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Arch Capital's (ACGL) Reliance on Robust Premiums is a Boon

Zacks Equity Research

Arch Capital Group Ltd. ACGL has been displaying a brilliant track record of premium growth on the back of a steady improvement in the metric across its segments. Moreover, the company’s wide and diverse suite of products and services has been contributing to this upside.

The property and casualty (P&C) insurer has been consistently meeting its clients’ demands and needs with the help of its tailor-made products and service menu. Further, this will accelerate the company’s long-term growth, thereby enabling it to reach greater heights in the future.

The company’s robust inorganic portfolio not only widened its international footprint but also added capabilities to its portfolio and boosted its operations. To that end, Arch Capital completed the buyout of McNeil & Co. last December wherein the insurer stands to gain from the latter’s reputation in the program space as well as its underwriting expertise and experience.

Further, the company’s commitment toward expanding its mortgage insurance business has been beneficial to its success. Moreover, this growth complements the P&C insurer’s strengths in the specialty insurance and reinsurance businesses.

Given a benign interest rate environment, the company has been experiencing better investment results over a considerable period of time. We expect this momentum to continue on the back of a probable reinvestment of fixed income securities at higher available yields and an increase in investable assets.

Banking on better investment results and sturdy premiums, the company’s top line is estimated to progress in the near term. In fact, the Zacks Consensus Estimate for 2019 revenues is pegged at $6.2 billion, reflecting a 6.2% year-over-year rise.

With respect to enhancement of shareholder value, the company has been indulging in a few shareholder-friendly moves like share buybacks and dividend payments. Such measures underscore the company’s strong liquidity position and in turn, not only retain its existing investors’ faith in the stock but also attract new ones.

Additionally, a solid capital position aids the company to protect itself from market volatility while maintaining its financial strength and flexibility required to pursue new opportunities.

Shares of this Zacks Rank #2 (Buy) insurer have rallied 20% year to date, outperforming the industry’s increase of 0.6%. We believe, the aforementioned positives will drive the stock higher in the near term.


For the P&C insurer, the Zacks Consensus Estimate for 2019 earnings stands at $2.55, indicating year-over-year growth of 15.9%.

Regarding its earnings history, the company delivered positive surprises in all the trailing four quarters, the average being 14.72%.

Shares of the company are trading at a price-to-book multiple of 1.37, lower than the industry average of 1.43. Price to book value ratio is the best multiple for valuing life insurers because of large variations in the earnings results from one quarter to the next. This ratio essentially measures a life insurer’s current market value, relative to what it would be worth if it chooses to shut down. Underpriced shares with firm fundamentals are profitable picks.

Other Stocks to Consider

Investors interested in some other top-ranked stocks from the same space can also consider Cincinnati Financial Corporation CINF, Hallmark Financial Services, Inc. HALL and Berkshire Hathaway Inc. BRK.B, each carrying a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cincinnati Financial provides property and casualty insurance products in the United States. The company pulled off positive surprises in three of the trailing four quarters, the average earnings surprise being 18.08%.

Hallmark Financial underwrites, markets, distributes and services property/casualty insurance products to businesses and individuals in the United States. The company surpassed estimates in all the preceding four quarters, the average being 91.28%.

Berkshire Hathaway engages in insurance, freight rail transportation and utility businesses. The company exceeded estimates in three of the last four quarters, the average beat being 4.31%.

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