Arch Capital Stock to split, shares will be more affordable

Arch Capital Group Ltd . ACGL recently decided to opt for a three-for-one common stock split. Shareholders of record on June 18 will receive two additional shares on June 20 for each share held. The company’s common shares are expected to begin trading on a split-adjusted basis from June 21. Arch Capital shares closed at $83.48 in yesterday’s trading.

Arch Capital shares have been trading steadily above $70 since June 28, 2016. In fact, for a few days in October 2017, the shares traded above the $100 mark. Over the past two years, the stock has returned 18.8% compared to the industry’s 36% gain. Notably, the stock price will be reduced by a third after the reversal, making it an attractive choice for potential investors.

The stock split increases the number of outstanding shares of a company without changing the market capitalization of the company. More shares outstanding translates to a lower share price, making it affordable for shareholders. In fact, Arch Capital shares are currently trading below the industry.

The company’s price-to-book, the best multiple for valuing insurers due to the large swings in their earnings from quarter to quarter, is 1.24, below the industry average of 1. 42. Strong fundamentals coupled with favorable sector trends make stocks more expensive as they trade at a premium. As a result of a stock split, the value of the same shares drops, which, in turn, increases the liquidity of a stock.

Arch Capital’s robust premium growth through an attractive product as well as a strong inorganic portfolio continues to drive long-term growth. The company has also expanded into mortgage insurance in the United States, complementing its strengths in the specialty insurance and reinsurance business.

The P&C insurer has maintained a strong capital position over the years, which reflects its financial flexibility. She also enhanced shareholder value through share buybacks and the payment of dividends. Significant efforts to boost the inorganic growth profile of this Zacks No. 3 (Hold) tier insurer boosted its private mortgage insurance business. The company’s return on equity, a measure of profitability, stands at 6%, better than the industry average of 5.3%, underscoring its judicious deployment of capital to utilize shareholder funds for better yields.

With stocks affordably priced after the split, Arch Capital looks like a lucrative investment bet given its strong fundamentals and undervaluation. Additionally, the stock has a decent value score of B and value-oriented investors are looking for undervalued stocks. This deviation from their fair value is what creates an exceptional upside opportunity.

Actions to consider

Some higher ranked stocks in the insurance sector are Alleghany Corporation Y, Markel Corporation MKL and RLI Corp. RLI.

Alleghany offers reinsurance and property and casualty insurance products in the United States and internationally. It achieved an average positive surprise of 17.61% over four quarters. The stock sports a Zacks rank of No. 1 (Strong Buy). You can see the full list of today’s Zacks #1 Rank stocks here.

Markel markets and underwrites specialty insurance products in the United States, United Kingdom, Canada and globally. The company has booked positive surprises over the past four quarters, with the average pace being 15.54%. The stock carries a Zacks rank No. 2 (buy).

RLI Corp. underwrites property and casualty insurance in the United States and abroad. The company posted an average four-quarter pace of 33.65%. The title has a Zacks rank of 2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Sallie R. Loera