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Arch financials drop in competitive market

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Investing in the recruitment of people and teams takes priority over mergers and acquisitions, Arch Capital Group Ltd.’s CEO said as he discussed the insurer and reinsurer’s lower results for the 2015 second quarter in a conference call Thursday.

Hamilton, Bermuda-based Arch on Wednesday reported a 40.6% decrease in net income for the second quarter of 2015 to $125.8 million compared with the year-ago quarter. Net premiums written for the quarter decreased 10.5% to $823.4 million for 2014’s second quarter, while its combined ratio rose to 87.9% vs. 86.2% for the comparable period.

During the call with analysts, CEO Constantine P. Iordanou said results “were driven by solid, reported underwriting results,” although investment income was affected by the recent rise in interest rates.

“Net income on a quarterly basis can be volatile, as earnings are influenced” by exchange rates and gains and losses in the investment portfolio, he said.

Mr. Iordanou said although competitive conditions have intensified, Arch’s “diversified mix of business and willingness to exercise discipline should allow us to generate acceptable returns.”

Mr. Iordanou said the current market environment “makes profitable growth within traditional lines of insurance and reinsurance difficult to achieve and, not surprisingly,” an elevated level of M&A activity is expected.

He added, however, that while “we like to investigate opportunities presented by the marketplace, our preference is to invest first in the recruitment of people and teams with specialty expertise that will complement our product platform.”

A secondary priority is to seek renewal rights, and the third is allocation of funds to its business units, Mr. Iordanou said. “We consider acquisitions to be most difficult because by nature they involve greater uncertainty,” he said.

Mr. Iordanou said that when evaluating a potential deal, “first and foremost” is whether it complements Arch’s longer-term strategic goals. The second criteria is whether there is a “cultural fit,” while the third is whether the balance sheet is “transparent.” When those three conditions are met “we look at price last,” he said.

For the 2015 six-month period, Arch reported $434.6 million in net income, an 11.2% increase over 2014’s first half. Net premiums written for the half decreased 9.6% to $1.77 billion. Arch reported an 87.7% combined ratio for the first half vs. 85.5% for the comparable period in 2014.

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