Does Arch Capital Still Offer Value After Specialty Insurance Expansion and Strong Long Term Gains?
- If you are wondering whether Arch Capital Group at around $91.92 is still a smart buy or if most of the upside is already priced in, you are not alone. That is exactly what we are about to unpack.
- Despite a modest 0.6% gain year to date and a 1.5% slide over the last year, the stock is still sitting on returns of 61.4% over 3 years and 176.7% over 5 years, indicating that long-term holders have already been well rewarded.
- Recent headlines have focused on Arch Capital Group expanding its presence in specialty insurance lines and continuing to build its reinsurance footprint. This reinforces the idea that the company is positioning for durable, profitable growth. At the same time, ongoing commentary about tighter underwriting standards and disciplined capital allocation supports the view that management is balancing opportunity with risk.
- On our framework Arch Capital Group scores a solid 5/6 valuation score, suggesting it looks undervalued on most of the key checks we run, but not all. Next we will break down how it compares under different valuation approaches and then return to a more holistic way of thinking about its worth beyond the numbers.
Approach 1: Arch Capital Group Excess Returns Analysis
The Excess Returns model looks at how efficiently Arch Capital Group turns shareholder equity into profits above its cost of capital, then projects those value creating returns into the future.
Arch starts with a book value of $62.58 per share and is expected to earn stable earnings of $10.61 per share, based on weighted future return on equity estimates from 7 analysts. With an average return on equity of 14.64% and a cost of equity of $5.04 per share, the company is generating an excess return of $5.57 per share, which is a healthy spread and a sign that new capital deployed should continue to add value.
Looking ahead, the stable book value is projected to rise to $72.42 per share, supported by estimates from 9 analysts. Feeding these assumptions into the Excess Returns framework produces an intrinsic value of about $223 per share, implying the stock is roughly 58.8% undervalued relative to the current price near $92.
Result: UNDERVALUED
Our Excess Returns analysis suggests Arch Capital Group is undervalued by 58.8%. Track this in your watchlist or portfolio, or discover 895 more undervalued stocks based on cash flows.
Approach 2: Arch Capital Group Price vs Earnings
For a consistently profitable business like Arch Capital Group, the price to earnings ratio is a straightforward way to gauge how much investors are paying for each dollar of earnings. In general, companies with stronger growth prospects and lower perceived risk tend to justify a higher PE multiple, while slower growth or higher risk usually warrant a discount.
Arch currently trades on a PE of about 8.2x, which sits well below both the Insurance industry average of roughly 13.0x and the peer group average of around 12.5x. Simply Wall St also calculates a Fair Ratio of 11.9x, which reflects the PE that would typically be expected for Arch given its earnings growth profile, profitability, size, industry and risk characteristics.
This Fair Ratio is more tailored than a simple comparison with peers or the industry because it adjusts for Arch’s specific fundamentals rather than assuming all insurers deserve the same multiple. With the current PE of 8.2x sitting noticeably below the 11.9x Fair Ratio, the shares appear attractively valued on an earnings multiple basis.
Result: UNDERVALUED
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Upgrade Your Decision Making: Choose your Arch Capital Group Narrative
Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives, a simple way to connect the story you believe about Arch Capital Group with your own assumptions for future revenue, earnings and margins, then translate that into a Fair Value you can compare to the current share price. A Narrative on Simply Wall St’s Community page is your personal, easy to edit forecast plus a clear explanation of why you think the business will play out that way. Instead of just accepting the analyst consensus Fair Value of about $107.56, you might build a more bullish Narrative closer to the $125 target if you expect underwriting discipline, buybacks and reinsurance growth to stay very strong, or a more cautious one near $93 if you think catastrophe losses and softer premium growth will bite. Crucially, Narratives are dynamic, so when new news or earnings arrive, the underlying numbers and your Fair Value update, helping you continuously decide whether Arch looks attractive, fairly valued or less compelling based on the gap between your Narrative and the live market price.
Do you think there's more to the story for Arch Capital Group? Head over to our Community to see what others are saying!
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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