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Arch Capital (ACGL) Up 3.9% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Arch Capital Group (ACGL - Free Report) . Shares have added about 3.9% in that time frame, underperforming 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 Q2 Earnings Top, Fall Y/Y on Segment Loss

Arch Capital Group Ltd.  reported second-quarter 2020 operating income per share of 4 cents in contrast to the Zacks Consensus Estimate of a loss of 26 cents. However, the bottom line dropped about 95% year over year.

The quarter results reflect improved premiums. However, catastrophic losses including COVID-19 related losses were a drag on results.

Behind the Headlines

Gross premiums written increased 19.6% year over year to $2.3 billion, largely fueled by higher premiums written across its Insurance, Reinsurance and Mortgage segments.

Net investment income decreased 15.2% year over year to $131.5 million.
Operating revenues of $1.8 billion increased 10.7% year over year.

Total expense of $1.8 billion increased 44.1% year over year on higher losses and loss adjustment expenses, acquisition expenses, other operating expenses, interest expense and forex.

Pre-tax current accident year catastrophic losses, net of reinsurance and reinstatement premiums were $207.2 million, including $173.1 million of COVID-19 related losses.

Arch Capital’s underwriting loss was $22.9 million against underwriting profit of $293.1 million in the year-ago quarter. Combined ratio deteriorated 2140 basis points (bps) to 101.8%.

Segment Results

Insurance: Gross premiums written increased 12% year over year to $1 billion driven by increases in property, energy, marine and aviation and professional lines, due in part to new business opportunities, rate increases and growth in existing accounts. Decrease in travel business, primarily due to the ongoing impact of the COVID-19 pandemic, was a partial offset.

Underwriting loss was $56.7 million against $2.6 million profit in the year-ago quarter. Combined ratio deteriorated 870 bps to 108.3%.

Reinsurance: Gross premiums written rose 47.9% year over year to $807.1 million driven by increases in property lines, due in part to new business and rate increases.

Underwriting loss was $33.1 million against $36.7 million profit in the year-ago quarter. Combined ratio deteriorated 1650 bps year over year to 106.8%.

Mortgage: Gross premiums written increased 1.3% year over year to $369.1 million. Underwriting income dropped 70.4% to $76.4 million. Combined ratio deteriorated 5290 bps year over year to 80.9%. Arch MI U.S. generated $24.6 billion of new insurance written.

Financial Update

Arch Capital exited the quarter with cash of $854.3 million, up 41.1% year over year. Debt was $2.9 billion, up 54.6% year over year.

As of Jun 30, 2020, book value per share was $27.62, up 12.1% year over year.

Operating return on equity was 0.6% in the second quarter, down 1250 basis points.

Net cash provided by operating activities was $711.1 million, up 49% year over year.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 135.71% due to these changes.

VGM Scores

At this time, Arch Capital has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile 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 broadly trending upward 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.


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