Uber exit to have “short-lived” negative effect on James River 2020 profitability: JMP

James Rivers’ decision to cancel contracts with its largest customer Uber is set to cause a reduction in 2020 earnings per share, but the dip will be temporary as the carrier turns its focus to core and “much more profitable” E&S business, according to a JMP Securities analyst.

Matthew Carletti said in a note this morning (9 october) that yesterday’s announcement from the carrier came as a surprise, but was ultimately the right move.

“Ultimately, we believe management came to the conclusion that over the long run there was not enough margin to be had in Uber’s business to continue forward, particularly when the core E&S business is seeing significant opportunities and is James River’s core competency,” said JMP in a note.

The analyst continued that while the cancellation would leave James River short some $300mn in net written premiums, the potential to generate more business once the “distraction” of its Uber contract had passed would be a positive step for James Rivers.

“While the removal of Uber’s $300m NWP will lead to a reduction in 2020 EPS, we believe it will be short-lived as the fast-growing core E&S business is much more profitable.

“Lastly, we think not having to sustain an ongoing business relationship, on the margin, will allow James River to more aggressively handle Uber claims and be less accommodative to Uber’s public relations focus,” added Carletti.

JMP maintained its market outperform rating for James Rivers, but urged caution until the carrier’s planned investor call in November, when reserve performance will be clearer.

“We believe there are competing forces at work here – the negative of the sizable reserve charge in the quarter with the potential remaining for more down the road, against the positive of taking the initiative to exit an underperforming book of business in favor of focusing on the significantly more favorable market conditions in the company’s core competency of E&S,” the note said.

It continued: “If management is successful in cordoning off the Uber exposure… and investor focus shifts to the fast-growing and highly profitable E&S business, we could see significant potential upside in the valuation of JRVR shares.

“Conversely, if management continues to be in the wrong on setting Uber reserves, we believe the market could quickly lose confidence… While we expect the shares to trade downward in the immediate aftermath of this news, we believe the move to cancel the Uber contract will likely keep the market focused on the E&S opportunity, at least so long as the Uber reserves hold, which at this point remains a longer-term question.”

JMP’s analysis follows yesterday’s news that specialty insurer James River has given notice of early cancellation of all insurance policies issued to its largest customer Rasier LLC and its affiliates – part of Uber Technologies – after the account underperformed on profitability.

The account contributed $294.3mn of gross written premiums (GWP) to the insurer in 2018, representing 45 percent of its excess and surplus lines (E&S) writings and 25 percent of its overall book.

In a statement, the carrier said it was cancelling the policies effective at year-end. It added that a majority of the insurance policies were due to expire on 29 February 2020.

James River revealed a reserve charge of $55mn to $60mn that it said was primary related to the commercial auto book of business in its E&S segment for the 2016 and 2017 underwriting years.

The remainder of the losses, less than $10mn, relate to its casualty reinsurance segment.

The reserve charge was pre-tax and net of reinsurance recoveries and reinstatement premiums.