Arch Capital's Nicolas Papadopoulo reports lower Q2 profit as underwriting margins narrow
Arch Capital reported lower second-quarter earnings as higher retrocession purchases, continued portfolio pruning and increased catastrophe losses reduced underwriting profitability, with chief executive officer Nicolas Papadopoulo (pictured) saying the group continued to deliver strong underwriting performance through its diversified specialty insurance, mortgage and reinsurance platform.
Group underwriting profit fell 19.7% to $657 million. The consolidated combined ratio rose 2.3 points to a still strong 83.5%, including a 1.6 point increase in the adjusted underlying measure ex-cats and ex-PYD to 82.5%.
Papadopoulo said: “We delivered a strong quarter, driven by solid underwriting performance across our three segments, reflecting the continued strength of our diversified platform and disciplined execution across the enterprise. Our leadership positions in specialty insurance, including our mortgage and reinsurance operations, provide us with a meaningful competitive advantage.”
That “disciplined execution” showed nearly all top line measures down against the prior year period, with gross to net comparisons suggesting Arch had further trimmed revenues by increasing retrocession on its reinsurance book.
GPW fell a moderate 1.1% year-on-year across the group, including a 2.9% decline in primary insurance versus a fractional 0.2% gain in reinsurance. It’s a mild acceleration against the 0.6% year-on-year decline posted for Q1.
But net premium written was down almost 7%, led by a 10.4% decline in the reinsurance segment where Arch added 6.8 points to its retrocession rate to 42.4% in Q2.
“Reductions in net premiums written this quarter were due, in part, to non-renewals, share reductions as well as targeted increased retrocessions,” management said of top-line trends in reinsurance.
Retrocession sounds like a good deal: Arch claimed a boost to expense margins on higher profit commissions on those retrocession deals. The increased buying also comes amid a sharply softer retro market, where market players report that cheaper protection has been stirring some additional demand from reinsurers.
The primary insurance segment also increased cessions, the gross-to-net comparison suggests. GWP fell 2.9%, but the decline rose to 5.1% by the NWP line as the cessions rate visible in the gross-to-net rose 1.6 points to 25.7%.
Shrinkage in primary insurance also followed continued non-renewals of select portions of the book taken on board in the 2024 acquisition of Allianz unit MidCorp and Entertainment. Adjusted for that deal, net premiums written would have decreased by a smaller 1.8% year on year, management claimed.
Margins shrank in the primary segment, chiefly on increased cat losses, while holding strong in the reinsurance segment.
The primary insurance combined ratio rose 5.1 points to a rather borderline-ish 98.5%, with a 5.1 point rise in the current year net cat loss ratio to 8% set against offsetting moves in increased expense and increasingly favourable PYD. Management made no explanation of either the cat loss or the improved reserve releases.
Reinsurance improved its overall margins, taking 1.0 points from its combined ratio on the net of reduced cats, improved impact from reserve releases, but an apparent worsening of attritional loss. The adjusted ex-cat, ex-PYD measure rose 2.7 points to a still strong 79.9%.
In Arch’s smallish mortgage segment, GWP rose 0.3% year-on-year and underwriting income fell 7.6%.
Toss in the group’s steady, fractional increase in investment income and the net of tax, corporate costs and the other give and takes, and Arch Capital ended Q2 with an attributable net profit of an even $1 billion, down from $1.2 billion in the prior year period. Management claimed that made for an annualised net income return on average common equity of 18.0%, down from 22.9% in the year prior quarter.
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