Arch Capital Group Ltd. (ACGL) was formed in Bermuda in 2001 to leverage opportunities for growth in the hard insurance and reinsurance markets that occurred in the aftermath of the September 11 terrorist attacks, recalls equity analyst Catherine Seifert in CFRA Research's flagship newsletter, The Outlook.
Since then, the firm has grown organically and through acquisitions to expand its presence in both of those areas and in the mortgage insurance space.
As a result of its increased presence, ACGL shares were added to the S&P 500 Index in 2022. Arch wrote more than $10 billion of net premiums in the nine months ended Sept. 30, 2023, of which insurance accounted for 43%, reinsurance for 49%, and mortgage insurance for 8%.
ACGL's underwriting portfolio is well diversified; casualty coverage accounted for 16% of the reinsurance portfolio, property (excluding catastrophe) accounted for 30%, property catastrophe for 16%, specialty lines for 33%, and marine and aviation and other lines for the remaining 5%.
The insurance portfolio is also diversified. Professional liability insurance accounted for 24% of the insurance portfolio, while property energy and aviation coverage accounted for 21%, and an array of other specialized liability lines of coverage accounted for the remainder.
Because Arch has a facile and opportunistic underwriting model, it can allocate capital to those areas that offer the highest return and best underwriting terms. As such, its business mix may shift, depending on market conditions.
Arch's successful implementation of this strategy has enabled the firm to produce compound annual written premium growth of 17.4% over the last five years and a combined ratio that has exceeded industry averages in each of those years.
We expect Arch to leverage favorable market and pricing conditions and produce operating revenue growth of more than 20% in 2023 when it reports its fourth quarter and full-year results on Feb. 14. We expect this rate of top-line growth to continue in 2024, which is about double the rate of the broader insurance and reinsurance industry.
We also expect underwriting margins to remain stable to slightly above their current superior levels. Property catastrophe reinsurance underwriting results are likely to have improved in 2023, subject to a decline in worldwide catastrophe losses.
Our 12-month target price of $105 assumes the shares will trade at 13.5x our 2023 operating EPS estimate of $7.79, at 13.4x our 2024 operating EPS estimate of $7.85, and at 12.7x our 2025 operating EPS estimate of $8.25, versus ACGL's 10-year average forward multiple of 14.7x and a peer average of 14x. The stock carries CFRA’s highest investment rating of 5-STARS, or Strong Buy.
