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Why Is Arch Capital (ACGL) Down 4.6% Since Last Earnings Report?

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A month has gone by since the last earnings report for Arch Capital Group (ACGL - Free Report) . Shares have lost about 4.6% in that time frame, outperforming 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 Q4 Earnings Beat, Revenues Miss Estimates

Arch Capital Group Ltd. reported fourth-quarter 2021 operating income per share of $1.27 per share, which surpassed the Zacks Consensus Estimate by 24.5%. The bottom line increased two-fold year over year.

The company’s results benefited from improved premiums, lower expenses, as well as lower catastrophic losses and improved combined ratio, offset by lower net investment income.

Behind the Headlines

Gross premiums written improved 26.8% year over year to $2.9 billion. Net premiums written climbed 15.7% year over year to $2 billion on higher premiums written across its Insurance and Reinsurance segments.
Net investment income plunged 21% year over year to $90.4 million.
Operating revenues of $2.2 billion rose 12.7% year over year. The top line missed the Zacks Consensus Estimate by 3.3%.

Total expenses of $1.7 billion decreased 3.3% year over year due to lower losses and loss adjustment expenses and interest expense.

Pre-tax current accident year catastrophic losses, net of reinsurance and reinstatement premiums were $72.3 million, which decreased 53.8% from the prior-year quarter.  Arch Capital’s underwriting income increased two-fold year over year to nearly $472 million. The combined ratio improved 1070 basis points (bps) to 77.6%.

Segment Results

Insurance: Gross premiums written advanced 19.5% year over year to $1.5 billion, while net premiums written climbed 23.7% year over year to $1 billion. This growth can primarily be attributed to increases in most lines of business, due in part to rate increases, new business opportunities and growth in existing accounts along with a lower level of premiums ceded.
Underwriting income was $70.5 million against the year-ago loss of $12.6 million. The combined ratio improved 880 bps to 92.9%.

Reinsurance: Gross premiums written improved 88.3% year over year to $1 billion, while net premiums written surged 44.5% year over year to $709.1 million. The growth in net premiums written was observed in most lines of business, primarily related to new business opportunities and growth in existing accounts in casualty, property excluding property catastrophe and other specialty lines and the benefit of rate increases. Underwriting income was $132.5 million, which increased more than two-fold from the prior-year quarter. The combined ratio improved 820 bps year over year to 83.1%.

Mortgage: Gross premiums written decreased 6.6% year over year to $364.1 million, while net premiums written decreased 12.8% year over year to $289.3 million. The reduction in gross premiums written primarily reflected lower U.S. primary mortgage insurance monthly and single premium volume. It was partially offset by growth in Australian single premium mortgage insurance due to the acquisition of Westpac Lenders Mortgage Insurance Limited in the third quarter of 2021. Underwriting income increased 42.2% year over year to $268.6 million. Combined ratio improved 3340 bps year over year to 11.7%.

Financial Update

Arch Capital exited the fourth quarter with cash of $858.7 million, which decreased 5.3% year over year. Debt was $2.7 billion as of Dec 31, 2021, up 0.03% year over year. As of Dec 31, 2021, the book value per share was $33.56, up 10.7% year over year.

Annualized operating return on average common equity was 15.6% in the fourth quarter, up 790 bps year over year. During 2021, net cash provided by operating activities was $3.4 billion, which increased 18.7% from the 2020-end figure.

Full-Year Update

For 2021, the company reported operating income per share of $3.58, which surpassed the Zacks Consensus Estimate of $3.33. The bottom line increased more than a two-fold year over year. Annualized operating return on average common equity was 11.5% in 2021, up 670 bps from the figure at 2020 end.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

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 this revision 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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