Arch Capital Group (ACGL)

By both methods, the value today (DCF $355 · Multiples $168) exceeds the market price ($97).

Today — with margin of safety: at $97 trades ~42.1% below its value discounted to today (~$168) — the wide discount we require (≥38%, equivalent to a ~15% annual return); the risk is covered by the margin, not the rate.

At 5 years — Muy infravalorado: the target price ($209) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years comfortably exceeds the risk-free rate (4.5%) — and the discount reaches the required margin of safety.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($97) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-22.3%/year) than we project (4.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$1.3 bn of owner earnings in year 5 (vs ~$5.7 bn of our base case). It recalculates if the DCF assumptions are edited.

A bank is valued on equity (P/E × common earnings + price/tangible book), not EV: deposits and debt are funding. It returns capital via dividend + buyback —the buyback reduces the share count, so earnings per share grow faster than aggregate earnings—. Total return adds the dividend collected along the way. In edit mode, the metric, shares, dividend, and exit multiple can be adjusted.

Arch Capital is valued at the equity level, on net income to common (P/E), as befits an insurer/reinsurer (§4): the funding (claim reserves, unearned premium) is already inside reported earnings, so no separate EV→equity bridge is built. The company pays no regular common dividend (the US$5M paid in 2025 is token against 348.8M shares; the return of capital is almost entirely via buybacks — US$1.9bn in FY2025, accelerated to ~US$3.5bn TTM after the US$2bn senior notes issuance of Jun-2026 —), so the model carries no real dividend series and the entire return comes from earnings per share and the compression of shares outstanding. Year 0 (TTM to 30-Jun-2026) uses net income to common from the last four reported quarters (US$4.652bn) and diluted shares from the latest quarter (348.8M). The 8-K of 28-Jul-2026 (the Q2 release) carries no numerical revenue or earnings per share guidance — Arch, like most P&C insurers, issues no formal guidance —; the only explicit item is rate pressure in property catastrophe reinsurance, with January 2026 renewals at -10%/-20%, which is incorporated as a headwind on the base case ROE (from ~15-17% TTM toward a durable ~14.5%) rather than extrapolating today's exceptional combined ratio (82.7%) without a cycle adjustment. Year 0 is normalized (§2, §4 «normalized P/E»): the year-0 metric is after-tax operating income attributable to common shareholders —US$3.928bn TTM— and not reported net income (US$4.652bn). The difference, US$0.72bn, is realized investment gains, foreign exchange results and transaction costs, which the company itself excludes from its preferred metric and which by definition are not projected forward: extrapolating them would have inflated the entire path by 15.6%. The level comes from the non-GAAP reconciliation in the release of 4-Aug-2026 and closes both ways —the sum of the four quarters (893+901+1,092+1,042) and the chaining of cumulative figures (FY2025 3,700 + H1 2026 1,794 − H1 2025 1,566)—, both US$3.928bn. On that basis TTM operating earnings per share are US$10.81 and that is the right base for the multiple, not reported earnings.

Today's multiple compresses on its own going forward as the metric per share grows (accelerated by the buyback, which reduces the share count). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—. Total return adds the dividend collected; the required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $209 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $97, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $209 in 5 years and a required return of 4.5% annually, the maximum to pay today is $168. Against the current market price ($97), the margin of safety is 42.1% (trades below the maximum → there is margin) and the total return at that price would be 16.6% annually.

• Entry multiple. 9× TTM earnings and ~1.45x book value, well below what a high-teens ROE normally sustains.
• Exit multiple. 13x terminal earnings, center of the 11-15x band for specialty insurers — neither optimistic nor punitive.
• Sensitivity to the rate cycle. The base case already normalizes ROE downward (from ~15-17% to ~14.5%); the margin of safety does not depend on the reinsurance cycle turning favorable.

• Return on capital. 17.1% operating ROE in FY2025, excellent band (15-20%), well above the 10% bar.
• Cash generation. $6.1bn TTM operating cash flow, consistently positive and growing over the last four years.
• Book value growth. Book value per share +22.6% in FY2025 and +15% in the TTM, driven by retained earnings and share compression.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

The four drivers show the recent quarterly trajectory of the two pieces that weigh most heavily on consolidated results (Insurance and Reinsurance, ~93% of premiums) and of book value per share, the metric that best summarizes how underwriting and buybacks translate into shareholder value. The mortgage segment, smaller and with a homeowner credit-cycle dynamic of its own, is tracked separately in the segment growth note.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Premium growth. Insurance +17.3% and Reinsurance +12.2% in FY2025, but the TTM already shows sharp deceleration (+0.4% total revenue) from rate pressure.
• MCE integration. The acquisition of Allianz's middle-market business explains much of Insurance's growth in 2025, with transaction costs declining.
• Mortgage segment. Stable NIW ($48.7bn in FY2025) but net premiums earned falling 4.8% from the termination of certain quota-share agreements.

