Arch Capital gets a target raise from Roth

After reviewing fourth quarter numbers from Arch Capital Group (Arch Capital Group Stock Quote, Charts, News, Analysts, Financials NYSE:ACGL), analyst Harry Fong of Roth Capital Partners increased his target price on the stock in a Tuesday report, saying Arch remains a best idea from the property and casualty insurance space.

Arch Capital, which has business segments in areas such as insurance, reinsurance, mortgage and investment income, announced its 2022 fourth quarter on Monday, coming in with net income available to shareholders of $849.5 million compared to $613.1 million a year earlier and EPS of $2.14 per share versus $1.27 per share a year ago. (All figures in US dollars.)

Gross premiums written by the company’s insurance segment were up 10.6 per cent and net premiums written were up 17.4 per cent, with the company saying the increases were due to rate increases, new business opportunities and growth in existing accounts.

“The insurance segment is retaining more business due to ongoing changes in its reinsurance programs, as well as higher levels of growth in lines with a higher retention rate. Net premiums earned in the 2022 fourth quarter were 24.0% higher than in the 2021 fourth quarter, and reflect changes in net premiums written over the previous five quarters,” Arch Capital said in a press release.

Looking at the numbers, Fong said Arch’s Q4 EPS of $2.14 was above his estimate at $1.23 as well as the consensus call at $1.34 per share, noting that the company benefitted from favourable loss development in the mortgage insurance unit of about $211 million or about $0.50 per share after tax. Fong said both Arch’s insurance and reinsurance segments reported a better underlying combined ratio and that Hurricane Elliott had only a minor impact on the company’s insurance business.

Fong said Reinsurance reported a 117.6 per cent increase in written premiums and grew 51 per cent for the full 2022 year.

With the update, Fong reiterated a “Buy” rating on Arch while lifting his target from $70 to $80, which at press time represented a projected one-year return of 22.6 per cent.

“While we are looking at slightly better (re)insurance underwriting results than our previous model, we also increased our investment income outlook with higher rates impacting the portfolio. Though our estimates are among the highest of publishing analysts, we continue to believe our forecast is conservative,” Fong wrote.

“Arch remains our top stock recommendation in the group, and we reiterate our Buy rating and raise our price target to $80, from $70, based on a 1.6x multiple of our expected 2024 book value excluding AOCI,” he said.