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Arch Capital (ACGL) Q4 Earnings Beat Estimates, Premiums Rise

Zacks Equity Research

Arch Capital Group Ltd. ACGL reported fourth-quarter 2018 operating income per share of 46 cents, which outperformed the Zacks Consensus Estimate by 24.3%. Moreover, the bottom line improved 2.2%.

The quarter benefited from improving premiums and net investment income. However, cat loss from Hurricane Michael and the California wildfires resulted in underwriting loss. Soft results at Insurance and Insurance segment were offset by sturdy performance at Mortgage segment.

Behind the Headlines

Gross premiums written increased 16.7% year over year to $1.7 billion, largely fueled by higher premiums written across its Insurance, Reinsurance and Mortgage segments.

Net investment income grew 25.4% to $157.2 million, supported by reinvestment of fixed income securities at higher available yields and a shift from municipal bonds to corporates.

Operating revenues of $1.5 billion grew 11.9% year over year and surpassed the Zacks Consensus Estimate by 10.7%

Total expense of $1.2 billion increased 8.4% year over year attributable to increase in losses and loss adjustment expenses, acquisition expenses, and corporate expenses.

Arch Capital’s underwriting income came in at $167 million, down 8.3% year over year. Combined ratio deteriorated 150 basis points (bps) to 87.8%.

Arch Capital Group Ltd. Price, Consensus and EPS Surprise

Arch Capital Group Ltd. Price, Consensus and EPS Surprise | Arch Capital Group Ltd. Quote

Full-Year Highlights

Operating income per share of $2.20 outpaced the Zacks Consensus Estimate of $2.12. Moreover, the bottom line surged 105.6%.

Operating revenues of $5.8 billion improved 8.7% over 2017.

Combined ratio of 81% improved 780 bps.

Segment Results

Insurance
: Gross premiums written increased 8.5% year over year to $832.8 million driven by favorable mix of new business, growth in existing accounts and rate increases.

Underwriting loss was $15.4 million against profit of $9 million in the year ago quarter. Combined ratio deteriorated 450 bps to 102.8%. The company suffered cat loss due to Hurricane Michael and the California wildfires.

Reinsurance: Gross premiums written in the quarter under review rose 41.5% year over year to $409.3 million.

Underwriting income was $41.2 million against profit of $24.6 million in the year ago quarter. Combined ratio deteriorated 1640 bps year over year to 110.9%. Hurricane Michael and the California wildfires resulted in cat loss.

Mortgage: Gross premiums written in the quarter under review increased 6.8% year over year to $358 million, primarily reflecting an increase in U.S. monthly premium business and government sponsored enterprise (GSE) credit-risk sharing transactions. However, lower levels in U.S. single premium business and a decline in Australian mortgage reinsurance business partially offset the upside. Underwriting income increased 42.6% to $245.8 million. Combined ratio improved 1730 bps year over year to 22.6%. Arch MI U.S. generated $16.7 billion of new insurance written, up 16% year over year driven by higher level of purchase market activity, which more than offset a reduction in refinance market activity.

Financial Update

Arch Capital exited 2018 with cash of $646.6 million, up 6.7% year over year. Debt was $1.7 billion, up 0.4% year over year.

Arch Capital exited 2018 with total capital of about $11.2 billion.

As of Dec 31, 2018, book value per share was $21.52, up 6% year over year.

Operating return on equity was 10.7% in 2018, up 500 basis points.

Net cash provided by operating activities was $1.6 billion, up 42% from 2017.

Share Repurchase Update

In the fourth quarter, the company bought back 3.6 million shares for $98.2 million.

Zacks Rank

Arch Capital currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other P&C Insurers

Among other players from the insurance industry, which have already reported fourth-quarter earnings, The Travelers Companies, Inc. TRV and RLI Corp. RLI outpaced the respective Zacks Consensus Estimate, while The Progressive Corporation’s PGR earnings missed the same.

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