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Why Is Arch Capital (ACGL) Up 1.1% Since Last Earnings Report?

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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 1.1% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.

Arch Capital Q1 Earnings Beat, Premiums Rise Y/Y

Arch Capital Group reported first-quarter 2019 operating income per share of 67 cents, which outperformed the Zacks Consensus Estimate by 8.1%. Moreover, the bottom line improved 19.6%.

The quarter benefited from improving premiums and net investment income.    

Behind the Headlines

Gross premiums written increased 13% year over year to $2.1 billion, largely fueled by higher premiums written across its Insurance, Reinsurance and Mortgage segments.

Net investment income increased more than threefold to $121.3 million, supported by reinvestment of fixed income securities at higher available yields and the shift from municipal bonds to corporates.

Operating revenues of $1.5 billion improved 12.1% year over year and beat the Zacks Consensus Estimate by nearly 15%.

Interest expense was $23.5 million, down 9.3% year over year, reflecting the paydown of revolving credit agreement borrowings in the second half of 2018.

Total expense of $1.2 billion increased 7.8% year over year on higher losses and loss adjustment expenses, acquisition expenses, other operating expenses and corporate expenses.

Arch Capital’s underwriting income came in at $260.1 million, up 9.8% year over year. Combined ratio improved 180 basis points (bps) to 81.4%.

Segment Results

Insurance: Gross premiums written increased 14.4% year over year to $942 million driven by acquisition of an U.K. commercial lines book of business and growth in most lines of business.

Underwriting profit dropped 92.9% year over year to $0.6 million. Combined ratio deteriorated 130 bps to 99.9%.

Reinsurance: Gross premiums written rose 18.2% year over year to $682.9 million on growth from selected new business opportunities in casualty and property excluding property catastrophe.

Underwriting income dropped 61.9% year over year to $4.3 million. Combined ratio deteriorated 1450 bps year over year to 95.2%.

Mortgage: Gross premiums written increased 10.9% year over year to $356.1 million. Underwriting income increased 39.6% to $244.1 million. Combined ratio improved 1320 bps year over year to 25.6%. Arch MI U.S. generated $11.2 billion of new insurance written.

Financial Update

Arch Capital exited the quarter with cash of $633.1 million, down 7% year over year. Debt was $1.7 billion, up 0.4% year over year.

As of Mar 31, 2019, book value per share was $23.12, up 7.4% year over year.

Operating return on equity was 12.3% in the first quarter, up 100 basis points.

Net cash provided by operating activities was $165.4 million, down 55.3% year over year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Arch Capital has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% 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 these revisions 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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