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Arch Capital (ACGL) Provides Q2 Catastrophe Loss Estimates

Zacks Equity Research

Arch Capital Group Ltd. ACGL now estimates second quarter pre-tax net catastrophe losses in the range of $205 million to $225 million across its property casualty insurance and reinsurance segments, net of reinsurance recoveries and reinstatement premiums. The expected loss could be due to the company’s exposure to the COVID-19 pandemic, civil unrest claims across the United States and other catastrophic events in the second quarter.

While COVID-19 pandemic losses are expected in the range of $170 million to $180 million, civil unrest claims across the United States and other catastrophic events in the second quarter are expected to result in losses in the range of $35 million to $45 million.

Given the unusual circumstances, COVID-19 losses were classified as a catastrophe. The company had earlier estimated approximately $87 million in COVID-19 losses across the insurance (41%) and reinsurance segment (59%).

The COVID-19 pandemic has affected the company’s businesses, primarily in the mortgage segment in the form of elevated delinquency rates and potentially higher loss experience. The company expects pretax underwriting results of its mortgage segment to remain at low levels during the remainder of 2020.

The Zacks Consensus Estimate for the second quarter is currently pegged at a loss of 1 cent, indicating a decline of 101.3% from the year-ago quarter reported figure. We expect estimates to move south once analysts start incorporating loss estimates into their numbers.

Being a property and casualty insurer, Arch Capital is exposed to natural and man-made catastrophic events including hurricanes, floods, windstorms, earthquakes, hailstorms, tornadoes. In the first quarter of 2020, Arch Capital incurred catastrophe loss of $31.8 million. Given the present financial market volatility on account of the pandemic, underwriting income declined 40.8% year over year to $154 million in the first quarter, while combined ratio deteriorated 980 bps to 91.5%.

Better pricing and reinsurance cover should provide some respite from cat loss incurred by the company in the second quarter.

As of Jan 1, 2020, the company’s insurance operations had in effect a reinsurance program, which provided coverage for certain property catastrophe related losses equal to $256 million in excess of various retentions per occurrence.

Recently, another property and casualty insurer, Chubb Limited CB also estimated second-quarter global net catastrophe loss of $1.807 billion pretax or $1.15 billion after tax, net of reinsurance including reinstatement premiums. The loss can be attributed to the COVID-19 pandemic, severe weather-related events in the United States, as well as civil unrest-related losses in the United States.

Shares of Arch Capital, carrying a Zacks Rank #4 (Sell), have lost 32.6% year to date compared with the industry’s decline of 19%. Diverse product and service portfolio that drives growth of premiums, expansion of U.S. Mortgage Insurance business, along with a robust capital position, should help shares bounce back.


Stocks to Consider

Some better-ranked property and casualty insurers include Fidelity National Financial Inc. FNF and Everest Re Group, Ltd. RE. While Fidelity National sports a Zacks Rank #1 (Strong Buy), Everest Re carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Fidelity National provides various insurance products in the United States and offers title insurance, escrow, other title related services and home warranty insurance. It surpassed estimates in each of the last four quarters, with the average surprise being 21.13%.

Everest Re provides reinsurance and insurance products in the United States, Bermuda, and internationally. It surpassed estimates in each of the last four quarters, with the average surprise being 30.89%.

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