TipRanks Smart Value #31: Safeguarded Gains
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Dear Investors,
Dear Investors,
Welcome to the 31st edition of our recently launched TipRanks Smart Value Newsletter!
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This Week’s Top Value Pick: Arch Capital Group (ACGL)
Arch Capital Group (ACGL) is an insurance and reinsurance company specializing in property, casualty, and mortgage insurance solutions. Its operations cover specialty lines, risk management, and credit enhancement. ACGL is a leading global player in mortgage insurance and specialty reinsurance worldwide.
Capital Mosaic
Arch Capital traces its roots to Risk Capital Holdings, founded in 1995. The company was reorganized as Arch in 2000, and subsequently expanded into reinsurance in the aftermath of the September 11 attacks to meet the surge in global demand for coverage. In 2015, Arch further diversified by entering the mortgage insurance business, laying the groundwork for one of its most significant growth drivers in the years ahead.
Over time, Arch has expanded through a mix of organic growth and selective acquisitions, steadily increasing its global footprint and business lines. Today, Arch Capital commands a market capitalization of over $33 billion, and its stock has been listed on the NASDAQ under the ticker ACGL since 2000, joining the S&P 500 in 2022.
Unlike many peers that rely heavily on acquisitions, the company has focused on organic expansion while using M&A as a complementary strategy. When deals have been pursued, they have been disciplined, strategic, and executed at attractive valuations. A pivotal moment came in 2014, when Arch entered the U.S. mortgage insurance market through the purchase of CMG and PMI’s mortgage assets, later consolidated under Arch Mortgage Insurance. This move set the stage for its acquisition of United Guaranty Corporation (UGC) from AIG in 2016, a transformative deal that made Arch the world’s largest private mortgage insurer and established mortgage insurance as a cornerstone of its operations. Over the next several years, Arch continued to increase its diversification, acquiring and investing in companies across verticals, specialization areas, and geographies.
Arch shifted toward digital innovation in 2023 with the acquisition of Thimble, an Insurtech platform providing flexible, on-demand coverage for small businesses. This move expanded Arch’s digital distribution channels and underscored its push into tech-enabled specialty insurance.
Expansion momentum carried into 2024 with the acquisition of Allianz’s U.S. MidCorp and Entertainment insurance businesses. The deal added $1.7 billion in gross premiums, strengthened Arch’s position in the U.S. middle market, and expanded its specialty offerings in property-led and entertainment lines. The U.S. middle market generally refers to companies with annual revenues between $10 million and $1 billion, representing a vital segment that drives roughly one-third of private-sector GDP and employment. For companies like Arch Capital, the middle market is important as it provides a diverse client base for specialized insurance and reinsurance solutions, particularly in commercial and specialty lines where risk management needs are complex but not largescale.
While parts of the acquired portfolio required remediation, the transaction provided access to valuable agency relationships and accelerated Arch’s mid-market expansion by nearly a decade. In its first year under Arch’s ownership, MidCorp is projected to generate over $1.5 billion in annualized premiums, slightly above initial forecasts.
Taken together, Arch’s acquisitions tell the story of a company that has grown through precision rather than volume. Each transaction has been carefully aligned with its long-term strategy, whether to build global leadership in mortgage insurance, expand specialty distribution, increase geographic diversification, or embrace digital innovation. These moves, combined with steady organic growth, have reshaped Arch Capital into a diversified, globally balanced insurer and reinsurer with a stronger premium base, disciplined underwriting, and a durable platform for long-term value creation.
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Structured Strength
Arch Capital Group operates through three major businesses: insurance, reinsurance, and mortgage insurance. The company’s revenue streams are built on premiums from underwriting across these segments, complemented by investment income from its expanding asset base. This mix provides recurring stability and flexibility to pivot into areas with the most attractive risk-adjusted returns.
The insurance segment encompasses a broad range of specialty coverages, including casualty, professional liability, property, travel, accident and health, and program business. A key growth area has been Arch’s expansion into the U.S. middle market and entertainment sectors through acquisitions, which complement its strengths in large-account and specialty lines. Casualty remains a core driver, with rate improvements in excess and surplus (E&S) and alternative markets supporting selective growth. International operations add further scale and diversification. While competitive pressures exist, Arch’s focus on underwriting discipline and program remediation is intended to sustain long-term profitability.
