Arch CEO: We'll Make Money In The Soft Market

By Susanne Sclafane

NU Online News Service, Feb. 15, 4:14 p.m.EST?Arch Capital will stay profitable in spite ofmarketwide price declines, Arch Capital's Chief Executive OfficerConstantine Iordanou said this morning, as the company reported a28 percent increase in fourth-quarter net income.[@@]

Net income was $107 million, or $1.45, per share compared with$83.7 million or $1.22 a share in 2003. The company also reported a20 percent jump in operating earnings.

The company, Mr. Iordanou said, will maintain future incomelevels through a unique process of board oversight of underwritingdecisions and companywide attention to analytical businessmodels.

Speaking during the Bermuda-based company's conference call, Mr.Iordanou and John Vollaro, the chief financial officer, reportedthat Arch was able to absorb significant catastrophe losses lastyear, achieving after-tax operating income of $320 million,compared to $266 million in 2003.

For the quarter, operating income grew 33 percent to $117.4million.

In both the last quarter and for the full year, net income waslower than operating income?mainly due to the impact of a $16million charge for foreign exchange losses (the effects ofrevaluing net insurance liabilities required to be settled inforeign currencies). Net income for the year, compared with 2003,was up roughly 13 percent, or $316.9 million, amounting to $4.37per share.

The middle of 2004 was "the high watermark for the cycle," Mr.Iordanou said, recognizing the positive effects of high prices inthe hard market on Arch and industry financial results.

"On the negative side," he said that moving past midyear,"competition emerged not only in property but casualty lines,"adding, however, that Arch is prepared to deal with the markettransition to lower pricing.

He explained that the company uses analytics to monitor ratesand test internal rate movements against industry benchmarks, bothwithin each business unit and based on independent reviews by theactuarial department.

On top of that, "Arch's board [of directors] maintains anunderwriting oversight committee" that looks at price adequacy,business mix and strategies. "We believe this is unique in theindustry," he said.

Mr. Iordanou gave his assessment of market conditions forvarious business segments, making some notable remarks about thedirectors and officers and program business segments.

For directors and officers liability, he delivered some positivenews, noting that in recent months, rate competition for excesslimit policies had cooled, after 15 percent declines in the priorquarter. He attributed this to the WorldCom settlement andcontinued regulatory investigations.

Reinsurance "support for D&O was definitely withdrawn" atJanuary 1, added Mr. Vollaro, the CFO.

Turning to program business, Mr. Iordanou said program businesspremiums were down 17 percent year over year, noting that thecompany made a strategic decision to down its relationships withmanaging general underwriters who produce this business. FourteenMGU relationships existed at the beginning of 2004, but there wereonly eight by year end, he said.

All the MGU programs "meet or exceed our profitabilityrequirements, and rates remain remarkably stable. Butstrategically, [this] is not going to be a big part of ourbusiness," he said.

Later when questioned, he explained, "We like what we have, butwe don't want to have a significant part of the business of thiscompany subject to contractual agreements?where they [MGUs] canwalk out at any time subject to no notice."

He said he would rather "own the business" through, emphasizingbusiness where Arch has the relationship with a retail broker,contrasting the situation on program business, where the MGU ownsthe renewal.

In a written announcement of the company's earnings thismorning, Arch also commented on ongoing investigations byregulatory authorities.

The statement said: "As previously reported, the company hasreceived various formal and informal information requests frominsurance regulatory authorities as to relationships with, andpayments to, brokers and other agents.

"In addition, the company received a subpoena from the New YorkState attorney general requesting certain information concerningits underwriting activities with respect to insurance coverages tolawyers and law firms for acts of professional malpractice. Thecompany is cooperating with these requests."

The statement also said that in view of the ongoing industryinvestigation, the company retained Cahill Gordon & Reindel LLPto conduct an internal review relating to certain businesspractices in the insurance industry currently beinginvestigated.

According to Arch, Cahill recently informed the company thattheir review is substantially complete and that no evidence thatthe company has engaged in illegal bid-rigging or price-fixing hasbeen uncovered. Also, there was no evidence that the company hasengaged in any illegal tying of insurance and reinsuranceservices.