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Why Is Arch Capital (ACGL) Up 0.7% Since Last Earnings Report?

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It has been about a month since the last earnings report for Arch Capital Group (ACGL). Shares have added about 0.7% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Arch Capital Q1 Earnings & Revenues Miss Estimates

Arch Capital Group Ltd. reported first-quarter 2022 operating income per share of $1.10 per share, which missed the Zacks Consensus Estimate by 2.7%. The bottom line however increased 86.4% year over year.

The year-over-year increase was driven by improved premiums, lower expenses, as well as lower catastrophic losses and improved combined ratio, offset by lower net investment income.

Behind the Headlines

Gross premiums written improved 11.9% year over year to $3.8 billion. Net premiums written climbed 5% year over year to $2.6 billion on higher premiums written across its Insurance and Reinsurance segments. Net investment income plunged 18.6% year over year to $80.4 million.

Operating revenues of $2.2 billion rose 6.8% year over year but missed the Zacks Consensus Estimate by 6.2%.

Total expenses of $1.8 billion decreased 3.8% year over year due to lower losses and loss adjustment expenses, net foreign exchange gains and interest expense. Pre-tax current accident year catastrophic losses, net of reinsurance and reinstatement premiums were $85.8 million, which decreased 54.4% from the prior-year quarter.  Arch Capital’s underwriting income more than doubled year over year to nearly $457.6 million. The combined ratio improved 1050 basis points (bps) to 78.7.

Segment Results

Insurance: Gross premiums written advanced 21.5% year over year to $1.7 billion, while net premiums written climbed 21.3% year over year to $1.2 billion. This growth can primarily be attributed to increases in most lines of business, due in part to rate increases, new business opportunities and growth in existing accounts. Underwriting income increased more than threefold to $63.5 million. The combined ratio improved 390 bps to 93.8.

Reinsurance: Gross premiums written improved 16.9% year over year to $1.7 billion, while net premiums written surged 14% year over year to $1.1 billion. The growth in net premiums written was observed in other specialty, casualty and property excluding property catastrophe lines, primarily related to rate increases, new business opportunities and growth in existing accounts. Underwriting income was $108.7 million, marking a rebound from the year-ago quarter’s loss of $19.7 million. The combined ratio improved 1630 bps year over year to 86.6.

Mortgage: Gross premiums written decreased 6.7% year over year to $364.8 million. Net premiums written decreased 14% year over year to $288.1 million. The reduction in gross premiums written primarily reflected lower U.S. primary mortgage insurance monthly and single premium volume, partially offset by growth in Australian single premium mortgage insurance. Underwriting income increased 42.5% year over year to $285.3 million. The combined ratio improved 3930 bps year over year to 3.1.

Financial Update

Arch Capital exited the first quarter of 2022 with cash of $812.9 million, which decreased 13.7% year over year. Debt was $2.7 billion as of Mar 31, 2022, down 4.8% year over year. As of Dec 31, 2021, the book value per share was $32.18, up 5.4% year over year. Annualized operating return on average common equity was 13.6% in the first quarter, up 580 bps. ACGL bought back shares worth $255 million in the first quarter of 2022.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

Currently, Arch Capital has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions 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.

Performance of an Industry Player

Arch Capital is part of the Zacks Insurance - Property and Casualty industry. Over the past month, RLI Corp. (RLI), a stock from the same industry, has gained 4%. The company reported its results for the quarter ended March 2022 more than a month ago.

RLI Corp. reported revenues of $287.04 million in the last reported quarter, representing a year-over-year change of +17.2%. EPS of $1.43 for the same period compares with $0.87 a year ago.

For the current quarter, RLI Corp. is expected to post earnings of $0.99 per share, indicating a change of -9.2% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #1 (Strong Buy) for RLI Corp. Also, the stock has a VGM Score of D.


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