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+44 (0)20 7232 3090 Traded on

AIM, London
Fax +44 (0)20 7232 3099 Stock Exchange Regulated and

LSE: IIR authorised by

Arch Capital Group Limited 08 July 2008

Update Report – 1Q 08 Results

Outlook positive despite increasing competition

NASDAQ BUY Fundamental research indicates a 25% upside in the price of the NASDAQ common stock for the
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weighted average of target prices obtained by using DCF and comparative valuation methodologies.
We have taken a 6-12 month investment horizon for this stock as the industry in which Arch Capital
Stock operates is highly cyclical and therefore trends can be captured more accurately with a shorter
Ticker: ACGL.O investment horizon.
Target price: US$81.10
We upgrade the NASDAQ common stock from a HOLD to a BUY based on fundamental factors, with a
Current price: US$64.96 6-12 month target price of US$81.10.

European BUY The European stock is expected to appreciate approximately 26% over the next 6-12 months as the
25% fundamental upside, augmented by approximately 5 percentage points upside attributable purely
Stock1 to the anticipated appreciation of the US dollar against the Euro, is partially offset by 4 percentage
Ticker: ACGL.BE points downside attributable to a reduction in premium over the same period2.
Target price: €53.74
Current price: €42.58
We upgrade the European stock from a HOLD to a BUY with a 6–12 month target price of €53.74.

Supervisor: Somnath Banerjee Investment horizon - short term actionable trading strategies
Analyst: Dewanshi Doshi This report addresses the needs of strategic investors with a long term investment horizon of 6-12 months. If this
Editor: Heloise Capon report is provided to you by your broker under the Global Settlement, you may now also access (free of charge) the
short term trading outlook that we publish from time to time for this issuer, looking at the coming 5-30 days for
Global Research Director: readers with a shorter trading horizon. These are available online only at
Satish Betadpur, CFA

Next news due:

2Q 08 results, 24 July 2008 Report summary
Arch Capital Group Ltd. (Arch Capital) reported a decline in net premiums earned in 1Q 08, with y-o-y
contraction in both top- and bottom-line during the quarter. However, although the company’s total
revenues were in line with our estimate, net income was above our estimate for the quarter. Despite
weakness in global financial markets, Arch Capital reported 11.0% y-o-y growth in net investment
income in 1Q 08, as well as q-o-q growth. Going forward, we continue to expect softening premium
pricing in both US and non-US reinsurance markets to impact Arch Capital’s ability to write premiums.
We are also concerned that the prospect of above average hurricane activity in 2008 could increase
the company’s combined ratio going forward. While the company’s total expenses declined on a y-o-y
basis in 1Q 08, expenses increased as a percentage of net premiums earned. Consequently, the
company reported a decline in its net income in 1Q 08. Despite concerns for the industry in general,
we remain encouraged by the company’s strong fundamentals relative to its peers, and we view Arch
Capital’s NASDAQ common stock as an attractive investment opportunity over our investment horizon.

Currency impact for US investors

The company reports in US dollars, which is its major trading currency. Earnings forecasts are,
therefore, also expressed in US dollars. Although Arch Capital has costs as well as revenues in other
currencies, we assume that the impact of currency movements on the price of the NASDAQ common
stock is neutral. Wherever specific currency risks are identified, these will be highlighted in the report.

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