The competitive conditions in the insurance and reinsurance market is making achieving profitable growth hard, according to Arch Capital Group’s CEO Dinos Iordanou, as the firm reported growth in insurance was offset be declining reinsurance underwriting.
“Currently competitive conditions make profitable growth in our traditional lines of insurance and reinsurance difficult to achieve,” Iordanou explained during the re/insurers recent earnings call.
The impact to companies like Arch has expanded outside of just reinsurance lines though, with some primary insurance lines feeling the pressure as companies seek to compete over more profitable business, particularly in residential and commercial property lines with catastrophe exposure.
Iordanou continued; “Competitive conditions in the property sector have negatively affected primary property rates and accordingly our U.S. premium volumes in those lines.”
Reinsurance does remain the real pain spot though, causing Arch to pull back on underwriting once again at recent renewals.
“In our reinsurance segment, softening pricing and continued pressure on terms and conditions led us to reduce reinsurance underwriting by 6%,” Iordanou explained.
While profitable growth in property or catastrophe exposed lines of insurance and reinsurance business is hard, Arch has taken an approach of trying to maintain its level of property catastrophe underwriting, while leveraging cheaper retro to offset peak exposures.
Iordanou explained; “Our approach to the cat business was to maintain as much of that business with our client base. In essence we committed to the client with purchases and then we looked at the risk characteristics of the portfolio and where we felt it was advantageous for us to buy retrocessional cover to protect our book we choose to do so.”
Some areas of the property catastrophe business are still very profitable, depending on what part of the curve you are on, Iordanou explained. So in those areas the re/insurer will seek to maintain relationships and signings, using retro as appropriate to balance the portfolio.
While profitable growth may be difficult in property and catastrophe exposed lines, one area where Arch can find profitable growth is in its Watford Re joint-venture, casualty focused vehicle. With an investment oriented reinsurer approach, Watford Re is helping Arch to grow that side of its business.
It is interesting though, that Arch has taken an approach of handing off business to Watford Re that it does not want to keep on its balance-sheet, while always underwriting the business that does match its own risk tolerances internally.
Watford Re’s investors may find that challenging to come to terms with if the vehicle faced an outsized loss at some point in the future. That could lead to questions about why if the risk wasn’t good enough for Arch itself it got handed off to Watford.
But that’s a risk with any joint-venture type reinsurer, where risks are selectively ceded through to the vehicle. The added bonus for Arch is that Watford Re is also sourcing risks itself, and where appropriate Arch can participate in order to boost line sizes or add the balance-sheet backing that some cedents may require.
At a time when insurance and reinsurance is difficult to grow into, Watford Re with its higher investment risk appetite (like a hedge fund reinsurer) can deploy its capital at lower ROE’s than Arch, providing the re/insurer with a pool of lower cost underwriting capacity from which it takes a profit share.
Efficient underwriting vehicles like Watford Re seem to be in the future plans of many of the world’s largest insurance and reinsurance firms. Arch will be hoping its early entry into that market gives it a head start.