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Arch Capital (ACGL) Down 2.3% Since Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Arch Capital Group Ltd. (ACGL - Free Report) . Shares have lost about 2.3% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is ACGL due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Arch Capital Q4 Earnings Beat Estimates, Improve Y/Y

Arch Capital Group Ltd. reported fourth-quarter 2017 operating income per share of $1.34, which outperformed the Zacks Consensus Estimate by 18.6%. Moreover, the bottom line improved 18.6% from the prior-year quarter.

The fourth quarter benefited from a sturdy performance at the Insurance and Mortgage segments. Positive impact of the United Guaranty Corporation (“UGC”) buyout and higher net investment income added to the upside.

Including net realized gain of 27 cents, net impairment loss recognized in earnings of 1 cent, equity in net income loss of investment funds accounted for using the equity method of 22 cents, net foreign exchange loss of 20 cents, UGC transaction costs of 1 cent and income tax charge of 15 cents, net income came in at $1.46 per share, up 192% year over year.

Full-Year Highlights

For 2017, Arch Capital reported operating income per share of $3.21, surpassing the consensus mark by 7% but deteriorating 30.7% year over year.

Behind the Headlines

Gross premiums written increased 25.7% year over year to $1.5 billion, largely fueled by higher premiums written in the Mortgage segment. Improved premiums at Insurance as well as Reinsurance further drove the upside.

Net investment income surged 42.1% to $99.6 million, supported by income from the acquired United Guaranty portfolio and a higher level of income on fund investments.

Arch Capital’s underwriting income was $182.1 million, having soared 59.6% from the year-ago quarter. Combined ratio improved 390 basis points (bps) to 86.3%.

Segment Results

Insurance: Gross premiums written increased 8.5% year over year to $767.5 million.

Underwriting income of $9 million skyrocketed 160.9% from the year-ago quarter. Combined ratio improved 100 bps to 98.3%.

Reinsurance: Gross premiums written in the quarter increased 4.6% year over year to $289.3 million.

Underwriting income of $24.6 million plunged 63.7% from the prior-year quarter. Combined ratio deteriorated 1600 bps year over year to 94.5%.

Mortgage: Gross premiums written in the quarter skyrocketed 142.5% year over year to $335.3 million, primarily reflecting growth in insurance force, driven by the acquisition of UGC.

Underwriting income rose 274.1% to $172.3 million. Combined ratio improved 890 bps year over year to 39.9%.

Financial Update

Arch Capital exited the fourth quarter with total capital of $11.30 billion compared with $10.49 at year-end 2016.

As of Dec 31, 2017, book value per share was $60.91, up 10.4% year over year.

Operating return on equity was 9.1% in the reported quarter compared with 8.7% in the year-ago period.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to two lower.

VGM Scores

At this time, ACGL has a subpar Growth Score of D, however its Momentum is doing a lot better with a B. The stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for momentum investors than value investors.


Estimates have been broadly trending downward for the stock and the magnitude of these revisions looks promising. Interestingly, ACGL has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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