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Arch Capital (ACGL) Up 6.3% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Arch Capital Group (ACGL). Shares have added about 6.3% in that time frame, outperforming 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 drivers.

Arch Capital Q4 Earnings Beat Estimates, Down Y/Y

Arch Capital Group Ltd. reported fourth-quarter 2020 operating income per share of 56 cents, which surpassed the Zacks Consensus Estimate by 12%. However, the bottom line plunged 24.3% year over year.

The company’s results have benefited from improved premiums. However, higher costs and elevated catastrophic losses stemming from several weather-related events and the COVID-19 pandemic partly dampened the results.

Behind the Headlines

Gross premiums written improved 16.2% year over year to $2.3 billion. Net premiums written climbed 20.8% year over year to $1.8 billion on higher premiums written across its Insurance, Reinsurance and Mortgage segments. Net investment income plunged 25.8% year over year to $114.5 million. Operating revenues of $1.9 billion rose 16% year over year.

Total expenses of $1.8 billion escalated 24.9% year over year due to higher losses and loss adjustment expenses, acquisition expenses, other operating expenses, interest expense and forex.

Pre-tax current accident year catastrophic losses, net of reinsurance and reinstatement premiums were $156.4 million, which increased to more than five-fold from the prior-year quarter. The surge in catastrophic losses has resulted from several weather-related events and includes $0.4 million of COVID-19 related losses. Arch Capital’s underwriting income fell 12.1% year over year to nearly $221 million. Combined ratio deteriorated 450 basis points (bps) to 88.3%.

Segment Results

Insurance: Gross premiums written advanced 19.6% year over year to $1.2 billion, while net premiums written climbed 21.6% year over year to $837.7 million. This growth can primarily be attributed to improved premiums across most of its business lines, which was driven by new business, rate increases and growth in existing accounts. However, the upside was partly offset by decline in travel business primarily as a result of the ongoing impact of the COVID-19 pandemic.

Underwriting loss was $12.6 million, which reflects a decline of 8.9% year over year. Combined ratio improved 40 bps to 101.7%.

Reinsurance: Gross premiums written improved 24.4% year over year to $537.9 million, while net premiums written surged 44.9% year over year to $490.9 million. The growth was driven by higher premiums across most of its business lines, which was fueled by new business and rate increases.

Underwriting income was $53.3 million, which more than doubled from the prior-year quarter. Combined ratio improved 250 bps year over year to 91.3%.

Mortgage: Gross premiums written improved 5.1% year over year to $389.7 million, while net premiums written increased 5.1% year over year to $331.7 million. The improvement can be primarily attributed to higher Australian single premium mortgage insurance, partially offset by reduced U.S. primary mortgage insurance in force on monthly premium policies.

Underwriting income slipped 31.7% year over year to $188.9 million. Combined ratio deteriorated 2350 bps year over year to 45.1%. Arch MI U.S. generated $38 billion of new insurance written (NIW) in the fourth quarter, which surged 57.7% year over year.

Financial Update

Arch Capital exited the fourth quarter with cash of $906.4 million, which climbed 24.8% year over year. Debt was $2.9 billion as of Dec 31, 2020, up 52.9% year over year. As of Dec 31, 2020, book value per share was $30.31, up 14.7% year over year.

Annualized operating return on average common equity was 7.7% in the fourth quarter, down 400 bps year over year. During 2020, net cash provided by operating activities was $2.9 billion, which increased 40.9% from the 2019-end figure.

Full-Year Update

For 2020, the company reported operating income per share of $1.36, which surpassed the Zacks Consensus Estimate of $1.32. However, the bottom line plunged 51.8% from the 2019-end figure. Annualized operating return on average common equity was 4.8% in 2020, down 720 bps from the figure at 2019 end.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 7.31% due to these changes.

VGM Scores

Currently, Arch Capital has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

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

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Arch Capital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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