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Arch Capital's (ACGL) Premiums Aid, Cost Concerns Linger

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Arch Capital Group Ltd. (ACGL - Free Report) is well-poised for growth on the back of new business opportunities, rate increases and strong capital position.

The company is well poised for progress, as is evident from its favorable VGM Score of A. Here V stands for Value, G for Growth and M for Momentum, with the score being a weighted combination of all three factors.

Over the past 30 days, the company’s 2020 and 2021 earnings estimates have moved 5.6% and 2.4% north, respectively.

Arch Capital’s reinsurance operations continue to benefit from a combination of new business opportunities, rate increases and the integration of the Barbican reinsurance business.

Given increases in most lines of business, due to new business opportunities, rate increases and growth in existing accounts will continue to boost the performance of the Insurance segment of Arch Capital.

Low interest rates are producing huge refinance activity. However, mortgage insurance (MI) premium rates remain above pre-COVID levels, and the continued high credit quality of borrowers is generally better than it was pre-pandemic. Though the insurer continues to face uncertainties due to the pandemic, it remains optimistic that among other positive factors, recent trends in the U.S. housing market will mitigate the effects of the pandemic.

The mortgage insurer’s balance sheet remained strong, with a debt plus preferred leverage ratio of 23.1% that remains well within a reasonable range. Its liquidity and capital resources were not materially impacted by COVID-19 during the third quarter of 2020. It raised an additional $1 billion of capital in the form of long-term senior notes at the end of June 2020.

Moreover, the company’s 5.8% return on equity (ROE) is better than the industry average of 5.5%, reflecting its efficiency in utilizing shareholders’ funds. Arch Capital’s investment approach is to improve its return on equity while avoiding undue risk. For achieving improved return, it focuses on total return with thoughtful target allocation and periodic rebalancing.

It has a decent earnings surprise history too. Its earnings beat estimates in three of the last four quarters with the trailing four-quarter average earnings surprise being 31.76%.

However, shares of Arch Capital, carrying a Zacks Rank #3 (Hold), have lost 19.7% in the past year compared with the industry’s decline of 3.6%. Also, the company has been witnessing rising expenses, which tend to weigh on the company’s margins. Notably, in the third quarter, net margin contracted 700 basis points (bps) year over year and 90 bps sequentially.

Nonetheless, the Zacks Consensus Estimate for 2021 earnings per share is pegged at $2.96, indicating year-over-year increase of nearly 125.9%. The expected long-term earnings growth rate is 10%, which compares favorably with the industry’s growth rate of 8.8%.

Stocks to Consider

Some better-ranked players in the property and casualty industry include Alleghany (Y - Free Report) , Fidelity National Financial (FNF - Free Report) and First American Financial Corporation (FAF - Free Report) . While Alleghany sports a Zacks Rank #1 (Strong Buy), Fidelity National and First American Financial carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Alleghany’s bottom-line surpassed estimates in two of the last four quarters, the average beat being 34.08%.

Fidelity National Financial surpassed earnings estimates in each of the last four quarters, with the average being 30.48%.

First American Financial surpassed estimates in three of the last four quarters, the average beat being 16.83%.

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