Arch can go as far as hard market takes it, and hard market has legs

The hard reinsurance market can roll on indefinitely without impediment and Arch Capital can deploy capital into the opportunity almost without any limits save for constraints on demand and a semblance of balance in the book, top officials at  Arch Capital have claimed.

“This hard market is proving to be one of the longest we’ve experienced,” CEO Marc Grandisson (pictured) told his company’s second quarter earnings call, citing an enduring “relatively simple” recipe for dislocation: “heightened uncertainty driving an imbalance of supply and demand.”

“The current environment dictates an extended period of rate hardening,” Grandisson said. “It may be a while before the clocks strikes twelve and we begin to move beyond the hard market.”

It’s predominantly a sticky supply-demand imbalance. Market talk of a $50 to 70 billion gap “is not a crazy number,” Grandisson said.

Exposure growth at the mid-year renewals was heavy in response to the perceived market opportunity. Peak zone exposures rose to 10.5% of tangible equity in the Arch books to end-June after having been at some 8.1% after the April renewals, all “well within our thresholds” and less than half of an age-old upper threshold at a full 25%.

“There is plenty of room to grow from ten and half to wherever we’re going to end up,” Grandisson said, admitting that Arch is a “different animal” than when they set the 25% cap. “We don’t know where that is going to be.”

There are some natural constraints on the pace of growth: the beaten-up state of many primary insurers, the need for incremental return as PML ratios grow, and the need to pace oneself in the “early innings of a market getting much better.” But capital and appetite seem relatively unbounded.

Cedent purchasing power is the big near-term limitation. “The ceding companies just don't have the resources or the money to buy the coverage that we think they should be buying,” CFO François Morin said. The market has to play “a little bit of wait and see” to learn if primaries can gain the pricing power on their own markets to return more forcefully to reinsurers.

“Demand is a big factor in our ability to grow PML,” Morin said.

Appetite is not the limiting factor. Arch would gladly deploy more capital to the cohort at current prices, Morin said.

Nor is capital in short supply. Arch has grown without asking shareholders for fresh capital by taking cash flows in mortgage to redeploy into a hardening property market. That need not change if market conditions hold. “We have plenty of capacity” and “a lot of tools in the toolbox,” Grandisson said.

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