• Segment diversification. Three lines (insurance, reinsurance, mortgage) with distinct cycle dynamics reduce dependence on a single business line.
• Underwriting quality. 82.7% TTM combined ratio, well below the 100% break-even threshold, with favorable reserve development across all three segments in FY2025.
• Exposure to the reinsurance cycle. January 2026 renewals down -10%/-20% in property catastrophe; the most cyclical segment (Reinsurance) accounts for ~48% of premiums.
• Mortgage client concentration. The largest Mortgage client represents 5.3% of gross premiums written; the top 10 represent 25.8%.

• ✓Underwriting profitability (combined ratio)Combined ratio 82.7%
• !Reserve adequacy (development)Adverse -3.5% pts
• ✓Catastrophe exposure6.5% pts of the combined ratio
• ✓Book value compounding+23%/yr · core ROE 17%
• ✓Float return (investment income)$1.7 bn on $49.5 bn of float

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Capitalization. $24.0bn of equity and $28.3bn of total capital (including debt) as of 30-Jun-2026, with strong credit ratings from the four major agencies.
• Leverage. $4.29bn in senior notes following the Jun-2026 issuance, moderate against the $24.0bn of equity.
• Investment liquidity. $49.5bn of investable assets, mostly in high-quality fixed income, funded by float from technical reserves.

How cash comes in and how it is deployed. In green, the business's own cash (the owner-FCF it generates and reinvests); in gray, the float and credit — customer and funding money, which is not the shareholder's.

Arch does not pay a regular common dividend (the $5M paid in 2025 is nominal against 348.8M shares); nearly all capital return comes via buybacks, which accelerated sharply in 2026 (~$3.5bn TTM vs $1.9bn for all of FY2025) after the $2.0bn Jun-2026 senior note issuance. The remaining capital is retained to sustain growth in underwriting capacity (reserves, unearned premium) and for occasional bolt-on acquisitions like MidCorp & Entertainment (2024).

Who owns the shares — the alignment and whether there is a controlling shareholder.

• CEO track record. Nicolas Papadopoulo has led since 2021 after rising internally from Reinsurance; continuity of the company's underwriting discipline.
• Capital allocation. Accelerated and consistent buybacks, with no dividend detracting from tax efficiency; integrated bolt-on acquisitions (MCE 2024) rather than transformational ones.
• Reporting transparency. The earnings release does not include formal numerical earnings or growth guidance, standard practice in the sector but one that reduces forward visibility.

• Perceived cycle bottom: the market sees property catastrophe reinsurance entering a soft-rate phase (-10%/-20% in January 2026) and extrapolates that pressure across the whole business, even though it accounts for only a fraction of consolidated premiums.
• Mean reversion feared rather than acknowledged: after several years of exceptional profitability (82.7% combined ratio), part of the market assumes a reversion more severe than Arch's own underwriting discipline track record suggests.
• Bermuda holding company with limited generalist analyst coverage: Arch lacks the sell-side coverage and retail familiarity of comparably sized domestic U.S. insurers, which can leave the price lagging the fundamentals.

All three sources fall under the missing-buyers category, not a broken business: the combined ratio, ROE and book value per share growth are solid and verifiable in the filing. The reinsurance rate risk is real and is built into the base case (ROE normalization), not denied — the question is whether the market is over-discounting it relative to what a diversified, well-rated reinsurer like Arch normally absorbs without losing profitability.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +9%/year (+54% total): the margin of safety protects the downside. The bull (+26%/year, +219% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Reinsurance cycle. Rate pressure of -10%/-20% in property catastrophe for January 2026 renewals, with risk of spreading to other lines.
• Natural catastrophes. Aggregate exposure to hurricanes, fires and earthquakes with rising frequency/severity from climate change.
• Reserve adequacy. $34.8bn of loss reserves subject to uncertainty in reserve estimation and inflation, especially in long-tail lines.
• Bermuda regulation. The IAIG designation broadens global supervision, and dependence on subsidiary dividends with strict capital restrictions could limit flexibility.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A narrow moat and ROE 17% above the 10% bar, with a +42% margin → a quality business at a good price.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 4% at a PEG of 2.2 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Not applicable — the Magic Formula excludes financials and regulated businesses (EBIT/EV does not capture the operating leverage).

• Howard Marks Perception vs reality + cycle

  The price discounts -22% vs our 4%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor +9%/yr, bull-scenario ceiling +26%/yr over 5y and a +42% margin → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, stable; sources: intangibles, efficient scale, cost advantage, switching costs → partially passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -22%, within what we project (4%) — the story squares with the numbers.