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Tax Cut & Cat Loss Make an Impact on Arch Capital in Q4


Arch Capital Group Ltd ACGL has announced estimated pre-tax catastrophe loss for the fourth quarter of 2017 as well as the impact of the recently revised tax cut.

The company projects pre-tax catastrophe loss between $60 million and $75 million for the period. The losses stemmed from wildfires of Northern California as well as other catastrophic events.

Being a property and casualty insurer, Arch Capital could not escape the vagaries of natural disasters inducing volatility in underwriting results. Last quarter was also bruised by $319.8 million cat loss, having stemmed from a devastating hurricane activity; inducing an underwriting loss of $142.2 million. Combined ratio deteriorated 2430 basis points. Through the first nine months of 2017, the company’s underwriting income declined 26.3% from the same period in 2016.

Among other property and casualty insurers, XL Group plc XL estimates pre-tax catastrophe loss of $250 million while RenaissanceRe Holdings Ltd. RNR expects to incur catastrophe loss of $90 million from the California wildfires.

President Donald Trump has signed the Tax Cuts and Jobs Act into law on Dec 22, 2017. This resulted in slashing the corporate tax rate to 21% from 35%, effective from January 2018 onward. As a result, Arch Capital expects to write down a portion of its deferred tax asset by about $15-$20 million in the fourth quarter of 2017.

Also, Arch Capital projects effective tax rate on pre-tax operating income between 17% and 20% for the fourth quarter. This, in turn, is likely to boost the bottom line.

Recently, Hartford Financial Services Group, Inc. HIG announced that this rate cut is anticipated to affect its net deferred tax asset position, based on its current accounting guidance as well as net deferred tax assets at the end of the first nine months of 2017. This is also likely to hit its risk-based capitalization levels. The company expects fourth-quarter results to witness a reduction of nearly $850 million due to the impact of the tax cut.

Shares of Arch Capital have lost 11.4% versus the industry’s increase of 8.3% since the onset of the fourth quarter of 2017. Nonetheless, the stock has seen the Zacks Consensus Estimate for 2018 earnings being moved north 1.3% over the last 30 days. Robust premium growth on a compelling product portfolio, expansion of U.S. Mortgage Insurance business, solid inorganic growth and a strong capital position should help the stock bounce back. Arch Capital carries a Zacks Rank #3 (Hold).

The company is scheduled to report fourth-quarter results on Feb 12. The Zacks Consensus Estimate for earnings in the quarter to be reported is pegged at $1.28 per share on revenues of $1.2 billion, reflecting a 13.3% year-over-year bottom-line growth and an 11.7% increase in the company’s top line.

Our proven model shows that the company is likely to beat estimates this quarter per an ideal combination of the two strong ingredients: a Zacks Rank of 3, which increases the predictive power of ESP and an Earnings ESP of +1.02%, which makes us confident of a likely positive earnings surprise.

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