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Investing.com -- Jefferies has downgraded Arch Capital Group (F:ACGL) to “hold” from “buy” in a note dated Tuesday, citing increasing competitive pressures and a less compelling risk-reward profile at current valuation levels.
The brokerage also cut its price target for the insurer by 6% to $100, implying limited upside of 5% from the most recent closing price of $95.53.
The brokerage expressed concern over softening pricing trends in property catastrophe (P-CAT) reinsurance and specialty insurance, areas where ACGL has traditionally been a strong performer.
While pricing remains above 2022 levels, recent mid-year renewals have seen rate declines of up to 20% in some catastrophe segments, driven by a surge in market capacity that is outpacing demand.
The brokerage notes that despite ACGL’s lead market position and underwriting discipline, these dynamics are expected to temper premium growth and compress returns.
Jefferies left its 2025 earnings per share estimate unchanged at $8 but lowered its 2026 and 2027 EPS estimates by 2% each, now forecasting $9.55 and $10.05 respectively.
These reductions primarily reflect weaker underlying margins, which analysts believe are now more in line with broader market expectations.
The brokerage’s operating return on equity projections for the next three years, 14%, 14.5%, and 13.5%, mark a decline from the previous three-year average of 17%.
The downgrade is largely attributed to a reassessment of ACGL’s valuation relative to growth expectations.
Jefferies now applies a 1.6x price-to-book multiple, down from 1.7x, which brings the valuation in line with the five-year average.
This adjustment reflects anticipated moderation in underwriting margins and slower premium expansion, particularly in the reinsurance segment.
In addition to property rate pressure, Jefferies pointed to increased competition in Lloyd’s specialty market and the surplus lines space, both of which could weigh on growth.
While some lines like other liability written on E&S paper continue to see strong pricing, cyber and financial lines have weakened.
ACGL’s recent acquisition of MidCorp also introduced some upward pressure on underlying loss ratios, though Jefferies expects eventual improvement as the business is re-underwritten.
“We cannot point to catalysts for near-term material upward EPS revisions,” the analysts added.