Intrinsic value of Arch Capital Group - ACGL

Previous Close

$96.17

  Intrinsic Value

$448.51

stock screener

  Rating & Target

str. buy

+366%

  Value-price divergence*

0%

Previous close

$96.17

 
Intrinsic value

$448.51

 
Up/down potential

+366%

 
Rating

str. buy

 
Value-price divergence*

0%

Our model is not good at valuating stocks of financial companies, such as ACGL.

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of ACGL stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 11.9

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  13.10
  17.00
  15.80
  14.72
  13.75
  12.87
  12.09
  11.38
  10.74
  10.17
  9.65
  9.18
  8.77
  8.39
  8.05
  7.75
  7.47
  7.22
  7.00
  6.80
  6.62
  6.46
  6.31
  6.18
  6.06
  5.96
  5.86
  5.78
  5.70
  5.63
  5.57
Revenue, $m
  0
  5,202
  6,024
  6,910
  7,860
  8,872
  9,945
  11,076
  12,266
  13,512
  14,816
  16,177
  17,595
  19,071
  20,606
  22,202
  23,861
  25,585
  27,376
  29,238
  31,174
  33,187
  35,282
  37,463
  39,735
  42,102
  44,570
  47,144
  49,830
  52,635
  55,564
Variable operating expenses, $m
 
  2,008
  2,325
  2,667
  3,034
  3,425
  3,839
  4,275
  4,735
  5,216
  5,719
  6,244
  6,792
  7,361
  7,954
  8,570
  9,210
  9,876
  10,567
  11,286
  12,033
  12,810
  13,619
  14,461
  15,338
  16,251
  17,204
  18,198
  19,234
  20,317
  21,448
Fixed operating expenses, $m
 
  1,986
  2,036
  2,087
  2,139
  2,193
  2,247
  2,304
  2,361
  2,420
  2,481
  2,543
  2,606
  2,672
  2,738
  2,807
  2,877
  2,949
  3,023
  3,098
  3,176
  3,255
  3,336
  3,420
  3,505
  3,593
  3,683
  3,775
  3,869
  3,966
  4,065
Total operating expenses, $m
  3,609
  3,994
  4,361
  4,754
  5,173
  5,618
  6,086
  6,579
  7,096
  7,636
  8,200
  8,787
  9,398
  10,033
  10,692
  11,377
  12,087
  12,825
  13,590
  14,384
  15,209
  16,065
  16,955
  17,881
  18,843
  19,844
  20,887
  21,973
  23,103
  24,283
  25,513
Operating income, $m
  837
  1,207
  1,662
  2,156
  2,687
  3,255
  3,859
  4,497
  5,170
  5,876
  6,616
  7,390
  8,197
  9,038
  9,914
  10,825
  11,774
  12,760
  13,786
  14,854
  15,965
  17,122
  18,327
  19,583
  20,892
  22,258
  23,683
  25,172
  26,726
  28,352
  30,051
EBITDA, $m
  837
  1,259
  1,722
  2,224
  2,765
  3,343
  3,957
  4,607
  5,291
  6,010
  6,763
  7,550
  8,371
  9,227
  10,118
  11,045
  12,010
  13,013
  14,057
  15,143
  16,274
  17,450
  18,676
  19,954
  21,285
  22,675
  24,124
  25,638
  27,220
  28,873
  30,601
Interest expense (income), $m
  63
  87
  215
  352
  500
  658
  827
  1,005
  1,194
  1,392
  1,600
  1,817
  2,044
  2,280
  2,526
  2,782
  3,048
  3,325
  3,612
  3,910
  4,221
  4,543
  4,879
  5,228
  5,591
  5,970
  6,365
  6,776
  7,205
  7,652
  8,120
Earnings before tax, $m
  856
  1,120
  1,448
  1,804
  2,187
  2,597
  3,032
  3,492
  3,976
  4,484
  5,016
  5,573
  6,153
  6,758
  7,388
  8,043
  8,726
  9,436
  10,174
  10,944
  11,744
  12,579
  13,448
  14,355
  15,300
  16,288
  17,319
  18,396
  19,522
  20,699
  21,931
Tax expense, $m
  32
  302
  391
  487
  591
  701
  819
  943
  1,074
  1,211
  1,354
  1,505
  1,661
  1,825
  1,995
  2,172
  2,356
  2,548
  2,747
  2,955
  3,171
  3,396
  3,631
  3,876
  4,131
  4,398
  4,676
  4,967
  5,271
  5,589
  5,921
Net income, $m
  693
  818
  1,057
  1,317
  1,597
  1,896
  2,213
  2,549
  2,902
  3,273
  3,662
  4,068
  4,492
  4,933
  5,393
  5,872
  6,370
  6,888
  7,427
  7,989
  8,573
  9,182
  9,817
  10,479
  11,169
  11,890
  12,643
  13,429
  14,251
  15,110
  16,010

