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Why Is Arch Capital (ACGL) Up 7.5% Since Last Earnings Report?

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A month has gone by since the last earnings report for Arch Capital Group (ACGL). Shares have added about 7.5% 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 catalysts.

Arch Capital's Q2 Earnings Beat, Premiums Rise Y/Y

Arch Capital Group Ltd. reported second-quarter 2021 operating income per share of $1.00, which surpassed the Zacks Consensus Estimate by 11.1%. The bottom line increased 25-fold year over year. The company’s results benefited from improved premiums across all the three segments backed by rate increase and new business growth.

Behind the Headlines

Gross premiums written improved 41.8% year over year to $3.3 billion. Net premiums written also climbed 43.8% to $2.4 billion on higher premiums written across its Insurance, Reinsurance and Mortgage segments.
Net investment income plunged 15.1% year over year to $111.6 million.
Operating revenues of $2.2 billion rose 24.8% year over year.

Total expenses of $1.8 billion increased 1.4% year over year due to higher acquisition costs, other operating expenses, as well as interest expense. Pre-tax current accident year catastrophic losses, net of reinsurance and reinstatement premiums, of $46.5 million narrowed from $207.2 million in the prior-year quarter.

Arch Capital’s underwriting income of $386.5 million rebounded from year-ago loss of $22.5 million. Combined ratio improved 1980 basis points (bps) to 82.

Segment Results

Insurance: Gross premiums written increased 32.9% year over year to $1.4 billion, while net premiums written climbed 43.3% to $963.6 million. This growth can primarily be attributed to rate increases, new business opportunities and rise in existing accounts. Underwriting income was $49.4 million, which rebounded from the year-ago loss of $56.7million. Combined ratio improved 1400 bps to 94.3.

Reinsurance: Gross premiums written improved 68.3% year over year to $1.4 billion, while net premiums written increased 63.6% to $924.7 million. The growth was driven by rate increases and new business. Underwriting income was $96 million against year-ago loss of 33.1 million. Combined ratio deteriorated 1970 bps year over year to 87.1.

Mortgage: Gross premiums written improved 6.1% year over year to $391.5 million, while net premiums written increased 3.3% to $335.8 million. The improvement can be primarily attributed to growth in Australian single premium mortgage insurance and the benefit of premiums received related to the exercise of early redemption options by GSEs for certain seasoned callable credit risk transfer contracts. Underwriting income increased more than three-fold year over year to $250.1 million. Combined ratio improved 5440 bps to 26.5.

Financial Update

Arch Capital exited the second quarter with cash of $1.2 billion, which climbed 36.1% from Dec 31, 2020. Debt was $2.9 billion as of Jun 30, 2021, which inched up 0.01% from Dec 31, 2020. As of Jun 30, 2021, book value per share was $32.02, up 5.9% year over year.

Annualized operating return on average common equity was 13% in the second quarter, up from 0.6% in the year-ago quarter. Net cash provided by operating activities was $849.7 billion, which increased 19.5% year over year.

The company bought back 7.8 million shares for $306 million in the reported quarter.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 7.34% due to these changes.

VGM Scores

Currently, Arch Capital has an average Growth Score of C, however its Momentum Score is doing a bit 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 these revisions looks promising. It comes with little surprise Arch Capital has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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