The reinsurance segment provides global exposure to property catastrophes, casualty, and specialty business. Arch applies a disciplined cycle management approach, expanding into markets where rates and terms exceed loss trends – such as Florida property catastrophe and casualty – while pulling back from areas where margins are eroding, like the property reinsurance market in California. Its portfolio is deliberately diversified by geography and risk type, enabling the company to balance volatility with steady profitability. This segment complements the insurance book by providing opportunities to scale quickly into attractive markets and offers additional earnings diversification.
The mortgage segment has become a stable and cash-generative pillar of Arch’s business model. An exception to Arch’s general rule of organic growth, the company’s mortgage business was built through acquisitions and international expansion. Currently, it provides credit enhancement solutions to lenders and investors in the U.S., Australia, the U.K., and Europe. Around 75% of its mortgage insurance book is U.S. primary mortgage insurance, while international mortgage/reinsurance and credit-risk transfer products make up the remainder. Mortgage insurance generates durable returns thanks to high persistency1 of the in-force portfolio, conservative underwriting, and innovative risk transfer mechanisms. While originations ebb and flow with interest rate cycles, Arch’s geographic diversity and risk management practices help protect the portfolio and maintain consistent contributions to group earnings.
Taken together, Arch’s three segments form a complementary model that blends growth with resilience. Insurance delivers scale and specialty expertise, reinsurance offers global diversification and opportunistic capital deployment, and mortgage provides consistent, cash-generative returns.
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1- Persistency rate measures the percentage of policies that remain active over time – indicating how well the company retains existing policyholders.
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Disciplined Opportunism
Arch Capital’s leadership views the property and casualty (P&C) insurance market not as a single underwriting cycle but as a collection of distinct opportunities that emerge and fade across different lines of business. Arch follows a disciplined capital allocation approach – deploying capital toward the most attractive opportunities and retreating when conditions deteriorate. This opportunistic yet disciplined framework has enabled the company to avoid chasing growth for its own sake and to focus instead on long-term, sustainable underwriting returns.
The company’s strategy has been particularly visible in property catastrophe reinsurance, where recent developments in Florida have created an improved operating environment. Legislative reforms have strengthened local insurers, allowing them to purchase more reinsurance coverage and spurring greater demand for global reinsurers like Arch. Even though rates have moderated slightly, property catastrophe coverage in the region continues to generate attractive returns – close to a 20% return on equity. Since 2023, Arch has more than doubled the size of its catastrophe reinsurance portfolio, with Florida now accounting for about 7.5%–8.6% of equity. Management emphasized that its underwriting appetite has not fundamentally changed – capital deployment remains measured and responsive to client needs and market returns. Arch intends to continue writing business in Florida as long as risk-adjusted returns justify the exposure.
While property reinsurance remains a key earnings driver, Arch also sees meaningful opportunities in casualty reinsurance. Rates are rising across the board, with primary casualty premiums rising in the mid-single digits and excess layers – coverage for large or severe claims – increasing by double digits. These increases have outpaced underlying loss trends, allowing reinsurers to earn more without a corresponding rise in claims costs. However, competition has kept commissions relatively stable, capping margin expansion. Still, Arch remains optimistic, viewing the current market as conducive to disciplined growth.
At the same time, the excess and surplus (E&S) property market – where insurers cover higher-risk properties or situations standard insurers avoid – entered a period of moderation, with double-digit rate declines in some areas. However, Arch believes the softening is narrower than industry data suggests. The softening is primarily the result of new capacity flowing back into the market through managing general agents (MGAs)2, which had previously pulled back following several years of heavy catastrophe losses. Management views this as a temporary, supply-driven adjustment rather than a broad-based weakening.
The company’s mortgage insurance segment, entered in the mid-2010s, continues to serve as a valuable stabilizer within its portfolio. Despite slower U.S. mortgage originations due to high interest rates and affordability challenges, persistency in Arch’s in-force book has remained high. The company’s growing presence in Europe and Australia, combined with its participation in credit risk transfer programs, adds further resilience. A moderate decline in interest rates could improve affordability and stimulate originations, whereas sharp declines could lead to refinancing and reduced persistency.
