Arch Capital passes baton to reinsurance wing for 2023 growth

Arch Capital is handing the role of growth driver from its mortgage insurance division to reinsurance following the upsurge in terms and pricing visible at the January renewals, the company’s top officials have declared.

“Where the shift has taken place is really on reinsurance,” CEO Marc Grandisson (pictured) told an equity market conference hosted by Bank of America Securities, making the segment “really the one where we think there are better opportunities.”

Mortgage insurance had most frequently been the favoured child in recent years. But a decline of some one to two percentage points of return in that line to some 11-13% has now been more than compensated by gains in reinsurance.

“I think mortgage, while we still think it’s going to be good for us going forward, we are downplaying it a little bit,” the CEO said.

The undisputed ROE leader is now reinsurance. “Based on what we saw at 1.1, we are north of mid-teens for sure in reinsurance,” Grandisson said. Six months ago, Arch’s three mainstay businesses of reinsurance, insurance and mortgage insurance were in more of a dead heat close to mid-teens, he noted.

Arch’s primary insurance business, in turn, still shows “room to grow,” but with an outlook blurred by how the industry works to absorb and pass on the rising cost of reinsurance, the CEO said. “It might take a bit of time,” Grandisson said. “It won’t happen all in the first half of the year, but that is why we think the momentum will keep growing.”

With opportunities across reinsurance sizeable in property cat, Arch Capital is ready to allow a notable rise in its PMLs, Grandisson said.

“If the pricing is at the level we think it is at – and we think it will be for ’23 – the answer is obviously we want to put the capital to work and we have the appetite to do so,” Grandisson said.

The CEO can imagine PMLs as a percent of capital rising by half, albeit to relatively moderate levels versus the group’s long-standing policy range for PMLs to capital of up to 25%: 8% today could become 10 to 12%. “Absolutely, we think there is a lot of room to grow there.” Going much higher would take some exceptional market disruption.

Arch claimed a 56% increase in underwriting income to $734 million in the fourth quarter. Underwriting income doubled in the reinsurance segment on a drop-off in cat losses and rate-driven premium gains. Favourable prior year reserve releases in mortgage insurance further boosted profits.

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