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Arch Capital (ACGL) Expects $110-$130M Catastrophe Loss in Q4

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Arch Capital Group Ltd. (ACGL - Free Report) announced pre-tax gross catastrophe loss estimates of $110-$130 million, stemming from Hurricane Michael and the California wildfire. The insurer’s fourth-quarter results will reflect these losses.

Being a property and casualty insurer, Arch Capital is vulnerable to natural disasters inducing volatility in underwriting results. In the last reported quarter, the company incurred net catastrophe losses of $58.2 million from Hurricane Florence and Typhoon Jebi in Japan. However, combined ratio, a measure of underwriting profitability, improved 2950 basis points, given the company’s underwriting excellence. In fact, operating earnings per share in the third quarter rebounded from the year-ago loss owing to favorable underwriting results and higher net investment income.

According to a report published in Insurance Journal on Dec 12, 2018, insured losses from the California wildfire came in at $9.05 billion, while catastrophe modeler CoreLogic estimated total losses resulting from the wildfires in Northern and Southern California between $15 billion and $19 billion. Per reports from Florida Office of Insurance Regulation, Hurricane Michael is estimated to cause about $4.3 billion in insured losses.

Insurer Mercury General Corporation (MCY - Free Report) estimates pre-tax gross catastrophe loss of $253 million, stemming from Camp Fire and Woolsey Fire. RLI Corp. (RLI - Free Report) projects cat loss between $22 million and $27 million, net of reinsurance. AXIS Capital Holdings Limited (AXS - Free Report) expects preliminary cat loss between $100 million and $120 million, net of estimated recoveries, owing to reinsurance and retrocessional covers, and including the impact of estimated reinstatement premiums for fourth-quarter 2018.

The Zacks Consensus Estimate for the fourth quarter is currently pegged at 45 cents, flat year over year on 1% higher revenues. However, we expect the estimates to move south, once analysts start incorporating loss estimates into their numbers.

Concurrently, Arch Capital projects effective tax rate on pre-tax operating income for the fourth quarter of 2018 between 12% and 15%.

The company is set to report fourth-quarter 2018 results on Feb 12. Our proven model does not conclusively show that the company is likely to deliver a positive surprise in the to-be-reported quarter. This is because, though its favorable Zacks Rank #3 (Hold) increases the predictive power of ESP, the company's Earnings ESP of -42.22% makes surprise prediction difficult. It came up with positive earnings surprises in the trailing three quarters.

Shares of Arch Capital have lost 8.5% year to date, wider than the industry’s decline of 6.5%. Nonetheless, diverse product and service portfolio that drives the growth of premiums, the expansion of U.S. Mortgage Insurance business, along with a robust capital position should help the stock rebound.



You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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