Insurance stocks were something of a mixed bag the week before corporate earnings season begins, though one stood out with a major decline after negative company news.
The S&P 500 rose 0.62% to 2,970.27 for the week ending Oct. 11, while the SNL U.S. Insurance Index dropped 0.60% to 1,047.23.
James River Group Holdings Ltd.'s shares plummeted 22% a day after the company announced it would cancel all insurance policies issued to Rasier LLC and its affiliates, which includes the ride-hailing conglomerate Uber Technologies Inc. Rasier LLC is James River's largest customer.
KBW analyst Meyer Shields told S&P Global Market Intelligence that there are two "superficially unrelated aspects" to the move. He pointed out that there has been deterioration in James River's reserves for the 2016 and 2017 accident years, but the company has reported that 2018 and 2019 were performing to expectations.
S&P Global Market Intelligence data shows that the company has been scaling up its commercial auto business since 2016 and commercial loss estimates have been rising.
"This was the first time I can think of where we're hearing that current business isn't adequately profitable, because what they've been saying for a while is that more recent years are performing as expected," Shields said. "I guess expected is not good enough, but it's a little bit surprising."
Shields said one big question going into earnings is what canceling the ride-hailing business means for profitability on the rest of the book and what is driving management confidence in more recent accident years, given that prior years have continued to worsen. He suggested the company emphasize that it is a very positive time for everything in its core excess and surplus segment aside from commercial auto. Outside of Uber, they have a "longtime track record of very conservative reserving," Shields said.
The KBW analyst was not surprised, however, by the sharp decline in James River's stock. Investors are now reevaluating their position on the company given "earlier, more optimistic expectations" of the Uber business, Shields said.
Two other sell-side analysts cut their calls on the stock this week. B. Riley FBR analyst Randy Binner downgraded James River to "sell" from "neutral," while SunTrust Robinson Humphrey analyst Mark Hughes lowered his recommendation to "hold" from "buy."
James River's stock lost nearly a quarter of its value during the week, finishing down 24.94%.
Although Argo Group International Holdings Ltd.'s shares generally held steady through a monthslong proxy battle with Voce Capital LLC, they took a downward turn this week after word broke that the company's independent directors are conducting a review of Argo's governance and compensation practices. The review comes after the company made changes to its compensation-related policies in August. Argo was also hit by a subpoena issued by the SEC requesting documents related to the company's disclosure of certain compensation-related perquisites.
Argo said it is fully cooperating with regulators and does not expect any material impact to its financial position or operations. Its stock slipped 2.52% for the week.
In the managed care space, there were several companies that ended the week up modestly. Molina Healthcare Inc., Centene Corp. and Cigna Corp. shares rose 0.53%, 1.61% and 1.09%, respectively.
UnitedHealth Group Inc., which is set to kick off earnings season for insurers next Tuesday, also ended the week trading up. The health insurer's shares inched up 1.03%.
Health insurance broker eHealth Inc. dropped 10.26%, placing it among the biggest losers of the week.
