Arch Capital Group Limited ACGL reported fourth-quarter 2016 earnings per share of $1.13 that beat the Zacks Consensus Estimate of $1.01 by about 12%. Earnings dipped 1.7% from the year-ago quarter. Arch Capital's net income declined 19% year over year to 50 cents per share. Operating earnings for 2016 came in at $4.63 per share, up 3.3% year over year. Gross premiums written increased 8.3% year over year to $1.2 billion on higher premiums written across its Insurance, Reinsurance and Mortgage segments. Net investment income grew nearly 4.5% to $70 million. The increase was fueled by higher income distributions on term loan investments. Arch Capital's underwriting income decreased 3.4% year over year to $109.2 million. Combined ratio deteriorated 180 basis points (bps) to 90.7%. : Gross premiums written increased 4% year over year to $707.5 million owing to growth in the travel line from a mix of new business as well as construction and national accounts. Underwriting income of $2.6 million plummeted 90.8% from the year-ago quarter.
Combined ratio deteriorated 480 bps to 99.4%. : Gross premiums written in the quarter rose 5.4% year over year to $277 million. Underwriting income decreased 4.8% year over year to $67.6 million. Combined ratio deteriorated 430 bps year over year to 78.6%. : Gross premiums written in the quarter jumped 50.7% year over year to $138.3 million, largely driven by growth in U.S. primary business, Australian mortgage reinsurance and GSE credit risk-sharing transactions receiving insurance accounting treatment. Underwriting income skyrocketed 139.7% year over year to $42.3 million. Combined ratio deteriorated 2150 bps year over year to 53.5%. Arch Capital exited 2016 with total capital of $10.49 billion, up from $7.06 at year-end 2015. As of Dec 31, 2016, diluted book value per share was $55.19, up 15.8% year over year. Operating return on equity was 9.4% in 2016 compared with 9.7% in 2015. Exiting 2016, Arch Capital closed the acquisition of United Guaranty Corporation for $3.3 billion. The buyout will enable the acquirer to expand its private mortgage insurance business.
Arch Capital presently carries a Zacks Rank #3 (Hold). You can see . Arch Capital Group Ltd. Price, Consensus and EPS Surprise Arch Capital Group Ltd. Price, Consensus and EPS Surprise | Arch Capital Group Ltd. Quote Performance of Other P&C Insurers Among the other players from the same space that have reported their fourth-quarter earnings so far, the bottom line at Progressive Corp. PGR and The Travelers Companies Inc. TRV and RLI Corp. RLI beat their respective Zacks Consensus Estimate. The Best Place to Start Your Stock Search Today, you are invited to download the full list of 220 Zacks Rank #1 ""Strong Buy"" stocks - absolutely free of charge. Since 1988, Zacks Rank #1 stocks have nearly tripled the market, with average gains of +26% per year. Plus, you can access the list of portfolio-killing Zacks Rank #5 ""Strong Sells"" and other private research. See these stocks free >> Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.
It feels as though it was a very long time ago when Arch Capital (Nasdaq:ACGL) last traded at a meaningful discount to fair value. But then, that's the price of excellence – there are few insurance management teams I'd rather invest with and the market is not shy about rewarding the shares for the skill of the team here. While there's always a chance that an active storm season could create an investment opportunity in Arch Capital, investors shouldn't this stock to offer many opportunities to buy at significant discounts to fair value.Can Pricing Stay Strong? Pricing has been pretty solid in the P&C market over the past couple of years, as losses haven't been too bad and companies have appeared to use a little more discipline with pricing. But nothing good ever lasts, and while Arch Capital did see U.S. rate growth of about 4%, management mentioned that a few areas of the market are showing tougher pricing environments. To that end, while gross insurance premiums were up 4% in the second quarter, reinsurance premiums written fell 10% (13% on a net basis) on lower property cat and mortgage premiums.
On one hand, insurance “supply” seems pretty robust right now. A) has entered the commercial P&C market and Arch Capital itself decided to enter the mortgage insurance market and compete with the likes of Genworth (NYSE:GNW) and Radian (NYSE:RDN). On the other hand, we're entering the peak season for Atlantic hurricanes. As much as I hate to put it this way, the industry probably “needs” storm damage on the order of $20 billion to maintain rates into 2014, while it would take a Katrina-sized level of losses ($50 billion) to lead to meaningful rate growth. The good news for Arch Capital shareholders is that, along with ACE (NYSE: ACE), this company is among the best-positioned to continue growing during a stable rate environment. Some of that is due to the company's strong capital position and robust reserves, but a lot of it also has to do with a very intelligently-run business approach that can quickly allocate capital across businesses as rates and returns evolve.Will Results Have to Regress to the Mean?
One of the bearish arguments is that Arch Capital can't be better than everybody forever. As the company grows, it becomes more difficult to redeploy capital and the company's returns should approach the industry average. I'm not sure I buy this completely. Yes, it will be difficult for the company to continually out-underwrite its peer group, but as the recent entry into the mortgage insurance business suggests, there are still areas where Arch has little or no presence. What's more, on a long-term basis you can do really well in insurance simply by avoiding the huge mistakes that your peers are likely to make sooner or later and Arch Capital has shown a good history of doing precisely that.Perhaps not surprisingly, Arch Capital makes sure that it doesn't have all that much exposure to the Atlantic hurricane market. But it may also surprise investors that reinsurance companies often outperform in the month of September, as truly devastating storms are relatively rare and “manageable” levels of damage can strengthen rates going into the next year.
To that end, investors who want to play insurance names with more exposure to Atlantic hurricanes may want to consider names like RenaissanceRe (NYSE:RNR), Everest Re (NYSE:RE), PartnerRe (NYSE:PRE), or Montpelier Re (NYSE:MRH).The Bottom Line Even if I project a long-term return on equity of 14% (only slightly below the prior decade average of about 16%), an excess returns model suggests a fair value of only about $59 – 10% above today's price, and only with a long-term ROE well in excess of what most sell-side analysts project for the company. Likewise, creating an industry-wide TBV/ROE regression suggests that Arch Capital's current P/TBV ratio of 1.35x is almost spot-on with how the industry is pricing stocks these days. There are certainly worse decisions than buying a well-run company at fair value, but the perpetual bargain hunter in me wants to hold back in the slim hope that worries about storms and/or pricing could make these shares a little cheaper before year end.Disclosure: As of this writing, the author has no financial positions in any companies mentioned.