Market Skepticism On Mortgage Insurance Still Offering Some Upside In Arch Capital

Arch Capital (ACGL) has had a challenging trailing 12 months, with many investors still not convinced that the company’s major foray into mortgage insurance will prove to be a value-creating move over time, and ongoing concerns about the change in management and the returns available in primary insurance and reinsurance. With that, Arch Capital’s double-digit decline over the past year doesn’t stack up very well next to the performance of Everest Re (RE), RenRe (RNR), or W.R. Berkley (WRB).

I am a little concerned about the uptick in primary insurance core losses, but I believe the Street is still undervaluing the company’s mortgage insurance business and the value Arch can generate from third-party vehicles like Watford and Bellemeade (the second-largest sponsor of insurance-linked bonds behind Everest). With a fair value of around $30, I don’t think Arch Capital is radically undervalued, but I think these shares can offer a solid high single-digit to low double-digit annualized return from here.

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Market Skepticism On Mortgage Insurance Still Offering Some Upside In Arch Capital