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Arch Capital (ACGL) Up 2.7% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Arch Capital Group (ACGL). Shares have added about 2.7% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Arch Capital due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Arch Capital Q2 Earnings Beat Estimates, Premiums Rise

Arch Capital Group Ltd. reported second-quarter 2018 operating income per share of 59 cents, which outperformed the Zacks Consensus Estimate by 13.5%. Moreover, the bottom line surged 47.5% from the prior-year quarter.

The quarter benefited from a sturdy performance at the Insurance and Reinsurance segments. Higher net investment income as well as favorable underwriting results added to this upside.

Including net realized loss of 15 cents, equity in net income loss of investment funds accounting for using the equity method of 2 cents, net foreign exchange loss of 11 cents, UGC transaction costs of 2 cents, loss on redemption of preferred shares of 2 cents and an income tax benefit of 1 cent, net income came in at 56 cents per share, up 33.3% year over year.

Behind the Headlines

Gross premiums written increased 5.4% year over year to $1.7 billion, largely fueled by higher premiums written in the Insurance and Reinsurance segments.

Net investment income grew 16.5% to $107.8 million, supported by reinvestment of fixed income securities at higher available yields as well as increase in investable assets.

Arch Capital's underwriting income was $235.5 million, having improved 20.5% from the year-ago quarter. Combined ratio improved 190 basis points (bps) to 82.7%.

Segment Results

Insurance : Gross premiums written increased 3.4% year over year to $769.4 million.

Underwriting income of $5.6 million compared favorably with the underwriting loss of $4.5 million in the year-ago quarter. Combined ratio improved 180 bps to 99.0%.

Reinsurance : Gross premiums written in the quarter under review rose 8.2% year over year to $490.3 million.

Underwriting income of $24.4 million jumped 28.8% from the prior-year quarter. Combined ratio improved 120 bps year over year to 92.8%.

Mortgage : Gross premiums written in the quarter fell 1.6% year over year to $330.9 million, primarily reflecting a lower level of Australian mortgage reinsurance business as well as that of U.S. single premium business. However, growth in U.S. monthly premium business and government sponsored enterprise (GSE) credit-risk sharing transactions partially offset the downside. Underwriting income climbed 12% to $205.7 million. Combined ratio improved 30 bps year over year to 30.2%.

Financial Update

Arch Capital exited the second quarter with total capital of $11.02 billion compared with $11.13 billion as of Jun 30, 2017.

As of Jun 30, 2018, book value per share was $20.68, up 4.1% year over year.

Operating return on equity was 11.6% in the reported quarter compared with 8.5% in the year-ago period.

Share Repurchase Update

In the second quarter the company bought back 6.4 million shares worth $170.3 million. As of Jun 30, 2018, Arch Capital had shares worth $272.9 million remaining under its authorized program.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 5.55% due to these changes.

VGM Scores

Currently, Arch Capital has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for value based on our style scores.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Arch Capital has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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