Arch Capital interested in managing more third-party capital

by Artemis on November 8, 2017

Arch Capital Group Ltd. would be interested in managing more third-party reinsurance capital alongside its own capacity, should the market improve significantly and present opportunities following recent catastrophe events, according to the firm’s Chairman and Chief Executive Officer (CEO), Constantine Iordanou.

Arch already manages third-party reinsurance capital through its Arch Underwriters Ltd. unit, and also utilises third-party investor capital through its total-return reinsurer, Watford Re.

Furthermore, the company recently announced its first mortgage insurance insurance-linked securities (ILS) transaction, after acquiring the Bellemeade Re issuance platform as part of its takeover of United Guaranty, the mortgage insurance arm of AIG.

So, the re/insurer is clearly comfortable working with ILS investors and utilising the benefits of third-party capital to supplement its traditional operations and, should market conditions permit, Arch is eager to manage more alternative capital in the future.

“If the market improved significantly, we’ll use a lot of our own capacity, but also, we’ll be very much interested in managing third-party capital, because we don’t want to change our risk profile,” said Iordanou, speaking on the company’s third-quarter 2017 earnings call.

“On the other hand, if the market doesn’t move, and there are people that will be willing to get our underwriting skills and they’re willing to accept maybe a little less return than we will, we’re not opposed to managing money in that fashion, either. But, that’s not our preferred outcome.

“We would like the market to get hard, so we can write more on our balance sheet and maybe write for our partners, also,” continued Iordanou.

Arch’s work with, and utilisation of ILS capital provides it with an additional means of earning fee and profit related income from its underwriting, while providing third-party investors with access to risk.

Arch announced in early August that it grew its ILS assets under management (AuM) to $500 million, and combined with its $368 million Bellemeade Re 2017-1 mortgage insurance risk issuance and Watford Re benefits, the re/insurer remains willing to further grow its third-party capital operations, and expand the volume of ILS capacity it manages.

However, Iordanou’s comments suggest that its strategy heading into the key January 1st, renewals season will be dependent on market conditions, specifically how much rates increase in response to record levels of catastrophe losses in the third-quarter.

During its earnings call, Arch was questioned on the size of rate increases required in property catastrophe business to enable it to assume more risk on a net basis.

President and Chief Operating Officer (COO), Marc Grandisson, commented; “We think that to get to a 15%+ return, we would need roughly 30% to 35% rate increases. So, we need a substantial increase in rate.”

Grandisson continued to explain that the market needs to be wary of looking at rate changes in isolation, highlighting that market conditions are very different now than five or six years ago, when rates jumped substantially.

“So, this is why, in 2005, when rates went up 10%, 15%, 20% we were in a very different market, pricing was a lot better, and now it’s not as good by any stretch of the imagination. So, we will need substantial rate increase to really fully deploy it and even then, as you know, we are very careful with our capital management, we will have to see it and have a good clarity of it before we commit fully to this,” said Grandisson.

Numerous industry observers, executives and analysts have commented on the different reinsurance market dynamics post-event 2017 than seen with large loss years of the past, most notably in 2005 and 2011.

Exactly how much rates increase by and how sustainable any uptick in pricing at 1/1 and beyond is, remains to be seen, as alternative and traditional capital continues to fight for a seemingly shrinking market share and take advantage of any rates movement.

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