Arch Capital Keeps Surging Into Earnings

Arch Capital Group (NASDAQ:ACGL) is a global insurer and reinsurer that formed just after the dotcom bubble in 2001.

Arch Capital Keeps Surging Into Earnings

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ACGL had nothing to do with the dotcom crash. As an insurer, it was more in the line of fire when the insurance industry, especially reinsurers, got hammered in 2008.

And if you look at the stock’s price chart during those difficult days, ACGL stock got through them smoothly. It’s likely that its current $15 billion market cap kept it below the level of massive risk exposure larger insurers and reinsurers had at the time.

Today, about 24% of its business is in the mortgage insurance sector, with another 22% in casualty and professional, and another 14% in specialty insurance. Specialty insurance is insurance on unique properties where risk has to be assessed for each unique case. For example, specialty insurance is what you use to insure marine, aviation and energy operations.

Over two-thirds of its business is generated in the U.S., with Europe making up another 18%. It also has offices in Australia and some exposure in Asia.

As for its reinsurance business — reinsurance is when an insurer sells part of its liability policy to another insurer to lower its exposure on a property or asset — it’s focused on the specialty sector and the casualty sector.

ACGL Has a Few Big Things Going for It

First, it has four consecutive quarters of outpacing earnings expectations by a significant amount. This is important because one surprise to the upside may be a fluke. But when you can string together an entire year of significant bullish reports, that says something about how the company is doing business.

Earnings for Q2 will be later this month and no one is expecting this streak to end. The stock is up 45% year-to-date, which is quite a run for an insurance company, especially in a low-interest-rate market.

But a good market is helping with its growth. Gross premiums were up 13% in Q1 compared to the same quarter a year ago. But investment income — the portfolio that the company put to work from all its premium payments — was up threefold.

Second, ACGL is continuing to lower its catastrophe risk. That means it’s not exposing itself to big risks in sectors where catastrophes like floods or hurricanes will suck up a lot of its premiums. It pays out less than it takes in and lowers its risk to big payouts.

Third, it’s now betting on the U.S. consumer, which is the strongest part of the U.S. market. Given the fact that interest rates are headed down even more in coming months, that should boost home sales and refinancings.

That’s particularly true now, since summer is prime time for home buying. Families that are moving like to get settled in before school starts.

Because consumers are doing well here, default risk is falling on its mortgage insurance clients, which bodes well moving forward.

With all this going for it, it’s no surprise my Portfolio Grader gives ACGL stock an A rating.

Louis Navellier is a renowned growth investor. He is the editor of four investing newsletters: Growth InvestorBreakthrough StocksAccelerated Profits and Platinum Growth. His most popular service, Growth Investor, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.

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