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James River Group Holdings Ltd. swung to a net loss of $25.2 million in the third quarter of 2019 from a profit of $19.6 million a year ago due to a $50 million charge related to its largest account, Uber Technologies Inc., which was dropped midway through the quarter.
J. Adam Abram, chairman and CEO of the Pembroke, Bermuda-based excess and surplus lines insurer, wasted no time addressing the snafu on the company’s Thursday morning earnings call.
“Those of you who have followed us for a while know that we pride ourselves on our underwriting standards, and this loss, which was driven by the lack of profitability on the Uber account, is not acceptable to us,” he said at the call’s outset.
“We decided it was not in the long-term interests of our company and our stakeholders to continue with Uber,” Mr. Abram said. “In 17 years since we founded James River, we’ve made underwriting profits in all but two years, and we’ve never reported a loss of this magnitude before.”
“We’ve cancelled the account, and after taking a reserve charge, we expect to resume producing low double-digit returns on tangible equity in 2020,” he said.
Mr. Abram then explained further and shouldered some of the blame for the loss.
“In Uber, we wrote a new type of risk that initially seemed to be highly profitable based on the data available to us,” he said. “But Uber’s business and the underlying risk evolved very quickly. Our underwriting assumptions and the related pricing did not keep pace with changes in Uber’s business.”
“The risk associated with Uber’s business model shifted as the company expanded and added tens of thousands of drivers, and evolved beyond just ride hailing,” Mr. Abram said. “All of these factors created a situation in which the risk became too large in absolute terms given the size of our company. And, candidly, in some years, we mispriced the risk.”
He added the insurer expects to process some 18,500 claims during the runoff of the Uber business.
There was overall unfavorable reserve development of $57.0 million in the third quarter compared with unfavorable reserve development of $12.2 million in the prior-year quarter, James River said in its earnings statement.
The reserve development in the quarter included $50.0 million of adverse development in the excess and surplus lines segment, driven by the 2016 and 2017 accident years of its commercial auto line of one large account, Rasier LLC, in the two prior underwriting years, the statement said.
Rasier LLC is an affiliate of Uber and is the account that was canceled Oct. 8.
Third-quarter gross written premiums rose 38.6% to $388.2 million compared with a year ago, while nine-month gross written premiums rose 26.2% to $1.10 billion compared with the same period last year.
The insurer’s third-quarter combined ratio soared to 118.8% from 96.0% a year ago and the nine-month ratio also worsened, to 103.9% from 96.6% a year ago, financial data from the statement showed.
Net investment income was $17.9 million, up 9.1% from the prior-year quarter. Nine-month investment income rose 19.7% to $54.8 million compared with the same period a year ago, the data showed.
Surplus lines insurer James River Insurance Group Holdings Ltd.’s shares fell more than 20% early Wednesday following its announcement Tuesday that it would drop its largest client, an affiliate of Uber Technologies Inc.