Arch Capital Group Ltd. reported sharply lower profits in the fourth quarter of 2018 due to the catastrophic impact of Hurricane Michael and the California wildfires.

The Hamilton, Bermuda-based insurer and reinsurer reported net income available to common shareholders of $126.1 million in the fourth quarter of 2018, down 38% compared with the $203.5 million reported for the same period in 2017, according to the company’s fourth-quarter earnings report released after the market close on Tuesday.

The company’s 2018 fourth-quarter results reflect estimated pre-tax net losses from current accident year catastrophic events of $118.2 million, net of reinsurance and reinstatement premiums, primarily related to Hurricane Michael and the California wildfires as well as other minor global events, according to the report. Actual losses may increase if Arch Capital’s reinsurers fail to meet their obligations or its reinsurance protections are exhausted or are otherwise unavailable, the company noted.

Net income totaled $713.6 million for the full year of 2018, up 26% compared with the $566.5 million reported in 2017, according to the report.

On average, Jan. 1 property/casualty renewals were “positive but below expectations given the record level of insured cat losses that were reported in the past two years,” Marc Grandisson, president and chief operating officer of Arch Capital, said during the company’s fourth-quarter earnings conference call on Wednesday. “Across the industry, loss affected property accounts saw rate increases of 10% or more while some property accounts in Europe were flat to down 5%. Hidden within the underlying property cat average industry rate changes, there are some signs of tightening capacity within the retro and facultative markets, but in many cases rate levels relative to risk remain inadequate to deploy additional capital from our perspective.”

“There is reason to believe that some rate improvement may occur throughout the year as the market absorbs the recent history of large cat losses,” he added. “However, uncertainty with respect to both the expected amount of capital and the return on capital within the property cat market make it difficult to predict where cat rates will be by year-end 2019.”

Company officials were asked about Arch Capital’s risk appetite and pricing in California for both property risk and liability exposures related to the utility sector – a reference to expected insurance industry losses associated with the PG&E bankruptcy and wildfire losses.

“On the liability side, it’s a little bit easier to answer,” Mr. Grandisson said. “There are a lot of question marks in the industry as to whether these are insurable and at what level and at what price. As you know, it’s not a big market. Currently, the player that has been identified as being liable for that loss is going through a lot of difficult times so we’ll see how that develops. This is still a very small market in the broader scheme of things.”

“As far as the property is concerned, it’s really uncertain,” he continued. “The capital supply is still plentiful. There were talks … that there might be some changes to the modeling of California wildfire. But it’s still very early. People are still trying to figure out what they have and what it means in their modeling. It’s a little bit isolated to one area of the country and people have a way to manage their portfolios and deploy capital in other areas. It’s a very hard question to answer because we don’t know what the supply of capital is going to be by mid-year. Logic would dictate it should go up to some extent, but we’ll see what happens.”

The company’s combined ratio worsened by 1.5 percentage points to 87.8% in the fourth quarter of 2018, according to the report.

Arch Capital reported net premiums written of $1.3 billion in the fourth quarter of 2018, up 17.2% from the $1.1 billion reported in the fourth quarter of 2017, according to the report.

Net premiums written in its insurance segment rose 8.5% to $832.8 million in the fourth quarter of 2018, which reflected growth in most lines of business partially offset by lower writings in contract binding, higher cessions in professional lines and a non-recurring item in the 2017 fourth quarter within national accounts, according to the report. The segment’s combined ratio worsened by 4.5 percentage points to 102.8% in the fourth quarter due to the catastrophe losses.

Net premiums written in the company’s reinsurance segment rose 41.5% to $409.3 million in the fourth quarter of 2018, including $25.6 million of reinstatement premiums and premium adjustments that were substantially earned, non-recurring retrocession premiums of $10 million and continued growth in casualty business, other specialty business and non-catastrophe property business, according to the report. The segment’s combined ratio worsened by 16.4 percentage points to 110.9% from the same period in 2017 due to the impact of the catastrophic wildfire and hurricane activity.

Arch Capital is changing its incentive compensation practices in 2019 to distribute equity grants made to employees historically in the second quarter to the first quarter, which will lead to a “small distortion in the timing of our operating expenses” with the expected shift of about $11 million to $13 million in operating expenses from the second quarter to the first quarter this year, Francois Morin, chief financial officer and treasurer, said during the call.