ACGL

We rate ARCH CAPITAL GROUP LTD. (ACGL) as a Reduce with a composite score of 44.2/100 at a current price of $99.18. The quantitative profile shows weakness across multiple dimensions, suggesting limited upside potential and elevated risk of underperformance relative to peers over the next 12 months.

The rating is primarily driven by strength in stability (72th percentile) and momentum (48th percentile), which together account for the majority of the composite score. Offsetting weakness in quality (26th percentile) and investment (26th percentile) tempers our overall conviction. We assign a Narrow Moat rating (53/100), High uncertainty, and Standard capital allocation.

Key items to watch: balance sheet deleveraging progress; sustainability of the current growth rate. Any material change in these dynamics could warrant a reassessment of our rating. The moat trend is stable, which suggests the competitive landscape is stable for now.

ARCH CAPITAL GROUP LTD. holds a top-quartile position (#0 of 50) within the Finance, Insurance, And Real Estate sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 44.2/100 places it at rank #2922 in our full 7,333-stock universe. With a $33.9B market capitalization, ARCH CAPITAL GROUP LTD. operates at meaningful scale within the Finance, Insurance, And Real Estate sector, providing competitive advantages in distribution, procurement, and customer reach.

Revenue is growing at 21%, though momentum at the 48th percentile suggests the market has not yet fully recognized this trajectory. This potential disconnect between fundamental improvement and market recognition could represent an opportunity for patient investors if the growth trend persists.

The margin cascade tells an important story: gross margins of 0% (-76.5pp vs sector) narrow to operating margins of 23% (+6.3pp vs sector) and net margins of 20.8%, yielding a gross-to-net conversion rate of N/A%. The significant margin erosion from gross to net suggests elevated operating expenses, high interest costs, or other structural drags that warrant monitoring.

At a current price of $99.18, ARCH CAPITAL GROUP LTD. is trading near fair value based on current fundamentals. Our value factor score of 44/100 reflects a composite assessment across multiple valuation metrics including price-to-earnings, price-to-book, EV/EBITDA, and price-to-sales ratios relative to both sector peers and the broader market. Valuation metrics are mixed, with no strong signal of mispricing in either direction.

The stock currently trades at a P/E of 8.5x (a 29% discount to the sector median of 11.9x), EV/EBITDA of 7.6x (near the sector median), P/B of 1.5x, P/S of 1.8x. The below-sector P/E suggests possible undervaluation or the market pricing in near-term headwinds.

We assign a High uncertainty rating to ARCH CAPITAL GROUP LTD.. Key risk factors include significant leverage (234% debt-to-equity), weak quality scores (26th percentile), low beta of 0.43 — while defensive, this may indicate limited upside participation in bull markets. The wide range of potential outcomes widens our fair value estimate and increases the possibility of permanent capital impairment. Investors considering this name should size positions accordingly and demand a meaningful margin of safety before initiating.

Specific risk factors that inform our assessment include: significant leverage (234% debt-to-equity); weak quality scores (26th percentile); low beta of 0.43 — while defensive, this may indicate limited upside participation in bull markets. Each of these factors independently widens the distribution of potential outcomes, and in combination they create a risk profile that demands careful position sizing. The stability factor at the 72th percentile and quality factor at the 26th percentile provide a quantitative summary of the overall risk landscape.

Key risk mitigants include: above-average stability (72th percentile) suggests predictable business dynamics; a 5.51% dividend yield anchors total return. These factors partially offset the identified risks and provide downside protection in adverse scenarios. On balance, the risk-reward profile warrants caution and disciplined position management.

We rate ARCH CAPITAL GROUP LTD.'s capital allocation as Standard. Management has shown adequate — though not exceptional — stewardship of shareholder capital. Returns on equity stand at 17.5%, and the balance sheet is managed within acceptable parameters (D/E: 234%). Exemplary allocators typically sustain ROE above 20% and D/E below 50%; ARCH CAPITAL GROUP LTD. falls short on at least one dimension.

There is room for improvement in optimizing the capital structure or enhancing shareholder returns. The 5.51% dividend yield provides some income return, but the overall capital allocation framework would benefit from either higher reinvestment returns, improved balance sheet efficiency, or increased shareholder distributions. We will monitor for signs of strategic improvement that could warrant an upgrade.

In summary, ARCH CAPITAL GROUP LTD. receives a Reduce rating with a composite score of 44.2/100 (rank #2922 of 7,333). Our quantitative framework assigns a Narrow Moat (53/100, trend: stable), High uncertainty, and Standard capital allocation. The average factor score across quality, value, momentum, stability, and investment is 43/100.

Our analysis does not support a constructive view on ARCH CAPITAL GROUP LTD. at this time. The combination of the current quantitative profile, high uncertainty, and standard capital allocation suggests unfavorable risk-reward at current levels. We recommend investors avoid new positions and existing holders consider reducing exposure.