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Arch Capital (ACGL) Up 1.4% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Arch Capital Group (ACGL - Free Report) . Shares have added about 1.4% 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 Q4 Earnings Beat Estimates, Premiums Rise

Arch Capital reported fourth-quarter 2018 operating income per share of 46 cents, which outperformed the Zacks Consensus Estimate by 24.3%. Moreover, the bottom line improved 2.2%.

The quarter benefited improving premiums and net investment income. However, cat loss from Hurricane Michael and the California wildfires induced underwriting loss. Soft results at Insurance and Insurance segment were offset by sturdy performance at Mortgage segment.

Behind the Headlines

Gross premiums written increased 16.7% year over year to $1.7 billion, largely fueled by higher premiums written across its Insurance, Reinsurance and Mortgage segments.

Net investment income grew 25.4% to $157.2 million, supported by reinvestment of fixed income securities at higher available yields and a shift from municipal bonds to corporates.

Operating revenues of $1.5 billion grew 11.9% year over year and surpassed the zacks Consensus estimate by 10.7%.

Total expense of $1.2 billion increased 8.4% year over year attributable to increase in losses and loss adjustment expenses, acquisition expenses, and corporate expenses.

Arch Capital’s underwriting income came in at $167 million down 8.3% year over year. Combined ratio deteriorated 150 basis points (bps) to 87.8%.

Full Year Highlights

Operating income per share of $2.20, which outperformed the Zacks Consensus Estimate of $2.12. Moreover, the bottom line surged 105.6%.

Operating revenues of $5.8 billion improved 8.7% over 2017.

Combined ratio of 81% improved 780 bps.

Segment Results

Insurance: Gross premiums written increased 8.5% year over year to $832.8 million driven by favorable mix of new business, growth in existing accounts and rate increases.

Underwriting loss of $15.4 million, compared with profit of $9 million. Combined ratio deteriorated 450 bps to 102.8%. The fourth quarter suffered cat loss from Hurricane Michael and the California wildfires.

Reinsurance: Gross premiums written in the quarter under review rose 41.5% year over year to $409.3 million.

Underwriting income of $41.2 million compared with profit of $24.6 million. Combined ratio deteriorated 1640 bps year over year to 110.9%. The fourth quarter suffered cat loss from Hurricane Michael and the California wildfires.

Mortgage: Gross premiums written in the quarter under review increased 6.8% year over year to $358 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 42.6% to $245.8 million. Combined ratio improved 1730 bps year over year to 22.6%. Arch MI U.S. generated $16.7 billion of new insurance written, up 16% year over year driven by higher level of purchase market activity more than offset a reduction in refinance market activity.

Financial Update

Arch Capital exited 2018 with cash of $646.6 million, up 6.7% year over year. Debt was $1.7 billion, up 0.4% year over year.

Arch Capital exited 2018 with total capital of about $11.2 billion.

As of Dec 31, 2018, book value per share was $21.52, up 6% year over year.

Operating return on equity was 10.7% in 2018 expanding 500 basis points.

Net cash provided by operating activities was $1.6 billion, up 42% over 2017.

Share Repurchase Update

In the fourth quarter, the company bought back 3.6 million shares for $98.2 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Arch Capital has a subpar Growth Score of D, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

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

Outlook

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 #1 (Strong Buy). We expect an above average return from the stock in the next few months.




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