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On Mar 20, 2013, shares of Arch Capital Group Limited (ACGL - Snapshot Report) hit a 52-week high of $52.44. Previously, the company had reported fourth-quarter results with a positive earnings surprise of 63.3%. This financial service providing company witnessed positive earnings surprises in 3 out of 4 quarters in 2012, with an average beat of 24.2%.

During the fourth quarter, Arch Capital’s top line grew 14.0% to $855 million on a year-over-year basis and it surpassed the Zacks Consensus Estimate by 3.0%. Results were driven by improvement in net premiums earned (up 15.8% year over year) and net realized gains (up 277.2% year over year).

Combined ratio also improved 290 basis points year over year to 95.4% in 2012.

On Feb 11, although Arch Capital reported fourth-quarter 2012 operating loss of 18 cents, it was narrower than the Zacks Consensus Estimate loss of 49 cents.

Arch Capital acquired the credit and surety operations of Zurich-based Ariel Reinsurance Company to enhance its reinsurance operations.

We view favorably the company’s pending acquisition of CMG Mortgage Insurance Company (CMG MI) from PMI Mortgage Insurance Company for $300 million. The acquisition will enable Arch Capital to penetrate deeper into the U.S. Mortgage Insurance market.

Arch Capital also has a strong capital management policy. In 2012, the company deployed $2.73 billion to repurchase 108.7 million shares. With excess capital in hand, the company expects to continue increasing shareholders value.

The Zacks Consensus Estimate for 2013 is pegged at $3.09, up 21.7% year over year. The Zacks Consensus Estimate for 2014 is $3.18, up 2.9% year over year. The overall long-term expected earnings growth rate for this stock is 9.4%.

However, valuation looks stretched for Arch Capital. The shares are trading at a 5.9% premium to the peer group average on a forward price-to-earnings basis and at a 29.3% premium to the peer group average on a price-to-book basis. The return on equity is 1.4% below the peer group average. Nevertheless, the 1-year return from the stock is 42.61%, much above NASDAQ’s return of 6.5%.

Arch Capital currently carries a Zacks Rank #1 (Strong Buy). Other stocks in this industry such as Cincinnati Financial Corporation (CINF - Analyst Report), EMC Insurance Group Inc. (EMCI - Snapshot Report) and Homeowners Choice Inc. (HCI - Snapshot Report) carry a Zacks Rank #1 (Strong Buy) and appear impressive.

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