Building on this foundation, Arch is also expanding deliberately into the U.S. mid-market through property-led industries such as manufacturing and hospitality. This strategic move complements its large-account business and broadens its customer base. About 75% of the portfolio acquired through the Allianz MidCorp transaction is performing well, with steady premium streams and high underwriting quality. Arch plans to further refine pricing models, strengthen risk selection, and align the acquired business with its established profitability standards.
Throughout these evolving market conditions, underwriting discipline remains at the core of Arch’s strategy. The company builds a margin of safety into its pricing to account for low-frequency but high-severity events – such as wildfires, earthquakes, and tsunamis – that the broader industry often underestimates. Its loss trend assumptions remain unchanged year over year, with mid-single-digit expectations for primary casualty and double-digit expectations for excess layers, consistent with current pricing realities.
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2- A Managing General Agent (MGA) is a specialized type of insurance intermediary that has been granted underwriting authority by an insurance company.
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Underwriting Edge
Over the past three years, Arch Capital Group has delivered impressive financial growth, with revenues expanding at a CAGR of 30.7% and EPS rising by 33.3%. This momentum has been driven by robust performance across its insurance and reinsurance businesses, disciplined underwriting practices, and steadily rising investment income.
The company sustained this growth trajectory in the second quarter of 2025, reporting strong premium expansion across all major segments. Total net premiums earned grew 21.7% year-over-year to $4.3 billion, highlighting continued demand for Arch’s insurance solutions. Over the trailing 12 months that ended June 30, 2025, Arch wrote roughly $22.9 billion in gross premiums, with reinsurance accounting for about half of that mix, insurance accounting for 44%, and mortgage insurance making up the remainder. This scale underscores the company’s well-balanced portfolio and its strategic focus on profitable underwriting combined with disciplined capital deployment.
Despite solid top-line growth, profitability showed some pressure. Underwriting income increased 7.3% year-over-year to $818 million, but underwriting margins narrowed as the combined ratio3 worsened by 2.5 percentage points to 81.2%. The decline reflected higher loss and expenses, partly due to growth-related costs and an uptick in claims activity. Excluding catastrophic activity, however, the combined ratio improved to 80.9% from 76.7% a year earlier. Arch reported catastrophe losses of $154 million, largely stemming from severe U.S. thunderstorms in the Midwest region. Despite these weather-related impacts, the company maintained underwriting profitability, demonstrating its strong risk management and pricing discipline, even as rising claims and a competitive market tempered some of the margin benefits from premium growth. Investment income added another layer of strength to the results. Net investment income rose 7% sequentially to $405 million, supported by higher reinvestment yields on the company’s $44.9 billion investment portfolio. The portfolio remains conservatively positioned, heavily weighted toward investment-grade and government-backed fixed-income securities to ensure stable returns and limited market volatility. Strong operating cash flow of $2.58 billion during the quarter further enhanced liquidity and balance sheet flexibility.
The company’s loss ratio4 climbed to 53.1% from 51.2%, and the expense ratio rose slightly to 28.1% from 27.5%. Even so, Arch continued to deliver strong bottom-line results. After-tax operating income reached $979 million, or $2.58 per share, exceeding consensus expectations. This performance translated to an annualized operating return on average common equity (ROE) of 18.2%, among the top 30% in the industry. Book value per share advanced 11.4% year-to-date and 7.3% sequentially to $59.17, supported by solid operating earnings, realized gains, equity method investments, and gains in fixed-maturity securities. Over its 23-year history, Arch has compounded book value per share at an impressive 15.5% annual rate – one of the strongest track records among global insurers.
Segment results reflected the benefits of Arch’s diversified model. The Insurance segment generated $129 million in underwriting income, up 18.3% year-over-year, with net premiums written exceeding $2 billion – a 30.7% increase driven by the acquisition of the U.S. middle market and entertainment businesses, which contributed $451 million in net premiums. Organic growth was modest but supported by continued strength in casualty and international lines. The Reinsurance segment achieved record quarterly underwriting income of $451 million, up 23.2% year-over-year, propelled by demand for property catastrophe coverage and selective casualty expansion, particularly in Florida. The Mortgage segment contributed $238 million in underwriting income, benefiting from strong persistency even as new originations remained subdued amid high mortgage rates.
