Arch Capital Group Ltd.

ACGL Details

Arch Capital Group Ltd. (NASDAQ: ACGL) is a Bermuda based firm that provides insurance, reinsurance and mortgage insurance in Bermuda, the United States, Europe, Canada, Australia and Hong Kong. ACGL operates in three underwriting segments, viz. 1) Insurance, which provides risk mitigation solutions to global customers across different industries. 2) Reinsurance, comprising reinsurance underwriting services covering property catastrophe, casualty; marine and aviation; and other specialty markets, and 3) Mortgage Insurance, which includes risk management and risk financing products to the mortgage insurance sectors through platforms in the US, Europe, and Bermuda. As of July 14, 2021, the company’s market capitalization stood at USD 15.15 billion.

Acquisition of Watford Holdings Ltd. (Watford): On July 02, 2021, the company declared its previously announced acquisition of Watford, a global property and casualty insurance and reinsurance company, in conjunction with investment partners Kelso & Company (Kelso) and Warburg Pincus, has been completed.  On November 02, 2020, ACGL and Watford had entered into a merger transaction through an affiliated entity of the former. The company holds a 40% interest in the entity, with 30% each held by Kelso and Warburg Pincus.

Public offering of preferred depositary shares: ACGL announced the public offering of 20 million depositary shares on June 02, 2021, for a total of USD 500 million public offerings at USD 25 per depositary share. The offer was closed on June 11, 2021. ACGL intends to redeem, in September 2021, all or some of its issued and outstanding Series E Non-Cumulative Preferred Shares utilizing the public offering net proceeds and make use of all remaining amounts for general activities.

Q1FY21 Results: The company reported an increase of 11.70% in net premiums earned to USD 1.95 billion in Q1FY21 (ended March 31, 2021) compared to USD 1.74 billion in Q1FY20. The company reported a net income of USD 475.71 million in Q1FY21 compared to the net loss incurred of USD 88.67 million in Q1FY20, primarily driven by the net realized gains of USD 142.46 million during the quarter. In addition, ACGL recorded an increase in net cash flow from operating activities to USD 762.85 million in Q1FY21 vs USD 610.45 million in Q1FY20.

Key Risks: The insurance and reinsurance industry has been facing consolidation over the last several years. The consolidated client and competitor businesses may try to use their greater market power to negotiate price reductions of products and services in which the company deals. If this happens, then the company's future underwriting activities might be reduced, resulting in reduced premiums and a decrement in future earnings.

Valuation Methodology: Price/Book Value Multiple Based Relative Valuation

(Analysis by Kalkine Group)

• % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

ACGL Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: ACGL has increased by 30.62% in the past 12 months but has corrected 5.88% over the past three months. It is currently leaning towards the higher band of the 52-week range of USD 27.41 to USD 41.28. The stock is currently trading between its 50 and 200 DMA levels, and its RSI Index is 42.36. We have valued the stock using the Price/Book Value-based relative valuation methodology and arrived at a target price of USD 40.76. Considering the company’s growth prospects, balance sheet strength and current valuation, we recommend a “Watch” rating on the stock at the closing price of USD 37.75, up by 0.56% as of July 14, 2021.

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.