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Arch profit spikes despite catastrophes

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Arch Capital Group Ltd. reported sharply higher profit in the fourth quarter of 2017 due to higher returns from its mortgage insurance business despite the catastrophic impact of the California wildfires.

The Hamilton, Bermuda-based insurer and reinsurer reported net income of $203.5 million in the fourth quarter of 2017 compared with $62.4 million for the same period in 2016, according to the company’s earnings report released after the market close on Monday.

Profit rose despite $68.4 million in losses from the California wildfires amid significantly higher net income from the company’s mortgage insurance segment. Arch Capital completed its acquisition of AIG United Guaranty Insurance (Asia) Ltd. from American International Group Inc. in 2017, an acquisition that added to the global footprint of Arch’s existing private mortgage insurance businesses, which already had operations in the United States, Europe and Australia.

“Our risk management structure and diversified business platforms performed as designed in face of challenging (property/casualty) market conditions and significant cat activity,” Marc Grandisson, president and chief operating officer of Arch Capital, said during the company’s fourth-quarter earnings conference call on Tuesday. “One year into our acquisition of UGC, we are pleased with the contribution that our mortgage segment makes to our returns and value creation.”

The company’s combined ratio improved to 86.3% in the fourth quarter of 2017 vs. 90.2% in the prior-year quarter, according to the report.

Arch Capital reported net premiums written of $1.1 billion in the fourth quarter of 2017, up 27.4% from the fourth quarter of 2016, according to the earnings statement.

“Rate increases in the property cat lines were not nearly as robust as many of us hoped given the significant cats in 2017,” Mr. Grandisson said. “We saw a few opportunities to put capital to work at the Jan. 1 renewals, but not enough rate movement to warrant a material increase in our writing. Rates across our reinsurance portfolio were up 2.5%, including 5% to 7.5% for our cat book. It’s a positive albeit tepid starting point for the year. Returns for cat business are low by historical standards and in our view do not fully capture risk volatility in this line of business.”

Net premiums written in its insurance segment rose 10.1% to $512 million in the fourth quarter of 2017 compared with the same period last year, which the company attributed to increases in national accounts and new business, according to the report. The segment’s combined ratio improved to 98.3% compared with 99.3% in the year-ago quarter, as reserve releases from hurricanes Harvey, Irma and Maria were partially offset by expenses from the California wildfires.

“Focusing on (property/casualty) insurance market overall conditions, they remain challenging, although we have seen rates stabilize and improving in some lines in the fourth quarter, particularly in property, commercial auto and some casualty lines,” Mr. Grandisson said. “Our current view of the market is cautiously optimistic. We are seeing a slight upward movement on the pricing side, with some margin expansion. However … rate levels are not sufficient to support the allocation of more capital to our insurance segment, especially given our opportunities in the (mortgage insurance) segment.”

Net premiums written in the company’s reinsurance segment increased 2% to $210.2 million in the fourth quarter 2017 compared with the same period in 2016. The segment’s combined ratio worsened to 94.5% vs. 78.5% during the same period last year, reflecting the impact of catastrophic activity mainly related to the California wildfires, although this was partially offset by lower initial losses related to the 2017 hurricanes.

“We see more exposure from the Northern California wildfires versus Southern California … and see this primarily as a reinsurance event for us,” said Mark Lyons, executive vice president and chief financial officer.

Net premiums written in the company’s mortgage insurance sector nearly tripled to $272.7 million in the fourth quarter compared with $92.9 million in the same period of 2016, according to the report.

Meanwhile, the company incurred a $21.5 million tax charge in the fourth quarter of 2017 resulting from the impact of the change in the U.S. corporate tax rate to 21% from 35% on deferred tax assets, Mr. Lyons said.

Constantine Iordanou, chairman and CEO of Arch Capital, will retire in March and be replaced by Mr. Grandisson.