Value Line has initiated coverage of Arch Capital Group, Ltd. (ACGL) in its flagship product, The Value Line Investment Survey. It is a Bermuda-based public limited liability company with $6.55 billion in capital at December 31, 2013 and, through operations in Bermuda, the United States, Europe, and Canada, writes insurance and reinsurance policies on a worldwide basis.

Although the insurer is positioned to provide a full range of property and casualty insurance and reinsurance lines, it focuses on writing specialty lines of insurance and reinsurance. For 2013, ACGL wrote $3.35 billion of net premiums and reported net income available to common shareholders of $687.8 million. Further, book value per common share was $39.82 at the end of last year.

Arch Capital’s core insurance and reinsurance offerings are centered on the following areas: casualty, construction, executive assurance, healthcare, lender’s products, national accounts, professional liability, programs, surety, and travel & accident. In addition, the company has recently targeted its efforts on developing a complex line of policies for the energy, marine, and aviation sectors. 

The global reinsurance and insurance businesses are highly competitive. Therefore, Arch Capital squares off against major U.S. and non-U.S. insurers and reinsurers, some of which have greater financial, marketing, and management resources. Moreover, many have longer-term relationships with clients and brokers than Arch. All told, this insurance outfit competes with other industry players primarily on the basis of overall financial strength, ratings assigned by independent rating agencies, geographic scope of business, depth of client relationships, premiums charged, contract terms & conditions, products, services offered, speed of claims payment, reputation, employee experience, qualifications and local presence. Although the list of insurance titans ACGL faces off with is vast, a number of notable businesses include ACE Limited (ACE), Alleghany Corporation (Y), American International Group, Inc. (AIG), Berkshire Hathaway (BRK/B), The Chubb Corporation (CB), The Hartford Financial Services Group, Inc. (HIG), HCC Insurance Holdings (HCC), Markel Corporation (MKL), and XL Group (XL).

Although the insurance industry has registered strong gains in both underwriting income and net profits during the last 12 months, the good times could be winding down. A prolonged low interest-rate environment has plagued returns on fixed income assets. Too, reinvestment yields on bonds remain historically weak. In addition, a lack of natural catastrophes during the past year has spurred excess capacity throughout the sector, which has hurt pricing leverage and hindered rate hikes for the upcoming policy renewal season. Moreover, an uneven economic recovery has caused many businesses to exercise caution when considering expansion plans and new product development.

Arch Capital has its sights on turning operations around. In that vein, the company has undertaken various initiatives aimed at reining in costs, slashing property loss exposure, and shoring up its reserve base. Furthermore, it took steps to bolster its Reinsurance arm, altering its business mix, and writing less-volatile, more-profitable professional policies. What’s more, ACGL has adopted a longer-term methodology with regards to its casualty lines, opting for steady, conservative returns rather than expensive coverage options.

The healing housing market ought to support better results at Arch Capital in the coming quarters. The company has made strides gaining market share and beefing up its customer base. In fact, the number of mortgage applications has tripled in recent months. Also, the insurer has received approval for meaningful rate increases throughout several of its primary markets. These higher premiums should alleviate loss pressures and boost earnings.

Despite having contended with a myriad of top and bottom line challenges lately, Arch has the strategies and resources in place to notch a noteworthy comeback.

All told, subscribers interested in this diversified insurance and reinsurance provider are advised to consult Value Line’s quarterly reports for Arch Capital Group, Ltd., as well as any supplemental reports and relevant articles as important news items arise.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.