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Shares of Arch Capital Group Ltd. ACGL have gained 23.7% in the past year, underperforming the industry’s growth of 26.8% and the Zacks S&P 500 composite’s return of 26.4%.
One Year Price Performance
Image Source: Zacks Investment Research
Based on the forward 12-month price-to-book ratio, ACGL is currently trading at 1.61X, above its industry average of 1.54X. Shares of other property and casualty insurers like The Travelers Companies, Inc. TRV, American Financial Group, Inc. AFG and RLI Corp. RLI are also trading at a multiple higher than the industry average.
Closing at $91.89 on Monday, the stock stands 21% below its 52-week high of $116.47. The expected long-term earnings growth rate is pegged at 7%, lower than the industry average of 11.2%.
The stock is trading below the 50-day and 200-day simple moving averages (SMA) of $98.38 and $100.32, respectively, indicating downward momentum. SMA is a widely used technical analysis tool to predict future price trends by analyzing historical price data.
Arch Capital has been experiencing escalating operating expenses, primarily due to higher losses and loss adjustment costs, acquisition expenses, other operating costs, interest expenses and corporate expenses. A rise in expenses tends to weigh on the operating margin expansion, which, in turn, will negatively impact the company’s overall results.
ACGL’s Return on Capital
Arch Capital’s trailing 12-month return on equity is 18.9%, ahead of the industry average of 7.5%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders.
Also, the return on invested capital in the trailing 12 months was 14.7%, better than the industry average of 5.8%. This reflects the company’s efficiency in utilizing funds to generate income.
ACGL’s Growth Projection
The Zacks Consensus Estimate for Arch Capital’s 2024 earnings per share indicates a year-over-year increase of 5.6%. The consensus estimate for revenues is pegged at $16.15 billion, implying a year-over-year improvement of 19.7%.
The consensus estimate for 2025 earnings per share and revenues indicates a year-over-year increase of 2.2% and 15%, respectively, from the corresponding 2024 estimates.
Earnings Surprise History
Arch Capital surpassed earnings estimates in each of the last four quarters, the average being 17.07%.
Factors Favoring ACGL
Widespread operations, coupled with a compelling product portfolio provide meaningful diversification and earnings stability to ACGL. These also enable international expansion, enhance operations and diversify business at attractive risk-adjusted returns through strategic buyouts.
Its Mortgage Insurance complements the specialty insurance and reinsurance businesses. ACGL’s buyout of Allianz’s U.S. MidCorp and Entertainment insurance business has expanded its footprint in the middle-market property and casualty segment.
A growing base of invested assets driven by improving cash flows should drive investment income.
Sufficient liquidity, coupled with low leverage, has helped ACGL strengthen its balance. It also shields it from market volatility and supports growth initiatives.
Notably, its free cash flow conversion has remained more than 85% over the last many quarters, reflecting its solid earnings.