On Friday, Arch Capital Group Ltd. (NASDAQ: NASDAQ:ACGL) saw its stock price target increased to $110 from $100 by Roth/MKM, with a maintained Buy rating. The firm's decision followed Arch Capital's announcement of acquiring Allianz (ETR:ALVG)'s U.S. MidCorp and Entertainment Insurance Businesses for a $450 million cash consideration.
The acquisition includes a business that writes $1.7 billion in gross premiums, previously part of Fireman's Fund Insurance's commercial operations.
The transaction is structured as a loss portfolio transfer of $2 billion of reserves covering the period from 2016 to 2023, with new business expected to be added to Arch's balance sheet starting in 2024.
According to the company's presentation, this deal is anticipated to contribute approximately 20% more growth to Arch Insurance's premiums with a relatively modest cash outlay. Arch is set to gain around $1.5 billion of new cash from the deal and foresees a temporary increase in the combined ratio, which should adjust to the low-90s following an integration period.
Arch Capital anticipates the deal will close in the second half of 2024 and predicts the acquisition will enhance earnings per share (EPS) and return on equity (ROE) starting in 2025, with more significant benefits expected in 2026 and beyond.
The firm noted that the transaction adds a new property and casualty (P&C) segment to Arch's insurance portfolio in the U.S. middle market business, a segment Arch has been evaluating for some time.
The analyst from Roth/MKM views the transaction positively, stating that it represents a good deal for both the seller and buyer. For Arch, the acquisition brings a new business segment at a nominal cost without materially affecting the company's strong balance sheet.
Based on the information provided by the company, there is no immediate need to alter current earnings estimates, but the transaction is likely to contribute to potential earnings in 2026. Consequently, the analyst has raised the price target, basing it on a 1.7x multiple of the expected 2025 book value excluding accumulated other comprehensive income (AOCI).
InvestingPro Insights
Following the upbeat analysis by Roth/MKM on Arch Capital Group Ltd. (NASDAQ: ACGL), real-time data from InvestingPro aligns with a positive outlook. With a market capitalization of $35.2 billion, Arch Capital is trading at an attractive earnings multiple of 7.87, according to the latest metrics.
This low P/E ratio, coupled with a substantial revenue growth of 41.83% over the last twelve months as of Q4 2023, underscores the company's robust financial performance.
InvestingPro Tips indicate that Arch Capital is a prominent player in the Insurance industry and has been trading with low price volatility, which could appeal to investors seeking stability. Moreover, the stock's strong return over the last three months, at 18.59%, and the significant return of 32.8% over the past year, reflect the company's solid market position and investor confidence.
For readers interested in detailed analytics and additional insights, there are 10 more InvestingPro Tips available for Arch Capital at https://www.investing.com/pro/ACGL, which can be accessed with an extra 10% off on a yearly or biyearly Pro and Pro+ subscription using the coupon code PRONEWS24.
It's noteworthy that Arch Capital does not pay a dividend, which may be a consideration for income-focused investors. However, the company's profitability over the last twelve months and analysts' predictions of profitability this year suggest a strong financial footing.
The upcoming earnings date on April 29, 2024, will provide further insights into the company's performance and the potential impact of the recent acquisition on its future earnings.
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