AXIS Capital (AXS) Posts Preliminary Catastrophe Loss Data

AXIS Capital Holdings Limited (NYSE:AXS) has recently announced preliminary estimates of its total net financial impact from fourth-quarter 2017 catastrophe and weather-related losses as well as its initial assessment of the recently revised tax cut.

The property and casualty (P&C) insurer has projected total catastrophe loss, net of tax and estimated recoveries from reinsurance and retrocessional covers including the impact of estimated reinstatement premiums to be $130 million. Such losses are expected to noticeably impact the company’s fourth-quarter results. The Zacks Consensus Estimate is currently pegged at $1.11, which reflects a year-over-year decline of 2.6%.

The loss comprises $54 million stemming from the Northern California wildfires and $38 million each from Southern California wildfires and other weather-related events. The company had earlier expected loss from Northern California wildfires to be between $$35 million and $45 million. Both Insurance and Reinsurance segments have suffered due to exposure to the catastrophe event.

Exposure to catastrophe events put a considerable dent in the company’s underwriting results, rendering volatility in the company’s earnings. The fourth quarter too will not be an exception. The company had already suffered underwriting loss of $700 million with combined ratio deteriorating 2240 basis points year over year through the first nine months. The loss stemmed mainly from hurricanes Harvey, Irma and Maria and also the two major Mexico earthquakes.

Among other P&C insurers having released respective fourth-quarter catastrophe loss estimates, Arch Capital Group Ltd. (NASDAQ:ACGL) projects pre-tax catastrophe loss between $60 million and $75 million while XL Group Ltd (NYSE:XL) expects to incur a catastrophe loss of $315 million from the Californian wildfires and other cat events. This apart, Chubb Limited (NYSE:CB) estimates pre-tax catastrophe loss of about $320 million ($249 million after-tax), stemming from natural catastrophes including the wildfires.

Last year, the P&C insurers faced the biggest brunt of a massive catastrophe loss, having largely impacted the industry and qualifying the year as the costliest in terms of incurring weather-related loss. Notably, per Swiss Re, total economic loss from natural and man-made disasters in 2017 are projected at $306 billion. The wildfires in the fourth quarter also added to the woes with catastrophe modeling firm AIR Worldwide estimating losses to reach up to $10.5 billion. However, thanks to a cat loss of huge magnitude, insurers braved price hikes, which remained flat in the past several quarters due to a not so active catastrophe environment. This in turn will help such insurers generate more premiums and mitigate cat loss in the near term.

Per the Tax Cuts and Jobs Act of 2017, effective January 2018, the corporate tax rate was slashed to 21% from the pre-existent 35%. As a result, this Zacks Rank #5 (Strong Sell) will incur a charge of $42 million in the fourth quarter of 2017 due to revaluation of its net Deferred Tax Asset. However, the charge will not have a material impact on the company’s fourth-quarter net income.

Shares of AXIS Capital have lost 12.3% against the industry’s increase of 6.8% since the onset of the fourth quarter of 2017. The stock has also witnessed the Zacks Consesnus Estimate for 2018 earnings being moved nearly 0.7% south in the last 60 days. Nonetheless, we expect the company’s focus on expanding its business lines, strategic acquisitions to fuel improvement in premiums and a solid capital position to turn the stock around in the near term.

AXIS Capital is expected to report fourth-quarter results on Feb 7. However, our proven model does not conclusively show that the stock is likely to beat on earnings this season. This is because it has a bearish Zacks Rank of 5, which lowers the predictive power of ESP and an Earnings ESP of 0.00%, which makes surprise prediction difficult.

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