the run-off market.
But in the first-quarter earnings commentary he said: “I believe that many of the structures potentially available on the legacy reinsurance marketplace could require a meaningful risk sharing or co-participation feature, frictional costs and additional premium features as well as a defined limit.
“I feel very comfortable that our new ultimate reserve levels are likely at similar levels as the legacy market may view,” he explained.
D’Orazio said the decision to strengthen the commercial auto run-off portfolio reserves by $170mn “wasn’t taken lightly”, after the insurer also added meaningfully to reserves with a $75.8mn charge in Q4 2020.
He said that previously James River’s actuarial work related to the terminated account had been based on industry data, pricing data, experience data, average claim severity data and blended methodologies.
“However, the continuation of highly elevated reported losses in the first quarter of 2021 led us to conclude that using only our own loss experience and our paid and incurred reserve methodologies rather than the array of inputs that we had used in prior quarters, and giving greater weight to incurred methods, would give us a better and more conservative estimate of ultimate loss on this account,” he stated.
D’Orazio said that James River’s run-off situation in commercial auto differs from those experienced by other carriers.
The run-off portfolio on the book consists of one very large account that has now been in run-off for over 18 months, rather than “numerous failed underwriting ventures”.
Reserving actions
The insurer detailed the actions taken in an accompanying investor presentation, where it said that it had seen a surge in paid and incurred losses in Q4 2020 and Q1 2021 following delays in reporting due to Covid-19 as well as higher severity.
Most of the recent adverse development stems from accident years 2018 and 2019, just before the book was put into run-off.
James River began insuring rideshare business in 2013 with one commercial account – Uber – growing significantly in later years, as commercial auto came to represent 28 percent of consolidated gross written premium in 2019.
In the presentation, the insurer said the recent claims emergence pattern and internal actuarial work gives it significant comfort around current carried reserves.
It noted that reserves are now greater than carried reserves at the end of 2019, with the reserve balance increased by a third since Q4 2020 to $450mn.
The current reserve mix includes 42 percent incurred but not reported (IBNR) reserves and 58 percent case reserves.
James River also said that it is closing run-off related claims quickly, and has closed 60 percent of open claims since the large account went into run-off in December 2019, with 8,000 current open claims as it closes 100 claims a week.
Meanwhile, the more than $55,000 average reserve per open claim is “meaningfully higher” than the $39,000 net paid per open claim since 1 January this year.
Core E&S growth targets $1bn GWP
In the presentation, James River said: “We believe this overhang has been eliminated, and that we are now fully able to focus on our prospective business and what continues to be a historically strong E&S market.”
On the call, D’Orazio highlighted a core E&S combined ratio of 83 percent delivered in the first quarter.
“This is a reminder of what our overall E&S segment is capable of from an earnings perspective now that our run-off portfolio has been addressed with certainty,” he said.
And he said that the core E&S division, which has almost doubled in size over the last two years to $669.1mn, should be approaching $1bn by the end of next year.
The executive also said the division has seen an exposure-adjusted decline in claims frequency of between 21 percent and 33 percent depending on the exposure metric.
The presentation detailed compound aggregate rate increases on renewal business and said the insurer is benefiting from significant rate hardening and strong submission flow as major industry competitors retrench and standard market writers recalibrate their risk appetite.
The insurer has also been gaining traction in its fee-based fronting specialty admitted segment, with 23.6 percent year-on-year growth to $110.9mn.
Growth achievable despite downgrade
James River was bullish that it would be able to maintain its growth trajectory despite the recent downgrade from A to A- by AM Best.
It said that it had operated with an A- financial strength rating from its inception in September 2002 until it was upgraded to A in July 2016.
It had grown at a compound annual growth rate of 23 percent during the period, albeit that CAGR had accelerated to 25 percent after being upgraded.
“Our competitors in our E&S segment operate with a range of financial strength ratings, although in the fronting space the majority are rated ‘A-’,” the presentation added.