Few insurers come close to the long-term returns generated by Arch Capital (ACGL), both in terms of total equity return and economic/financial returns, and yet every cycle there are sell-side analysts who decide to tug on Superman’s cape and try to point out perceived weaknesses in the model at that point… only to be proven wrong within a couple of years.
The latest example is the criticism leveled at Arch Capital when they made a big commitment to mortgage insurance and deprioritized primary insurance. While mortgage defaults have indeed spiked in this recession, overall losses are still better than the bears predicted. Meanwhile, insurers who wrote a lot of primary insurance business in the 2015-2018 period are starting to see adverse reserve developments and weak overall underwriting results.
Arch Capital can get pretty cheap every once in a while (as happened in March/April of 2020 and mid-2018), but for the most part investors have to content themselves with prospective returns in the high single-digits to low double-digits. I think that’s a pretty fair return for a superior company, and I still think the shares are worth owning at today’s price.
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