View from the Top: Constantine Iordanou, Arch Capital GroupReprints
Constantine “Dinos” Iordanou is chairman and CEO of commercial insurer and reinsurer Arch Capital Group Ltd., in Pembroke, Bermuda. Mr. Iordanou plans to retire in March 2018, and the company promoted Marc Grandisson to president and chief operating officer on Jan. 1, 2016. Arch disclosed in a June 6 U.S. Securities and Exchange Commission filing that it would book a $38 million loss on facultative property cover for the second quarter of 2017. Mr. Iordanou recently spoke with Business Insurance Reporter Matthew Lerner about markets, trends and issues that are affecting Arch. Edited excerpts follow.
Q: Is 2017 better or worse than last year? Different?
A: I would say some things are better, some things are worse. There are lines of business that are starting to have significant issues with profitability. Those lines of business are seeing price increases. Commercial auto is an example of that, and there are other pockets — I think construction risks in certain jurisdictions, especially in the New York City area because of the Scaffold Law and labor law. These are difficult lines, and they’re seeing reduced appetite from underwriters and pricing increases. On the other side, there are other lines such as excess liability and property, which are seeing continued price declines. Overall, I would characterize 2017 markets as slightly worse than 2016 on the basis that we’re not keeping up with loss trends.
Q: When you look at midyear reinsurance renewals, what do you see?
A: In reinsurance, there is still softening on the excess of loss contracts, which are seeing very low single-digit pricing. We don’t see further softening on the proportional treaties. Ceding commissions have stabilized at a high rate, so the reinsurers are subsidizing the primary insurers through the ceding commission, but we haven’t seen further erosion on the ceding commissions. Having said that, even the proportional business will suffer by what’s happening to the underlying pricing of the primary contracts because, even though in proportionality we haven’t lost ground, if the subject business has not kept up with trend and it has lost a few points of rate, reinsurance will suffer from that, too.
Q: Does that go forward to July?
A: I think so. I don’t see any change in the environment yet. So I don’t expect July to be any different than January or April 1, which are the big dates in reinsurance.
Q: Is what the industry calls alternative capital still truly alternative, or has it become more mainstream? How is it affecting markets?
A: Well, it depends. Alternative capital is just the terminology, right? Anything that can enter and exit our business quickly, to me, is true alternative. We had it when we had Flatiron Re, which we operated for only three years. After the three years, we chose to shut it down and liquidate it. I think that term probably has validity when you get to the (insurance-linked securities) market, where basically you can start up something with alternative capital and shut it down and distribute that capital in a short period of time. When you get to a long-tail type of business with claims open for five, 10 or 15 years, it’s the wrong terminology. It’s capital that is not alternative anymore. It is real capital committed to the business and not easily extracted. You must wait many, many, many years to be able to extract it. It’s a question of what type of business is being committed to underwrite and what is the duration of liabilities of those lines of business. If it’s a long tail, I will assure you it becomes permanent capital. And I think it has an effect. The business is overcapitalized on its own, and when you add on top of that the additional capacity, it helps make the problem worse. In essence, you’ve got an oversupply of capacity, which affects pricing. It’s the old economic equation 101, supply and demand. So too much supply, steady demand, prices go down.
Q: What about mergers and acquisitions? Will they continue? And is this good for the industry?
A: Mergers and acquisitions will continue to happen. They happen in every part of the cycle, and I find it to be positive. Larger organizations can become more cost-effective and more sophisticated if they’re run well. That’s a big if, though. In a business where individual underwriting decisions count, the larger you become, the more difficult it is to control the quality of the underwriting decision. On the other hand, the larger you are, the more you can invest in technology and efficiencies and analytics that make you a better company. So you’ve got to have a balance between the two.
Q: Where does Arch stand on M&A?
A: We see ourselves as a company that if we find the opportunity to make a strategic acquisition, we will. On the other hand, if somebody believes that strategically Arch improves their operations, we will always listen to that opportunity also. My wife says the house is never for sale, but I say at the right price, every house is for sale.
Q: Can you provide any detail on the recent filing about the $38 million facultative loss?
A: It just happened that we got several claims in the same quarter. In this line, usually, we get one of those claims a quarter, sometimes every two quarters. So from a materiality point of view, it was material. The builders risk contracts were written in 2015, 2016 and 2017, but if you write a builders risk policy in 2015, you don’t get off risk until the project gets completed, and if you have a loss in 2017, that’s the current accident year and you’ve got to report. With all claim activity, we always try to see if there are lessons to be learned and do we have to change some of our underwriting. With these losses, nothing looks unusual to us. They were good risks; if they were presented to us again, we would probably underwrite them again. Sometimes you get losses.