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  29,372
  34,449
  39,892
  45,764
  52,056
  58,757
  65,858
  73,351
  81,229
  89,486
  98,121
  107,133
  116,524
  126,299
  136,466
  147,036
  158,020
  169,435
  181,298
  193,628
  206,448
  219,783
  233,658
  248,102
  263,145
  278,821
  295,165
  312,211
  330,000
  348,573
  367,972
Adjusted assets (=assets-cash), $m
  29,372
  34,449
  39,892
  45,764
  52,056
  58,757
  65,858
  73,351
  81,229
  89,486
  98,121
  107,133
  116,524
  126,299
  136,466
  147,036
  158,020
  169,435
  181,298
  193,628
  206,448
  219,783
  233,658
  248,102
  263,145
  278,821
  295,165
  312,211
  330,000
  348,573
  367,972
Revenue / Adjusted assets
  0.000
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
  0.151
Average production assets, $m
  440
  515
  596
  684
  778
  878
  985
  1,097
  1,214
  1,338
  1,467
  1,602
  1,742
  1,888
  2,040
  2,198
  2,362
  2,533
  2,710
  2,895
  3,086
  3,286
  3,493
  3,709
  3,934
  4,168
  4,412
  4,667
  4,933
  5,211
  5,501
Working capital, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total debt, $m
  2,489
  6,140
  10,053
  14,275
  18,799
  23,617
  28,723
  34,111
  39,775
  45,712
  51,920
  58,399
  65,151
  72,180
  79,490
  87,090
  94,988
  103,195
  111,724
  120,590
  129,807
  139,395
  149,371
  159,756
  170,573
  181,844
  193,594
  205,851
  218,641
  231,995
  245,943
Total liabilities, $m
  21,118
  24,769
  28,682
  32,904
  37,428
  42,246
  47,352
  52,740
  58,404
  64,341
  70,549
  77,028
  83,780
  90,809
  98,119
  105,719
  113,617
  121,824
  130,353
  139,219
  148,436
  158,024
  168,000
  178,385
  189,202
  200,473
  212,223
  224,480
  237,270
  250,624
  264,572
Total equity, $m
  8,254
  9,680
  11,210
  12,860
  14,628
  16,511
  18,506
  20,612
  22,825
  25,146
  27,572
  30,104
  32,743
  35,490
  38,347
  41,317
  44,404
  47,611
  50,945
  54,410
  58,012
  61,759
  65,658
  69,717
  73,944
  78,349
  82,941
  87,731
  92,730
  97,949
  103,400
Total liabilities and equity, $m
  29,372
  34,449
  39,892
  45,764
  52,056
  58,757
  65,858
  73,352
  81,229
  89,487
  98,121
  107,132
  116,523
  126,299
  136,466
  147,036
  158,021
  169,435
  181,298
  193,629
  206,448
  219,783
  233,658
  248,102
  263,146
  278,822
  295,164
  312,211
  330,000
  348,573
  367,972
Debt-to-equity ratio
  0.302
  0.630
  0.900
  1.110
  1.290
  1.430
  1.550
  1.650
  1.740
  1.820
  1.880
  1.940
  1.990
  2.030
  2.070
  2.110
  2.140
  2.170
  2.190
  2.220
  2.240
  2.260
  2.270
  2.290
  2.310
  2.320
  2.330
  2.350
  2.360
  2.370
  2.380
Adjusted equity ratio
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  693
  818
  1,057
  1,317
  1,597
  1,896
  2,213
  2,549
  2,902
  3,273
  3,662
  4,068
  4,492
  4,933
  5,393
  5,872
  6,370
  6,888
  7,427
  7,989
  8,573
  9,182
  9,817
  10,479
  11,169
  11,890
  12,643
  13,429
  14,251
  15,110
  16,010
Depreciation, amort., depletion, $m
  0
  51
  60
  68
  78
  88
  98
  110
  121
  134
  147
  160
  174
  189
  204
  220
  236
  253
  271
  289
  309
  329
  349
  371
  393
  417
  441
  467
  493
  521
  550
Funds from operations, $m
