Q4 2023 Earnings Summary
- Arch Capital's reinsurance segment has achieved a sub-50% underlying loss ratio for two consecutive quarters, driven by increased property premiums in short-tail lines, indicating strong profitability in a favorable market.
- The reinsurance market, particularly in property catastrophe, continues to improve, and Arch Capital has significant capacity to grow, with its PML at 9.2%, providing room for expansion and sustained returns.
- Arch Capital is well-positioned to grow its primary insurance segment, with the capabilities, capital, and talent to seize market opportunities in 2024, potentially matching or exceeding 2023 growth levels if conditions are favorable.
- Concerns over casualty reserves due to adverse development and exposure from acquisitions: The company acknowledged some adverse development in casualty sub-lines. When asked if their comfort with reserves applied to the business acquired from Watford, which has significant casualty exposure, the CEO stated that Watford's underwriting is managed by their team but did not provide a detailed answer. This may indicate potential reserve risk in the casualty book. ,
- Industry-wide reserve issues could impact Arch's reinsurance business: Analysts highlighted that several companies reported reserve problems in the fourth quarter and questioned whether Arch's reinsurance book might be affected. The CEO admitted that their teams may have different views on loss ratios compared to cedents, suggesting potential exposure to under-reserved business.
- Decline in mortgage insurance new business and increased capital utilization: The company experienced the lowest quarter of new insurance written in the mortgage insurance business since acquiring UGC, and capital utilization increased due to capital protection transactions no longer providing capital credit. This could signal challenges in the mortgage insurance segment.
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Casualty Market Outlook
Q: How do you see casualty market trends unfolding?
A: Arch expects the casualty market to continue hardening over several years due to reserve additions, uncertainty from pandemic impacts, and inflation pressures. They see opportunities emerging as the market adjusts, with rate increases and reunderwriting efforts improving conditions. -
M&A Strategy and Parameters
Q: What are Arch's priorities when considering acquisitions?
A: Arch is prudent and disciplined in M&A, focusing on opportunities with a proper margin of safety and strong returns on capital. There is no desire to grow for growth's sake; culture fit and strategic benefits are crucial. They prefer organic growth but remain open to compelling acquisitions. -
Capital Position and S&P Model Impact
Q: How do S&P capital model changes affect your capital?
A: The changes in S&P's capital model had a net positive effect due to reductions in mortgage charges and diversification benefits, although offset by debt reclassification. Overall, Arch has more excess capital to deploy into growth opportunities in 2024. -
Primary Insurance Growth Outlook
Q: Can primary insurance growth match last year's pace?
A: While not providing specific guidance, Arch is capable of growing its primary insurance segment as much as in 2023 if market opportunities persist. They have the capacity and talent to seize available opportunities in both insurance and reinsurance. -
Mortgage Insurance Reserve Releases
Q: Will mortgage reserve releases continue at this pace?
A: Reserve releases in mortgage were higher due to better-than-expected housing market conditions versus prior conservatively set reserves. Current reserves are lower, so future reserve releases may not be as significant if conditions remain stable. -
Reinsurance Loss Ratio Sustainability
Q: Is the sub-50 reinsurance loss ratio sustainable?
A: The low underlying loss ratio in reinsurance reflects strong property premiums and favorable market conditions. While quarterly volatility is expected, profitability should remain strong, supported by an improving reinsurance market. -
Casualty Loss Trends and Pricing
Q: What loss trends and rate increases are you seeing in casualty?
A: Arch is seeing loss trends of 5–10%, varying by line, and achieving price increases in the low to mid-teens. They believe pricing is outpacing loss trends, supporting profitability. -
Catastrophe Load and PML
Q: What is your catastrophe load for the start of 2024?
A: The catastrophe load has increased from 2023 levels; Arch expects a cat load of 6–7% in loss ratio points for 2024. Their Probable Maximum Loss (PML) as a percent of equity is lower due to equity growth, despite higher absolute PML. -
Alternative Capital Impact
Q: How is alternative capital affecting the property market?
A: There is still high demand for returns and some skepticism among alternative capital providers, leading to less impact on the market than in previous years. Arch is not seeing the same level of influence from ILS capital as in 2014–2016. -
MGAs and Underwriting Discipline
Q: Are aggressive MGAs influencing your underwriting approach?
A: While MGAs have emerged in areas with capacity needs, especially in professional lines, Arch continues to focus on underwriting discipline and pricing adequacy. They react to market conditions by selecting better clients and maintaining their cycle management strategies. -
Reinsurance Terms and Attachment Points
Q: How are reinsurance terms and attachment points evolving?
A: There is a trend of clients increasing retentions and buying more coverage at higher attachment points. This shift is due to higher premiums at lower layers and clients retaining more frequency losses. Arch expects this trend to continue into 2024.