Why Is Arch Capital (ACGL) Down 23.7% Since Last Earnings Report?

It has been about a month since the last earnings report for Arch Capital Group (ACGL). Shares have lost about 23.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Arch Capital 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 catalysts.

Arch Capital Earnings Beat Estimates in Q4, Soar Y/Y

Arch Capital Group Ltd. reported fourth-quarter 2019 operating income per share of 74 cents, which beat the Zacks Consensus Estimate by 10.5%. Also, the bottom line improved 60.9% year over year.

The upside can be attributed to improved net premiums written as well as a decrease in expenses related to the amortization of intangible assets.

Behind the Headlines

Gross premiums written increased 14.6% year over year to $1.9 billion, largely fueled by higher premiums written across its Insurance, Reinsurance and Mortgage segments.

Net investment income was down 1.9% year over year to $154.3 million due to a reduction in interest rates.

Operating revenues of $1.7 billion increased 23.4% year over year on higher premiums earned.

Interest expenses were $31.2 million, up 4.8% year over year.

Total expenses of $1.3 billion increased 5.8% year over year on higher losses and loss adjustment expenses, acquisition expenses, other operating expenses, interest expenses, and corporate expenses.

Arch Capital’s underwriting income was $251.4 million, up 50.6% year over year. Combined ratio improved 400 basis points (bps) to 83.8%.

Segment Results

Insurance: Gross premiums written increased 24.9% year over year to $1 billion. Net premiums written rose 28.7% year over year to $688.7 million, driven by the acquisition of new businesses, growth in existing accounts and rate increase in most lines of business.

Underwriting loss was $13.8 million in the fourth quarter compared with underwriting loss of $15.6 million in the year-ago quarter. Combined ratio improved 70 bps to 102.1%.

Reinsurance: Gross premiums written rose 5.6% year over year to $432.2 million. Net premiums written improved 4.3% year over year to $338.9 million, reflecting new business opportunities in property lines and growth in existing accounts.

The segment reported underwriting income of $26.4 million against underwriting loss of $41.2 million in the year-ago quarter. Combined ratio improved 1710 bps year over year to 93.8%.

Mortgage: Gross premiums written increased 3.5% year over year to $370.7 million. Net premiums written rose 2% year over year to $315.5 million, driven by strong growth in monthly premium business on rise in demand for insurance in force. Underwriting income increased 12.5% to $276.5 million.

Combined ratio improved 100 bps year over year to 21.6%. Arch MI U.S. generated $24.1 billion of new insurance written, which increased 44.3% year over year.

Financial Update

Arch Capital exited the quarter with cash of $726.2 million, up 12.3% year over year. Debt was $1.7 billion, which inched up marginally from the year-ago quarter.

As of Dec 31, 2019, book value per share was $26.42, up 22.8% year over year.

Operating return on equity was 11.7% in the fourth quarter, up 290 basis points.

Net cash provided by operating activities was $505.3 million, up 15.3% year over year.

Full Year Update

Net income for the year ended Dec 31, 2019, surged nearly 150% year over year to $316 million.

How Have Estimates Been Moving Since Then?

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

VGM Scores

Currently, Arch Capital has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, 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 B. 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 looks promising. Notably, Arch Capital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.