Arch revises Q4 cat loss estimates; anticipates write down due to tax changes

Arch Capital Group has established a range of pre-tax losses of $60 million to $75 million, net of reinsurance recoveries and reinstatement premiums, the catastrophic events in the fourth quarter of 2017. These included a series of wildfires in California and a series of smaller catastrophe events occurred around the globe.

This new estimate incorporates and updates the $30 million to $55 million range previously disclosed by the company in its Quarterly Report on Form 10-Q for the 2017 third quarter.

The company explained that the previous range reflected the first series of California wildfires only (also referred to as the Tubbs fire), whereas this current range reflects the Tubbs Fire, the second series of California wildfires (also referred to as the Thomas Fire) and other catastrophic events from around the globe.

But it also stressed that there remain significant uncertainties surrounding the number of claims and the scope of damage for both the Tubbs and Thomas Fires, as well as the other global events.

Arch said it entered into intercompany loss portfolio transfers (LPTs) effective on December 31, 2017 that transferred approximately $1.35 billion of net retained reserves for losses and allocated loss adjustment expenses between its subsidiaries. Given that these transactions involve two related parties, and in accordance with GAAP, they eliminate in consolidation. These transactions support the Company’s ongoing capital management strategies.

As a result of the reduction in the US corporate tax rate from 35 percent to 21 percent effective January 1, 2018 pursuant to the Tax Cuts and Job Act of 2017, the company anticipates that it will write down a portion of its deferred tax asset by approximately $15 million to $20 million in the 2017 fourth quarter. Such charge will be excluded from after-tax operating income available to Arch common shareholders, a non-GAAP financial measure, as it is not reflective of operations.

Additionally, the company estimates that the effective tax rate on pre-tax operating income for the fourth quarter of 2017 will be in a range of 17 percent to 20 percent. This estimate is based on both statutory income tax rates applied to underwriting income, expenses and investment returns by jurisdiction, as well as an amalgam of discrete items that includes, but is not limited to, the impact of vested or exercised equity compensation, changes in judgment with respect to valuation allowances and changes related to the LPTs referenced above, the company said.

The effective tax rate for the 2017 fourth quarter reflects an increased proportion of US based operating income. The losses related to the 2017 fourth quarter catastrophic occurrences emanated mostly from its non-US underwriting operations.

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