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Arch Capital (ACGL) Up 0.5% 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 0.5% 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 Q3 Earnings Miss Estimates, Rise Y/Y

Arch Capital Group Ltd.  reported third-quarter 2019 operating income per share of 63 cents, which missed the Zacks Consensus Estimate by 3.1%. However, the bottom line improved 6.8%.

The year-over-year increase in earnings was due to higher premiums and net investment income as well as decrease in interest expense.

Behind the Headlines

Gross premiums written increased 26% year over year to $2.2 billion, largely fueled by higher premiums written across its Insurance, Reinsurance and Mortgage segments.

Net investment income was up 12.1% year over year to $161.5 million, driven by an increase in average investable assets.

Operating revenues of $1.7 billion increased 20% year over year on the back of higher premiums earned, net investment income and other income.

Interest expense was $31.3 million, up nearly 5.4% year over year.

Total expense of $1.2 billion increased 11% year over year on higher losses and loss adjustment expenses, acquisition expenses, other operating expenses, interest expense and corporate expenses.

Arch Capital’s underwriting income came in at $235.7 million, up 0.4% year over year. Combined ratio deteriorated 210 basis points (bps) to 82.2%.

Segment Results

Insurance: Gross premiums written increased 20.2% year over year to $1 billion. Net premiums written rose 22% year over year to $703.8 million driven by the acquisition of U.K. commercial lines book of business, growth in existing accounts and rate increase in most lines of business.

Underwriting loss was $24.1 million in the third quarter, compared with underwriting loss of $26.7 million in the year-ago quarter. Combined ratio deteriorated 80 bps to 104%.

Reinsurance: Gross premiums written rose 52.2% year over year to $662.6 million, reflecting new business opportunities in casualty and property lines. It is partially offset by a decline in other specialty business due to reductions in motor and agriculture business.

The segment sustained underwriting loss of $2.7 million in contrast to underwriting gain of $30.9 million in the year-ago quarter. Combined ratio improved 1040 bps year over year to 100.3%.

Mortgage: Gross premiums written increased 7% year over year to $375.1 million. Underwriting income increased 13.8% to $262.5 million. Combined ratio remained unchanged year over year at 24.6%. Arch MI U.S. generated $25.3 billion of new insurance written, which increased 18.2% year over year.

Financial Update

Arch Capital exited the quarter with cash of $880 million, up 35% year over year. Debt was $1.7 billion, down 7% year over year.

As of Sep 30, 2019, book value per share was $25.61, up 3.9% year over year.

Operating return on equity was 10.3% in the third quarter, down 110 basis points.

Net cash provided by operating activities was $830.6 million, up 33.1% year over year.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -7.95% due to these changes.

VGM Scores

Currently, Arch Capital has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, 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.

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 #3 (Hold). We expect an in-line return from the stock in the next few months.


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