Arch continues to demonstrate a disciplined approach to managing natural catastrophe exposure. The company’s peak zone probable maximum loss (PML) – the estimated loss from a severe event in its highest-risk area – stands at $1.9 billion, representing just 8.6% of tangible equity. This conservative position, well within internal limits, highlights Arch’s commitment to maintaining robust capital buffers and the capacity to absorb large losses without compromising financial strength or shareholder returns.
Meanwhile, management sees further opportunities in casualty insurance, where favorable market conditions continue to support growth. However, Arch remains cautious in more competitive areas, maintaining its focus on profitability and disciplined underwriting over pure volume expansion.
Arch’s balance sheet remains one of the strongest in the industry, with a debt-to-equity ratio of 0.12, placing it among the top 30% of insurers. The company also maintains robust credit ratings, including “A” from S&P, “A3” from Moody’s, and “A-” from Fitch, each reflecting a stable and positive outlook. These ratings underscore Arch’s financial resilience, operational discipline, and consistent ability to create long-term shareholder value.
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3- Combined ratio is a key measure of underwriting profitability. It represents the total of losses and expenses incurred from underwriting activities as a percentage of premiums earned.
4- Loss ratio is a key profitability metric that measures the ratio of claims paid and reserves for future claims to premiums earned.
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Hidden Value
Unlike most large-cap financial institutions, Arch Capital Group has chosen not to pay a regular dividend, instead directing excess capital toward acquisitions and share repurchases to strengthen shareholder value. In the first half of 2025, the company repurchased approximately $360 million worth of shares, followed by an additional $244 million between July and early August. Share buybacks remain a key component of Arch’s capital allocation strategy, used selectively when management believes the stock is undervalued relative to its intrinsic worth. Reflecting its ongoing confidence, the Board of Directors recently expanded the company’s repurchase authorization by $2 billion. After factoring in third-quarter repurchases, Arch had roughly $2.3 billion available under its buyback program as of September 4, 2025.
Despite its strong fundamentals, Arch Capital’s stock has declined roughly 21% over the past year amid investor concerns about softening underwriting conditions and weaker premium pricing trends across its insurance and reinsurance businesses. Broader sector apprehension about deteriorating pricing power and rising catastrophe exposure has weighed on sentiment, even as Arch continues to post resilient profitability.
From a valuation perspective, the recent pullback has created a potential opportunity. ACGL currently trades at a discount of more than 10% based on non-GAAP trailing and forward P/E ratios, as well as a trailing EV/EBITDA, and at a discount of more than 5% based on its price-to-book ratio compared to its historical averages. Compared to peers like AIG, Chubb, Hartford Insurance, and W R Berkley, ACGL is trading in the low-to-moderate valuation range based on non-GAAP trailing and forward P/E ratios, trailing EV/EBITDA, price-to-book, and price-to-cash flow ratios.
Analysts, meanwhile, remain confident in Arch’s outlook, citing strong momentum in its Property and Casualty segment, a solid balance sheet with low leverage, and growing investment income that supports sustainable long-term earnings. Consensus estimates suggest around 20% upside from current levels, with some projections calling for potential gains exceeding 38%. A discounted cash flow (DCF) analysis also indicates that the stock is trading approximately at 37% below its intrinsic value.
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Investing Takeaway
Arch Capital Group represents a compelling long-term value opportunity in the specialty insurance and reinsurance space. Its disciplined underwriting, conservative balance sheet, and diversified business model create a durable foundation for compounding intrinsic value over time. While near-term sentiment has been clouded by market concerns around pricing trends and catastrophe exposure, Arch’s consistent profitability, prudent capital allocation, and opportunistic share repurchases all position it well for recovery. The company’s ability to redeploy capital into high-return areas rather than pay dividends reflects a strategy centered on long-term compounding rather than short-term payouts. As market conditions normalize and investor focus shifts back to fundamentals, Arch’s measured approach to growth, risk, and capital deployment is likely to unlock significant value for patient shareholders.
