Arch Capital Group Ltd. (NASDAQ:ACGL) Q3 2020 Earnings Conference Call - Final Transcript

Oct 30, 2020 • 11:00 am ET

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Arch Capital Group Ltd. (NASDAQ:ACGL) Q3 2020 Earnings Conference Call - Final Transcript

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Presentation
Executive
Marc Grandisson

continue to obtain strong rate increases in areas like property, D&O, and casualty. Group-wide, our rate increase for the third quarter averaged over 11%, and we believe this trend of increasing rates should continue through 2021.

At Arch, we have always followed the simple rule, our participation in the business should follow the direction of premium rates. As rates improve, we write more business. When rates decrease, as they did over the past several years, we write less. This strategy takes courage. You will often appear an outlier to the market. But being intellectually honest, disciplined, and applying our cycle management techniques is what we're all about at Arch.

Obviously, the P&C market is broad, and all opportunities are not created equal. There are areas such as workers' comp, where premium rates or conditions are not improving to the levels we believe are needed for an adequate return, and in those instances, we manage our appetite accordingly. Despite headwinds from the pandemic, our growth in insurance lines like E&S, property, casualty, and professional lines are great examples of our platform's ability to flex into improved underwriting conditions.

Our reinsurance unit has been able to lean into this hardening market both earlier and with more vigor than our primary operations. There are two main reasons for this. First, when a market transitions, needed rate increases compound up the insurance supply chain. Reinsurance is often a leading indicator of what's to come more broadly. Second, reinsurance can provide capacity quicker and in larger amounts, since it can put capital to work through clients' platforms. Of course, sheer growth is only one part of the equation of growing returns.

Let's turn now to margin improvement. We all know that, mathematically, rate increases in excess of loss trends lead to margin improvement. The marketplace seems to be supporting the momentum of continued rate increases. We are in the early stages of seeing the benefits of rate-on-rate increases in our operating results. Simply stated, adding the two parts, growth and margin, will lead to better returns.

Many factors are driving today's P&C markets. These include elevated natural cat loss activity in each of the past four years, weakened reserve positions from soft market years, lower investment yield, and a rise in claims inflation. Add in a global pandemic that is still ongoing, and it's not surprising that market conditions are changing.

Now pivoting to MI. Our $33 billion of NIW in the U.S. in the quarter was a record for Arch. Low interest rates are producing huge refinance activity and, unsurprisingly, some churn in our in-force business. However, MI premium rates remain above pre-COVID levels and the continued high credit quality of borrowers is generally better than it was pre-pandemic. We continue to face uncertainties such as the economy's health and how the pandemic may ultimately affect individual borrowers. However, we are optimistic that, among other positive factors, recent trends in the U.S. housing market will mitigate the effects of the pandemic.

Finally, Arch's ability