Q3 earnings commentary highlights buoyant E&S market

At a time when the excess and surplus (E&S) lines sector is seeing record levels of business flowing from the admitted market, delegates heading to San Diego for this year’s WSIA Annual Marketplace will be buoyed by recent bullish market commentary from leading executives around further growth in the sector.

Senior figures from wholesalers and E&S carriers including Ryan Specialty Group, WR Berkley and James River, as well as new entrants like Palomar and reinsurers such as RenaissanceRe have all confidently predicted that the sector will continue to grow, while pricing is expected to remain on the rise.

On a call to discuss the newly public company’s third quarter results earlier this month, Ryan Specialty Group president Tim Turner said the firm is ready for what is expected to be a surge of property catastrophe business into the wholesale market across both its brokerage and underwriting operations, with the significant losses incurred this year set to generate further dislocation in the sector.

Turner said earlier this month that the property market is continuing to firm.

“It was already very firm… but aspects of these storms [like Uri in Texas and Hurricane Ida] were poorly modelled by many carriers. And so we see a constriction in the marketplace, with more dumping and shedding from the standard markets,” Turner explained.

E&S business flow accelerates in Q3

WR Berkley CEO Rob Berkley said the amount of business flowing from the admitted markets into the excess and surplus lines sector had continued to accelerate during the third quarter.

“We continue to see a growing flow of opportunities, both in specialty and even more so in E&S,” the executive said on a call with analysts to discuss those results.

“There’s nothing that leads us to believe that [the] tide is going to reverse anytime soon,” he added.

WR Berkley – the fourth largest surplus lines carrier excluding Lloyd’s as per AM Best – reported year on year net premiums written (NPW) growth of 24 percent to $2.33bn in Q3 2021 and Berkley said the flow of business from the admitted to E&S markets is continuing to increase.

“It’s certainly more robust now than it was, without a doubt, last year. It’s more robust than it was in Q1. And quite frankly, it’s notably more robust than it was in Q2. So we’re seeing that continue to accelerate,” he stated.

And at James River - ranked 20th in AM Best list of the largest surplus lines carriers ex-Lloyd’s in 2020 - E&S gross premiums written increased by 21.3 percent year on year to $217.7mn in Q3 2021.

During 2021’s third quarter, James River saw E&S renewal pricing increases that averaged 8.7 percent from the prior year period, with nearly all underwriting divisions reporting positive growth and rate increases. The third quarter of 2021 was the 19th consecutive quarter of renewal rate increases for James River’s E&S business, compounding to 45.9 percent over the same period.

During James River’s second quarter 2021 earnings call, the company’s CEO Frank D’Orazio said there had been a slowdown in new E&S business volume in May, but the executive said that returned to normal in June and July, and that continued into Q3.

“Just as importantly, the macroeconomic conditions that have created this market hardening still exist today,” D’Orazio said on the Q3 2021 earnings call at the beginning of this month.

“Concerns of social inflation, the impact of climate change, a continued low-interest-rate environment and the hangover effect associated with soft market era underwriting, lead me to believe that the market’s current pricing and underwriting discipline should continue well into 2022,” D’Orazio said.

Start-ups and reinsurers bullish

Following Palomar’s Q3 2021 results call, CEO Mac Armstrong predicted E&S market pricing was rising.

E&S all risk pricing increased by 20 percent in 2021’s third quarter, Armstrong said on the call.

“I think now you’re looking at 25 percent up, if not more,” Armstrong said.

“We believe whether it’s excess property or excess liability, there is an almost in some ways a reinvigoration of the hard market, and that gives us confidence that we’re going to maintain pretty good rate integrity through 2022,” Armstrong, whose company made its entry into the E&S market in 2020, said.

And reinsurers are also confident about the opportunities that lie ahead.

RenaissanceRe’s president and CEO Kevin O’Donnell on his company’s third quarter 2021 results call, noted how the reinsurer’s “other property” portfolio, which largely consists of catastrophe-exposed excess and surplus insurance lines business written on a proportional basis, had already experienced considerable dislocation and seen “substantial” rate increases in the lead up to Q3.

“Given the active [catastrophe] quarter, we expect this favorable trend to continue,” O’Donnell said.

“This is the most impacted and dislocated segment of the property market,” he added.

Uncertainty fuels growth

The E&S market historically sees growth during times of stress and uncertainty. Even before the onset of the pandemic, outsized property catastrophe losses – including those outside the peak zones from so-called secondary and tertiary perils – have helped to fuel rampant growth in the surplus lines space as admitted carriers shed business which then has to find a home elsewhere.

Other contributing factors such as economic inflation, social inflation and its impact on nuclear jury verdicts, as well as cyber ransomware attacks have further fuelled the surplus lines sector’s growth as the standard market retrenched, slashed limits and came off risks.

AIG’s wholesale arm Lexington saw its property and casualty premium increase by more than 30 percent in Q3 2021.

Over at Chubb, its E&S wholesale business Westchester reported Q3 2021 rate increases of 16 percent overall, with property rates up 13 percent and casualty up 20 percent. Financial lines rates were up some 21 percent, the company’s executive chairman and CEO Evan Greenberg said on his firm’s third quarter 2021 results call.

Record premium volumes at stamping offices

The Surplus Lines Stamping Office of Texas (SLTX) has repeatedly reported record levels of surplus line premium month after month. The SLTX, which is the second largest of the US surplus lines service and stamping offices behind California, posted $7.59bn of premium volume during the first 10 months of 2021, up 14.7 percent on the prior year period.

As data from AM Best shows, surplus lines direct premium written (DPW) reached $66.1bn in 2020, up 17.5 percent compared with the prior year.

That came after surplus lines DPW hit $56.3bn in 2019, growth of 11.2 percent year on year, while 2018’s DPW of $49.9bn also represented an 11.2 percent increase compared with 2017.

The consensus among many in the market is that the rampant E&S growth of recent years will continue, and few will be surprised if a similar level of premium increase is recorded for 2021.