Arch looks to mid-year renewals with appetite for double-digit PML gain

Arch Capital could easily add 10-12% to its peak risk PMLs as it seeks to “respond aggressively” to what it considers “excellent” risk-adjusted returns in the property cat markets, top officials have declared.

“A key element of cycle management is to respond aggressively when you see conditions change,” CEO Marc Grandisson said. Arch “continues to lean into attractive market conditions where excellent risk-adjusted returns remain available.”

“We remain very positive on the current market and the opportunities ahead of us,” CFO François Morin added. “Deploying meaningful capital in our business currently represents the best options for maximizing returns for our shareholders.”

That could mean a double-digit increase in peak risk PMLs from the single event 1:250 nat cat PML measurement of $1.069 billion as of April 1, some 8.1% of tangible shareholder equity, a level CFO Morin called “well below our internal limit.”

“Could it go up 10-12%? We think so. We think it is a reasonable scenario,” Morin told his company’s Q1 investor call. “We’ll have to see how everything gets lined up, but directionally that is where we might be headed through July 1.”

Arch’s current peak zone is the US northeast after some fresh capital deployment at the April renewals, but the mid-year’s renewals with their gulf coast focus could yet alter the leader board, Morin indicated.

The pricing outlook for mid-year reinsurance renewals should follow a pattern laid down at 1/1 and 1/4, albeit with caveat for the regional differences in the renewals and the fact that mid-year 2022 renewals offer a higher base to measure growth from, Grandisson said. “The momentum is there, clearly,” he said.

The beauty of the current cycle is the prospect of positive feedback between the primary and reinsurance markets.

Reinsurance is the more attractive side today, but it only bodes well for the primary property market which typically follows suit in a slower process. “The property market is still broadly dislocated and we believe it will take further rate improvement before it finds equilibrium.” The filter-through from the reinsurance hardening will “take 12 to 18 months to really take hold,” all the while improving conditions to further support reinsurance over the mid-term, Grandisson said.

“We expect the underlying property improvement to be there for two, maybe two and a half, three years,” Grandisson said. “There is momentum being built. …. We think we have some nice runway ahead of us.”

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