The going may be getting tougher, but Bermuda-based insurer Arch Capital (NASDAQ:ACGL) keeps going.
Results for the first quarter were solid. The company managed to slightly boost its book value compared with the fourth quarter, and its combined ratio fell from 89.2 to 88.7 (lower is better), though it was up slightly from the fourth quarter. After-tax operating income grew nearly 30% to over $112 million, and EPS grew by just over 20%.
Based on management's comments on the conference call, business in the first quarter looked pretty much the way that most people expected it would. That is, rates were generally down slightly and many markets got a bit tougher.
In an insurance market that's getting a bit tougher, Arch Capital's multiple lines of business help the company. Shifting capital across business lines, Arch Capital can write more business in those lines where rates and returns meet management's standards and cut back in those lines where returns are inadequate.
Overall, there was continued erosion in the company's reinsurance business. As more primary insurers hang on to their business, Arch Capital's balance of business shifted to 51% insurance and 49% reinsurance -- a reversal of recent trends that favored the reinsurance side.
While the company continues to perform well, shareholders have a legitimate gripe about its policy of returning cash to investors. At present, Arch Capital has neither a dividend policy nor an active share buyback program. This marks Arch Capital as one of the relatively few insurers that don't pay a dividend.
Management continued to acknowledge the possibility of returning capital to shareholders, most likely through a buyback program, but the same was said the previous quarter. Of course, another well-known insurer by the name of Berkshire Hathaway (NYSE:BRKa) has done OK for investors without paying a dividend (and no emails please: I'm not actually trying to put Arch Capital in the same league as Warren Buffett's company).
Investors considering Arch Capital need to also realize that the company has been rather aggressive with some of its casualty loss assumptions. While those assumptions appear to be working out so far, it is a potential risk that investors must consider.
What's more, the company currently enjoys very low tax rates due in part to its location in Bermuda. Should Congress actually carry through on its periodic threats of cracking down on this sort of arrangement, that could be bad news for Arch Capital.
I still think that Arch Capital is an interesting option in the insurance sector. While there are drawbacks -- aggressive underwriting and loss assumptions, no dividend, and a tough overall market -- the company is growing and trading at a fairly low valuation. To me, that at least merits keeping on eye on it for the time being.
For more Foolish commentary on the insurance sector, see:
- UnitedHealth Keeps Growing Strong
- Life Is Easier -- and Harder
- Six Signs of a Winner
- Worthless Insurance
Want even more information on insurance? Check out The Motley Fool Insurance Center.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
