Arch Capital's (ACGL) Premiums Aid, Cost Concerns Linger

Arch Capital Group Ltd. ACGL is well-poised for growth, driven by new business opportunities, rate increases, higher level of income on fund investments and strategic buyouts.

The stock carries a VGM Score of B. VGM Score helps to identify stocks with the most attractive value, best growth and the most promising momentum.

The stock has seen its estimates for 2020 move up nearly 17.8% in the past 30 days and the same for 2021 move up nearly 4.1% in the past 60 days, reflecting investor optimism.

Factors Driving Arch Capital

Arch Capital has been witnessing a positive trend in net premiums written, driven by premium growth at both its Reinsurance and Insurance segments. Increase in property, energy, marine and aviation and professional lines, new business opportunities, rate increases across most lines of business and growth in existing accounts are expected to drive premiums going forward.

This consistent increase in premiums is likely to drive the company’s top line further, which rose at a four-year CAGR (2015-2019) of 15.2%. The Zacks Consensus Estimate for the company’s 2020 and 2021 revenues is pegged at $7.36 billion and $7.45 billion, respectively, indicating year-over-year increase of nearly 14.7% and 1.2%.

Moreover, net investment income continues to be another important driver of the company’s top-line growth and has been exhibiting improvement over the last several years. The metric witnessed four-year CAGR (2015-2019) of 15.9%. Despite the current low interest rate environment, higher level of income on fund investments, reinvestment of fixed income securities at slightly higher available yields and the shift from municipal bonds to corporates will continue to drive net investment income.

As part of its strategic initiatives, the property and casualty insurer remains focused on acquisitions to expand as well as diversify its business lines apart from widening geographical footprint. It expanded the insurance platform in 2019 through two acquisitions. In January 2019, Arch Insurance acquired the UK Commercial Lines business of the Ardonagh Group and formed the Arch UK Regional Division.

In November 2019, it acquired Barbican Group Holdings Limited, which enhanced existing specialty lines expertise of Arch Capital.

Furthermore, return on equity (ROE), reflecting the company’s efficient utilization of its shareholders’ funds to generate earnings, has been increasing over the past several years. Its trailing twelve months ROE of 6.9% betters the industry average of 6.2%.

However, shares of Arch Capital, carrying a Zacks Rank #3 (Hold), have lost 22.9% in the past year compared with the industry’s decline of 3.3%. Also, the company has been witnessing rising expenses due to higher losses and loss-adjustment expenses, acquisition expenses, other operating expenses, interest expenses, and corporate expenses. Such costs tend to weigh on the company’s margins. Notably, in the second quarter, net margin contracted 450 basis points (bps) year over year.

Nonetheless, the Zacks Consensus Estimate for 2021 earnings per share is pegged at $2.79, indicating year-over-year increase of nearly 181.3%. The expected long-term earnings growth rate is 10%, which compares favorably with the industry’s growth rate of 8.8%.

Stocks to Consider

Investors interested in property and casualty industry may look at Donegal Group Incorporation DGICA, Fidelity National Financial Inc., FNF and The Allstate Corporation ALL. While Donegal Group and Fidelity National carry a Zacks Rank #1 (Strong Buy), Allstate carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Donegal surpassed estimates in each of the last four quarters, with the average being 86.44%.

Fidelity National surpassed estimates in each of the last four quarters, with the average being 32.13%.

Allstate surpassed estimates in each of the last four quarters, with the average being 25.24%.

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