  1,877
  869
  1,116
  1,385
  1,675
  1,984
  2,312
  2,659
  3,024
  3,407
  3,809
  4,228
  4,666
  5,122
  5,597
  6,091
  6,606
  7,141
  7,698
  8,278
  8,882
  9,511
  10,166
  10,850
  11,563
  12,307
  13,084
  13,896
  14,744
  15,632
  16,560
Change in working capital, $m
  480
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from operations, $m
  1,397
  869
  1,116
  1,385
  1,675
  1,984
  2,312
  2,659
  3,024
  3,407
  3,809
  4,228
  4,666
  5,122
  5,597
  6,091
  6,606
  7,141
  7,698
  8,278
  8,882
  9,511
  10,166
  10,850
  11,563
  12,307
  13,084
  13,896
  14,744
  15,632
  16,560
Maintenance CAPEX, $m
  0
  -44
  -51
  -60
  -68
  -78
  -88
  -98
  -110
  -121
  -134
  -147
  -160
  -174
  -189
  -204
  -220
  -236
  -253
  -271
  -289
  -309
  -329
  -349
  -371
  -393
  -417
  -441
  -467
  -493
  -521
New CAPEX, $m
  -15
  -75
  -81
  -88
  -94
  -100
  -106
  -112
  -118
  -123
  -129
  -135
  -140
  -146
  -152
  -158
  -164
  -171
  -177
  -184
  -192
  -199
  -207
  -216
  -225
  -234
  -244
  -255
  -266
  -278
  -290
Cash from investing activities, $m
  -2,722
  -119
  -132
  -148
  -162
  -178
  -194
  -210
  -228
  -244
  -263
  -282
  -300
  -320
  -341
  -362
  -384
  -407
  -430
  -455
  -481
  -508
  -536
  -565
  -596
  -627
  -661
  -696
  -733
  -771
  -811
Free cash flow, $m
  -1,325
  750
  983
  1,238
  1,512
  1,806
  2,118
  2,448
  2,796
  3,162
  3,546
  3,947
  4,365
  4,802
  5,256
  5,729
  6,222
  6,734
  7,268
  7,823
  8,401
  9,003
  9,630
  10,285
  10,967
  11,679
  12,423
  13,200
  14,011
  14,861
  15,749
Issuance/(repayment) of debt, $m
  1,168
  3,651
  3,913
  4,222
  4,524
  4,818
  5,106
  5,387
  5,664
  5,937
  6,208
  6,479
  6,752
  7,028
  7,310
  7,600
  7,898
  8,207
  8,529
  8,865
  9,218
  9,587
  9,976
  10,385
  10,816
  11,271
  11,751
  12,257
  12,790
  13,354
  13,948
Issuance/(repurchase) of shares, $m
  357
  608
  473
  333
  171
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  1,664
  4,259
  4,386
  4,555
  4,695
  4,818
  5,106
  5,387
  5,664
  5,937
  6,208
  6,479
  6,752
  7,028
  7,310
  7,600
  7,898
  8,207
  8,529
  8,865
  9,218
  9,587
  9,976
  10,385
  10,816
  11,271
  11,751
  12,257
  12,790
  13,354
  13,948
Total cash flow (excl. dividends), $m
  318
  5,010
  5,370
  5,793
  6,207
  6,624
  7,224
  7,836
  8,460
  9,099
  9,754
  10,426
  11,117
  11,830
  12,567
  13,329
  14,120
  14,942
  15,797
  16,688
  17,619
  18,590
  19,607
  20,670
  21,783
  22,950
  24,173
  25,456
  26,802
  28,214
  29,697
Retained Cash Flow (-), $m
  -2,049
  -1,426
  -1,529
  -1,650
  -1,768
  -1,883
  -1,995
  -2,106
  -2,214
  -2,320
  -2,426
  -2,532
  -2,639
  -2,747
  -2,857
  -2,970
  -3,087
  -3,208
  -3,333
  -3,465
  -3,602
  -3,747
  -3,899
  -4,059
  -4,227
  -4,405
  -4,592
  -4,790
  -4,999
  -5,219
  -5,451
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  3,583
  3,840
  4,143
  4,439
  4,741
  5,228
  5,730
  6,247
  6,779
  7,328
  7,894
  8,479
  9,083
  9,710
  10,359
  11,033
  11,734
  12,464
  13,224
  14,016
  14,843
  15,708
  16,611
  17,556
  18,545
  19,581
  20,666
  21,803
  22,995
  24,245
Discount rate, %
 
