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Arch Capital (ACGL) Down 1.3% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Arch Capital Group (ACGL - Free Report) . Shares have lost about 1.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Arch Capital due for a breakout? 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 drivers.

Arch Capital's Q1 Earnings Beat, Revenues Up Y/Y

Arch Capital reported first-quarter 2021 operating income per share of 59 cents, which surpassed the Zacks Consensus Estimate by 18%. The bottom line also increased 28.3% year over year.

The company’s results benefited from improved premiums. However, higher costs and elevated catastrophic losses stemming from several weather-related events as well as the COVID-19 pandemic partly dampened the results.

Behind the Headlines

Gross premiums written improved 19.9% year over year to $3.4 billion. Net premiums written also climbed 17.4% year over year to $2.5 billion on higher premiums written across its Insurance, Reinsurance and Mortgage segments.

Net investment income plunged 31.9% year over year to $98.9 million.

Total expenses of $1.8 billion increased 14.6% year over year due to higher losses and loss adjustment expenses, acquisition costs, other operating expenses, corporate costs as well as interest expense.

Pre-tax current accident year catastrophic losses, net of reinsurance and reinstatement premiums, of $188.3 million increased about 59% from the prior-year quarter. The surge in catastrophic losses — which includes $0.6 million of COVID-related losses — resulted from several weather-related events including winter storms Uri and Viola.

Arch Capital’s underwriting income increased 20.7% year over year to $185.9 million. Combined ratio improved 80 basis points (bps) to 90.7.

Segment Results

Insurance: Gross premiums written increased 17.2% year over year to $1.4 billion, while net premiums written climbed 20% to $994.8 million. This growth can primarily be attributed to rate increases, new business opportunities and growth in existing accounts, partially offset by deterioration in the travel business.

Underwriting income was $18.4 million, which rebounded from the year-ago loss of $28.2 million. Combined ratio improved 620 bps to 97.7

Reinsurance: Gross premiums written improved 31% year over year to $1.5 billion, while net premiums written increased 25.3% to $999.1 million. The growth was driven by rate increases and new business.

Underwriting loss was $19.8 million, which widened from the year-ago loss of 9.4 million. Combined ratio deteriorated 90 bps year over year to 102.9.

Mortgage: Gross premiums written improved 6% year over year to $391.2 million, while net premiums written increased 3.3% to $335.2 million. The improvement can be primarily attributed to growth in Australian single premium mortgage insurance, partially offset by a lower level of U.S. primary mortgage insurance in force on monthly premium policies.

Underwriting income increased 1.4% year over year to $200 million. Combined ratio improved 170 bps year over year to 45.8. The U.S. primary mortgage insurance business generated $27 billion of new insurance written, up 60.7% year over year, driven by a significant increase in mortgage originations in the market.

Financial Update

Arch Capital exited the first quarter with cash of $941.9 million, which climbed 3.9% from Dec 31, 2020. Debt was $2.9 billion as of Mar 31, 2021, which inched up 0.01% from Dec 31, 2020.

As of Mar 31, 2021, book value per share was $30.54, up 17% year over year.

Annualized operating return on average common equity was 7.8% for the first quarter, which expanded 70 bps year over year.

During 2020, net cash provided by operating activities was $762.8 billion, which increased 25% year over year.

The company bought back 5.3 million shares for $179.3 million in the reported quarter.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 13.99% due to these changes.

VGM Scores

At this time, Arch Capital has a nice Growth Score of B, a grade with the same score on the momentum front. 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 A. 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. 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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