Opinions
Joe Terranova
Arch Captal Group Ltd
ACGL-Q
BUY
Jun 21, 2023
Stock price when the opinion was issued
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Premium contentThis Bermuda based $29 billion market cap travel focused general liability insurance company is well positioned for the expected 15% increase in global travel that is expected for the next 5-10 years. It trades at 10x earnings, under 2x book value and supports a 21% ROE. We like that cash reserves are growing. We suggest placing a stop-loss at $63, looking to achieve $95 -- upside potential of 29%. Yield 0%
(Analysts’ price target is $95.20)Premium contentPremium contentPremium contentPremium contentPremium contentPremium contentOur PAST TOP PICK with ACGL has triggered its stop at $105. To remain disciplined, we recommend covering the position at this time. This will result in a net investment gain of 34%, when combined with our previous guidance.
EPS of $1.54 beat estimates of $1.33; revenue of $4.67B beat estimates by just under 1%. Arch's underlying loss ratio may deteriorate this year, but remain solid. Still, 1Q margins were better than consensus in insurance and reinsurance, potentially leading to improved annual estimates. Underwriting income should worsen in 2025 on waning price increases, yet premium growth and still-expanding investment income remain earnings tailwinds. Even a higher underlying loss ratio in 2025 would likely yield a midteens return on equity, not much better than other Bermuda carriers, despite Arch's premium valuation. Continued consolidated favorable P&C reserve development was a positive and beat consensus. Catastrophes, including preannounced wildfire losses, were a bit better than expected (but certainly the company was impacted). EPS beat consensus, as catastrophe losses were lower and reserve development was higher than expected.
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Rare to find a financial company that grows 34% over the last 4 quarters and double digits the last 36 months.