Arch CEO bullish on mortgage insurance

Arch Capital Group CEO Marc Grandisson sees mortgage insurance producing “outstanding” results while conditions in the reinsurance business are only improving “modestly”.

“We were pleased with the results across our platform this quarter as our MI (mortgage insurance) segment continued to produce outstanding results while slightly improving conditions in our P&C operations and higher investment yield helped to produce an annualized operating ROE of 11.6 percent,” Grandisson said during the re/insurer’s second quarter 2018 earnings call.

Arch reported net income of $233.2 million for the second quarter of 2018 after $173.8 million in the second quarter of 2017.

The results included favourable development in prior year loss reserves, net of related adjustments, of $60.3 million.

The combined ratio improved to 82.7 percent from 84.6 percent over the period. Arch grew underwriting income by 20.5 percent year on year to $235.5 million in the second quarter of 2018 after $195.4 million in the same period a year ago.

The mortgage insurance segment grew the underwriting income by 12 percent year on year to $205.7 million in the second quarter of 2018.

“The types of risks that find their way to the MI purchase market have a little bit of credit, wider than it was possibly three or four years ago,” Grandisson said. “The rates are increasing. That's refinancing. There are more first-time home buyers. And there is house price appreciation. So that tends to be higher LTVs (loan-to-values) and there are more first-time homebuyers,” he added.

Arch is therefore focusing on MI and plans to deploy additional capital into the space.

At the same time, Grandisson described the market conditions in the P&C business as “improving modestly”. “In most of our insurance lines, rate increases appear to be outpacing claim trends,” he said.

“In our insurance segment, more than 60 percent of the growth in net written premium was due to rate increases and the balance was from exposure growth,” Grandisson noted.

The insurance segment grew net written premium by 5.6 percent year on year $524.1 million in the second quarter of 2018.

Rate increases were particularly attractive in travel insurance, programmes, as well as more recently, in property, Grandisson explained.

“We decreased premium again this quarter in the more commoditized lines such as general liability and D&O (directors and officers) due to the highly competitive environment. In our reinsurance segment, net premium growth was generated primarily from property,” Grandisson said.

In reinsurance, Arch grew net written premium by 4.8 percent year on year to $354.1 million in the second quarter of 2018.

In P&C, large attritional losses affected the results of both insurance and reinsurance, but in distinct ways, Grandisson noted.

“The insurance group benefited from a below average level of such losses while our reinsurance operations were impacted by a higher than normal level, mainly in a facultative area,” he explained.

“You rarely, if ever, get an even distribution of expected losses in a given quarter or year. But over time, specialty businesses such as ourselves can generate good risk adjusted returns if managed properly,” Grandisson said.