James River Group Holdings, Ltd. JRVR stock plummeted on Wednesday, dropping more than 20%, after the company said it is canceling all insurance policies with its largest customer, a subsidiary of Uber Technologies Inc UBER.
The decision led one sell-side firm to downgrade the stock to sell, although another said it was a good move and reaffirmed a more bullish stance on the insurer.
The Analysts
B. Riley FBR’s Randy Binner downgraded the stock from Neutral to Sell and lowered the price target from $45 to $40.
JMP Securities analyst Matthew Carletti reiterated a Market Outperform rating and $50 price target.
The Takeaways
James River Group, a Bermuda-based insurance company, said after the close Tuesday that it will cancel all policies held by Uber subsidiary Rasier LLC because of unfavorable loss experience.
The insurer’s third-quarter results will include a $55 million to $60 million adverse reserve charge related to the cancellation of the Uber account.
The reserve charge will amount to about $2 a share, Binner said in a Wednesday note. While “manageable,” the analyst said concern around reserve adequacy is likely to suppress James River's share price in light of the significant cancellation.
JMP: Excess, Surplus Lines More Profitable
But Carletti found a positive and said James River is shedding a line of business that has fallen short of profit goals.
The company’s core Excess and Surplus lines of business are “seeing the best market conditions in decades,” the analyst said.
Carletti acknowledged a larger-than-expected charge, and said it's unclear whether there will be further reserve charges.
"We continue to believe that in the intermediate term (beyond what could be a difficult day ahead for the stock) the market focus on strengthening conditions in the core E&S business will ultimately win out."
Canceling the Uber contract made sense, the analyst said.
“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,” Carletti said.
“While the removal of Uber’s $300 million net premiums written 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.”
Price Action
James River stock was down 22.67% at $37.84 at the time of publication.
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