It has been about a month since the last earnings report for Arch Capital Group (ACGL - Free Report) . Shares have added about 0.3% 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 (ACGL - Free Report) Q3 Earnings Top Estimates, Premiums Up
Arch Capital Group reported third-quarter 2018 operating income per share of 59 cents, which outperformed the Zacks Consensus Estimate by 13.5%. Moreover, the bottom line reversed the year-ago quarter’s operating loss per share of 26 cents.
The quarter benefited from a sturdy performance at the Insurance, Reinsurance and Mortgage segments. Higher net investment income as well as favorable underwriting results added to this upside.
Including net realized gain of 12 cents, equity in net income of investment funds accounting for using the equity method of 4 cents and net foreign exchange gains of 2 cents, net income came in at 53 cents per share, rebounding from the year-ago quarter’s loss of 13 cents.
Behind the Headlines
Gross premiums written increased 5% year over year to $1.7 billion, largely fueled by higher premiums written across its Insurance, Reinsurance and Mortgage segments.
Net investment income grew 23.7% to $144 million, supported by reinvestment of fixed income securities at higher available yields and a shift from municipal bonds to corporates.
Arch Capital’s underwriting income came in at $234.6 million versus the year-ago quarter’s loss of $142.2 million. Combined ratio improved 2950 basis points (bps) to 82.3%.
Insurance: Gross premiums written increased 6.3% year over year to $836.8 million.
Underwriting loss of $26.7 million was substantially narrower than the underwriting loss of $207.1 million in the year-ago quarter. Combined ratio improved 3390 bps to 104.8%.
Reinsurance: Gross premiums written in the quarter under review rose 3.2% year over year to $435.4 million.
Underwriting income of $30.9 million was against the year-ago quarter’s loss of $86.9 million. Combined ratio improved 3750 bps year over year to 89.9%.
Mortgage: Gross premiums written in the quarter under review inched up 0.7% year over year to $350.6 million, primarily reflecting an increase in U.S. monthly premium business and government sponsored enterprise (GSE) credit-risk sharing transactions. However, lower levels in U.S. single premium business and a decline in Australian mortgage reinsurance business partially offset the upside. Underwriting income increased 23.7% to $230.6 million. Combined ratio improved 880 bps year over year to 24.6%.
Arch Capital exited the third quarter with total capital of about $11.2 billion compared with $11 billion as of Sep 30, 2017.
As of Sep 30, 2018, book value per share was $21.15, up 2.3% year over year.
Operating return on equity was 11.4% in the reported quarter against (5.3%) in the year-ago period.
Share Repurchase Update
In the third quarter, the company bought back shares worth $11 million. As of Sep 30, 2018, Arch Capital had shares worth $261.9 million remaining under its authorized program.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -14.9% due to these changes.
At this time, Arch Capital has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Arch Capital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.