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6. Arch Specialty Insurance Co.


Arch Specialty Insurance Co. hasn't been around as long as some of its surplus lines competitors, but it's making up quickly for lost time.

New York-based Arch Specialty became the main U.S. surplus lines unit of Arch Capital Group Ltd. in 2002, when Bermuda-based Arch Capital acquired the company, originally founded in 1964, as a shell from Sentry Insurance Group.

Since then, Arch Specialty has expanded its gross written premium volume from slightly more than $220 million in 2002 to $821.7 million last year. Its nonadmitted volume totaled $801.4 million in 2005, making Arch Specialty the sixth-largest U.S. surplus lines insurer this year in Business Insurance's ranking.

Catastrophe-exposed property difference-in-conditions business, including Florida and Gulf Coast windstorm and California earthquake risks, has been one of Arch's strengths over the last year, said John S. Edack, executive vp in charge of the insurer's Western region in San Francisco.

Capacity shortages have driven up prices on some of these risks by 25% to 100%, according to Mr. Edack, who noted that "property lines are in great dislocation."

Arch is looking to become a market leader in primary professional and general liability for health care "miscellaneous facilities," which include medical transportation, home care, imaging and teleradiology facilities, he said.

Primary and excess casualty business, on the other hand, has become more competitive, with pricing on certain risks falling 20% or more, he said. Some of the business--notably commercial construction, premises and operations, and manufacturers' products liability business--has been migrating back to admitted markets.

"It's typical of the cyclical nature of our business," Mr. Edack said.

Still, a large part of Arch's 2005 gross premiums were in liability lines, according to its statutory financial statement. Arch, admitted only in Wisconsin, wrote $629.5 million in liability gross premiums last year, or about 77% of its $821.7 million total. Property lines accounted for $172.8 million and other lines made up the balance.

Arch reinsures a large amount of its business with an array of reinsurers, including Bermuda-based affiliate Arch Reinsurance Ltd. Arch Specialty's net written premium volume amounted to $54.7 million last year, or 6.7% of its gross volume, the statement shows.

The huge ceding commissions generated by these reinsurance placements allowed Arch to significantly reduce its combined ratio last year. While the insurer's loss and loss expense ratio rose to 102.0% from 89.1% in 2004, its ratio of other underwriting expenses--which are offset by the ceding commissions--dropped to a negative 40.7% from a positive 12.5% in 2004. Arch thus finished the year with a combined ratio of 61.3% compared with 101.6% in 2004.

Ceding commissions also helped Arch turn what otherwise would have been a narrow underwriting loss in 2005 into a $21.4 million underwriting gain.

Arch booked $103 million in capital contributions from its immediate parent company, Arch Insurance Co., last year, raising its policyholders' surplus to $243.9 million at year end. The contributions were to bring Arch Specialty into compliance with a 2002 agreement with the Wisconsin Insurance Department to maintain Arch Specialty's surplus at 275% of its authorized control level risk-based capital level, the insurer reported. Arch's surplus exceeded the requirement at the end of last year.