Insurer and reinsurer AXIS Capital Holdings Ltd. (AXS) is expecting that the Thai floods will cause an estimated losses of approximately $48 million in the fourth quarter. The natural catastrophes, during the first three quarters of 2011, are likely to adversely affect the company’s fourth quarter results by $75 million.

For the first nine months of 2011, AXS incurred cat losses of $0.8 billion, 4 times higher than $0.2 billion of cat loss incurred in the year-ago period. Given the exceptionally high incidence of natural calamities in 2011, the company posted operating loss of $221 million or $1.82 per share, in contrast to an operating profit of $429 million or $3.12 per share in the comparable period.

The year 2011 has been very costly for insurers in terms of catastrophes. According to figures from Munich Re, insured catastrophe losses in the United States totaled $35.9 billion in 2011, well above the 2000 – 2010 average of $23.8 billion. The data provided by Insurance Information Institute shows that catastrophe losses totaled $14.1 billion in 2010 and $10.5 billion in 2009.

U.S.catastrophe losses, mostly due to tornadoes, amounted to an unprecedented $27 billion for the first half of 2011. As per its estimates, 2011 is likely to become the 5th or 6th most expensive year in terms of insured catastrophe losses in the US.

However, there is a silver lining to the cloud. Insurance is a cyclical industry with alternate periods of soft and hard pricing cycles. Simply put, a soft market means low insurance rates as the amount of capital chasing the business is too high. Conversely, a hard market implies higher pricing, resulting from lesser capital chasing a higher amount of business.

Currently the industry is in a soft pricing cycle, which began in 2004. Since then, the industry has witnessed low insurance rates. It has suffered underwriting losses evident from the combined ratio, which is expected to be approximately 108.2% in 2011, up from 100.8% in 2010. Combined ratio is a measure of the amount of money paid out in claims as a percentage of premiums written. A combined ratio of greater than 100 signifies underwriting losses. Underwriting in dollar terms was $34.9 billion through the first nine months of 2011, highest since 2001.

Despite a significant amount of capital being used to cover up for losses during 2011, industry experts believe that the trend needs to continue for some time, for the insurance pricing cycle to take a full turn. The recent losses have led to stiff pricing in some lines of business. In some areas, where the losses have been significant, a broad-based price hardening is yet to be seen.

Coming back, despite the soft casualty market conditions, AXIS Capital has managed to perform consistently well, with the help of its diversified book of business, expanding worldwide infrastructure, robust enterprise risk management controls and a highly experienced management team. However, the company’s exposure to large catastrophe losses has put bottom-line earnings under pressure. We will get more color on how the company fared in its fourth quarter earnings release, due on February 7, 2012. Till then, we maintain our Neutral recommendation on the shares of AXIS Capital. The stock also retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

Among other players, Everest Re Group Ltd. (RE) estimates Thai floods to cause a loss of $100million-$125 million to its fourth quarter earnings, Swiss Re sees losses amounting to $600 million, Munich Re pegs the cost of loss at $370 million, while XL Group plc. (XL) is expected to end the fourth and final quarter of 2011 with estimated losses of $135 million – $185 million.

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