  5.20
  5.46
  5.73
  6.02
  6.32
  6.64
  6.97
  7.32
  7.68
  8.07
  8.47
  8.89
  9.34
  9.81
  10.30
  10.81
  11.35
  11.92
  12.51
  13.14
  13.80
  14.49
  15.21
  15.97
  16.77
  17.61
  18.49
  19.41
  20.38
  21.40
PV of cash for distribution, $m
 
  3,406
  3,453
  3,505
  3,514
  3,489
  3,556
  3,576
  3,551
  3,482
  3,373
  3,228
  3,050
  2,846
  2,621
  2,382
  2,135
  1,886
  1,642
  1,407
  1,187
  984
  801
  640
  501
  385
  289
  212
  152
  106
  72
Current shareholders' claim on cash, %
  100
  95.1
  92.0
  90.1
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3
  89.3

Arch Capital Group Ltd., together with its subsidiaries, provides property, casualty, and mortgage insurance and reinsurance products worldwide. Its Insurance segment offers primary and excess casualty coverages; loss sensitive primary casualty insurance programs; collateral protection, debt cancellation, and service contract reimbursement products; directors’ and officers’ liability, errors and omissions liability, employment practices and fiduciary liability, crime, professional indemnity, and other financial related coverages; medical professional and general liability insurance coverages; and workers’ compensation and umbrella liability, as well as commercial automobile and inland marine products. It also provides property, energy, marine, and aviation insurance; travel insurance; accident, disability, and medical plan insurance coverages; captive insurance programs; employers’ liability insurance coverages; and contract and commercial surety coverages. This segment markets its products through a group of licensed independent retail and wholesale brokers. The company’s Reinsurance segment provides reinsurance for third party liability and workers’ compensation exposures; marine and aviation reinsurance; reinsurance protection for catastrophic losses and commercial property risks; life reinsurance; casualty clash; risk management solutions; and surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit, and political risk products. This segment markets its reinsurance products through brokers, and directly to ceding companies. Its Mortgage segment offers private mortgage insurance covering one-to-four family residential mortgages; mortgage insurance to cover previously originated residential loans; quota share reinsurance; and risk-sharing products. This segment sells its products through direct basis and through brokers to its bank and credit union customers. The company was founded in 1995 and is based in Pembroke, Bermuda.

FINANCIAL RATIOS  of  Arch Capital Group (ACGL)

Valuation Ratios
P/E Ratio 17
Price to Sales 2.7
Price to Book 1.4
Price to Tangible Book
Price to Cash Flow 8.5
Price to Free Cash Flow 8.5
Growth Rates
Sales Growth Rate 13.1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -6.3%
Cap. Spend. - 3 Yr. Gr. Rate -3.6%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 30.2%
Total Debt to Equity 30.2%
Interest Coverage 15
Management Effectiveness
Return On Assets 2.9%
Ret/ On Assets - 3 Yr. Avg. 3.2%
Return On Total Capital 7.6%
Ret/ On T. Cap. - 3 Yr. Avg. 9.1%
Return On Equity 9.6%
Return On Equity - 3 Yr. Avg. 10.8%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 20.7%
EBITDA Margin - 3 Yr. Avg. 19.6%
Operating Margin 18.8%
Oper. Margin - 3 Yr. Avg. 17.2%
Pre-Tax Margin 19.3%
Pre-Tax Margin - 3 Yr. Avg. 18.3%
Net Profit Margin 15.6%
Net Profit Margin - 3 Yr. Avg. 16.7%
Effective Tax Rate 3.7%
Eff/ Tax Rate - 3 Yr. Avg. 4.5%
Payout Ratio 4%

ACGL stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ACGL stock intrinsic value calculation we used $4446 million for the last fiscal year's total revenue generated by Arch Capital Group. The default revenue input number comes from 2016 income statement of Arch Capital Group. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ACGL stock valuation model: a) initial revenue growth rate of 17% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 5.2%, whose default value for ACGL is calculated based on our internal credit rating of Arch Capital Group, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Arch Capital Group.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ACGL stock the variable cost ratio is equal to 38.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $1938 million in the base year in the intrinsic value calculation for ACGL stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Arch Capital Group.

Corporate tax rate of 27% is the nominal tax rate for Arch Capital Group. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ACGL stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ACGL are equal to 9.9%.

Life of production assets of 10 years is the average useful life of capital assets used in Arch Capital Group operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ACGL is equal to 0%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $8254 million for Arch Capital Group - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 123.263 million for Arch Capital Group is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Arch Capital Group at the current share price and the inputted number of shares is $11.9 billion.

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COMPANY NEWS

▶ Arch Capital beats 2Q profit forecasts   [Jul-26-17 11:48PM  Associated Press]
▶ Arch Capital beats 1Q profit forecasts   [Apr-25-17 05:06PM  Associated Press]
▶ Arch Capital beats 4Q profit forecasts   [Feb-13-17 05:04PM  Associated Press]
▶ AIG: Better Returns, Higher Valuation?   [Dec-12-16 03:48PM  at Barrons.com]
Stock chart of ACGL Financial statements of ACGL
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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